<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 1-8520
TERRA INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
Maryland 52-1145429
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Terra Centre
P.O. Box 6000
600 Fourth Street 51102-6000
Sioux City, Iowa (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (712) 277-1340
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of October 31, 1999, the following shares of the registrant's stock were
outstanding:
Common Shares, without par value 75,308,040 shares
<PAGE>
PART I. FINANCIAL INFORMATION
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1999 1998 1998
-------------- ------------- --------------
<S> <C> <C> <C>
ASSETS
Cash and short-term investments $ 5,555 $ 141,643 $ 39,547
Accounts receivable, less allowance for
doubtful accounts of $15,027, $15,134, $14,875 144,377 116,234 103,908
Inventories 131,449 169,232 169,053
Net current assets of discontinued operations --- 17,194 295,551
Other current assets 64,157 37,900 27,057
- -----------------------------------------------------------------------------------------------------
Total current assets 345,538 482,203 635,116
- -----------------------------------------------------------------------------------------------------
Equity and other investments 2,101 1,986 2,489
Property, plant and equipment, net 1,009,893 1,017,885 1,017,310
Excess of cost over net assets of acquired businesses 257,207 272,553 270,818
Deferred tax asset 2,737 6,202 4,373
Net long-term assets of discontinued operations --- 188,089 207,190
Other assets 75,580 83,977 94,218
- -----------------------------------------------------------------------------------------------------
Total assets $1,693,056 $2,052,895 $2,231,514
=====================================================================================================
LIABILITIES
Debt due within one year $ 32,321 $ 9,470 $ 34,547
Accounts payable 67,743 107,007 139,695
Accrued and other liabilities 54,166 97,678 154,185
- -----------------------------------------------------------------------------------------------------
Total current liabilities 154,230 214,155 328,427
- -----------------------------------------------------------------------------------------------------
Long-term debt 477,550 487,560 496,018
Deferred income taxes - noncurrent 196,876 204,153 192,158
Other liabilities 83,070 62,671 82,012
Minority interest 103,668 336,504 336,458
- -----------------------------------------------------------------------------------------------------
Total liabilities 1,015,394 1,305,043 1,435,073
- -----------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Capital stock
Common Shares, authorized 133,500 shares;
outstanding 75,308, 75,465 and 74,896 shares 127,890 127,887 127,623
Paid-in capital 552,903 552,893 549,015
Accumulated other comprehensive loss (11,814) (14,157) (1,934)
Retained earnings 8,683 81,229 121,737
- -----------------------------------------------------------------------------------------------------
Total stockholders' equity 677,662 747,852 796,441
- -----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,693,056 $2,052,895 $2,231,514
=====================================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements. 2
<PAGE>
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per-share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
REVENUES
Net sales $169,275 $165,902 $572,675 $634,072
Other income, net 4,203 5,642 12,727 13,599
- ------------------------------------------------------------------------------------------------------
Total revenues 173,478 171,544 585,402 647,671
- ------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales 176,636 157,776 590,284 570,078
Selling, general and administrative expense 14,492 13,263 39,785 46,043
Equity in losses (earnings) of unconsolidated
affiliates 210 1,391 (465) ---
- ------------------------------------------------------------------------------------------------------
191,338 172,430 629,604 616,121
- ------------------------------------------------------------------------------------------------------
Income (loss) from operations (17,860) (886) (44,202) 31,550
Interest income 255 147 7,463 212
Interest expense (12,495) (13,977) (38,070) (38,479)
Minority interest 2,043 (5,425) (7,585) (22,585)
- ------------------------------------------------------------------------------------------------------
Loss from continuing operations
before income taxes (28,057) (20,141) (82,394) (29,302)
Income tax provision 11,150 12,597 32,950 16,936
- ------------------------------------------------------------------------------------------------------
Loss from continuing operations (16,907) (7,544) (49,444) (12,366)
Income (loss) from discontinued operations:
Income (loss) from operations, net of taxes --- (14,280) (5,800) 22,880
Loss on disposition, net of taxes --- --- (4,724) ---
- ------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary items (16,907) (21,824) (59,968) 10,514
Extraordinary loss on early retirement of debt --- --- (7,295) ---
- ------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(16,907) $(21,824) $(67,263) $ 10,514
======================================================================================================
Basic earnings per share:
Loss from continuing operations $ (0.23) $ (0.10) $ (0.67) $ (0.16)
Income (loss) from discontinued operations --- (0.19) (0.14) 0.31
Extraordinary loss on early retirement of debt --- --- (0.10) ---
