-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M5UCXy1Q0Ju9kDWRw9sg33WQqwM1HTKUImMkJbtX58YTRQ+cZozQY3MD0xGaj300 UbgS0MIpXD721Eo/T7hChg== 0000950131-99-001659.txt : 19990325 0000950131-99-001659.hdr.sgml : 19990325 ACCESSION NUMBER: 0000950131-99-001659 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TERRA INDUSTRIES INC CENTRAL INDEX KEY: 0000722079 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MISCELLANEOUS NONDURABLE GOODS [5190] IRS NUMBER: 521145429 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-08520 FILM NUMBER: 99570662 BUSINESS ADDRESS: STREET 1: TERRA CENTRE 600 4TH ST STREET 2: P.O. BOX 6000 CITY: SIOUX CITY STATE: IA ZIP: 51102-6000 BUSINESS PHONE: 7122771340 MAIL ADDRESS: STREET 1: TERRA CENTER STREET 2: 600 4TH ST P O BOX 6000 CITY: SIOUX CITY STATE: IA ZIP: 51102-6000 FORMER COMPANY: FORMER CONFORMED NAME: INSPIRATION RESOURCES CORP DATE OF NAME CHANGE: 19920517 10-K405 1 FORM 10-K ================================================================================ 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, 1998 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, 1999, was approximately $230 million. On January 31, 1999, the Registrant's outstanding voting stock consisted of 75,466,040 Common Shares, without par value. =============================================================================== DOCUMENTS INCORPORATED BY REFERENCE Annual Report to Stockholders of Registrant for the fiscal year ended December 31, 1998. 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 4, 1999. Certain information therein is incorporated by reference into Part III hereof.
TABLE OF CONTENTS PART I ------ Items 1 and 2. Business and Properties................................................... 1 Item 3. Legal proceedings......................................................... 10 Item 4. Submission of matters to a vote of security holders....................... 11 Executive officers of the Company......................................... 11 PART II ------- Item 5. Market for Terra Industries' common equity and related stockholder matters................................... 12 Item 6. Selected financial data................................................... 12 Item 7. Management's discussion and analysis of financial condition and results of operations................................................. 12 Item 8. Financial statements and supplementary data............................... 12 Item 9. Changes in and disagreements with accountants on accounting and financial disclosure.................................................. 12 PART III -------- 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 PART IV ------- Item 14. Exhibits, financial statement schedules and reports on Form 8-K........... 13 Signatures................................................................................ 18 Index to financial statement schedules, reports and consents.............................. S-1
PART I ------ 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. Business Overview 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 fertilizer 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, as well as the largest producer of ammonium nitrate in the United Kingdom. In addition, the Company is one of the largest U.S. manufacturers and marketers of methanol. The Company's distribution network serves the United States and eastern region of Canada and includes 403 Company operated farm service centers as of December 31, 1998. This network distributes and markets a comprehensive line of fertilizers, crop protection products, seed and services. The Company's principal production facilities are comprised of: . seven nitrogen fertilizer plants located in the following places: 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, and an ammonia loop is being constructed at the Beaumont Facility.) 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. 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 full range 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 purchased from a number of other agricultural suppliers, the Company also markets its own Riverside(R) brand products. Riverside products represented approximately 12% of the Company's total crop protection product sales in 1998. As of December 31, 1998, the Riverside line includes over 200 products. The Riverside line of products consists of herbicides, insecticides, fungicides, adjuvants, seed treatments, plant growth regulators, defoliants and desiccants. Many of the 1 Riverside(R) products are formulated or packaged by Omnium LLC, the Company's 50% owned joint venture. 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, advertising, 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 1998. The Company offered genetically enhanced seeds under the Terra(R) brand for the 1998 growing season and plans to expand these offerings for the 1999 growing season. Biotech 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 performance, feed and grain merchandising, and precision agriculture support. 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 is taking an active role in precision agriculture. Precision agriculture relies on global positioning satellites (GPS) 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 GPS technology in their planting and harvesting equipment and gain additional information for crop production decisions. The Company has invested in hardware, software and personnel to meet the demand of its Precision in Agriculture(R) program, including the addition in 1998 of a center for geo- processing data gathered by using GPS technology. The Company's feed and grain merchandising business enhances 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 1998, approximately 75% of the Company's distribution revenues were attributable to grower sales through farm service center locations and approximately 25% 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. 2 The Company's distribution operations are organized for management purposes into two divisions with five regions reporting to them and, as of December 31, 1998, these regions have 28 areas reporting to them. Field personnel receive regular training through Terra University(R), a series of courses designed to develop skills in agronomy, management, sales, environmental responsibility, personal safety and crop inputs application. Terra's company-wide database marketing initiative, named LOCALMOTION(TM), 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 by aiding the development of customized 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 at these locations 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 makes liquid crop protection products and the Blytheville Formulation Facility makes dry flowable ("DF") crop protection products. Dry, water-dispersible DF products are mixed with water before application. Water-based or solvent-based liquid products are also mixed with water before application. In addition to Riverside(R) products, these facilities formulate products for Farmland Industries and others. These 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 agricultural areas 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 significant portion of the Company's ammonia production is upgraded into other nitrogen fertilizer products such as urea, UAN and AN. Other important products manufactured in the U.K. include nitric acid and carbon dioxide. 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 3 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, has increased in the United States over the past decade, and the Company believes this trend, if continued, should increase UAN demand. AN. The Company produces AN at its two plants in the U.K. 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 principal nitrogen products for each of the last three years (including the U.K. Business for 1998 only) was approximately (based on tons sold): 1998 1997 1996 ---- ---- ---- Ammonia 21% 22% 23% Urea 11% 12% 13% UAN 55% 66% 64% AN 13% N/A N/A
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 facilities are operated by the Company: Gross Annual Ammonia Year when Terra first Capacity (short tons) acquired interest --------------------- --------------------- 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) 550,000 1997 Severnside Facility (England) 265,000 1997 --------- Total 3,555,000
* 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 (including the U.K. facilities in 1998 only) was 102% in 1998, 103% in 1997 and 101% in 1996. 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 4 resuming in May 1996. 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 2004, and the Company has the option to renew the lease for an additional term of five years. The Company's assets at this facility are subject to an encumbrance in favor of lenders. 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 ammonia plant lease term is scheduled to expire in November 2004, and the Company has the option to extend the lease for eleven 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 urea plant lease is scheduled to expire in November 2005, and the Company has the option to renew the lease for three 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 Company's assets at this facility are subject to an encumbrance in favor of lenders. 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 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 1997 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 1997 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 North American manufactured nitrogen products are independent dealers, national retail chains, cooperatives and industrial customers. The U.K. Business revenues are virtually split evenly between agricultural and industrial customers. For the Nitrogen Products segment as a whole, industrial customers accounted for approximately 23% of the Company's 1998 tons, while they accounted for approximately 12% of the Company's 1997 tons. In 1998, approximately 13% of the Company's North American fertilizer production tonnage was supplied to its farm service center locations for sale to growers, while the rest was sold to outside customers. In 1998, no outside customer accounted for greater than 5% of revenues for Nitrogen Products. 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. 5 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 thresholds during any year, subject to maximum payments of (Pounds) 58 million ($95.7 million USD at the time of signing) 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. For 1998, the Company did not make any such payments to ICI. Methanol 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 1998. 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. The Company's Woodward Facility operates a methanol loop with capacity to produce up to about 40 million gallons methanol annually. This facility produced 31 million, 34 million and 38 million gallons in 1996, 1997 and 1998, respectively. This facility is owned by the Company in fee. 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 280 million, 276 million and 258 million gallons in 1996, 1997 and 1998, respectively. This plant was temporarily idled in early 1999 due to low methanol sales prices. 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 1998, the Company sold over 60% of its production under such contracts. At December 31, 1998, the Company had contracted to sell over 60% of its 1999 scheduled production at prices indexed to published sources. Most of these sales contracts (other than the DuPont contract noted below) 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 continues in effect until terminated by either party on two years' notice. 6 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 finance program to provide secured, interest-bearing financing to qualified customers for their operating and crop input requirements on extended payment terms. The Company provided approximately $66 million in 1996, $65 million in 1997, and $85 million in 1998 on credit lines to grower customers under this program. Alliances with third-party lenders are in place to provide financing to the Company's customers in 1999 on a basis with limited or no recourse against the Company. The Company's bad debt experience is affected by the financial condition of its customers which, in turn, is affected by weather conditions, crop prices, and other factors. Bad debt write-offs were $17.9 million in 1996, $8.1 million in 1997, and $10.4 million in 1998. The elevated 1996 write-off level is due principally to two years of drought conditions in the South and mid-South regions of the U.S. Poor weather conditions and unusually low crop prices hampered 1998 collections. 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 North American markets, are weather patterns and field conditions (particularly during periods of high fertilizer consumption), quantities of fertilizers imported to and exported from North America and current and projected grain inventories and prices, which are heavily influenced by U.S. exports and world-wide grain markets. U.S. governmental policies may directly or indirectly influence the number of acres planted, the level of grain inventories, the mix of crops planted and crop prices. The U.S. farm bill passed in 1996 put an end to acreage reduction and production control measures, allowing farmers more flexibility in planting. Nitrogen fertilizer price levels can be volatile and 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 came on-stream and profit margins have been under pressure. Profit margins will continue to be under pressure until demand is sufficient to absorb the new supplies or marginal production capacity is shut down. 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. At the end of 1998, methanol sales prices were below the low end of their historic sales price range and there can be no assurance as to whether or when prices may turn higher. 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 in 1998, including transportation and forward pricing activities, comprised about 49% of the costs and expenses 7 associated with the Company's North American Nitrogen Products segment and about 24% for its U.K. nitrogen manufacturing operations. Natural gas costs represented about 65% of the costs and expenses associated with its Methanol segment in 1998. 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 90 liquid, dry and anhydrous ammonia fertilizer terminal storage facilities in twenty-five states and one Canadian province 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 vessels 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 2,600 railcars and owns ten nitric acid railcars. In England, AN is transported primarily by contract carriers' trucks and ammonia is primarily transported by owned pipelines. 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. 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. 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. Purchased natural gas is transported to the Billingham and Severnside Facilities via a nationwide pipeline operating as an open access natural gas transporter. 8 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. Terra's seed specialists observe experimental corn hybrids and soybean varieties in many U.S. locations to identify and select appropriate seed for the 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 the Company markets. Competition The market for the fertilizer, crop protection products and seed distributed by the Company is highly competitive. In 1998, 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. A significant amount of additional nitrogen fertilizer manufacturing capacity was brought into production recently and more capacity is expected. The Company believes that it competes with other manufacturers of nitrogen fertilizer on delivery terms and availability of products, as well as on price. The methanol industry, like the fertilizer industry, is highly competitive and such competition is based largely on price, reliability and deliverability of this global commodity. The relative cost and availability of natural gas and the efficiency of production facilities are important competitive factors. Significant determinants of a methanol manufacturing plant's competitive position are the natural gas acquisition and transportation contracts that a plant negotiates with its major suppliers. Domestic competitors for methanol include a number of large integrated petrochemical producers, many of which are better capitalized than the Company. Environmental and Other Regulatory Matters The Company's operations are subject to various federal, state and local environmental, safety and health laws and regulations, including laws relating to air quality, hazardous and solid wastes and water quality. Terra'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 9 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 existing regulations at these locations in 1999 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. 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, Clean Water Act and similar requirements. These equipment requirements are also typically applicable to competitors as well. The Company estimates that the cost of complying with these existing requirements in 1999 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 these regulations are expected to continue to change and generally be more restrictive than current requirements, the costs of compliance 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 4,185 full-time employees at December 31, 1998, with only the U.K. employees being covered by anything equivalent to a collective bargaining agreement. The Company also employs part-time employees from time to time (about 80 at December 31, 1998) and temporary employees on a seasonal basis. The Company hired approximately 1,400 temporary employees during the peak of its spring selling season in 1998. 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. 10 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 1998. 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 a business experience during the past five years:
Present positions and offices with the Company Name and age and principal occupations during the past five years - -------------------------------------- ----------------------------------------------------------- Michael L. Bennett (45) Executive Vice President and Chief Operating Officer of Terra since February 1997; President and Chief Executive Officer of Terra Nitrogen Division since June 1998; 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. Burton M. Joyce (57) President and Chief Executive Officer of Terra since May 1991; Executive Vice President and Chief Operating Officer thereof from February 1988 to May 1991. William R. Loomis, Jr. (50) Chairman of the Board of Terra since May 1996 and a director thereof since February 1996; Chairman, President and Chief Executive Officer of Minorco (U.S.A.) Inc. from 1996 to 1998; 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 (47) 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. Paula C. Norton (53) Vice President, Corporate and Investor Relations of Terra since February 1995; Director, Corporate Relations of Terra from January 1993 to February 1995. Charles J. Pero (50) Vice President, Human Resources of Terra since June 1998; Vice President, Environmental, Health & Safety of Terra from February 1998 to June 1998; Vice President, Human Resources of Terra Nitrogen Corporation from February 1990 to February 1998. W. Mark Rosenbury (51) 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.
11
Present positions and offices with the Company Name and age and principal occupations during the past five years - -------------------------------------- ----------------------------------------------------------- Wynn Stevenson (44) Vice President, Taxes and Corporate Development of Terra since May 1998; Vice President, Taxes of Terra from April 1996 to May 1998; Director, Taxes of Terra from June 1992 to April 1996. Monty R. Summa (46) 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 1994 to April 1997. George H. Valentine (50) 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.
