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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission file number: 1-8520
TERRA INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
52-1145429
(I.R.S. Employer
Identification No.)
Terra Centre
600 Fourth Street
P. O. Box 6000
Sioux City, Iowa
(Address of principal executive offices)
51102-6000
(Zip Code)
Registrant's telephone number, including area code: (712) 277-1340
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Shares, without par value New York Stock Exchange
Toronto Stock Exchange
10 3/4% Senior Notes Due 2003 N/A
10 1/2% Senior Notes Due 2005 N/A
Securities registered pursuant to Section 12(g) of the Act: None
--------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Registrant's voting stock held by non-
affiliates of the Registrant, at January 31, 1998, was approximately $386
million.
On January 31, 1998, the Registrant's outstanding voting stock consisted of
74,982,411 Common Shares, without par value.
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DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Stockholders of Registrant for the fiscal year ended December
31, 1997. Certain information therein is incorporated by reference into Part I,
Part II and Part IV hereof.
Proxy Statement for the Annual Meeting of Stockholders of Registrant to be held
on May 5, 1998. Certain information therein is incorporated by reference into
Part III hereof.
TABLE OF CONTENTS
PART I
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<S> <C> <C>
Items 1 and 2. Business and Properties............................................................. 1
Item 3. Legal proceedings...................................................................11
Item 4. Submission of matters to a vote of security holders.................................11
Executive officers of the Company...................................................11
</TABLE>
PART II
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<TABLE>
<S> <C> <C>
Item 5. Market for Terra Industries' common equity and related stockholder matters..........12
Item 6. Selected financial data.............................................................13
Item 7. Management's discussion and analysis of financial condition
and results of operations...........................................................13
Item 8. Financial statements and supplementary data.........................................13
Item 9. Changes in and disagreements with accountants on accounting
and financial disclosure............................................................13
</TABLE>
PART III
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<S> <C> <C>
Item 10. Directors and executive officers of the Company.....................................13
Item 11. Executive compensation..............................................................13
Item 12. Security ownership of certain beneficial owners and management......................13
Item 13. Certain relationships and related transactions......................................13
</TABLE>
PART IV
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Item 14. Exhibits, financial statement schedules and reports on Form 8-K.....................14
Signatures.........................................................................................18
Index to financial statement schedules, reports and consents......................................S-1
</TABLE>
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PART I
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Items 1 and 2. BUSINESS AND PROPERTIES.
Terra Industries Inc., a Maryland corporation, conducts its ongoing
operations primarily through its various subsidiaries. Unless otherwise referred
to herein or the context otherwise requires, references to the "Company" or
"Terra" shall mean Terra Industries Inc., including, where the context so
requires, its direct and indirect subsidiaries. The subsidiaries that are not
wholly owned include two limited partnerships operating the businesses of the
Beaumont Facility in one case and both the Verdigris Facility and the
Blytheville Facility in the other case. Terra is the sole general partner and
majority partner in both partnerships. The principal corporate office of the
Company is located at Terra Centre, 600 Fourth Street, Sioux City, Iowa 51102-
6000 and its telephone number is 712-277-1340.
General
The Company is a leader in each of its three business segments: (i) the
distribution of crop inputs 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 distributor of crop inputs 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
acquired a United Kingdom nitrogen products business (the "U.K. Business") on
December 31, 1997 from Imperial Chemicals Industries Plc ("ICI").
The Company's distribution network serves the United States and eastern
region of Canada and includes 423 Company operated farm service centers as of
December 31, 1997. In addition, another 100-plus locations are about 40% owned
by the Company through an investment in Royster-Clark, Inc.
The Company's principal production facilities are comprised of:
. seven nitrogen fertilizer plants located in Oklahoma (the "Woodward
Facility" and the "Verdigris Facility"), Iowa (the "Port Neal
Facility"), Ontario, Canada (the "Courtright Facility") Arkansas (the
"Blytheville Facility") and the United Kingdom (the "Billingham
Facility" and the "Severnside Facility"); and
. a methanol production plant located in Texas (the "Beaumont
Facility") (the Woodward Facility also includes methanol
production).
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 incorporated herein.
Terra's long-term strategy for growth is to: (i) acquire and upgrade
production and distribution facilities, (ii) increase distribution volumes by
expanding sales from existing farm service centers, (iii) shift its product mix
to include more profitable products and (iv) continue to build customer loyalty
by providing value-added services. As part of this strategy, in April 1993,
Terra acquired the Courtright Facility and an interest in 32 farm service
centers in Canada; in December 1993, Terra acquired 12 farm service centers in
Florida; in September 1994, Terra acquired a minority interest in a 100-plus
location distributor of crop input and protection products in the mid-Atlantic
region; in October 1994, Terra acquired Agricultural Minerals and Chemicals Inc,
which provided Terra two fertilizer plants having 1.4 million tons of annual
gross production capacity of ammonia, as well as the Beaumont Facility; in July
1996, Terra completed a construction project at its Courtright Facility enabling
the upgrade of an additional 65,000 tons of ammonia annually into urea and
nitrogen solutions (UAN); in May 1997, Terra acquired 18 farm service centers
which include grain operations and are located in or near southern Minnesota; in
November 1997, Terra completed construction of a nitric acid plant at its Port
Neal Facility which increases annual UAN capacity by 320,000
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tons and on December 31, 1997, Terra acquired the U.K. Business. In addition,
certain other distribution location acquisitions and manufacturing upgrade
projects have been completed during the past few years.
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
southeastern 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 13%
of the Company's total crop protection product sales in 1997. As of December 31,
1997, the Riverside(R) line included approximately 210 products, of which 11
were added in 1997. 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 in whole or in part 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 indirect costs, including the cost of maintaining inventory,
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(R) brand seeds for corn hybrids,
soybean, wheat and cotton varieties, which generally provide higher margins.
These products represented approximately 17% of the Company's total seed sales
in 1997. The Company plans to offer genetically enhanced seeds under the
Terra(R) brand for the 1998 growing season. Biotechnical advances make seeds
more sophisticated by incorporating resistance to specific herbicides or pests,
or enhancing the nutritional characteristics of the crop. 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 analytical services
laboratory to analyze nutrient levels in soil and plant tissue samples. The
results of these tests are used 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
Company 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 commitment to its customers by taking an active role in
precision agriculture. Precision agriculture relies on global positioning
satellites as a navigation aid to site-specific locations in a field for which
various crop response characteristics are identified through soil sampling and
yield monitoring. Variable rate applicators apply prescription rates of various
crop inputs using the information and technology available for precision
agriculture. Growers utilize the technology in their planting and harvesting
equipment and gain more control in crop production decisions. The Company has
invested in hardware, software and personnel to meet the demand of its Precision
in Agriculture(TM) program.
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The Company has also entered the grain and feed merchandising business in
connection with several recently acquired farm service centers. Grain marketing
may enhance Terra's effectiveness in helping a grower through the planning,
planting, growing and crop marketing cycle.
In connection with product sales to dealers, the Company provides
warehousing and delivery services. For selected dealer customers, the Company
offers environmental and safety services, access to the Company's soil and plant
tissue testing laboratory, and other services.
Marketing and Distribution. The Company markets its products primarily to
agricultural customers, including both dealers and growers. For 1997,
approximately 70% of the Company's distribution revenues were attributable to
grower sales through farm service center locations and approximately 30% 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, 1997 are divided into 11
separate geographical regions for management purposes. Field personnel receive
regular training through Terra University, a series of courses designed to
develop skills in agronomy, management, sales, environmental responsibility,
personal safety and crop inputs application. In 1997 Terra implemented a
company-wide database marketing initiative named LOCALMOTION(TM). This effort
has created a platform for Terra sales representatives to improve communications
with customers by providing timely information specific to their individual
needs as well as aiding the development of tailored product and service
offerings. The field salespeople are supported by an 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.
Product Formulations. The Company formulates crop protection products
through its Omnium LLC joint venture, which is jointly owned and controlled with
Farmland Industries Inc. The St. Joseph Formulation Facility formulates liquid
crop protection products and the Blytheville Formulation Facility formulates dry
flowable ("DF") crop protection products. 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. In addition to formulating Riverside(R) products,
these facilities formulate products for Farmland Industries and others. The two
formulation facilities are owned by the Omnium joint venture 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 in North
America are ammonia, urea and urea ammonium nitrate solution ("UAN"). The
Company's principal nitrogen products manufactured in the U.K. are ammonia and
ammonium nitrate ("AN"). A
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significant portion of the Company's ammonia production is upgraded into other
nitrogen fertilizer products such as urea, UAN and AN.
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 animal feed and fertilizer market by
converting ammonia and carbon dioxide 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 animal
feed supplements.
UAN. The Company produces UAN at all five of its North American 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, and
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.
AN. With the acquisition of the U.K. Business, the Company produces AN at
its two plants in England. AN is produced by combining nitric acid and ammonia
into a liquid form which is then turned into a solid. The nitrogen content of AN
is 34.5% by weight. Most of the AN sold by the U.K. Business is for the
fertilizer market.
The Company's sales mix of its three principal nitrogen products for each
of the last three years (excluding the U.K. Business) was approximately (based
on tons sold):
<TABLE>
1997 1996 1995
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Ammonia 22% 23% 25%
Urea 12% 13% 14%
UAN 66% 64% 61%
</TABLE>
Plants. All the Company's plants in North America are integrated facilities
for the production of ammonia, liquid urea and UAN. In addition, the Blytheville
Facility and the Courtright Facility produce granular urea. The Company's two
plants in the U.K. are integrated facilities for the production of ammonia,
nitric acid, ammonium nitrate and liquid carbon dioxide. The following nitrogen
products facilities are operated by the Company:
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<TABLE>
<CAPTION>
Gross Annual Ammonia Year when Terra first
Production Capacity (tons) acquired interest
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<S> <C> <C>
Port Neal Facility (Iowa) 350,000 1965
Woodward Facility (Oklahoma)* 440,000 1976
Courtright Facility (Canada) 480,000 1993
Verdigris Facility (Oklahoma) 1,050,000 1994
Blytheville Facility (Arkansas) 420,000 1994
Billingham Facility (England) 530,000 1997
Severnside Facility (England) 290,000 1997
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Total 3,560,000
</TABLE>
* Ammonia capacity depends, in part, on desired rate of methanol production at
this facility.
Each of the Company's seven fertilizer manufacturing facilities is designed
to operate continuously, except for planned shutdowns (usually biennial) for
maintenance and 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 (excluding the
U.K. facilities) for each of the years ended December 31, 1997, 1996 and 1995,
in the aggregate, was approximately 103%, 101% and 97%, respectively.
The Port Neal Facility was the site of a major explosion on December 13,
1994. The Company repaired the facility, with ammonia production resuming in
December 1995 and the urea and UAN upgrading facilities production resuming in
May 1996. The Company settled in 1997 for $321 million its property damage and
business interruption insurance claims associated with this explosion. The
Company further completed in November 1997 a $23 million capital project at the
Port Neal Facility to increase annual nitric acid production which increases UAN
production capacity to 810,000 tons from 490,000 tons. The Company owns the Port
Neal Facility in fee.
The Woodward Facility includes not only an ammonia plant and a UAN plant,
but also a methanol plant with annual capacity of up to about 40 million
gallons. 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 completed in July 1996. The
project enabled the upgrade of up to an additional 65,000 tons of ammonia
annually into urea and UAN. The Company owns the Courtright Facility in fee, but
this facility is subject to an encumbrance in favor of lenders.
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
the Company, while the Port Terminal is leased from the Tulsa-Rogers County Port
Authority. The leasehold interest on the Port Terminal is scheduled to expire in
April 1999, and the Company 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 the Company has the option to extend the lease for twelve successive
terms of five years each at the same rental rate. The Company 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 the
Company has the option to renew the lease for four successive periods of five
years each at a nominal annual rental. The Company also has an option to
purchase the urea plant for a nominal price.
The Billingham Facility consists of an ammonia plant, three nitric acid
plants, a sodium nitrite plant, an ammonium nitrate plant and a carbon dioxide
recovery unit. The Billingham Facility also provides to customers
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certain site services and utilities including steam and electricity. The Company
owns the Billingham Facility in fee, but this facility is subject to an
encumbrance in connection with the financing for the purchase of the U.K.
Business.
The Severnside Facility includes two ammonia plants, two nitric acid
plants, an ammonium nitrate plant and a carbon dioxide recovery unit. This
facility is owned in fee, but it is subject to an encumbrance in connection with
the financing for the purchase of the U.K. Business.
Terra announced in October 1997 a $57 million capital project to add an
ammonia production loop to its Beaumont Facility. This project is expected to
add 255,000 tons of annual ammonia capacity without reducing methanol capacity.
It is expected to be operational in the fourth quarter of 1999.
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% of the Company's 1997 total tons of its manufactured nitrogen
products. In 1997, 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 1997, no outside customer
accounted for greater than 5% 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.
Under an ammonium nitrate agreement with ICI, the Company has agreed to
make payments based on the market price of ammonium nitrate in connection with
the Company's U.K. Business. The Company will be required to make a payment for
each year through 2002 if average ammonium nitrate prices exceed certain
threshholds during any year, subject to maximum payments of (Pounds)58 million
(95.7 million USD) over the term of the agreement. As a result of making any
such payments, the Company will not benefit fully from the U.K. price of
ammonium nitrate over certain thresholds during the term of this agreement.
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 1997.
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 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. In 1994, the Company completed a project for optional production of
methanol, offsetting up to about 25% of the Woodward Facility's ammonia
capacity. The Company has up to about 40 million gallons of annual methanol
capacity at the Woodward Facility, and this facility produced 36 million, 31
million and 34 million gallons in each of 1995, 1996 and 1997, respectively.
This facility is owned by the Company in fee.
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The Beaumont Facility is among the largest methanol production plants in
the United States, with approximately 280 million gallons of annual methanol
capacity. This facility produced 263 million, 280 million and 276 million
gallons in each of 1995, 1996 and 1997, respectively. The plant and processing
equipment at the Beaumont Facility are owned by the Company, 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"), the Company depends on DuPont for access to the Beaumont
Facility. The Company 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. The Company also
depends on DuPont for access to the pipelines used to transport methanol and to
obtain natural gas, as well as for certain utilities, 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. The Company has
a number of long-term methanol sales contracts, the most significant of which is
with DuPont. In 1997, the Company sold over 60% of its production under such
contracts. At December 31, 1997, the Company had contracted to sell over 60% of
its 1998 scheduled production at prices indexed to published sources. Most of
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 54
million gallons of methanol each year until 2001 (representing 19% 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.
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 $88
million in 1995, $66 million in 1996 and $65 million in 1997 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.
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 $7.3 million in 1995, $17.9 million
in 1996 and $8.1 million in 1997. The 1996 increase is due principally to two
years of drought conditions in the South and mid-South regions of the U.S.
Seasonality and Volatility
The crop inputs 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 crop inputs 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
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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, nitrogen fertilizer price levels can be
volatile.
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.
During 1994, several factors combined to create a tight market that dramatically
increased prices. Methanol prices from mid-1995 through 1996 remained near
historically "normal" levels. In 1997, methanol prices increased moderately to
the higher end of normal levels due in part to a number of plant shutdowns and
turnarounds. 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 50% of the total costs and expenses associated with
the Company's Nitrogen Products segment in 1997. Natural gas costs represented
about 65% of the total costs and expenses associated with its Methanol segment
in 1997. 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 price 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.
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.
At its North American manufacturing facilities, formulation facilities and
liquid fertilizer storage locations, the Company utilizes railcars as the major
method of transportation. The Company leases approximately 2,500 railcars and
owns ten nitric acid railcars. In England, AN is transported primarily by truck
and ammonia is primarily transported by pipeline. The Company provides some
transportation services to its own facilities and customers as a contract
carrier. The Company uses approximately 90 owner-operators and 14 employee
drivers to deliver fertilizer, crop protection products, seed, feed ingredients
and other products to its own facilities and customers.
8
<PAGE>
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 an 80-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. Recently, the
emphasis has been placed on examining and viewing the new gene altered or
specific trait corn hybrid and soybean variety production systems.
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(R) brand 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)
brand 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 1997, 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. The Company's competitors include cooperatives, divisions
of diversified agribusiness companies, regional distributors and independent
dealers, some of which have substantially greater financial and other resources
than the Company. The Company competes 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. and foreign producers,
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 favorable market conditions for
nitrogen producers in 1995 and 1996 that stimulated construction of new
projects, additional nitrogen fertilizer manufacturing capacity is being brought
into production. 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
9
<PAGE>
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's operations
in Canada 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. Terra's operations in the U.K. are
subject to similar regulations under a variety of acts governing hazardous
chemicals, transportation and worker health and safety. 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 laws for all or part of the costs of such investigation and
remediation.
Terra 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 1998 and beyond will be less than $10 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) retained 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 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
10
<PAGE>
typically applicable to competitors as well. The Company estimates that the cost
of complying with these requirements in 1998 and beyond will be less than $10
million.
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 4,435 full-time employees at December 31, 1997, with only
the UK employees being covered by anything equivalent to a collective bargaining
agreement. The Company also hires temporary employees on a seasonal basis, and
hired approximately 1,400 temporary employees during the peak of its spring
selling season in 1997.
Item 3. LEGAL PROCEEDINGS.
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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No items were submitted to a vote of security holders of the Company during
the fourth quarter of 1997.
EXECUTIVE OFFICERS OF THE COMPANY
The following paragraphs set forth the name, age and offices of each
present executive officer of Terra, the period during which each executive
officer has served as such and each executive officer's business experience
during the past five years:
<TABLE>
<CAPTION>
Present positions and offices with the Company
Name and age and principal occupations during the past five years
------------ ----------------------------------------------------
<S> <C>
Michael L. Bennett (44) Executive Vice President and Chief Operating Officer
of Terra since February 1997; President of Terra
Distribution Division from November 1995 to February
1997; Senior Vice President of Terra from February
1995 to February 1997; Senior Vice President,
Distribution of Terra International from October
1994 to February 1997; Vice President, Northern
Division thereof from January 1992 to October 1994;
Vice President, Wholesale Fertilizer Division
thereof from January 1990 to January 1992.
Lawrence S. Hlobik (53) President of Terra Nitrogen Division and Senior Vice
President of Terra since February 1996; Senior Vice
President, Marketing of Terra Nitrogen Corporation
from February 1995 to February 1996; Vice President,
Marketing of Arcadian Corporation from 1989 to
February 1995.
Burton M. Joyce (56) President and Chief Executive Officer of Terra since
May 1991; Executive Vice President and Chief
Operating Officer thereof from February 1988 to May
1991.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Present positions and offices with the Company
Name and age and principal occupations during the past five years
------------ ----------------------------------------------------
<S> <C>
William R. Loomis, Jr. (49) Chairman of the Board of Terra since April 1996 and a director thereof since February 1996;
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.
Francis G. Meyer (46) Senior Vice President and Chief Financial Officer of Terra since November 1995; Vice President
and Chief Financial Officer of Terra from November 1993 to November 1995; Controller thereof from
August 1991 to November 1993; Vice President, Controller of Terra International from June 1986 to
August 1991.
Paula C. Norton (52) Vice President, Corporate and Investor Relations of Terra since February 1995, Director,
Corporate Relations of Terra from January 1993 to February 1995, Director, Corporate
Communication of Universal Foods Corp. prior thereto.
W. Mark Rosenbury (50) Vice President, European Operations of Terra and Managing Director of Terra Nitrogen UK since
January 1998; Vice President, Business Development and Strategic Planning of Terra from November
1995 to January 1998; President of Terra Nitrogen Corporation from November 1994 to February
1996; Executive Vice President of Terra from November 1993 to November 1995; Chief Operating
Officer thereof from November 1993 to November 1994; Vice President and Chief Financial Officer
thereof from August 1991 to November 1993.
Monty R. Summa (45) President of Terra Distribution Division and Senior Vice President of Terra since April 1997;
Senior Vice President and General Manager of Crop Protection Chemicals for American Cyanamid
Corp. from prior to 1992 to April 1997.
George H. Valentine (49) Senior Vice President, General Counsel and Corporate Secretary of Terra since November 1995; Vice
President, General Counsel and Corporate Secretary of Terra from November 1993 to November 1995;
Assistant General Counsel of Household International, Inc. from February 1986 to November 1993.
</TABLE>
There are no family relationships among the executive officers and
directors of Terra or arrangements or understandings between any executive
officer and any other person pursuant to which any executive officer was
selected as such. Officers of Terra are elected annually to serve until their
respective successors are elected and qualified.
PART II
-------
Item 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Information with respect to the market for the Company's common equity and
related stockholder matters contained in Terra's 1997 Annual Report to
Stockholders under the captions "Quarterly Financial and Stock Market Data
(Unaudited)" and "Stockholders" is incorporated herein by reference.
12
<PAGE>
Item 6. SELECTED FINANCIAL DATA.
Information with respect to selected financial data contained in Terra's
1997 Annual Report to Stockholders under the caption "Financial Summary" is
incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Information with respect to management's discussion and analysis of
financial condition and results of operations contained in Terra's 1997 Annual
Report to Stockholders under the caption "Financial Review" is incorporated
herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements, together with the notes thereto and
the report of independent auditors thereon, and the information set forth under
the caption "Quarterly Financial and Stock Market Data (Unaudited)" contained in
Terra's 1997 Annual Report to Stockholders are incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
Information with respect to directors of the Company under the caption
"Election of Directors" in the Proxy Statement for the Annual Meeting of
Stockholders of Terra to be held on May 5, 1998, is incorporated herein by
reference. Information with respect to executive officers who are not also
directors of the Company appears under the caption "Executive Officers of the
Company" in Part I hereof and is incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION.
Information with respect to executive compensation under the caption
"Executive Compensation and Other Information" in the Proxy Statement for the
Annual Meeting of Stockholders of Terra to be held on May 5, 1998, is
incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to security ownership of certain beneficial owners
and management under the caption "Equity Security Ownership" in the Proxy
Statement for the Annual Meeting of Stockholders of Terra to be held on May 5,
1998, is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to certain relationships and related transactions
under the caption "Certain Relationships and Related Transactions" in the Proxy
Statement for the Annual Meeting of Stockholders of Terra to be held on May 5,
1998, is incorporated herein by reference.
13
<PAGE>
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
1. Consolidated Financial Statements of Terra and its subsidiaries
(incorporated herein by reference to Terra's 1997 Annual Report to
Stockholders).
Consolidated Statements of Financial Position at December 31, 1997
and 1996.
Consolidated Statements of Income for the years ended December 31,
1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended December
31, 1997, 1996 and 1995.
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995.
Notes to the Consolidated Financial Statements.
Independent Auditors' Report.
Quarterly Production Data (Unaudited).
Quarterly Financial and Stock Market Data (Unaudited).
Revenues.
Volumes and Prices (Unaudited).
Stockholders.
Financial Summary.
2. Index to Financial Statement Schedules
See Index to Financial Statement Schedules of Terra and its
subsidiaries at page S-1.
3. Other Financial Statements
Individual financial statements of Terra's subsidiaries are omitted
because all such subsidiaries are included in the consolidated
financial statements being filed. Individual financial statements of
50% or less owned persons accounted for on the equity method have
been omitted because such 50% or less owned persons considered in
the aggregate, as a single subsidiary, would not constitute a
significant subsidiary.
(b) Executive Compensation Plans and Arrangements
Exhibits 10.1.1 through 10.1.15 are incorporated herein by reference.
14
<PAGE>
(c) Reports on Form 8-K
Current Report on Form 8-K dated November 20, 1997 reporting the
Corporation's agreement to purchase a United Kingdom nitrogen fertilizer
business.
Current Report on Form 8-K dated December 12, 1997 reporting the
Corporation's settlement of a lawsuit with an insurance carrier defendant.
Current Report on Form 8-K dated December 23, 1997 reporting the
Corporation's settlement of a lawsuit with the last insurance carrier
defendant.
Current Report on Form 8-K/A dated December 31, 1997 reporting the
Corporation's purchase of the U.K. nitrogen business.
(d) Exhibits
<TABLE>
<CAPTION>
<C> <S>
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 31, 1997
among 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 to
Terra Industries' Form 8-K/A dated December 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.
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,
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
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.
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 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.
10.1.7 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.
10.1.8 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.
10.1.9 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.
10.1.10 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.
10.1.11 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.
10.1.12 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.
10.1.13 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.
10.1.14 Form of Incentive Stock Option Agreement of Terra Industries under its
1997 Stock Incentive Plan.
10.1.15 Form of Nonqualified Stock Option Agreement of Terra Industries under
its 1997 Stock Incentive Plan.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
10.2 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.
10.3 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.
10.4 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.
10.5 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.
10.6 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.
10.7 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.
10.8 Sale of Business Agreement dated November 20, 1997 between ICI
Chemicals & Polymers Limited, Imperial Chemical Industries PLC, Terra
Nitrogen (U.K.) Limited (f/k/a Terra Industries Limited) and Terra
Industries Inc. filed as Exhibit 2 to Terra Industries' Form 8-K/A
dated December 31, 1997, is incorporated herein by reference.
10.9 Ammonium Nitrate Agreement dated December 31, 1997 between Terra
International (Canada) Inc and ICI Chemicals & Polymers Limited filed
as Exhibit 99 to Terra Industries' Form 8-K/A dated December 31, 1997,
is incorporated herein by reference.
*10.10 Amended and Restated Agreement of Limited Partnership of Beaumont
Methanol, Limited Partnership dated December 31, 1997 by and among
Terra Methanol Corporation, BMC Holdings, Inc. and Nova Products LLC.
13 Financial Review and Consolidated Financial Statements as contained in
the Annual Report to Stockholders of Terra Industries for the fiscal
year ended December 31, 1997.
21 Subsidiaries of Terra Industries.
24 Powers of Attorney.
27 Financial Data Schedule. [EDGAR filing only]
</TABLE>
================================================================================
*Confidential treatment has been requested in connection with this document.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TERRA INDUSTRIES INC.
Date: March 12, 1998 By: /s/ FRANCIS G. MEYER
--------------------
Francis G. Meyer
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
* Chairman of the Board
- ----------------------
William R. Loomis, Jr.
* Chief Executive Officer, President and Director
- ---------------------- (Principal Executive Officer)
Burton M. Joyce
* Senior Vice President and Chief Financial Officer
- ---------------------- (Principal Financial Officer)
Francis G. Meyer
* Director
- ----------------------
Edward G. Beimfohr
* Director
- ----------------------
Carole L. Brookins
* Director
- ----------------------
Edward M. Carson
* Director
- ----------------------
David E. Fisher
* Director
- ----------------------
Anthony W. Lea
* Director
- ----------------------
John R. Norton III
* Director
- ----------------------
Henry R. Slack
* Director
- ----------------------
Robert L. Thompson
</TABLE>
Date: March 12, 1998 *By: /s/ GEORGE H. VALENTINE
-----------------------
George H. Valentine
Attorney-in-Fact
18
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES, REPORTS AND CONSENTS
------------------------------------------------------------
Page
----
Report of Deloitte & Touche LLP on Financial Statement Schedules.......... S-2
Consent of Deloitte & Touche LLP.......................................... S-2
Schedule No.
- ------------
I Condensed Financial Information of Registrant............... S-3
II Valuation and Qualifying Accounts:
Years Ended December 31, 1997, 1996 and 1995................ S-8
Financial statement schedules not included in this report have been omitted
because they are not applicable or the required information is shown in the
consolidated financial statements or the notes thereto.
S-1
<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, 1997 and 1996 and for each of the three years in the
period ended December 31, 1997, and have issued our report thereon dated
February 2, 1998; such financial statements and report are included in the 1997
Annual Report to Stockholders of Terra Industries Inc. and are incorporated
herein by reference. Our audits also included the Financial Statement Schedules
of Terra Industries Inc. listed in Item 14(a) of this Form 10-K. 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 2, 1998
INDEPENDENT AUDITORS' CONSENT
-----------------------------
We consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-8 (Registration Nos.
333-32869, 33-46735, 33-46734, 33-30058 and 33-4939) and Registration Statements
on Form S-3 (Registration Nos. 333-31769, 2-90808, 2-84876 and 2-84669) of Terra
Industries Inc. of our report dated February 2, 1998, included in the 1997
Annual Report to Stockholders of Terra Industries Inc. which is incorporated by
reference in this Form 10-K. We also consent to the incorporation by reference
in such Prospectuses of our report on the Financial Statement Schedules,
appearing above.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
March 6, 1998
S-2
<PAGE>
SCHEDULE I
TERRA INDUSTRIES INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
---------------------------------------------
STATEMENTS OF FINANCIAL POSITION
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) December 31,
- --------------------------------------------------------------------------
1997 1996
--------------------------
<S> <C> <C>
Assets
Cash and short-term investments $ 14,993 $ 6,307
Accounts receivable, net 866 761
Deferred tax asset - current 5,945 2,020
------------------------------------------------------------------------
Other current assets 352 12,733
------------------------------------------------------------------------
Total current assets 22,156 21,821
Investment in and advances to subsidiaries 1,264,734 1,055,909
Other assets 13,452 13,872
------------------------------------------------------------------------
Total assets $ 1,300,342 $ 1,091,602
==========================================================================
Liabilities
Income taxes payable $ 20,514 $ 5,096
Accrued and other liabilities 2,466 6,631
------------------------------------------------------------------------
Total current liabilities 22,980 11,727
Long-term debt 358,755 358,755
Deferred income taxes 104,349 108,377
Other liabilities 15,441 5,221
------------------------------------------------------------------------
Total liabilities 501,525 484,080
- --------------------------------------------------------------------------
Stockholders' Equity
Capital stock 127,581 127,614
Paid-in capital 548,772 550,850
Retained earnings (deficit) 122,464 (70,942)
------------------------------------------------------------------------
Total stockholders' equity 798,817 607,522
- --------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,300,342 $ 1,091,602
==========================================================================
</TABLE>
See accompanying Notes to the Condensed Financial Statements.
S-3
<PAGE>
TERRA INDUSTRIES INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
---------------------------------------------
CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands, except per-share amounts) For the Year Ended December 31,
- -------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
Income
Equity in earnings of subsidiaries $ 250,064 $ 160,204 $ 186,048
Interest and other income 294 123 1,367
- -------------------------------------------------------------------------------------------------
Total income 250,358 160,327 187,415
- -------------------------------------------------------------------------------------------------
Expenses
Selling, general and administrative expense 4,843 2,544 3,328
Interest expense 39,507 38,725 29,183
Infrequent items 10,000 --- ---
Income tax benefit (13,874) (14,893) (8,978)
- -------------------------------------------------------------------------------------------------
Total expenses 40,476 26,376 23,533
- -------------------------------------------------------------------------------------------------
Income before extraordinary items 209,882 133,951 163,882
Extraordinary loss on early retirement of debt (2,995) --- (4,338)
- -------------------------------------------------------------------------------------------------
Net income 206,887 133,951 159,544
Cash dividends paid to common stockholders (13,481) (11,582) (8,662)
Retained earnings (deficit) - beginning of year (70,942) (193,311) (344,193)
- -------------------------------------------------------------------------------------------------
Retained earnings (deficit) - end of year $ 122,464 $ (70,942) $ (193,311)
=================================================================================================
Basic Earnings Per Share:
Income before extraordinary items $ 2.84 $ 1.74 $ 2.03
Extraordinary loss on early retirement of debt (0.04) --- (0.05)
- -------------------------------------------------------------------------------------------------
Net income $ 2.80 $ 1.74 $ 1.98
=================================================================================================
Diluted Earnings Per Share:
Income before extraordinary items $ 2.80 $ 1.72 $ 2.01
Extraordinary loss on early retirement of debt (0.04) --- (0.05)
- -------------------------------------------------------------------------------------------------
Net income $ 2.76 $ 1.72 $ 1.96
=================================================================================================
</TABLE>
See accompanying Notes to the Condensed Financial Statements.
S-4
<PAGE>
TERRA INDUSTRIES INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
---------------------------------------------
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands) For the Year Ended December 31,
- ------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 206,887 $ 133,951 $ 159,544
Adjustments to reconcile net income to
net cash used by operations:
Equity in earnings of subsidiaries (250,064) (160,204) (186,048)
Deferred income taxes 13,543 24,689 44,293
Other non-cash items 10,556 1,588 5,010
Change in working capital components 23,529 (30,726) 16,071
Other 125 480 785
---------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities (22,510) (30,222) 39,655
- -----------------------------------------------------------------------------------------------------
Investing Activities
Proceeds from asset sales and
discontinued operations --- --- 5,832
---------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities --- --- 5,832
- -----------------------------------------------------------------------------------------------------
Financing Activities
Net long-term debt increase --- --- 200,000
Debt issuance costs --- --- (3,666)
Dividends (13,481) (11,582) (8,662)
Stock (repurchase) issuance - net (21,264) (91,131) 1,187
Advances from (to) subsidiaries - net 65,941 128,542 (234,157)
---------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities 31,196 25,829 (45,298)
- -----------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash 8,686 (4,393) 189
Cash and Investments at Beginning of Year 6,307 10,700 10,511
- -----------------------------------------------------------------------------------------------------
Cash and Investments at End of Year $ 14,993 $ 6,307 $ 10,700
=====================================================================================================
Interest Paid $ 39,505 $ 39,639 $ 27,521
=====================================================================================================
Taxes Paid $ 20,698 $ 58,809 $ 21,651
=====================================================================================================
</TABLE>
See accompanying Notes to the Condensed Financial Statements.
S-5
<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.
2. Long-Term Debt
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<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.
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 June
1998. Total minimum rental payments are: 1998, $1.7 million. This amount is not
reduced by sublease rentals, which in 1997 was $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 provided reserves equal to the estimated present
value of these liabilities of $20 million at December 31, 1997.
The Registrant had letters of credit outstanding totaling $5.5 million at
December 31, 1997 and $5.4 million at December 31, 1996, guaranteeing various
insurance and financing activities. Short-term investments of $5.4 million at
December 31, 1997 are restricted to collateralize certain of the letters of
credit.
S-6
<PAGE>
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.
S-7
<PAGE>
SCHEDULE II
TERRA INDUSTRIES INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1997, 1996, and 1995
---------------------------------------------
(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> <C>
Year Ended December 31, 1997:
- ----------------------------
Allowance for Doubtful Accounts $ 11,391 $ 7,090 $ (5,327) $ 13,154
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
</TABLE>
S-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
10.1.14 Form of Incentive Stock Option Agreement of Terra Industries under its
1997 Stock Incentive Plan.
10.1.15 Form of Nonqualified Stock Option Agreement of Terra Industries under
its 1997 Stock Incentive Plan.
*10.10 Amended and Restated Agreement of Limited Partnership of Beaumont
Methanol, Limited Partnership dated December 31, 1997 by and among
Terra Methanol Corporation, BMC Holdings, Inc. and Nova Products LLC.
13 Financial Review and Consolidated Financial Statements as contained in
the Annual Report to Stockholders of Terra Industries for the fiscal
year ended December 31, 1997.
21 Subsidiaries of Terra Industries.
24 Powers of Attorney.
27 Financial Data Schedule. [EDGAR filing only]
</TABLE>
- --------------------------------------------------------------------------------
*Confidential treatment has been requested in connection with this document.
<PAGE>
Exhibit 10.10
EXECUTION COPY
================================================================================
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
BEAUMONT METHANOL, LIMITED PARTNERSHIP
Dated as of December 31, 1997
Among
TERRA METHANOL CORPORATION,
as General Partner,
-- ------- -------
and
BMC HOLDINGS, INC.,
as Class B Limited Partner,
-- ----- - ------- -------
and
NOVA PRODUCTS LLC,
as Class A Limited Partner
-- ----- - ------- -------
================================================================================
Confidential material has been omitted from this agreement pursuant to a request
for confidential treatment filed with the Securities and Exchange Commission
under Rule 24b-2(b) under the Securities Exchange Act of 1934, as amended and
has been filed separately with the Securities and Exchange Commission.
<PAGE>
<TABLE>
<CAPTION>
T A B L E O F C O N T E N T S
Section Page
ARTICLE I
THE PARTNERSHIP
<S> <C> <C>
SECTION 1.01. Formation............................................... 1
SECTION 1.02. Name and Principal Office............................... 1
SECTION 1.03. Registered Agent........................................ 1
SECTION 1.04. Filings; Certificate of Limited Partnership............. 1
SECTION 1.05. Term.................................................... 2
SECTION 1.06. Independent Activities.................................. 2
SECTION 1.07. Computation of Time Periods............................. 3
ARTICLE II
PURPOSE
SECTION 2.01. Purpose................................................. 3
SECTION 2.02. Powers.................................................. 3
SECTION 2.03. Separate Business....................................... 4
ARTICLE III
PARTNERS' CAPITAL CONTRIBUTIONS
SECTION 3.01. General Partner......................................... 4
SECTION 3.02. Limited Partners........................................ 4
SECTION 3.03. Additional Capital Contributions........................ 4
SECTION 3.04. Other Matters........................................... 5
ARTICLE IV
ALLOCATIONS
SECTION 4.01. Profits................................................. 5
SECTION 4.02. Losses.................................................. 5
SECTION 4.03. Special Allocations..................................... 5
SECTION 4.04. Curative Allocations.................................... 7
SECTION 4.05. Limitation on Losses.................................... 7
SECTION 4.06. Priority of Allocations................................. 8
SECTION 4.07. Other Allocation Rules.................................. 8
SECTION 4.08. Tax Allocations: Section 704(c) of the Code............ 8
SECTION 4.09. Asset Values............................................ 9
</TABLE>
ARTICLE V
<PAGE>
ii
<TABLE>
<CAPTION>
DISTRIBUTIONS
<S> <C>
SECTION 5.01. Class A Limited Partner's First Priority Distribution....11
SECTION 5.02. Terra Partners' Second Priority Distribution.............12
SECTION 5.03. Class A Limited Partner Guaranteed Payment...............12
SECTION 5.04. Amounts Withheld.........................................12
SECTION 5.05. Tax Distributions........................................12
ARTICLE VI
MANAGEMENT
SECTION 6.01. Authority of the General Partner.........................12
SECTION 6.02. Right to Rely on the General Partner.....................13
SECTION 6.03. Restrictions on Authority of the General Partner.........13
SECTION 6.04. Duties and Obligations of the General Partner............14
SECTION 6.05. Indemnification of Class A Limited Partner...............16
SECTION 6.06. Compensation and Expenses................................18
ARTICLE VII
ROLE OF LIMITED PARTNERS
SECTION 7.01. Rights or Powers.........................................18
SECTION 7.02. Voting Rights............................................18
SECTION 7.03. Procedure for Consent....................................18
ARTICLE VIII
REPRESENTATIONS AND WARRANTIES
SECTION 8.01. General..................................................19
SECTION 8.02. Representations and Warranties of Each Terra Partner.....19
SECTION 8.03. Representations and Warranties of the Class A Limited
Partner.................................................21
ARTICLE IX
BOOKS AND RECORDS; REPORTS
SECTION 9.01. Accounting; Books and Records............................22
SECTION 9.02. Reports..................................................23
SECTION 9.03. Tax Matters..............................................26
SECTION 9.04. Confidential Information.................................27
</TABLE>
ARTICLE X
<PAGE>
iii
AMENDMENTS; MEETINGS
<TABLE>
<CAPTION>
<S> <C>
SECTION 10.01. Amendments...............................................27
SECTION 10.02. Meetings of the Partners.................................27
SECTION 10.03. Unanimous Consent........................................28
ARTICLE XI
TRANSFERS OF INTERESTS
SECTION 11.01. Restriction on Transfers.................................28
SECTION 11.02. Permitted Transfers......................................28
SECTION 11.03. Conditions to Permitted Transfers........................29
SECTION 11.04. Prohibited Transfers.....................................30
SECTION 11.05. Admission as Substitute Partners.........................30
SECTION 11.06. Rights of Unadmitted Assignees...........................31
SECTION 11.07. Distributions with Respect to Transferred Interests......31
SECTION 11.08. Retirement of Partners' Interest in the Partnership......32
ARTICLE XII
GENERAL PARTNER
SECTION 12.01. Covenant Not to Withdraw, Transfer or Dissolve...........32
SECTION 12.02. Termination of Status as General Partner.................32
ARTICLE XIII
DISSOLUTION AND WINDING UP
SECTION 13.01. Liquidation..............................................33
SECTION 13.02. Winding Up...............................................33
SECTION 13.03. Restoration of Deficit Capital Accounts; Compliance with
Timing Requirements of Regulations......................34
SECTION 13.04. Deemed Contribution and Liquidation......................35
SECTION 13.05. Rights of Partners.......................................35
SECTION 13.06. Notice of Dissolution....................................35
SECTION 13.07. The Liquidator...........................................35
SECTION 13.08. Form of Liquidating Distributions........................36
</TABLE>
ARTICLE XIV
POWER OF ATTORNEY
<PAGE>
<TABLE>
<CAPTION>
iv
<S> <C> <C>
SECTION 14.01. General Partner as Attorney-In-Fact.....................36
SECTION 14.02. Nature of Special Power.................................37
ARTICLE XV
MISCELLANEOUS
SECTION 15.01. Notices.................................................37
SECTION 15.02. Binding Effect..........................................39
SECTION 15.03. Construction............................................39
SECTION 15.04. Headings................................................39
SECTION 15.05. Severability............................................39
SECTION 15.06. Governing Law...........................................39
SECTION 15.07. Waiver of Action for Partition..........................39
SECTION 15.08. Consent to Jurisdiction.................................39
SECTION 15.09. Execution in Counterparts...............................39
SECTION 15.10. Treatment as Security...................................39
SECTION 15.11. Waiver of Jury Trial....................................39
</TABLE>
<TABLE>
<CAPTION>
SCHEDULES
<S> <C>
Schedule I - Original Capital Contributions
Schedule II - Appraisal Guidelines
Schedule III - Collateral for Demand Loans
Schedule IV - Existing Investments of Terra U.K.