- ------------------------------------------------------------------------------------------------------
Net income (loss) $ (0.23) $ (0.29) $ (0.91) $ 0.15
======================================================================================================
Diluted earnings per share:
Loss from continuing operations $ (0.23) $ (0.10) $ (0.67) $ (0.16)
Income (loss) from discontinued operations --- (0.19) (0.14) 0.30
Extraordinary loss on early retirement of debt --- --- (0.10) ---
- ------------------------------------------------------------------------------------------------------
Net income (loss) $ (0.23) $ (0.29) $ (0.91) $ 0.14
======================================================================================================
Basic weighted average shares outstanding 74,168 73,898 74,168 73,885
Diluted weighted average shares outstanding 74,168 73,898 74,168 75,013
======================================================================================================
Cash dividends declared per share $ --- $ 0.05 $ 0.07 $ 0.15
======================================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements. 3
<PAGE>
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF
CASH FLOWS (in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss from continuing operations $ (49,444) $ (12,366)
Adjustments to reconcile net loss from continuing
operations to net cash used in operating activities:
Depreciation and amortization 75,586 68,724
Deferred income taxes (5,506) 4,116
Minority interest in earnings 7,585 22,585
Other non-cash items 1,079 (3,089)
Changes in current assets and liabilities excluding
working capital purchased/sold during the period:
Accounts receivable (131,897) (43,015)
Inventories 37,783 (28,732)
Other current assets (11,667) 9,381
Accounts payable (24,290) 1,037
Accrued and other liabilities (86,605) 46,901
Reimbursed Port Neal casualty --- 14,314
Other (502) (1,058)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities (187,878) 78,798
- ----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (32,056) (47,437)
Discontinued operations 315,627 (151,699)
Other items 1,069 13,478
- ----------------------------------------------------------------------------------------------------------------------------
Net cash flows from investing activities 284,640 (185,658)
- ----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net short-term borrowings 21,000 25,000
Principal payments on long-term debt (8,159) (1,003)
Redemption of preferred minority interest (224,998) ---
Repurchases of TNCLP common units (5,994) (16,523)
Distributions to minority interests (9,429) (30,173)
Dividends (5,283) (11,241)
Other 13 285
- -----------------------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities (232,850) (33,655)
- -----------------------------------------------------------------------------------------------------------------------------
Decrease to cash and short-term investments (136,088) (140,515)
Cash and short-term investments at beginning of period 141,643 180,062
- -----------------------------------------------------------------------------------------------------------------------------
Cash and short-term investments at end of period $ 5,555 $ 39,547
=============================================================================================================================
</TABLE>
4
<PAGE>
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
Capital Paid-In Comprehensive Retained
Stock Capital Loss Earnings Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 127,887 $ 552,893 $ (14,157) $ 81,229 $ 747,852
Comprehensive income:
Net loss --- --- --- (67,263) (67,263)
Foreign currency
translation adjustment --- --- 2,343 --- 2,343
Exercise of stock options 3 10 --- --- 13
Dividends --- --- --- (5,283) (5,283)
- ----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 $ 127,890 $ 552,903 $ (11,814) $ 8,683 $ 677,662
======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Capital Paid-In Comprehensive Retained
Stock Capital Loss Earnings Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 127,581 $ 548,772 $ (8,488) $ 122,464 $ 790,329
Comprehensive income:
Net income --- --- --- 10,514 10,514
Foreign currency
translation adjustment --- --- 6,554 --- 6,554
Exercise of stock options 42 243 --- --- 285
Dividends --- --- --- (11,241) (11,241)
- ----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 $ 127,623 $ 549,015 $ (1,934) $ 121,737 $ 796,441
======================================================================================================================
</TABLE>
5
<PAGE>
TERRA INDUSTRIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. The accompanying unaudited consolidated financial statements and notes
thereto contain all adjustments necessary to summarize fairly the financial
position of Terra Industries Inc. and all majority-owned subsidiaries (the
"Corporation") and the results of the Corporation's operations for the
periods presented. Because of the seasonal nature of the Corporation's
operations and effects of weather-related conditions in several of its
marketing areas, results of operations of any single reporting period
should not be considered as indicative of results for a full year. Certain
reclassifications have been made to prior years' financial statements to
conform with current year presentation. These statements should be read in
conjunction with the Corporation's 1998 Annual Report to Stockholders.