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 1998 Annual Report to Stockholders under the captions "Quarterly Financial and Stock Market Data (Unaudited)" and "Stockholders" is incorporated herein by reference. Item 6. SELECTED FINANCIAL DATA. Information with respect to selected financial data contained in Terra's 1998 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 1998 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 1998 Annual Report to Stockholders are incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 12 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 4, 1999, is incorporated herein by reference. Information with respect to executive officers 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 4, 1999, 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 4, 1999, 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 4, 1999, is incorporated herein by reference. 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 1998 Annual Report to Stockholders). Consolidated Statements of Financial Position at December 31, 1998 and 1997. Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996. Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996. Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996. Notes to the Consolidated Financial Statements. Independent Auditors' Report. Quarterly Production Data (Unaudited). 13 Quarterly Financial and Stock Market Data (Unaudited). Revenues (Unaudited). 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 10.1.20 are incorporated herein by reference. (c) Reports on Form 8-K None (d) Exhibits 3.1.1 Articles of Restatement of Terra Industries filed with the State of Maryland on September 11, 1990, filed as Exhibit 3.1 to Terra Industries' Form 10-K for the year ended December 31, 1990, is incorporated herein by reference. 3.1.2 Articles of Amendment of Terra Industries filed with the State of Maryland on May 6, 1992, filed as Exhibit 3.1.2 to Terra Industries' Form 10-K for the year ended December 31, 1992, is incorporated herein by reference. 3.1.3 Articles Supplementary of Terra Industries filed with the State of Maryland on October 13, 1994, filed as Exhibit 4.1.3 to Terra Industries' Form 8-K/A dated November 3, 1994, is incorporated herein by reference. 3.2 By-Laws of Terra Industries, as amended through August 7, 1991, filed as Exhibit 3 to Terra Industries' Form 8-K dated September 30, 1991, is incorporated herein by reference. 4.1 Indenture dated as of October 15, 1993 among Terra Industries (as successor by merger to Agricultural Minerals and Chemicals Inc.) and Society National Bank, including form of Senior Note, filed as Exhibit 99.2 to Terra Industries' Registration Statement on Form S-3, as amended (File No. 33-52493), is incorporated herein by reference. 4.2 Indenture, dated as of June 22, 1995 between the Company and First Trust National Association, as trustee, including form of Exchange Note, filed as Exhibit 4.1 to Terra 14 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 (the "1998 Credit Agreement") dated as of March 31, 1998 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 4.4 to Terra Industries' Form 10-Q for the quarter ended March 31, 1998, is incorporated herein by reference. 4.4 Amendment No. 1 dated as of September 30, 1998 to the 1998 Credit Agreement, filed as Exhibit 4.5 to Terra Industries' Form 10-Q for the quarter ended September 30, 1998, is incorporated herein by reference. Other instruments defining the rights of holders of long-term debt 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 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, 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 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. 15 10.1.10 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. 10.1.11 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. 10.1.12 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. 10.1.13 Form of Incentive Stock Option Agreement of Terra Industries under its 1997 Stock Incentive Plan, filed as Exhibit 10.1.14 to Terra Industries' Form 10-K for the year ended December 31, 1997, is incorporated herein by reference. 10.1.14 Form of Nonqualified Stock Option Agreement of Terra Industries under its 1997 Stock Incentive Plan, filed as Exhibit 10.1.15 to Terra Industries' Form 10-K for the year ended December 31, 1997, is incorporated herein by reference. 10.1.15 Form of Performance Share Award of Terra Industries under its 1997 Stock Incentive Plan. 10.1.16 1998 Incentive Award Program for Officers and Key Employees of Terra Industries, filed as Exhibit 10.1.16 to Terra Industries' Form 10-Q for the quarter ended March 31, 1998, is incorporated herein by reference. 10.1.17 Executive Retention Agreement for William R. Loomis, Jr. 10.1.18 Executive Retention Agreement for Burton M. Joyce. 10.1.19 Form of Executive Retention Agreement for Other Executive Officers. 10.1.20 1999 Incentive Award Program for Officers and Key Employees of Terra Industries. 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 16 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 Second Amended and Restated Agreement of Limited Partnership of Beaumont Methanol, Limited Partnership dated March 31, 1998 by and among Terra Methanol Corporation, BMC Holdings, Inc. and Nova Products LLC, filed as Exhibit 10.11 to Terra Industries' Form 10- Q for the quarter ended March 31, 1998, is incorporated herein by reference. 10.11 Amendment No. 1 dated as of September 30, 1998 to the Second Amended and Restated Agreement of Limited Partnership of Beaumont Methanol, Limited Partnership, filed as Exhibit 10.12 to Terra Industries' Form 10-Q for the quarter ended September 30, 1998, is incorporated herein by reference. 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] - ------------------------------------------------------------------------------- *Confidential treatment has been requested in connection with this document. 17 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 22, 1999 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: Signature Title - --------- ----- * Chairman of the Board - ----------------------------- William R. Loomis, Jr. * Director, Chief Executive - ----------------------------- Officer and President Burton M. Joyce (Principal Executive Officer) * Senior Vice President and Chief - ----------------------------- Francis G. Meyer (Principal Financial Officer) * - ----------------------------- 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 Date: March 22, 1999 *By: /s/ GEORGE H. VALENTINE ----------------------- George H. Valentine Attorney-in-Fact 18 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, 1998, 1997 and 1996.............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 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, 1998 and 1997 and for each of the three years in the period ended December 31, 1998, and have issued our report thereon dated February 5, 1999; such financial statements and report are included in the 1998 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 5, 1999 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 5, 1999, included in the 1998 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 16, 1999 S-2 SCHEDULE I TERRA INDUSTRIES INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT --------------------------------------------- STATEMENTS OF FINANCIAL POSITION - --------------------------------------------------------------------------------
(in thousands) December 31, - -------------------------------------------------------------------------------- 1998 1997 ---------------------------------- Assets Cash and short-term investments $ 6,041 $ 14,993 Accounts receivable, net 1,349 866 Deferred tax asset - current 12,131 5,945 Other current assets 312 352 ------------------------------------------------------------------------------ Total current assets 19,833 22,156 Investment in and advances to subsidiaries 1,218,454 1,256,246 Other assets 12,892 13,452 ------------------------------------------------------------------------------ Total assets $ 1,251,179 $ 1,291,854 ================================================================================ Liabilities Income taxes payable $ 18,441 $ 20,514 Accrued and other liabilities 3,266 2,466 ------------------------------------------------------------------------------ Total current liabilities 21,707 22,980 Long-term debt 358,755 358,755 Deferred income taxes 104,718 104,349 Other liabilities 18,147 15,441 ------------------------------------------------------------------------------ Total liabilities 503,327 501,525 - -------------------------------------------------------------------------------- Stockholders' Equity Capital stock 127,887 127,581 Paid-in capital 552,893 548,772 Accumulated other comprehensive income (14,157) (8,488) Retained earnings 81,229 122,464 ------------------------------------------------------------------------------ Total stockholders' equity 747,852 790,329 - -------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 1,251,179 $ 1,291,854 ================================================================================
See accompanying Notes to the Condensed Financial Statements. S-3 TERRA INDUSTRIES INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT --------------------------------------------- CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS - --------------------------------------------------------------------------------
(in thousands, except per-share amounts) For the Year Ended December 31, - -------------------------------------------------------------------------------- 1998 1997 1996 ------------------------------- Income (Loss) Equity in earnings (loss) of subsidiaries $ (4,185) $250,064 $ 160,204 Interest and other income 32 294 123 ----------------------------------------------------------------------------- Total income (loss) (4,153) 250,358 160,327 - ------------------------------------------------------------------------------- Expenses Selling, general and administrative expense 4,874 4,843 2,544 Interest expense 38,861 39,507 38,725 Infrequent item --- 10,000 --- Income tax benefit (21,639) (13,874) (14,893) ----------------------------------------------------------------------------- Total expenses 22,096 40,476 26,376 - ------------------------------------------------------------------------------- Income (loss) before extraordinary item (26,249) 209,882 133,951 Extraordinary loss on early retirement of debt --- (2,995) --- - ------------------------------------------------------------------------------- Net income (loss) (26,249) 206,887 133,951 Cash dividends paid to common stockholders (14,986) (13,481) (11,582) Retained earnings (deficit) - beginning of year 122,464 (70,942) (193,311) - ------------------------------------------------------------------------------- Retained earnings (deficit) - end of year $ 81,229 $122,464 $ (70,942) =============================================================================== Basic Earnings (Loss) Per Share: Income (loss) before extraordinary item $ (0.35) $ 2.84 $ 1.74 Extraordinary loss on early retirement of debt --- (0.04) --- ----------------------------------------------------------------------------- Net income (loss) $ (0.35) $ 2.80 $ 1.74 =============================================================================== Diluted Earnings (Loss) Per Share: Income (loss) before extraordinary item $ (0.35) $ 2.80 $ 1.72 Extraordinary loss on early retirement of debt --- (0.04) --- ----------------------------------------------------------------------------- Net income (loss) $ (0.35) $ 2.76 $ 1.72 ===============================================================================
See accompanying Notes to the Condensed Financial Statements. S-4 TERRA INDUSTRIES INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT --------------------------------------------- STATEMENTS OF CASH FLOWS ================================================================================
(in thousands) For the Year Ended December 31, - ----------------------------------------------------------------------------------------------------- 1998 1997 1996 ----------------------------------------- Operating Activities Net income (loss) $ (26,249) $ 206,887 $ 133,951 Adjustments to reconcile net income to net cash used by operations: Equity in earnings of subsidiaries 4,185 (250,064) (160,204) Deferred income taxes (5,817) (13,543) 24,689 Other non-cash items 556 10,556 1,588 Change in working capital components (1,716) 23,529 (30,726) Other 2,508 125 480 -------------------------------------------------------------------------------------------------- Net Cash Used in Operating Activities (26,533) (22,510) (30,222) - ---------------------------------------------------------------------------------------------------- Financing Activities Dividends (14,986) (13,481) (11,582) Stock (repurchase) issuance - net 286 (21,264) (91,131) Advances from (to) subsidiaries - net 37,950 72,999 129,701 -------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 23,250 38,254 26,988 - ---------------------------------------------------------------------------------------------------- Foreign Exchange Effect on Cash and Short-term Investments (5,669) (7,058) (1,159) -------------------------------------------------------------------------------------------------- Increase (Decrease) in Cash (8,952) 8,686 (4,393) Cash and Investments at Beginning of Year 14,993 6,307 10,700 - ---------------------------------------------------------------------------------------------------- Cash and Investments at End of Year $ 6,041 $ 14,993 $ 6,307 ==================================================================================================== Interest Paid $ 38,862 $ 39,505 $ 39,639 ==================================================================================================== Income Taxes Paid (Received) $ (17,244) $ 20,698 $ 58,809 ====================================================================================================
See accompanying Notes to the Condensed Financial Statements. S-5 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:
(in thousands) 1998 1997 - -------------------------------------------------------- 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 ========================================================
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 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. During 1998, the purchaser ceased operations and declared bankruptcy. The Registrant has provided reserves adequate to cover the estimated present value of these liabilities at December 31, 1998. The Registrant had letters of credit outstanding totaling $4.7 million at December 31, 1998 and $5.5 million at December 31, 1997, guaranteeing various insurance and financing activities. Short-term investments of $4.6 million at December 31, 1998 are restricted to collateralize certain of the letters of credit. S-6 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 SCHEDULE II TERRA INDUSTRIES INC. VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1998, 1997, and 1996 --------------------------------------------- (in thousands)
Additions Less Balance at Charged to Write-offs, Balance Beginning Costs and Net of at End Description of Period Expenses Recoveries of Period - -------------------------------------------------------------------------------- Year Ended December 31, 1998: - ---------------------------- Allowance for Doubtful Accounts $13,154 $9,633 $(7,653) $15,134 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
S-8 EXHIBIT INDEX 10.1.15 Form of Performance Share Award of Terra Industries under its 1997 Stock Incentive Plan. 10.1.17 Executive Retention Agreement for William R. Loomis, Jr. 10.1.18 Executive Retention Agreement for Burton M. Joyce. 10.1.19 Form of Executive Retention Agreement for Other Executive Officers. 10.1.20 1999 Incentive Award Program for Officers and Key Employees of Terra Industries. 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, 1998. 21 Subsidiaries of Terra Industries. 24 Powers of Attorney. 27 Financial Data Schedule. [EDGAR filing only] EX-10.1.15 2 FORM OF PERFORMANCE SHARE AWARD Exhibit 10.1.15 PERFORMANCE SHARE AWARD Date of Award:December 14,1998 Number of Shares Awarded: Dear: We are pleased to inform you that as a key employee of Terra Industries Inc. (the "Corporation") or a Subsidiary thereof, you have been awarded, under the 1997 Stock Incentive Plan (the "Plan"), the number of Common Shares of the Corporation set forth above, subject to certain restrictions, terms and conditions set forth in this letter and in the Plan. The restricted Common Shares issued to you are referred to in this letter as the "Performance Shares." 1. From the date hereof until the restrictions on the Performance Shares terminate (the "Restriction Period"), the Performance Shares shall not be sold, exchanged, transferred, pledged, hypothecated or otherwise disposed; provided, however, that any of the Performance Shares may be exchanged for any other Common Shares that are similarly restricted. 2. The Restriction Period shall terminate at the following times: a. The Restriction Period shall terminate with respect to one hundred percent (100%) of the Performance Shares on the business day following any period, occurring on or before the second anniversary of the Date of Award, of thirty consecutive business days during which the average closing price of the Common Shares on the New York Stock Exchange Composite Transactions (or if the Common Shares do not trade on the New York Stock Exchange, on the principal securities market on which the Common Shares are traded) equals or exceeds a 100% increase in the closing market price of the Common Shares on the Date of Award, or $11.50. b. The Restriction Period shall terminate with respect to one hundred percent (100%) of the Performance Shares on the day any one of the following occurs within two (2) years of the Date of Award: (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 1 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. c. The Restriction Period shall terminate with respect to one hundred percent (100%) of the Performance Shares on the business day following the second anniversary of the Date of Award. The Corporation shall retain possession of the Performance Shares until the later to occur of the termination of the Restriction Period and the termination of the security interest described in Section 6 of this letter. 3. If your employment with the Corporation and all Subsidiaries terminates during the term of this agreement, all Performance Shares subject to the Restriction Period shall automatically be forfeited by you and reconveyed to the Corporation, except as follows: a. If your employment terminates by reason of death, the Performance Shares shall continue to be eligible for vesting pursuant to Section 2. b. If your employment terminates by reason of Total Disability, the Performance Shares shall continue to be eligible for vesting pursuant to Section 2. c. 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 period for vesting or terminate the Restriction Period with respect to all or a portion of your Performance Shares. 4. This award shall not be effective unless you sign a copy of 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 December 23, 1998. 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 shall evidence your acceptance of the 2 Performance Shares upon the terms and conditions of this Award. Attached is a copy of your Stock Certificate and Stock Power. Your execution of the stock power will permit the Corporation to enforce the security interest described in Section 6 of this letter or reconvey the Performance Shares to the Corporation in the event the Award is forfeited. 5. Except as set forth in this letter, upon the issuance of the Performance Shares you shall have all of the rights of a stockholder, including the right to vote the Performance Shares and the right to receive dividends thereon. The certificates for any Performance Shares shall bear an appropriate legend reciting the terms, conditions and restrictions applicable thereto, and shall be subject to appropriate stop-transfer orders. The Corporation shall issue your Performance Shares promptly after the Corporation's Corporate Secretary receives the documents set forth in Section 4, the Performance Shares have been listed (or authorized for listing upon official notice of issuance) upon each stock exchange upon which the Common Shares of the Corporation are listed and there has been compliance with such laws and regulations as the Corporation may deem applicable. The Corporation agrees to use its best efforts to effect such listing and compliance. 6. 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 the Performance Shares or the termination of the Restriction Period (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 the Employee, any Withholding Taxes and to condition the delivery of the Performance Shares after the termination of the Restriction Period on the payment to the Corporation of the Withholding Taxes. You hereby grant to the Corporation a security interest in the Performance Shares to secure the reconveyance of the Performance Shares to the Corporation upon any forfeiture and to ensure adequate provision for the Withholding Taxes. The Corporation shall release its security interest in respect of any Performance Shares on which (i) the Restriction Period has terminated and (ii) all Withholding Taxes have been paid. In lieu of the payment of such amounts in cash, you may pay all or a portion of the Withholding Taxes by (a) the delivery of Common Shares not subject to any Restriction Period or (b) having the Corporation withhold a portion of the Common Shares otherwise to be delivered upon vesting of the Performance Shares. 7. The Corporation may, in its sole discretion, at any time or from time to time, in lieu of the delivery of all or any portion of your Performance Shares, pay to you cash equal to the Fair Market Value (as defined in the 1997 Stock Incentive Plan) of such shares on the day the Restriction Period terminates. 8. If any distribution is made to the holders of Performance Shares other than a cash dividend and new, different, or additional shares or other securities of the Corporation or of another company are received by the holders of the Performance Shares, or if any recapitalization or reclassification, split-up or consolidation of the Performance Shares shall be effected, or, if in connection with a merger or consolidation of the Corporation or a sale by 3 the Corporation of all or a part of its assets, the Performance Shares are exchanged for a different number or class of shares of stock or other securities of the Corporation or for shares of stock or other securities of any other company, then any such other securities shall be subject to similar restrictions as the Performance Shares, and the number and class of Performance Shares, and the restrictions, terms and other conditions applicable to any such other securities shall be equitably determined by the Committee. 9. Nothing in this Agreement shall confer upon the Employee any right to continue in the employ of the Corporation or a Subsidiary, or affect the right of the Corporation or of any Subsidiary to terminate the employment of the Employee, with or without cause. These Performance Shares are awarded pursuant to the Plan and are 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 4 EX-10.1.17 3 EXECUTIVE RETENTION AGREEMENT Exhibit 10.1.17 EXECUTIVE RETENTION AGREEMENT AGREEMENT made and effective this ___ day of December, 1998 by and between Terra Industries Inc., its subsidiaries and affiliates (the "Company") and William R. Loomis, Jr. (the "Executive"). The Company has determined that both the Executive's performance and the Company's ability to retain Executive as Chairman of the Board will be significantly enhanced if Executive is provided with fair and reasonable protection from the risks of a termination following a change in control of the Company. Accordingly, the Company and Executive agree as follows: 1. Defined Terms. ------------- Unless otherwise indicated, capitalized terms used in this Agreement shall have the meanings set forth in Schedule A. 2. Effective Date; Term. -------------------- This Agreement shall be effective on the date hereof and shall remain in effect until the Company terminates this Agreement by giving Executive at least one (1) year advance written notice of termination. Notwithstanding the foregoing, this Agreement shall, if in effect on the date of a Change of Control, remain in effect for at least two (2) years following such Change of Control, and such additional time as may be necessary to give effect to the terms of the Agreement. 3. Change of Control Benefits. -------------------------- If Executive's position with the Company is terminated at any time within the two (2) years following a Change of Control by the Company without Cause, or by Executive for Good Reason (the effective date of any such termination hereafter referred to as the "Termination Date"), Executive shall be entitled to the benefits provided hereunder. If Executive's position with the Company is terminated prior to a Change of Control at the request of any party acquiring control of the Company, Executive's Termination Date shall be deemed to have occurred immediately following the Change of Control, and the Executive shall be entitled to the benefits provided herein. (a) Payment. Company shall pay to Executive within ten (10) days of termination five hundred thousand dollars ($500,000) in a lump sum. (b) Payment of Accrued But Unpaid Amounts. Within seven (7) business days after the Termination Date, Company shall pay Executive any unpaid portion of compensation previously earned by Executive. 