Schedule V - Collateral for Terra Capital Note
Schedule 8.02(g) - Environmental Matters
Schedule 11.02(b) - Restricted Transferees of the Class A Limited Partner
EXHIBITS
Exhibit A - Form of Partnership Balance Sheet
Exhibit B - Form of Confidentiality Agreement
Exhibit C - Form of Transferor Certificate
Exhibit D - Form of Transferee Certificate
Exhibit E-1 - Form of Demand Loan
Exhibit E-2 - Form of Minorco Guarantee
Exhibit E-3 - Form of Terra Capital Guarantee
Exhibit F - Form of Terra Capital Note
</TABLE>
<PAGE>
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
BEAUMONT METHANOL, LIMITED PARTNERSHIP
This AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP is entered
into and shall be effective as of the 31st day of December, 1997, by and among
TERRA METHANOL CORPORATION, a Delaware corporation ("TMC"), as the General
Partner, BMC HOLDINGS, INC., a Delaware corporation ("Holdings"), as the Class B
Limited Partner, and NOVA PRODUCTS LLC, a Delaware limited liability company
("Nova"), as the Class A Limited Partner. Capitalized terms used in this
Agreement shall have the meanings specified therefor in the Appendix attached
hereto (such meanings to be equally applicable to both the singular and plural
forms of the terms defined).
ARTICLE I
THE PARTNERSHIP
SECTION 1.01. Formation. The Partnership was formed on December 23,
1994. The Partners hereby agree to continue the Partnership as a limited
partnership pursuant to the provisions of the Act and upon the terms and
conditions set forth in this Agreement. This Agreement completely amends,
restates and supersedes that certain Agreement of Limited Partnership of
Beaumont Methanol, Limited Partnership entered into on December 23, 1994, by and
between TMC, as the General Partner, and Holdings, as the Limited Partner.
Simultaneous with the execution and delivery of this Agreement, (a) Holdings
will become the Class B Limited Partner and (b) Nova will acquire an Interest in
the Partnership in exchange for the contribution described in Section 3.02 and
Nova will be admitted to the Partnership as the Class A Limited Partner.
SECTION 1.02. Name and Principal Office. The name of the Partnership
shall continue to be "BEAUMONT METHANOL, LIMITED PARTNERSHIP", or such other
name as the General Partner shall hereafter determine. All Partnership Property
shall be held in such name (and not in the name of any Partner), and all
business and affairs of the Partnership shall be conducted under such name, or
under any name licensed for use by the Partnership. The principal office of the
Partnership shall continue to be at the address of the General Partner set forth
in Section 15.01, or such other place as the General Partner may from time to
time designate. In addition, the General Partner may establish and maintain such
other offices and places of business within and without the State of Delaware as
it may from time to time determine.
SECTION 1.03. Registered Agent . The name of the Partnership's
registered agent for service of process in the State of Delaware is The
Prentice-Hall Corporation, or any successor as appointed by the General Partner.
The address of the registered agent and the address of the registered office in
the State of Delaware is 32 Loockerman Square, Suite L100, Dover, Delaware
19904.
SECTION 1.04. Filings; Certificate of Limited Partnership. (a) The
General Partner has executed and caused the Certificate of Limited Partnership
described in the Act (the "Certificate") to be filed with the Secretary of State
of Delaware as required under Section 1.05 and the provisions of the Act and has
executed and caused to be filed, recorded and/or published, and shall execute
and cause to be
<PAGE>
2
filed, recorded and/or published, such other certificates or documents with the
appropriate authorities of the State of Texas as may be determined by the
General Partner to be reasonable and necessary or appropriate for the formation,
continuation, qualification, registration and/or operation of a limited
partnership in the State of Texas or any other state in which the Partnership
has elected or may elect to do business. The General Partner has executed and
filed such fictitious name registrations as are required under applicable law
with regard to the use of the name of the Partnership. The General Partner shall
take any and all other actions necessary or reasonable and appropriate to
perfect and maintain the status of the Partnership as a "limited partnership",
each of the Limited Partners as a "limited partner" in the Partnership, and the
General Partner as a "general partner" in the Partnership, under the Act and the
other laws of the State of Delaware or any other state in which the Partnership
has elected or may elect to do business. The General Partner may omit from the
Certificate filed with the Secretary of State of Delaware and from any other
certificates or documents filed in any other state in order to register and/or
qualify the Partnership to do business therein, and from all amendments thereto,
any information not required under applicable law (including, without
limitation, the name and address of each Limited Partner and information
relating to the Capital Contributions and shares of Profits and Losses and
compensation of the General Partner).
(b) To the extent the General Partner determines such action to be
necessary or reasonable and appropriate, the General Partner shall cause a
certified copy of the Certificate and any amendments thereto to be recorded in
the office of the county recorder in each county in which the Partnership owns
real property.
(c) Upon the dissolution of the Partnership, the General Partner (or,
if there is no remaining General Partner, the Liquidator selected pursuant to
clause (b) of the definition thereof set forth in the Appendix attached hereto)
shall promptly execute and cause to be filed certificates of dissolution and/or
certificates of cancellation in accordance with the Act and the law of any other
jurisdictions in which the Partnership has filed a Certificate or has registered
and/or qualified to do business therein.
SECTION 1.05. Term. The existence of the Partnership as a limited
partnership commenced on the date on which the Certificate was filed in the
office of the Secretary of State of Delaware in accordance with the Act, and
shall continue until the winding up and liquidation of the partnership and its
business and affairs following a Terminating Event, as provided in Article XIII.
SECTION 1.06. Independent Activities. (a) The General Partner and each
Limited Partner may, except as otherwise expressly provided in this Section
1.06, engage in whatever activities they choose, without having or incurring any
obligation to offer any interest in such activities to the Partnership or any
Partner. Neither this Agreement nor any action undertaken pursuant hereto shall
prevent any Partner or any of its Affiliates from engaging in such activities
(including, without limitation, making and managing Investments and otherwise
engaging in the methanol and/or agricultural minerals industry), or require any
Partner to permit the Partnership or any Partner to participate in any such
activities, and as a material part of the consideration for the execution of
this Agreement by each Partner, each Partner hereby waives, relinquishes and
renounces any such right or claim of participation.
(b) To the extent permitted under applicable law and except as
otherwise provided in this Agreement, the General Partner, when acting on behalf
of the Partnership, is hereby authorized to purchase property and assets from,
sell property and assets to or otherwise deal with any Partner, acting on its
own behalf, or any Affiliate of any Partner; provided that any such purchase,
sale or other
<PAGE>
3
transaction shall be made on terms and conditions which are no less favorable to
the Partnership than if such sale, purchase or other transaction had been made
with an independent third party. The Partners agree that the Transaction
Documents shall satisfy this independent third-party standard and the Partners
hereby authorize the General Partner to cause the Partnership to enter into the
Transaction Documents to which it is or is to be a party.
(c) Each Limited Partner and any Affiliate thereof may also lend money
to, borrow money from, act as a surety, guarantor or endorser for, guarantee or
assume one or more specific obligations of, provide collateral for, and transact
other business with the Partnership and, subject to other applicable law, has
the same rights and obligations with respect thereto as a Person who is not a
Partner. The existence of these relationships and acting in such capacities will
not result in the Limited Partners being deemed to be participating in the
control of the business of the Partnership or otherwise affect the limited
liability of the Limited Partners.
SECTION 1.07. Computation of Time Periods. In this Agreement, in the
computation of periods of time from a specified date to a later specified date,
the word "from" means "from and including" and the words "to" and "until" each
mean "to but excluding."
ARTICLE II
PURPOSE
SECTION 2.01. Purpose. The purpose of the Partnership is to provide a
business structure wherein the Partners can join together their knowledge,
expertise and resources and engage in the business of owning and managing the
Methanol Business and the Permitted Assets and manage, protect and conserve the
Partnership Property and make such additional investments and engage in such
additional business and activities as are permitted under this Agreement, and
engage in activities related or incidental thereto. The Partnership shall have
the power to do any and all acts necessary, appropriate, proper, advisable,
incidental or convenient to or in furtherance of the purpose of the Partnership
and shall have, without limitation, any and all powers that may be exercised on
behalf of the Partnership by the General Partner pursuant to Section 1.06(b) and
Article VI.
SECTION 2.02. Powers. The Partnership shall have such powers as are
necessary or appropriate to carry out the purposes of the Partnership,
including, without limitation:
(a) to have and maintain one or more offices and places of business
described in Section 1.02 and, in connection therewith, to do such acts and
things and incur such expenses as may be necessary or advisable in
connection with the maintenance of each such office or place of business
and the conduct of the business and affairs of the Partnership;
(b) to open, maintain and close accounts with one or more banks or
other financial institutions, and to draw checks and other orders for the
payment of money;
(c) to guarantee on a nonrecourse basis borrowings of the Partners
used to acquire Partnership Property, and, in connection therewith, to
pledge and grant liens on and security interests in all or any portion of
the Partnership Property;
<PAGE>
4
(d) to borrow money in furtherance of the purposes set forth in
Section 2.01, and to secure the payment of such borrowing or other
obligations of the Partnership by the pledge of, or the grant of liens on
and security interests in, all or any portion of the Partnership Property;
(e) to enter into, make and perform all such contracts, agreements and
other undertakings as may be necessary, advisable or incident to the
carrying out of the purposes set forth in Section 2.01; and
(f) to engage in any other lawful act or activity which may be
necessary or appropriate in the pursuance of the foregoing, including,
without limitation, the retention of employees, agents, independent
contractors, attorneys, accountants and investment counselors and the
preparation and filing of all Partnership tax returns.
SECTION 2.03. Separate Business. The Partnership shall keep its
business and affairs and all of the Partnership Property and operations separate
and distinct from the business, affairs, property and assets and operations of
the Partners and of any other Person in which any of them may be or become
interested.
ARTICLE III
PARTNERS' CAPITAL CONTRIBUTIONS
SECTION 3.01. General Partner. The General Partner shall have
contributed or shall be deemed to have contributed on the Closing Date, as an
Original Capital Contribution, the property and assets described on Part A of
Schedule I attached hereto (which Schedule shall be adjusted as promptly as
practicable and in any event no later than January 30, 1998 to reflect the
actual (as opposed to estimated) property and assets contributed or deemed to be
contributed to the Partnership by the General Partner).
SECTION 3.02. Limited Partners. Each Limited Partner shall have
contributed or shall be deemed to have contributed on the Closing Date, as an
Original Capital Contribution, the property and assets described opposite the
name of such Limited Partner on Part B of Schedule I attached hereto (which
Schedule shall be adjusted as promptly as practicable and in any event no later
than January 30, 1998 to reflect the actual (as opposed to estimated) property
and assets contributed or deemed to be contributed to the Partnership by the
Class B Limited Partner).
SECTION 3.03. Additional Capital Contributions. (a) General. Each
Partner may (with the consent of the General Partner) contribute from time to
time as Additional Capital Contributions such additional cash or other property
or assets as it may determine; provided that any such Additional Capital
Contributions shall consist solely of Permitted Assets. None of the Partners
shall be required to contribute additional cash or other Permitted Assets to the
Partnership, except as required under Section 3.03(b).
(b) Required Capital Contributions. [Confidential material has been
omitted pursuant to a request for confidential treatment filed with the
Securities and Exchange Commission (the "Commission") under Rule 24b-2(b) under
the Securities Exchange Act of 1934, as amended
<PAGE>
5
("Rule 24b-2(b)")and has been filed separately with the Commission.]
SECTION 3.04. Other Matters. (a) Except as otherwise expressly
provided in this Agreement, no Partner shall demand or receive a return of its
Capital Contributions or withdraw from the Partnership without the consent of
all of the other Partners. Under any circumstances requiring a return of any
Capital Contribution, no Partner shall have the right to receive property or
assets other than cash, except as may be otherwise expressly provided in this
Agreement.
(b) No Partner shall receive any interest, salary, or drawing with
respect to its Capital Contributions or its Capital Account or for services
rendered by it or any of its Affiliates on behalf of the Partnership or
otherwise in its capacity as a Partner, except as may be otherwise expressly
provided in this Agreement.
(c) The Limited Partners shall not be liable for the debts,
liabilities, contracts or any other obligations of the Partnership. Except as
otherwise provided under any other agreements among the Partners or any
mandatory provisions of applicable law, a Limited Partner shall be liable only
to make its Capital Contributions as expressly set forth in this Agreement, and
shall not be required to lend any funds to the Partnership or, after such
Capital Contributions have been made, to make any Additional Capital
Contributions to the Partnership.
ARTICLE IV
ALLOCATIONS
SECTION 4.01. Profits. Profits for any Allocation Year shall be
allocated in the following manner and order of priority: [Confidential material
has been omitted pursuant to a request for confidential treatment filed with the
Commission under Rule 24b-2(b)and has been filed separately with the
Commission.]
SECTION 4.02. Losses. Losses for any Allocation Year shall be
allocated in the following manner and order of priority: [Confidential material
has been omitted pursuant to a request for confidential treatment filed with the
Commission under Rule 24b-2(b)and has been filed separately with the
Commission.]
SECTION 4.03. Special Allocations. (a) Minimum Gain Chargeback. Except
as otherwise provided in Section 1.704-2(f) of the Regulations, notwithstanding
any other provision of this Article IV, if there is a net decrease in
Partnership Minimum Gain during any Allocation Year, each Partner shall be
specially allocated items of Partnership income and gain for such Allocation
Year (and, if necessary, subsequent Allocation Years) in an amount equal to such
Partner's share of the net decrease in Partnership Minimum Gain, determined in
accordance with Section 1.704-2(g) of the Regulations. Allocations pursuant to
the immediately preceding sentence shall be made in proportion to the respective
amounts required to be allocated to each Partner pursuant thereto. The items to
be so allocated shall be determined in accordance with Sections 1.704-2(f)(6)
and 1.704-2(j)(2) of the Regulations. This Section 4.03(a) is intended to comply
with the minimum gain chargeback requirement in Section 1.704-2(f) of the
Regulations and shall be interpreted consistently therewith.
<PAGE>
6
(b) Partner Minimum Gain Chargeback. Except as otherwise provided in
Section 1.704-2(i)(4) of the Regulations, notwithstanding any other provision of
this Article IV, if there is a net decrease in Partner Nonrecourse Debt Minimum
Gain attributable to any Partner Nonrecourse Debt during any Allocation Year,
each Partner who has a share of the Partner Nonrecourse Debt Minimum Gain
attributable to such Partner Nonrecourse Debt, determined in accordance with
Section 1.704-2(i)(5) of the Regulations, shall be specially allocated items of
Partnership income and gain for such Allocation Year (and, if necessary,
subsequent Allocation Years) in an amount equal to such Partner's share of the
net decrease in Partner Nonrecourse Debt Minimum Gain attributable to such
Partner Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(4) of
the Regulations. Allocations pursuant to the immediately preceding sentence
shall be made in proportion to the respective amounts required to be allocated
to each Partner pursuant thereto. The items to be so allocated shall be
determined in accordance with Sections 1.704-2(i)(4) and 1.704-2(j)(2) of the
Regulations. This Section 4.03(b) is intended to comply with the minimum gain
chargeback requirement in Section 1.704-2(i)(4) of the Regulations and shall be
interpreted consistently therewith.
(c) Qualified Income Offset. If any Limited Partner unexpectedly
receives any adjustment, allocation or distribution described in Section 1.704-
1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6) of the
Regulations, items of Partnership income and gain shall be specially allocated,
as promptly as practicable, to each such Limited Partner in an amount and a
manner sufficient to eliminate, to the extent required under the Regulations,
the Adjusted Capital Account Deficit of such Limited Partner; provided that an
allocation pursuant to this Section 4.03(c) shall be made only if and to the
extent that such Limited Partner would have an Adjusted Capital Account Deficit
after all other allocations provided for in this Article IV have been
tentatively made as if this Section 4.03(c) were not included in this Agreement.
(d) Gross Income Allocation. If any Limited Partner has a deficit in
its Capital Account at the end of any Allocation Year which is in excess of the
sum of (i) the amount such Limited Partner is obligated to restore pursuant to
any provision of this Agreement and (ii) the amount such Limited Partner is
deemed to be obligated to restore pursuant to the penultimate sentences of
Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Regulations, each such Limited
Partner shall be specially allocated, as promptly as practicable, items of
Partnership income and gain in the amount of such excess; provided that an
allocation pursuant to this Section 4.03(d) shall be made only if and to the
extent that such Limited Partner would have a deficit in its Capital Account in
excess of such sum after all other allocations provided for in this Article IV
have been made as if Section 4.03(c) and this Section 4.03(d) were not included
in this Agreement.
(e) Nonrecourse Deductions. Nonrecourse Deductions for any Allocation
Year shall be specially allocated Ratably among the Partners.
(f) Partner Nonrecourse Deductions. Any Partner Nonrecourse Deductions
for any Allocation Year shall be specially allocated to the Partner who bears
the economic risk of loss with respect to the Partner Nonrecourse Debt to which
such Partner Nonrecourse Deductions are attributable in accordance with Section
1.704-2(i)(1) of the Regulations.
(g) Section 754 Adjustments. To the extent an adjustment to the
adjusted tax basis of any Partnership Property pursuant to Section 734(b) or
743(b) of the Code is required pursuant to Section 1.704-1(b)(2)(iv)(m)(2) or
1.704-1(b)(2)(iv)(m)(4) of the Regulations to be taken into account in
<PAGE>
7
determining Capital Accounts as the result of a distribution to a Partner in
complete liquidation of its Interest, the amount of such adjustment to Capital
Accounts shall be treated as an item of gain (if the adjustment increases the
basis of the such Partnership Property) or loss (if the adjustment decreases the
basis of the such Partnership Property), and such gain or loss shall be
specially allocated (i) if Section 1.704-1(b)(2)(iv)(m)(2) of the Regulations
applies, to the Partners in accordance with their Interests, or (ii) if Section
1.704-1(b)(2)(iv)(m)(4) of the Regulations applies, to the Partner to whom such
distribution was made.
(h) Allocations Relating to Taxable Issuance of Interests. Any item of
income, gain, loss, or deduction realized as a direct or indirect result of the
issuance of an Interest by the Partnership to a Partner (the "Issuance Items")
shall be allocated among the Partners so that, to the extent possible, the net
amount of such Issuance Items, together with all other allocations made to each
Partner pursuant to this Agreement, shall be equal to the net amount that would
have been allocated to each such Partner if the Issuance Items had not been
realized.
(i) Class A Limited Partner Guaranteed Payment. [Confidential material
has been omitted pursuant to a request for confidential treatment filed with the
Commission under Rule 24b-2(b)and has been filed separately with the
Commission.]
(j) Depreciation. [Confidential material has been omitted pursuant to
a request for confidential treatment filed with the Commission under Rule 24b-
2(b)and has been filed separately with the Commission.]
SECTION 4.04. Curative Allocations. (a) The allocations set forth in
Sections 4.03(a) through 4.03(g) and Section 4.05 (the "Regulatory Allocations")
are intended to comply with certain requirements of the Regulations. It is the
intent of the Partners that, to the extent possible, all Regulatory Allocations
shall be offset either with other Regulatory Allocations or with special
allocations of other items of Partnership income, gain, loss, or deduction
pursuant to this Section 4.04. Therefore, notwithstanding any other provision of
this Article IV (other than the Regulatory Allocations), the General Partner
shall make such offsetting special allocations of Partnership income, gain, loss
or deduction as are necessary so that, after such offsetting allocations are
made, the balance in each Partner's Capital Account is, to the extent possible,
equal to the balance such Partner's Capital Account would have had if the
Regulatory Allocations were not included in this Agreement. In making offsetting
allocations under this Section 4.04 at any time, the General Partner shall take
into account future Regulatory Allocations under Sections 4.03(a) and 4.03(b)
that, although not made at such time, are likely to offset other Regulatory
Allocations made under Sections 4.03(e) and 4.03(f) prior to such time.
(b) The General Partner shall have reasonable discretion, with respect
to each Allocation Year, (i) to apply the provisions of Section 4.04(a) in
whatever order is likely to minimize the economic distortions that might
otherwise result from the Regulatory Allocations and (ii) to divide all
allocations pursuant to Section 4.04(a) among the Partners in a manner that is
likely to minimize such economic distortions.
SECTION 4.05. Limitation on Losses. The Losses allocated pursuant to
Section 4.02 and the items of Partnership loss or deduction allocated pursuant
to Sections 4.03 and 4.04 shall not exceed the maximum amount of Losses that can
be so allocated without causing any Limited Partner to have an Adjusted Capital
Account Deficit at the last day of any Allocation Year. All Losses in excess of
the
<PAGE>
8
limitations set forth in the immediately preceding sentence shall be allocated
to the General Partner.
SECTION 4.06. Priority of Allocations. (a) The allocations set forth
in this Article IV shall be made in the following manner and order of priority:
[Confidential material has been omitted pursuant to a request for confidential
treatment filed with the Commission under Rule 24b-2(b)and has been filed
separately with the Commission.]
(b) The Partners and the Partnership agree to treat the Partnership as
a partnership for federal, state and local income tax purposes and to report all
Partnership items and all transactions involving the Partnership or any of the
Interests or other ownership or profit interests therein, whether direct or
indirect (collectively, the "Partnership Matters"), in a manner consistent with
such treatment. Furthermore, the Partners and the Partnership agree to report
all Partnership Matters for federal, state and local income tax purposes
consistently with the treatment provided in this Agreement or, if no such
treatment is so provided, consistently with the manner in which the Class A
Limited Partner reasonably determines to treat such Partnership Matters. If the
Class A Limited Partner does not notify the Partnership of its treatment of any
Partnership Matter, the Partners and the Partnership shall report such
Partnership Matter consistently with the manner in which the General Partner
reasonably determines to treat such Partnership Matter.
SECTION 4.07. Other Allocation Rules. (a) Profits, Losses and any
other items of Partnership income, gain, loss or deduction shall be allocated to
the Partners pursuant to this Article IV as of the last day of each Allocation
Year; provided that Profits, Losses and such other items shall also be allocated
at such times as are required under Section 11.08(b) and at such other times as
the Asset Values of the Partnership Property are adjusted in accordance with
Section 4.09 and the definition of "Asset Value" set forth in the Appendix
attached hereto.
(b) In the case of a Partner whose entire Interest is retired or sold,
the Partnership taxable year shall close with respect to such Partner, and such
Partner's distributive share of all items of Profits, Losses and other items of
Partnership income, gain, loss or deduction shall be determined by using the
interim closing of the books method under Section 706 of the Code and Section
1.706-1(c)(2)(i) of the Regulations. In all other cases in which it is necessary
to determine the Profits, Losses or any other such items allocable to any
period, Profits, Losses or any such other item shall be determined on a daily,
monthly or other basis, as determined by the General Partner using any
permissible method under Section 706 of the Code and the Regulations promulgated
thereunder.
(c) The Partners are aware of the income tax consequences of the
allocations made under this Article IV, and each Partner hereby agrees to be
bound by the provisions of this Article IV in reporting their shares of
Partnership income and loss for income tax purposes.
SECTION 4.08. Tax Allocations: Section 704(c) of the Code. (a) In
accordance with Section 704(c) of the Code and the Regulations promulgated
thereunder, income, gain, loss and deduction with respect to any Permitted Asset
contributed to the capital of the Partnership shall, solely for income tax
purposes, be allocated among the Partners so as to take account of any variation
between the adjusted basis of such Permitted Asset to the Partnership for United
States federal income tax purposes and its Initial Asset Value.
(b) If the Asset Value of any Partnership Property is adjusted
pursuant to clause (ii)
<PAGE>
9
of the definition of "Asset Value" set forth in the Appendix attached hereto,
subsequent allocations of income, gain, loss and deduction with respect to such
Partnership Property shall take account of any variation between the adjusted
basis of such Partnership Property for United States federal income tax purposes
and its Asset Value in the same manner as is provided under Section 704(c) of
the Code and the Regulations promulgated thereunder.
(c) Depreciation recapture arising under Sections 1245 and 1250 of the
Code shall be allocated in accordance with such Sections and the Regulations
promulgated thereunder.
(d) Any elections or other decisions relating to such allocations
shall be made by the General Partner in any manner that reasonably reflects the
purpose and intention of this Agreement. Allocations pursuant to this Section
4.08 are solely for purposes of federal, state and local taxes and shall not
affect, or in any way be taken into account in computing, any Partner's Capital
Account or share of Profits, Losses, other items of Partnership income, gain,
loss or deduction, or distributions pursuant to any other provision of this
Agreement.
(e) Except as otherwise provided in this Agreement, all items of
Partnership income, gain, loss and deduction, and any other allocations not
otherwise provided for herein, shall be divided among the Partners in the same
proportions as they share Profits or Losses and items thereof, as the case may
be, for the Allocation Year.
(f) Subject to any limitations set forth in the Code and the
Regulations promulgated thereunder (including Section 263 of the Code with
respect to the capitalization of certain expenses), the Partners and the
Partnership hereby agree to treat, for federal, state and local income tax
purposes, all Extraordinary Expenses, all payments made to the Class A Limited
Partner for Qualified Investor Costs and all indemnification payments made to
the Class A Limited Partner pursuant to Section 6.05(b), as Code Section 162
ordinary and necessary expenses incurred in connection with the carrying on of a
trade or business.
SECTION 4.09. Asset Values. For the purpose of determining the balance
in the Capital Account of each Partner on the Closing Date and for purposes of
determining the amount of gain or loss deemed to be realized on a Mark-to-Market
Valuation of any Permitted Asset, the Asset Values of the Permitted Assets of
the Partnership shall be as follows:
(a) Initial Asset Values. (i) The initial Asset Value of the Terra
Newco Stock shall be equal to the sum of (A) the aggregate outstanding
principal amount of the Terra U.K. Loan plus all accrued and unpaid
interest thereon, if any, (B) the book value of all Investments made by the
Partnership, directly or indirectly, in the Ammonia Loop and (C) the face
value of all Liquid Investments of Terra Newco, plus accrued and unpaid
interest thereon, if any, adjusted for any unamortized premium or discount
thereon; provided that each of the amounts or values referred to in
subclause (i)(A), (i)(B) or (i)(C) of this Section 4.09(a) shall be
adjusted, if necessary, on a pro forma basis for all reasonably anticipated
income taxes that will be required to be paid by Terra Newco or any
Subsidiary of Terra Newco on such amount or value at a rate of 35%.
(ii) The initial Asset Value of the Terra Capital Note, any of the
Demand Loans and any of the Permitted Securitization Assets shall be equal
to the aggregate outstanding principal amount thereof plus all accrued and
unpaid interest thereon, if any.
<PAGE>
10
(iii) The initial Asset Value of the Methanol Plant and all Methanol
Related Assets shall be determined pursuant to an appraisal conducted by an
independent valuation firm acceptable to each of the Partners (the "Initial
Appraiser") pursuant to the Appraisal Guidelines.
(iv) The initial Asset Value of any of the Liquid Investments shall be
equal to the face value thereof, plus accrued and unpaid interest thereon,
if any, adjusted for any unamortized premium or discount.
(b) Mark-to-Market Valuation. A Mark-to-Market Valuation shall be made
upon the occurrence of each Mark-to-Market Event, and the Mark-to-Market
Value of each Permitted Asset comprising part of the Partnership Property
shall be determined in accordance with the following provisions, except
that, unless otherwise expressly provided in this Section 4.09(b), the
Mark-to-Market Value of any such Permitted Asset shall be made as of the
applicable Measurement Date:
(i) The Terra Newco Stock shall be valued at the sum of:
[Confidential material has been omitted pursuant to a request for
confidential treatment filed with the Commission under Rule 24b-
2(b)and has been filed separately with the Commission.]
provided that each of the amounts or values referred to in subclause
(i)(A), (i)(B) or (i)(C) of this Section 4.09(b) shall be adjusted, if
necessary, on a pro forma basis for all reasonably anticipated income
taxes that will be required to be paid by Terra Newco or any
Subsidiary of Terra Newco on such amount or value at a rate of 35%;
and provided further, however, that, if any payment or other material
default has occurred and is continuing with respect to the certificate
of incorporation or bylaws of Terra Newco, the Terra U.K. Loan
Documents or the Ammonia Loop Completion Guarantee, and such default
shall continue after the applicable grace period, if any, specified
therein, the value of the Partnership Property described above in this
Section 4.09(b)(i) with respect to which such payment or other
material default shall have occurred and be continuing shall be
determined by an appraisal firm, investment bank or commercial bank of
national reputation selected by the General Partner with the consent
of the Class A Limited Partner (which consent shall not be
unreasonably withheld).
(ii) The Terra Capital Note, each of the Permitted Securitization
Assets and each of the Demand Loans shall be valued at the aggregate
outstanding principal amount thereof plus all accrued and unpaid
interest thereon to the date of any such Mark-to-Market Valuation;
provided that if any payment or other material default has occurred
and is continuing with respect to the Terra Capital Note, any of the
Permitted Securitization Assets or any of the Demand Loans, and such
default shall continue after the applicable grace period, if any,
specified in the Terra Capital Note or the agreements or instruments
evidencing or setting forth the terms of any such Permitted
Securitization Asset or Demand Loan, as the case may be, the value of
the Partnership Property described above in this Section 4.09(b)(ii)
with respect to which such payment or other material default shall
have occurred and be continuing shall be determined by an investment
bank or commercial bank of national reputation selected by the General
<PAGE>
11
Partner with the consent of the Class A Limited Partner (which consent
shall not be unreasonably withheld).
(iii) The Methanol Plant and all of the Methanol Related Assets
will be valued pursuant to an appraisal conducted by the Initial
Appraiser on or about the date of such Mark-to-Market Valuation, or,
if the Initial Appraiser is unavailable or unwilling to do such
appraisal on or about such date, by an Appraiser pursuant to the
Appraisal Guidelines; provided, however, that any of the Partners may,
at such Partner's sole expense, independently elect to determine the
fair market value of the Methanol Plant and all of the Methanol
Related Assets, in which case such fair market value shall be
determined by an Alternate Appraiser pursuant to the Appraisal
Guidelines (and if the fair market value of the Methanol Plant and all
of the Methanol Related Assets determined by the Alternate Appraiser
differs by at least 10% (whether higher or lower) from the fair market
value thereof determined by the Initial Appraiser or the Appraiser, as
applicable, then the Methanol Plant and all of the Methanol Related
Assets will be valued at the average of the respective fair market
values of the Methanol Plant and all of the Methanol Related Assets
determined by Initial Appraiser or the Appraiser, as applicable, and
the Alternate Appraiser).
(iv) Each of the Liquid Investments of the Partnership shall be
valued at their face value plus all accrued and unpaid interest
thereon, if any, to the date of any such Mark-to-Market Valuation,
adjusted for any unamortized premium or discount thereon at such date;
provided that if any payment or other material default has occurred
and is continuing with respect to any of the Liquid Investments, the
value of the Liquid Investment with respect to which such payment or
other material default shall have occurred and be continuing shall be
determined by an investment bank or commercial bank of national
reputation selected by the General Partner with the consent of the
Class A Limited Partner (which consent shall not be unreasonably
withheld).
Each of the Partners hereby agrees that any election by such Partner to have the
Ammonia Loop appraised by an Alternate Appraiser pursuant to Section
4.09(b)(i)(B)(2) or the Methanol Plant and the Methanol Related Assets appraised
by an Alternate Appraiser pursuant to Section 4.09(b)(iii) shall be made as
promptly as practicable and that it shall use its reasonable efforts to cause
each such Alternate Appraiser to diligently conduct its appraisal of the Ammonia
Loop or the Methanol Plant and the Methanol Related Assets, as the case may be,
and to complete such appraisal within a reasonable period of time.
ARTICLE V
DISTRIBUTIONS
SECTION 5.01. Class A Limited Partner's First Priority Distribution.
The General Partner shall cause the Partnership to make cash distributions to
the Class A Limited Partner on each Distribution Date until the Class A Limited
Partner has been distributed an amount equal to the remainder, if any, of (a)
the Cumulative First Priority Return from the Closing Date to such Distribution
Date, minus (b) all cash distributions in respect of the First Priority Return
previously made to the Class A Limited Partner pursuant to this Section 5.01.
<PAGE>
12
SECTION 5.02. Terra Partners' Second Priority Distribution. The
General Partner shall cause the Partnership to make cash distributions to the
Terra Partners, on each Distribution Date, Ratably until the Terra Partners have
been distributed an amount equal to the remainder, if any, of (a) the Cumulative
Second Priority Return from the Closing Date to such Distribution Date, minus
(b) all cash distributions in respect of the Second Priority Return previously
made to the Terra Partners pursuant to this Section 5.02; provided, however,
that no distribution shall be made under this Section 5.02 on any Distribution
Date unless, after giving pro forma effect to such distribution, the aggregate
principal amount of all Liquid Investments of the Partnership and all Demand
Loans shall be at least equal to the sum of (i) $145,000,000 and (ii) the
aggregate book value of all fixed and capital assets comprising part of the
Partnership Property which have been sold, transferred or otherwise disposed of
at or prior to such Distribution Date (in each case which book value shall be
determined as of the later of (A) the Closing Date and (B) the date of
acquisition of the applicable fixed or capital asset).
SECTION 5.03. Class A Limited Partner Guaranteed Payment.
[Confidential material has been omitted pursuant to a request for confidential
treatment filed with the Commission under Rule 24b-2(b)and has been filed
separately with the Commission.]
SECTION 5.04. Amounts Withheld. All amounts withheld pursuant to the
Code or any provision of any other federal, state or local law with respect to
any payment, distribution or allocation to the Partnership or the Partners shall
be treated as amounts distributed to the Partners pursuant to this Article V for
all purposes under this Agreement. The General Partner is hereby authorized to
withhold from distributions, or with respect to allocations, to the Partners and
to pay over to any federal, state or local taxation authority or other
governmental authority any amounts required to be so withheld pursuant to the
Code or any provision of any other federal, state or local law, and shall
allocate any such amounts to the Partners with respect to which such amount was
withheld.
SECTION 5.05. Tax Distributions. Within ten Business Days after the
end of each Fiscal Quarter, the General Partner shall make a good faith estimate
of the First Priority Return and the taxable income for United States federal
income tax purposes of the Partnership for such Fiscal Quarter. If and to the
extent that the General Partner estimates that the amount of taxable income
allocable to the Class A Limited Partner for such Fiscal Quarter exceeds the
First Priority Return allocated to the Class A Limited Partner for such Fiscal
Quarter, the General Partner shall, within two Business Days after making such
estimate, cause the Partnership to make cash distributions to the Class A
Limited Partner in an amount equal to 45% of such excess.
ARTICLE VI
MANAGEMENT
SECTION 6.01. Authority of the General Partner. Subject to the
limitations and restrictions set forth in this Agreement (including, without
limitation, those limitations and restrictions set forth in this Article VI),
the General Partner shall direct the business and affairs of the Partnership
and, in so doing, shall manage, control and have all of the rights and powers
which may be possessed by a general partner under the Act.
<PAGE>
13
SECTION 6.02. Right to Rely on the General Partner. (a) Any Person
dealing with the Partnership may rely (without duty of further inquiry) upon a
certificate signed by any General Partner as to:
(i) The identity of the General Partner or any Limited Partner;
(ii) The existence or nonexistence of any fact or facts which
constitute a condition precedent to acts by the General Partner or which
are in any other manner germane to the affairs of the Partnership;
(iii) The Persons who are authorized to execute and deliver any
agreement, instrument or other document of or on behalf of the Partnership;
or
(iv) Any act or failure to act by the Partnership or any other matter
whatsoever involving the Partnership or any Partner.
(b) The signature of the General Partner shall be sufficient to convey
title to any of the Partnership Property, and all of the Partners agree that (i)
a copy of this Agreement may be shown to the appropriate Persons in order to
confirm the authority or such signature and (ii) the signature of the General
Partner shall be sufficient to execute any "statement of partnership" or other
documents necessary or appropriate to effectuate any provision of this
Agreement.