2. On June 30, 1999, the Corporation sold its Distribution business segment to
Cenex/ Land O' Lakes Agronomy Company ("Buyer") for a preliminary purchase
price of $485 million. The preliminary purchase price is subject to post
closing adjustments and final audit. The Corporation expects to finalize
post-closing adjustments, complete the final audit and collect remaining
balances due from the sale prior to December 31, 1999.
In the sales transaction, the Buyer acquired all rights to the Distribution
business' earnings from April 1, 1999 forward. Included in the sale were
the Corporation's approximately 400 retail farm service centers in the U.S.
and Canada, and its 50% ownership position in the Omnium chemical
formulation plants. The Corporation retained ownership of approximately $25
million in accounts receivable and approximately 40 storage or retail sites
associated with Distribution operations. Reserves for doubtful accounts of
approximately $15 million have been recorded to value the retained accounts
receivable at estimated net realizable value. The retained sites had a zero
net book value at September 30, 1999 as costs of disposal are estimated to
approximate sales proceeds.
The accompanying unaudited consolidated statements of operations, financial
position and cash flows have been restated for prior periods to segregate
results of operations and net assets associated with the discontinued
Distribution business segment. Net current assets of discontinued
operations are comprised of accounts receivable, inventory and other
current assets net of accounts payable and accrued and other liabilities
directly identifiable with the Distribution business. Net long-term assets
of discontinued operations are comprised of property, plant and equipment,
goodwill and other long-term assets of the Distribution business that were
transferred in the sales transaction.
6
<PAGE>
The results of discontinued operations for the three and nine-month
periods ended September 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
(in thousands) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $ --- $ 291,173 $ 228,991 $1,539,967
Cost of sales --- (241,473) (186,647) (1,268,916)
Selling, general and
administrative expense --- (70,534) (64,711) (227,999)
Equity in earnings of affiliates --- 3,430 696 4,579
- --------------------------------------------------------------------------------------------------------------------
Operating income (loss) as reported --- (17,404) (21,671) 47,631
Allocated general and
administrative expense --- 2,138 3,466 11,164
- --------------------------------------------------------------------------------------------------------------------
Operating income (loss) - restated --- (15,266) (18,205) 58,795
Gain on sale of unconsolidated
affiliate --- --- 9,804 ---
Interest income --- (478) 938 3,647
Interest expense --- (638) (2,202) (8,225)
Income taxes --- 2,103 3,865 (31,337)
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) from
discontinued operations --- (14,280) (5,800) 22,880
Loss on disposition, net of taxes --- --- (4,724) ---
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) from
discontinued operations $ --- $ (14,280) $ (10,524) $ 22,880
=====================================================================================================================
</TABLE>
The sale of the Distribution business segment was effective April 1, 1999
with respect to segment operating results. Distribution revenues and cost
of sales are net of inter-company sales from the Corporation's Nitrogen
business segment of $1.0 million for the three month period ended September
30, 1998 and $8.9 million and $13.2 million for the nine month periods
ended September 30, 1999 and 1998, respectively. Interest income and
expense allocated to the Distribution business represents interest earned
or expensed from short-term investments or borrowings caused by seasonal
fluctuations to Distribution working capital balances. None of the
Corporation's long-term interest expense was allocated to earnings from
discontinued operations.
The Buyer and the Corporation have also entered into a three-year nitrogen
fertilizer supply agreement through which the Buyer will purchase
approximately the quantity that the Corporation's Nitrogen Products segment
supplied to both the Distribution business and the Buyer.
3. 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.
7
<PAGE>
4. Inventories consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
(in thousands) 1999 1998 1998
- --------------------------------------------------------------------
<S> <C> <C> <C>
Raw materials $ 54,014 $ 60,676 $ 58,118
Finished goods 77,485 108,556 110,935
- --------------------------------------------------------------------
Total $ 131,499 $ 169,232 $ 169,053
====================================================================
</TABLE>
5. The Corporation and certain of its subsidiaries are involved in various
legal actions and claims, including environmental matters, arising during
the normal course of business. Although it is not possible to predict with
any certainty the outcome of such matters, it is the opinion of management
that these matters will not have a material adverse effect on the results
of operations, financial position or cash flows of the Corporation.