4. Mitigation. ---------- Executive shall not be required to seek other employment after termination and any compensation earned from other employment shall not reduce the amounts otherwise payable under this Agreement. 5. Taxes. ----- In the event that the aggregate of all payments or benefits made or provided to the Executive under this Agreement and under all other programs and arrangements of the Company (the "Aggregate Payment") is determined to constitute an "excess parachute payment," as such term is defined in Section 280G(b) of the Internal Revenue Code, the Company shall pay to the Executive prior to the time any excise tax imposed by Section 4999 of the Internal Revenue Code ("Excise Tax") is payable with respect to such Aggregate Payment, an additional amount which, after the imposition of all income and excise taxes thereon, is equal to the Excise Tax on the Aggregate Payment. The determination of whether the Aggregate Payment constitutes an excess parachute payment and, if so, the amount to be provided to the Executive and the time of payment pursuant to this Section 5 shall be made by Deloitte & Touche or such other nationally recognized public accounting firm selected by the Company (the "Auditor"). Notwithstanding the foregoing, in the event that the amount of the Executive's Excise Tax liability is subsequently determined to be greater than the Excise Tax liability with respect to which any initial payment to the Executive under this Section 5 has been made, the company shall pay to the Executive an additional amount (grossed up for all taxes), with respect to such additional Excise Tax (and any interest and penalties thereon) at the time and in the amount reasonably determined by the Auditor. Similarly, if the amount of the Executive's Excise Tax liability is subsequently determined to be less than the Excise Tax liability with respect to which any prior payment to the Executive has been made under this paragraph 5, the Executive shall refund to the Company the excess amount received, promptly after the Executive has received any corresponding refund. The Executive and the Company shall cooperate with each other in connection with any proceeding or claim relating to the existence or amount of liability for Excise Tax, and all expenses incurred by the Executive in connection therewith shall be paid by the Company promptly upon notice of demand from the Executive. 6. Termination for Cause. --------------------- Nothing in this Agreement shall be construed to prevent the Company from terminating Executive's position for Cause. If Executive is terminated for Cause, Company shall have no obligation to make any payments under this Agreement, except for payment of compensation that may otherwise be payable. 7. Indemnification; Director's and Officer's Liability Insurance. ------------------------------------------------------------- Executive shall, after the Termination Date, retain all rights to indemnification under applicable law or under the Company's Articles of Incorporation or By-Laws, as they -2- may be amended or restated from time to time. In addition, the Company shall maintain Director's and Officer's liability insurance on behalf of Executive, at the level in effect immediately prior to the Termination Date, for the two (2) year period following the Termination Date, and throughout the period of any applicable statute of limitations. 8. Executive Covenants. ------------------- (a) Confidential Information. During the twelve (12) month period following the Termination Date, Executive shall not disclose to any person, or use to the significant disadvantage of any of the Company, any non- public information relating to business plans, marketing plans, customers or employees of the Company other than information the disclosure of which cannot reasonably be expected to adversely affect the business of the Company ("Confidential Information"), provided that nothing contained in this Section 8 shall prevent Executive from being employed by, or serving with, a competitor of the Company or utilizing Executive's general skills, experience, and knowledge, including those developed while serving the Company. (b) Nondisclosure. Executive shall not disclose the existence of this agreement or its terms to anyone except (i) those outside advisors of Executive which have a need to know such information for tax or other planning purposes or (ii) as is necessary for the enforcement of this agreement or (iii) as required by law. (c) Release. In consideration for the protection and benefits provided for under this Agreement, Executive hereby agrees to execute a release substantially in the form of Schedule B. 9. Disputes. -------- Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Sioux City, Iowa in accordance with the Rules of the American Arbitration Association then in effect. At the election of the Executive the arbitrators shall be a panel consisting of Burton Joyce, Gregg Williams and Francis Meyer, or such person or persons selected by the American Arbitration Association in accordance with its rules. Judgment may be entered on an arbitrator's award relating to this Agreement in any court having jurisdiction. 10. Costs of Proceedings. -------------------- The Company shall pay all costs and expenses, including attorneys' fees and disbursements, at least monthly, of Executive in connection with any legal proceeding (including arbitration), whether or not instituted by the Company or Executive, relating to the interpretation or enforcement of any provision of this Agreement, except that if Executive instituted the proceeding and the judge, arbitrator or other individual presiding over the proceeding affirmatively finds that Executive instituted the proceeding in bad faith, -3- Executive shall pay all costs and expenses, including attorney's fees and disbursements, of Executive. 11. Assignment. ---------- Except as otherwise provided herein, this Agreement shall be binding upon, inure to the benefit of and be enforceable by the Company and Executive and their respective heirs, legal representatives, successors and assigns. If the Company shall be merged into or consolidated with another entity, the provisions of this Agreement shall be binding upon and inure to the benefit of the entity surviving such merger or resulting from such consolidation. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. The provisions of this paragraph 11 shall continue to apply to each successive employer of Executive hereunder in the event of any merger, consolidation or transfer of assets of a successor employer. 12. Applicable Law. -------------- This Agreement shall be governed by and construed in accordance with the laws of the State of Iowa applicable to contracts made and to be performed therein. 13. Entire Agreement. ---------------- This Agreement constitutes the entire agreement between the parties and, except as expressly provided herein, supersedes all other prior agreements concerning the effect of a Change of Control on the relationship between the Company and Executive. This Agreement may be changed only by a written agreement executed by the Company and Executive. * * * The parties have executed this Agreement on the ___ day of December, 1998. EXECUTIVE: TERRA INDUSTRIES INC: _________________________ By:___________________________ William R. Loomis, Jr. Its: ________________________ -4- Schedule A CERTAIN DEFINITIONS As used in this Agreement, and unless the context requires a different meaning, the following terms, when capitalized, have the meaning indicated: "Cause" shall mean: (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board of Directors of the Company or any successor to the Company (the "Board") which specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. The termination of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above and specifying the particulars thereof in detail. "Change of Control" shall mean any one of the following: (i) any person (as such term is used in Section 13(d) of the Securities Exchange Act of 1934, hereafter the "Exchange Act") 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) acquires beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission promulgated under the Exchange Act) of the outstanding securities of the Company in an amount having, or convertible into securities having 25% or more of the ordinary voting power for the election of directors of the Company; A-1 (ii) during a period of not more than 24 months, a majority of the Board of Directors of the Company ceases to consist of the existing membership or successors nominated by the existing membership or their similar successors; (iii) shareholder approval of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 60% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) shareholder approval of either (A) a complete liquidation or dissolution of the Company or (B) a sale or other disposition of all or substantially all of the assets of the Company, or a transaction having a similar effect. "Change of Control" shall not in any event mean any transaction which results from the sale of part or all of the interests of Minorco and its affiliates to the Company or a transaction in which the officers of the Company acquire voting securities of the Company which represent more than 5% of the combined voting power of the voting securities of the Company (such percentage to be determined on a fully diluted basis, assuming the exercise of any stock options granted such management in connection with the transaction). "Good Reason" shall mean any of the following actions, without Executive's express prior written approval, other than due to Executive's permanent disability; (1) any diminution in Executive's titles, duties, responsibilities or status from the positions, duties, responsibilities or status existing immediately prior to a Change of Control. (2) the removal of Executive from, or any failure to re-elect Executive to, any of the offices Executive held immediately prior to a Change of Control; (3) the failure of the Company to pay Executive any compensation when due; (4) any reduction of Executive's annual compensation; For these purposes, permanent disability shall mean Executive's inability, by reason of any physical or mental impairment, to substantially perform regular duties which inability is reasonably contemplated to continue for at least one (1) year from its incurrence. A-2 Schedule B SAMPLE GENERAL RELEASE --------------- For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the undersigned, with the intention of binding himself/herself, his/her heirs, executors, administrators and assigns, does hereby release and forever discharge Terra Industries Inc., a Maryland corporation ("Company"), and its present and former officers, directors, executives, agents, employees, affiliated companies, subsidiaries, successors, predecessors and assigns (collectively the "Released Parties"), from any and all claims, actions, causes of action, demands, rights, damages, debts, accounts, suits, expenses, attorneys' fees and liabilities of whatever kind or nature in law, equity, or otherwise, whether now known or unknown, which the undersigned now has, owns or holds, or has at any time heretofore had, owned or held against any Released Party, arising out of or in any way connected with the undersigned's service relationship with the Company, its subsidiaries, predecessors or affiliated entities, or the termination thereof, including without limitation, any claim for severance, unpaid compensation, breach of contract, wrongful discharge, impairment of economic opportunity, intentional infliction of emotional harm or other tort or employment discrimination under any applicable federal, state or local statute, provision, order or regulation including but not limited to, any claim under Title VII of the Civil Rights Act ("Title VII"), the federal Age Discrimination in Employment Act ("ADEA") and any similar or analogous state statute, excepting only (i) those obligations of the Company under that certain Executive Retention Agreement between the Company and the undersigned effective December ___, 1998 (the "Agreement"), pursuant to which this General Release is being executed and delivered, and (ii) any rights to indemnification the undersigned may have under applicable corporate law, the by-laws or certificate of incorporation of any Released Party or as an insured under any D & O or liability insurance policy now or previously in force. The undersigned understands that by releasing discrimination claims against the Released Parties, the undersigned also forever releases and discharges any rights he may have to file or recover in a lawsuit he may bring himself/herself on the same claims and also any right that he may have to any relief that he might otherwise be entitled to as a result of any proceedings instituted by the Equal Employment Opportunity Commission or any other comparable enforcement authority or by the representative(s) of any class to which it is alleged the undersigned may belong. The undersigned acknowledges and agrees that neither the Agreement nor this General Release is to be construed in any way as an admission of any liability whatsoever by any Released Party under Title VII, ADEA, or any other federal or state statute or the principles of common law, any such liability having been expressly denied. The undersigned further declares and represents that he has carefully read and fully understands the terms of this General Release and the Agreement, that he has been advised and had the opportunity to seek the advice and assistance of counsel with B-1 regard to this General Release and the Agreement, that he may take up to and including forty-five (45) days from receipt of this General Release, to consider whether to sign this General Release, that he may revoke this General Release within seven (7) calendar days after signing it by delivering to Company, at its Sioux City, Iowa offices, written notification of revocation, and that he knowingly and voluntarily, of his/her own free will, without any duress, being fully informed and after due deliberate action, accepts the terms of and signs the same as his/her own free act. Dated: Signature: _____________________________ __________________________ William R. Loomis, Jr. B-2 EX-10.1.18 4 EXECUTIVE RETENTION AGREEMENT Exhibit 10.1.18 EXECUTIVE RETENTION AGREEMENT AGREEMENT made and effective this ___ day of December, 1998 by and between Terra Industries Inc., its subsidiaries and affiliates (the "Company") and Burton M. Joyce (the "Executive"). The Company has determined that both the Executive's performance and the Company's ability to retain Executive as President and Chief Executive Officer will be significantly enhanced if Executive is provided with fair and reasonable protection from the risks of a termination of employment following a change in control of the Company. Accordingly, the Company and Executive agree as follows: 1. Defined Terms. ------------- Unless otherwise indicated, capitalized terms used in this Agreement shall have the meanings set forth in Schedule A. 2. Effective Date; Term. -------------------- This Agreement shall be effective on the date hereof and shall remain in effect until the Company terminates this Agreement by giving Executive at least one (1) year advance written notice of termination. Notwithstanding the foregoing, this Agreement shall, if in effect on the date of a Change of Control, remain in effect for at least three (3) years following such Change of Control, and such additional time as may be necessary to give effect to the terms of the Agreement. 3. Change of Control Benefits. -------------------------- If Executive's employment with the Company is terminated at any time within the three (3) years following a Change of Control by the Company without Cause, or by Executive for Good Reason (the effective date of any such termination hereafter referred to as the "Termination Date"), Executive shall be entitled to the benefits provided hereunder. If Executive's employment by the Company is terminated prior to a Change of Control at the request of any party acquiring control of the Company, Executive's Termination Date shall be deemed to have occurred immediately following the Change of Control, and the Executive shall be entitled to the benefits provided herein. (a) Continuation Payments. (i) Company shall continue to pay Executive for three (3) years following the Termination Date, the Executive's per annum base salary of six hundred seventy thousand dollars ($670,000) in effect on the date hereof ("Base Salary"). Company shall also pay to Executive an amount equal to three hundred percent (300%) of the four hundred thousand dollar ($400,000) average annual bonus earned by the Executive during 1995, 1996 and 1997 ("Average Bonus") ratably over a three (3) year period following the Termination Date. The amount and period of Base Salary and Average Bonus continuation payments provided for herein shall be reduced by a fraction, the numerator of which is the number of whole months during which the Executive is employed with the Company following a Change of Control and the denominator of which is 36. (ii) As an alternative to the payments described in subparagraph (i) above, the Executive may elect within ten (10) days after the Termination Date to receive an amount equal to the Base Salary and Average Bonus continuation payments provided for in subparagraph (i) in a lump sum payment payable within seven (7) days of election. (iii) Any periodic payments to be made pursuant to sub-paragraph (i) above shall be made in accordance with the Company's normal payroll procedures. If the Executive's termination occurs on or after September 1 of any year, the Company shall also pay to the Executive the Executive's target bonus then in effect multiplied by a fraction, the numerator of which shall be the number of days Executive was employed by the Company in the fiscal year in which the Termination Date occurs and the denominator of which shall be 365, payable within thirty (30) days after termination. (b) Continued Benefits. Until the third anniversary of the Termination Date, Company shall, at its expense (subject to Executive's payment of the normal premium, if any, then in effect for employees generally) provide Executive with medical and dental benefits at the highest level provided to Executive during the period beginning immediately prior to the Change of Control and ending on the Termination Date. In addition, the Executive will qualify for the Terra Industries Health, Life Benefit Plan upon termination of employment. Nothing contained herein shall adversely affect the Executive's rights under the Consolidated Omnibus Budget Reconciliation Act of 1985. (c) Payment of Accrued But Unpaid Amounts. Within seven (7) business days after the Termination Date, Company shall pay Executive any unpaid portion of compensation previously earned by Executive. (d) Pension Benefits. On the Termination Date, the Executive shall become vested in the benefits provided under the Terra Industries Inc. Excess Benefit Plan (the "SERP"). For purposes of computing the Executive's accrued benefits under the SERP, the Company shall credit the Executive with eight (8) additional years of credited service (as defined in the Employee's Retirement Plan of Terra Industries Inc. (the "Qualified Plan")) under the SERP and eight (8) years of age over the actual years of credited service and age of the Executive on the Termination Date; provided, such eight (8) year period shall be reduced by the number of whole months during which the Executive is employed with the Company following a Change of Control. In addition, the -2- Executive's accrued benefit under the SERP shall be computed as if the Executive retired at age sixty-five (65) without any reduction for early retirement. However, the Executive shall not qualify for receipt of the accrued SERP benefits to the extent enhanced pursuant to this paragraph (d) until he reaches age 60. The Executive shall also qualify for retirement benefits under the Qualified Plan. Based on the foregoing provisions of this paragraph (d) and the current actuarial assumptions in effect under the Qualified Plan and the SERP and on the assumption that Executive will receive compensation as defined in the plans in each calendar year after 1998 in the same amount as received in 1998 (which assumption could change based upon any future increase in compensation or change in actuarial assumptions), Executive would receive under those two plans and this paragraph (d), an estimated aggregate monthly lifetime benefit based on a single life annuity of $31,450. Nothing contained herein shall prevent the Executive from electing a joint and survivor annuity benefit (or making any other permissible election) upon retirement. (e) Effect on Existing Plans. All Change of Control provisions applicable to Executive and contained in any plan, program, agreement or arrangement maintained on or after the date hereof by the Company (including, but not limited to, any stock option, restricted stock or pension plan) shall remain in effect for such period after the date of a Change of Control as is necessary to carry out such provisions and provide the benefits payable thereunder, and may not be altered in a manner which adversely affects Executive without Executive's prior written approval. (f) Outplacement Counseling. Until the earlier of the third anniversary of the Termination Date or the date on which Executive becomes employed on a full time basis by a new employer, the Company shall make available to Executive at the Company's expense professional outplacement services provided by qualified consultants employed by the firm of Challenger, Gray & Associates or a comparable firm selected by the Company. (g) Office Space; Secretarial Support. The Company shall provide the Executive with office space within 25 miles of his primary residence and secretarial support for a one (1) year period following the Termination Date. The Executive may elect within (10) days after the Termination Date to forego the provision of office space and secretarial support and receive in lieu thereof a lump sum payment in the amount of seventy-five thousand dollars ($75,000) within seven (7) days of election. (h) Benefits In Lieu of Severance. Except as may be otherwise specifically provided in an amendment adopted in accordance with paragraph 14, payments under this paragraph 3 shall be in lieu of any severance that may be otherwise payable to or on behalf of the Employee pursuant to the terms of any severance pay arrangement of the Company. -3- 4. Mitigation. ---------- Executive shall not be required to seek other employment after termination and any compensation earned from other employment shall not reduce the amounts otherwise payable under this Agreement. 5. Taxes. ----- In the event that the aggregate of all payments or benefits made or provided to the Executive under this Agreement and under all other programs and arrangements of the Company (the "Aggregate Payment") is determined to constitute an "excess parachute payment," as such term is defined in Section 280G(b) of the Internal Revenue Code, the Company shall pay to the Executive prior to the time any excise tax imposed by Section 4999 of the Internal Revenue Code ("Excise Tax") is payable with respect to such Aggregate Payment, an additional amount which, after the imposition of all income and excise taxes thereon, is equal to the Excise Tax on the Aggregate Payment. The determination of whether the Aggregate Payment constitutes an excess parachute payment and, if so, the amount to be provided to the Executive and the time of payment pursuant to this Section 5 shall be made by Deloitte & Touche or such other nationally recognized public accounting firm selected by the Company (the "Auditor"). Notwithstanding the foregoing, in the event that the amount of the Executive's Excise Tax liability is subsequently determined to be greater than the Excise Tax liability with respect to which any initial payment to the Executive under this Section 5 has been made, the company shall pay to the Executive an additional amount (grossed up for all taxes), with respect to such additional Excise Tax (and any interest and penalties thereon) at the time and in the amount reasonably determined by the Auditor. Similarly, if the amount of the Executive's Excise Tax liability is subsequently determined to be less than the Excise Tax liability with respect to which any prior payment to the Executive has been made under this paragraph 5, the Executive shall refund to the Company the excess amount received, promptly after the Executive has received any corresponding refund. The Executive and the Company shall cooperate with each other in connection with any proceeding or claim relating to the existence or amount of liability for Excise Tax, and all expenses incurred by the Executive in connection therewith shall be paid by the Company promptly upon notice of demand from the Executive. 