SECTION 6.03. Restrictions on Authority of the General Partner. Except
as otherwise provided in this Agreement, the General Partner shall not have the
authority to, and the General Partner covenants and agrees that it shall not,
without the consent of all the other Partners (which consent shall not be
unreasonably withheld (it being understood and agreed that the failure of the
Class A Limited Partner to obtain the consent of the requisite lenders and, if
applicable, the agent under the Credit Facility to any of the actions set forth
below in this Section 6.03 shall be deemed to be a reasonable basis for the
Class A Limited Partner to withhold any such consent)):
(a) Take any action that (i) is in contravention of this Agreement or
(ii) would subject any Limited Partner to liability as a general partner in
any jurisdiction;
(b) Engage in any business or activity on behalf of the Partnership
that is inconsistent with the purposes of the Partnership described in
Section 2.01;
(c) Cause or permit the Partnership to voluntarily take any action
with respect to the Partnership described in clause (a)(iii), (b) or (c) of
the definition of "Voluntary Bankruptcy" set forth in the Appendix attached
hereto;
(d) Cause or permit the Partnership to acquire, by purchase or
contribution, any property or assets that, at the time of the acquisition
thereof, (i) does not constitute a Permitted Asset or (ii) is a Permitted
Asset comprised of a financial asset that is in default;
(e) Cause or consent to any amendment, modification or waiver of any
rights or obligations of the Partnership, or cause or give any consent to
or approval or make any election on behalf of the Partnership, under any of
the Transaction Documents if any such amendment,
<PAGE>
14
waiver, consent approval or election, either individually or in the
aggregate, could reasonably be expected to have a material adverse effect
on the Partnership's rights or materially increase its obligations
thereunder, including, without limitation, unless such action is immaterial
and insubstantial in nature and does not adversely affect the Class A
Limited Partner:
(i) Cause or consent to any amendment, modification or waiver of
any provision of the Terra Capital Note or any of the agreements,
instruments or other documents evidencing or otherwise setting forth
the terms of any Demand Loan;
(ii) Cause or permit Terra Newco to consent to any amendment,
modification or waiver of any provision of any of the Terra U.K. Loan
Documents or the Ammonia Loop Completion Guarantee; or
(iii) Cause or consent to any amendment, modification or waiver
of any provision of the certificate of incorporation or bylaws of
Terra Newco or BAI;
(f) Cause or permit the Partnership to change its Fiscal Year, except
as required under Section 706 of the Code;
(g) Cause or permit the admission of any Limited Partner to the
Partnership other than pursuant to Article XI;
(h) Cause or permit the Partnership to merge or consolidate with or
into, or sell all or substantially all of the Partnership Property (whether
in one transaction or a series of transactions) to, any Person;
(i) Cause or permit the Partnership to issue any additional Interests
or any other ownership or profit interests therein to any Person other than
the Interests issued or held by the Partners referred to in the first
paragraph of this Agreement on the Closing Date (it being understood and
agreed that the making of any Additional Capital Contribution pursuant to
Section 3.03 shall not, in and of itself, constitute the issuance of any
additional Interests or other ownership or profit interests in the
Partnership); or
(j) Cause or permit the Partnership to enter into, or to purchase or
otherwise acquire, any supply or sales contracts in which the Partnership
has basis for federal income tax purposes.
Notwithstanding the foregoing provisions of this Section 6.03, the General
Partner shall not have the authority to, and the General Partner covenants and
agrees that it shall not, with or without the consent of any or all of the other
Partners, possess Partnership Property, or assign rights in specific Partnership
Property, other than for a purpose of the Partnership described in Section 2.01.
SECTION 6.04. Duties and Obligations of the General Partner. (a) The
General Partner shall cause the Partnership to conduct its business, operations
and activities in all material respects separate and apart from the business,
operations and activities of any Terra Partner or any of its Affiliates,
including, without limitation, in all material respects (i) segregating all
Partnership Property and not allowing funds or other Partnership Property to be
commingled with the funds or other property or assets
<PAGE>
15
of, held by, or registered in the name of, any Terra Partner or any of its
Affiliates, except as and to the extent contemplated in the Services Agreement,
(ii) maintaining books and financial records of the Partnership separate from
the books and financial records of any Terra Partner and its Affiliates, (iii)
observing all procedures and formalities of the Partnership (including, without
limitation, maintaining minutes of Partnership meetings and acting on behalf of
the Partnership only pursuant to the due authorization of the Partners or as
otherwise required under applicable law), (iv) causing the Partnership to pay
its liabilities solely from the Partnership Property and (v) causing the
Partnership to conduct its dealings with third parties in its own name and as a
separate and independent entity, including dealings conducted pursuant to the
Services Agreement.
(b) The General Partner shall take in its sole discretion all actions
which are necessary or reasonable and appropriate (i) for the continuation of
the Partnership's valid existence as a limited partnership and its qualification
to do business under the laws of the State of Delaware, the State of Texas and
each other jurisdiction in which such existence or qualification is necessary or
appropriate in order to protect the limited liability of the Limited Partners or
to enable the Partnership to conduct the business in which it is engaged or to
perform its obligations under any agreement, instrument or other document to
which it is a party, except where the failure to so exist or qualify, either
individually or in the aggregate, could not reasonably be expected to have a
Material Adverse Effect, and (ii) for the accomplishment of the purposes of the
Partnership described in Section 2.01, including the acquisition, management,
maintenance, preservation and operation of Permitted Assets in accordance with
the provisions of this Agreement and applicable laws. Without limiting any of
the foregoing provisions of this Section 6.04(b), the General Partner shall
cause the Partnership and its Subsidiaries:
(A) to maintain all licenses and permits necessary to own or lease and
operate their respective property and assets and to conduct their
respective businesses and activities in accordance in all material respects
with all applicable laws, rules, regulations and orders;
(B) to pay and discharge (1) all taxes, assessments, reassessments,
levies and other governmental charges imposed upon it or upon its property
and assets and (2) all lawful claims, that, if unpaid, might by applicable
law become a Lien upon its property and assets or any part thereof;
provided, however, that neither the Partnership nor any of its Subsidiaries
shall be required to pay or discharge any such tax, assessment,
reassessment, levy, charge or claim the amount, applicability or validity
of which is being contested in good faith and by proper proceedings and as
to which appropriate and adequate reserves are being maintained in
accordance with GAAP, unless and until any Lien resulting therefrom
attaches to its property or assets and becomes enforceable against its
other creditors; and
(C) to maintain insurance (including, without limitation,
environmental insurance) for the benefit of the Partnership or its
Subsidiaries for their respective properties, assets and businesses with
sound and responsible insurance companies and of such types, in such
amounts and covering such casualties and contingencies as are at least as
favorable as those usually carried by companies of established reputations
engaged in similar businesses and owning similar property and assets in the
same general areas in which the Partnership or the applicable Subsidiary
thereof operates and, in any case, as may otherwise be required by
applicable law.
(c) The General Partner shall devote to the Partnership such time as
in its sole discretion it determines is necessary for the proper performance of
all duties under this Agreement.
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16
Certain officers, directors and employees of the General Partner may from time
to time also be officers, directors or employees of one or more of its
Affiliates. The General Partner shall cause its employees to devote as much time
to the management of the Partnership as is necessary in its sole discretion for
the proper conduct of its business and affairs. The General Partner and its
Affiliates shall not be liable to any Limited Partner or any of its Affiliates
for any action taken or omitted to be taken by it in the good faith exercise of
its reasonable business judgment in the management and operation of the
Partnership.
(d) The General Partner shall cause all distributions or payments to
the Partners (in their capacities as such) pursuant to any provision of this
Agreement to be made no later than 12:00 Noon (New York City time) on the date
of distribution or payment, and, at the time of any such distribution or
payment, the General Partner shall provide to the other Partners a notice
setting forth the nature of the distribution or payment, each of the Sections of
this Agreement pursuant to which such distribution or payment is being made and
the amount being distributed or paid pursuant to each such Section.
[Confidential material has been omitted pursuant to a request for confidential
treatment filed with the Commission under Rule 24b-2(b)and has been filed
separately with the Commission.]
(j) The General Partner shall cause the Partnership to comply with all
of the terms of, and perform all of its obligations under, this Agreement.
SECTION 6.05. Indemnification of Class A Limited Partner (a) The
Partnership or, solely to the extent of the Partnership Property, its receiver
or its trustee shall indemnify and hold harmless the Class A Limited Partner for
any and all claims, damages, losses, liabilities and expenses of the Partnership
arising out of or relating to events, developments or circumstances occurring
prior to the Closing Date, other than the liabilities and expenses of the
Partnership comprising part of the Original Capital Contributions of the Terra
Partners and set forth on Schedule I hereto. In the case of any investigation,
litigation or proceeding for which the indemnity under this Section 6.05(a)
applies, such indemnity shall be effective whether or not such investigation,
litigation or proceeding is brought by the Class A Limited Partner, any of its
respective directors, stockholders, partners, members or creditors, the
Partnership or any other Partner and whether or not the Partnership or any other
Partner is otherwise a party thereto. The indemnification provided pursuant to
this Section 6.05(a) shall not guarantee the payment of the First Priority
Return, any Class A Limited Partner Guaranteed Payment in lieu thereof, the
return of any of the Capital Contributions of the Class A Limited Partner or the
retirement or purchase of the Interest of the Class A Limited Partner (whether
through the exercise of the Purchase Option or otherwise).
(b) The Partnership or, solely to the extent of the Partnership
Property, its receiver or its trustee shall, to the extent any state or local
taxes based on or measured by the income of the Partnership or the Partnership
Property are imposed on the Class A Limited Partner or any Class A Beneficial
Owner by any External Taxing Jurisdiction, indemnify and hold harmless the Class
A Limited Partner or such Class A Beneficial Owner for an amount equal to, on an
After-Tax Basis, the excess of such state and local taxes (determined after
taking into account associated deductions) over the amount of any state or local
tax refund, deduction or credit which the Class A Limited Partner or such Class
A Beneficial Owner (or any of its Affiliates) realizes as a result of the
imposition of such state or local taxes by such External Taxing Jurisdiction,
conclusively presuming for purposes of this Section 6.05(b) that any such
beneficial owner is subject to the tax laws of the State of New York. The Class
A Limited Partner or the Class A Beneficial Owner seeking indemnification under
this Section 6.05(b) shall provide the Partnership with notice of such claim,
which notice shall set forth in reasonable detail the Class A Limited
<PAGE>
17
Partner's or such Class A Beneficial Owner's calculation of the amount of such
claim. In connection with the foregoing provisions of this Section 6.05(b), the
Class A Limited Partner agrees to use its reasonable efforts, and to cause its
affiliates to use their reasonable efforts, to claim and pursue any state or
local tax refund, deduction or credit that would reduce the indemnification
obligations of the Partnership (or its receiver or trustee) hereunder.
(c) All indemnities provided for in this Section 6.05 shall survive
any transfer of the Interest of the Class A Limited Partner, in whole or in
part, and the indemnities provided for in Section 6.05(b) shall also survive the
liquidation or winding up of the Partnership.
(d) (i) If any claim is made by a third party against the Class A
Limited Partner, any Class A Beneficial Owner, the Liquidator or any Affiliate
of any of the foregoing, or any officer, director, agent, employee,
representative, advisor, successor or assign thereof (each, an "Indemnitee"),
with respect to an actual or potential claim, damage, loss, liability or expense
for which any such Person is otherwise entitled to be indemnified under any
provisions of Section 6.05(a), 6.05(b) or 13.07(b), and any such Person wishes
to be indemnified with respect thereto, such Indemnitee shall promptly notify
the appropriate indemnitor as provided in the applicable Section (the
"Indemnitor"), which notice shall set forth in reasonable detail the nature of
the related claim, damage, loss, liability or expense; provided that the failure
of any such Indemnitee to notify the applicable Indemnitor shall not relieve
such Indemnitor from any liability or other obligation which it otherwise may
have to such Person under Section 6.05(a), 6.05(b) or 13.07(c), as applicable,
or otherwise, unless, and then only to the extent that, such failure results in
the forfeiture of rights or defenses and the Indemnitor incurs an increased
indemnification obligation to such Indemnitee under the terms of such applicable
Section on account of such failure.
(ii) Any Indemnitor may, by notice to the Indemnitee, take control of
all aspects of the investigation and assume the defense of all claims asserted
against such Indemnitee, and may employ counsel of its choice and at its
expense; provided that (A) no Indemnitor may, without the consent of any
Indemnitee, agree to any settlement that requires such Indemnitee to make any
payment that is not indemnified hereunder, or does not grant a full and
unconditional release to such Indemnitee, and, in any event, such Indemnitor may
not in connection with any such investigation, defense or settlement, without
the consent of any Indemnitee, take or refrain from taking any action which
would reasonably be expected to materially impair the indemnification of such
Indemnitee hereunder or would require such Indemnitee to take or refrain from
taking any action or to make any public statement which such Indemnitee
reasonably considers to materially and adversely affect its rights or interests,
and (B) no Indemnitor may take control of any investigation, defense or
settlement which could reasonably be expected to entail a risk of criminal
liability to any Indemnitee. Upon the request of any Indemnitee, the Indemnitor
shall use its best efforts to keep such Indemnitee reasonably apprised of the
status of those aspects of such investigation and defense controlled by such
Indemnitor and shall provide such information with respect thereto as such
Indemnitee may reasonably request. The Indemnitee shall cooperate with the
Indemnitor in all reasonable respects with respect thereto.
(e) No Indemnitor shall be liable to any Indemnitee for the settlement
by such Indemnitee of any pending or threatened investigation, litigation or
proceeding for which such Indemnitee may seek indemnity under Section 6.05(a)
without the prior written consent of such Indemnitor (which consent shall not be
unreasonably withheld or delayed). In turn, none of the Indemnitors or any of
their respective Affiliates or their respective officers, directors,
stockholders, partners, members, employees, agents, representatives or advisors
shall effect the settlement of any such pending or threatened
<PAGE>
18
investigation, litigation or proceeding unless either (i) such settlement
includes a full and unconditional release and discharge of each Indemnitee
subject to such investigation, litigation or proceeding from all liability and
potential liability on claims that are the subject matter thereof or (ii) each
Indemnitee subject to such investigation, litigation or proceeding shall give
its prior written consent to the settlement thereof (which consent shall not be
unreasonably withheld or delayed).
SECTION 6.06. Compensation and Expenses
(a) Compensation and Reimbursement. Except as otherwise provided in
this Section 6.06, neither any Partner nor any Affiliate of any Partner shall
receive any salary, fee or draw from the Partnership for services rendered to or
on behalf of the Partnership or otherwise in its capacity as a Partner, and
neither any Partner nor any Affiliate of any Partner shall be reimbursed by the
Partnership for any expenses incurred by such Partner or Affiliate on behalf of
the Partnership or otherwise in its capacity as a Partner.
(b) Management Fee; Expenses. [Confidential material has been omitted
pursuant to a request for confidential treatment filed with the Commission under
Rule 24b-2(b)and has been filed separately with the Commission.]
ARTICLE VII
ROLE OF LIMITED PARTNERS
SECTION 7.01. Rights or Powers. The Limited Partners shall not have
any right or power to take part in the management or control of the Partnership
or its business and affairs or to act for or bind the Partnership in any way.
Notwithstanding the foregoing, the Limited Partners shall have all the rights
and powers specifically set forth in this Agreement. A Limited Partner, any
Affiliate thereof, or an employee, stockholder, agent, director or officer of a
Limited Partner or any Affiliate thereof, may also be an employee or agent of
the Partnership or a stockholder, director or officer of a General Partner or
any of its Affiliates. The existence of these relationships and acting in such
capacities will not result in a Limited Partner being deemed to be participating
in the control of the business of the Partnership or otherwise affect the
limited liability of any Limited Partner.
SECTION 7.02. Voting Rights. The Limited Partners shall have the
right to vote only on those matters expressly reserved for their vote under this
Agreement and otherwise as required under the Act.
SECTION 7.03. Procedure for Consent. In any circumstances requiring
the approval or consent of the Limited Partners specified in this Agreement or
otherwise required under the Act, such approval or consent may, except as
expressly provided to the contrary in this Agreement, be given or withheld in
the sole and absolute discretion of the Limited Partners. If the General Partner
receives the necessary approval or consent of the Limited Partners to such
circumstances, the General Partner shall be authorized and empowered to
implement such action without further authorization by the Limited Partners.
Each class of Limited Partners shall exercise the rights to vote or consent
granted such class of Limited Partners under this Agreement by a vote or consent
of the majority in Percentage Interest of such class of Limited Partners, such
result of the majority vote or consent to be the decision of the class of
Limited Partners.
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19
ARTICLE VIII
REPRESENTATIONS AND WARRANTIES
SECTION 8.01. General. Each of the Partners hereby makes each of the
representations and warranties applicable to such Partner as set forth in this
Article VIII, and such representations and warranties shall survive the
execution of this Agreement.
SECTION 8.02. Representations and Warranties of Each Terra Partner.
Each Terra Partner hereby represents and warrants as follows:
(a) Such Terra Partner (i) is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation, (ii) is duly qualified and in good standing as a foreign
corporation in each other jurisdiction in which it owns or leases property
or in which the conduct of its business requires it to so qualify or be
licensed, except where the failure to so qualify or be licensed, either
individually or in the aggregate, could not reasonably be expected to have
a Material Adverse Effect, and (iii) has all requisite corporate power and
authority (including, without limitation, all governmental licenses,
permits and other approvals) to own or lease and operate its property and
assets (including, without limitation, its Interest) and to carry on its
business as now conducted and as proposed to be conducted. All of the
outstanding shares of capital stock of such Terra Partner have been validly
issued, are fully paid and nonassessable and are owned by Terra Capital,
free and clear of all Liens, except for the liens and security interests
created therein under the Terra Capital Loan Documents.
(b) The execution, delivery and performance by such Terra Partner of
this Agreement and each other Transaction Document to which it is or is to
be a party, and the consummation of the transactions contemplated hereby
and thereby, are within such Terra Partner's corporate powers, have been
duly authorized by all necessary corporate action and do not (i) contravene
such Terra Partner's certificate of incorporation or bylaws (or similar
organizational documents), (ii) violate any law, rule, regulation, order,
writ, judgment, injunction, decree, determination or award, except to the
extent that any such violation, either individually or in the aggregate,
could not reasonably be expected to have a Material Adverse Effect, (iii)
result in the breach of, or constitute a default under, any contract, loan
agreement, indenture, mortgage, deed of trust, lease, instrument or other
agreement binding on or affecting such Terra Partner, any of its
Subsidiaries or any of their respective properties or assets, except to the
extent that any such breach or default, either individually or in the
aggregate, could not reasonably be expected to have a Material Adverse
Effect, or (iv) result in or require the creation or imposition of any Lien
upon or with respect to any of the properties or assets of the Partnership
or any of its Subsidiaries.
(c) No authorization, approval or other action by, and no notice to or
filing with, any governmental or regulatory authority, or any other third
party that is a party to any contract, loan agreement, indenture, mortgage,
deed of trust, lease, instrument or other agreement referred to in Section
8.02(b)(iii), is required for the due execution, delivery, recordation,
filing or performance by such Terra Partner of this Agreement or any other
Transaction Document to which it is or is to be a party, or for the
consummation of any material transaction contemplated hereby or thereby.
<PAGE>
20
(d) This Agreement has been, and each other Transaction Document to
which such Terra Partner is or is to be a party when delivered hereunder
will have been, duly executed and delivered by such Terra Partner. This
Agreement is, and each other Transaction Document to which such Terra
Partner is or is to be a party when delivered hereunder will be, the legal,
valid and binding obligation of such Terra Partner, enforceable against
such Terra Partner in accordance with its terms, except to the extent such
enforceability may be limited by the effect of applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and by general principles of
equity.
(e) There is no action, suit, investigation, litigation, arbitration
or proceeding pending or, to the best knowledge of such Terra Partner,
threatened against or affecting such Terra Partner, any of its Subsidiaries
or any of their respective properties or assets in any court, before any
arbitrator or by or before any governmental or regulatory authority that
(i) either individually or in the aggregate, could reasonably be expected
to have a Material Adverse Effect or (ii) purports to affect the legality,
validity or enforceability of this Agreement or any other Transaction
Document or the consummation of the transactions contemplated hereby or
thereby.
(f) The Partnership's Methanol Business complies in all material
respects with all applicable Environmental Laws and Environmental Permits;
all past noncompliance with such Environmental Laws and Environmental
Permits has been resolved without ongoing material obligations or costs;
and no circumstances exist that would be reasonably likely to (i) form the
basis of an Environmental Action against the Partnership or such Terra
Partner, any of their Subsidiaries or any of their respective properties or
assets or (ii) cause the Partnership Property to be subject to any
restrictions on ownership, occupancy, use or transferability under any
Environmental Law, except in the case of clauses (i) and (ii) of this
Section 8.02, as, either individually or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect.
(g) Except as described on Schedule 8.02(g) attached hereto: (i) none
of the Partnership Property related to the Methanol Business is listed or
proposed for listing on the NPL or on the CERCLIS or any analogous state or
local list or, to the best knowledge of such Terra Partner, is adjacent to
any properties so listed or proposed for listing; (ii) there are no and, to
the best knowledge of such Terra Partner, there never have been any
underground or aboveground storage tanks or any surface impoundments,
septic tanks, pits, sumps or lagoons in which Hazardous Materials are being
or have been treated, stored or disposed on any such Partnership Property;
(iii) there is no asbestos or asbestos-containing material on any such
Partnership Property; and (iv) Hazardous Materials have not been released,
discharged or disposed of on any such Partnership Property in a manner
that, either individually or in the aggregate, could reasonably be expected
to result in material liability to the Partnership.
(h) Except as, either individually or in the aggregate, could not
reasonably be expected to result in material liability to the Partnership:
(i) such Terra Partner is not undertaking, and has not completed, either
individually or together with other potentially responsible parties, any
investigation or assessment or remedial or response action relating to any
location or operation related to the Methanol Business, either voluntarily
or pursuant to the order of any governmental or regulatory authority or the
requirements of any Environmental Law; and
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21
(ii) no Hazardous Materials generated, used, treated, handled or stored at,
or transported to or from, any Partnership Property related to the Methanol
Business have been disposed of in any manner.
(i) Each of such Terra Partner and the Partnership has filed, has
caused to be filed or has been included in all material tax returns
(federal, state, local and foreign) required to be filed and has paid all
taxes shown thereon to be due, together with applicable interest and
penalties, except for any such taxes, assessments, levies, fees and other
charges the amount, applicability or validity of which is being contested
in good faith and by appropriate proceedings and with respect to which such
Terra Partner or the Partnership, as the case may be, has established
appropriate and adequate reserves in accordance with GAAP.
(j) Such Terra Partner is not (i) an "investment company" or an
"affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment company", nor, as a result of such Terra Partner's ownership of
its Interests, is the Partnership an "investment company", or an
"affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment company", in each case as such term is defined in the
Investment Company Act of 1940, as amended, or (ii) a "holding company", an
"affiliate of a holding company" or a "subsidiary of a holding company", in
each case as defined in, or subject to regulation under, the Public Utility
Holding Company Act of 1935, as amended.
SECTION 8.03. Representations and Warranties of the Class A Limited
Partner. The Class A Limited Partner represents and warrants as follows:
(a) The Class A Limited Partner (i) has been duly formed as a limited
liability company and is validly existing and in good standing under the
laws of the State of Delaware, and (ii) has all requisite limited liability
company power and authority (including, without limitation, all
governmental licenses, permits and other approvals) to enter into this
Agreement and the other Transaction Documents to which it is a party and to
own or lease and operate its property and assets (including, without
limitation, its Interest) and to carry on its business as described in its
limited liability company agreement.
(b) The execution, delivery and performance by the Class A Limited
Partner of this Agreement and each other Transaction Document to which it
is or is to be a party are within the Class A Limited Partner's limited
liability company powers, have been duly authorized by all necessary
limited liability company action and do not (i) contravene the Class A
Limited Partner's limited liability company agreement, (ii) violate any
law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award binding upon or applicable to it, (iii) result in
the breach of, or constitute a default under, any contract, loan agreement,
indenture, mortgage, deed of trust, lease, instrument or other agreement
binding on or affecting the Class A Limited Partner or any of its
properties or assets or (iv) result in or require the creation or
imposition of any Lien upon or with respect to any of the properties or
assets of the Partnership or any of its Subsidiaries.
(c) No authorization, approval or other action by, and no notice to or
filing with, any governmental or regulatory authority or any other third
party is required for the due execution, delivery, recordation, filing or
performance by the Class A Limited Partner of this Agreement or any other
Transaction Document to which it is or is to be a party.
<PAGE>
22
(d) This Agreement has been, and each other Transaction Document to
which the Class A Limited Partner is or is to be a party when delivered
hereunder will have been, duly executed and delivered by the Class A
Limited Partner. This Agreement is and each other Transaction Document to
which the Class A Limited Partner is or is to be a party when delivered
hereunder will be the legal, valid and binding obligation of the Class A
Limited Partner, enforceable against the Class A Limited Partner in
accordance with its terms, except to the extent such enforceability may be
limited by the effect of applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the enforcement of creditors'
rights generally and by general principles of equity.
(e) There is no action, suit, investigation, litigation, arbitration
or proceeding pending or, to the best knowledge of the Class A Limited
Partner, threatened against or affecting the Class A Limited Partner or any
of its properties or assets in any court, before any arbitrator or by or
before governmental or regulatory authority that (i) either individually or
in the aggregate, could reasonable be expected to have a Material Adverse
Effect or (ii) purports to affect the legality, validity or enforceability
of this Agreement or any other Transaction Document.
(f) The Class A Limited Partner is not an "investment company", or an
"affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment company", in each case as such term is defined in the
Investment Company Act of 1940, as amended.
ARTICLE IX
BOOKS AND RECORDS; REPORTS
SECTION 9.01. Accounting; Books and Records. (a) Maintenance of
Books and Records. The Partnership shall maintain at its address set forth in
Section 15.01 or, upon notice to the Limited Partners, at such other place as
the General Partner shall determine, books of record and account for the
Partnership in which full and correct entries shall be made of all financial
transactions and the Partnership Property in sufficient detail to reflect the
business and operations of the Partnership and to make all of the calculations
required under this Agreement.
(b) Accounting Methods. (i) The Partnership shall use the accrual
method of accounting in the preparation of its annual reports and for tax
purposes, and shall keep its books and records accordingly.
(ii) Except with respect to distributions and other payments provided
for in Article V and Sections 3.03(b), 11.08 and 13.02, all amounts payable
under any agreement between the Partnership, on the one hand, and any Partner or
any of its Affiliates, on the other hand, shall be treated as occurring between
the Partnership and a Person who is not a Partner within the meaning of Section
707(a)(1) of the Code, and such amounts payable by the Partnership to any
Partner or any of its Affiliates shall be considered an expense of the
Partnership for both income tax and financial reporting purposes and shall not
be considered a distribution to such Partner (including, without limitation, any
such amounts payable in maintaining such Partner's Capital Account), and any
such amounts payable by any Partner or any of its Affiliates to the Partnership
shall not be considered a contribution to the Partnership, including,
<PAGE>
23
without limitation, any such amounts payable in maintaining such Partner's
Capital Account.
(c) Access to Books, Records, Etc. Any Partner or any agent or
representative thereof on its behalf may, subject to Section 9.04 and at the
Partnership's sole and reasonable expense, upon reasonable notice, for proper
purposes and during normal business hours, visit and inspect any of the
properties of the Partnership and its Subsidiaries (subject to reasonable safety
requirements) and examine any information it may reasonably request and make
copies of and abstracts from the financial and operating records and books of
account of the Partnership and its Subsidiaries, and discuss the affairs,
finances and accounts of the Partnership and/or any of its Subsidiaries with the
General Partner and its officers and directors, and with the independent
accountants of the Partnership and its Subsidiaries, as often as such Partner or
any such agent or representative may reasonably request.
SECTION 9.02. Reports. The General Partner shall cause to be
prepared and furnished to the Class A Limited Partner the following:
(a) Terminating Events, Notice Events and Incipient Events. Within
five Business Days of knowledge thereof by any Responsible Officer of the
General Partner or Terra Capital, notice of each Terminating Event, Notice
Event (other than the Notice Event referred to in clause (a) of the
definition thereof set forth in the Appendix attached hereto) or Incipient
Event, and each incurrence of an Extraordinary Expense and each occurrence
of any events, developments or circumstances which, either individually or
in the aggregate, could reasonably be expected to give rise to an
Extraordinary Expense or to have a Material Adverse Effect, and the actions
that the Partnership or any other appropriate Person has taken or proposes
to take with respect thereto.
(b) Quarterly. Within 60 days after the end of each Fiscal Quarter,
commencing with the Fiscal Quarter ending March 31, 1998:
(i) Compliance Statements. A certificate of a Senior Financial
Officer of Terra Capital, certifying (A) as to whether the Partnership
holds any Permitted Asset which is a financial asset that is in
default, (B) the aggregate principal amount of all Demand Loans
outstanding on the last day of such Fiscal Quarter, after giving pro
forma effect to the Demand Loans and the repayments of Demand Loans
made within the 30-day period following the end of such Fiscal
Quarter, and (C) that no Terminating Event, Notice Event (other than
the Notice Event referred to in clause (a) of the definition thereof
set forth in the Appendix attached hereto) or Incipient Event has
occurred and is continuing or, if any such Terminating Event, Notice
Event or Incipient Event has occurred and is continuing, the actions
that the Partnership or any other appropriate Person has taken or
proposes to take with respect thereto;
(ii) Financial Reports. An unaudited balance sheet of the
Partnership and its Subsidiaries as of the end of such Fiscal Quarter
and statements of income and cash flow of the Partnership for the
period commencing at the end of the previous Fiscal Year and ending
with the end of such Fiscal Quarter, in each case certified by a
Senior Financial Officer of Terra Capital as (A) having been prepared
in accordance with GAAP (without the requirement for complete
footnotes and subject to normal year-end audit adjustments) and (B)
fairly presenting (subject to the absence of complete footnotes and
normal year-end audit adjustments) the financial condition of the
Partnership and its Subsidiaries as at
<PAGE>
24
the last day of such Fiscal Quarter and the results of operations and
cash flows of the Partnership and its Subsidiaries for the period
ended on the last day of such Fiscal Quarter; and
(iii) Insurance Compliance. A certificate, signed by a
Responsible Officer of the General Partner or Terra Capital,
confirming compliance with the provisions of Section 6.04(b).
(c) Annually. Within 110 days after the end of each Fiscal Year, a
report for such Fiscal Year which sets forth (i) a copy of the annual audit
report of the Partnership for such Fiscal Year, including therein the
audited balance sheet of the Partnership and its Subsidiaries as of the end
of such Fiscal Year and statements of income and cash flow of the
Partnership for such Fiscal Year, in each case prepared in accordance with
GAAP, and accompanied by an unqualified opinion or an opinion otherwise
acceptable to the Partners of Deloitte & Touche LLP or other independent
public accountants of nationally recognized standing and (ii) a schedule,
certified by a Senior Financial Officer of Terra Capital, setting forth, in
reasonable detail, each of the following: (A) the Asset Values of the
Permitted Assets and the balance in the Capital Account of each Partner,
all as reflected in, and in substantially the form of, Exhibit A attached
hereto (a "Partnership Balance Sheet"), as of the last day of such Fiscal
Year and (B) the Partnership's income, including items of profit, expense
or deduction and any realized and recognized (or deemed to be realized and
recognized on a Mark-to-Market Valuation) gains or losses, and the
allocations to the Capital Accounts (a "Partnership Income Statement"), for
such Fiscal Year.
(d) Financial Asset Default. Within five Business Days following
knowledge by any Responsible Officer of the General Partner or Terra
Capital of a default on any Permitted Asset which is a financial asset, a
certificate setting forth, in reasonable detail, a description of the
Permitted Asset so affected and the nature of such default.
(e) Contribution Date, Retirement Date and Termination Date Reports.
(i) (A) As promptly as practicable and in any event within 30 days after
the date on which any Capital Contribution (other than an Original Capital
Contribution) is made by any of the Partners, whether pursuant to Section
3.03 or otherwise, (B) on any date on which any distribution is made to any
of the Partners in retirement of all or any part of its Interest pursuant
to Section 11.08 and (C) on the date on which final distributions are made
to the Partners upon the liquidation or winding up of the Partnership
pursuant to Article XIII, each of the following reports:
(1) A report which sets forth an unaudited pro forma Partnership
Balance Sheet and Partnership Income Statement for the applicable
Measurement Date (based upon a Mark-to-Market Valuation as of such
Mark-to-Market Event, if applicable) and includes a certificate of a
Senior Financial Officer of Terra Capital that such pro forma
Partnership Balance Sheet and Partnership Income Statement fairly
present in all material respects the information contained therein;
and
(2) In the case of reports required under subclause (i)(B) of
this Section 9.02(e), a certificate of a Responsible Officer of the
General Partner or Terra Capital that, immediately before and after
giving pro forma effect to the retirement of all or any portion of the
Interest of any of the Partners, no Terminating Event, Notice Event or
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25
Incipient Event has occurred and is continuing.
(ii) Not later than 60 days after the date on which any Capital
Contribution, retirement or liquidating distribution referred to in
subclause (i)(A), (i)(B) or (i)(C) of this Section 9.02(e) is made, the
General Partner shall cause the statements referred to in this Section
9.02(e) to be reviewed and reported on by the Partnership's independent
public accountants.
(f) Purchase Option Reports. (i) On the Purchase Date, a report which
sets forth an unaudited pro forma Partnership Balance Sheet and Partnership
Income Statement for the applicable Measurement Date and includes a
certificate of a Senior Financial Officer of Terra Capital that such pro
forma Partnership Balance Sheet and Partnership Income Statement fairly
present in all material respects the information contained therein and (ii)
not later than 60 days after the Purchase Date, the General Partner shall
cause the statements referred to in this Section 9.02(f) to be reviewed and
reported on by the Partnership's independent public accountants.
(g) Environmental Conditions. Promptly and in any event within five
Business Days after a Responsible Officer of the General Partner or Terra
Capital becomes aware of the assertion or occurrence thereof, notice of:
(i) any condition or occurrence on or arising from any property
owned or operated by the Partnership or any of the Terra Partners or
any of their respective Subsidiaries that resulted or is alleged to
have resulted in noncompliance by the Partnership or any such Terra
Partner or Subsidiary with any applicable Environmental Law or
Environmental Permit in such a manner as, either individually or in
the aggregate, could reasonably be expected to have a Material Adverse
Effect;
(ii) any condition or occurrence on any Partnership Property
related to the Methanol Business that could reasonably be expected to
cause such Partnership Property to be subject to any material
restrictions on the ownership, occupancy, use or transferability
thereof by the Partnership under any Environmental Law; and
(iii) the taking of any removal or remedial action outside of
the ordinary course of business of the Partnership in response to the
actual or alleged presence of any Hazardous Materials on any
Partnership Property related to the Methanol Business required by any
Environmental Law or any Environmental Permit or any governmental or
regulatory authority.
All such notices shall set forth in reasonable detail the nature of the
condition, occurrence, removal or remedial action described therein and, in the
case of each such condition or occurrence, the action that the applicable
Partner or Subsidiary of the Partnership or any of the Partners has taken or
proposes to take with respect thereto.
(h) Terra Capital Information. As promptly as practicable and in any
event within two Business Days after receipt thereof, all financial and
other information received by, and all notices delivered to, the
Partnership from Terra Capital pursuant to the Terra Capital Note or the
Loan Purchase Agreement.
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26
(i) Terra U.K. and Ammonia Loop Information. As promptly as
practicable and in any event within two Business Days after receipt
thereof, all financial and other information received by the Partnership
regarding the Terra U.K. and its property, assets and businesses and BAI
and the Ammonia Loop pursuant to Section 6.04(i)(ii).
(j) Additional Information. Promptly following any such request, such
other information relating to the Partnership or any of its Subsidiaries,
or the properties, assets, business, operations or activities thereof, as
any of the Partners may from time to time reasonably request.
SECTION 9.03. Tax Matters. (a) The General Partner is authorized to
make any and all elections for federal, state and local tax purposes (including,
without limitation, any election, if permitted by applicable law):
(i) to adjust the basis of Partnership Property pursuant to Sections
754, 734(b) and 743(b) of the Code, or comparable provisions of state or
local law, in connection with Transfers of Interests and Partnership
distributions;
(ii) with the consent of the Class A Limited Partner, to extend the
statute of limitations for assessment of tax deficiencies against the
Partners with respect to adjustments to the Partnership's federal, state or
local tax returns; and
(iii) to the extent provided in Sections 6221 through 6231 of the
Code, to represent the Partnership and the Partners before taxation
authorities and other governmental authorities or courts of competent
jurisdiction in tax matters affecting the Partnership or the Partners in
their capacities as Partners, and to file any tax returns and execute any
agreements or other documents relating to or affecting such tax matters,
including, without limitation, agreements or other documents that bind the
Partners with respect to such tax matters or otherwise affect the rights of
the Partnership and the Partners.
The General Partner is specifically authorized to act as the "Tax Matters
Partner" under the Code and in any similar capacity under state or local law (in
such capacity, the "Tax Matters Partner"). Notwithstanding the generality of
the foregoing, the Tax Matters Partner shall make regular and current reports to
the Class A Limited Partner on the status of all representations of the
Partnership and the Partners before taxation authorities and other governmental
authorities and courts of competent jurisdiction. Furthermore, without the
prior consent of the Class A Limited Partner (which consent shall not be
unreasonably withheld), the Tax Matters Partner may not enter into any agreement
or document which would affect the amount, timing or character of any item of
Profits or Losses allocated to, or otherwise realized by, the Class A Limited
Partner.
(b) The General Partner shall cause all necessary tax information to
be delivered to each Partner as soon as practicable and in any event not later
than 90 days after the end of each Fiscal Year. The General Partner shall file
tax returns for the Partnership prepared in accordance with the Code and the
Regulations. Promptly and in any event no later than 30 days after the filing
or receipt thereof, the General Partner shall furnish to each other Partner all
federal, state and local tax returns filed on behalf of the Partnership and all
written notices received by the Partnership from any taxation authority or other
governmental authority.
<PAGE>
27
SECTION 9.04. Confidential Information. The Class A Limited Partner
shall keep all information furnished to it pursuant to this Article IX
confidential pursuant to a Confidentiality Agreement, and shall take reasonable
steps to ensure that any other Person to whom the Class A Limited Partner
provides any such information shall keep such information confidential on a
similar basis as is provided in the Confidentiality Agreement executed and
delivered by the Class A Limited Partner.
ARTICLE X
AMENDMENTS; MEETINGS
SECTION 10.01. Amendments. Amendments to this Agreement may be
proposed by the General Partner or any Limited Partner. The General Partner
shall seek the written vote of the Partners on the proposed amendment or shall
call a meeting to vote thereon and to transact any other business that it may
deem appropriate. A proposed amendment shall be adopted and be effective as an
amendment to this Agreement only if it receives the affirmative vote of all of
the Partners.