6. The Corporation's natural gas procurement policy is to effectively fix or
cap the price of between 40% and 80% of its natural gas requirements for a
one-year period and up to 50% of its natural gas requirements for the
subsequent two-year period through supply contracts, financial derivatives
and other forward pricing techniques. The contracts are traded in months
forward and settlement dates are scheduled to coincide with gas purchases
during that future period. These contracts reference physical natural gas
prices or appropriate NYMEX futures contract prices. Contract physical
prices are frequently based on prices at the Henry Hub in Louisiana, the
most common and financially liquid location of reference for financial
derivatives related to natural gas. However, natural gas supplies for the
Corporation's six North American production facilities are purchased for
each plant at locations other than Henry Hub 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 Corporation has entered into forward pricing positions for a portion of
its natural gas requirements for the remainder of 1999 and 2000, consistent
with its policy. As a result of its policies, the Corporation has reduced
the potential adverse financial impact of natural gas price increases
during the forward pricing period, but conversely, if natural gas prices
were to decrease, the Corporation will incur higher costs. Contracts were
in place at September 30, 1999 to cover 44% of natural gas requirements
through September 30, 2000 and 5% of natural gas requirements for the
succeeding twelve months. Unrealized gains from forward pricing positions
totaled $24.6 million as of September 30, 1999. The amount recognized by
the Corporation will be dependent on prices in effect at the time of
settlement.
For the first nine months of 1999, natural gas forward pricing activities
reduced natural gas costs $1.2 million compared with spot prices.
7. During the 1999 second quarter and in connection with its sale of the
Distribution business segment the Corporation renegotiated its revolving
credit facility and reduced the available line of credit to $62 million for
working capital needs and other corporate purposes. Under the credit
facility, there was $21 million outstanding all of which was classified as
short-term borrowing at September 30, 1999. Interest on borrowings under
this line is charged at current market rates.
8. The Corporation temporarily shut down production at its Beaumont, Texas
methanol plant in January 1999 due to methanol sales prices being less than
raw material costs. The plant came back on stream March 29, 1999.
8
<PAGE>
9. The Corporation classifies its continuing operations into two business
segments: Nitrogen Products and Methanol. The Nitrogen Products business
produces and distributes ammonia, urea, nitrogen solutions and ammonium
nitrate to farm distributors and industrial users. The Methanol business
manufactures and distributes methanol which is used 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. The
Corporation does not allocate interest, income taxes or infrequent items to
continuing business segments. Included in Other are general corporate
activities not attributable to a specific industry segment. The following
summarizes operating results by business segment:
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- --------------------------------
(in thousands) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues - Nitrogen Products $ 144,606 $ 146,527 $ 519,904 $ 569,892
- Methanol 28,569 22,243 62,133 77,054
- Other 303 2,774 3,365 725
- --------------------------------------------------------------------------------------------------------
Total revenues $ 173,478 $ 171,544 $ 585,402 $ 647,671
========================================================================================================
Operating income
- Nitrogen Products $ (16,884) $ 7,545 $ (26,237) $ 47,041
- Methanol (801) (3,335) (13,785) (2,284)
- Other (175) (5,096) (4,180) (13,207)
- --------------------------------------------------------------------------------------------------------
Total operating income (17,860) (886) (44,202) 31,550
========================================================================================================
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
- ---------------------
QUARTER ENDED SEPTEMBER 30, 1999 COMPARED WITH
QUARTER ENDED SEPTEMBER 30, 1998
Consolidated Results
The Corporation reported a net loss of $16.9 million for the 1999 third quarter
compared with a $21.8 million net loss in 1998. During the 1999 second quarter,
the Corporation completed the sale of its Distribution business segment. During
the 1998 third quarter, discontinued Distribution operations generated a net
loss of $14.3 million.
Loss from continuing operations for the 1999 third quarter was $16.9 million
compared to the 1998 loss of $7.5 million. The increased 1999 loss from
continuing operations was primarily related to reduced operating income as the
result of lower nitrogen prices.
The Corporation classifies its remaining operations into two business segments:
Nitrogen Products and Methanol. The Nitrogen Products segment represents
wholesale sales of nitrogen products from the Corporation's ammonia production
and upgrading facilities. The Methanol segment represents wholesale sales of
methanol produced at the Corporation's two methanol manufacturing facilities.