6. Termination for Cause. --------------------- Nothing in this Agreement shall be construed to prevent the Company from terminating Executive's employment for Cause. If Executive is terminated for Cause, Company shall have no obligation to make any payments under this Agreement, except for payments that may otherwise be payable under then existing employee benefit plans, programs and arrangements of the Company. -4- 7. Indemnification; Director's and Officer's Liability Insurance. ------------------------------------------------------------- Executive shall, after the Termination Date, retain all rights to indemnification under applicable law or under the Company's Articles of Incorporation or By-Laws, as they may be amended or restated from time to time. In addition, the Company shall maintain Director's and Officer's liability insurance on behalf of Executive, at the level in effect immediately prior to the Termination Date, for the three (3) year period following the Termination Date, and throughout the period of any applicable statute of limitations. 8. Executive Covenants. ------------------- (a) Confidential Information. During the twelve (12) month period following the Termination Date, Executive shall not disclose to any person, or use to the significant disadvantage of the Company, any non-public information relating to business plans, marketing plans, customers or employees of the Company other than information the disclosure of which cannot reasonably be expected to adversely affect the business of the Company ("Confidential Information"), provided that nothing contained in this Section 8 shall prevent Executive from being employed by a competitor of the Company or utilizing Executive's general skills, experience, and knowledge, including those developed while employed by the Company. (b) Nondisclosure. Executive shall not disclose the existence of this agreement or its terms to anyone except (i) those outside advisors of Executive which have a need to know such information for tax or other planning purposes or (ii) as is necessary for the enforcement of this Agreement or (iii) as required by law. (c) Release. In consideration for the protection and benefits provided for under this Agreement, Executive hereby agrees to execute a release substantially in the form of Schedule B. 9. Disputes. -------- Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Sioux City, Iowa in accordance with the Rules of the American Arbitration Association then in effect. At the election of the Executive the arbitrators shall be a panel consisting of Gregg Williams, William R. Loomis, Jr., and John R. Norton III, or such person or persons selected by the American Arbitration Association in accordance with its rules. Judgment may be entered on an arbitrator's award relating to this Agreement in any court having jurisdiction. In the event of the resignation of a named panel member, the remaining members shall select a replacement. If a replacement is not named within ten (10) days of such resignation, the remaining member or members shall act as the panel. -5- 10. Costs of Proceedings. -------------------- The Company shall pay all costs and expenses, including attorneys' fees and disbursements, at least monthly, of Executive in connection with any legal proceeding (including arbitration), whether or not instituted by the Company or Executive, relating to the interpretation or enforcement of any provision of this Agreement, except that if Executive instituted the proceeding and the judge, arbitrator or other individual presiding over the proceeding affirmatively finds that Executive instituted the proceeding in bad faith, Executive shall pay all costs and expenses, including attorney's fees and disbursements, of Executive. 11. Assignment. ---------- Except as otherwise provided herein, this Agreement shall be binding upon, inure to the benefit of and be enforceable by the Company and Executive and their respective heirs, legal representatives, successors and assigns. If the Company shall be merged into or consolidated with another entity, the provisions of this Agreement shall be binding upon and inure to the benefit of the entity surviving such merger or resulting from such consolidation. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. The provisions of this paragraph 11 shall continue to apply to each successive employer of Executive hereunder in the event of any merger, consolidation or transfer of assets of a successor employer. 12. Withholding. ----------- Notwithstanding the provisions of paragraphs 4 and 5 hereof, Company may, to the extent required by law, withhold applicable federal, state and local income and other taxes from any payments due to Executive hereunder. 13. Interest. -------- In the event of any delay in the payment of any amount required to be paid pursuant to this Agreement for any reason whatsoever, the Company shall pay to the Executive at the time of such delayed payment interest thereon from the date payment was required to be made pursuant to this Agreement to the date of actual payment. The rate of interest shall be equal to the greater of 9% or the ten-year United States Treasury Bill rate in effect from time to time during the period in which the payment was delayed and shall be compounded quarterly. -6- 14. Applicable Law. -------------- This Agreement shall be governed by and construed in accordance with the laws of the State of Iowa applicable to contracts made and to be performed therein. 15. Entire Agreement. ---------------- This Agreement constitutes the entire agreement between the parties and, except as expressly provided herein, supersedes all other prior agreements concerning the effect of a Change of Control on the relationship between the Company and Executive. This Agreement may be changed only by a written agreement executed by the Company and Executive. * * * The parties have executed this Agreement on the ___ day of December, 1998. EXECUTIVE: TERRA INDUSTRIES INC: _________________________ By:___________________________ Burton M. Joyce William R. Loomis, Jr. Its: Chairman of the Board of Directors -7- Schedule A CERTAIN DEFINITIONS As used in this Agreement, and unless the context requires a different meaning, the following terms, when capitalized, have the meaning indicated: "Cause" shall mean: (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board of Directors of the Company or any successor to the Company (the "Board") which specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. The termination of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above and specifying the particulars thereof in detail. "Change of Control" shall mean any one of the following: (i) any person (as such term is used in Section 13(d) of the Securities Exchange Act of 1934, hereafter the "Exchange Act") 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) acquires beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission promulgated under the Exchange Act) of the outstanding securities of the Company in an amount having, or convertible into securities having 25% or more of the ordinary voting power for the election of directors of the Company; A-1 (ii) during a period of not more than 24 months, a majority of the Board of Directors of the Company ceases to consist of the existing membership or successors nominated by the existing membership or their similar successors; (iii) shareholder approval of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 60% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) shareholder approval of either (A) a complete liquidation or dissolution of the Company or (B) a sale or other disposition of all or substantially all of the assets of the Company, or a transaction having a similar effect. "Change of Control" shall not in any event mean any transaction which results from the sale of part or all of the interests of Minorco and its affiliates to the Company or a transaction in which the officers of the Company acquire voting securities of the Company which represent more than 5% of the combined voting power of the voting securities of the Company (such percentage to be determined on a fully diluted basis, assuming the exercise of any stock options granted such management in connection with the transaction). "Good Reason" shall mean any of the following actions, without Executive's express prior written approval, other than due to Executive's permanent disability; (1) any diminution in Executive's titles, duties, responsibilities or status from the positions, duties, responsibilities or status existing immediately prior to a Change of Control. (2) the removal of Executive from, or any failure to re-elect Executive to, any of the offices Executive held immediately prior to a Change of Control; (3) the failure of the Company to pay Executive any compensation when due; (4) any reduction of Executive's base salary or target bonus; (5) any material reduction in Executive's retirement, insurance or fringe benefits; or (6) the change of Executive's principal place of employment to a location more than 25 miles from Executive's principal place of employment immediately prior to the Change of Control. A-2 For these purposes, permanent disability shall mean Executive's inability, by reason of any physical or mental impairment, to substantially perform regular duties which inability is reasonably contemplated to continue for at least one (1) year from its incurrence. A-3 Schedule B SAMPLE GENERAL RELEASE --------------- For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the undersigned, with the intention of binding himself/herself, his/her heirs, executors, administrators and assigns, does hereby release and forever discharge Terra Industries Inc., a Maryland corporation ("Company"), and its present and former officers, directors, executives, agents, employees, affiliated companies, subsidiaries, successors, predecessors and assigns (collectively the "Released Parties"), from any and all claims, actions, causes of action, demands, rights, damages, debts, accounts, suits, expenses, attorneys' fees and liabilities of whatever kind or nature in law, equity, or otherwise, whether now known or unknown, which the undersigned now has, owns or holds, or has at any time heretofore had, owned or held against any Released Party, arising out of or in any way connected with the undersigned's employment relationship with the Company, its subsidiaries, predecessors or affiliated entities, or the termination thereof, including without limitation, any claim for severance or vacation benefits, unpaid wages, salary or bonus, breach of contract, wrongful discharge, impairment of economic opportunity, intentional infliction of emotional harm or other tort or employment discrimination under any applicable federal, state or local statute, provision, order or regulation including but not limited to, any claim under Title VII of the Civil Rights Act ("Title VII"), the federal Age Discrimination in Employment Act ("ADEA") and any similar or analogous state statute, excepting only (i) those obligations of the Company under that certain Executive Retention Agreement between the Company and the undersigned effective ________, 1998 (the "Agreement"), pursuant to which this General Release is being executed and delivered, and (ii) any rights to indemnification the undersigned may have under applicable corporate law, the by-laws or certificate of incorporation of any Released Party or as an insured under any D & O or liability insurance policy now or previously in force. The undersigned understands that by releasing employment discrimination claims against the Released Parties, the undersigned also forever releases and discharges any rights he may have to file or recover in a lawsuit he may bring himself/herself on the same claims and also any right that he may have to any relief that he might otherwise be entitled to as a result of any proceedings instituted by the Equal Employment Opportunity Commission or any other comparable enforcement authority or by the representative(s) of any class to which it is alleged the undersigned may belong. The undersigned acknowledges and agrees that neither the Agreement nor this General Release is to be construed in any way as an admission of any liability whatsoever by any Released Party under Title VII, ADEA, or any other federal or state statute or the principles of common law, any such liability having been expressly denied. The undersigned further declares and represents that he has carefully read and fully understands the terms of this General Release and the Agreement, that he has B-1 been advised and had the opportunity to seek the advice and assistance of counsel with regard to this General Release and the Agreement, that he may take up to and including forty-five (45) days from receipt of this General Release, to consider whether to sign this General Release, that he may revoke this General Release within seven (7) calendar days after signing it by delivering to Company, at its Sioux City, Iowa offices, written notification of revocation, and that he knowingly and voluntarily, of his/her own free will, without any duress, being fully informed and after due deliberate action, accepts the terms of and signs the same as his/her own free act. Dated: Signature: _________________________ ___________________ Burton M. Joyce B-2 EX-10.1.19 5 FORM OF EXECUTIVE RETENTION AGREEMENT Exhibit 10.1.19 EXECUTIVE RETENTION AGREEMENT AGREEMENT made and effective this ___ day of _________, 1998 by and between Terra Industries Inc., its subsidiaries and affiliates (the "Company") and ___________________________ (the "Executive"). The Company has determined that both the Executive's performance and the Company's ability to retain Executive as an employee will be significantly enhanced if Executive is provided with fair and reasonable protection from the risks of a termination of employment following a change in control of the Company. Accordingly, the Company and Executive agree as follows: 1. Defined Terms. ------------- Unless otherwise indicated, capitalized terms used in this Agreement shall have the meanings set forth in Schedule A. 2. Effective Date; Term. -------------------- This Agreement shall be effective on the date hereof and shall remain in effect until the Company terminates this Agreement by giving Executive at least one (1) year advance written notice of termination. Notwithstanding the foregoing, this Agreement shall, if in effect on the date of a Change of Control, remain in effect for at least two (2) years following such Change of Control, and such additional time as may be necessary to give effect to the terms of the Agreement. 3. Change of Control Benefits. -------------------------- If Executive's employment with the Company is terminated at any time within the two (2) years following a Change of Control by the Company without Cause, or by Executive for Good Reason (the effective date of any such termination hereafter referred to as the "Termination Date"), Executive shall be entitled to the benefits provided hereunder. If Executive's employment by the Company is terminated prior to a Change of Control at the request of any party acquiring control of the Company, Executive's Termination Date shall be deemed to have occurred immediately following the Change of Control, and the Executive shall be entitled to the benefits provided herein. (a) Continuation Payments. --------------------- (i) Company shall continue to pay Executive for two (2) years following termination, the Executive's per annum base salary in effect on the date of the Change of Control ("Base Salary"). (ii) Company shall pay to Executive within ten (10) days of termination an amount equal to 200 percent of the Executive's target bonus of ___ percent of Base Salary ("Target Bonus") ratably over a two (2) year period following termination. (iii) As an alternative to the payments described in sub- paragraphs (i) and (ii) above, the Executive may elect, within ten (10) days after termination, to receive (A) an amount equal to two (2) years Base Salary plus 200 percent of the Target Bonus, in a lump sum payment payable within seven (7) days of election, or (B) an amount equal to two (2) years Base Salary plus 200 percent of the Target Bonus over a three (3) year period of payment. (iv) Any periodic payments to be made pursuant to sub-paragraphs (i), (ii) or (iii)(B) above shall be made in accordance with the Company's normal payroll procedures. If the Executive's termination occurs on or after September 1 of any year, the Company shall also pay to the Executive the Executive's Target Bonus of ___ percent of Base Salary multiplied by a fraction, the numerator of which shall be the number of days Executive was employed by the Company in the fiscal year in which the Termination Date occurs and the denominator of which shall be 365, payable within thirty (30) days after termination. (b) Continued Benefits. Until the earlier of the second anniversary of the Termination Date or the date on which Executive becomes employed by a new employer, Company shall, at its expense (subject to Executive's payment of the normal premium, if any, then in effect for employees generally) provide Executive with medical and dental benefits at the highest level provided to Executive during the period beginning immediately prior to the Change of Control and ending on the Termination Date, provided, however, that if Executive becomes employed by a new employer which maintains a major medical plan that either (i) does not cover Executive with respect to a pre-existing condition which was covered under the Company's major medical plan, or (ii) does not cover Executive for a designated waiting period, Executive's coverage under the Company's major medical plan shall continue (but shall be limited in the event of noncoverage due to a preexisting condition, to the preexisting condition itself) until the earlier of the end of the applicable period of noncoverage under the new employer's plan or the second anniversary of the Termination Date. Nothing contained herein shall adversely affect the Executive's rights under the Consolidated Omnibus Budget Reconciliation Act of 1985. (c) Payment of Accrued But Unpaid Amounts. Within seven (7) business days after the Termination Date, Company shall -2- pay Executive any unpaid portion of compensation previously earned by Executive. (d) SERP Benefits. On the Termination Date, the Executive shall become vested in the benefits provided under the Terra Industries Inc. Excess Benefit Plan (the "SERP"). For purposes of computing the Executive's accrued benefits under the SERP, the Company shall credit the Executive with the excess of two (2) years of participation in the SERP and two (2) years of age over the actual years of participation and age credited to Executive on the Termination Date. (e) Effect on Existing Plans. All Change of Control provisions applicable to Executive and contained in any plan, program, agreement or arrangement maintained on or after the date hereof by the Company (including, but not limited to, any stock option, restricted stock or pension plan) shall remain in effect for such period after the date of a Change of Control as is necessary to carry out such provisions and provide the benefits payable thereunder, and may not be altered in a manner which adversely affects Executive without Executive's prior written approval. (f) Outplacement Counseling. Until the earlier of the second anniversary of the Termination Date or the date on which Executive becomes employed by a new employer, the Company shall make available to Executive at the Company's expense professional outplacement services provided by qualified consultants employed by the firm of Challenger, Gray & Associates or a comparable firm selected by the Company. (g) Benefits In Lieu of Severance. Except as may be otherwise specifically provided in an amendment adopted in accordance with paragraph 14, payments under this paragraph 3 shall be in lieu of any severance that may be otherwise payable to or on behalf of the Employee pursuant to the terms of any severance pay arrangement of the Company. 4. Mitigation. Executive shall not be required to seek other employment after termination and any compensation earned from other employment shall not reduce the amounts otherwise payable under this Agreement. 5. Taxes. In the event that the aggregate of all payments or benefits made or provided to the Executive under this Agreement and under all other programs and arrangements of the Company (the "Aggregate Payment") is determined to constitute an "excess parachute payment," as such term is defined in Section 280G(b) of the Internal Revenue Code, the Company shall pay to the Executive -3- prior to the time any excise tax imposed by Section 4999 of the Internal Revenue Code ("Excise Tax") is payable with respect to such Aggregate Payment, an additional amount which, after the imposition of all income and excise taxes thereon, is equal to the Excise Tax on the Aggregate Payment. The determination of whether the Aggregate Payment constitutes an excess parachute payment and, if so, the amount to be provided to the Executive and the time of payment pursuant to this Section 5 shall be made by Deloitte & Touche or such other nationally recognized public accounting firm selected by the Company (the "Auditor"). Notwithstanding the foregoing, in the event that the amount of the Executive's Excise Tax liability is subsequently determined to be greater than the Excise Tax liability with respect to which any initial payment to the Executive under this Section 5 has been made, the company shall pay to the Executive an additional amount (grossed up for all taxes), with respect to such additional Excise Tax (and any interest and penalties thereon) at the time and in the amount reasonably determined by the Auditor. Similarly, if the amount of the Executive's Excise Tax liability is subsequently determined to be less than the Excise Tax liability with respect to which any prior payment to the Executive has been made under this paragraph 5, the Executive shall refund to the Company the excess amount received, promptly after the Executive has received any corresponding refund. The Executive and the Company shall cooperate with each other in connection with any proceeding or claim relating to the existence or amount of liability for Excise Tax, and all expenses incurred by the Executive in connection therewith shall be paid by the Company promptly upon notice of demand from the Executive. 6. Termination for Cause. Nothing in this Agreement shall be construed to prevent the Company from terminating Executive's employment for Cause. If Executive is terminated for Cause, Company shall have no obligation to make any payments under this Agreement, except for payments that may otherwise be payable under then existing employee benefit plans, programs and arrangements of the Company. 7. Indemnification; Director's and Officer's Liability Insurance. Executive shall, after the Termination Date, retain all rights to indemnification under applicable law or under the Company's Articles of Incorporation or By-Laws, as they may be amended or restated from time to time. In addition, the Company shall maintain Director's and Officer's liability insurance on behalf of Executive, at the level in effect immediately prior to the Termination Date, for the two (2) year period following the Termination Date, and throughout the period of any applicable statute of limitations. -4- 8. Executive Covenants. (a) Confidential Information. During the twelve (12) month period following the Termination Date, Executive shall not disclose to any person, or use to the significant disadvantage of any of the Company, any non-public information relating to business plans, marketing plans, customers or employees of the Company other than information the disclosure of which cannot reasonably be expected to adversely affect the business of the Company ("Confidential Information"), provided that nothing contained in this Section 8 shall prevent Executive from being employed by a competitor of the Company or utilizing Executive's general skills, experience, and knowledge, including those developed while employed by the Company. (b) Nondisclosure. Executive shall not disclose the existence of this agreement or its terms to anyone except (i) those outside advisors of Executive which have a need to know such information for tax or other planning purposes or (ii) as is necessary for the enforcement of this agreement or (iii) as required by law. (c) Release. In consideration for the protection and benefits provided for under this Agreement, Executive hereby agrees to execute a release substantially in the form of Schedule B. 9. Disputes. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Sioux City, Iowa in accordance with the Rules of the American Arbitration Association then in effect. At the election of the Executive the arbitrators shall be a panel consisting of Burton Joyce, Gregg Williams and Francis Meyer, or such person or persons selected by the American Arbitration Association in accordance with its rules. Judgment may be entered on an arbitrator's award relating to this Agreement in any court having jurisdiction. 