SECTION 10.02. Meetings of the Partners. (a) Meetings of the
Partners may be called by the General Partner and shall be called upon the
written request of any other Partner. Each call for a meeting of the Partners
shall state the nature of the business to be transacted at such meeting and the
proposed date of such meeting. Unless waived in writing, notice of any such
meeting shall be given to all Partners not less than seven Business Days nor
more than 30 days prior to the date of such meeting. Partners may vote in
person, by proxy or by telephone at such meeting. Whenever the vote or consent
of Partners is permitted or required under this Agreement, such vote or consent
may be given at a meeting of Partners or may be given in accordance with the
procedure prescribed in Section 10.03. Except as otherwise expressly provided in
this Agreement, the unanimous vote of all of the Partners shall be required to
constitute the act of the Partners.
(b) For the purpose of determining the Partners entitled to vote on,
or to vote at, any meeting of the Partners or any adjournment thereof, the
General Partner or the Limited Partner requesting such meeting may fix, in
advance, a date as the record date for any such determination. Such date shall
not be less than ten days nor more than 30 days before any such meeting.
(c) Each Limited Partner may authorize any Person or Persons to act
for it by proxy on all matters in which a Limited Partner is entitled to
participate, including waiving notice of any meeting, or voting or participating
at a meeting. Every proxy must be signed by the Limited Partner granting such
proxy or its attorney-in-fact. No proxy shall be valid for more than 11 months
from the date thereof unless otherwise provided in the proxy. Every proxy shall
be revocable at the pleasure of the Limited Partner executing it.
(d) Each meeting of the Partners shall be conducted by the General
Partner or such other Person as the General Partner may appoint pursuant to such
rules for the conduct of the meeting as the General Partner or such other Person
deems appropriate.
SECTION 10.03. Unanimous Consent. If the consent of the Partners is
required for any action to be taken by the Partnership, such consent may be
given at a meeting, which may be conducted
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28
by conference telephone call, or provided in a writing executed by all of the
Partners.
ARTICLE XI
TRANSFERS OF INTERESTS
SECTION 11.01. Restriction on Transfers. Except as otherwise
permitted under this Agreement, no Partner shall pledge or otherwise Transfer
all or any portion of its Interest.
SECTION 11.02. Permitted Transfers. (a) Terra Partners. Subject to
the conditions set forth in Section 11.03, a Terra Partner may at any time (i)
pledge all or any portion of its Interest to the agent, the lenders and the
other secured parties under the Terra Capital Loan Documents in accordance with
the terms thereof and (ii) otherwise Transfer all or any portion of its Interest
to (A) Terra or a Wholly Owned Subsidiary of Terra or (B) any other Person
approved by all of the other Partners (such consent not to be unreasonably
withheld).
(b) Class A Limited Partner. Subject to the conditions set forth in
Section 11.03, the Class A Limited Partner may pledge or otherwise Transfer all
or any portion of its Interest to any Person other than any of the Persons
specified on Schedule 11.02(b) attached hereto with the consent of the General
Partner, which consent shall not be unreasonably withheld or delayed; provided
that the General Partner shall be deemed to be reasonably withholding such
consent to any pledge or other Transfer (other than pursuant to the Credit
Facility) which imposes additional costs on the Partnership or on any of the
Terra Partners or any of their Affiliates. The General Partner shall have the
right from time to time to supplement Schedule 11.02(b) attached hereto to
include any other Person that it determines in good faith is a competitor of
Terra.
(c) Consent to Pledge of Interest of Class A Limited Partner. Each of
the Partners (other than the Class A Limited Partner) hereby acknowledges
notice, and consents to the terms and conditions, of the pledge and security
agreement related to the Credit Facility and the pledge of the Interest of the
Class A Limited Partner and the rights of the Class A Limited Partner under this
Agreement to the security agent and the lenders under the Credit Facility
pursuant to such pledge and security agreement, and hereby further consents and
agrees to any Transfer of such Interest or such rights made as a result of the
exercise by security agent for the Credit Facility of the rights and remedies
afforded to the security agent, the agent and the lenders under, and in
accordance with the terms of, such pledge and security agreement and the other
loan documentation for the Credit Facility (whether as a result of foreclosure
thereon or any other disposition thereof).
(d) General. Any Transfer permitted under this Section 11.02 shall be
a "Permitted Transfer" for all purposes of this Agreement.
SECTION 11.03. Conditions to Permitted Transfers. A Transfer shall
only be treated as a Permitted Transfer under Section 11.02 upon the
satisfaction of the following conditions:
(a) (i) The transferor and transferee shall execute and deliver to the
Partnership such documents and instruments of conveyance as may be
necessary or appropriate in the opinion of counsel to the Partnership to
effect such Transfer and to confirm the agreement of the transferee
<PAGE>
29
to be bound by the provisions of this Agreement and (ii) unless the
requirement of this clause (ii) has been waived by the General Partner, the
transferee shall execute and deliver to the Partnership a confidentiality
agreement, in substantially the form of Exhibit B attached hereto (a
"Confidentiality Agreement"). In addition, unless the requirements of this
sentence have been waived by the General Partner, the Partnership shall be
reimbursed by the transferor and/or transferee for all costs and expenses
(including, without limitation, reasonable fees and expenses of counsel)
that it reasonably incurs in connection with such Transfer.
(b) The Transfer shall not cause the Partnership to terminate, within
the meaning of Section 708(b)(1)(B) of the Code, for United States federal
income tax purposes, and, unless the General Partner has waived the
requirements of this Section 11.03(b) with respect to a Transfer by any
Limited Partner, the transferor shall provide the Partnership a favorable
opinion of counsel or a qualified tax advisor to such effect. Such counsel
or qualified tax advisor, as the case may be, and opinion shall be
reasonably satisfactory to the General Partner, and the General Partner and
the other Partners shall provide to such counsel or qualified tax advisor
any information available to the General Partner or such other Partners, as
the case may be, as is relevant to such opinion.
(c) The transferor and transferee shall furnish the Partnership with
the transferee's federal taxpayer identification number, sufficient
information to determine the transferee's initial tax basis in the
Interests Transferred and any other information reasonably necessary to
permit the Partnership to file all required federal and state tax returns
and other required information statements or returns. Without limiting the
generality of the foregoing, the Partnership shall not be required to make
any distribution otherwise provided for in this Agreement with respect to
any Transferred Interests until it has received such information.
(d) Such Transfer shall be exempt from all applicable registration
requirements and shall not violate any applicable laws regulating the
Transfer of securities, and, except in the case of a Transfer of Interests
to another Partner or to a Wholly Owned Subsidiary of the transferor or of
any other Partner, unless waived by the General Partner, the transferor
shall provide an opinion of counsel to such effect. Such counsel and
opinion shall be reasonably satisfactory to the General Partner.
(e) Such Transfer shall not cause the Partnership to be deemed to be
an "investment company" under the Investment Company Act of 1940, as
amended, and, unless waived by the General Partner, the transferor shall
provide an opinion of counsel to such effect. Such counsel and opinion
shall be reasonably satisfactory to the General Partner, and the General
Partner and the other Partners shall provide to such counsel any
information available to the General Partner or to such other Partners, as
the case may be, as is relevant to such opinion.
(f) If the transferor is the General Partner, the transferor and
transferee shall provide the Partnership with an opinion of counsel to the
effect that such Transfer will not cause the Partnership to become taxable
as a corporation for federal income tax purposes. Such counsel and opinion
shall be reasonably satisfactory to the other Partners.
(g) If the transferor is the Class A Limited Partner, unless waived by
the General Partner, the Class A Limited Partner and the transferee of the
Class A Limited Partner shall
<PAGE>
30
execute certificates, in substantially the forms of Exhibits C and D
attached hereto, respectively (the "Transferor Certificate" and the
"Transferee Certificate", respectively).
SECTION 11.04. Prohibited Transfers. (a) Any purported Transfer of
Interests that is not a Permitted Transfer shall be null and void and of no
effect whatever; provided that, if the Partnership is required to recognize a
Transfer that is not a Permitted Transfer (or if the General Partner, in its
sole discretion, elects to recognize a Transfer that is not a Permitted
Transfer), the Interest Transferred shall be strictly limited to the
transferor's rights to allocations and distributions as provided under this
Agreement with respect to such Transferred Interests, which allocations and
distributions may be applied (without limiting any other legal or equitable
rights of the Partnership) to satisfy any debts, obligations or liabilities for
damages that the transferor or transferee of such Interests may have to the
Partnership.
(b) In the case of a Transfer or attempted Transfer that is not a
Permitted Transfer, the parties engaging or attempting to engage in such
Transfer shall indemnify and hold harmless the Partnership and each of the other
Partners from any and all claims, damages, losses, liabilities and expenses that
the Partnership or any such other Partner may incur (including, without
limitation, incremental tax liability and fees and expenses of counsel) as a
result of such Transfer or attempted Transfer and any efforts to enforce the
indemnity granted under this Section 11.04(b).
SECTION 11.05. Admission as Substitute Partners. Subject to the
other provisions of this Article XI, a transferee of Interests may be admitted
to the Partnership as a substitute Partner only upon satisfaction of the
following conditions:
(a) If such transferee acquired its interest from a Class A Limited
Partner, the General Partner shall consent to such admission, which consent
shall not be unreasonably withheld or delayed;
(b) The Interests with respect to which the transferee is being
admitted shall be acquired by means of a Permitted Transfer;
(c) The transferee shall become a party to this Agreement as a Partner
and shall execute such documents and instruments as the General Partner may
reasonably request (including, without limitation, amendments to the
Certificate) as may be necessary or appropriate to confirm such transferee
as a Partner in the Partnership and the agreement of such transferee to be
bound by the terms and conditions of this Agreement;
(d) Unless waived by the General Partner, the transferee shall pay or
reimburse the Partnership for all reasonable legal, filing and publication
costs that the Partnership incurs in connection with the admission of the
transferee as a Partner with respect to the Transferred Interests;
(e) Unless waived by the General Partner, if the transferee is a
Person other than an individual, the transferee shall provide the
Partnership with evidence satisfactory to counsel for the Partnership that
such transferee has made each of the representations and warranties
contained in Section 8.02 or 8.03, as applicable, as of the date of the
Transfer; and
(f) If the transferee of an Interest is admitted under this Agreement,
such transferee
<PAGE>
31
shall be deemed admitted to the Partnership as a substitute Partner
immediately prior to the Transfer, and with respect to the transferee of a
General Partner, such transferee shall continue the business of the
Partnership without dissolution.
SECTION 11.06. Rights of Unadmitted Assignees. (a) General. A
Person who acquires one or more Interests but who is not admitted as a
substitute Partner pursuant to Section 11.05 shall be entitled only to
allocations and distributions with respect to such Interests in accordance with
this Agreement, but shall have no right to any information or accounting of the
affairs of the Partnership, shall not be entitled to inspect the books or
records of the Partnership and shall not have any of the rights of a Partner
under the Act or this Agreement.
(b) General Partners. A transferee who acquires an Interest from a
General Partner under this Agreement by means of a Transfer that is permitted
under this Article XI, but who is not admitted as a General Partner, shall have
no authority to act for or bind the Partnership or otherwise to be treated as a
General Partner. Following such a Transfer, the transferor shall not cease to
be a General Partner of the Partnership and shall continue to be a General
Partner until such time as the transferee is admitted as a General Partner.
(c) Limited Partners. Following a transfer to a transferee who
acquires an Interest from a Limited Partner under this Agreement by means of a
Transfer that is permitted under this Article XI, but who is not admitted as a
Limited Partner, the transferor shall not cease to be a Limited Partner of the
Partnership and shall continue to be a Limited Partner until such time as the
transferee is admitted as a Limited Partner under this Agreement.
SECTION 11.07. Distributions with Respect to Transferred Interests.
If any Interest is sold, assigned or otherwise Transferred in compliance with
the provisions of this Article XI, all distributions made on or before the date
of such Transfer shall be made to the transferor, and all distributions made
after such date shall be made to the transferee. Solely for purposes of making
such distributions, the Partnership shall recognize such Transfer not later than
the end of the calendar month during which it is given notice of such Transfer;
provided, however, that if the Partnership is given notice of a Transfer at
least 14 days prior to the Transfer, the Partnership shall recognize such
Transfer as of the date of such Transfer; and provided further, however, that if
the Partnership does not receive a notice stating the date such Interest was
Transferred and such other information as the General Partner may reasonably
require within 30 days after the end of the accounting period during which the
Transfer occurs, all distributions shall be made to the Person who, according to
the books and records of the Partnership, was the owner of the Interest on the
last day of the accounting period during which the Transfer occurs. Neither the
Partnership nor the General Partner shall incur any liability for making
distributions in accordance with the provisions of this Section 11.07, whether
or not the General Partner or the Partnership has knowledge of any Transfer of
any Interest.
SECTION 11.08. Retirement of Partners' Interest in the Partnership.
[Confidential material has been omitted pursuant to a request for confidential
treatment filed with the Commission under Rule 24b-2(b)and has been filed
separately with the Commission.]
ARTICLE XII
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32
GENERAL PARTNER
SECTION 12.01. Covenant Not to Withdraw, Transfer or Dissolve.
Except as otherwise permitted by this Agreement, the General Partner hereby
covenants and agrees not to (a) take any action to file a certificate of
dissolution or its equivalent with respect to itself, (b) withdraw or attempt to
withdraw from the Partnership other than as a result of distributions made under
Section 11.08 in retirement of its entire Interest, (c) exercise any power under
the Act to dissolve the Partnership, (d) Transfer all or any portion of its
Interest in the Partnership as a General Partner, except pursuant to the
applicable provisions of Article XI (and only so long as a substitute General
Partner is admitted pursuant to Section 11.05 at or prior to such time) or (e)
petition for judicial dissolution of the Partnership. Furthermore, the General
Partner hereby covenants and agrees to continue to carry out its duties as
General Partner under this Agreement until a substitute General Partner is
admitted pursuant to Section 11.05 or the Partnership is dissolved and
liquidated pursuant to Article XIII.
SECTION 12.02. Termination of Status as General Partner. (a) A
General Partner shall cease to be a General Partner upon the earliest to occur
of: (i) the retirement of its entire Interest in accordance with Section 11.08;
(ii) the Bankruptcy of the General Partner; (iii) the Transfer of the General
Partner's entire Interest as a General Partner pursuant to Section 11.02 (so
long as a substitute General Partner is admitted pursuant to Section 11.06 at or
prior to such time); (iv) the involuntary Transfer by operation of law of such
General Partner's Interest; (v) the vote of all of the other Partners to approve
a request by such General Partner to withdraw; or (vi) the vote of the Class A
Limited Partner to remove such General Partner after such General Partner has
attempted to make a Transfer of its Interest that is not permitted under Section
11.02. If, at any time, a Person ceases to be a General Partner without having
Transferred its entire Interest as a General Partner, such Person shall be
treated as an unadmitted transferee of an Interest as a result of a Transfer
(other than a Permitted Transfer) pursuant to Section 11.04. If a Person who is
General Partner ceases to be a General Partner for any reason under this
Agreement, such Person shall continue to be liable as a Partner for all debts,
obligations and liabilities of the Partnership existing at the time such Person
ceases to be a General Partner, regardless of whether, at such time, such debts,
obligations or liabilities were known or unknown, actual or contingent, unless
the substitute General Partner therefor has unconditionally agreed to be liable
for all such debts, obligations and liabilities to the same extent as if such
substitute General Partner had itself incurred such debts, obligations and
liabilities. A Person shall not be liable as a General Partner for debts,
obligations or liabilities of the Partnership arising after such Person ceases
to be a General Partner. Any debts, obligations or liabilities to the
Partnership of any Person who ceases to be a General Partner shall be
collectible by any legal means, and the Partnership is authorized, in addition
to any other remedies it may have at law or in equity, to apply any amounts
otherwise distributable or payable by the Partnership to such Person to satisfy
such debts, obligations or liabilities.
(b) It is the intention of the Partners that the Partnership not
dissolve as a result of the cessation of any General Partner's status as a
General Partner; provided, however, that if it is determined by a court of
competent jurisdiction that the Partnership has dissolved, the provisions of
Section 13.01 shall govern.
(c) If at the time a Person ceases to be a General Partner, such
Person is also a Limited Partner with respect to Interests other than its
Interest as a General Partner, such cessation shall not affect such Person's
rights and obligations with respect to its Interests as a Limited Partner.
<PAGE>
33
ARTICLE XIII
DISSOLUTION AND WINDING UP
SECTION 13.01. Liquidation. (a) Terminating Events. The
Partnership shall dissolve and commence winding up and liquidating upon, and
only upon, the occurrence of a Terminating Event.
(b) Notice Events. [Confidential material has been omitted pursuant
to a request for confidential treatment filed with the Commission under Rule
24b-2(b)and has been filed separately with the Commission.]
SECTION 13.02. Winding Up. (a) Upon the occurrence of a Terminating
Event, the Partnership shall continue solely for the purposes of winding up its
affairs in an orderly manner, liquidating its assets and satisfying the claims
of its creditors and Partners, and no Partner shall take any action with respect
to the Partnership that is inconsistent with the winding up of the Partnership's
business and affairs; provided that all covenants of the Partners contained in
this Agreement and all obligations of the Partners provided for in this
Agreement shall continue to be fully binding upon the Partners until such time
as the Partnership Property has been distributed pursuant to this Section 13.02
and the Certificate has been canceled pursuant to the Act. The Liquidator shall
be responsible for overseeing the winding up and dissolution of the Partnership.
The Liquidator shall take full account of the Partnership's liabilities and all
of the Partnership Property and, except as otherwise provided in Section 13.03,
shall, within 90 days of the occurrence of a Terminating Event, cause the
Partnership Property or the proceeds from the sale, lease, transfer or other
disposition thereof (as determined pursuant to Section 13.08), to the extent
sufficient therefor, to be applied and distributed, to the maximum extent
permitted by applicable law and notwithstanding anything in this Agreement to
the contrary, in the following order of priority:
(i) First, to creditors other than the Terra Partners (including, to
the extent otherwise permitted by applicable law, the Class A Limited
Partner to the extent such Partner is a creditor), in satisfaction of all
of the Partnership's debts and liabilities other than debts and liabilities
for which reasonable provision for payment has been made and liabilities
for distributions to Partners under Section 17-601 or 17-604 of the Act;
(ii) Second, to the Class A Limited Partner [Confidential material has
been omitted pursuant to a request for confidential treatment filed with
the Commission under Rule 24b-2(b)and has been filed separately with the
Commission.];
(iii) Third, to the payment and discharge of all of the Partnership's
debts and liabilities to the Terra Partners, Ratably, to the extent
adequate provision therefor has not been made; and
(iv) Fourth, to the Partners in accordance with their positive Capital
Accounts on the applicable Measurement Date, after giving effect to all
contributions, distributions and allocations for all periods.
If any payment or distribution made under this Section 13.02 is made in-kind,
the amount of the payment or distribution shall be equal to the Mark-to-Market
Value of the Partnership Property paid or distributed at the time of such
payment or distribution.
<PAGE>
34
(b) No General Partner shall receive any additional compensation for
any services performed pursuant to this Article XIII.
(c) Each of the Terra Partners understands and hereby agrees that, by
accepting the provisions of this Section 13.02 setting forth the priority of the
distribution of the Partnership Property to be made upon its liquidation, it
expressly waives any right or claim which it might otherwise have as a creditor
of the Partnership under the Act to receive distributions of the Partnership
Property pari passu with the other creditors of the Partnership in connection
with a distribution of the Partnership Property in satisfaction of any liability
of the Partnership, and each of the Terra Partners hereby subordinates any such
right or claim to all such creditors of the Partnership.
SECTION 13.03. Restoration of Deficit Capital Accounts; Compliance
with Timing Requirements of Regulations. (a) If the Partnership is
"liquidated" within the meaning of Section 1.704-1(b)(2)(ii)(g) of the
Regulations, (i) distributions shall be made pursuant to this Article XIII to
the Partners who have positive balances in their Capital Accounts in compliance
with Section 1.704-1(b)(2)(ii)(b)(2) of the Regulations and (ii) if the General
Partner Capital Account has a deficit balance in its Capital Account (after
giving effect to all contributions, distributions and allocations for all
taxable years, including the taxable year during which such liquidation occurs),
such General Partner shall contribute to the capital of the Partnership the
amount necessary to restore such deficit balance to zero in compliance with
Section 1.704-1(b)(2)(ii)(b)(3) of the Regulations. If any Limited Partner has a
deficit balance in its Capital Account (after giving effect to all
contributions, distributions and allocations for all taxable years, including
the taxable year during which such liquidation occurs), such Limited Partner
shall have no obligation to make any contribution to the capital of the
Partnership with respect to such deficit, and such deficit shall not be
considered a debt owed to the Partnership or to any other Person for any purpose
whatsoever.
(b) In the discretion of the Liquidator, with the consent of the Class
A Limited Partner, a portion (determined in the manner provided below) of the
distributions that would otherwise be made to the Partners pursuant to this
Article XIII may be:
(i) Distributed to a trust established for the benefit of the Partners
solely for the purposes of liquidating Partnership Property, collecting
amounts owed to the Partnership and paying any contingent or unforeseen
liabilities or obligations of the Partnership or of the General Partner
arising out of or in connection with the Partnership. The property and
assets of any such trust shall be distributed to the Partners from time to
time, in the reasonable discretion of the Liquidator, in the same
proportions (as determined in the manner provided below) as the amount
distributed to such trust by the Partnership would otherwise have been
distributed to the Partners pursuant to Section 13.02; or
(ii) Withheld to provide a reasonable reserve for Partnership debts
and liabilities (contingent or otherwise) and to allow for the collection
of the unrealized portion of any installment obligations owed to the
Partnership; provided that such withheld amounts shall be distributed to
the Partners as soon as practicable.
The portion of the distributions that would otherwise have been made to each of
the Partners that is instead distributed to a trust pursuant to
<PAGE>
35
Section 13.03(i) or withheld to provide a reserve pursuant to Section 13.03(ii)
shall be determined in the same manner as the expense or deduction would have
been allocated if the Partnership had realized an expense equal to the amount of
such distributions immediately prior to any distributions being made pursuant to
Section 13.02.
SECTION 13.04. Deemed Contribution and Liquidation. If the Partnership
is liquidated within the meaning of Section 1.704-1(b)(2)(ii)(g) of the
Regulations and no Terminating Event has occurred and is continuing, the
Partnership Property shall not be liquidated, the Partnership's debts and
liabilities shall not be paid or discharged (except to the extent due and
payable in the ordinary course) and the Partnership's affairs shall not be wound
up. Instead, solely for federal income tax purposes, the Partnership shall be
deemed to have contributed the Partnership Property in-kind to a "new
partnership", which shall be deemed to have taken the Partnership Property
subject to all debts and liabilities of the Partnership. Immediately thereafter,
the Partnership shall be deemed to have been liquidated, distributing new
partnership interests to the Partners, all in accordance with their respective
Capital Accounts. The new partnership shall operate in accordance with this
Agreement.
SECTION 13.05. Rights of Partners. Each Partner shall look solely to
the Partnership Property for the return of its Capital Contribution and, except
as otherwise provided in this Article XIII, shall have no right or power to
demand or receive Partnership Property other than cash from the Partnership.
SECTION 13.06. Notice of Dissolution. If a Terminating Event has
occurred and is continuing, the General Partner shall, within 30 days
thereafter, provide notice thereof to each of the other Partners and to all
other parties with whom the Partnership regularly conducts business (as
determined in the discretion of the General Partner) and shall publish notice
thereof in a newspaper of general circulation in each place in which the
Partnership regularly conducts business (as determined in the discretion of the
General Partner).
SECTION 13.07. The Liquidator. (a) Fees. If the Liquidator is a Person
other than a General Partner, the Partnership is authorized to pay a reasonable
fee to the Liquidator for services performed thereby pursuant to this Article
XIII and to reimburse the Liquidator for its reasonable out-of-pocket costs and
expenses incurred in performing those services.
(b) Indemnification. Subject to Section 6.05(d), if the Liquidator is
a Person other than a General Partner, the Partnership, or in the event that the
Partnership has terminated, the General Partner, shall indemnify and hold
harmless the Liquidator and each of its officers, directors, agents, employees
representatives and advisors from any and all claims, damages, losses,
liabilities and expenses arising out of or relating to any action taken or
omitted to be taken by the Liquidator or any such officer, director, agent,
employee, representative or advisor in connection with the liquidation of the
Partnership (including reasonable fees and expenses of counsel incurred by the
Liquidator or any such officer, director, agent, employee, representative or
advisor in connection with the defense of any action or proceeding based on any
such action or omission, which fees and expenses of counsel may be paid as
incurred), except to the extent that any such claim, damage, loss, liability or
expense has resulted from the fraud, willful misconduct or gross negligence of
the Liquidator or any such officer, director, agent, employee, representative or
advisor.
SECTION 13.08. Form of Liquidating Distributions. (a) General. Except
as provided in this Section 13.08, for purposes of making distributions required
by Section 13.02, the Liquidator may
<PAGE>
36
determine whether to distribute all or any portion of the Partnership Property
in-kind or to sell, assign, transfer or otherwise dispose of all or any portion
of the Partnership Property and distribute the proceeds therefrom; provided,
however, that the Liquidator (i) shall not distribute Partnership Property other
than cash to the Class A Limited Partner without the consent of the Class A
Limited Partner and (ii) shall be required to reduce the Partnership Property to
cash to the extent necessary to make distributions in cash to the Class A
Limited Partner pursuant to Section 13.02 unless the Class A Limited Partner
otherwise agrees. [Confidential material has been omitted pursuant to a request
for confidential treatment filed with the Commission under Rule 24b-2(b)and has
been filed separately with the Commission.]
ARTICLE XIV
POWER OF ATTORNEY
SECTION 14.01. General Partner as Attorney-In-Fact. Each Partner
hereby makes, constitutes and appoints the General Partner and the Liquidator,
severally, with full power of substitution and resubstitution, its true and
lawful attorney-in-fact for it and in its name, place and stead and for its use
and benefit, to sign, execute, certify, acknowledge, swear to, file, publish and
record:
(a) All certificates of limited partnership, amended name or similar
certificates and other certificates and instruments (including counterparts
of this Agreement) which the General Partner or Liquidator may deem
necessary to be filed by the Partnership under the laws of the State of
Delaware or any other jurisdiction in which the Partnership is doing or
intends to do business;
(b) Any and all amendments, restatements, supplements or other
modifications to this Agreement and the instruments described in clause (a)
of this Section 14.01, as now or hereafter amended, which the General
Partner may deem necessary to effect a change in or modification to the
Partnership approved by the Partners in accordance with the terms of this
Agreement, including, without limitation, amendments, restatements or
changes to reflect (i) the exercise by the General Partner of any power
granted to it under this Agreement, (ii) any amendments adopted by the
Partners in accordance with the terms of this Agreement, (iii) the
admission of any substitute Partner and (iv) the disposition by any Partner
of its Interest;
(c) All certificates of cancellation and other instruments which the
General Partner or the Liquidator deem necessary or appropriate to effect
the liquidation, winding up, dissolution or termination of the Partnership
pursuant to the terms of this Agreement; and
(d) Any other instrument which is now or may hereafter be required
under applicable law to be filed on behalf of the Partnership or is deemed
necessary by the General Partner or the Liquidator to carry out fully the
provisions of this Agreement in accordance with its terms (including,
without limitation, in the case of the General Partner, executing the
documents described in Section 6.02(b)).
Each Partner (A) hereby authorizes each such attorney-in-fact to take any
further action which such attorney-in-fact shall consider necessary or
appropriate in connection with any of the foregoing provisions of this Section
14.01, (B) hereby gives each such attorney-in-fact full power and authority to
do and
<PAGE>
37
perform each and every act required to be done in connection with any of the
foregoing provisions of this Section 14.01 as fully as such Partner might or
could do personally, and (C) hereby ratifies and confirms all that any such
attorney-in-fact shall lawfully do or cause to be done by virtue thereof or
hereof.
SECTION 14.02. Nature of Special Power. The power of attorney granted
pursuant to Section 14.01:
(a) Is a special power of attorney coupled with an interest and is
irrevocable;
(b) May be exercised by any such attorney-in-fact by listing the
Partners executing any agreement, certificate, instrument or other document
with the single signature of any such attorney-in-fact acting as attorney-
in-fact for such Partners; and
(c) Shall survive and not be affected by the subsequent Bankruptcy,
insolvency, liquidation, winding up, dissolution or cessation of the
existence of a Partner, and shall survive the delivery of an assignment by
a Partner of all or a portion of its Interest (except that where the
assignment is of such Partner's entire Interest and the assignee, with the
consent of the General Partner, is admitted as a substitute Partner, the
power of attorney shall survive the delivery of such assignment for the
sole purpose of enabling any such attorney-in-fact to effect such
substitution) and shall extend to such Partner's or assignee's successors
and assigns.
ARTICLE XV
MISCELLANEOUS
SECTION 15.01. Notices. Any notice, payment, demand or communication
required or permitted to be given by any provision of this Agreement shall be in
writing and shall be deemed to have been delivered, given and received for all
purposes (a) upon delivery, if delivered personally to the Person or to an
officer of the Person to whom the same is directed, or (b) when the same is
actually received, if sent either by registered or certified mail, postage and
charges prepaid, or by facsimile, if such facsimile is followed by a hard copy
of the facsimilied communication sent by registered or certified mail, postage
and charges prepaid, addressed as follows:
(i) If to the Partnership, to
Beaumont Methanol, Limited Partnership
Highway 347
Beaumont, Texas 77775
Telecopier No.: (409) 723-1990
Attention: Plant Manager,
with a copy sent to:
Terra Capital, Inc.
600 Fourth Street
Sioux City, Iowa 51102
Telecopier No.: (712) 279-8703
Attention: Chief Financial Officer,
<PAGE>
38
and to the General Partner at its address set forth in subclause (ii)
of this Section 15.01;
(ii) If to the General Partner, to
Terra Methanol Corporation
600 Fourth Street
Sioux City, Iowa 51102
Telecopier No.: (712) 279-8719
Attention: General Counsel;
(iii) If to the Class B Limited Partner, to
BMC Holdings, Inc.
600 Fourth Street
Sioux City, Iowa 51102
Telecopier No.: (712) 279-8719
Attention: General Counsel; and
(iv) If to the Class A Limited Partner, to
Nova Products LLC
890 Clinton Square
Rochester, New York 14604
Telecopier No.: (716) 325-8006
Attention: Mr. Douglas D. Stark,
with a copy sent to:
Nixon, Hargrave, Devans & Doyle LLP
Clinton Square, P.O. Box 1051
Rochester, New York 14603
Telecopier No.: (716) 263-1600
Attention: Scott F. Cristman, Esq.
Any Person may from time to time specify a different address by notice to the
Partnership and the other Partners.
SECTION 15.02. Binding Effect. Except as otherwise provided in this
Agreement, every covenant, term and provision of this Agreement shall be binding
upon and inure to the benefit of the Partners and their respective successors,
transferees and assigns.
SECTION 15.03. Construction. Every covenant, term and provision of
this Agreement shall be construed simply according to its fair meaning and not
strictly for or against any Partner.
SECTION 15.04. Headings. Section and other headings contained in this
Agreement are for reference purposes only and are not intended to describe,
interpret, define or limit the scope, extent or intent of this Agreement or any
provision of this Agreement.
SECTION 15.05. Severability. Every term and provision of this
Agreement is intended to be severable, and, if any term or provision of this
Agreement is illegal or invalid for any reason whatsoever, such illegality or
invalidity shall not affect the legality or validity of the remainder of this
Agreement. The immediately preceding sentence of this Section 15.05 shall be of
no force or effect if the
<PAGE>
39
consequence of enforcing the remainder of this Agreement without such illegal or
invalid term or provision would be to cause any Partner to lose the benefit of
its economic bargain.
SECTION 15.06. Governing Law. The laws of the State of Delaware shall
govern the validity of this Agreement, the construction of its terms and the
interpretation of the rights and duties of the Partners.
SECTION 15.07. Waiver of Action for Partition. Each Partner
irrevocably waives any right that it may have to maintain any action for
partition with respect to any of the Partnership Property.
SECTION 15.08. Consent to Jurisdiction. Each Partner hereby (a)
irrevocably submits to the jurisdiction of any New York state or Delaware state
court or federal court sitting in New York County, New York, or Wilmington,
Delaware in any action or proceeding arising out of this Agreement, (b) agrees
that all claims in such action may be decided in such court, (c) waives, to the
fullest extent it may effectively do so, the defense of an inconvenient forum
and (d) consents to the service of process by mail. A final judgment in any such
action or proceeding shall be conclusive and may be enforced in other
jurisdictions. Nothing herein shall affect the right of any Partner to serve
legal process in any manner permitted by applicable law or affect its right to
bring any action or proceeding in the courts of any jurisdiction.
SECTION 15.09. Execution in Counterparts. This Agreement may be
executed in any number of counterparts and by different Partners in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same agreement.
SECTION 15.10. Treatment as Security. The Partnership and the
Partners intend that the Class A Limited Partnership Interest and each of the
other Interests is a "security" governed by Article 8 of the Delaware Uniform
Commercial Code, 6 Del. C. (S)1-101 et seq., within the meaning of (S)8-
102(a)(15) thereof, the transfer of which may be registered upon the books
maintained for such purpose by the Partnership.
SECTION 15.11. Waiver of Jury Trial. Each of the Partners hereby
irrevocably waives all right to trial by jury in any action, proceeding or
counterclaim (whether based on contract, tort or otherwise) arising out of or
relating to this Agreement, any other Transaction Document, any documents
delivered pursuant to the terms of this Agreement or any of the other
Transaction Documents, or any of the transactions contemplated hereby or
thereby.
[The balance of this page is intentionally left blank]
<PAGE>
40
IN WITNESS WHEREOF, the parties have entered into this Amended and
Restated Agreement of Limited Partnership as of the day first above written.
THE GENERAL PARTNER
TERRA METHANOL CORPORATION
By
---------------------------------
Name:
Title:
THE CLASS B LIMITED PARTNER
BMC HOLDINGS, INC.
By
---------------------------------
Name:
Title:
THE CLASS A LIMITED PARTNER
NOVA PRODUCTS LLC
By: STONEHURST CAPITAL L.L.C.,
as Managing Member
By: STONEHURST CAPITAL, INC.,
as Manager
By
---------------------------------
Name:
Title:
THIS IS A SIGNATURE PAGE TO THE AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP OF BEAUMONT METHANOL, LIMITED PARTNERSHIP, AND IS EXECUTED BY THE
PARTIES NAMED ABOVE.
<PAGE>
APPENDIX TO AMENDED AND RESTATED AGREEMENT OF
LIMITED PARTNERSHIP OF BEAUMONT METHANOL, LIMITED PARTNERSHIP
DEFINITIONS
-----------
"Act" means the Delaware Revised Uniform Limited Partnership Act, as
set forth in Del. Code Ann. Tit. 6, (S)(S) 17-101 to 17-1109, as amended from
time to time.
"Additional Capital Contributions" means, with respect to each
Partner, the Capital Contributions made by such Partner pursuant to Section
3.03.
"Adjusted Capital Account" means, with respect to each Partner for any
Allocation Year, the Capital Account of such Partner as of the last day of such
Allocation Year, after giving effect to the following adjustments:
(a) Such Capital Account shall be credited for any amounts which such
Partner is obligated to restore pursuant to any provision of this Agreement
or is deemed to be obligated to restore pursuant to the penultimate
sentences of Sections 1.704-1(g)(1) and 1.704-2(i)(5) of the Regulations;
and
(b) Such Capital Account shall be debited for all of the items
described in Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) and
1.704-1(b)(2)(ii)(d)(6) of the Regulations.
"Adjusted Capital Account Deficit" means, with respect to each Limited
Partner, the deficit balance, if any, in such Limited Partner's Capital Account
as of the end of the relevant Allocation Year, after giving effect to the
following adjustments:
(a) Such Capital Account shall be credited for any amounts which such
Limited Partner is obligated to restore pursuant to any provision of this
Agreement or is deemed to be obligated to restore pursuant to the
penultimate sentences of Sections 1.704-1(g)(1) and 1.704-2(i)(5) of the
Regulations; and
(b) Such Capital Account shall be debited for all of the items
described in Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) and
1.704-1(b)(2)(ii)(d)(6) of the Regulations.
This definition is intended to comply with the provisions of Section 1.704-
1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently
therewith.
"Adjusted Eurodollar Rate" means, for any Current Period, a rate per
annum equal to the rate obtained by dividing (a) the Eurodollar Rate for such
Current Period by (b) a percentage equal to 100% minus the Eurodollar Rate
Reserve Percentage for such Current Period.
"Affiliate" means, with respect to any Person, any other Person that,
directly or indirectly, controls, is controlled by or is under common control
with such Person or is a director, officer, partner or member of such Person.
For purposes of this definition, the term "control" (including the terms
"controlling", "controlled by" and "under common control with") of a Person
means the possession, direct or indirect, of the power to vote 20% or more of
the Voting Interests of such Person or to direct or cause the direction of the
management and policies of such Person, whether through the ownership of
<PAGE>
2
Voting Interests, by contract or otherwise.
"After-Tax Basis" means, with respect to any payment to any Person,
the amount of such payment (the "base payment") supplemented by a further
payment (the "gross-up amount") to such Person so that the sum of the base
payment and the gross-up amount, after deduction of the amount of all taxes
actually required to be paid by such Person in respect of the receipt or accrual
of the base payment and gross-up amount (and after taking into account all
credits or deductions (collectively, the "tax benefits") realized from (i) the
payment by the indemnified Person of any amount giving rise to the obligation to
make the base payment and (ii) the payment by the indemnified Person of taxes
that the gross-up amount is intended to pay), shall be equal to the amount
required to be received on an "After-Tax Basis". Such calculations shall be made
on the basis of the assumptions that for such Person or any Affiliate thereof,
(A) federal taxes are payable at the highest marginal rate applicable to such
Person or any such Affiliate for the relevant period or periods and (B) state
and local taxes are payable at a rate equal to 5% (after taking into account the
federal tax benefits attributable to such state and local taxes).
"Agreement" means this Amended and Restated Agreement of Limited
Partnership, as amended, supplemented or otherwise modified from time to time.
All references in this Agreement to any "Article", "Section", "Schedule" or
"Exhibit" are, unless otherwise specified, to an Article, a Section, a Schedule
or an Exhibit of or to this Agreement.
"Allocation Year" means (a) the period commencing on the Closing Date
and ending on December 31, 1997, (b) except as otherwise required under Section
706 of the Code, any subsequent 12-month period commencing on January 1 and
ending on the next succeeding December 31 and (c) any portion of the period
described in clause (a) or (b) of this definition for which the Partnership is
required to allocate Profits, Losses and other items of Partnership income,
gain, loss or deduction pursuant to Article IV.