Total revenues and operating income (loss) by segment for the three-month
periods ended September 30, 1999 and 1998 were as follows:
(in thousands) 1999 1998
- -------------------------------------------------------------------------------
REVENUES:
Nitrogen Products $ 144,606 $ 146,527
Methanol 28,569 22,243
Other 303 2,774
- -------------------------------------------------------------------------------
$ 173,478 $ 171,544
===============================================================================
OPERATING INCOME (LOSS):
Nitrogen Products $ (16,884) $ 7,545
Methanol (801) (3,335)
Other expense - net (175) (5,096)
- -------------------------------------------------------------------------------
$ (17,860) $ (886)
===============================================================================
Nitrogen Products
Volumes and prices for the three-month periods ended September 30, 1999 and 1998
were as follows:
<TABLE>
<CAPTION>
VOLUMES AND PRICES
1999 1998
- -------------------------------------------------------------------------------------------------------------------
Sales Average Sales Average
(quantities in thousands of tons) Volumes Unit Price Volumes Unit Price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ammonia 303 $ 115 274 $ 143
Nitrogen solutions 794 58 407 68
Urea 114 95 117 123
Ammonium nitrate 189 114 245 133
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
Nitrogen revenues of $144.6 million in the 1999 third quarter approximated
revenues in the 1998 third quarter as increased nitrogen solution sales volumes
offset the effects of lower unit selling prices. Nitrogen solution sales
volumes increased 95% over prior year levels due primarily to an earlier start
to fill dealer storage capacity than experienced in 1998. Third quarter selling
prices, however, were substantially below 1998 levels as price reductions for
ammonia, nitrogen solutions, urea and ammonium nitrate of 20%, 15%, 23% and 14%,
respectively, reduced revenues in the 1999 quarter compared with 1998 by $19.7
million. Continued industry over-capacity caused nitrogen prices to fall from
prior year levels.
The Nitrogen segment had an operating loss of $16.9 million for the 1999 third
quarter compared with operating income of $7.5 million in 1998. The decline in
operating income was primarily related to lower selling prices. In addition,
natural gas costs during the 1999 third quarter increased $3.5 million over the
same 1998 period.
Methanol
For the three months ended September 30, 1999 and 1998, respectively, the
Methanol segment had revenues of $28.6 million and $22.2 million. Sales volumes
approximated prior year levels, but selling prices increased 26% as the result
of more balanced industry inventories to demand than was the case in the 1998
third quarter. Higher raw material costs contributed to the improved industry
supply-demand situation.
The Methanol segment generated a $801,000 operating loss in the 1999 third
quarter compared to a $3.3 million operating loss in 1998. The lower loss was
primarily the result of higher selling prices offset, in part, by natural gas
cost increases of $2.1 million.
Other Expense - Net
Other operating expense of $175,000 in the 1999 third quarter was $4.9 million
favorable to the 1998 third quarter expense of $5.1 million due primarily to the
elimination of 1998 expenses allocated to discontinued Distribution operations.
Interest Expense - Net
Interest expense, net of interest income, totaled $12.2 million during the 1999
third quarter compared with $13.8 million for the prior year period. The
decrease is primarily related to repayment of long-term debt.
Minority Interest
Minority interest represents third-party interests in the earnings of the
publicly held common units of Terra Nitrogen Company, L.P. (TNCLP). Minority
interest income of $2.0 million was recorded for the 1999 third quarter as the
result of TNCLP losses that were included in their entirety in consolidated
operating income. The 1998 third quarter minority interest charge of $5.4
million included the third-party share of TNCLP earnings plus approximately $4.7
million for a third-party's limited partnership interest in Beaumont Methanol,
Limited Partnership (BMLP). On June 30, 1999, the Corporation redeemed the
third-party's BMLP interest and thereby eliminated future charges to earnings
relating to the minority BMLP partnership interest.
Income Taxes
Income taxes for the third quarter 1999 were recorded at an effective tax rate
of 40% representing the Corporation's estimated annual effective tax rate.
11
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH
NINE MONTHS ENDED SEPTEMBER 30, 1998
Consolidated Results
The Corporation reported a net loss of $67.3 million for the nine months ended
September 30, 1999 compared with net income of $10.5 million in 1998. During
the 1999 second quarter, the Corporation sold its Distribution business segment
which generated a $10.5 million net loss during the 1999 first nine months
compared to net income of $22.9 million in the same 1998 period. In connection
with sale of the Distribution business segment, the Corporation repaid
outstanding obligations and realized a $7.3 million extraordinary loss on early
retirement of debt.
The Corporation had a $49.4 million net loss from continuing operations during
the nine months ending September 30, 1999 compared to a $ 12.4 million loss in
1998. The larger loss in 1999 was related primarily to lower prices for the
nitrogen products manufactured and sold by the Corporation.