10. Costs of Proceedings. The Company shall pay all costs and expenses, including attorneys' fees and disbursements, at least monthly, of Executive in connection with any legal proceeding (including arbitration), whether or not instituted by the Company or Executive, relating to the interpretation or enforcement of any provision of this Agreement, except that if Executive instituted the proceeding and the judge, arbitrator or other individual presiding over the proceeding affirmatively finds that Executive instituted the proceeding in bad faith, Executive shall pay all costs and expenses, including attorney's fees and disbursements, of Executive. -5- 11. Assignment. ---------- Except as otherwise provided herein, this Agreement shall be binding upon, inure to the benefit of and be enforceable by the Company and Executive and their respective heirs, legal representatives, successors and assigns. If the Company shall be merged into or consolidated with another entity, the provisions of this Agreement shall be binding upon and inure to the benefit of the entity surviving such merger or resulting from such consolidation. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. The provisions of this paragraph 11 shall continue to apply to each successive employer of Executive hereunder in the event of any merger, consolidation or transfer of assets of a successor employer. 12. Withholding. ----------- Notwithstanding the provisions of paragraphs 4 and 5 hereof, Company may, to the extent required by law, withhold applicable federal, state and local income and other taxes from any payments due to Executive hereunder. 13. Applicable Law. -------------- This Agreement shall be governed by and construed in accordance with the laws of the State of Iowa applicable to contracts made and to be performed therein. 14. Entire Agreement. ---------------- This Agreement constitutes the entire agreement between the parties and, except as expressly provided herein, supersedes all other prior agreements concerning the effect of a Change of Control on the relationship between the Company and Executive. This Agreement may be changed only by a written agreement executed by the Company and Executive. * * * The parties have executed this Agreement on the ___ day of _____________, 1998. EXECUTIVE: TERRA INDUSTRIES INC: _________________________ By:___________________________ Its: ________________________ -6- Schedule A CERTAIN DEFINITIONS As used in this Agreement, and unless the context requires a different meaning, the following terms, when capitalized, have the meaning indicated: "Cause" shall mean: (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board of Directors of the Company or any successor to the Company (the "Board") which specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. The termination of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above and specifying the particulars thereof in detail. "Change of Control" shall mean any one of the following: (i) any person (as such term is used in Section 13(d) of the Securities Exchange Act of 1934, hereafter the "Exchange Act") 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) acquires beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission promulgated under the Exchange Act) of the outstanding securities of the Company A-1 in an amount having, or convertible into securities having 25% or more of the ordinary voting power for the election of directors of the Company; (ii) during a period of not more than 24 months, a majority of the Board of Directors of the Company ceases to consist of the existing membership or successors nominated by the existing membership or their similar successors; (iii) shareholder approval of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 60% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) shareholder approval of either (A) a complete liquidation or dissolution of the Company or (B) a sale or other disposition of all or substantially all of the assets of the Company, or a transaction having a similar effect. "Change of Control" shall not in any event mean any transaction which results from the sale of part or all of the interests of Minorco and its affiliates to the Company or a transaction in which the officers of the Company acquire voting securities of the Company which represent more than 5% of the combined voting power of the voting securities of the Company (such percentage to be determined on a fully diluted basis, assuming the exercise of any stock options granted such management in connection with the transaction). "Good Reason" shall mean any of the following actions, without Executive's express prior written approval, other than due to Executive's permanent disability; (1) any diminution in Executive's titles, duties, responsibilities or status from the positions, duties, responsibilities or status existing immediately prior to a Change of Control. (2) the removal of Executive from, or any failure to re-elect Executive to, any of the offices Executive held immediately prior to a Change of Control; (3) the failure of the Company to pay Executive any compensation when due; (4) any reduction of Executive's base salary or target bonus; A-2 (5) any material reduction in Executive's retirement, insurance or fringe benefits; or (6) the change of Executive's principal place of employment to a location more than 25 miles from Executive's principal place of employment immediately prior to the Change of Control. For these purposes, permanent disability shall mean Executive's inability, by reason of any physical or mental impairment, to substantially perform regular duties which inability is reasonably contemplated to continue for at least one (1) year from its incurrence. A-3 Schedule B SAMPLE GENERAL RELEASE --------------- For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the undersigned, with the intention of binding himself/herself, his/her heirs, executors, administrators and assigns, does hereby release and forever discharge Terra Industries Inc., a Maryland corporation ("Company"), and its present and former officers, directors, executives, agents, employees, affiliated companies, subsidiaries, successors, predecessors and assigns (collectively the "Released Parties"), from any and all claims, actions, causes of action, demands, rights, damages, debts, accounts, suits, expenses, attorneys' fees and liabilities of whatever kind or nature in law, equity, or otherwise, whether now known or unknown, which the undersigned now has, owns or holds, or has at any time heretofore had, owned or held against any Released Party, arising out of or in any way connected with the undersigned's employment relationship with the Company, its subsidiaries, predecessors or affiliated entities, or the termination thereof, including without limitation, any claim for severance or vacation benefits, unpaid wages, salary or bonus, breach of contract, wrongful discharge, impairment of economic opportunity, intentional infliction of emotional harm or other tort or employment discrimination under any applicable federal, state or local statute, provision, order or regulation including but not limited to, any claim under Title VII of the Civil Rights Act ("Title VII"), the federal Age Discrimination in Employment Act ("ADEA") and any similar or analogous state statute, excepting only (i) those obligations of the Company under that certain Executive Retention Agreement between the Company and the undersigned effective ________, 1998 (the "Agreement"), pursuant to which this General Release is being executed and delivered, and (ii) any rights to indemnification the undersigned may have under applicable corporate law, the by-laws or certificate of incorporation of any Released Party or as an insured under any D & O or liability insurance policy now or previously in force. The undersigned understands that by releasing employment discrimination claims against the Released Parties, the undersigned also forever releases and discharges any rights (s)he may have to file or recover in a lawsuit (s)he may bring himself/herself on the same claims and also any right that (s)he may have to any relief that (s)he might otherwise be entitled to as a result of any proceedings instituted by the Equal Employment Opportunity Commission or any other comparable enforcement authority or by the representative(s) of any class to which it is alleged the undersigned may belong. The undersigned acknowledges and agrees that neither the Agreement nor this General Release is to be construed in any way as an admission of any liability whatsoever by any Released B-1 Party under Title VII, ADEA, or any other federal or state statute or the principles of common law, any such liability having been expressly denied. The undersigned further declares and represents that (s)he has carefully read and fully understands the terms of this General Release and the Agreement, that (s)he has been advised and had the opportunity to seek the advice and assistance of counsel with regard to this General Release and the Agreement, that (s)he may take up to and including forty-five (45) days from receipt of this General Release, to consider whether to sign this General Release, that (s)he may revoke this General Release within seven (7) calendar days after signing it by delivering to Company, at its Sioux City, Iowa offices, written notification of revocation, and that (s)he knowingly and voluntarily, of his/her own free will, without any duress, being fully informed and after due deliberate action, accepts the terms of and signs the same as his/her own free act. Dated: Signature: _________________________ ______________________________ B-2 EX-10.1.20 6 1999 INCENTIVE AWARD PROGRAM Exhibit 10.1.20 TERRA INDUSTRIES INC. INCENTIVE AWARD PROGRAM FOR OFFICERS & KEY EMPLOYEES 1999 ---- I. Purpose of the Plan ------------------- The purpose of this Incentive Award Program is to motivate and reward officers and key employees of the Company toward achievement of planned annual goals and improved results. II. Eligibility in the Plan ----------------------- Participation in this Incentive Award Program is limited to officers and key employees of Terra Industries Inc., Terra Distribution and Terra Nitrogen whose efforts are expected to contribute directly to the success and accomplishment of the Company's planned goals. III. Special Provisions and Considerations ------------------------------------- Terra's incentive plan year coincides with the company's fiscal year. The Chief Executive Officer will establish corporate financial goals, which are approved by the Board of Directors, which will be used to establish the 1999 incentive pool. Each officer and key employee participating in this plan will be assigned an index directly linked to their position's salary grade which establishes the target incentive as a percentage of year-end base salary. Some Division participants will participate in this Plan and a Division plan and their individual indices will be split or allocated between this plan and their Division plan in establishing the year-end pool for this and their Division Plan. The Chief Executive Officer, Chief Operating Officer or appropriate Senior Officer, is responsible for approving each plan participant's individual goals as soon as practicable in 1999 (See Section IV below). The importance of each goal is reflected in the weight assigned to each goal which sums to one hundred percent (100%). Each plan participant must periodically report on his/her goal achievement to the Chief Executive Officer. These individual goals or objectives will be used in determining the participant's final incentive payment. IV. Funding the Officers and Key Employees Incentive Award Program -------------------------------------------------------------- The 1999 Plan contemplates a split of incentive awards between a portion based upon Company financial performance (which would constitute up to 75% of an individual's target bonus) and a portion based upon individual performance on personal goals (which would constitute up to 34% of each participant's target bonus). As noted above in Part III, Division participants may have their target bonuses split or allocated between overall Company performance and Division performance, as well as the portion based upon individual performance. The funding for the Company performance portion of the incentive award pool is based on the accomplishment of Terra Industries Inc.'s approved return- on-equity (ROE) objectives. The Company performance portion of the pool starts to fund at fifty percent (50%) when the Company's ROE reaches seven percent (7%) and increases on a straight-line basis where twelve percent (12%) ROE equals one hundred percent (100%) funding. Maximum funding of two hundred percent (200%) is achieved at twenty percent (20%) ROE. Any funding for performance over 20% ROE or under 7% ROE is at the discretion of the Personnel Committee of the Board of Directors and the Chief Executive Officer. Funding of the individual performance portion of the incentive award pool is not tied to Company performance. Each participant will develop up to five goals that will be used as the measurement in determining payments under the personal goals section. These goals should be reviewed and approved by the appropriate Senior Officer and the Chief Executive Officer. Accordingly, a participant could earn the portion of his or her bonus based on achieving personal goals even if there is no funding of the Company performance portion of the pool. V. Basis of the Incentive Award ---------------------------- The starting point in determining each participant's individual incentive award is the evaluation of the individual objectives. The participant's individual raw award is calculated by taking each participant's year-end salary, times his/her individual index (or that portion of his/her index used to calculate this pool) and then adjusted by his/her individual performance. The sum of all participants' adjusted raw awards creates an adjusted raw pool. This adjusted raw pool is compared with the sum of the plan participant's year-end salary, times their index (or a portion of his/her index used to calculate this pool) which is then adjusted by the Company's composite performance to form the incentive pool. This adjusted raw pool is adjusted up or down to match the incentive pool. All participant incentives are paid from the incentive pool. -2- The Chief Executive Officer has the discretion to adjust any individual's participation up or down to reflect unusual or unplanned events or to reflect the degree of difficulty of the goals. He may adjust amounts between plan participants and may add amounts from the discretionary part of the pool. The Chief Executive Officer may also choose to award less than the full amount of the pool or add as much as 20% to the pool. VI. Review, Revision and Modification of the Goals ---------------------------------------------- Under normal business conditions, the corporate goals or individual objectives will not be altered or revised once established for the year. Unexpected and unforeseen developments during the course of the year may prompt re-examination of an officer's or key employee's established goals. It is the responsibility of each officer and key employee to note the conditions of change which would prompt such a review and take timely action. Such action would include review with the Chief Executive Officer for the need for revision of an established goal as soon as possible after the detected change. The change(s) is subject to final approval of the Chief Executive Officer. VII. Payment of Award ---------------- The incentive award will be paid each officer and key employee by check as soon as possible after the close of the fiscal year and after approval of the Chief Executive Officer's recommendations by the Personnel Committee of the Board of Directors. To be eligible for full payment, the officer or key employee must have been in the employ of Terra Industries Inc. or one of its subsidiaries as of January 1 of the incentive plan year and must be actively employed by the company on the date the incentive award is paid. VIII. Special Provision ----------------- A newly elected officer or key employee will participate in this incentive program in proportion to the number of full months worked as an officer or key employee during the incentive program year. A participant who retires, becomes permanently disabled or dies shall cease to participate in this program as of the end of the month coincident with retirement, disability or death. The proportionate incentive award will be paid as soon as possible after the close of the fiscal year. While it is the intent of the company to make awards under this plan and to continue the plan from year to year, it reserves the right to amend or terminate the plan entirely at its discretion. -3- EX-13 7 ANNUAL REPORT Exhibit 13 TERRA INDUSTRIES INC. 1998 ANNUAL REPORT FINANCIAL SECTION FINANCIAL TABLE OF CONTENTS Financial Review Consolidated Statements of Financial Position Consolidated Statements of Operations Consolidated Statements of Cash Flows Consolidated Statements of Changes in Stockholders'Equity Notes to the Consolidated Financial Statements Responsibility for Financial Statements Independent Auditors' Report Quarterly Production Data Quarterly Financial and Stock Market Data Revenues Volumes and Prices Stockholders Financial Summary FINANCIAL REVIEW OVERVIEW OF CONSOLIDATED RESULTS The Corporation reported a net loss for 1998 of $(26.2) million compared with net income of $206.9 million in 1997 and $134.0 million in 1996 with diluted earnings (loss) per share of $(0.35), $2.76 and $1.72, respectively, and basic earnings (loss) per share of $(0.35), $2.80 and $1.74, respectively. Revenues increased to $2.55 billion in 1998 from $2.54 billion in 1997 and $2.32 billion in 1996. Reduced margins and sales volumes in both the nitrogen and methanol segments as well as lower sales of crop protection products have significantly impacted the Corporation's 1998 results. 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. Net income in 1997 was reduced by $3.0 million ($0.04 per share) due to the write-off of deferred financing fees in connection with the early retirement of debt. 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. FINANCIAL COMPARABILITY On December 31, 1997, the Corporation acquired the United Kingdom 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 funded a portion of the acquisition with a $225 million minority preferred limited interest in 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 adds distribution locations each year through acquisitions of distributors in its marketing area and disposes of under-performing locations. 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 2 have on the timing and duration of field work for crop planting and harvesting, the supply of crop inputs, technological advances that can affect crop input product mix, 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. 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 came on-stream and profit margins have been under pressure. Profit margins will continue to be under pressure until demand is sufficient to absorb the new supplies or 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. Currently, the methanol industry is experiencing low methanol prices due to oversupply conditions caused by increased worldwide production and decreased worldwide demand. 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 remain steady at 80 million acres in 1999. They also expect planted cotton acreage in the U.S. to stay constant at 13.5 million acres. Passage of the Federal Agriculture Improvement and Reform Act of 1996 eliminated annual acreage set-asides and base acreage restrictions for most crops. The Act 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 3 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. 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 1999. The principal raw material used to produce manufactured nitrogen products and methanol is natural gas. Natural gas costs in 1998 comprised about 49% of the cost of sales for the North American nitrogen manufacturing plants and 24% of the cost of sales for the U.K. manufacturing plants and 65% of the cost of sales 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. 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 1999 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. 4 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. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows of the Corporation due to adverse changes in financial and commodity market prices and rates. The Corporation uses derivative financial instruments to manage risk in the areas of (a) foreign currency fluctuations, (b) changes in natural gas prices and (c) changes in interest rates. (See Note 13 to the Consolidated Financial Statements for additional information on the use of derivative financial instruments.) It is the general policy of the Corporation to avoid unnecessary risk and to limit, to the extent practical, risks associated with operating activities. Management of the Corporation may not engage in activities that expose the Corporation to speculative or non-operating risks. Management is expected to limit risks to acceptable levels. The use of derivative financial instruments is consistent with the overall business objectives of the Corporation. Derivatives are used to manage operating risk within the limits established by Corporation's Board of Directors, and in response to identified exposures, provided they qualify as hedge activities. As such, derivative financial instruments are used to manage exposure to interest rate fluctuations, to hedge specific assets and liabilities denominated in foreign currency, to hedge firm commitments and forecasted commodity purchase transactions, and to protect against foreign exchange rate movements between different currencies that impact revenue and earnings expressed in U.S. dollars. 5 Foreign Currency Fluctuations It is the policy of the Corporation to manage risk associated with foreign currency fluctuations by entering into exchange forward and option contracts covering specific currency obligations or net foreign currency operating requirements. Such hedging is limited to the amounts and duration of the specific obligations being hedged and, in the case of operating requirements, no more than 75% of the forecast requirements, which include firm commitments to purchase natural gas, for a twelve-month period. The primary currencies to which the Corporation is exposed include the Canadian dollar and the British pound. The table below summarizes forward contracts held at December 31, 1998. All contracts are valued in U.S. dollars using December 31, 1998 exchange rates and mature in 1999. Contracts to Purchase Foreign Currency Notional Exchange Fair Value Rate Value Currency Purchased Currency Exchanged (Millions) (FC/1USD$) (Millions) - ------------------------------------------------------------------------------ Canadian Dollar U.S. Dollar 3.0 1.55 --- ============================================================================== Natural Gas Prices -- North American Operations It is the policy of the Corporation to hedge 40-80% of its natural gas requirements for the upcoming 12 months and up to 50% of its requirements for the following 13-36 month period. Natural gas is the principal raw material used to manufacture nitrogen and methanol. Natural gas market prices are volatile and the Corporation manages this volatility through the use of derivative commodity instruments. Annual procurement requirements for natural gas are approximately 134 million MMBtu. The Corporation has hedged 59% of its 1999 requirements and 15% of its 2000 requirements. The fair value of these instruments is estimated based on quoted market prices from brokers, and computations prepared by the Corporation. Market risk is estimated as the potential loss in fair value resulting from a hypothetical 10 percent adverse change in price. As of December 31, 1998, the Corporation's market risk exposure related to future natural gas requirements being hedged was $17.9 million based on a sensitivity analysis. Changes in the market value of these derivative instruments have a high correlation to changes in the spot price of natural gas. This hypothetical adverse impact on natural gas derivative instruments would be more than offset by lower costs for natural gas purchases. Natural Gas Prices - United Kingdom Operations - To meet natural gas production requirements at the Corporation's United Kingdom production facilities, the Corporation enters into one or two-year gas supply contracts with fixed prices for 40-80% of total volume requirements. As of December 31, 1998, the 6 Corporation had contracts for 68% of 1999 natural gas requirements. Accordingly, the Corporation does not use derivative commodity instruments for its United Kingdom natural gas needs. Interest Rate Fluctuations It is the policy of the Corporation to limit the extent of uncapped, variable rate debt to no more than 50% of its total outstanding debt. The Corporation manages interest rate risk to reduce the potential volatility of earnings that may arise from changes in interest rates. The table below provides information about the Corporation's derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, including debt obligations and interest rate swaps. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted average interest rates by expected maturity dates. Notional amounts are used to calculate contractual payments to be exchanged under the contract.