"Alternate Appraiser" has the meaning specified in Section
4.09(b)(i)(B).
"Alternate Base Rate" means a fluctuating interest rate per annum in
effect from time to time, which rate per annum shall at all times be equal to
the highest of:
(a) the rate of interest announced publicly by the Rate Determination
Bank in New York, New York from time to time, as the Rate Determination
Bank's base rate or prime rate;
(b) the sum (adjusted to the nearest 1/4 of 1% or, if there is no
nearest 1/4 of 1%, to the next higher 1/4 of 1%) of (i) 1/2 of 1% per annum
plus (ii) the rate obtained by dividing (A) the latest three-week moving
average of secondary market morning offering rates in the United States of
America for three-month certificates of deposit of major United States
money center banks, such three-week moving average (adjusted to the basis
of a year of 360 days) being determined weekly on each Monday (or, if such
day is not a Business Day, on the next succeeding Business Day) for the
three-week period ending on the previous Friday by the Rate Determination
Bank on the basis of such rates reported by certificate of deposit dealers
to and published by the Federal Reserve Bank of New York or, if such
publication shall be suspended or terminated, on the basis of quotations
for such rates received by the Rate Determination Bank from three New York
certificate of deposit dealers of recognized standing selected by the Rate
Determination Bank, by (B) a percentage equal to 100% minus the average of
the daily
<PAGE>
3
percentages specified during such three-week period by the Board of
Governors of the Federal Reserve System (or any successor thereto) for
determining the maximum reserve requirement (including, but not limited to,
any emergency, supplemental or other marginal reserve requirement) for the
Rate Determination Bank with respect to liabilities consisting of or
including (among other liabilities) three-month U.S. dollar nonpersonal
time deposits in the United States of America plus (iii) the average during
such three-week period of the annual assessment rates estimated by the Rate
Determination Bank for determining the then current annual assessment rate
payable by the Rate Determination Bank to the Federal Deposit Insurance
Corporation (or any successor thereto) for insuring U.S. dollar deposits of
the Rate Determination Bank in the United States of America; and
(c) 1/2 of 1% per annum above the Federal Funds Rate.
"Ammonia Loop" means the ammonia loop facility that will be
constructed as an extension of the Methanol Plant pursuant to the Engineering,
Procurement and Construction Agreement dated as of October 20, 1997 between
Terra Nitrogen Corporation, a Delaware corporation and a Wholly Owned Subsidiary
of Terra Capital, and Foster Wheeler USA Corporation, a Delaware corporation, as
amended, supplemented or otherwise modified from time to time hereafter in
accordance with the terms thereof.
"Ammonia Loop Completion Guarantee" means the completion guarantee to
be made by Terra Capital in favor of Terra Newco prior to such time as the
Partnership contributes to, or otherwise makes Investments in, BAI of more than
$7,000,000, which completion guarantee shall be in form and substance
satisfactory to the Class A Limited Partner and shall be delivered to the
Partnership (with a copy to the Class A Limited Partner) together with such
certificates, opinions and other documents relating to the authorization and
approvals therefor and enforceability thereof as the Class A Limited Partner
shall reasonably request, all in form and substance reasonably satisfactory to
the Class A Limited Partner.
"Ammonium Nitrate Hedging Agreement" means the agreement dated
December 31, 1997 between Terra Canada and ICI Chemicals & Polymers Limited
pursuant to which Terra Canada agrees to pay certain amounts to ICI in the event
that the annual average price of ammonium nitrate exceeds (Pounds)100 per tonne,
as amended, supplemented or otherwise modified from time to time hereafter in
accordance with the terms thereof (except with respect to any increase in the
notional amount thereunder, any extension of the termination date thereof or any
decrease in the price of ammonium nitrate thereunder).
"Applicable Amounts" has the meaning specified in the definition of
"Early Termination Premium" set forth below in this Appendix.
"Appraisal Guidelines" means the guidelines set forth on Schedule II
attached hereto which have been established for appraising the fair market value
of the Methanol Plant and the Methanol Related Assets and/or the Ammonia Loop.
"Appraiser" has the meaning specified in Section 4.09(b)(i)(B).
"Asset Value" means, with respect to any Partnership Property, the
adjusted basis of such Partnership Property for United States federal income tax
purposes, except as follows:
<PAGE>
4
(a) The initial Asset Value of any Partnership Property contributed
to the Partnership pursuant to Sections 3.01 and 3.02 shall be as set forth
in Section 4.09(a);
(b) The Asset Values of all Partnership Property shall be adjusted to
equal their respective values, as determined in accordance with Section
4.09(b) (or, in the case of cash, shall be its face amount) on the date
specified in Section 4.09(b), upon the following events: (i) the
distribution by the Partnership to a Partner of more than a de minimis
amount of Partnership Property as consideration for an Interest and (b) the
liquidation of the Partnership within the meaning of Section 1.704-
1(b)(2)(ii)(g) of the Regulations;
(c) The Asset Value of any Partnership Property distributed to any
Partner shall be adjusted to equal the value of such Partnership Property,
as determined in accordance with Section 4.09(b) (or, in the case of cash,
shall be its face amount) on the date specified in Section 4.09(b), or, if
the distribution is made pursuant to Section 13.02, on the date of such
distribution; and
(d) The Asset Values of all Partnership Property shall be increased
(or decreased) to reflect any adjustments to the adjusted basis of such
Partnership Property pursuant to Section 734(b) or 743(b) of the Code, but
only to the extent that such adjustments are taken into account in
determining Capital Accounts pursuant to Section 1.704-1(b)(2)(iv)(m) of
the Regulations and clause (d) of the definition of "Profits" and "Losses"
set forth below in this Appendix or Section 4.03(g); provided, however,
that Asset Values shall not be adjusted pursuant to this clause (d) to the
extent that an adjustment pursuant to clause (b) is required in connection
with a transaction that would otherwise result in an adjustment pursuant to
this clause (d).
If the Asset Value of any Partnership Property has been determined or adjusted
pursuant to clause (a), (b) or (d) of this definition, such Asset Value shall
thereafter be adjusted by the Depreciation taken into account with respect to
such Partnership Property for purposes of the allocations made pursuant to
Article IV.
"BAI" means Beaumont Ammonia, Inc., a Delaware corporation, the
principal business of which shall be the construction and operation of the
Ammonia Loop.
"Bankruptcy" means, collectively, a Voluntary Bankruptcy or an
Involuntary Bankruptcy.
"Business Day" means a day on which banks are not required or
authorized to close in New York, New York, and, if the applicable Business Day
relates to the computation of the Eurodollar Rate, a day on which dealings are
carried on in the London interbank market.
"Capital Account" means, with respect to any Partner, the Capital
Account maintained for such Partner in accordance with the following provisions:
(a) To each Partner's Capital Account there shall be credited (i)
such Partner's Capital Contributions, (ii) such Partner's distributive
share of Profits and any items of Partnership income or gain which are
specially allocated pursuant to Section 4.03 or 4.04 and (iii) the amount
of any Partnership debts or liabilities assumed by such Partner or secured
by any Partnership
<PAGE>
5
Property distributed to such Partner.
(b) From each Partner's Capital Account there shall be debited (i)
the amount of cash and the Asset Value of any Partnership Property
distributed to such Partner pursuant to any provision of this Agreement,
(ii) such Partner's distributive share of Losses and any items of
Partnership losses or deductions which are specially allocated pursuant to
Section 4.03 or 4.04 and (iii) the amount of any debts or liabilities of
such Partner assumed by the Partnership or secured by any property or
assets contributed by such Partner to the Partnership.
(c) If all or a portion of an Interest is Transferred in accordance
with the terms of Article XI, the transferee shall succeed to the Capital
Account of the transferor to the extent it relates to the Interest
Transferred.
(d) In determining the amount of any debt or liability for purposes
of clause (a) or (b) of this definition, Section 752(c) of the Code and any
other applicable provisions of the Code and the Regulations shall be taken
into account.
The foregoing provisions of this definition and the other provisions of this
Agreement relating to the maintenance of Capital Accounts are intended to comply
with Section 1.704-1(b) of the Regulations and shall be interpreted and applied
in a manner consistent with such Regulations. If the General Partner shall
determine that it is prudent to modify the manner in which the Capital Accounts,
or any debits or credits thereto (including, without limitation, debits or
credits relating to debts or liabilities which are secured by contributed or
distributed property or assets or which are assumed by the Partnership or any
Partner), are computed in order to comply with such Regulations, the General
Partner may make such modification; provided that any such modification, either
individually or in the aggregate, could not reasonably be expected to have a
material effect on the amounts distributable to any Partner pursuant to Article
XIII upon the dissolution of the Partnership. The General Partner also shall
make any such adjustments that are necessary or appropriate to maintain equality
between the Capital Accounts of the Partners and the amount of Partnership
capital reflected on the Partnership's balance sheet, as computed for book
purposes in accordance with Section 1.704-1(b)(2)(iv)(q) of the Regulations;
provided that, to the extent any such adjustment is inconsistent with the other
provisions of this Agreement and would have a material effect on the amounts
distributable to any Limited Partner, such adjustment shall require the consent
of such Limited Partner.
"Capital Contribution" means, with respect to any Partner, the amount
of cash and the Initial Asset Value of all Permitted Assets (other than cash)
contributed to the Partnership with respect to the Interest held by such
Partner. The principal amount of a promissory note which is not readily traded
on an established securities market and which is contributed to the Partnership
by the maker of the note (or a Partner related to the maker of the note (within
the meaning of Section 1.704-1(b)(2)(ii)(c) of the Regulations)) shall not be
included in the Capital Account of any Partner until the Partnership makes a
taxable disposition of such promissory note or until (and to the extent)
principal payments are made on such promissory note, all in accordance with
Section 1.704-1(b)(2)(iv)(d)(2) of the Regulations.
"CERCLA" means the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended from time to time.
"CERCLIS" means the Comprehensive Environmental Response,
Compensation and
<PAGE>
6
Liability Information System maintained by the United States Environmental
Protection Agency.
"Certificate" has the meaning specified in Section 1.04.
"Class A Beneficial Owners" means the beneficial owners of the Class A
Limited Partner.
"Class A Limited Partner" means any Person who (a) is referred to as
such in the first paragraph of this Agreement or who has become a substitute
Class A Limited Partner pursuant to the applicable provisions of Article XI and
(b) has not ceased to be a Class A Limited Partner.
"Class A Limited Partner Guaranteed Payment" has the meaning specified
in Section 5.03.
"Class B Limited Partner" means any Person who (a) is referred to as
such in the first paragraph of this Agreement or who has become a substitute
Class B Limited Partner pursuant to the applicable provisions of Article XI and
(b) has not ceased to be a Class B Limited Partner.
"Closing Date" means December 31, 1997.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time.
"Confidentiality Agreement" has the meaning specified in Section
11.03(a).
"Credit Facility" means the Credit Agreement dated as of December 31,
1997 among the Class A Limited Partner, the banks, financial institutions and
other institutional lenders from time to time party thereto, Citibank, N.A., as
agent for such banks, financial institutions and other institutional lenders,
and The Bank of Nova Scotia and Bank of America National Trust and Savings
Association, as syndication agents therefor, as amended, supplemented or
otherwise modified from time to time hereafter in accordance with the terms
thereof.
"Cumulative First Priority Return" means, at any date of
determination, the sum of the amounts determined pursuant to the definition of
the "First Priority Return" set forth below in this Appendix for each
Distribution Period since the Closing Date, and, without duplication, any
Current Period ending on such date.
"Cumulative Second Priority Return" means, at any date of
determination, the sum of the amounts determined pursuant to the definition of
the "Second Priority Return" set forth below in this Appendix for each
Distribution Period since the Closing Date, and, without duplication, any
Current Period ending on such date.
"Current Period" means any Distribution Period or any portion thereof.
"Demand Loan" means any senior demand loan (a) made by the Partnership
to Terra Capital or any of its Affiliates (including, without limitation, Terra
U.K.), (b) the repayment obligations of which bear an arm's-length floating
interest rate, and are evidenced by a promissory note, in substantially the form
of Exhibit E-1 attached hereto, (c) which either (i) is secured by a valid and
perfected lien on and
<PAGE>
7
security interest in all of the property and assets of Terra and its
Subsidiaries described on Schedule III attached hereto or (ii) is
unconditionally and irrevocably guaranteed under the Minorco Guarantee and (d)
solely in the case of any such demand loan to an Affiliate of Terra Capital, the
repayment obligations of which are unconditionally and irrevocably guaranteed by
Terra Capital on the terms set forth in Exhibit E-3 attached hereto.
"Depreciation" means, for each Allocation Year, an amount equal to the
depreciation, amortization or other cost recovery deduction allowable for United
States federal income tax purposes with respect to any Partnership Property for
such Allocation Year, except that if the Asset Value of any such Partnership
Property asset differs from its adjusted basis for United States federal income
tax purposes at the beginning of such Allocation Year, Depreciation shall be an
amount which bears the same ratio to such beginning Asset Value as the United
States federal income tax depreciation, amortization or other cost recovery
deduction for such Allocation Year bears to such beginning adjusted basis
[Confidential material has been omitted pursuant to a request for confidential
treatment filed with the Commission under Rule 24b-2(b)and has been filed
separately with the Commission.].
"Distribution Date" means the last Business Day of each Distribution
Period.
"Distribution Period" means (a) the period commencing on the Closing
Date and ending on March 31, 1998 and (b) thereafter, each subsequent period
commencing on the last day of the immediately preceding Distribution Period and
ending on the earliest to occur of the next succeeding March 31, June 30,
September 30 or December 31; provided, however, that whenever the last day of
any Distribution Period would otherwise occur on a day other than a Business
Day, the last day of such Distribution Period shall occur on the immediately
preceding Business Day and the next Distribution Period shall commence on such
day.
"Early Termination Premium" means an amount equal to (a) the aggregate
Capital Contribution of the Class A Limited Partner multiplied by (b) the
difference, if any, between (i) the present value of the sum of (A) 0.00189
received quarterly on the last Business Day of each Distribution Period
occurring during the period commencing on the applicable Retirement Date,
Purchase Date or Termination Date, as the case may be, and ending on the then
current Reset Date and (B) 0.04444 received on such Reset Date (the "Applicable
Amounts"), discounted at a rate equal to the sum of (1) the bid-side yield on
U.S. Treasury notes whose maturity matches or approximates the then current
Reset Date and (2) 2.50% minus (ii) the present value of the Applicable Amounts,
discounted at the rate of 17%.
"Environmental Action" means any legal action, suit, demand, demand
letter, claim, notice of noncompliance or violation, notice of liability or
potential liability, governmental or regulatory investigation, proceeding,
consent order or consent agreement, abatement order or other order or directive
(conditional or otherwise) relating in any way to any Environmental Law, any
Environmental Permit or any Hazardous Materials or arising from alleged injury
or threat to health, safety, natural resources or the environment, including,
without limitation, (a) by any governmental or regulatory authority for
enforcement, cleanup, removal, response, remedial or other actions or damages
and (b) by any governmental or regulatory authority or other third party for
damages, contribution, indemnification, cost recovery, compensation or
injunctive relief.
"Environmental Law" means any federal, state, local or foreign
statute, law, rule,
<PAGE>
8
regulation, ordinance, code, order, writ, judgment, injunction or decree, or any
judicial or agency interpretation, policy, guideline or other requirement of any
governmental or regulatory authority, relating to (a) the generation, use,
handling, transportation, treatment, storage, disposal, release or discharge of
Hazardous Materials, (b) pollution or the protection of the environment, health,
safety or natural resources or (c) occupational safety and health, industrial
hygiene, land use or the protection of human, plant or animal health or welfare,
including CERCLA, the Hazardous Materials Transportation Act (49 U.S.C. (S) 1801
et seq.), the Resource Conservation and Recovery Act (42 U.S.C. (S) 6901 et
seq.), the Federal Water Pollution Control Act (33 U.S.C. (S) 1251 et seq.), the
Clean Air Act (42 U.S.C. (S) 7401 et seq.), the Toxic Substances Control Act (15
U.S.C. (S) 2601 et seq.), the Federal Insecticide, Fungicide and Rodenticide Act
(7 U.S.C. (S) 136 et seq.), the Occupational Safety and Health Act (29 U.S.C.
(S) 651 et seq.), the Oil Pollution Act (33 U.S.C. (S) 2701 et seq.) and the
Emergency Planning and Community Right-to-Know Act (42 U.S.C. (S) 11001 et
seq.), in each case as amended from time to time, and including the regulations
promulgated and the rulings issued from time to time thereunder.
"Environmental Permit" means any permit, approval, license,
identification number or other authorization required under any Environmental
Law.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the regulations promulgated and rulings issued
thereunder.
"ERISA Affiliate" means any Person that for purposes of Title IV of
ERISA is a member of the controlled group of the Partnership, or under common
control with the Partnership, within the meaning of Section 414 of the Internal
Revenue Code.
"ERISA Event" means:
(a) (i) the occurrence of a reportable event, within the meaning of
Section 4043(c) of ERISA, with respect to any Plan unless the 30-day notice
requirement with respect to such event has been waived by the Pension
Benefit Guaranty Corporation or (ii) the requirements of paragraph (1) of
Section 4043(b) of ERISA are met with respect to a contributing sponsor, as
defined in Section 4001(a)(13) of ERISA, of a Plan, and an event described
in paragraph (9), (10), (11), (12) or (13) of Section 4043(c) of ERISA
could reasonably be expected to occur with respect to such Plan within the
following 30 days;
(b) the application for a minimum funding waiver with respect to a
Plan;
(c) the provision by the administrator of any Plan of a notice of
intent to terminate such Plan pursuant to Section 4041(a)(2) of ERISA
(including any such notice with respect to a plan amendment referred to in
Section 4041(e) of ERISA);
(d) the cessation of operations at a facility of the Partnership or
any of the ERISA Affiliates under the circumstances described in Section
4062(e) of ERISA;
(e) the withdrawal or partial withdrawal by the Partnership or any of
the ERISA Affiliates from a Plan or a Multiemployer Plan;
(f) the conditions for the imposition of a Lien under Section 302(f)
of ERISA shall
<PAGE>
9
have been met with respect to any Plan;
(g) the adoption of an amendment to a Plan requiring the provision of
security to such Plan pursuant to Section 307 of ERISA; or
(h) the institution by the Pension Benefit Guaranty Corporation of
proceedings to terminate a Plan pursuant to Section 4042 of ERISA, or the
occurrence of any event or condition described in Section 4042 of ERISA,
that constitutes grounds for the termination of, or the appointment of a
trustee to administer, a Plan.
"Eurocurrency Liabilities" has the meaning specified in Regulation D
of the Board of Governors of the Federal Reserve System, as in effect from time
to time.
"Eurodollar Rate" means, for any Distribution Period or portion
thereof, an interest rate per annum equal to the average (rounded upward to the
nearest whole multiple of 1/16 of 1% per annum, if such average is not such a
multiple) of the rates per annum at which deposits in U.S. dollars are offered
by the principal office of each of the Reference Banks in London, England to
prime banks in the London interbank market at approximately 5:00 P.M. (London
time) two Business Days before the immediately preceding Distribution Date in an
amount substantially equal to $10,000,000 and for a period equal to three
months. The Eurodollar Rate for the Distribution Period commencing on the
Closing Date shall be 5.9375% per annum.
"Eurodollar Rate Reserve Percentage" means, for any Distribution
Period, the reserve percentage applicable two Business Days before the
immediately preceding Distribution Date under regulations issued from time to
time by the Board of Governors of the Federal Reserve System (or any successor
thereto) for determining the maximum reserve requirement (including, without
limitation, any emergency, supplemental or other marginal reserve requirement)
for a member bank of the Federal Reserve System in New York City with respect to
liabilities or assets consisting of or including Eurocurrency Liabilities (or
with respect to any other category of liabilities that includes deposits by
reference to which the Eurodollar Rate is determined) having a term equal to
three months.
"External Taxing Jurisdiction" means any state or local taxing
jurisdiction in the United States of America or any foreign taxing jurisdiction
with respect to which the Class A Limited Partner or any Class A Beneficial
Owner (or any of their respective Affiliates) has no connection other than as a
result of being a Partner or enforcing its rights under this Agreement.
"Extraordinary Expenses" means, collectively, all expenses in excess
of $500,000 for any single occurrence arising from any events, developments or
circumstances occurring after the Closing Date relating to or in connection with
or arising out of (a) any Environmental Law or Environmental Action, (b) (i) the
occurrence of any ERISA Event with respect to a Plan or any Withdrawal Liability
to any Multiemployer Plan, (ii) the insolvency, reorganization or termination of
any Multiemployer Plan, within the meaning of Title IV of ERISA, (iii) any
"accumulated funding deficiency" (as defined in Section 302 of ERISA and Section
412 of the Internal Revenue Code), whether or not waived, with respect to one or
more of the Plans, or any Lien on the property and assets of the Partnership or
any of the ERISA Affiliates in favor of the Pension Benefit Guaranty Corporation
or any Plan, (c) local, state or federal income taxes in excess of 6% of taxable
income as computed for United States federal income tax purposes, (d) liability
in tort and (e) casualty and condemnation losses.
<PAGE>
10
"Federal Funds Rate" means, for any period, a fluctuating interest
rate per annum equal for each day during such period to the weighted average of
the rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, as published for such day (or,
if such day is not a Business Day, for the immediately preceding Business Day)
by the Federal Reserve Bank of New York or, if such rate is not so published for
any day that is a Business Day, the average of the quotations for such day for
such transactions received by the Rate Determination Bank from three federal
funds brokers of recognized standing selected by it.
"First Priority Return" means, for each Current Period, an amount
equal to (a) the First Priority Return Rate for such Current Period multiplied
by (b) the sum of (i) (A) the Original Capital Contribution of the Class A
Limited Partner described in Section 3.02 plus (B) all Additional Capital
Contributions made by the Class A Limited Partner pursuant to Section 3.03(a),
adjusted for the timing of any Additional Capital Contributions made during such
Current Period, and (ii) (A) the Cumulative First Priority Return as of the
immediately preceding Distribution Date minus (B) the cumulative distributions
made to the Class A Limited Partner pursuant to Section 5.01 during the period
commencing on the Closing Date and ending on the immediately preceding
Distribution Date. All computations referred to in this definition shall be
determined on the basis of the actual number of days elapsed in a 360-day year
(including the first day but excluding the last day) occurring in the period for
which the First Priority Return is being calculated.
"First Priority Return Rate" [Confidential material has been omitted
pursuant to a request for confidential treatment filed with the Commission under
Rule 24b-2(b)and has been filed separately with the Commission.]
"Fiscal Quarter" means (a) the period commencing on the Closing Date
and ending on March 31, 1998, (b) with respect to any fiscal quarter in any
Fiscal Year not described in clause (a) or (c) of this definition, any
subsequent consecutive three-month period commencing on April 1 and ending on
the next succeeding June 30, the period commencing on July 1 and ending on the
next succeeding September 30, the period commencing on October 1 and ending on
the next succeeding December 31 or the period commencing on January 1 and ending
on the next succeeding March 31, as the case may be, and (c) the period
commencing on the first day of the fiscal quarter in which the Termination Date
occurs and ending on the Termination Date.
"Fiscal Year" means (a) the period commencing on the Closing Date and
ending on December 31, 1998, (b) with respect to any fiscal year not described
in clause (a) or (c) of this definition, any subsequent consecutive 12-month
period commencing on January 1 and ending on the next succeeding December 31 and
(c) the period commencing on the immediately preceding January 1 and ending on
the Termination Date.
"GAAP" means generally accepted accounting principles as in effect in
the United States from time to time and applied on a consistent basis.
"General Partner" means any Person who (a) is referred to as such in
the first paragraph of this Agreement or has become a substitute General Partner
pursuant to the applicable provisions of Article XI and (b) has not ceased to be
a General Partner.
<PAGE>
11
"Hazardous Materials" means: (a) any chemical, material or substance
at any time defined as or included in the definition of "hazardous substances",
"hazardous wastes", "hazardous materials", "extremely hazardous waste", "acutely
hazardous waste", "radioactive waste", "biohazardous waste", "pollutant", "toxic
pollutant", "contaminant", "restricted hazardous waste", "infectious waste",
"toxic substances", or any other term or expression intended to define, list or
classify substances by reason of properties harmful to health, safety or the
indoor or outdoor environment (including, without limitation, harmful properties
such as ignitability, corrosivity, reactivity, carcinogenicity, toxicity,
reproductive toxicity, "TCLP toxicity" or "EP toxicity" or words of similar
import) under any applicable Environmental Laws; (b) any oil, petroleum,
petroleum fraction or petroleum-derived substance; (c) any drilling fluids,
produced waters and other wastes associated with the exploration, development or
production of crude oil, natural gas or geothermal resources; (d) any flammable
substances or explosives; (e) any radioactive materials; (f) any asbestos-
containing materials; (g) any urea formaldehyde foam insulation; (h) any
electrical equipment which contains any oil or dielectric fluid containing
polychlorinated biphenyls; (i) any pesticides; (j) any radon gas; and (k) any
other chemical, material or substance designated, classified or regulated as
hazardous or toxic or as a pollutant or contaminant under any Environmental Law
or which could pose a hazard to health, safety or the environment.
"Holdings" has the meaning specified in the first paragraph of this
Agreement.
"Incipient Event" means an event which with notice or lapse of time or
both would constitute a Terminating Event or Notice Event.
"Indebtedness" means, with respect to any Person (without
duplication):
(a) all indebtedness of such Person for borrowed money;
(b) all obligations of such Person for the deferred purchase price of
property and assets or services (other than (i) trade payables or other
accounts payable incurred in the ordinary course of such Person's business
and not past due for more than 30 days and (ii) deferred employee
compensation and other employee benefits);
(c) all obligations of such Person evidenced by notes, bonds,
debentures or other similar instruments;
(d) all obligations of such Person as lessee under leases which have
been or should be, in accordance with GAAP, recorded as capital leases; and
(e) all Indebtedness referred to in clauses (a) through (d) above
guaranteed directly or indirectly by such Person, or in effect guaranteed
directly or indirectly by such Person through an agreement (i) to pay or
purchase such Indebtedness or to advance or supply funds for the payment or
purchase of such Indebtedness, (ii) to purchase, sell or lease (as lessee
or lessor) property, or to purchase or sell services, primarily for the
purpose of enabling the debtor to make payment of such Indebtedness or to
assure the holder of such Indebtedness against loss, (iii) to supply funds
to or in any other manner invest in the debtor (including any agreement to
pay for property or services irrespective of whether such property is
received or such services are rendered) or (iv) otherwise to assure a
creditor against loss.
<PAGE>
12
"Indemnitee" has the meaning specified in Section 6.05(d)(i).
"Indemnitor" has the meaning specified in Section 6.05(d)(i).
"Initial Appraiser" has the meaning specified in Section 4.09(a)(iii).
"Initial Asset Value" means the initial value of a Permitted Asset
determined pursuant to Section 4.09(a).
"Interest" means any interest in the Partnership representing all or
any portion of the Capital Contributions made or deemed made by a Partner
pursuant to Article III, including any and all benefits to which the holder of
such an Interest may be entitled as provided in this Agreement, together with
all obligations of such Person to comply with the terms and provisions of this
Agreement.
"Investment" means, with respect to any Person, any loan or advance to
such Person, any purchase or other acquisition of shares of capital stock of (or
other ownership or profit interests in), or other obligations or other
securities (including, without limitation, warrants, rights and options) of,
such Person, any capital contribution to such Person or any other investment in
such Person, including, without limitation, any arrangement pursuant to which
the investor incurs Indebtedness of the types referred to in clause (e) of the
definition of "Indebtedness" set forth above in this Appendix in respect of such
Person.
"Involuntary Bankruptcy" means, with respect to any Person, without
the consent or acquiescence of such Person, the entering of an order for relief
or approving of a petition for relief or reorganization of such Person, or any
other petition seeking any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or other similar relief of such Person
under any present or future bankruptcy, insolvency or similar statute, law or
regulation, or the filing of any such petition against such Person, in any such
case which petition shall not be dismissed within 60 days, or, without the
consent or acquiescence of such Person, the entering of an order appointing a
trustee, custodian, receiver or liquidator of such Person or of all or any
substantial portion of its property and assets, in any such case which order
shall not be dismissed within 60 days.
"Issuance Items" has the meaning specified in Section 4.03(h).
"Lien" means any lien, security interest or other charge or encumbrance
of any kind, or any other type of preferential arrangement having the effect of
a lien, security interest or other charge or encumbrance, including, without
limitation, the lien or retained security title of a conditional vendor and any
easement, right of way or other encumbrance on title to real property.
"Limited Partners" means, collectively, the Class A Limited Partner
and the Class B Limited Partner.
"Liquid Investments" means any of the following types of Investments,
to the extent owned by any Person free and clear of all Liens (other than Liens
created under the Transaction Documents):
(a) readily marketable obligations issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof having maturities of not
<PAGE>
13
more than 90 days from the date of acquisition thereof; provided that the
full faith and credit of the United States of America is pledged in support
thereof;
(b) time deposits or demand deposits with, or insured certificates of
deposit of, any commercial bank that (i) is organized under the laws of the
United States of America, any state thereof or the District of Columbia or
is the principal banking subsidiary of a bank holding company organized
under the laws of the United States of America, any state thereof or the
District of Columbia and is a member of the Federal Reserve System and (ii)
issues (or the parent of which issues) commercial paper rated as described
in clause (c) of this definition, in each case with maturities of not more
than 90 days from the date of acquisition thereof;
(c) commercial paper issued by any Person organized under the laws of
any state of the United States of America and rated at least "Prime-1" (or
the then equivalent grade) by Moody's or at least "A-1" (or the then
equivalent grade) by S&P, in each case with maturities of not more than 90
days from the date of acquisition thereof;
(d) Investments, classified in accordance with GAAP as current assets
of such Person, in money market investment programs registered under the
Investment Company Act of 1940, as amended, which are structured to trade
at a price equal to the face value thereof, and the portfolios of which are
substantially comprised of Investments of the character and quality
described in clauses (a), (b) and (c) of this definition; and
(e) cash.
"Liquidator" means (a) any Person appointed as such by the Class A
Limited Partner (which Person may be the General Partner) or (b) if a
Terminating Event which results from the Bankruptcy of the Class A Limited
Partner or the Notice Event referred to in clause (a) of the definition thereof
set forth below in this Appendix has occurred and is continuing, the General
Partner; provided that if the final liquidation distributions have not been made
by the General Partner within 30 days of the date of any such Terminating Event,
the Class A Limited Partner shall thereafter have the right to appoint a
replacement Liquidator.
"Loan Purchase Agreement" has the meaning specified in Section 6.01 of
the Terra Capital Note.
"Losses" has the meaning specified in the definition of "Profits and
Losses" set forth below in this Appendix.
[Confidential material has been omitted pursuant to a request for
confidential treatment filed with the Commission under Rule 24b-2(b)and has been
filed separately with the Commission.]
"Mark-to-Market Event" means either (a) the retirement of any Interest
pursuant to Section 11.08 or (b) the liquidation of the Partnership pursuant to
Article XIII; provided, however, that, unless the Class A Limited Partner
otherwise consents, no Mark-to-Market Event shall occur if the Notice Event
giving rise to any event referred to in clause (a) or (b) above results from a
Terra Event.
<PAGE>
14
"Mark-to-Market Valuation" means an adjustment of the Asset Value of
the Permitted Assets of the Partnership to reflect their respective Mark-to-
Market Values.
"Mark-to-Market Value" means, with respect to any Permitted Asset of
the Partnership, (a) upon a Mark-to-Market Event, the value of such Permitted
Asset as determined pursuant to Section 4.09(b) and (b) upon the exercise of the
Purchase Option, the value of such Permitted Asset as determined pursuant to
Section 4.09(b) and Section 2 of the Support and Option Agreement.
"Material Adverse Effect" means a material adverse effect on (a) (i)
the business, assets, operations, properties or financial condition of the
Partnership or any of its Subsidiaries or (ii) the contingent liabilities of the
Partnership or any of its Subsidiaries which could reasonably be expected to
result in any of the effects described in subclause (a)(i) of this definition
other than, in the case of subclause (a)(i) or (a)(ii) of this definition, any
such effect resulting solely from a general economic change in the industry of
the Partnership or any of its Subsidiaries, (b) the rights and remedies of the
Class A Limited Partner under this Agreement or any other Transaction Document
or (c) the ability of the Partnership or any of its Subsidiaries or the any of
the Terra Partners to perform or observe its obligations under this Agreement or
any other Transaction Document to which it is a party; provided that, solely on
and as of the Closing Date, a material adverse effect on the Terra U.K. Assets
which does not otherwise constitute a "Material Adverse Change" under the Terra
U.K. Acquisition Agreement shall not, in and of itself, be deemed a material
adverse effect under this definition.
"Measurement Date" means (a) with respect to the retirement of the
Class A Partner's Interest pursuant to Section 11.08(a), the Distribution Date
immediately preceding the date on which the related Retirement Notice was
delivered, (b) with respect to the liquidation of the Partnership pursuant to
Article XIII, the Distribution Date immediately preceding the Distribution
Period in which the earlier of (i) the date on which the Terminating Event
giving rise to such liquidation occurred and (ii) if applicable, the date on
which the Notice Event (without giving effect to any grace period therefor)
giving rise to such Terminating Event occurred and (c) with respect to the
exercise of the Purchase Option, the Distribution Date immediately preceding the
Distribution Period in which the earlier of (i) if applicable, the Purchase
Election Date and (ii) the date on which the Notice Event (without giving effect
to any grace period therefor) giving rise to the Purchase Option occurred.
"Methanol Business" means the manufacture, storage, distribution and
marketing of methanol, including the maintenance and operation of the Methanol
Plant and the Methanol Related Assets.
"Methanol Plant" means the methanol production facility of the
Partnership located in Beaumont, Texas and having, on the date of this
Agreement, a rated capacity of approximately 280,000,000 gallons per year.
"Methanol Related Assets" means the feedstock and other raw materials,
the product pipeline and the other property and assets related to the
maintenance and operation of the Methanol Plant and the operation of the
Methanol Business.
"Minorco" means Minorco, S.A., a Luxembourg societe anonyme and, on
the date of this Agreement, the indirect parent of Terra.
<PAGE>
15
"Minorco Guarantee" means the guarantee dated December 31, 1997, in
the form of Exhibit E-2 attached hereto, duly executed by Minorco, which
guarantee, among other things, unconditionally and irrevocably guarantees all of
the obligations of Terra Capital under the Demand Loans (whether as obligor or
guarantor) and the Terra Capital Note.
"Moody's" means Moody's Investors Service, Inc., or any successor
thereto.
"Multiemployer Plan" means a multiemployer plan (as defined in Section
4001(a)(3) of ERISA) to which the Partnership or any of the ERISA Affiliates (a)
is making or accruing an obligation to make contributions or (b) has within any
of the preceding five plan years made or accrued an obligation to make
contributions and with respect to which the Partnership or any of the ERISA
Affiliates could reasonably be expected to have liability.
"Multiple Employer Plan" means a single employer plan (as defined in
Section 4001(a)(15) of ERISA) that (a) is maintained for employees of the
Partnership or any of the ERISA Affiliates and at least one Person other than
the Partnership and the ERISA Affiliates or (b) was so maintained and in respect
of which the Partnership or any of the ERISA Affiliates could reasonably be
expected to have liability under Section 4064 or 4069 of ERISA in the event such
plan has been or were to be terminated.
"Nonrecourse Deductions" has the meaning specified in Section 1.704-
2(b)(1) of the Regulations.
"Nonrecourse Liability" has the meaning specified in Section 1.704-
2(b)(3) of the Regulations.
"Notice Event" means any of the following events: [Confidential
material has been omitted pursuant to a request for confidential treatment filed
with the Commission under Rule 24b-2(b)and has been filed separately with the
Commission.]
"Nova" has the meaning specified in the first paragraph of this
Agreement.
"NPL" means the National Priorities List under CERCLA.
"Original Capital Contribution" means, with respect to each Partner,
the Capital Contribution made, or deemed made, by such Partner pursuant to
Section 3.01 or 3.02, as applicable.
"Partner Nonrecourse Debt" has the meaning specified in Section 1.704-
2(b)(4) of the Regulations.
"Partner Nonrecourse Debt Minimum Gain" means, with respect to any
Partner Nonrecourse Debt, an amount equal to the Partnership Minimum Gain that
would result if such Partner Nonrecourse Debt were treated as a Nonrecourse
Liability, determined in accordance with Section 1.704-2(i)(3) of the
Regulations.
"Partner Nonrecourse Deductions" has the meaning specified in Sections
1.704-2(i)(1) and 1.704-2(i)(2) of the Regulations.
<PAGE>
16
"Partners" means, collectively, the General Partner and the Limited
Partners.
"Partnership" means the partnership continued pursuant to this
Agreement.
"Partnership Balance Sheet" has the meaning specified in Section
9.02(c)(ii)(A).
"Partnership Income Statement" has the meaning specified in Section
9.02(c)(ii)(B).
"Partnership Matters" has the meaning specified in Section 4.06(b).
"Partnership Minimum Gain" has the meaning specified in Sections
1.704-2(b)(2) and 1.704-2(d) of the Regulations.
"Partnership Property" means all real and personal property and assets
owned by the Partnership and any improvements thereto, and shall include both
tangible and intangible property.
"Percentage Interest" means, with respect to each Partner at any date
of determination, the ratio (expressed as a percentage) of (a) such Partner's
Capital Account on such date to (b) the aggregate Capital Accounts of all of the
Partners on such date, such Capital Accounts to be determined after giving
effect to all contributions, distributions and allocations for all periods
ending on or prior to such date.
"Permitted Assets" means [Confidential material has been omitted
pursuant to a request for confidential treatment filed with the Commission under
Rule 24b-2(b)and has been filed separately with the Commission.].
"Permitted Securitization Assets" means the rights of the Partnership
under or in connection with (a) the Receivables Purchase Agreement dated as of
August 20, 1996 among Terra Funding, Inc., Terra Capital, the financial
institutions from time to time party thereto and Bank of America National Trust
and Savings Association, as administrative agent thereunder, and the "Agreement
Documents" referred to therein, in each case as amended, supplemented or
otherwise modified hereafter from time to time in accordance with their terms,
and (b) any successor transaction thereto effected on substantially the same
terms (other than with respect to the size of the receivables securitization
program) as the transaction contemplated by the documentation referred to in
clause (a) of this definition.
"Permitted Transfer" has the meaning specified in Section 11.02.
"Person" means any individual, partnership (whether general or
limited), corporation (including a business trust), limited or unlimited
liability company, joint stock company, trust, unincorporated association, joint
venture or other entity, or a government or any political subdivision or agency
thereof.
"Plan" means a Single Employer Plan and/or a Multiple Employer Plan,
as the context may require.