Total revenues and operating income (loss) by segment for the nine-month periods
ended September 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Nitrogen Products $ 519,904 $ 569,892
Methanol 62,133 77,054
Other 3,365 725
- ----------------------------------------------------------------------------
$ 585,402 $ 647,671
============================================================================
OPERATING INCOME (LOSS):
Nitrogen Products $ (26,237) $ 47,041
Methanol (13,785) (2,284)
Other expense - net (4,180) (13,207)
- ----------------------------------------------------------------------------
$ (44,202) $ 31,550
============================================================================
</TABLE>
Nitrogen Products
Volumes and prices for the nine-month periods ended September 30, 1999 and 1998
were as follows:
VOLUMES AND PRICES
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------
Sales Average Sales Average
(quantities in thousands of tons) Volumes Unit Price Volumes Unit Price
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ammonia 1,120 $ 120 973 $ 150
Nitrogen solutions 2,698 62 2,450 69
Urea 428 98 468 125
Ammonium nitrate 624 115 619 136
- --------------------------------------------------------------------------------
</TABLE>
Nitrogen revenues declined $50 million to $519.9 million in the 1999 first nine
months compared with $569.9 million in the 1998 period due to lower selling
prices. Continued industry global over-capacity coupled with lower U.S demand
caused by reductions to planted corn and wheat acres caused nitrogen prices to
fall from prior year levels. Nitrogen solution sales prices were also adversely
affected by increased competition as the result of expanded domestic production
capacity during the past year and Spring planting conditions that favored
ammonia
12
<PAGE>
consumption as an alternative to nitrogen solutions. Sales volumes of nitrogen
solutions increased over 1998 quantities during the third quarter as the result
of an earlier start to fill dealer storage capacity in 1999.
The Nitrogen segment had an operating loss of $26.2 million during the nine
months ended September 30, 1999 compared with operating income of $47.0 million
for the same 1998 period. The decline in operating income was primarily related
to lower selling prices which declined $72 million on 1998 volumes. Natural gas
costs during the 1999 first nine months increased $12.4 million over the same
1998 period, but this and other cost increases were mostly offset by lower
operating costs at the Corporation's facilities in the United Kingdom acquired
at the beginning of 1998.
Methanol
For the nine months ended September 30, 1999 and 1998, respectively, the
Methanol segment had revenues of $62.1 million and $77.1 million. The
Corporation's Beaumont plant was shut down for two months during the 1999 first
quarter which primarily caused the significant decline in 1999 revenues. The
Corporation made the decision to cease production because raw material costs
exceeded selling prices. As a result of the shutdown, sales volumes declined by
16% to 184 million gallons compared with the 1998 first nine months.
The methanol segment had an operating loss of $13.8 million for the first nine
months of 1999 compared with a $2.3 million loss for the 1998 period. The
increased operating loss was a result of the first quarter 1999 plant shutdown
including $2.8 million of losses on its natural gas forward pricing positions
that were not required due to the plant shutdown.
Other Expense - Net
The Corporation had $4.2 million of other operating expenses during the 1999
period compared to $13.2 million during the 1998 period. Most of these expenses
represent allocations of shared services expenses to discontinued Distribution
operations which amounted to $3.5 million and $11.2 million for the first nine
months of 1999 and 1998, respectively.
Interest Expense - Net
Interest expense, net of interest income, totaled $30.6 million during the 1999
first nine months compared with $38.3 million for the prior year period. The
decrease is primarily related to interest income of $6.3 million realized in
connection with the sale of the Distribution business segment.
Minority Interest
Minority interest represents interest in the earnings of the publicly held
common units of Terra Nitrogen Company, L.P. (TNCLP) and a third-party's limited
partnership interest in Beaumont Methanol, Limited Partnership (BMLP). Minority
interest charges for the limited partnership interest in BMLP were $9.4 million
during the 1999 first nine months. The Corporation redeemed the third-party's
BMLP interest on June 30, 1999 and thereby eliminated future charges to earnings
relating to the minority BMLP partnership interest.
Minority interest was $7.6 million for the nine months ended September 30, 1999
compared with $22.6 million in 1998. Minority interest declined due primarily
to lower earnings from TNCLP operations and the Corporation's June 30, 1999
redemption of the BMLP interest.
Income Taxes
Income taxes for the first nine months of 1999 were recorded at an effective tax
rate of 40%, comparable to the effective tax rate for the 1998 period.