Interest Rate Sensitivity (in millions) Expected Maturity Date --------------------------------------------------------------------------------------------- 1999 2000 2001 2002 2003 Thereafter Total Fair Value ------ ------- ------ ------ ------ ---------- ------ ---------- Long-Term Debt Senior Notes, fixed rate ($US) $ -- $ -- $ -- $ -- $ -- $200.0 $200.0 $207.0 Average interest rate 10.50% 10.50% 10.50% 10.50% 10.50% 10.50% Senior Notes, fixed rate ($US) -- -- -- -- 158.8 -- 158.8 161.1 Average interest rate 10.75% 10.75% 10.75% 10.75% 10.75% 10.75% Bank Term Notes, LIBOR based ($US) 7.8 7.8 7.8 -- 93.8 -- 117.2 117.2 Average interest rate 7.11% 7.05% 7.20% 7.30% 7.43% IDR Bonds, various rates ($US) 0.3 0.3 0.3 0.4 0.5 6.6 8.4 9.0 Average interest rate 6.74% 6.76% 6.77% 6.78% 6.78% 6.79% Other Debt, various rates ($US) 1.4 3.1 0.3 7.2 0.6 -- 12.6 12.6 Average interest rate 7.82% 7.85% 7.29% 7.31% 7.20% -------------------------------------------------------------------------------------------- Total Long-Term Debt $ 9.5 $ 11.2 $ 8.4 $ 7.6 $253.7 $206.6 $497.0 $506.9 ============================================================================================ Short-Term Borrowings Revolving credit facility, notional amount ($US) $330.0 $330.0 $330.0 $330.0 $ 0.0 Variable interest rate: LIBOR based 7.11% 7.05% 7.20% 7.30% Accounts Receivable Securitization Maximum proceeds available ($US) $150.0 $ 136.0 Variable interest rate: LIBOR based 5.62% Preferred Minority Interest BMLP limited interest, notional amount ($US) $225.0 $225.0 $225.0 Variable interest rate: LIBOR based 8.28% 8.22% Interest Rate Swap Variable to fixed, notional amount ($US) $300.0 $300.0 $300.0 $300.0 $(11.2) Average pay rate 6.09% 6.09% 6.09% 6.09% Average receive rate LIBOR LIBOR LIBOR LIBOR ============================================================================================
7 RESULTS OF OPERATIONS - 1998 COMPARED WITH 1997 Consolidated Results The Corporation reported a net loss of $(26.2) million on revenues of $2.55 billion for 1998 compared with net income of $206.9 million on revenues of $2.54 billion in 1997. Basic earnings (loss) per share for 1998 was $(0.35) compared with $2.80 for 1997. Diluted earnings (loss) per share was $(0.35) and $2.76, respectively, for 1998 and 1997. The 1997 results reflect a gain of $1.31 per diluted share for the settlement of insurance claims related to the rebuild of the Port Neal plant. Worldwide overcapacity in both nitrogen and methanol markets has lowered prices and margins for these products which substantially accounts for the decline in earnings in 1998. 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 at the Corporation's ammonia manufacturing and upgrading facilities. The Methanol segment represents wholesale sales of methanol produced at the Corporation's two methanol manufacturing facilities. Total revenues and operating income (loss) by segment for the years ended December 31, 1998 and 1997 were as follows:
(in thousands) 1998 1997 - ------------------------------------------------------------------- REVENUES: Distribution $1,734,257 $1,786,673 Nitrogen Products 751,597 621,410 Methanol 96,547 180,646 Other - net of intercompany eliminations (30,383) (46,360) - ------------------------------------------------------------------- $2,552,018 $2,542,369 ======================= OPERATING INCOME (LOSS): Distribution $ 21,387 $ 40,686 Nitrogen Products 39,329 150,270 Methanol (7,891) 63,662 Other expense - net (7,468) (1,302) - ------------------------------------------------------------------- $ 45,357 $ 253,316 =======================
8 Distribution Revenues from the Distribution segment for the years ended December 31, 1998 and 1997 were as follows:
Distribution Revenues - ------------------------------------------------------------- (in thousands) 1998 1997 - ------------------------------------------------------------- Resale fertilizer $ 401,447 $ 443,751 Crop protection products 1,006,173 1,059,077 Seed 124,928 106,557 Other 201,709 177,288 - ------------------------------------------------------------- $1,734,257 $1,786,673 ====================================
Distribution revenues for 1998 were $1.73 billion, a decrease of $52.4 million from the comparable 1997 period. Operating income for the Distribution segment was $21.4 million and $40.7 million, respectively, for the years ended December 31, 1998 and 1997. Acquisitions, net of closed locations (due to under- performance), contributed $21.2 million in revenues, while revenues at existing locations declined $73.6 million in comparison with the prior year. Operating income at new locations, net of closed locations amounted to $0.2 million for the year ended December 31, 1998. Operating income at existing locations declined $19.5 million in comparison with 1997. Fertilizer revenues were $42.3 million lower in 1998. Selling prices were 6% lower or $19.2 million driven principally by lower nitrogen prices and correspondingly fertilizer cost of sales declined $20.5 million. Fertilizer volumes decreased by 5% lowering gross profit by $2.7 million for the year ended December 31, 1998 compared with 1997. Heavy fall applications in 1997 combined with continuously rainy weather in the spring of 1998 throughout the Corn Belt more than offset a volume increase across the Southern division. Crop protection products revenues for 1998 amounted to $1.01 billion, or $52.9 million less than 1997. Dealer sales were $32.7 million lower and grower sales declined $22.3 million in 1998 compared with 1997. The impact of low grain prices reduced crop protection products demand from both dealers and growers. In addition, the increased use of genetically engineered seed (with built-in resistance to specific insects or herbicides) also reduced crop protection product revenues. Correspondingly, gross profits for crop protection products declined $8.6 million for 1998 in comparison with 1997. 9 A marketing focus on seed sales as well as an increase in demand and availability of specialized seeds led to an increase in seed revenues of $18.4 million for 1998 in comparison with 1997. The increase in sales contributed to a $3.9 million increase in seed gross profit. Other distribution revenues increased $24.4 million in 1998 compared with 1997. Grain and feed have contributed $12.5 million of new revenues with a corresponding gross profit of $7.0 million. Licensing fees related to biotechnical seed varieties added $14.3 million to revenues in 1998 and $2.3 million to gross profits. Partially offsetting these increases was a reduction in customer service charges on past-due accounts of $1.8 million. Selling, general and administrative expenses increased $18.0 million in 1998 in comparison with 1997. Acquisitions, net of closed locations increased expenses by $6.9 million while expenses at existing locations increased by $11.1 million. Bad debt expense increased $3.2 million in comparison to 1997 as low grain prices and poor weather conditions impacted growers' ability to pay for crop inputs. The 1997 period included a $5.3 million decrease to employee benefits expense related to a reduction in retiree medical benefits. Nitrogen Products Volumes and prices for the years ended December 31, 1998 and 1997 were as follows:
Volumes and Prices - ------------------------------------------------------------------------------- (excludes the Distribution segment) 1998 1997 - ------------------------------------------------------------------------------- Sales Average Sales Average (quantities in thousands of tons) Volumes Unit Price Volumes Unit Price - ------------------------------------------------------------------------------- Ammonia 1,349 $ 143 1,182 $ 187 Nitrogen solutions 3,548 66 3,440 82 Urea 631 118 671 145 Ammonium nitrate 809 134 45 149 - -------------------------------------------------------------------------------
Nitrogen Products revenues increased by $130.2 million to $751.6 million for 1998 in comparison with 1997. Revenue for 1998 at the Corporation's U.K. plants, which were acquired December 31, 1997, amounted to $279.4 million. Revenue for 1998 at the North American plants declined by $149.2 million in comparison with 1997 as a result of lower prices for all products and lower sales volumes for ammonia and urea. Ammonia, nitrogen solutions and urea prices decreased by 27%, 20% and 19%, respectively, causing revenues to decline by $131.1 million. Lower worldwide demand for urea and increased worldwide nitrogen production capacity created excess nitrogen supplies and caused prices to fall. For the North American operations, ammonia sales volumes declined 9%, and urea sales volumes declined 6%, while nitrogen solutions sales volumes increased 3% in the year ended 10 December 31, 1998 compared with 1997. Weather conditions during the 1998 period favored nitrogen solutions applications while the weather in 1997 favored ammonia applications. The Nitrogen Products segment reported operating income of $39.3 million and $150.3 million for 1998 and 1997, respectively. U.K. operations contributed $300,000 towards operating income. North American operating income declined by $111.2 million for 1998 in comparison with 1997. Pricing pressures and lower volumes as discussed above accounted for the significant decline to operating income. Those factors were partially offset by lower operating expenses and reduced natural gas costs which declined by 2% in comparison with 1997. The Corporation's use of financial derivatives to forward price a portion of its natural gas needs resulted in cost savings of $11.9 million compared with 1998 spot prices. Methanol Methanol revenues were $96.5 million compared with $180.6 million for the years ended December 31, 1998 and 1997, respectively. Average methanol sales prices were $0.34 per gallon and $0.58 per gallon for 1998 and 1997, respectively. Lower prices in 1998 were a result of oversupply conditions due to higher production and lower worldwide demand. Methanol sales volumes declined by 8% to 286 million gallons for 1998 compared with 1997. The Corporation began reducing production of methanol in the third quarter of 1998 due to market conditions. The decline in prices resulted in a revenue decline of $69.3 million while the volume decrease accounted for $14.8 million of the decline. The Methanol segment reported an operating loss of $7.9 million for 1998 and an operating income of $63.7 million for the comparable 1997 period. The decline in prices and volumes discussed above accounted for the decline in operating income. Partially offsetting these was a 6% decline in the cost of natural gas. During 1998, natural gas hedging activities reduced the Corporation's natural gas costs by $3.5 million compared with spot prices. The Corporation temporarily shut down production at its Beaumont methanol plant in January 1999. Current expectations are to re-start the plant in March 1999. The Beaumont plant has an annual production capacity of 280 million gallons. The Corporation has adequate inventory to meet sales commitments until the plant is restarted in March. 11 Other Expense - Net Other expenses, which represent costs associated with general corporate activities not attributable to a specific business segment, increased $6.1 million in 1998 due primarily to vesting of restricted stock grants and professional fees related to the proposed sale of the Corporation's outstanding common stock. (See the "Pending Change of Control" section of this discussion.) Interest Expense - Net Net interest expense was $59.1 million in 1998 compared with $56.6 million in 1997. Interest expense increased as a result of additional borrowings used to fund the U.K. acquisition, partially offset by decreased borrowings for working capital needs. 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 was $27.5 million for 1998 compared with $27.6 million in 1997. Minority interest declined $18.0 million due to lower earnings from TNCLP operations. Minority interest increased $17.9 million in 1998 due to the BMLP minority interest issued by the Corporation on December 31, 1997 and not outstanding in 1997. Income Taxes Income tax expense was recorded at an effective rate of 36.4% for 1998 compared with 36.8% in 1997. 12 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). Total revenues and operating income by segment for the years ended December 31, 1997 and 1996 were as follows:
(in thousands) 1997 1996 - ----------------------------------------------------------------------- REVENUES: 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 ======================== Distribution Revenues from the Distribution segment for the years ended December 31, 1997 and 1996 were as follows: Distribution Revenues - ----------------------------------------------------------------------- (in thousands) 1997 1996 - ----------------------------------------------------------------------- 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 ========================
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. 13 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:
Volumes and Prices - -------------------------------------------------------------------------------- (excludes the Distribution segment) 1997 1996 - -------------------------------------------------------------------------------- Sales Average Sales Average (quantities in thousands of tons) Volumes Unit Price Volumes Unit Price - -------------------------------------------------------------------------------- Ammonia 1,182 $ 187 1,174 $ 185 Nitrogen solutions 3,440 82 3,180 94 Urea 671 145 575 179 - --------------------------------------------------------------------------------
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 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 14 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. 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%. 15 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 stock, 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 provided by operations in 1998 was $141 million, or $199 million less than 1997 primarily as a result of lower operating income. The 1998 decline to earnings resulted primarily from lower prices for nitrogen products and methanol produced by the Corporation. Nitrogen and methanol prices are expected to remain at or near current levels into 1999. Nevertheless, the Corporation expects over $120 million of non-cash charges to 1999 income and consequently believes that cash from operations and available financing sources will be sufficient to meet anticipated cash requirements. The Corporation has available a $330 million revolving credit facility for working capital needs. As of December 31, 1998, $7.0 million was outstanding under this facility. The Corporation funded plant and equipment investments of $100.4 million and expended $6.6 million to acquire new distribution locations in 1998. The Corporation began construction in the fourth quarter of 1997 of a $57 million ammonia production loop at the Beaumont, Texas methanol plant with the facility expected to be fully operational by the end of 1999. The Corporation expects 1999 capital expenditures to approximate $90 million consisting of the expenditures related to completing the Beaumont ammonia production loop, expansion of existing service centers, routine replacement of equipment, and efficiency improvements at manufacturing facilities. During 1998, the Corporation distributed $2.89 per unit, or $17.2 million, to minority TNCLP Common Unitholders, distributed a preferred return of $17.9 million to BMLP's minority partner, and paid a dividend of $0.20 per Common Share which totaled $15.0 million. On December 17, 1997, the Corporation announced that it was resuming purchases of common units of TNCLP on the open market and through privately negotiated transactions. Under an existing authorization of the Board of Directors, the Corporation may acquire up to five million common units. The Corporation acquired 632,500 common units during 1998 for $16.5 million, bringing its total number of common units acquired under this authorization, to 1.6 million units. 16 Cash balances at December 31, 1998 were $141.6 million of which $4.6 million is used to collateralize letters of credit supporting recorded liabilities. 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, 1999. The Corporation has reviewed SFAS 133 and intends to implement the standard on January 1, 2000. 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 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 near January 1, 2000. This issue affects virtually every company. The Corporation has assigned dedicated resources to address its Year 2000 issues with a Year 2000 Steering Committee providing management oversight and coordination. The Corporation has also published Year 2000 Information and Readiness Disclosures on its 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 some remedial actions have been identified. The cost of remedial actions for the MIS area is not material to the Corporation. Nearly all of these remedial actions are complete with minimal cost. Testing is substantially complete with the mainframe hardware systems and the associated software, with the exception of a few software packages originally purchased from third parties that are scheduled to be updated in 1999. The Corporation recently completed an organization-wide review of all possible computing functions, including the process control systems and instrumentation in the manufacturing facilities and the diverse operations in the distribution segment. Some remedial actions have been identified in a few areas, with the bulk of those remaining principally associated with the Corporation's U.K. operations. The cost of these remedial actions is not expected to be material to the Corporation. Testing is substantially complete at three of the Corporation's manufacturing facilities and at a small part of the operations at the lower risk distribution segment. 17 The Corporation is also assessing Year 2000 issues in relation to its customers, suppliers and other constituents because the action or inaction of third parties may materially affect the Corporation. An initial assessment of key third parties, including utility suppliers, has been completed and some follow up is ongoing. 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 assessment, remediation, testing and contingency planning efforts for Year 2000 issues in the third quarter of 1999. Based on substantial completion of these 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. PENDING CHANGE OF CONTROL Minorco, S.A., through its wholly-owned subsidiaries, owns 56% of the Corporation's outstanding shares. In October 1998, Minorco announced its intention to dispose of its interest in the Corporation. Minorco and the Corporation are in discussion with prospective purchasers for the Minorco interests and/or all of Corporation's outstanding common shares. 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 this discussion. 18 19 Consolidated Statements of Financial Position
======================================================================================= At December 31, - --------------------------------------------------------------------------------------- (in thousands) 1998 1997 - --------------------------------------------------------------------------------------- Assets Cash and short-term investments $ 141,643 $ 180,062 Accounts receivable, less allowance for doubtful accounts of $15,134 and $13,154 138,751 111,690 Inventories 419,704 395,940 Other current assets 38,592 51,287 - --------------------------------------------------------------------------------------- Total current assets 738,690 738,979 - --------------------------------------------------------------------------------------- Equity and other investments 25,334 24,485 Property, plant and equipment, net 1,159,313 1,181,384 Excess of cost over net assets of acquired businesses 291,325 304,567 Deferred tax asset 6,202 10,794 Other assets 94,283 99,745 - --------------------------------------------------------------------------------------- Total assets $2,315,147 $2,359,954 ======================================================================================= Liabilities Debt due within one year $ 9,470 $ 9,538 Accounts payable 257,484 203,554 Accrued and other liabilities 209,453 223,163 - --------------------------------------------------------------------------------------- Total current liabilities 476,407 436,255 - --------------------------------------------------------------------------------------- Long-term debt 487,560 497,030 Deferred income taxes 204,153 193,456 Other liabilities 62,671 82,315 Minority interest 336,504 360,569 Commitments and contingencies (Note 12) - --------------------------------------------------------------------------------------- Total liabilities 1,567,295 1,569,625 - --------------------------------------------------------------------------------------- Stockholders' Equity Capital stock Common Shares, authorized 133,500 shares; 75,465 and 74,977 shares outstanding 127,887 127,581 Paid-in capital 552,893 548,772 Accumulated other comprehensive income (14,157) (8,488) Retained earnings 81,229 122,464 - --------------------------------------------------------------------------------------- Total stockholders' equity 747,852 790,329 - --------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $2,315,147 $2,359,954 =======================================================================================
See accompanying Notes to the Consolidated Financial Statements. 20 Consolidated Statements of Operations