"Profits" and "Losses" means, for each Allocation Year, an amount
equal to the
<PAGE>
17
Partnership's taxable income or loss for such Allocation Year, determined in
accordance with Section 703(a) of the Code (for this purpose, all items of
income, gain, loss or deduction required to be stated separately pursuant to
Section 703(a)(1) of the Code shall be included in taxable income or loss), with
the following adjustments:
(a) Any income of the Partnership that is exempt from federal income
tax and not otherwise taken into account in computing Profits or Losses
pursuant to this definition shall be added to such taxable income or loss;
(b) Any expenditures of the Partnership described in Section
705(a)(2)(B) of the Code or treated as Code Section 705(a)(2)(B)
expenditures pursuant to Section 1.704-1(b)(2)(iv)(i) of the Regulations
and not otherwise taken into account in computing Profits or Losses
pursuant to this definition shall be subtracted from such taxable income or
loss;
(c) If the Asset Value of any Partnership Property is adjusted
pursuant to clause (a) or (b) of the definition of "Asset Value" set forth
above in this Appendix, the amount of such adjustment shall be treated as
an item of gain (if the adjustment increases the Asset Value of such
Partnership Property) or an item of loss (if the adjustment decreases the
Asset Value of such Partnership Property) from the disposition of such
Partnership Property and shall be taken into account for purposes of
computing Profits or Losses;
(d) Gain or loss resulting from any disposition of Partnership
Property with respect to which gain or loss is recognized for United States
federal income tax purposes shall be computed by reference to the Asset
Value of the Partnership Property disposed of, notwithstanding that the
adjusted basis for United States federal income tax purposes of such
Partnership Property differs from its Asset Value;
(e) In lieu of the depreciation, amortization and other cost recovery
deductions taken into account in computing such taxable income or loss,
there shall be taken into account Depreciation for such Fiscal Year,
computed in accordance with the definition of "Depreciation" set forth
above in this Appendix;
(f) To the extent that an adjustment to the adjusted basis of any
Partnership Property pursuant to Section 734(b) or 743(b) of the Code is
required pursuant to Section 1.704-1(b)(2)(iv)(m)(4) of the Regulations to
be taken into account in determining Capital Accounts as a result of a
distribution other than in liquidation of a Partner's Interest, the amount
of such adjustment shall be treated as an item of gain (if the adjustment
increases the basis of such Partnership Property) or loss (if the
adjustment decreases the basis of such Partnership Property) from the
disposition of such Partnership Property and shall be taken into account
for purposes of computing Profits or Losses; and
(g) Notwithstanding any other provision of this definition, any items
which are specially allocated pursuant to Section 4.03 or 4.04 shall not be
taken into account in computing Profits or Losses.
"Purchase Date" means the date on which Terra Capital or its designee
purchases or otherwise acquires all (but not a portion) of the Interest of the
Class A Limited Partner or the equity
<PAGE>
18
interests in Nova, as the case may be, pursuant to, and in accordance with the
terms of, Section 2.1 or 2.2 of the Support and Option Agreement.
"Purchase Election Date" means the date on which Terra Capital or its
designee elects to exercise the Purchase Option pursuant to, and in accordance
with the terms of, Section 2.1 or 2.2 of the Support and Option Agreement.
[Confidential material has been omitted pursuant to a request for
confidential treatment filed with the Commission under Rule 24b-2(b)and has been
filed separately with the Commission.]
"Ratably" means (a) with respect to the Terra Partners, in proportion
to each Terra Partner's Percentage Interest in the Partnership and (b) with
respect to all of the Partners, in proportion to each Partner's Percentage
Interest in the Partnership.
"Rate Determination Bank" means any of the Reference Banks selected by
the General Partner from time to time to act as such for all purposes of this
Agreement, which Reference Bank shall initially be Citibank, N.A.; provided that
the General Partner shall provide notice of any change in its selection of the
Rate Determination Bank to each of the other Partners at least five Business
days prior to the date on which any such change is proposed to become effective.
"Reference Banks" means Citibank, N.A., The Bank of Nova Scotia, Bank
of America National Trust and Savings Association and NationsBank of Texas, N.A.
"Regulations" means the Income Tax Regulations, including Temporary
Regulations, promulgated under the Code, as amended from time to time (including
the corresponding provisions of successor regulations).
"Regulatory Allocations" has the meaning specified in Section 4.04(a).
"Reset Date" means (a) December 29, 2000 or (b) the Business Day
occurring on or immediately prior to the next succeeding third anniversary of
December 29, 2000, as the context may require.
"Responsible Officer" means (a) in the case of TMC, Holdings, Terra
Capital or Terra Newco, any person that is an officer thereof holding the
position of vice president or higher (or the equivalent thereto) and (b) in the
case of any Person admitted as a substitute Partner in accordance with the
applicable provisions of Article XI, such executive officers of such Person as
are approved by the other Partners (such approval not to be unreasonably
withheld or delayed).
"Retirement Date" has the meaning specified in Section 11.08(d)(ii).
"Retirement Notice" has the meaning specified in Section 11.08(c).
"Retirement Payment" has the meaning specified in Section 11.08(d)(i).
"S&P" means Standard & Poor's Ratings Service, a division of The
McGraw-Hill
<PAGE>
19
Companies, Inc., or any successor thereto.
"Second Priority Return" means [Confidential material has been omitted
pursuant to a request for confidential treatment filed with the Commission under
Rule 24b-2(b)and has been filed separately with the Commission.].
"Second Priority Return Rate" means (a) for each Current Period
occurring during the period commencing on the Closing Date and ending on the
first Reset Date, a rate per annum equal to the sum of (i) the First Priority
Return Rate and (ii) 1.50% per annum and (b) for each Current Period commencing
on or after the first Reset Date either (i) the rate per annum set forth in
clause (a) of this definition or (ii) such other rate per annum as shall be
agreed among all of the Partners.
"Senior Financial Officer" means, with respect to any Person, the
Treasurer, the Assistant Treasurer, the Controller or the Chief Financial
Officer of such Person.
"Services Agreement" means the General and Administrative Services
Agreement dated as of December 31, 1997 among Terra, the General Partner and the
Partnership, as amended, supplemented or otherwise modified from time to time in
accordance with the terms hereof and thereof.
"Single Employer Plan" means a single employer plan (as defined in
Section 4001(a)(15) of ERISA) that (a) is maintained for employees of the
Partnership or any of the ERISA Affiliates and no Person other than the
Partnership and the ERISA Affiliates or (b) was so maintained and in respect of
which the Partnership or any of the ERISA Affiliates could reasonably be
expected to have liability under Section 4069 of ERISA in the event such plan
has been or were to be terminated.
"Subsidiary" means, with respect to any Person, any corporation,
partnership, joint venture, limited liability company, trust or estate of which
(or in which) more than 50% of (a) the issued and outstanding Voting Interests
in such corporation, (b) the interest in the capital or profits of such
partnership, joint venture or limited liability company or (c) the beneficial
interest in such trust or estate, is at the time directly or indirectly owned or
controlled by such Person, by such Person and one or more of its other
Subsidiaries or by one or more of such Person's other Subsidiaries.
"Support and Option Agreement" means the Support and Option Agreement
dated as of December 31, 1997 among Terra Capital, the Class A Limited Partner
and the Class A Beneficial Owners, as amended supplemented or otherwise modified
from time to time in accordance with the terms hereof and thereof.
"Tax Matters Partner" has the meaning specified in Section 9.03(a).
"Terminating Event" means any of the following events: [Confidential
material has been omitted pursuant to a request for confidential treatment filed
with the Commission under Rule 24b-2(b)and has been filed separately with the
Commission.]
"Termination Date" has the meaning specified in Section 5.03(a).
"Terra" means Terra Industries, Inc., a Maryland corporation and, on
the date of this Agreement, the indirect parent of Terra Capital.
<PAGE>
20
"Terra Canada" means Terra International (Canada) Inc., a corporation
governed by the laws of Ontario and, on the date of this Agreement, an indirect
Subsidiary of Terra Capital.
"Terra Capital" means Terra Capital, Inc., a Delaware corporation and,
on the date of this Agreement, the direct parent of the Terra Partners.
"Terra Capital Loan Documents" means the Amended and Restated Credit
Agreement dated as of December 31, 1997 among Terra Capital, Terra Nitrogen,
Limited Partnership, the guarantors named therein, the banks, financial
institutions and other institutional lenders party thereto and Citibank, N.A.,
as administrative agent for such banks, financial institutions and other
institutional lenders, the notes issued from time to time thereunder and all of
the other "Loan Documents" as defined and referred to therein, in each case as
such agreement, instrument or other document may be amended, supplemented or
otherwise modified from time to time hereafter in accordance with the terms
thereof.
"Terra Capital Note" means the senior promissory note (a) of Terra
Capital payable to the order of the Partnership, (b) the repayment obligations
under which bear an arm's-length floating interest rate and all of the principal
of which is due and payable on December 29, 2000, (c) the obligations under
which either (i) are secured by a valid and perfected lien on and security
interest in all of the property and assets of Terra and its Subsidiaries
described on Schedule V attached hereto or (ii) are unconditionally and
irrevocably guaranteed under the Minorco Guarantee and (d) all of the other
terms and conditions of which shall be in the form of Exhibit F attached hereto.
"Terra Event" means an act or omission by Terra Capital or any of its
Affiliates [Confidential material has been omitted pursuant to a request for
confidential treatment filed with the Commission under Rule 24b-2(b)and has been
filed separately with the Commission.].
"Terra Newco" means Terra (U.K.) Holdings, Inc., a Delaware
corporation and a direct Subsidiary of the Partnership.
"Terra Newco Stock" means the issued and outstanding shares of capital
stock of Terra Newco.
"Terra Partners" means, collectively, TMC and Holdings, in each case
so long as such Person remains a Partner, and any other Affiliate of Terra that
may from time to time own an Interest hereunder.
"Terra U.K." means Terra Nitrogen (U.K.) Limited, a company formed
under the laws of England.
"Terra U.K. Acquisition Agreement" means the Sale of Business
Agreement dated November 20, 1997 between Terra and ICI Chemical & Polymers
Limited.
"Terra U.K. Assets" means the business and other assets to be conveyed
under the Terra U.K. Acquisition Agreement.
"Terra U.K. Loan" means, at any date of determination, the aggregate
principal amount
<PAGE>
21
of all loans and advances outstanding under the Terra U.K. Loan Documents on
such date.
"Terra U.K. Loan Documents" means the Credit Agreement dated as of
December 31, 1997 among Terra U.K. and Terra Newco, the note issued to Terra
Newco thereunder and all of the other "Loan Documents" as defined and referred
to therein, in each case as such agreement, instrument or other document may be
amended, supplemented or otherwise modified from time to time hereafter in
accordance with the terms thereof.
"Terra U.K. Offtake Agreement" means the commodity hedge agreement
dated as of December 31, 1997 between Terra U.K. and Terra Capital relating to
fluctuations in the price of ammonium nitrate, ammonia and nitric acid, as such
agreement may be amended, supplemented or otherwise modified from time to time
hereafter in accordance with the terms thereof.
"TMC" has the meaning specified in the first paragraph of this
Agreement.
"Transaction Documents" means this Agreement, the Support and Option
Agreement, the Terra Capital Note, the notes evidencing the Demand Loans and the
Services Agreement.
"Transfer" means, with respect to all or any portion of an Interest,
as a noun, any voluntary or involuntary sale, pledge, assignment, transfer or
other disposition of such Interest or any such portion thereof and, as a verb,
to voluntarily or involuntarily sell, pledge, assign, transfer or otherwise
dispose of such Interest or any such portion thereof.
"Transferee Certificate" has the meaning specified in Section
11.03(g).
"Transferor Certificate" has the meaning specified in Section
11.03(g).
"United States" and "U.S." each means the United States of America.
"Voluntary Bankruptcy" means, with respect to any Person, (a) (i) the
inability of such Person generally to pay its debts as such debts become due,
(ii) the failure of such Person generally to pay its debts as such debts become
due or (iii) an admission in writing by such Person of its inability to pay its
debts generally or a general assignment by such Person for the benefit of
creditors, (b) the filing of any petition or answer by such Person seeking to
adjudicate it a bankrupt or insolvent, or seeking for itself or its property and
assets any liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief, or composition of such Person or its debts under any law
relating to bankruptcy, insolvency or reorganization or relief of debtors, or
seeking, consenting to, or acquiescing in the entry of an order for relief or
the appointment of a receiver, trustee, custodian or other similar official for
such Person or for any substantial portion of its property or assets, or (c) the
taking of any corporate action by such Person to authorize any of the actions
set forth in clause (a) or (b) of this definition.
"Voting Interests" means shares of capital stock issued by a
corporation, or equivalent equity (or other ownership or profit) interests in
any other Person, the holders of which are ordinarily, in the absence of
contingencies, entitled to vote for the election of directors (or Persons
performing similar functions) of such Person, even if the right so to vote has
been suspended by the happening of such a contingency.
<PAGE>
22
"Wholly Owned Subsidiary" means, with respect to any Person, a
Subsidiary of such Person 100% of the Voting Interests in which are owned
beneficially by such Person, directly or indirectly through one or more Wholly
Owned Subsidiaries (without taking into account in determining such percentage
de minimis amounts of Voting Interests held by directors, nominees and similar
persons pursuant to statutory or regulatory requirements).
"Withdrawal Liability" has the meaning specified in Part I of Subtitle
E of Title IV of ERISA.
<PAGE>
23
Schedule I
Beaumont Methanol, Limited Partnership
Original Capital Contribution (Estimated)
[Confidential material has been omitted pursuant to a request for confidential
treatment filed with the Commission under Rule 24b-2(b)and has been filed
separately with the Commission.]
<PAGE>
Exhibit 10.1.14
INCENTIVE STOCK OPTION AGREEMENT
Date of Grant: ________
Number of Shares: ________
Exercise Price Per Share: ________
NAME
ADDRESS
CITY, STATE, ZIP
Dear SALUTATION:
We are pleased to inform you that, as a key employee of Terra Industries
Inc. (the "Corporation") or a Subsidiary thereof, you have been granted, under
the Terra Industries Inc. 1997 Stock Incentive Plan, an Incentive Stock Option
(the "Option"), evidenced by this letter, to purchase up to a total of the
number of Common Shares set forth above at the price per share set forth above
and on the terms and conditions set forth below. The Option is intended (but
not warranted) to be an incentive stock option within the meaning of section 422
of the Internal Revenue Code.
1. The Option cannot be exercised unless you sign your name in the space
provided on the copy of this letter enclosed with this letter and deliver it to
the Corporate Secretary of the Corporation, Terra Centre, 600 Fourth Street,
Sioux City, Iowa 51101, before 4:30 p.m. central time on _______________. If
the Corporate Secretary does not have your properly executed copy of this letter
before such time, then, anything in this letter to the contrary notwithstanding,
this award shall terminate and be of no effect. Your signing and delivering a
copy of this letter will not commit you to purchase any of the shares that are
subject to the Option, but will evidence your acceptance of the Option upon the
terms and conditions herein stated.
2. Subject to the provisions of this letter, the Option shall be exercisable,
in whole at any time or in part from time to time, in integral multiples of 100
shares each (to the maximum extent possible), during the period set forth in
this Section 2.
a. The Option shall be exercisable with respect to one-third of the
Number of Shares set forth above beginning on the first business day following
the first anniversary of the Date of Grant.
b. The Option shall be exercisable with respect to the next one-third of
the Number of Shares set forth above beginning on the first business day
following the second anniversary of the Date of Grant.
c. The Option shall be exercisable with respect to the final one-third of
the Number of Shares set forth above beginning on the first business day
following the third anniversary of the Date of Grant.
<PAGE>
d. The Option shall be exercisable with respect to all of the Number of
Shares set forth above beginning on the day any one of the following occurs: (i)
any person or group of persons acting in concert (other than Minorco, a company
incorporated under the laws of Luxembourg as a societe anonyme, and its
affiliates or a group consisting solely of such persons (the "Minorco
Affiliates")) acquires beneficial ownership (within the meaning of Rule 13d-3 of
the Securities and Exchange Commission promulgated under the Securities Exchange
Act of 1934) of the outstanding securities (the "Voting Shares") of the
Corporation in an amount having, or convertible into securities having, 25% or
more of the ordinary voting power for the election of directors of the
Corporation, provided that this 25% beneficial ownership trigger shall apply
only when the Minorco Affiliates no longer own 50% or more of the Voting Shares;
(ii) during a period of not more than 24 months, a majority of the Board of
Directors of the Corporation 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 Corporation'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 Corporation or (B) a sale or other disposition of all or
substantially all of the assets of the Corporation, or a transaction having a
similar effect.
e. The Option shall in all events terminate at the close of business on
the last business day preceding the tenth anniversary of the Date of Grant, but
shall be subject to earlier termination as provided in Section 4 hereof.
3. The Option shall not be transferable by you otherwise than by will or by
the laws of descent and distribution. During your lifetime, the Option shall be
exercisable only by you.
4. If your employment with the Corporation and all Subsidiaries terminates
during the term of this agreement, the Option shall automatically terminate and
cease to be exercisable, except the term shall be extended (subject to Section
2e) as follows:
a. If your employment terminates by reason of your death, the Option
shall terminate and cease to be exercisable one year from the date of death.
b. If your employment terminates by reason of Total Disability or
Retirement, the Option shall terminate and cease to be exercisable three years
from the date of Total Disability or Retirement.
c. If your employment terminates on or within two years subsequent to the
circumstances contemplated in Section 2d, the Option shall terminate and cease
to be exercisable three months from the date of such termination.
d. Notwithstanding the foregoing, in cases of special circumstances the
Committee may, in its sole discretion when it finds that a waiver would be in
the best interests of the Corporation, extend the term of this Option with
respect to all or a portion of the Number of Shares set forth above for such
period of time as the Committee deems appropriate.
<PAGE>
5. The Corporation shall not be obligated to deliver any shares until they
have been listed (or authorized for listing upon official notice of issuance) on
each stock exchange upon which are listed outstanding shares of the same class
as that of the shares at the time subject to the Option and until there has been
compliance with such laws or regulations as the Corporation may deem applicable.
The Corporation agrees to use its best efforts to effect such listing and
compliance. No fractional shares will be delivered.
6. For the purposes of this Agreement: (a) a transfer of your employment from
the Corporation to a Subsidiary or vice versa, or from one Subsidiary to
another, without an intervening period, shall not be deemed a termination of
employment, and (b) if you are granted in writing a leave of absence, you shall
be deemed to have remained in the employment of the Corporation or a Subsidiary
during such leave of absence.
7. In the event of any merger, consolidation, stock dividend, split-up,
combination or exchange of shares or recapitalization or change in
capitalization, the number or kind of shares that are subject to the Option
immediately prior to such event shall be proportionately and appropriately
adjusted without increase or decrease in the aggregate option price to be paid
therefor upon exercise of the Option. The determination of the Committee as to
the terms of any such adjustment shall be binding and conclusive upon you and
any other person or persons who are at any time entitled to exercise the Option.
8. Neither you nor any other person shall have any rights of a stockholder as
to shares under the Option until, after proper exercise of the Option, such
shares shall have been recorded on the Corporation's official stockholder
records as having been issued or transferred.
9. Subject to the terms and conditions of this Agreement, the Option may be
exercised in whole at any time or in part from time to time in integral
multiples of 100 shares each (to the maximum extent possible) by a written
notice on a form approved by the Committee that (i) is signed by the person or
persons exercising the Option, (ii) is delivered to the Corporate Secretary of
the Corporation, Terra Centre, 600 Fourth Street, Sioux City, Iowa 51101 (or at
such other place that the Corporate Secretary may specify by written notice to
you), (iii) signifies election to exercise the Option, (iv) states the number of
shares as to which it is being exercised, and (v) is accompanied by payment in
full of the option price of such shares. If a properly executed notice of
exercise of the Option is not delivered to and in the hands of the Corporate
Secretary of the Corporation by the applicable expiration date or dates of this
Option, such notice will be deemed null and void and of no effect. If notice of
exercise of the Option is given by a person or persons other than you, the
Corporation may require as a condition to exercise of the Option the submission
to the Corporation of appropriate proof of the right of such person or persons
to exercise the Option. Certificates for shares so purchased will be issued and
delivered as soon as practicable.
10. Payment of the exercise price for shares may be made in cash, by the
delivery of or certification of ownership of Common Shares that have been held
by you for a period of at least six months with a Fair Market Value equal to the
exercise price, or by a combination of cash and such shares that have been held
by you for a period of at least six months.
<PAGE>
11. You agree to notify the Corporate Secretary of the Corporation in the event
the shares acquired by you on exercise of the Option are sold or otherwise
disposed of within one year from the date of exercise or two years from the date
the Option was granted.
The Option is issued pursuant to the Plan and is subject to its terms.
Capitalized terms used in this letter have the same meanings as defined in the
Plan. A copy of the Plan is being furnished to you with this letter and also is
available on request from the Corporate Secretary of the Corporation.
Very truly yours,
TERRA INDUSTRIES INC.
By:
--------------------------------------
President and Chief Executive Officer
By:
--------------------------------------
Senior Vice President, General Counsel
and Corporate Secretary
I hereby agree to the terms and conditions set forth above and acknowledge
receipt of the 1997 Stock Incentive Plan and the Prospectus covering shares
issued under that plan.
- --------------------------------
Signature of Employee
<PAGE>
Exhibit 10.1.15
NONQUALIFIED STOCK OPTION AGREEMENT
Date of Grant: ______
Number of Shares: ______
Exercise Price Per Share: ______
NAME
ADDRESS
CITY, STATE, ZIP
Dear SALUTATION:
We are pleased to inform you that, as a key employee of Terra Industries
Inc. (the "Corporation") or a Subsidiary thereof, you have been granted, under
the Terra Industries Inc. 1997 Stock Incentive Plan, a Nonqualified Stock
Option, evidenced by this letter, to purchase up to a total of the number of
Common Shares set forth above at the exercise price per share set forth above
and on the terms and conditions set forth below. The Option is not intended to
be an incentive stock option within the meaning of section 422 of the Internal
Revenue Code.
1. The Option cannot be exercised unless you sign your name in the space
provided on the copy of this letter enclosed with this letter and deliver it to
the Corporate Secretary of the Corporation, Terra Centre, 600 Fourth Street,
Sioux City, Iowa 51101, before 4:30 p.m. central time on ________________. If
the Corporate Secretary does not have your properly executed copy of this letter
before such time, then, anything in this letter to the contrary notwithstanding,
this award shall terminate and be of no effect. Your signing and delivering a
copy of this letter will not commit you to purchase any of the shares that are
subject to the Option, but will evidence your acceptance of the Option upon the
terms and conditions herein stated.
2. Subject to the provisions of this letter, the Option shall be exercisable,
in whole at any time or in part from time to time, in integral multiples of 100
shares each (to the maximum extent possible), during the period set forth in
this Section 2.
a. The Option shall be exercisable with respect to one-third of the Number
of Shares set forth above beginning on the first business day following the
first anniversary of the Date of Grant.
b. The Option shall be exercisable with respect to the next one-third of
the Number of Shares set forth above beginning on the first business day
following the second anniversary of the Date of Grant.
c. The Option shall be exercisable with respect to the final one-third of
the Number of Shares set forth above beginning on the first business day
following the third anniversary of the Date of Grant.
d. The Option shall be exercisable with respect to all of the Number of
Shares set forth above beginning on the day any one of the following occurs: (i)
any person or group of persons acting
<PAGE>
in concert (other than Minorco, a company incorporated under the laws of
Luxembourg as a societe anonyme, and its affiliates or a group consisting solely
of such persons (the "Minorco Affiliates")) acquires beneficial ownership
(within the meaning of Rule 13d-3 of the Securities and Exchange Commission
promulgated under the Securities Exchange Act of 1934) of the outstanding
securities (the "Voting Shares") of the Corporation in an amount having, or
convertible into securities having, 25% or more of the ordinary voting power for
the election of directors of the Corporation, provided that this 25% beneficial
ownership trigger shall apply only when the Minorco Affiliates no longer own 50%
or more of the Voting Shares; (ii) during a period of not more than 24 months, a
majority of the Board of Directors of the Corporation 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 Corporation'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 Corporation or (B) a sale or
other disposition of all or substantially all of the assets of the Corporation,
or a transaction having a similar effect.
e. The Option shall in all events terminate at the close of business on
the last business day preceding the tenth anniversary of the Date of Grant, but
shall be subject to earlier termination as provided in Section 4 hereof.
3. The Option shall not be transferable by you otherwise than by will or by the
laws of descent and distribution. During your lifetime, the Option shall be
exercisable only by you.
4. If your employment with the Corporation and all Subsidiaries terminates
during the term of this agreement, the Option shall automatically terminate and
cease to be exercisable, except the term shall be extended (subject to Section
2e) as follows:
a. If your employment terminates by reason of death, the Option shall
terminate and cease to be exercisable one year from the date of death.
b. If your employment terminates by reason of Total Disability or
Retirement, the Option shall terminate and cease to be exercisable three years
from the date of Total Disability or Retirement.
c. If your employment terminates on or subsequent to the circumstances
contemplated in Section 2d, the Option shall terminate and cease to be
exercisable two years from the date of such "change in control".
d. Notwithstanding the foregoing, in cases of special circumstances the
Committee may, in its sole discretion when it finds that a waiver would be in
the best interests of the Corporation, extend the term of this Option with
respect to all or a portion of the Number of Shares set forth above for such
period of time as the Committee deems appropriate.
5. The Corporation shall not be obligated to deliver any shares until they have
been listed (or authorized for listing upon official notice of issuance) upon
each stock exchange upon which are listed outstanding shares of the same class
as that of the shares at the time subject to the Option and
<PAGE>
until there has been compliance with such laws or regulations as the Corporation
may deem applicable. The Corporation agrees to use its best efforts to effect
such listing and compliance. No fractional shares will be delivered.
6. For the purposes of this Agreement: (a) a transfer of your employment from
the Corporation to a Subsidiary or vice versa, or from one Subsidiary to
another, without an intervening period, shall not be deemed a termination of
employment, and (b) if you are granted in writing a leave of absence, you shall
be deemed to have remained in the employment of the Corporation or a Subsidiary
during such leave of absence.
7. In the event of any merger, consolidation, stock dividend, split-up,
combination or exchange of shares or recapitalization or change in
capitalization, the number or kind of shares that are subject to the Option
immediately prior to such event shall be proportionately and appropriately
adjusted without increase or decrease in the aggregate option price to be paid
therefor upon exercise of the Option. The determination of the Committee as to
the terms of any such adjustment shall be binding and conclusive upon you and
any other person or persons who are at any time entitled to exercise the Option.
8. Neither you nor any other person shall have any rights of a stockholder as
to shares under the Option until, after proper exercise of the Option, such
shares shall have been recorded on the Corporation's official stockholder
records as having been issued or transferred.
9. Subject to the terms and conditions of this Agreement, the Option may be
exercised in whole at any time or in part from time to time in intregal
multiples of 100 shares each (to the maximum extent possible) by a written
notice on a form approved by the Committee that (i) is signed by the person or
persons exercising the Option, (ii) is delivered to the Corporate Secretary of
the Corporation, Terra Centre, 600 Fourth Street, Sioux City, Iowa 51101 (or at
such other place that the Corporate Secretary may specify by written notice to
you), (iii) signifies election to exercise the Option, (iv) states the number of
shares as to which it is being exercised, and (v) is accompanied by payment in
full of the exercise price of such shares. If a properly executed notice of
exercise of the Option is not delivered to and in the hands of the Corporate
Secretary of the Corporation by the applicable expiration date or dates of this
Option, such notice will be deemed null and void and of no effect. If notice of
exercise of the Option is given by a person or persons other than you, the
Corporation may require as a condition to exercise of the Option the submission
to the Corporation of appropriate proof of the right of such person or persons
to exercise the Option. Certificates for shares so purchased will be issued and
delivered as soon as practicable.
10. Payment of the exercise price for shares may be made in cash, by the
delivery of or certification of ownership of Common Shares that have been held
by you for a period of at least six months with a Fair Market Value equal to the
exercise price, or by a combination of cash and such shares that have been held
by you for a period of at least six months.
11. You hereby agree to pay to the Corporation, or otherwise make arrangements
satisfactory to the Corporation regarding payment of, any federal, state or
local taxes required or authorized by law to be withheld with respect to the
award of this Option or its exercise (the "Withholding Taxes"). The Corporation
shall have, to the extent permitted by law, the right to deduct from any payment
of
<PAGE>
any kind otherwise due to the Employee, any Withholding Taxes and to condition
the delivery of the Common Shares after the exercise of the Option on the
payment to the Corporation of the Withholding Taxes. In lieu of the payment of
such amounts in cash, you may pay all or a portion of the Withholding Taxes by
(i) the delivery of Common Shares not subject to any Restriction Period or (ii)
having the Corporation withhold a portion of the Common Shares otherwise to be
delivered upon exercise of the Option.
The Option is issued pursuant to the Plan and is subject to its terms.
Capitalized terms used in this letter have the same meanings as defined in the
Plan. A copy of the Plan is being furnished to you with this letter and also is
available on request from the Corporate Secretary of the Corporation.
Very truly yours,
TERRA INDUSTRIES INC.
By: ___________________________________________
President and Chief Executive Officer
By: ___________________________________________
Senior Vice President, General Counsel
and Corporate Secretary
I hereby agree to the terms and conditions set forth above and acknowledge
receipt of the 1997 Stock Incentive Plan and the Prospectus covering shares
issued under that Plan.
______________________________
Signature of Employee
<PAGE>
Exhibit 13
TERRA INDUSTRIES INC.
1997 ANNUAL REPORT
FINANCIAL SECTION
<TABLE>
<CAPTION>
FINANCIAL TABLE OF CONTENTS
<S> <C>
Financial Review............................................ 2-17
Consolidated Statements of Financial Position............... 18
Consolidated Statements of Income........................... 19
Consolidated Statements of Cash Flows....................... 20
Consolidated Statements of Changes in Stockholders' Equity.. 21
Notes to the Consolidated Financial Statements.............. 22-39
Responsibility for Financial Statements..................... 40
Independent Auditors' Report................................ 41
Quarterly Production Data................................... 42
Quarterly Financial and Stock Market Data................... 42
Revenues.................................................... 43
Volumes and Prices.......................................... 43
Stockholders................................................ 43
Financial Summary........................................... 44
</TABLE>
<PAGE>
2
Financial Review
Consolidated Results
Net income for 1997 amounted to $206.9 million compared with $134.0 million in
1996 and $159.5 million in 1995 with diluted earnings per share of $2.76, $1.72
and $1.96, respectively, and basic earnings per share of $2.80, $1.74 and $1.98,
respectively. Revenues increased to $2.5 billion in 1997 from $2.3 billion in
1996 and 1995.
The Corporation recorded a pretax gain of $163 million ($1.31 per diluted share,
after-tax) in 1997 to reflect settlement of insurance claims related to the Port
Neal plant rebuild. In 1996, income taxes were reduced $18 million ($0.23 per
share) as a result of a transaction with a Canadian subsidiary of Minorco, the
Corporation's majority shareholder. Net income in 1997 and 1995 was reduced by
$3.0 million ($0.04 per share) and $4.3 million ($0.05 per share), respectively,
due to the write-off of deferred financing fees in connection with the early
retirement of debt.
Financial Comparability and Overview
On December 31, 1997, the Corporation acquired the fertilizer business assets of
Imperial Chemical Industries PLC ("ICI") for approximately $338 million. In
connection with the acquisition, the Corporation issued $125 million of long
term debt and received $225 million to fund a portion of the acquisition through
a partnership that operates the Corporation's methanol plant located at
Beaumont, Texas. The acquisition had no effect on 1997 operations except to
reduce income tax expense by $8 million. See Note 2 to the Consolidated
Financial Statements for pro forma results of operations related to the United
Kingdom acquisition. The Corporation continues to add distribution locations
each year through acquisitions of distributors in its marketing area.
Factors That Affect Operating Results
Factors that may affect the Corporation'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 inputs, the availability and cost of natural gas,
the effect of environmental legislation on demand for the Corporation'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.
<PAGE>
3
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 supplies
will be coming on-stream and profit margins will be under pressure until
increasing demand is sufficient to absorb new supplies or other marginal
production capacity is shut down.
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
in 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 and potential legislation.
Due to the concentration of the Corporation's distribution locations and the
higher quantities of crop inputs per acre for corn and cotton compared with
other major crops, changes in corn and cotton acreages have a more significant
effect on the demand for the Corporation's products and services than changes in
other crops. Industry analysts expect planted acreage for corn to increase
nearly 2% to 81.5 million acres in 1998. They also expect planted cotton acreage
in the U.S. to decline to 12.1 million acres in 1998 from 13.8 million acres in
1997. 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. This Farm Bill provides farmers more freedom in
making decisions regarding what crops are planted.
Weather can have a significant effect on the Corporation's operations. Weather
conditions that delay or intermittently disrupt field work during the planting
and growing season may result in fewer-than-normal crop inputs 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 inputs
purchased from the Corporation and its dealer customers.
<PAGE>
4
Reliable sources for supply of crop inputs at competitive prices are critical to
the Distribution portion of the Corporation's business. The Corporation's
sources for fertilizer, crop protection products and seed are typically
manufacturers without the capability to distribute products to the North
American grower. The Corporation has entered into purchase agreements which
should ensure an adequate supply of products for its grower and dealer customers
through 1998, with some major supplier agreements extending into 1999 or longer.
The principal raw material used to produce manufactured nitrogen products and
methanol is natural gas. Natural gas costs in 1997 comprised about 50% of the
total costs and expenses associated with the Nitrogen Products segment and 65%
of the total costs and expenses associated with the Methanol segment. The
Corporation'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 Corporation 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 Corporation'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 Corporation
builds inventories during the first quarter of the year in order to ensure
timely product availability during the peak sales season. The Corporation'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 Corporation requires lines of credit to fund inventory
increases and to support customer credit terms. The Corporation believes that
its credit facilities are adequate for expected sales levels in 1998 and for the
next several years.
The Corporation'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
Corporation 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 Corporation to withstand major damage to any
of its facilities. The Corporation's Port Neal facility experienced such a
casualty on December 13, 1994.
<PAGE>
5
Many of the same factors which affect the Corporation's North American nitrogen
products business also impact the nitrogen products business in the United
Kingdom. Additional factors which affect the United Kingdom operations include
European Community protections against the dumping of cheap fertilizer on the
market, continued deregulation of natural gas and collective bargaining issues.
Derivative Financial Instruments
The Corporation uses derivative financial instruments to manage risk in the
areas of (a) foreign currency fluctuations, (b) changes in natural gas supply
prices and (c) interest rates. See Note 13 to the Consolidated Financial
Statements for information on the use of derivative financial instruments.
<PAGE>
6
RESULTS OF OPERATIONS
1997 COMPARED WITH 1996
Consolidated Results
The Corporation reported net income of $206.9 million, or $2.76 per diluted
share and $2.80 per basic share, on revenues of $2.5 billion for 1997 compared
with net income of $134.0 million, or $1.72 per diluted share and $1.74 per
basic share, on revenues of $2.3 billion in 1996. The Corporation recorded a
gain, net of income taxes, of $1.31 per diluted share in 1997 to reflect
settlement of insurance claims related to the Port Neal plant rebuild (see Note
8 to the Consolidated Financial Statements).
The Corporation classifies its operations into three business segments:
Distribution, Nitrogen Products and Methanol. The Distribution segment includes
sales of products purchased from manufacturers, including the Corporation, and
resold by the Corporation. Distribution revenues are derived primarily from
grower and dealer customers through sales of crop protection products,
fertilizers, seed and services. The Nitrogen Products segment represents only
those operations directly related to the wholesale sales of nitrogen products
produced by the Corporation's ammonia manufacturing and upgrading facilities.
The Methanol segment represents wholesale sales of methanol produced by the
Corporation's two methanol manufacturing facilities.
......................................................................
......................................................................
Total revenues and operating income by segment for the years ended December 31,
1997 and 1996 were as follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- -----------------------------------------------------------------------------------------
REVENUES:
<S> <C> <C>
Distribution $ 1,786,673 $ 1,580,142
Nitrogen Products 621,410 654,486
Methanol 180,646 132,533
Other - net of intercompany eliminations (46,360) (50,675)
- -----------------------------------------------------------------------------------------
$ 2,542,369 $ 2,316,486
=========================================================================================
OPERATING INCOME:
Distribution $ 40,686 $ 23,872
Nitrogen Products 150,270 255,263
Methanol 63,662 18,520
Other expense - net (1,302) (2,474)
- -----------------------------------------------------------------------------------------
$ 253,316 $ 295,181
=========================================================================================
</TABLE>
<PAGE>
7
Distribution
Revenues from the Distribution segment for the years ended December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
Distribution Revenues
- ------------------------------------------------------------------------------
(in thousands) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Resale fertilizer $ 443,751 $ 386,774
Crop protection products 1,059,077 981,267
Seed 106,557 90,175
Other 177,288 121,926
- ------------------------------------------------------------------------------
$ 1,786,673 $ 1,580,142
==============================================================================
</TABLE>
Distribution revenues for 1997 amounted to $1.8 billion compared with $1.6
billion for 1996. New distribution locations generated $101 million of revenues
in 1997 and existing locations generated $106 million of additional revenues
compared with 1996 results. Higher volumes contributed to the increase in
revenue for all product lines due to new locations and increased market share.
Operating income for 1997 for the Distribution segment was $41 million compared
with $24 million for 1996. Expansion of the distribution network contributed $4
million to the operating income increase while existing locations generated an
increase of $13 million. Gross profits increased $49 million due primarily to
the increased sales volume. Selling, general and administrative expenses
increased $33 million in 1997 compared with the 1996 expenses. Additional
equipment, employees and new locations to meet the demands of the 1997 season
contributed to increases in depreciation, operating, maintenance and
compensation expenses. Offsetting these expense increases was a decrease to bad
debt expense of $8 million and a decrease to employee benefits expense of $5
million related to a reduction in retiree medical benefits.
Nitrogen Products
Volumes and prices for the years ended December 31, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
Volumes and Prices
- ------------------------------------------------------------------------------------------------
(excludes the Distribution segment) 1997 1996
- ------------------------------------------------------------------------------------------------
Sales Average Sales Average
(quantities in thousands of tons) Volumes Unit Price Volumes Unit Price
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ammonia 1,182 $ 187 1,174 $ 185
Nitrogen solutions 3,440 82 3,180 94
Urea 671 145 575 179
- ------------------------------------------------------------------------------------------------
</TABLE>
Nitrogen Products revenues totaled $621 million for 1997 compared with $654
million for 1996. The $33 million decline in revenues was caused by lower sales
prices for nitrogen solutions and urea offset somewhat by higher
<PAGE>
8
sales volumes. Lower worldwide demand for urea during 1997, particularly in
China, caused urea prices to fall from prior-year levels. Weather conditions
during the 1997 planting season were more favorable for ammonia application
which kept ammonia prices relatively strong while nitrogen solutions prices
declined. In contrast, 1996 weather conditions forced a late planting season and
favored nitrogen solutions applications resulting in higher prices than in 1997.