13
<PAGE>
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
capital expenditures and acquisitions and fund repurchases of TNCLP common
units. The principal sources of funds will be cash flow from operations and
borrowings under available bank facilities.
Cash used for operations in the first nine months of 1999 was $187.9 million
comprised of $216.7 million to fund working capital increases, net of $28.8
million in earnings from continuing operations after non-cash charges. Working
capital changes included termination of the Corporation's accounts receivable
securitization program which used cash of $130 million during 1999 to repay
outstanding December 31, 1998 balances.
On June 30, 1999, the Corporation sold its Distribution business segment to
Cenex/ Land O' Lakes Agronomy Company ("Buyer") for $485 million subject to
post-closing adjustments and final audit. The sales proceeds, net of increases
to Distribution net working capital balances since December 31, 1998 and other
operating cash items, contributed $315.6 million to 1999 cash flows. Sales
proceeds were used to redeem the outstanding preferred minority interest in BMLP
for $225 million, fund termination of the accounts receivable securitization
program and repay outstanding borrowings under the Corporation's revolving
credit facility. The Corporation expects to finalize post-closing adjustments
and complete the final audit prior to December 31, 1999.
In connection with the sale of the Distribution business segment, the
Corporation renegotiated outstanding bank agreements and reduced amounts
available under its revolving credit facility from $225 million to $63 million.
As of September 30, 1999, $21 million was outstanding under this facility and an
additional $15 million was used to support outstanding letters of credit. The
Corporation believes that cash from operations and available financing sources
will be sufficient to meet anticipated cash requirements.
Management expects that nitrogen and methanol prices will remain at or near
current levels through the remainder of 1999 and into 2000. An unanticipated
decline to prices of 10% or more, or other factors causing a similar reduction
to operating income, will result in the Corporation's failure to meet certain
earnings covenants contained in its revolving credit facility and $117 million
bank term loan. Failure to meet these covenants would require the Corporation to
incur additional costs to amend the bank facilities or could result in
termination of the facilities. The Corporation is in discussion with lending
institutions concerning alternative refinancing packages which would replace
existing bank facilities in order to increase liquidity sources and reduce risk
of failing to maintain earnings covenants. Although there can be no assurance
that the Corporation will complete any of the contemplated alternatives, it is
planned that the refinancing will be completed near December 31, 1999.
The Corporation funded plant and equipment expenditures of $32.1 million year-
to-date in 1999. Approximately $20 million of the 1999 expenditures was for the
ammonia production loop at the Beaumont, Texas methanol plant expected to be
fully operational by the end of 1999. The Corporation expects remaining 1999
capital expenditures to approximate $15 million consisting of the expenditures
to complete the Beaumont ammonia production loop, routine replacement of
equipment and efficiency improvements at manufacturing facilities.
During the first nine months of 1999, the Corporation distributed a preferred
return of $9.4 million to BMLP's minority partner and paid dividends of $0.07
per Common Share which totaled $5.3 million. The Corporation redeemed the BMLP
minority interest on June 30, 1999 and thereby eliminated future cash
requirements to fund payments to the BMLP minority partner. On August 3, 1999,
the Board of Directors suspended the Corporation's payment of a regular
quarterly dividend on common stock.
Cash balances at September 30, 1999 were $5.5 million none of which was used to
collateralize letters of credit.
14
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 is effective for fiscal years
beginning after June 15, 2000. The Corporation has reviewed SFAS 133 and
intends to implement the standard on January 1, 2001. At this time, the
Corporation has not determined the impact SFAS 133 will have on its financial
position, results of operations or cash flows.
YEAR 2000 ISSUES
The Corporation has assigned dedicated resources to address its year 2000
computer issues with a Year 2000 Steering Committee providing management
oversight and coordination and has also published Year 2000 Information and
Disclosures on Terra's website (http://www.terraindustries.com). In general,
-------------------------------
management believes the "State of Readiness" for the Corporation is such that it
will be ready for Year 2000 issues on time.
The Corporation's management information systems (MIS) environment has been
assessed for Year 2000 issues and nearly all remedial actions and testing have
been completed with minimal cost. Remaining MIS actions require updating a few
software packages originally purchased from third parties that are scheduled to
be updated in 1999.
Organization-wide reviews of all possible computing functions have been
completed, including the process control systems and instrumentation in the
manufacturing facilities, with the few remaining remedial actions scheduled to
be updated in 1999. The cost of these remedial actions is not expected to be
material to the Corporation.