================================================================================================== Year ended December 31, - -------------------------------------------------------------------------------------------------- (in thousands, except per-share amounts) 1998 1997 1996 - -------------------------------------------------------------------------------------------------- Revenues Net sales $2,472,961 $2,462,081 $2,264,509 Other income, net 79,057 80,288 51,977 - -------------------------------------------------------------------------------------------------- 2,552,018 2,542,369 2,316,486 - -------------------------------------------------------------------------------------------------- Cost and Expenses Cost of sales 2,152,392 1,967,344 1,722,450 Selling, general and administrative expense 357,441 323,975 300,897 Equity in earnings of unconsolidated affiliates (3,172) (2,266) (2,042) - -------------------------------------------------------------------------------------------------- 2,506,661 2,289,053 2,021,305 - -------------------------------------------------------------------------------------------------- Income from operations 45,357 253,316 295,181 Insurance recovery - damaged facility -- 163,427 -- Interest income 4,553 6,525 7,102 Interest expense (63,649) (63,153) (59,947) Minority interest (27,510) (27,633) (44,485) - -------------------------------------------------------------------------------------------------- Income (loss) before income taxes and extraordinary item (41,249) 332,482 197,851 Income tax provision (benefit) (15,000) 122,600 63,900 - -------------------------------------------------------------------------------------------------- Income (loss) before extraordinary item (26,249) 209,882 133,951 Extraordinary loss on early retirement of debt -- (2,995) -- - -------------------------------------------------------------------------------------------------- Net Income (Loss) $ (26,249) $ 206,887 $ 133,951 ================================================================================================== Basic Earnings (Loss) Per Share: Income (loss) before extraordinary item $ (0.35) $ 2.84 $ 1.74 Extraordinary loss on early retirement of debt -- (0.04) -- - -------------------------------------------------------------------------------------------------- Net Income (Loss) $ (0.35) $ 2.80 $ 1.74 ================================================================================================== Diluted Earnings (Loss) Per Share: Income (loss) before extraordinary item $ (0.35) $ 2.80 $ 1.72 Extraordinary loss on early retirement of debt -- (0.04) -- - -------------------------------------------------------------------------------------------------- Net Income (Loss) $ (0.35) $ 2.76 $ 1.72 ==================================================================================================
See accompanying Notes to the Consolidated Financial Statements. 21 Consolidated Statements of Cash Flows
============================================================================================ Year ended December 31, - -------------------------------------------------------------------------------------------- (in thousands) 1998 1997 1996 - -------------------------------------------------------------------------------------------- Operating Activities Net income (loss) $ (26,249) $ 206,887 $ 133,951 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Insurance recovery - damaged facility -- (163,427) -- Depreciation and amortization 131,004 96,091 83,210 Deferred income taxes 11,319 66,342 15,959 Minority interest in earnings 27,510 27,633 44,485 Other non-cash items (2,197) (4,306) (3,059) Change in current assets and liabilities, excluding working capital purchased: Accounts receivable (25,393) (9,649) 100,359 Inventories (21,987) 86,253 (53,185) Other current assets 3,780 45,276 (42,849) Accounts payable 53,921 (15,144) (8,291) Accrued and other liabilities (17,616) (1,127) (27,952) Reimbursed Port Neal casualty expenses 14,314 7,629 (26,498) Other (7,015) (1,695) (14,291) - -------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 141,391 340,763 201,839 - -------------------------------------------------------------------------------------------- Investing Activities Acquisitions, net of cash acquired (6,623) (384,284) (16,181) Purchase of property, plant and equipment (100,414) (55,249) (99,326) Port Neal plant construction -- (29,860) (86,323) Insurance proceeds from plant casualty -- 95,057 26,675 Other 8,709 3,451 6,659 - -------------------------------------------------------------------------------------------- Net Cash Used In Investing Activities (98,328) (370,885) (168,496) - -------------------------------------------------------------------------------------------- Financing Activities Net short-term borrowings -- (116,332) 90,318 Proceeds from issuance of long-term debt -- 132,867 151 Principal payments on long-term debt (9,538) (33,611) (4,412) Stock (repurchase) issuance - net 286 (21,264) (91,131) Distributions to minority interests (35,052) (34,402) (53,493) Repurchase of TNCLP common units (16,523) -- -- Redemption of preferred stock -- (24,950) -- Sale of minority interest in subsidiary -- 225,000 -- Dividends (14,986) (13,481) (11,582) Other -- 2,673 -- - -------------------------------------------------------------------------------------------- Net Cash Provided by (Used In) Financing Activities (75,813) 116,500 (70,149) - -------------------------------------------------------------------------------------------- Foreign Exchange Effect on Cash and Short-Term Investments (5,669) (7,058) (1,159) - -------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Short-Term Investments (38,419) 79,320 (37,965) Cash and Short-Term Investments at Beginning of Year 180,062 100,742 138,707 - -------------------------------------------------------------------------------------------- Cash and Short-Term Investments at End of Year $ 141,643 $ 180,062 $ 100,742 ============================================================================================ Interest Paid $ 61,907 $ 61,446 $ 58,706 ============================================================================================ Income Taxes Paid (Received) $ (7,085) $ 18,519 $ 80,340 ============================================================================================ Noncash Investing and Financing Activities: Stock issuance for distribution locations acquisition $ -- $ 19,112 $ 2,842 ============================================================================================
See accompanying Notes to the Consolidated Financial Statements. 22 Consolidated Statements of Changes in Stockholders' Equity ================================================================================
Accumulated Capital Stock Other Retained Comprehensive ------------------ Paid-In Comprehensive Earnings (in thousands) Income Shares Amount Capital Income (Deficit) Total - ------------------------------------------------------------------------------------------------------------------------------- December 31, 1995 81,173 $133,970 $631,195 $ (271) $(193,311) $571,583 Comprehensive Income Net income $133,951 --- --- --- --- 133,951 133,951 Foreign currency translation adjustments (1,159) --- --- --- (1,159) --- (1,159) -------- Total $132,792 ======== Issuance of Common Shares 219 219 2,623 --- --- 2,842 Repurchase of Common Shares (6,827) (6,827) (84,963) --- --- (91,790) Exercise of stock options, net 144 144 515 --- --- 659 Stock Incentive Plan 301 108 1,480 --- --- 1,588 Dividends --- --- --- --- (11,582) (11,582) - ------------------------------------------------------------------------------------------------------------------------------- December 31, 1996 75,010 127,614 550,850 (1,430) (70,942) 606,092 - ------------------------------------------------------------------------------------------------------------------------------- Comprehensive Income Net income $206,887 --- --- --- --- 206,887 206,887 Foreign currency translation adjustments (7,058) --- --- --- (7,058) --- (7,058) -------- Total $199,829 ======== Issuance of Common Shares 1,499 1,499 17,613 --- --- 19,112 Repurchase of Common Shares (1,673) (1,673) (20,759) --- --- (22,432) Exercise of stock options, net 141 141 1,068 --- --- 1,209 Dividends --- --- --- --- (13,481) (13,481) - ------------------------------------------------------------------------------------------------------------------------------- December 31, 1997 74,977 127,581 548,772 (8,488) 122,464 790,329 - ------------------------------------------------------------------------------------------------------------------------------- Comprehensive Income Net loss $(26,249) --- --- --- --- (26,249) (26,249) Foreign currency translation adjustments (5,669) --- --- --- (5,669) --- (5,669) -------- Total $(31,918) ======== Exercise of stock options, net 43 43 243 --- --- 286 Stock Incentive Plan 445 263 3,878 --- --- 4,141 Dividends --- --- --- --- (14,986) (14,986) - ------------------------------------------------------------------------------------------------------------------------------- December 31, 1998 75,465 $127,887 $552,893 $(14,157) $ 81,229 $747,852 ===============================================================================================================================
See accompanying Notes to the Consolidated Financial Statements. 23 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. Description of business: The Corporation produces and markets nitrogen fertilizer, crop protection products, seed and services for farmers, dealers, and professional growers. The Corporation also produces and markets nitrogen products and methanol for the industrial sector. 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 foreign currency translation adjustments in accumulated other comprehensive income in stockholders' equity. These translation adjustments are the only component of accumulated other comprehensive income. 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 expected cash flows from 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 until 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. 24 Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications: Certain reclassifications have been made to prior years' financial statements to conform with current year presentation. Per-share results: 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. Recently issued accounting standards: In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities," which will be effective for fiscal years beginning after June 15, 1999. The Corporation will adopt SFAS 133 effective January 1, 2000. At this time, the Corporation has not determined the impact of SFAS 133 on its results of operations, financial position or cash flows. 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 excess of the purchase price over the fair value of the assets acquired of $31 million is being amortized on a straight line basis over 18 years which is estimated to be the average remaining useful life of the manufacturing plants acquired. 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 58 million British Pound Sterling ($95.7 million USD at the time of signing) 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. No payments were due under this agreement in 1998. 25 Operating results subsequent to the date of acquisition are reflected in the 1998 Consolidated Statements of Operations. 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:
Year Ended December 31, - ------------------------------------------------------------------------------- (in thousands, except per-share data) 1997 1996 - ------------------------------------------------------------------------------- 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 ===============================================================================
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. 3. Earnings Per Share The following table provides a reconciliation between Basic and Diluted Earnings (Loss) Per Share.
(in thousands, except per-share data) 1998 1997 1996 - ------------------------------------------------------------------------------------------ Basic earnings (loss) per share computation: Earnings (loss) available before extraordinary item $(26,249) $209,882 $133,951 Extraordinary loss on debt retirement -- (2,995) -- - ------------------------------------------------------------------------------------------ Earnings (loss) available to common shareholders $(26,249) $206,887 $133,951 ========================================================================================== Basic weighted average shares outstanding 73,954 73,830 77,178 ========================================================================================== Earnings (loss) per share before extraordinary item $ (0.35) $ 2.84 $ 1.74 Extraordinary loss per share -- (0.04) -- - ------------------------------------------------------------------------------------------ Basic earnings (loss) per share $ (0.35) $ 2.80 $ 1.74 ========================================================================================== Diluted earnings (loss) per share computation: Earnings (loss) available before extraordinary item $(26,249) $209,882 $133,951 Extraordinary loss on debt retirement -- (2,995) -- - ------------------------------------------------------------------------------------------ Earnings (loss) available to common shareholders $(26,249) $206,887 $133,951 ========================================================================================== Basic weighted average shares outstanding 73,954 73,830 77,178 Stock options -- 513 572 Restricted shares -- 346 83 Contingent shares -- 336 -- - ------------------------------------------------------------------------------------------ Diluted weighted average shares outstanding 73,954 75,025 77,833 ========================================================================================== Earnings (loss) per share before extraordinary item $ (0.35) $ 2.80 $ 1.72 Extraordinary loss per share -- (0.04) -- - ------------------------------------------------------------------------------------------ Diluted earnings (loss) per share $ (0.35) $ 2.76 $ 1.72 ==========================================================================================
26 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, 1998, the proceeds of the uncollected balance of accounts receivable sold totaled $136 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 Operations. 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:
(in thousands) 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Raw materials $ 60,676 $ 41,724 Finished goods 359,028 354,216 - --------------------------------------------------------------------------------------------------------------------- Total $ 419,704 $ 395,940 ===================================================================================================================== 6. Other Current Assets Other current assets consisted of the following at December 31: (in thousands) 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Deferred tax asset - current $ 15,307 $ 8,332 Income taxes recoverable - foreign 813 -- Insurance recoverable -- 14,314 Other current assets 22,472 28,641 - --------------------------------------------------------------------------------------------------------------------- Total $ 38,592 $ 51,287 ===================================================================================================================== 7. Property, Plant and Equipment, Net Property, plant and equipment, net consisted of the following at December 31: (in thousands) 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Land and buildings $ 170,424 $ 143,816 Plant and equipment 1,281,514 1,216,481 Construction in progress 75,962 81,561 - --------------------------------------------------------------------------------------------------------------------- 1,527,900 1,441,858 Less accumulated depreciation and amortization (368,587) (260,474) - --------------------------------------------------------------------------------------------------------------------- Total $1,159,313 $1,181,384 =====================================================================================================================
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 27 explosion less uninsured expenses. The Corporation capitalized $249 million related to the rebuild of the Port Neal manufacturing facility. 9. Debt Due Within One Year Debt due within one year consisted of the following at December 31:
(in thousands) 1998 1997 - ------------------------------------------------------------------------------ Short-term borrowings $ -- $ -- Current maturities of long-term debt 9,470 9,538 - ------------------------------------------------------------------------------ Total $ 9,470 $ 9,538 ============================================================================== Weighted average short-term borrowings $ 15,534 $ 96,741 ============================================================================== Weighted average interest rate 8.0% 7.6% ==============================================================================
The Corporation has a credit agreement to provide revolving credit facilities of up to $330 million for seasonal working capital needs and other corporate purposes. There was $7.0 million outstanding at December 31, 1998 and 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 revolving credit facilities expire December 31, 2002. A commitment fee is charged on the unused portion of the facilities under the credit agreement, currently 1/2 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:
(in thousands) 1998 1997 - ------------------------------------------------------------------------------ Customer deposits $ 81,119 $ 99,582 Payroll and benefit costs 30,822 35,684 Income taxes - federal 1,649 14,487 Income taxes - foreign -- 1,741 Income taxes - state 3,498 4,286 Other 92,365 67,383 - ------------------------------------------------------------------------------ Total $209,453 $223,163 ==============================================================================
28 11. Long-Term Debt Long-term debt consisted of the following at December 31:
(in thousands) 1998 1997 - ------------------------------------------------------------------------------------------- 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 117,187 125,000 Industrial Development Revenue Bonds bearing interest at an average 6.85% with increasing payments from 1999 to 2011 8,405 8,645 Other 12,683 14,168 - ------------------------------------------------------------------------------------------- 497,030 506,568 Less current maturities (9,470) (9,538) - ------------------------------------------------------------------------------------------- Total $487,560 $497,030 ===========================================================================================
Scheduled principal payments for each of the five years 1999 through 2003 are $9.5 million, $11.2 million, $8.4 million, $7.6 million and $253.7 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 7.31%. The Notes include covenants similar to the credit agreement described in Note 9 - Debt Due Within One Year. The Industrial Development Revenue Bonds due in 2011 are secured by a letter of credit guaranteed by the Corporation and, along with certain other long-term debt due in 2003, by the Corporation's headquarters building located in Sioux City, Iowa. 29 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:
(in thousands) - -------------------------------------------------------------------------------- 1999 $ 49,775 2000 39,313 2001 24,434 2002 16,121 2003 and thereafter 27,475 - -------------------------------------------------------------------------------- Total $157,118 ================================================================================
Total rental expense under all leases, including short-term cancelable operating leases, was approximately $58.4 million, $54.3 million and $54.1 million for the years ended December 31, 1998, 1997 and 1996, 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. During 1998, the purchaser ceased operations and declared bankruptcy. The Corporation has provided reserves adequate to cover the estimated present value of these liabilities at December 31, 1998. 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 into derivative transactions only 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 Corporation to currency, interest or price risk. 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. 30 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, 1998, the existing forward contracts represented approximately 15% of anticipated net 1999 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 one or two-year term gas supply contracts with fixed prices for 40-80% of total volume requirements. As of December 31, 1998, the Corporation had contracts for 68% of 1999 natural gas requirements. Accordingly, the Corporation does not use derivative financial instruments for 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 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 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 contracts are traded in months forward and settlement dates are scheduled to coincide with gas purchases during that future period. A swap is a contract between the 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. Basis swap 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 swap and basis swap agreements. 31 The following summarizes open natural gas contracts at December 31, 1998 and 1997:
(in thousands) 1998 1997 - ------------------------------------------------------------------------------ Contract Unrealized Contract Unrealized MMBtu Gain (Loss) MMBtu Gain (Loss) - ------------------------------------------------------------------------------ Futures 1,200 $ (46) (540) $ --- Swaps 86,565 (11,698) 133,570 29,219 Options 16,480 (55) --- --- - ------------------------------------------------------------------------------ 104,245 $ (11,799) 133,030 $ 29,219 ============================================================================== Basis swaps 19,165 $ 2,213 104,575 $ (2,034) ==============================================================================
Annual production requirements are approximately 134 million MMBtu. Contracts were in place at December 31, 1998 to cover 59% of 1999 natural gas requirements and 15% of 2000 natural gas requirements. 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 losses on closed contracts of $3.9 million relating to future periods have been deferred and are included in other current assets as of December 31, 1998. Cash flows related to natural gas hedging are reported as cash flows from operating activities. During 1998, 1997 and 1996, natural gas hedging activities reduced the Corporation's natural gas costs by approximately $15.4 million, $57.6 million and $74.3 million, respectively, compared with spot prices. Interest Rate Fluctuations - The Corporation has entered into interest rate swap agreements to fix the interest rate on a portion of its floating rate obligations at an average rate of approximately 6.09% per annum. The interest rate swap agreements are designated as hedges. At December 31, 1998, the notional amount of the swap agreement was $300 million. The agreements expire December 31, 2002. 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, 1998 and 1997. 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.