Higher 1997 sales volumes were due in part to increased corn acres, which
require more nitrogen than most other crops. Urea sales volumes in 1997
benefitted from expansion and efficiency improvement projects at the Courtright
and Blytheville plants. Additionally, nitrogen solutions sales volumes were
higher in 1997 reflecting the impact of production from the Port Neal plant
which began production of nitrogen solutions in May 1996.
Operating income for the Nitrogen Products segment was $150 million and $255
million for 1997 and 1996, respectively. Lower sales prices, as discussed above,
and 27% higher natural gas costs combined to reduce margins by $103 million in
1997 in comparison with 1996 results. In addition, depreciation expense
increased $7 million during 1997 compared with 1996 due to the rebuilt Port Neal
plant's higher depreciation base. The Corporation's use of financial derivatives
to forward price a portion of its natural gas needs resulted in costs that were
$42 million lower than if bought at 1997 spot prices. The increased sales volume
contributed $16 million to 1997 operating income.
Methanol
Revenues for the Methanol segment amounted to $181 million and $133 million for
1997 and 1996, respectively. Average methanol sales prices were $0.58 per gallon
for 1997 and $0.42 per gallon for 1996 which substantially accounted for the
increase in revenues. The higher methanol prices reflect the tighter methanol
market conditions caused by industry-wide planned and unplanned production
outages and increased worldwide demand. Sales volumes declined 1% in 1997 to 311
million gallons compared with 1996.
Methanol operating income increased $45 million in 1997 compared with 1996
results. The increase is due to higher methanol sales prices which more than
offset a 9% increase in natural gas costs. The Corporation's use of financial
derivatives to forward price a portion of its natural gas needs resulted in cost
savings of $15 million compared with buying at 1997 spot prices.
Other Operating Expense - Net
<PAGE>
9
Other operating expense was $1.3 million in 1997 compared with $2.5 million in
1996. 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 was $57 million in 1997 compared with $53 million in 1996.
Interest expense increased as a result of additional borrowings used to fund
operations.
Minority Interest
Minority interest, representing primarily third-party unitholder interest in the
earnings of Terra Nitrogen Company, L.P. (TNCLP), was $28 million for 1997
compared with $45 million in 1996. Minority interest declined primarily due to
lower earnings from TNCLP operations.
Income Taxes
Income tax expense was recorded at an effective rate of 37% for 1997 compared
with 32% in 1996. The 1997 tax provision includes an $8 million (2%) benefit
from the recovery of amounts provided in prior years. During 1996, the
Corporation purchased tax benefits from a Canadian subsidiary of Minorco,
resulting in a deferred tax asset for the Corporation which reduced the
effective tax rate by 9%.
<PAGE>
10
Results of Operations
1996 Compared with 1995
Consolidated Results
The Corporation reported net income of $134.0 million, with diluted earnings per
share of $1.72 and basic earnings per share of $1.74, on revenues of $2.32
billion for 1996 compared with net income of $159.5 million, with diluted
earnings per share of $1.96 and basic earnings per share of $1.98, 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 by segment for the years ended December 31,
1996 and 1995 were as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
REVENUES:
<S> <C> <C>
Distribution $ 1,580,142 $ 1,501,307
Nitrogen Products 654,486 635,126
Methanol 132,533 194,565
Other - net of intercompany eliminations (50,675) (38,825)
- ------------------------------------------------------------------------------------------------
$ 2,316,486 $ 2,292,173
================================================================================================
OPERATING INCOME:
Distribution $ 23,872 $ 40,665
Nitrogen Products 255,263 263,787
Methanol 18,520 77,138
Other expense - net (2,474) (3,888)
- ------------------------------------------------------------------------------------------------
$ 295,181 $ 377,702
================================================================================================
</TABLE>
Distribution
Revenues from the Distribution segment for the years ended December 31, 1996 and
1995 were as follows:
<TABLE>
<CAPTION>
Distribution Revenues
- --------------------------------------------------------------------
(in thousands) 1996 1995
- --------------------------------------------------------------------
<S> <C> <C>
Resale fertilizer $ 386,774 $ 360,725
Crop protection products 981,267 962,864
Seed 90,175 78,588
Other 121,926 99,130
- --------------------------------------------------------------------
$ 1,580,142 $ 1,501,307
====================================================================
</TABLE>
<PAGE>
11
Distribution revenues for the year ended December 31, 1996 increased 5.3% to
$1.58 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.
Operating income for the Distribution segment amounted to $23.9 million for 1996
in comparison with $40.7 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
Volumes and prices for the years ended December 31, 1996 and 1995 were as
follows:
<TABLE>
<CAPTION>
Volumes and Prices
- ----------------------------------------------------------------------------------------------
(excludes the Distribution segment) 1996 1995
- ----------------------------------------------------------------------------------------------
Sales Average Sales Average
(quantities in thousands of tons) Volumes Unit Price Volumes Unit Price
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ammonia 1,174 $ 185 1,089 $ 195
Nitrogen solutions 3,180 94 2,667 95
Urea 575 179 640 189
- ----------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
12
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. Sales volumes of 314.7 million gallons for 1996
remained steady in comparison with 1995.
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.
Other Operating Expense - Net
Other operating expense was $2.5 million in 1996 compared with $3.9 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 Corporation in the second
and third quarters of 1995.
<PAGE>
13
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 Corporation
purchased tax benefits from a Canadian subsidiary of Minorco, resulting in a
deferred tax asset for the Corporation which reduced the effective rate by 9.1%.
<PAGE>
14
Liquidity and Capital Resources
The Corporation'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 Shares, and make capital expenditures and acquisitions. Its principal
sources of funds will be cash flow from operations and borrowings under
available credit facilities. The Corporation believes that cash from operations
and available financing sources will be sufficient to meet anticipated cash
requirements.
Cash provided by operations in 1997 was $341 million. Working capital balances
decreased $106 million in 1997 due to reductions to inventories and receipt of
refundable income taxes. The ratio of current assets to current liabilities
increased to 1.7 at December 31, 1997 from 1.4 at December 31, 1996. The
Corporation has available a $350 million revolving credit facility for working
capital needs. As of December 31, 1997, $7 million was outstanding under this
facility.
Cash used for investing activities was $371 million in 1997. The purchase of
plant and equipment amounted to $85 million. Cash used for acquisitions ($384
million) is comprised of $338 million to purchase the UK fertilizer business of
ICI (now operated as Terra Nitrogen U.K.) and amounts paid to acquire new
locations for the Corporation's distribution network. In October 1997, the
Corporation announced plans to begin construction of a $57 million capital
project to add an ammonia production loop to the methanol plant in Beaumont,
Texas. The new facility is expected to add 255,000 tons per year of ammonia
capacity without reducing methanol capacity. The project is expected to be
operational in the fourth quarter of 1999. The Corporation expects 1998 capital
expenditures, exclusive of expenditures related to the Beaumont ammonia
production loop and the acquisition of retail distribution locations, to
approximate $70 million consisting of the expansion of existing service centers,
routine replacement of equipment, and efficiency improvements at manufacturing
facilities.
During 1997, the Corporation reached a settlement of $321 million with its
insurance carriers related to the Port Neal casualty property damage and
business interruption claims. As of December 31, 1997, the Corporation had
received $306 million of insurance receipts. The final cash settlement was
received in January 1998.
<PAGE>
15
The Corporation funded the acquisition of Terra Nitrogen U.K. with the issuance
of $125 million of long-term debt, proceeds of $175 million from the
contribution of a $225 million minority preferred limited partnership interest
in the Corporation's Beaumont Methanol, Limited Partnership (BMLP) subsidiary
and available cash. The additional $50 million proceeds contributed through the
BMLP preferred partnership interest will be used to fund the ammonia production
loop at the Beaumont plant. The Corporation prepaid $31 million of long-term
debt in advance of the acquisition financing of Terra Nitrogen U.K.
On April 30, 1996, the Board of Directors of the Corporation 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. The share
repurchase was completed in May 1997 for a total cost of $114.2 million.
On December 17, 1997, the Corporation announced that it is resuming purchases of
common units of Terra Nitrogen Company, L.P. (TNCLP) on the open market and
through privately negotiated transactions. Under an existing authorization of
the Board of Directors dating back to May 1995, the Corporation may acquire up
to 4 million common units of the 6.4 million common units currently held by the
public. There were no purchases under this program in 1997.
During 1997, the Corporation distributed $5.19 per unit, or $33.3 million, to
minority Unitholders, paid a dividend rate of 8.42%, or $1.1 million, to
minority preferred stock shareholders, and paid a dividend of $0.18 per Common
Share which totaled $13.5 million. The cash distribution to minority Unitholders
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
was no longer required to be maintained.
Pursuant to the provisions of the 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 included a $0.605 distribution per unit for the first quarter of
1997.
Port Neal Holdings Corp. redeemed its $25.0 million non-convertible, preferred
stock on June 30, 1997.
<PAGE>
16
Cash balances at December 31, 1997 were $180.1 million of which $5.4 million is
used to collateralize letters of credit supporting recorded liabilities.
RECENTLY ISSUED ACCOUNTING STANDARDS
------------------------------------
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income". SFAS
130 establishes standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. SFAS 130
is effective for fiscal years beginning after December 15, 1997 and will be
adopted by the Corporation in its 1998 annual financial statements.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS 131 establishes standards for the way
public enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS 131 is
effective for financial statements for periods beginning after December 15,
1997, and the Corporation will adopt SFAS 131 in its 1998 financial statements.
The Corporation currently complies with most of the provisions of this
Statement, and any additional disclosure required is expected to be minimal.
YEAR 2000 ISSUES
----------------
The Year 2000 issue concerns computer programs that use only the last two digits
to identify the year in date fields. If not corrected, many of these computer
applications could fail or create erroneous results on or before January 1,
2000. This issue affects virtually every company.
The Corporation has assigned dedicated resources to address its Year 2000
issues. A significant part, but not all, of the Corporation's computer
environment has been assessed for Year 2000 issues and some remedial actions
have been identified in these assessed areas. The impact of these remedial
actions for areas where an assessment has already been completed is not expected
to be material to the Corporation. Some of these actions have already been
completed at minimal cost.
<PAGE>
17
The Corporation has initiated an additional organization-wide review of all
possible computing functions, including the process control systems and
instrumentation in the manufacturing facilities. The Corporation is also
assessing Year 2000 issues in relation to its customers, suppliers and other
constituents because the actions of many such third parties may materially
affect the Corporation.
The Corporation anticipates that it will complete all assessment, remediation
and testing efforts for Year 2000 issues in advance of January 1, 2000 with no
material adverse consequences. The costs or consequences of incomplete or
untimely resolution of Year 2000 issues by the Corporation or third parties
could have a material adverse affect on the Corporation.
FORWARD LOOKING PRECAUTIONS
---------------------------
Information contained in this report, other than historical information, may be
considered forward looking. Forward looking information reflects Management's
current views of future events and financial performance that involve a number
of risks and uncertainties. The factors that could cause actual results to
differ materially include, but are not limited to, the following: general
economic conditions within the agricultural industry, competitive factors and
pricing pressures, changes in product mix, changes in the seasonality of demand
patterns, changes in weather conditions, changes in agricultural regulations,
and other risks detailed in the "Factors that Affect Operating Results" section
of this discussion.
<PAGE>
18
Consolidated Statements of Financial Position
<TABLE>
<CAPTION>
==========================================================================================
At December 31,
- ------------------------------------------------------------------------------------------
(in thousands) 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and short-term investments $ 180,062 $ 100,742
Accounts receivable, less allowance for doubtful
accounts of $13,154 and $11,391 111,690 81,606
Inventories 395,940 422,938
Other current assets 51,287 107,008
- ------------------------------------------------------------------------------------------
Total current assets 738,979 712,294
- ------------------------------------------------------------------------------------------
Equity and other investments 24,485 16,579
Property, plant and equipment, net 1,181,384 846,353
Excess of cost over net assets of acquired businesses 304,567 291,645
Deferred tax asset 10,794 15,311
Other assets 99,745 87,183
- ------------------------------------------------------------------------------------------
Total assets $ 2,359,954 $ 1,969,365
==========================================================================================
Liabilities
Debt due within one year $ 9,538 $ 118,937
Accounts payable 203,554 198,273
Accrued and other liabilities 223,163 207,927
- ------------------------------------------------------------------------------------------
Total current liabilities 436,255 525,137
- ------------------------------------------------------------------------------------------
Long-term debt 497,030 404,707
Deferred income taxes 193,456 134,523
Other liabilities 82,315 125,013
Minority interest 360,569 173,893
Commitments and contingencies (Note 12)
- ------------------------------------------------------------------------------------------
Total liabilities 1,569,625 $ 1,363,273
- ------------------------------------------------------------------------------------------
Stockholders' Equity
Capital stock
Common Shares, authorized 133,500 shares;
74,977 and 75,010 shares outstanding 127,581 127,614
Paid-in capital 548,772 550,850
Cumulative translation adjustment (8,488) (1,430)
Retained earnings (deficit) 122,464 (70,942)
- ------------------------------------------------------------------------------------------
Total stockholders' equity 790,329 606,092
- ------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 2,359,954 $ 1,969,365
==========================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
<PAGE>
19
Consolidated Statements of Income
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per-share amounts) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Net sales $2,462,081 $2,264,509 $2,215,874
Other income, net 80,288 51,977 76,299
- ------------------------------------------------------------------------------------------------------------------------------------
2,542,369 2,316,486 2,292,173
- ------------------------------------------------------------------------------------------------------------------------------------
Cost and Expenses
Cost of sales 1,967,344 1,722,450 1,657,070
Selling, general and administrative expense 323,975 300,897 259,295
Equity in earnings of unconsolidated affiliates (2,266) (2,042) (1,894)
- ------------------------------------------------------------------------------------------------------------------------------------
2,289,053 2,021,305 1,914,471
- ------------------------------------------------------------------------------------------------------------------------------------
Income from operations 253,316 295,181 377,702
Insurance recovery - damaged facility 163,427 --- ---
Interest income 6,525 7,102 13,811
Interest expense (63,153) (59,947) (64,897)
Minority interest (27,633) (44,485) (47,234)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item 332,482 197,851 279,382
Income tax provision 122,600 63,900 115,500
- ------------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 209,882 133,951 163,882
Extraordinary loss on early retirement of debt (2,995) --- (4,338)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 206,887 $ 133,951 $ 159,544
====================================================================================================================================
Basic Earnings Per Share:
Income before extraordinary item $ 2.84 $ 1.74 $ 2.03
Extraordinary loss on early retirement of debt (0.04) --- (0.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 2.80 $ 1.74 $ 1.98
====================================================================================================================================
Diluted Earnings Per Share:
Income before extraordinary item $ 2.80 $ 1.72 $ 2.01
Extraordinary loss on early retirement of debt (0.04) -- (0.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 2.76 $ 1.72 $ 1.96
====================================================================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
<PAGE>
20
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
================================================================================================
Year ended December 31,
- ------------------------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 206,887 $ 133,951 $ 159,544
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Insurance recovery - damaged facility (163,427) --- ---
Depreciation and amortization 96,091 83,210 66,075
Deferred income taxes 66,342 15,959 47,849
Minority interest in earnings 27,633 44,485 47,234
Other non-cash items (4,306) (3,059) 2,544
Change in current assets and liabilities, excluding
working capital purchased:
Accounts receivable (9,649) 100,359 (24,557)
Inventories 86,253 (53,185) (30,466)
Other current assets 45,276 (42,849) 46
Accounts payable (15,144) (8,291) 22,950
Accrued and other liabilities (1,127) (27,952) 35,349
Unreimbursed Port Neal casualty 7,629 (26,498) (68,748)
Other (1,695) (14,291) (14,699)
- ------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 340,763 201,839 243,121
- ------------------------------------------------------------------------------------------------
Investing Activities
Port Neal plant construction (29,860) (86,323) (133,106)
Insurance proceeds from plant casualty 95,057 26,675 127,557
Acquisitions, net of cash acquired (384,284) (16,181) (22,326)
Purchase of property, plant and equipment (55,249) (99,326) (44,023)
Purchase of minority interest - TNCLP --- --- (28,834)
Proceeds from asset sales 1,734 5,798 ---
Other 1,717 861 5,670
- ------------------------------------------------------------------------------------------------
Net Cash Used In Investing Activities (370,885) (168,496) (95,062)
- ------------------------------------------------------------------------------------------------
Financing Activities
Net short-term borrowings (116,332) 90,318 4,906
Proceeds from issuance of long-term debt 132,867 151 203,112
Principal payments on long-term debt (33,611) (4,412) (349,134)
Debt issuance costs (9,203) --- (8,333)
Stock (repurchase) issuance - net (21,264) (91,131) 1,187
Distributions to minority interests (34,402) (53,493) (36,750)
Distribution reserve fund 18,480 --- ---
Redemption of SPUs (6,604) --- ---
Redemption of preferred stock (24,950) --- ---
Sale of minority interest in subsidiaries 225,000 --- 24,950
Dividends (13,481) (11,582) (8,662)
- ------------------------------------------------------------------------------------------------
Net Cash Provided by (Used In) Financing Activities 116,500 (70,149) (168,724)
- ------------------------------------------------------------------------------------------------
Foreign Exchange Effect on Cash
and Short-Term Investments (7,058) (1,159) 988
- ------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Short-Term Investments 79,320 (37,965) (19,677)
Cash and Short-Term Investments at Beginning of Year 100,742 138,707 158,384
- ------------------------------------------------------------------------------------------------
Cash and Short-Term Investments at End of Year $ 180,062 $ 100,742 $ 138,707
================================================================================================
Interest Paid $ 61,446 $ 58,706 $ 77,800
================================================================================================
Income Taxes Paid $ 18,519 $ 80,340 $ 47,665
================================================================================================
Noncash Investing and Financing Activities:
Stock issuance for distribution locations acquisition $ 19,112 $ 2,842 $ ---
================================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
<PAGE>
21
Consolidated Statements of Changes in Stockholders' Equity
================================================================================
<TABLE>
<CAPTION>
Capital Stock Cumulative Retained
--------------------- Paid-In Translation Earnings
(in thousands) Shares Amount Capital Adjustment (Deficit) Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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, net 141 141 1,068 --- --- 1,209
Issuance of Common Shares 1,499 1,499 17,613 --- --- 19,112
Repurchase of Common Shares (1,673) (1,673) (20,759) --- --- (22,432)
Translation adjustment --- --- --- (7,058) --- (7,058)
Dividends --- --- --- --- (13,481) (13,481)
Net income --- --- --- --- 206,887 206,887
- -------------------------------------------------------------------------------------------------------------------
December 31, 1997 74,977 $127,581 $548,772 $ (8,488) $122,464 $ 790,329
===================================================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
<PAGE>
22
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 Corporation). All significant
intercompany accounts and transactions have been eliminated.
Foreign exchange:
Results of operations for the foreign subsidiaries are translated using average
currency exchange rates during the period while assets and liabilities are
translated using current rates. Resulting translation adjustments are recorded
as currency translation adjustments in stockholders' equity.
Cash and short-term investments:
The Corporation considers short-term investments with an original maturity of
three months or less to be cash equivalents which are reflected at their
approximate fair value.
Inventories:
Inventories are stated at the lower of cost or estimated net realizable value.
The cost of inventories is determined using the first-in, first-out method.
Property, plant and equipment:
Expenditures for plant and equipment additions, replacements and major
improvements are capitalized. Related depreciation is charged to expense on a
straight-line basis over estimated useful lives 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 businesses:
The Corporation 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 (see Note 13 - Derivative Financial Instruments).
Stock-based compensation:
The Corporation 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.
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.
<PAGE>
23
Reclassifications:
Certain reclassifications have been made to prior years' financial statements to
conform with current year presentation.
Per-share results:
Earnings per share are calculated in accordance with SFAS 128, "Earnings Per
Share". Basic earnings per share data are based on the weighted-average number
of Common Shares outstanding during the period. Diluted earnings per share data
are based on the weighted-average number of Common Shares outstanding and the
effect of all dilutive potential common shares including stock options,
restricted shares and contingent shares. All prior periods have been restated
in accordance with SFAS 128.
Recently issued accounting standards:
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income" which
will be effective in 1998. The Corporation anticipates minimal impact from this
statement. Also in June 1997, the FASB issued SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information" which will be effective in
1998. The Corporation currently complies with most provisions of this
Statement, and any additional disclosure required by this Statement is expected
to be minimal.
2. Acquisitions
On December 31, 1997, a wholly owned subsidiary of the Corporation, Terra
International (Canada) Inc. (Terra Canada) acquired two nitrogen fertilizer
manufacturing plants in the United Kingdom from Imperial Chemical Industries PLC
(ICI) for approximately $338 million. The plants, located in Billingham and
Severnside, England, produce nitrogen products for sale in the agricultural and
industrial markets in the U.K. and western Europe. The acquisition has been
accounted for using the purchase method of accounting. The Corporation funded
the acquisition with $125 million from a five year term loan provided by a bank
group and secured by the assets of Terra Canada, $175 million as part of a
contribution to the Corporation for a $225 million minority preferred limited
interest in its Beaumont Methanol, Limited Partnership subsidiary, and the
balance with available cash. The purchase price was allocated to the assets
based on estimated fair values at the date of acquisition. The allocation of
the purchase price to assets acquired is based on preliminary estimates and may
change upon completion of the audit of the opening balance sheet. The excess of
the purchase price over the fair value of the assets acquired of $24 million
will be amortized on a straight line basis over 18 years which is estimated to
be the average remaining useful life of the manufacturing plants acquired.
Under an ammonium nitrate agreement with ICI, related to the acquisition, which
covers 500,000 metric tons per year, the Corporation has agreed to make payments
based on the market price of ammonium nitrate in connection with the
Corporation's U.K. Business. The Corporation will be required to make a payment
for each year through 2002 if average ammonium nitrate prices exceed certain
thresholds during any year, subject to maximum payments of (Pounds)58 million
($95.7 million USD) over the term of the agreement. As a result of making any
such payments, the Corporation will not benefit fully from the U.K. price of
ammonium nitrate over certain thresholds during the term of this agreement.
<PAGE>
24
Operating results subsequent to the date of acquisition will be reflected in the
1998 Consolidated Statements of Income. The following represents unaudited pro
forma results of operations of the Corporation and the acquired manufacturing
plants as if the acquisition had occurred at the beginning of 1996:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
(in thousands, except per-share data) 1997 1996
- -------------------------------------------------------------------
<S> <C> <C>
Revenues $ 2,845,200 $ 2,671,200
Income before extraordinary item $ 204,000 $ 179,100
Net income $ 204,000 $ 176,100
Basic EPS
Income before extraordinary item $ 2.76 $ 2.32
Net income $ 2.76 $ 2.28
Diluted EPS
Income before extraordinary item $ 2.72 $ 2.30
Net income $ 2.72 $ 2.26
- -------------------------------------------------------------------
</TABLE>
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, interest expense of the acquisition borrowings and
the effect of income taxes. The pro forma information listed above does not
purport to be indicative of the results that would have been obtained if the
operations were combined during the above period, and is not intended to be a
projection of future operating results or trends.
Identifiable assets in the United Kingdom totaled $358 million as of December
31, 1997.
3. Earnings Per Share
The FASB issued SFAS 128, "Earnings Per Share" (EPS), which is effective for
1997 financial statements. SFAS 128 requires dual presentation of Basic and
Diluted EPS, as well as restatement of EPS for all periods for which an income
statement or summary of earnings is presented. The following table provides a
reconciliation between Basic and Diluted EPS.
<TABLE>
<CAPTION>
(in thousands, except per-share data) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
Per-Share Per-Share Per-Share
Income Shares Amount Income Shares Amount Income Shares Amount
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
Income before
extraordinary item $209,882 73,830 $2.84 $133,951 77,178 $1.74 $163,882 80,730 $2.03
Effect of Dilutive
Securities
Stock options 513 572 597
Restricted shares 346 83 ---
Contingent shares 336 --- ---
- ----------------------------------------------------------------------------------------------------------------
Diluted EPS $209,882 75,025 $2.80 $133,951 77,833 $1.72 $163,882 81,327 $2.01
================================================================================================================
</TABLE>
4. Accounts Receivable
On August 20, 1996, the Corporation, through Terra Funding Corporation (TFC), a
beneficially owned subsidiary of the Corporation 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 Corporation 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 December 31, 1997,
the proceeds of the uncollected balance of accounts receivable
<PAGE>
25
sold totaled $150 million. The Corporation 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.
5. Inventories
Inventories consisted of the following at December 31:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 41,724 $ 39,782
Finished goods 354,216 383,156
- --------------------------------------------------------------------------------
Total $ 395,940 $ 422,938
================================================================================
</TABLE>
6. Other Current Assets
Other current assets consisted of the following at December 31:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax asset - current $ 8,332 $ 15,180
Income taxes recoverable - federal --- 12,641
Income taxes recoverable - foreign --- 10,884
Partnership distribution reserve fund --- 18,480
Insurance recoverable 14,314 ---
Other current assets 28,641 49,823
- --------------------------------------------------------------------------------
Total $ 51,287 $ 107,008
================================================================================
</TABLE>
7. Property, Plant and Equipment, Net
Property, plant and equipment, net consisted of the following at December 31:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Land and buildings $ 143,816 $ 128,741
Plant and equipment 1,212,955 886,150
Finance leases 3,526 3,526
Construction in progress 81,561 30,576
- --------------------------------------------------------------------------------
1,441,858 1,048,993
Less accumulated depreciation and amortization (260,474) (202,640)
- --------------------------------------------------------------------------------
Total $1,181,384 $ 846,353
================================================================================
</TABLE>
8. Port Neal Casualty
On December 13, 1994, the Corporation's Port Neal facility in Iowa was
extensively damaged as a result of an explosion. Insurance was in force to cover
the Corporation's property damage, business interruption and third-party
liability claims. During 1997, the Corporation reached a settlement with all its
insurance carriers, who agreed to pay the Corporation a total claim fixed at
$321 million. Estimated lost profits under the business interruption policy were
included in income in 1996 and 1995. The rebuild of the Port Neal plant required
the recognition of a new cost basis for the facility, which resulted in
recording a substantial gain in 1997 representing the difference between the
property insurance settlement received on the Port Neal plant and the carrying
value of the facility at the time of the explosion less uninsured expenses. The
Corporation capitalized $249 million related to the rebuild of the Port Neal
manufacturing facility.
<PAGE>
26
9. Debt Due Within One Year
Debt due within one year consisted of the following at December 31:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Short-term borrowings $ --- $ 116,332
Current maturities of long-term debt 9,538 2,605
- --------------------------------------------------------------------------------
Total $ 9,538 $ 118,937
================================================================================
Weighted average short-term borrowings $ 96,741 $ 109,701
================================================================================
Weighted average interest rate 7.6% 7.6%
================================================================================
</TABLE>
The Corporation has a credit agreement to provide revolving credit facilities of
up to $350 million for seasonal working capital needs and other corporate
purposes. There was $7.0 million outstanding at December 31, 1997 which was
classified as long-term debt under the facility. Interest on borrowings under
this line is charged at current market rates.
Under the credit agreement, the Corporation 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 Corporation's revolving credit
facilities expire December 31, 2000. A commitment fee is charged on the unused
portion of the facilities under the credit agreement, currently 3/8 percent
adjustable based on the Corporation's most recent quarter debt to cash flow
ratio. The credit agreement is secured by the stock of certain principal
subsidiaries of the Corporation as well as substantially all the property of
certain subsidiaries.
10. Accrued and Other Liabilities
Accrued and other liabilities consisted of the following at December 31:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Customer deposits $ 99,582 $ 102,347
Payroll and benefit costs 35,684 26,382
Income taxes - federal 14,487 ---
Income taxes - foreign 1,741 ---
Income taxes - state 4,286 5,096
Other 67,383 74,102
- --------------------------------------------------------------------------------
Total $ 223,163 $ 207,927
================================================================================
</TABLE>
<PAGE>
27
11. Long-Term Debt
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Senior Notes, 10.5%, due 2005 $ 200,000 $ 200,000
Senior Notes, 10.75%, due 2003 158,755 158,755
Bank Term Notes, due 2003 125,000 ---
Senior Notes, 8.48%, originally due 2005 --- 30,000
Industrial Development Revenue Bonds bearing interest at an
average 6.81% with increasing payments from 1998 to 2011 8,645 8,860
Notes, 8.75%, originally due 1998 --- 2,000
Other 14,168 7,697
- -------------------------------------------------------------------------------------------
506,568 407,312
Less current maturities (9,538) (2,605)
- -------------------------------------------------------------------------------------------
Total $ 497,030 $ 404,707
===========================================================================================
</TABLE>
Scheduled principal payments for each of the five years 1998 through 2002 are
$9.5 million, $16.5 million, $11.2 million, $8.4 million and $0.6 million,
respectively.
In 1995, the Corporation 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
Corporation, 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.
The 10.75% unsecured Senior Notes are redeemable at the option of the
Corporation, 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 Bank Term Notes are secured by substantially all assets of Terra
International (Canada) Inc., a beneficially owned subsidiary of the Corporation.
The Notes require specified annual payments with the balance due January 2,
2003. The Notes bear interest at a rate based on current market rates,
currently 7.19%. The Notes include covenants similar to the credit agreement
described in Note 9 - Debt Due Within One Year.
The $30 million unsecured 8.48% Senior Notes and the 8.75% Notes were retired in
December 1997.
The Industrial Development Revenue Bonds due in 2011 are secured by a letter of
credit guaranteed by the Corporation and, along with other long-term debt due in
2003, by the Corporation's headquarters building located in Sioux City, Iowa.
<PAGE>
28
12. Commitments and Contingencies
The Corporation and its subsidiaries are committed to various non-cancelable
operating leases for agricultural equipment, and office, production, and storage
facilities expiring on various dates through 2017. Total minimum rental
payments are as follows:
<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
<S> <C>
1998 $ 50,831
1999 39,900
2000 29,615
2001 15,603
2002 and thereafter 30,109
- --------------------------------------------------------------------------------
Total $166,058
================================================================================
</TABLE>
Total rental expense under all leases, including short-term cancelable operating
leases, was approximately $54.3 million, $54.1 million and $46.8 million for the
years ended December 31, 1997, 1996 and 1995, respectively.
The Corporation is contingently liable for retiree medical benefits of employees
of coal mining operations sold on January 12, 1993. Under the purchase
agreement, the purchaser agreed to indemnify the Corporation against its
obligations under certain employee benefit plans. Due to the Coal Industry
Retiree Health Benefit Act of 1992, certain retiree medical benefits of union
coal miners have become statutorily mandated, and all companies owning 50% or
more of any company liable for such benefits as of certain specified dates
becomes liable for such benefits if the company directly liable is unable to pay
them. As a result, if the purchaser becomes unable to pay its retiree medical
obligations assumed pursuant to the sale, the Corporation may have to pay such
amount. The Corporation has provided reserves equal to the estimated present
value of these liabilities of $20 million at December 31, 1997.
The Corporation 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 Corporation.
13. Derivative Financial Instruments
The Corporation manages three categories of risk using derivative financial
instruments: (a) foreign currency fluctuations, (b) changes in natural gas
supply prices and (c) interest rate fluctuations. Derivative financial
instruments have credit risk and market risk.
To manage credit risk, the Corporation enters only into derivative transactions
with counter-parties who are currently rated BBB or better or equivalent as
recognized by a national rating agency. The Corporation will not enter into
transactions with counter-parties if the additional transaction will result in
credit exposure exceeding $20 million. 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.
The Corporation classifies a derivative financial instrument as a hedge if all
of the following conditions are met:
1. The item to be hedged must expose the enterprise to currency, interest or
price risk.
<PAGE>
29
2. It must be probable that the results of the hedge position substantially
offset the effects of currency, interest or price changes on the hedged item
(e.g., there is a high correlation between the hedge position and changes in
market value of the hedge item).
3. The derivative financial instrument must be designated as a hedge of the item
at the inception of the hedge.
A change in the market value of a derivative financial instrument is recognized
as a gain or loss in the period of the change unless the instrument meets the
criteria to qualify as a hedge. If the hedge criteria are met, the accounting
for the derivative financial instrument is related to the accounting for the
hedged item so that changes in the market value of the derivative financial
instrument are recognized in income when the effects of related changes in the
currency rate, interest rate or price of the hedged item are recognized.
A change in the market value of a derivative financial instrument that is a
hedge of a firm commitment is included in the measurement of the transaction
that satisfies the commitment. The Corporation accounts for a change in the
market value of a derivative financial instrument that hedges an anticipated
transaction in the measurement of the subsequent transaction. If a derivative
financial instrument that has been accounted for as a hedge is closed before the
date of the anticipated transaction, the Corporation carries forward the
accumulated change in value of the contract and includes it in the measurement
of the related transaction.
Foreign Currency Fluctuations - The Corporation 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.
The cash flows related to these transaction gains and losses are reported as
cash flows from operating activities.
A significant portion of the Corporation'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 Corporation's earnings will decline when the
Canadian dollar increases in value compared with the U.S. dollar. Consequently,
the Corporation 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, 1997, the existing forward contracts represented
approximately 15% of anticipated net 1998 Canadian dollar requirements of
approximately $20 million (Cdn).
Natural Gas Prices - United Kingdom Operations - To meet natural gas production
requirements at the Corporation's United Kingdom production facilities, the
Corporation enters into fixed price supply contracts. Accordingly, the
Corporation does not have a hedging program related to its United Kingdom
natural gas needs.
Natural Gas Prices - North American Operations - Natural gas supplies to meet
production requirements at the Corporation's production facilities are purchased
at market prices. Natural gas market prices, as with other commodities, are
volatile and the Corporation 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. Contract physical prices
are frequently based on the Henry Hub Louisiana price, but natural gas supplies
for the Corporation's six production facilities are physically purchased for
each plant location which often 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.
<PAGE>
30
A swap is a contract between the Corporation 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, 1997 and
1996:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
Contract Unrealized Contract Unrealized
MMBtu Gain MMBtu Gain (Loss)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Futures (540) $ --- 2,530 $ (1,024)
Swaps 133,570 29,219 177,315 41,958
Options --- --- 6,260 1,102
- --------------------------------------------------------------------------------
133,030 $ 29,219 186,105 $ 42,036
================================================================================
</TABLE>
Annual production requirements are approximately 134 million MMBtu. Contracts
were in place at December 31, 1997 to cover 68% of 1998 natural gas
requirements, 34% for 1999 and 5% for 2000.
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 of $1.6 million relating to future periods have been
deferred and are included in other current assets as of December 31, 1997. Cash
flows related to natural gas hedging are reported as cash flows from operating
activities.
During 1997 and 1996, natural gas hedging activities reduced the Corporation's
natural gas costs by approximately $57.6 million and $74.3 million,
respectively, compared with spot prices. During 1995, natural gas hedging
activities produced cost increases of approximately $34.5 million compared with
spot prices.
The Corporation has also entered into basis swaps. Such contracts require
payments to or from the Corporation 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. There are no
initial cash requirements related to the basis swap agreements. Gains and
losses on settlement of these contracts are credited or charged to cost of sales
in the month in which the hedged transaction occurs. Cash flows related to
natural gas basis swaps are reported as cash flows from operating activities.
As of December 31, 1997 and 1996, MMBtu's under such contracts totaled 104.6
million and 16.0 million, respectively. The unrealized loss on basis swaps at
December 31, 1997 was $2.0 million.
Interest Rate Fluctuations -The Corporation has entered into interest rate swap
agreements to fix the interest rate on a portion of its floating rate debt at an
average rate of approximately 6.09% per annum. The interest rate swap
agreements are designated as hedges. At December 31, 1997, the notional amount
of the swap agreement was approximately $300 million. The differential paid or
received on interest rate swap agreements is recognized as an adjustment to
interest expense. Cash flows for the interest rate swap agreements are
classified as cash flows from operations.
The following table presents the carrying amounts and estimated fair values of
the Corporation's derivative financial instruments at December 31, 1997 and
1996. 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.
<PAGE>
31
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(in millions) Amount Value Amount Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign currency $ --- $ (0.1) $ --- $ ---
Natural gas 5.7 32.9 9.6 51.6
Interest rate --- (2.1) 0.3 0.3
- --------------------------------------------------------------------------------
</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 Corporation.
Natural gas futures, swaps, options and basis swaps: Estimated based on quoted
market prices from brokers, and computations prepared by the Corporation.
Interest rate swap agreements: Estimated based on quotes from the market makers
of these instruments.
14. Financial Instruments and Concentrations of Credit Risk
The following table presents the carrying amounts and estimated fair values of
the Corporation's financial instruments at December 31, 1997 and 1996. 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>
1997 1996
- ---------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(in millions) Amount Value Amount Value
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and short-term investments $ 180.1 $ 180.1 $ 100.7 $ 100.7
Receivables 111.7 111.7 81.6 81.6
Equity and other investments 24.5 26.3 16.6 18.6
Other assets 9.9 9.9 9.2 9.8
Financial Liabilities
Short-term borrowings --- --- (116.3) (116.3)
Long-term debt (506.6) (530.5) (407.3) (437.0)
==================================================================================
</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.
<PAGE>
32
Long-term debt: The fair value of the Corporation'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 Corporation for debt
of the same remaining maturities.
Concentration of Credit Risk - The Corporation is subject to credit risk through
trade receivables and short-term investments. Although a substantial portion of
its debtors' ability to pay is dependent upon the agribusiness economic sector,
credit risk with respect to trade receivables generally 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
Corporation limits the amount of credit exposure in any one type of investment
instrument.
Financial Instruments - At December 31, 1997, the Corporation had letters of
credit outstanding totaling $21.2 million, guaranteeing various insurance and
financing activities. Short-term investments of $5.4 million at December 31,
1997 and 1996 are restricted to collateralize certain letters of credit.
15. Stockholders' Equity
The Corporation allocates $1.00 per share upon the issuance of Common Shares to
the Common Share capital account.
At December 31, 1997, 1.7 million Common Shares were reserved for issuance upon
award of restricted shares and exercise of employee stock options.
The Corporation has authorized 16,500,000 Trust Shares for issuance. There was
no activity related to the Trust Shares from December 31, 1994 to December 31,
1997 and no Trust Shares were outstanding at December 31, 1997.
Port Neal Holdings Corp. (PNH) was structured to finance and complete the
construction of the Port Neal manufacturing facility and was partially financed
by the issuance of $25 million of non-convertible preferred stock to unrelated
third parties in September 1995. PNH redeemed the preferred stock on June 30,
1997.
16. Stock-Based Compensation
The Corporation 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 $1.2 million, $2.8 million and $1.0
million for the years ended December 31, 1997, 1996 and 1995, respectively.
The Corporation's 1997 Stock Incentive Plan authorized granting key employees
awards in the form of options, rights, performance units or restricted stock.