The Corporation has largely completed its assessment of Year 2000 issues in
relation to its customers, suppliers and other constituents.
Although the Corporation expects that there will be no significant adverse
consequences relating to its Year 2000 issues, the Corporation believes its most
reasonably likely worst case Year 2000 scenario involves the interruption of its
manufacturing facilities due to failed utility supplies or some other cause. The
Corporation has in place contingency plans to deal with such interruptions,
although restarting these facilities may be dependent on the resumption of
utilities from sole source suppliers. Other general contingency planning efforts
continue to be evaluated and refined for precautionary purposes.
The Corporation anticipates that it will complete all remaining assessment,
remediation, testing, and contingency planning efforts for Year 2000 issues in
advance of year end. Based on substantial completion of activities to date, the
Corporation anticipates that Year 2000 issues, including the historical and
estimated costs of remediation, will not have a material effect on its business,
results of operations or financial condition. However, 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.
POTENTIAL CHANGE OF CONTROL
Anglo American plc, through its wholly-owned subsidiaries, owns 56% of the
Corporation's outstanding shares. Anglo American has made public its intention
to dispose of its interest in the Corporation with the timing based on market
and other conditions.
15
<PAGE>
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
price changes (principally, sales prices of nitrogen and methanol products and
natural gas costs), 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 the Corporation's most recent Form 10-K.
16
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1.21 Form of Non-Employee Director Stock Option Agreement
under the 1997 Stock Incentive Plan
27 Financial Data Schedule [EDGAR filing only]
(b) Reports on Form 8-K
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
TERRA INDUSTRIES INC.
Date: November 8, 1999 /s/ Francis G. Meyer
-----------------------------------------
Francis G. Meyer
Senior Vice President and Chief Financial
Officer and a duly authorized signatory
17
<PAGE>
NON-EMPLOYEE DIRECTOR
NONQUALIFIED STOCK OPTION AGREEMENT
Date of Grant: August 3, 1999
Number of Shares:________
Exercise Price Per Share: $________
Dear:
We are pleased to inform you that, as a non-employee director 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 total
Number of Shares evidenced by this letter 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 total Number of Shares evidenced by this letter 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 total Number of Shares evidenced by this letter beginning on the
first business day following the third anniversary of the Date of
Grant.
1
<PAGE>
d. The Option shall be exercisable with respect to all of the Number of
Shares evidenced by this letter beginning on the day any one of the
following occurs: (i) any person or group of persons acting in concert
(other than Anglo American plc, a company incorporated under the laws
of the United Kingdom, and its affiliates or a group consisting solely
of such persons (the "Anglo American 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 Anglo American 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 service as a director with the Corporation 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 service as a director terminates by reason of death, the
Option shall terminate and cease to be exercisable one year from the
date of death.
b. If your service as a director terminates by reason of Total Disability
or retirement with the permission of the Committee, the Option shall
terminate and cease to be exercisable three years from the date of
Total Disability or such retirement.
c. If your service as a director 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 of service as a director.
2
<PAGE>
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 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. 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.
7. 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.
8. 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.
9. 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
3
<PAGE>
of cash and such shares that have been held by you for a period of at least
six months.
10. 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 any kind otherwise due to you, 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: ________________________________________
Executive Vice President and
Chief Operating Officer
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 Director
4
<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
September 30, 1999 and the related consolidated statement of income for the
period then ended.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,555
<SECURITIES> 0
<RECEIVABLES> 159,404
<ALLOWANCES> (15,027)
<INVENTORY> 131,449
<CURRENT-ASSETS> 345,538
<PP&E> 1,309,869
<DEPRECIATION> (299,976)
<TOTAL-ASSETS> 1,693,056
<CURRENT-LIABILITIES> 154,230
<BONDS> 477,550
0
0
<COMMON> 127,890
<OTHER-SE> 549,772
<TOTAL-LIABILITY-AND-EQUITY> 1,693,056
<SALES> 572,675
<TOTAL-REVENUES> 585,402
<CGS> 590,284
<TOTAL-COSTS> 629,604
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 280
<INTEREST-EXPENSE> 38,070
<INCOME-PRETAX> (82,394)
<INCOME-TAX> (32,950)
<INCOME-CONTINUING> (49,444)
<DISCONTINUED> (10,524)
<EXTRAORDINARY> (7,295)
<CHANGES> 0
<NET-INCOME> (67,263)
<EPS-BASIC> (0.91)
<EPS-DILUTED> (0.91)
</TABLE>