The aggregate number of Common Shares that may be subject to awards under the
plan may not exceed 3.8 million shares. There were no outstanding rights or
performance units at December 31, 1997. The Corporation's 1992 Stock Incentive
Plan authorized granting key employees options, performance units and restricted
shares. No further awards may be granted under the 1992 Plan. Options generally
may not be exercised prior to one year or more than ten years from the date of
grant. 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 Corporation's Common Shares. The restricted
shares are entitled to normal voting rights and earn dividends as declared
during the performance periods. At December 31, 1997, 2,960,000 Common Shares
were available for grant under the 1997 Plan.
<PAGE>
33
A summary of the Corporation's stock-based compensation activity related to
stock options for the years ended December 31, is as follows:
<TABLE>
<CAPTION>
(options in thousands)
- -------------------------------------------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
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 1,719 $ 9.44 1,350 $ 6.92 1,533 $ 6.79
Granted 871 12.23 535 14.62 9 13.00
Expired/terminated 21 14.49 8 10.50 --- ---
Exercised 141 8.23 158 5.36 192 6.16
- -------------------------------------------------------------------------------------------------
Outstanding - end of year 2,428 $10.47 1,719 $ 9.44 1,350 $ 6.92
=================================================================================================
</TABLE>
The following table summarizes information about stock options outstanding and
exercisable at December 31, 1997:
<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 $ 5.99 519 4.3 years $ 4.99 519 $ 4.99
6.00 8.99 234 1.5 6.81 234 6.81
9.00 11.99 281 7.0 10.50 140 10.50
12.00 14.99 1,394 9.6 13.12 180 14.62
- -------------------------------------------------------------------------------------------------------
Total 2,428 7.4 $10.47 1,073 $ 7.72
=======================================================================================================
</TABLE>
There were 1,035,000 and 1,052,000 options exercisable at December 31, 1996 and
1995, respectively.
The weighted average fair value of options granted was $3.58 per option for
1997, $4.34 per option for 1996 and $5.08 per option for 1995. The fair value of
options granted was estimated at the date of grant using a Black-Scholes option
pricing model with the following assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 5.77% 5.93% 6.45%
Dividend yield 1.40% 1.00% 1.00%
Expected volatility 28.00% 27.00% 27.00%
Expected life (years) 4.6 4.5 7.0
================================================================================
</TABLE>
There were 20,000 restricted shares granted during 1997 with a weighted average
fair value of $14.63 per share. 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.
<PAGE>
34
The pro forma impact on net income and diluted earnings per share of accounting
for stock-based compensation using the fair value method required by SFAS 123,
"Accounting for Stock-Based Compensation" is as follows:
<TABLE>
<CAPTION>
(in thousands, except per-share data) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income
As reported $ 206,887 $ 133,951 $ 159,544
Pro forma 205,626 133,816 159,561
Diluted earnings per share
As reported $ 2.76 $ 1.72 $ 1.96
Pro forma 2.74 1.72 1.96
================================================================================
</TABLE>
The pro forma impact only takes into account stock-based compensation grants
since January 1, 1995 and is likely to increase in future years as additional
awards are granted and amortized ratably over the vesting period.
17. Retirement Plans
The Corporation and its subsidiaries maintain non-contributory pension plans
that cover substantially all salaried and hourly employees. Benefits are based
on a final pay formula for the salaried plans and a flat benefit formula for the
hourly plans. The plans' assets consist principally of equity securities and
corporate and government debt securities. The Corporation and its subsidiaries
also have certain non-qualified pension plans covering executives, which are
unfunded. The Corporation accrues pension costs based upon annual independent
actuarial valuations for each plan and funds these costs in accordance with
statutory requirements. The components of net periodic pension expense were as
follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current service cost $ 5,394 $ 5,280 $ 4,120
Interest on projected benefit obligation 6,651 6,098 4,746
Actual return on assets (17,025) (6,591) (12,763)
Net amortization and other 10,501 1,203 8,080
- --------------------------------------------------------------------------------
Pension expense $ 5,521 $ 5,990 $ 4,183
================================================================================
</TABLE>
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) 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefit obligations $ (67,090) $ (3,534) $ (57,455) $ (3,206)
Accumulated benefit obligations $ (72,914) $ (3,766) $ (62,092) $ (3,354)
Projected benefit obligations $ (90,449) $ (4,144) $ (84,997) $ (4,169)
Plan assets at fair value 87,357 --- 71,596 ---
- -------------------------------------------------------------------------------------------------------------------------
Funded status (3,092) (4,144) (13,401) (4,169)
Unrecognized net experience loss (gain) (7,957) 461 5,570 915
Unrecognized prior service cost (14) 286 155 276
Unrecognized net transition (asset) obligation (2,005) 407 (2,371) 466
Additional minimum liability --- (731) --- (753)
- -------------------------------------------------------------------------------------------------------------------------
Pension liability $ (13,068) $ (3,721) $ (10,047) $ (3,265)
=========================================================================================================================
</TABLE>
<PAGE>
35
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, 1997 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average discount rate 7.25% 7.5% 7.25%
Long-term per annum compensation increase 4.0% 5.0% 5.0%
Long-term return on plan assets 9.5% 9.5% 9.5%
================================================================================
</TABLE>
As of December 31, 1997, the Corporation acquired two fertilizer manufacturing
plants in the United Kingdom from Imperial Chemical Industries PLC (ICI).
Employees of these plants became employees of the Corporation. These employees
may elect to transfer their ICI pension to the Corporation's pension plans in
1998. Any transfer will be fully funded by ICI.
The Corporation also sponsors a qualifying savings plan covering most full-time
employees. Contributions made by participating employees are matched based on a
specified percentage of employee contributions up to 6% of the employees' pay
base. The cost of the Corporation's matching contribution to the savings plan
totaled $4.6 million in 1997, $4.0 million in 1996 and $3.7 million in 1995.
18. Post-Retirement Benefits
The Corporation 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.
The following table indicates the components of the post-retirement medical
benefits obligation included in the Corporation's Consolidated Statements of
Financial Position at December 31:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Accumulated post-retirement medical benefit obligation:
Retirees $ (2,791) $ (2,554)
Fully eligible active plan participants (1,873) (2,099)
Other active participants (634) (4,583)
- --------------------------------------------------------------------------------
Funded status (5,298) (9,236)
Unrecognized net gain (1,619) (3,367)
Unrecognized prior service benefit (701) (1,505)
- --------------------------------------------------------------------------------
Accrued post-retirement benefit cost $ (7,618) $ (14,108)
================================================================================
</TABLE>
Net periodic post-retirement medical benefit cost consisted of the following
components:
<TABLE>
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost of benefits earned $ 409 $ 424 $ 521
Interest cost on accumulated post-retirement
medical benefit obligation 644 638 730
Net amortization and other (339) (260) (193)
Effect of curtailment (7,004) --- ---
- --------------------------------------------------------------------------------
Post-retirement medical benefit cost (income) $ (6,290) $ 802 $ 1,058
================================================================================
</TABLE>
<PAGE>
36
During 1997, the Corporation amended its retiree medical plan to eliminate
retiree medical benefits for eligible employees who do not retire and elect
participation on or before January 1, 2002. The impact of the amendment was a
$7.0 million decrease to post-retirement medical benefit expense.
The Corporation limits its future obligation for post-retirement medical
benefits by capping at 5% the annual rate of increase in the cost of claims it
assumes under the plan. The weighted average discount rate used in determining
the accumulated post-retirement medical benefit obligation is 7.25% in 1997,
7.5% in 1996, and 7.25% in 1995.
19. Other Income, Net
Other income consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fertilizer service revenue $ 33,623 $ 28,529 $ 25,132
Service charge income 11,074 10,318 8,178
Other, including business interruption 35,591 13,130 42,989
- ------------------------------------------------------------------------------------------------
Total $ 80,288 $ 51,977 $ 76,299
================================================================================================
20. Income Taxes
Components of the income tax provision (benefit) applicable to operations are as
follows:
(in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------
Current:
Federal $ 48,214 $ 28,853 $ 45,938
Foreign 2,352 12,939 12,285
State 5,692 6,149 9,416
- ------------------------------------------------------------------------------------------------
56,258 47,941 67,639
- ------------------------------------------------------------------------------------------------
Deferred:
Federal 43,938 49,994 42,673
Foreign 16,923 (34,876) 3,568
State 5,481 841 1,620
- ------------------------------------------------------------------------------------------------
66,342 15,959 47,861
- ------------------------------------------------------------------------------------------------
Total income tax provision $122,600 $ 63,900 $115,500
================================================================================================
The income tax provision differs from the federal statutory provision for the
following reasons:
(in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------
Income from operations before taxes:
U.S. $281,850 $138,318 $237,892
Canada 50,632 59,533 41,490
- ------------------------------------------------------------------------------------------------
$332,482 $197,851 $279,382
================================================================================================
Statutory income tax:
U.S. $ 98,648 $ 48,411 $ 83,262
Canada 19,240 22,801 15,891
- ------------------------------------------------------------------------------------------------
117,888 71,212 99,153
Purchased Canadian tax benefit (8,144) (18,000) ---
Non-deductible expenses, primarily goodwill 6,632 6,312 6,020
State and local income taxes 9,225 6,069 8,345
Benefit of loss carryforwards (975) (1,001) (1,183)
Other (2,026) (692) 3,165
- ------------------------------------------------------------------------------------------------
Income tax provision $122,600 $ 63,900 $115,500
================================================================================================
</TABLE>
<PAGE>
37
Current deferred tax assets totaled $8.3 million and $15.2 million at December
31, 1997 and 1996, respectively, while deferred tax liabilities totaled $193.5
million and $134.5 million, respectively. Deferred tax assets, non-current
totaled $10.8 million and $15.3 million at December 31, 1997 and 1996,
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) 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Depreciation $(173,155) $ (88,369)
Investments in partnership (28,320) (28,569)
Unfunded employee benefits 16,335 16,605
Discontinued business costs 10,880 7,461
Valuation allowance (7,107) (9,142)
NOL, capital loss and tax credit carryforwards 4,869 6,306
Inventory valuation 3,349 3,799
Accrued liabilities (1,738) (12,517)
Other 557 394
- --------------------------------------------------------------------------------------------
$(174,330) $(104,032)
============================================================================================
</TABLE>
There were no NOL carryforwards or alternative minimum tax (AMT) credits at
December 31, 1997. Remaining unutilized NOL carryforwards were $0.7 million at
December 31, 1996. AMT credits were $3.0 million at December 31, 1996. The
Corporation's capital loss carryforwards totaled $5.8 million and $8.6 million
at December 31, 1997 and 1996, respectively. Capital loss carryforwards that
are not utilized will expire in 2002. A valuation allowance is provided since
the realization of tax benefits of capital loss carryforwards is not assured.
During 1996, the Corporation, 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 Corporation. Minorco, through its
beneficial ownership of Common Shares, owned approximately 57% of the equity of
the Corporation at December 31, 1997. The ultimate realization of the deferred
tax asset will require future taxable income in Canada. The Corporation assessed
its past earnings history and trends and established a valuation allowance of
$5.1 million and $6.1 million, respectively, related to the transaction as of
December 31, 1997 and 1996. The Corporation will continue to review this
valuation allowance and make adjustments as appropriate.
Components of income tax provision (benefit) included in net income other than
from continuing operations are as follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $(1,944) $ --- $(2,392)
State (87) --- (107)
- -----------------------------------------------------------------------------
$(2,031) $ --- $(2,499)
=============================================================================
</TABLE>
Current tax benefits in 1997 and 1995 result from losses on early retirement or
refinancing of long-term debt.
21. Industry Segment Data
The Corporation 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
<PAGE>
38
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 Corporation's industry segments:
<TABLE>
<CAPTION>
Nitrogen
(in thousands) Distribution Products Methanol Other Total
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Sales $1,786,673 $ 621,410 $180,646 $(46,360) $2,542,369
Operating earnings 40,686 150,270 63,662 (1,302) 253,316
Identifiable assets 747,904 1,322,413 189,088 100,549 2,359,954
Depreciation and amortization 23,777 55,501 13,027 3,786 96,091
Capital expenditures 36,692 43,890 2,428 2,099 85,109
=======================================================================================================
1996
Sales $1,580,142 $ 654,486 $132,533 $(50,675) $2,316,486
Operating earnings 23,872 255,263 18,520 (2,474) 295,181
Identifiable assets 656,787 1,048,241 194,635 69,702 1,969,365
Depreciation and amortization 18,125 47,690 12,866 4,529 83,210
Capital expenditures 27,310 156,833 1,327 179 185,649
=======================================================================================================
1995
Sales $1,501,307 $ 635,126 $194,565 $(38,825) $2,292,173
Operating earnings 40,665 263,787 77,138 (3,888) 377,702
Identifiable assets 583,119 984,363 225,034 75,342 1,867,858
Depreciation and amortization 13,216 32,518 16,636 3,705 66,075
Capital expenditures 15,331 150,687 10,329 782 177,129
=======================================================================================================
</TABLE>
22. Agreements of Limited Partnerships
Terra Nitrogen Company, L.P. (TNCLP)
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 in the partnership agreement.
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
Preference Period for TNCLP ended on December 31, 1996. Until March 31, 1997,
the holders of all SPUs had the right to elect to convert their SPUs into Common
Units on a one-for-one basis, effective as of December 31, 1996. Any SPUs which
did not convert continued (until redeemed) to be entitled to the Minimum
Quarterly Distribution (MQD) but did not participate with the Common Units in
any additional distributions.
As of March 31, 1997 (the end of the Conversion Period) holders of 13,329,162
SPUs converted their units to Common Units and 307,202 units remained SPUs. The
Common Units began trading on the New York Stock Exchange on April 1, 1997 under
the symbol TNH. Pursuant to the provisions of the Agreement of Limited
Partnership, on May 27, 1997, the Partnership redeemed all SPUs that did not
convert to Common Units. The redemption price was $21.50 per unit. The SPUs
received the MQD of $0.605 per unit for the quarter ended March 31, 1997 in
addition to the redemption price. As a result of the redemption of the SPUs on
May 27, 1997, the
<PAGE>
39
Reserve Amount was no longer required to be maintained. The Reserve Amount of
$18.5 million was distributed out of Available Cash on May 27, 1997 to holders
of the Common Units and to the General Partner.
If at any time less than 25% of the issued and outstanding units are held by
non-affiliates of the General Partner, the Partnership may call, or assign to
the General Partner or its affiliates its right to acquire all such outstanding
units held by non-affiliated person. The Corporation owned 66% of the Common
Units at December 31, 1997. TNCLP shall give at least 30 but not more than 60
days notice of its decision to purchase the outstanding units. The purchase
price per unit will be the greater of (1) the average of any previous twenty
trading days closing prices as of the date five days before the purchase is
announced or (2) the highest price paid by the General Partner or any of its
affiliates for any unit within the 90 days preceding the date the purchase is
announced.
Beaumont Methanol, Limited Partnership (BMLP)
BMLP sold a 42% limited interest for $225 million to Nova Investors LLC (Nova)
an entity not otherwise affiliated with the Corporation, in December 1997. BMLP
used $175 million of proceeds to partially fund the Terra Nitrogen U.K.
acquisition. The remaining $50 million will be used to fund construction of the
$57 million ammonia loop at the Beaumont plant. Terra Methanol Corporation (the
General Partner) and BMC Holdings, Inc. (a limited partner), beneficially owned
subsidiaries of the Corporation, own the 58% majority interest in BMLP.
Nova will receive a first priority return from BMLP approximating LIBOR plus
1.95% on its $225 million investment. The Corporation will receive a second
priority return that is expected to be 1.5% above the first priority return.
Any earnings in excess of the first and second priority returns, will be
allocable 1% or less to Nova and the remainder to the Corporation. The first
priority return is cumulative and must be paid in full before any cumulative
second priority returns can be paid.
The partnership will terminate in 2014. The first priority rate of return is
fixed for three years, whereupon it will be renegotiated among the Corporation
and Nova. If the partners cannot agree on new rates, the partnership will
terminate or the Corporation may purchase Nova's interest. At the termination
of the partnership, the assets will be liquidated and the partners will receive
proceeds in accordance with their capital accounts.
The publicly held TNCLP Common Units and the BMLP limited interest are reflected
in the financial statements as minority interest.
<PAGE>
40
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements of Terra Industries Inc. and
its subsidiaries have been prepared in conformity with generally accepted
accounting principles appropriate in the circumstances. The integrity and
objectivity of data in these financial statements and supplemental data,
including estimates and judgments related to matters not concluded by year end,
are the responsibility of management.
The Corporation has a system of internal accounting controls that provides
management with reasonable assurance that transactions are recorded and executed
in accordance with its authorizations, that assets are properly safeguarded and
accounted for, and that financial records are maintained to permit preparation
of financial statements in accordance with generally accepted accounting
principles. This system includes written policies and procedures, an
organizational structure that segregates duties, and a comprehensive program of
periodic audits by the internal auditors. The Corporation also has instituted
policies and guidelines that require employees to maintain the highest level of
ethical standards.
The Audit Committee of the Board of Directors is responsible for the review and
oversight of the financial statements and reporting practices used, as well as
the internal audit function. The Audit Committee meets periodically with
management, internal auditors and the independent accountants. The independent
accountants and internal auditors have access to the Audit Committee and,
without management present, have the opportunity to discuss the adequacy of
internal accounting controls and to review the quality of financial reporting.
The Consolidated Financial Statements contained in this Annual Report have been
audited by our independent accountants. Their audits included a review of
internal accounting controls to establish a basis for reliance thereon in
determining the nature, extent and timing of audit tests applied in their audits
of the Consolidated Financial Statements.
Burton M. Joyce Francis G. Meyer
President and Chief Financial Officer
Chief Executive Officer
<PAGE>
41
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, 1997 and 1996, 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, 1997. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
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, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
February 2, 1998
<PAGE>
42
<TABLE>
<CAPTION>
Quarterly Production Data (unaudited)
- -------------------------------------------------------------------------------------------
Quarter Quarter Quarter Quarter Year
Ended Ended Ended Ended Ended
March 31 June 30 Sept. 30 Dec. 31 Dec. 31
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 Net Production (tons):
Anhydrous ammonia 280,460 312,478 305,187 266,327 1,164,452
Nitrogen solutions 852,907 862,120 815,337 924,278 3,454,642
Urea 166,284 165,503 165,884 163,837 661,508
Methanol (million gallons) 79.6 64.8 82.5 83.4 310.3
- -------------------------------------------------------------------------------------------
1996 Net Production (tons):
Anhydrous ammonia 333,934 278,868 308,404 282,777 1,203,983
Nitrogen solutions 738,659 745,663 750,754 885,472 3,120,548
Urea 142,798 154,494 154,139 190,047 641,478
Methanol (million gallons) 84.3 68.0 78.5 80.9 311.7
===========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Quarterly Financial and Stock Market Data (unaudited)
- ------------------------------------------------------------------------------------------------
(in thousands, except
per-share data and stock prices) March 31, June 30, Sept. 30, Dec. 31,
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Total revenues $433,710 $1,221,894 $495,836 $390,929
Gross profit 95,658 270,778 114,525 94,064
Income before extraordinary item 3,902 89,804 67,515 48,661
Net income 3,902 89,804 67,515 45,666
Per Share:
Income before extraordinary item:
Basic earnings per share $ 0.05 $ 1.22 $ 0.91 $ 0.66
Diluted earnings per share 0.05 1.20 0.90 0.65
Net income:
Basic earnings per share $ 0.05 $ 1.22 $ 0.91 $ 0.62
Diluted earnings per share 0.05 1.20 0.90 0.61
Dividends 0.04 0.04 0.05 0.05
Common Share Price:
High $ 15.00 $ 14.13 $ 13.94 $ 13.44
Low 12.50 10.63 11.00 11.00
1996
Total revenues $394,741 $1,085,678 $471,538 $364,529
Gross profit 117,224 235,898 128,433 112,481
Net income 18,400 71,450 23,902 20,199
Per Share:
Basic earnings per share $ 0.23 $ 0.92 $ 0.32 $ 0.27
Diluted earnings per share 0.23 0.90 0.32 0.27
Dividends 0.03 0.04 0.04 0.04
Common Share Price:
High $ 14.25 $ 14.25 $ 15.00 $ 15.00
Low 11.00 12.38 12.00 13.63
================================================================================================
</TABLE>
<PAGE>
43
Revenues (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Manufactured nitrogen products $ 621,410 $ 654,486 $ 635,126
Methanol 180,646 132,533 194,565
Resale fertilizer 443,751 386,774 360,725
Crop protection products 1,059,077 981,267 962,864
Seed 106,557 90,175 78,588
Other 130,928 71,251 60,305
- --------------------------------------------------------------------------------
Total $ 2,542,369 $ 2,316,486 $ 2,292,173
================================================================================
</TABLE>
Volumes & Prices (unaudited)
<TABLE>
- -----------------------------------------------------------------------------------------
<CAPTION>
(Excludes the Distribution segment) 1997 1996
- -----------------------------------------------------------------------------------------
Sales Realized Sales Realized
(quantities in thousands) Volumes Price/unit Volumes Price/unit
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Anhydrous ammonia (tons) 1,182 $ 187 1,174 $ 185
Nitrogen solutions (tons) 3,440 82 3,180 94
Urea (tons) 671 145 575 179
Other nitrogen products (tons) 130 156 159 194
Methanol (gallons) 311,476 0.58 314,670 0.42
=========================================================================================
</TABLE>
STOCKHOLDERS
- --------------------------------------------------------------------------------
The Corporation's Common Shares are traded principally on the New York Stock
Exchange. At January 31, 1998, 75 million Common Shares were outstanding and
held by 4,331 stockholders.
<PAGE>
44
Financial Summary
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
(in thousands, except
per-share and employee data) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial Position
Working capital $ 302,724 $ 187,157 $ 307,873 $ 273,941 $ 231,287
Total assets 2,359,954 1,969,365 1,867,858 1,687,970 634,482
Long-term debt 506,568 407,312 411,573 558,256 121,384
Stockholders' equity 790,329 606,092 571,583 418,429 242,980
Results of Operations
Revenues $ 2,542,369 $ 2,316,486 $ 2,292,173 $ 1,665,947 $ 1,238,001
Costs and expenses (2,289,053) (2,021,305) (1,914,471) (1,550,652) (1,196,173)
Infrequent item 163,427 --- --- --- ---
Interest income 6,525 7,102 13,811 5,541 3,261
Interest expense (63,153) (59,947) (64,897) (22,082) (12,944)
Minority interest (27,633) (44,485) (47,234) (8,809) ---
Income tax provision (122,600) (63,900) (115,500) (33,700) (9,300)
- -------------------------------------------------------------------------------------------------------------
Income from
continuing operations 209,882 133,951 163,882 56,245 22,845
Extraordinary item (2,995) --- (4,338) (3,060) ---
Cumulative effect of
accounting changes --- --- --- 3,376 ---
- -------------------------------------------------------------------------------------------------------------
Net income $ 206,887 $ 133,951 $ 159,544 $ 56,561 $ 22,845
=============================================================================================================
Basic Earnings Per Share:
Continuing operations $ 2.84 $ 1.74 $ 2.03 $ 0.77 $ 0.33
Extraordinary item (0.04) --- (0.05) (0.04) ---
Cumulative effect of
accounting changes --- --- --- 0.05 ---
- -------------------------------------------------------------------------------------------------------------
Net Income $ 2.80 $ 1.74 $ 1.98 $ 0.78 $ 0.33
=============================================================================================================
Diluted Earnings Per Share:
Continuing operations $ 2.80 $ 1.72 $ 2.01 $ 0.77 $ 0.33
Extraordinary item (0.04) --- (0.05) (0.04) ---
Cumulative effect of
accounting changes --- --- --- 0.05 ---
- -------------------------------------------------------------------------------------------------------------
Net Income $ 2.76 $ 1.72 $ 1.96 $ 0.78 $ 0.33
=============================================================================================================
Dividends Per Share $ 0.18 $ 0.15 $ 0.10 $ 0.08 $ 0.02
=============================================================================================================
Capital Expenditures $ 85,109 $ 185,649 $ 177,129 $ 31,213 $ 21,620
=============================================================================================================
Permanent employees
at end of period 4,435 3,575 3,415 3,210 2,570
=============================================================================================================
</TABLE>
<PAGE>
Exhibit 21
TERRA INDUSTRIES INC.
MAJORITY AND PARTIALLY OWNED SUBSIDIARIES
February 28, 1998
<TABLE>
<CAPTION>
Percentage Percentage
Name of Company Held by TRA Held by Sub Jurisdiction
- --------------- ----------- ----------- ------------
<S> <C> <C>
I. El Rancho Rock & Sand, Inc. 100.0 California
II. Hudson Bay Gold Inc. 100.0 Canada
which owns
----------
A. Mingold Resources Inc./1/ 50.0 Canada
III. Inspiration Coal Inc. 100.0 Delaware
IV. Inspiration Coal Development Company 100.0 Delaware
which owns
----------
A. Ashland Mining Corporation 100.0 W. Virginia
B. Briarwood Mining Inc. 100.0 Virginia
C. Plateau Fuels, Inc. 100.0 Kentucky
D. Southern Floyd Coal, Inc. 100.0 Kentucky
V. Inspiration Consolidated Copper Company 100.0 Maine
which owns
----------
A. Black Pine Mining Company 100.0 Montana
B. Inspiration Development Company 100.0 Delaware
VI. Inspiration Gold Incorporated 100.0 Delaware
VII. Terra Capital Holdings, Inc. 100.0 Delaware
which owns
----------
A. Terra Capital, Inc. 100.0 Delaware
which owns
----------
1. Terra Methanol Corporation 100.0 Delaware
2. Terra International, Inc. 100.0 Delaware
which owns
----------
a. Farmbelt Chemicals, Inc. 100.0 Delaware
b. Farmers Agricultural Credit Corporation 100.0 Iowa
c. Northern Agricultural Credit Corporation 100.0 Minnesota
</TABLE>
/1/50% of Special Voting Preference Shares held by Hudson Bay Gold.
Western Gold Exploration and Mining Co., Limited owns 100% of Limited Voting
Common Shares and 100% of Non-Voting Preference Shares.
<PAGE>
Exhibit 21
TERRA INDUSTRIES INC.
MAJORITY AND PARTIALLY OWNED SUBSIDIARIES
February 28, 1998
<TABLE>
<CAPTION>
Percentage Percentage
Name of Company Held by TRA Held by Sub Jurisdiction
- --------------- ----------- ----------- ------------
<S> <C> <C> <C>
A. Terra Capital, Inc. (continued)
------------------------------------
2. Terra International, Inc. (continued)
d. Terra International (Oklahoma) Inc. 100.0 Delaware
e. Terra Real Estate Corporation 100.0 Iowa
f. Terra Real Estate Development Corporation 100.0 Iowa
g. Terra Express, Inc. 100.0 Delaware
h. Omnium, LLC 50.0 Missouri
i. Terra International (Canada) Inc. 100.0 Ontario, Canada
which owns
----------
1. Terra Nitrogen (U.K.) Limited 100.0 England
2. Belmont Farm Supply Inc. 50.0 Canada
3. Bluewater Agromart Limited 50.0 Ontario
4. Brussels Agromart Ltd. 50.0 Ontario
5. Cardinal Farm Supply Limited 50.0 Ontario
6. Fingal Farm Supply Limited 50.0 Ontario
7. Grand Falls Agromart Ltd. 50.0 Canada
8. Hartland Agromart Ltd. 50.0 Canada
9. Harvex Agromart Inc. 50.0 Ontario
10. Hoegy's Farm Supply Limited 50.0 Ontario
11. Lakeside Grain & Feed Limited 50.0 Ontario
12. Macroblend Limited 50.0 Ontario
13. Maple Farm Supply Limited 50.0 Ontario
14. Max Underhill's Farm Supply Limited 50.0 Ontario
15. Munro Agromart Ltd. 50.0 Ontario
16. Oakwood Agromart Ltd. 50.0 Ontario
17. Oxford Agropro Ltd. 50.0 Ontario
18. Scotland Agromart Ltd. 50.0 Ontario
19. Setterington's Fertilizer Service Limited 50.0 Ontario
20. Sprucedale Agromart Limited 50.0 Ontario
21. Tri-County Agromart Ltd. 50.0 Ontario
j. Royster-Clark, Inc. 40.0 Delaware
k. Port Neal Corporation 100.0 Delaware
</TABLE>
<PAGE>
TERRA INDUSTRIES INC. Exhibit 21
MAJORITY AND PARTIALLY OWNED SUBSIDIARIES
February 28, 1998
<TABLE>
<CAPTION>
Percentage Percentage
Name of Company Held by TRA Held by Sub Jurisdiction
- --------------- ----------- ----------- ------------
<S> <C> <C>
A. Terra Capital, Inc. (continued)
-----------------------------------
3. BMC Holdings, Inc. 100.0 Delaware
which owns
----------
a. Beaumont Methanol, Limited Partnership/2/ 58.0 Delaware
which owns
----------
1. Terra (U.K.) Holdings Inc. 100.0 Delaware
which owns
----------
a. Beaumont Ammonia Inc. 100.0 Delaware
4. Terra Nitrogen Corporation 100.0 Delaware
which owns
----------
a. Terra Nitrogen Company, L.P./3/ 66.0 Delaware
which owns
----------
1. Terra Nitrogen, Limited Partnership/4/ 99.0 Delaware
a. Oklahoma Co\\2\\ Partnership 50.0 Oklahoma
5. Terra Capital Funding LLC/5/ 99.0 Delaware
a. Terra Funding Corporation/6/ 100.0 Delaware
VIII. Western Gold Exploration and Mining Company,
Limited Partnership 50.0 Delaware
which owns
----------
A. West Gold Placer, Inc. 100.0 Delaware
</TABLE>
- --------------------------
/2/Terra Methanol Corporation is General Partner.
/3/Terra Nitrogen Corporation's interest includes 1.0101% as General Partner.
/4/Terra Nitrogen Corporation is 1% General Partner.
/5/Terra Capital Holdings, Inc. has a 1% interest.
/6/An outside investor owns one share of Class SV Preferred Shares with limited
voting rights.
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That I,
EDWARD G. BEIMFOHR
hereby constitute and appoint George H. Valentine, Francis G. Meyer and Burton
M. Joyce, or each of them, with full power of substitution and resubstitution,
my true and lawful attorney, for me and in my name, place and stead, to sign my
name as a director of Terra Industries Inc. (the "Company") to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and any
amendments or supplements thereto, and to file said Annual Report and any
amendment or supplement thereto, with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended.
I hereby ratify and confirm all that said attorneys, or each of them, or
his substitute or substitutes, have done or shall lawfully do by virtue of this
Power of Attorney.
WITNESS my hand this 19th day of February, 1998.
/s/ Edward G. Beimfohr
-------------------------------------
EDWARD G. BEIMFOHR
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That I,
CAROLE L. BROOKINS
hereby constitute and appoint George H. Valentine, Francis G. Meyer and Burton
M. Joyce, or each of them, with full power of substitution and resubstitution,
my true and lawful attorney, for me and in my name, place and stead, to sign my
name as a director of Terra Industries Inc. (the "Company") to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and any
amendments or supplements thereto, and to file said Annual Report and any
amendment or supplement thereto, with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended.
I hereby ratify and confirm all that said attorneys, or each of them, or
his substitute or substitutes, have done or shall lawfully do by virtue of this
Power of Attorney.
WITNESS my hand this 2nd day of March, 1998.
/s/ Carole L. Brookins
-----------------------------------------
CAROLE L. BROOKINS
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That I,
EDWARD M. CARSON
hereby constitute and appoint George H. Valentine, Francis G. Meyer and Burton
M. Joyce, or each of them, with full power of substitution and resubstitution,
my true and lawful attorney, for me and in my name, place and stead, to sign my
name as a director of Terra Industries Inc. (the "Company") to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and any
amendments or supplements thereto, and to file said Annual Report and any
amendment or supplement thereto, with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended.
I hereby ratify and confirm all that said attorneys, or each of them, or
his substitute or substitutes, have done or shall lawfully do by virtue of this
Power of Attorney.
WITNESS my hand this 19th day of February, 1998.
/s/ Edward M. Carson
-------------------------------------
EDWARD M. CARSON
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That I,
DAVID E. FISHER
hereby constitute and appoint George H. Valentine, Francis G. Meyer and Burton
M. Joyce, or each of them, with full power of substitution and resubstitution,
my true and lawful attorney, for me and in my name, place and stead, to sign my
name as a director of Terra Industries Inc. (the "Company") to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and any
amendments or supplements thereto, and to file said Annual Report and any
amendment or supplement thereto, with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended.
I hereby ratify and confirm all that said attorneys, or each of them, or
his substitute or substitutes, have done or shall lawfully do by virtue of this
Power of Attorney.
WITNESS my hand this 24th day of February, 1998.
/s/ David E. Fisher
--------------------------------------
DAVID E. FISHER
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That I,
ROBERT L. THOMPSON
hereby constitute and appoint George H. Valentine, Francis G. Meyer and Burton
M. Joyce, or each of them, with full power of substitution and resubstitution,
my true and lawful attorney, for me and in my name, place and stead, to sign my
name as a director of Terra Industries Inc. (the "Company") to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and any
amendments or supplements thereto, and to file said Annual Report and any
amendment or supplement thereto, with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended.
I hereby ratify and confirm all that said attorneys, or each of them, or
his substitute or substitutes, have done or shall lawfully do by virtue of this
Power of Attorney.
WITNESS my hand this 19th day of February, 1998.
/s/ Robert L. Thompson
--------------------------------------
ROBERT L. THOMPSON
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That I,
BURTON M. JOYCE
hereby constitute and appoint George H. Valentine and Francis G. Meyer, or each
of them, with full power of substitution and resubstitution, my true and lawful
attorney, for me and in my name, place and stead, to sign my name as a director
of Terra Industries Inc. (the "Company") to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997 and any amendments or
supplements thereto, and to file said Annual Report and any amendment or
supplement thereto, with the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended.
I hereby ratify and confirm all that said attorneys, or each of them, or
his substitute or substitutes, have done or shall lawfully do by virtue of this
Power of Attorney.
WITNESS my hand this 19th day of February, 1998.
/s/ Burton M. Joyce
-------------------------------------
BURTON M. JOYCE
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That I,
ANTHONY W. LEA
hereby constitute and appoint George H. Valentine, Francis G. Meyer and Burton
M. Joyce, or each of them, with full power of substitution and resubstitution,
my true and lawful attorney, for me and in my name, place and stead, to sign my
name as a director of Terra Industries Inc. (the "Company") to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and any
amendments or supplements thereto, and to file said Annual Report and any
amendment or supplement thereto, with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended.
I hereby ratify and confirm all that said attorneys, or each of them, or
his substitute or substitutes, have done or shall lawfully do by virtue of this
Power of Attorney.
WITNESS my hand this 19th day of February, 1998.
/s/ Anthony W. Lea
-------------------------------------
ANTHONY W. LEA
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That I,
JOHN R. NORTON III
hereby constitute and appoint George H. Valentine, Francis G. Meyer and Burton
M. Joyce, or each of them, with full power of substitution and resubstitution,
my true and lawful attorney, for me and in my name, place and stead, to sign my
name as a director of Terra Industries Inc. (the "Company") to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and any
amendments or supplements thereto, and to file said Annual Report and any
amendment or supplement thereto, with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended.
I hereby ratify and confirm all that said attorneys, or each of them, or
his substitute or substitutes, have done or shall lawfully do by virtue of this
Power of Attorney.
WITNESS my hand this 18th day of February, 1998.
/s/ John R. Norton III
-------------------------------------
JOHN R. NORTON III
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That I,
HENRY R. SLACK
hereby constitute and appoint George H. Valentine, Francis G. Meyer and Burton
M. Joyce, or each of them, with full power of substitution and resubstitution,
my true and lawful attorney, for me and in my name, place and stead, to sign my
name as a director of Terra Industries Inc. (the "Company") to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and any
amendments or supplements thereto, and to file said Annual Report and any
amendment or supplement thereto, with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended.
I hereby ratify and confirm all that said attorneys, or each of them, or
his substitute or substitutes, have done or shall lawfully do by virtue of this
Power of Attorney.
WITNESS my hand this 18th day of February, 1998.
/s/ Henry R. Slack
-------------------------------------
HENRY R. SLACK
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That I,
FRANCIS G. MEYER
hereby constitute and appoint George H. Valentine and Burton M. Joyce, or each
of them, with full power of substitution and resubstitution, my true and lawful
attorney, for me and in my name, place and stead, to sign my name as Senior
Vice President and Chief Financial Officer of Terra Industries Inc. (the
"Company") to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 and any amendments or supplements thereto, and to file said
Annual Report and any amendment or supplement thereto, with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended.
I hereby ratify and confirm all that said attorneys, or each of them, or
his substitute or substitutes, have done or shall lawfully do by virtue of this
Power of Attorney.
WITNESS my hand this 19th day of February, 1998.
/s/ Francis G. Meyer
-------------------------------------
FRANCIS G. MEYER
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That I,
WILLIAM R. LOOMIS, JR.
hereby constitute and appoint George H. Valentine, Francis G. Meyer and Burton
M. Joyce, or each of them, with full power of substitution and resubstitution,
my true and lawful attorney, for me and in my name, place and stead, to sign my
name as a director of Terra Industries Inc. (the "Company") to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and any
amendments or supplements thereto, and to file said Annual Report and any
amendment or supplement thereto, with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended.
I hereby ratify and confirm all that said attorneys, or each of them, or
his substitute or substitutes, have done or shall lawfully do by virtue of this
Power of Attorney.
WITNESS my hand this 19th day of February, 1998.
/s/ William R. Loomis, Jr.
-------------------------------------
WILLIAM R. LOOMIS, JR.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the consolidated statement of financial position of Terra Industries Inc. as of
December 31, 1997 and the related consolidated statement of income for the year
then ended and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 118,869
<SECURITIES> 61,193
<RECEIVABLES> 124,844
<ALLOWANCES> (13,154)
<INVENTORY> 395,940
<CURRENT-ASSETS> 738,979
<PP&E> 1,441,858
<DEPRECIATION> (260,474)
<TOTAL-ASSETS> 2,359,954
<CURRENT-LIABILITIES> 436,255
<BONDS> 497,030
0
0
<COMMON> 127,581
<OTHER-SE> 662,748
<TOTAL-LIABILITY-AND-EQUITY> 2,359,954
<SALES> 2,462,081
<TOTAL-REVENUES> 2,542,369
<CGS> 1,967,344
<TOTAL-COSTS> 1,967,344
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 7,090
<INTEREST-EXPENSE> 63,153
<INCOME-PRETAX> 332,482
<INCOME-TAX> 122,600
<INCOME-CONTINUING> 209,882
<DISCONTINUED> 0
<EXTRAORDINARY> (2,995)
<CHANGES> 0
<NET-INCOME> 206,887
<EPS-PRIMARY> 2.80
<EPS-DILUTED> 2.76
</TABLE>