1998 1997 - ---------------------------------------------------------------- Carrying Fair Carrying Fair (in millions) Amount Value Amount Value - ---------------------------------------------------------------- Foreign currency $ --- $ --- $ --- $ (0.1) Natural gas (3.9) (13.5) 5.7 32.9 Interest rate --- (11.2) --- (2.1) - ----------------------------------------------------------------
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. 32 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, 1998 and 1997. 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.
1998 1997 - ------------------------------------------------------------------------------- Carrying Fair Carrying Fair (in millions) Amount Value Amount Value - ------------------------------------------------------------------------------- Financial Assets Cash and short-term investments $ 141.6 $ 141.6 $ 180.1 $ 180.1 Receivables 138.8 138.8 111.7 111.7 Equity and other investments 25.3 26.8 24.5 26.3 Other assets 9.3 9.3 9.9 9.9 Financial Liabilities Long-term debt (497.0) (506.9) (506.6) (530.5) ===============================================================================
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. 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, 1998, the Corporation had letters of credit outstanding totaling $27.9 million, guaranteeing various insurance and financing activities. Short-term investments of $4.6 million and $5.4 million at December 31, 1998 and 1997, respectively 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, 1998, 2.1 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, 1995 to December 31, 1998 and no Trust Shares were outstanding at December 31, 1998. 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 $4.2 million, $1.2 million and $2.8 million for the years ended December 31, 1998, 1997 and 1996, 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, 1998. 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, 1998, 2.6 million Common Shares were available for grant under the 1997 Plan. 34 A summary of the Corporation's stock-based compensation activity related to stock options for the years ended December 31, is as follows:
(options in thousands) - ------------------------------------------------------------------------------------------------------- 1998 1997 1996 ------------------- ------------------- ------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Number Price Number Price Number Price - ------------------------------------------------------------------------------------------------------- Outstanding - beginning of year 2,428 $ 10.47 1,719 $ 9.44 1,350 $ 6.92 Granted 35 8.47 871 12.23 535 14.62 Expired/terminated 269 11.75 21 14.49 8 10.50 Exercised 43 6.69 141 8.23 158 5.36 - ------------------------------------------------------------------------------------------------------- Outstanding - end of year 2,151 $ 10.35 2,428 $ 10.47 1,719 $ 9.44 =======================================================================================================
The following table summarizes information about stock options outstanding and exercisable at December 31, 1998:
(options in thousands) - ----------------------------------------------------------------------------------------- Options Outstanding Options Exercisable ---------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Range of Number Remaining Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price - ----------------------------------------------------------------------------------------- $3.00 $ 5.99 515 3.3 years $ 5.00 515 $ 5.00 6.00 8.99 152 2.6 6.94 125 6.75 9.00 11.99 286 6.1 10.51 139 10.50 12.00 14.99 1,198 8.6 13.05 533 13.45 - ----------------------------------------------------------------------------------------- Total 2,151 6.6 $ 10.35 1,312 $ 9.18 =========================================================================================
There were 1,073,000 and 1,035,000 options exercisable at December 31, 1997 and 1996, respectively. The weighted average fair value of options granted was $2.83 per option for 1998, $3.58 per option for 1997 and $4.34 per option for 1996. The fair value of options granted was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions:
1998 1997 1996 - ---------------------------------------------------------- Risk-free interest rate 5.52% 5.77% 5.93% Dividend yield 2.30% 1.40% 1.00% Expected volatility 42.00% 28.00% 27.00% Expected life (years) 4.0 4.6 4.5 ==========================================================
There were 610,000 restricted shares granted during 1998 with a weighted average fair value of $5.75 per share. 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. The restricted shares granted in 1997 and 1996 became fully vested in 1998 and are included as increases to stockholders' equity. 35 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:
(in thousands, except per-share data) 1998 1997 1996 - ----------------------------------------------------------------------------- Net income (loss) As reported $(26,249) $206,887 $133,951 Pro forma (28,270) 205,626 133,816 Diluted earnings (loss) per share As reported $ (0.35) $ 2.76 $ 1.72 Pro forma (0.38) 2.74 1.72 =============================================================================
The pro forma impact takes into account only 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 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:
(in thousands) 1998 1997 1996 - ---------------------------------------------------------------------------- Service cost $ 8,319 $ 5,394 $ 5,280 Interest cost 9,689 6,651 6,098 Expected return on plan assets (13,523) (6,344) (5,552) Amortization of transition asset (307) (306) (306) Amortization of actuarial (gain) loss (64) 42 385 Amortization of prior service cost 79 84 85 - ---------------------------------------------------------------------------- Pension expense $ 4,193 $ 5,521 $ 5,990 ============================================================================
The following table reconciles the plans' funded status to amounts included in the Consolidated Statements of Financial Position at December 31:
(in thousands) 1998 1997 - ---------------------------------------------------------------------- Change in Benefit Obligation Benefit Obligation-beginning of year $ 94,593 $ 89,166 Acquisition 52,035 -- Service cost 8,319 5,394 Interest cost 9,689 6,650 Participants' contributions 322 -- Amendments -- (75) Actuarial (gain) loss 12,871 (3,400) Foreign currency exchange rate changes (805) (672) Benefits paid (3,099) (2,470) - ---------------------------------------------------------------------- Benefit Obligation-end of year 173,925 94,593 - ---------------------------------------------------------------------- Change in Plan Assets Fair value plan assets-beginning of year 87,357 71,596 Acquisition 59,759 -- Actual return on plan assets (2,113) 16,202 Foreign currency exchange rate changes (876) (750) Employer contribution 6,215 2,779 Participants' contributions 322 -- Benefits paid (3,099) (2,470) - ---------------------------------------------------------------------- Fair value plan assets-end of year 147,565 87,357 - ---------------------------------------------------------------------- Funded status (26,360) (7,236) Unrecognized net actuarial (gain) loss 19,377 (7,496) Unrecognized prior service cost 238 272 Unrecognized net transition (asset) obligation (1,292) (1,598) - ---------------------------------------------------------------------- Accrued benefit cost $ (8,037) $(16,058) ======================================================================
The non-qualified pension plans are unfunded and have an Accumulated Benefit Obligation of $4.7 million at December 31, 1998. 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, 1998 were as follows:
1998 1997 1996 - -------------------------------------------------------------------- Weighted average discount rate 6.7% 7.3% 7.5% Long-term per annum compensation increase 4.2% 4.0% 5.0% Long-term return on plan assets 8.9% 9.5% 9.5% ====================================================================
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 were eligible to transfer their ICI pension to the Corporation's pension plans in 1998. The transfer of U.K. employees' pension was fully funded by ICI. The Corporation also sponsors a qualified 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 $4.9 million in 1998, $4.6 million in 1997 and $4.0 million in 1996. 37 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:
(in thousands) 1998 1997 - ------------------------------------------------------------- Change in Benefit Obligation Benefit Obligation-beginning of year $ 5,298 $ 9,236 Service cost 118 409 Interest cost 372 644 Participants' contributions 172 195 Amendments (464) (358) Actuarial (gain) loss (547) 1,413 Foreign currency exchange rate changes (32) (24) Curtailment (gain) loss -- (5,869) Benefits paid (545) (348) - ------------------------------------------------------------- Benefit Obligation-end of year 4,372 5,298 - ------------------------------------------------------------- Change in Plan Assets Fair value plan assets-beginning of year -- -- Employer contribution 373 153 Participants' contributions 172 195 Benefits paid (545) (348) - ------------------------------------------------------------- Fair value plan assets-end of year -- -- - ------------------------------------------------------------- Funded status (4,372) (5,298) Unrecognized net actuarial (gain) loss (1,713) (1,619) Unrecognized prior service cost (908) (701) - ------------------------------------------------------------- Accrued benefit cost $(6,993) $(7,618) =============================================================
Net periodic post-retirement medical benefit cost consisted of the following components:
(in thousands) 1998 1997 1996 - ------------------------------------------------------------------------ Service cost $ 118 $ 409 $ 424 Interest cost 372 644 638 Amortization of prior service cost (236) (169) (128) Amortization of actuarial gain (403) (170) (132) Effect of curtailment -- (7,004) -- - ------------------------------------------------------------------------ Post-retirement medical benefit cost (income) $(149) $(6,290) $ 802 ========================================================================
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 38 accumulated post-retirement medical benefit obligation was 7.00% in 1998, 7.25% in 1997, and 7.50% in 1996. The assumed annual health care cost trend rate was 7.00% in 1998 and is assumed to decrease 1.00% per year to 5.00% in 2000 and remain at that level thereafter. A 1% increase in the assumed health care cost trend rate would increase total service and interest cost by $7,000 while a 1% decline would decrease cost by $32,000. The impact on the benefit obligation of a 1% increase in the assumed health care cost trend rate would be $33,000 while a 1% decline in the rate would decrease the benefit obligation by $182,000. 19. Other Income, Net Other income consisted of the following:
(in thousands) 1998 1997 1996 - --------------------------------------------------------------------------- Fertilizer service revenue $37,276 $33,623 $28,529 Service charge income 6,570 11,074 10,318 Other 35,211 35,591 13,130 - --------------------------------------------------------------------------- Total $79,057 $80,288 $51,977 ===========================================================================
20. Income Taxes Components of the income tax provision (benefit) applicable to operations are as follows:
(in thousands) 1998 1997 1996 - ---------------------------------------------------------------------------- Current: Federal $(25,345) $ 48,214 $28,853 Foreign 981 2,352 12,939 State (1,955) 5,692 6,149 - ---------------------------------------------------------------------------- (26,319) 56,258 47,941 - ---------------------------------------------------------------------------- Deferred: Federal 8,586 43,938 49,994 Foreign 2,464 16,923 (34,876) State 269 5,481 841 - ---------------------------------------------------------------------------- 11,319 66,342 15,959 - ---------------------------------------------------------------------------- Total income tax provision (benefit) $(15,000) $122,600 $ 63,900 ============================================================================
The following table reconciles the income tax provision (benefit) per the Consolidated Statements of Operations to the federal statutory provision:
(in thousands) 1998 1997 1996 - ----------------------------------------------------------------------------- Income (loss) from operations before taxes: Domestic $(51,665) $281,850 $138,318 Foreign 10,416 50,632 59,533 - ----------------------------------------------------------------------------- $(41,249) $332,482 $197,851 ============================================================================= Statutory income tax provision (benefit): Domestic $(18,083) $ 98,648 $ 48,411 Foreign 4,100 19,240 22,801 - ----------------------------------------------------------------------------- (13,983) 117,888 71,212 Purchased Canadian tax benefit (4,344) (8,144) (18,000) Non-deductible expenses, primarily goodwill 6,884 6,632 6,312 State and local income taxes (700) 9,225 6,069 Benefit of loss carryforwards (442) (975) (1,001) Other (2,415) (2,026) (692) - ----------------------------------------------------------------------------- Income tax provision (benefit) $(15,000) $122,600 $ 63,900 =============================================================================
Current deferred tax assets totaled $15.3 million and $8.3 million at December 31, 1998 and 1997, respectively, while deferred tax liabilities totaled $204.1 million and $193.5 million, respectively. Deferred tax assets, non-current totaled $6.2 million and $10.8 million at December 31, 1998 and 1997, 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:
(in thousands) 1998 1997 - -------------------------------------------------------------------------------- Depreciation $(181,788) $(173,155) Investments in partnership (27,514) (28,320) Unfunded employee benefits 17,177 16,335 Discontinued business costs 9,677 10,880 Valuation allowance (6,695) (7,107) NOL, capital loss and tax credit carryforwards 4,786 4,869 Inventory valuation 2,636 3,349 Accrued liabilities (1,590) (1,738) Other 667 557 - -------------------------------------------------------------------------------- $(182,644) $(174,330) ================================================================================
The Corporation's capital loss carryforwards totaled $4.6 million at December 31, 1998. Capital loss carryforwards that are not utilized will expire in 2003. 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 56% of the equity of the Corporation at December 31, 1998. 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 related to the transaction as of December 31, 1998 and 1997. 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:
(in thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- Current: Federal $ --- $(1,944) $ --- State --- (87) --- - -------------------------------------------------------------------------------- $ --- $(2,031) $ --- ================================================================================
Current tax benefits in 1997 result from losses on early retirement or refinancing of long-term debt. 40 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. The Nitrogen Products business produces and distributes ammonia, urea, nitrogen solutions and ammonium nitrate to farmers and industrial users. 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. Management evaluates performance based on operating earnings of each segment. The Corporation does not allocate interest, income taxes or infrequent items to the business segments. Intersegment revenues have been recorded at amounts approximating market. Included in Other are general corporate activities not attributable to a specific industry segment and eliminations of intersegment activity. The following summarizes additional information about the Corporation's industry segments:
Nitrogen (in thousands) Distribution Products Methanol Other Total - -------------------------------------------------------------------------------------------- 1998 External revenues $1,734,257 $ 698,558 $ 96,547 $ 22,656 $2,552,018 Intersegment revenues --- 53,039 --- 23,710 76,749 Operating earnings (loss) 21,387 39,329 (7,891) (7,468) 45,357 Total assets 735,559 1,332,765 176,197 70,626 2,315,147 Depreciation and amortization 29,951 81,933 12,821 6,299 131,004 Capital expenditures 45,087 53,908 1,354 65 100,414 Equity earnings 1,936 1,236 --- --- 3,172 Equity investments 23,349 1,985 --- --- 25,334 Minority interest in earnings --- 9,633 17,877 --- 27,510 ============================================================================================ 1997 External revenues $1,786,673 $ 561,460 $180,646 $ 13,590 $2,542,369 Intersegment revenues --- 59,950 --- 52,133 112,083 Operating earnings (loss) 40,686 150,270 63,662 (1,302) 253,316 Total 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 Equity earnings 2,266 --- --- --- 2,266 Equity investments 22,556 1,929 --- --- 24,485 Minority interest in earnings --- 27,633 --- --- 27,633 ============================================================================================ 1996 External revenues $1,580,142 $ 588,502 $132,533 $ 15,309 $2,316,486 Intersegment revenues --- 65,984 --- 51,026 117,010 Operating earnings (loss) 23,872 255,263 18,520 (2,474) 295,181 Total 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 Equity earnings 2,042 --- --- --- 2,042 Equity investments 16,579 --- --- --- 16,579 Minority interest in earnings --- 44,485 --- --- 44,485 ============================================================================================
41 The following summarizes geographic information about the Corporation:
Revenues Long-lived Assets ----------------------------------- ---------------------------------- (in thousands) 1998 1997 1996 1998 1997 1996 - ----------------------------------------------------------------------------------------- United States $2,204,774 $2,472,340 $2,220,992 $1,190,995 $1,215,824 $1,170,604 Canada 67,846 70,029 95,494 70,404 87,347 86,467 United Kingdom 279,398 --- --- 315,058 317,804 --- - ----------------------------------------------------------------------------------------- $2,552,018 $2,542,369 $2,316,486 $1,576,457 $1,620,975 $1,257,071 =========================================================================================
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 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 persons. The Corporation owned 69% of the Common Units at December 31, 1998. If, and when the 75% ownership threshold is met, 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 U.K. acquisition. The remaining $50 million is being 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. 42 Nova receives a first priority return from BMLP approximating LIBOR plus 3.17% on its $225 million investment. The Corporation may receive a second priority return that is expected to be 1.5% above the first priority return. Earning will first be allocated to satisfy 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. Specific allocations to the Corporation of certain BMLP expenses, if any, are made to preserve Nova's first priority return and its capital account. 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 through December 31, 2000, whereupon it will be renegotiated between 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. 23. Pending Change of Control Minorco, S.A., through its wholly-owned subsidiaries, owns 56% of the Corporation's outstanding shares. In October 1998, Minorco announced its intention to dispose of its interest in the Corporation. Minorco and the Corporation are in discussion with prospective purchasers for the Minorco interests and/or all of Corporation's outstanding common shares. 43 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 Senior Vice President and Chief Executive Officer Chief Financial Officer 44 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, 1998 and 1997, and the related consolidated statements of operations, cash flows and changes in stockholders' equity for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Omaha, Nebraska February 5, 1999 45
Quarterly Production Data (unaudited) - --------------------------------------------------------------------------------- Quarter Quarter Quarter Quarter Year Ended Ended Ended Ended Ended March 31 June 30 Sept. 30 Dec. 31 Dec. 31 - --------------------------------------------------------------------------------- 1998 Net Production (tons): Anhydrous ammonia 303,365 371,928 356,316 344,807 1,376,416 Nitrogen solutions 904,776 960,590 925,535 1,004,696 3,795,597 Urea 159,805 169,139 173,801 148,226 650,971 Ammonium nitrate 246,070 217,297 244,616 227,430 935,413 Methanol (million gallons) 85.1 57.4 77.7 75.7 295.9 - --------------------------------------------------------------------------------- 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 =================================================================================
Quarterly Financial and Stock Market Data (unaudited)
(in thousands, except per-share data and stock prices) March 31, June 30, Sept. 30, Dec. 31, - ------------------------------------------------------------------------------------------ 1998 Total revenues $465,672 $1,259,249 $462,717 $364,380 Gross profit 70,990 214,187 63,467 50,982 Net income (loss) (18,280) 50,618 (21,824) (36,763) Per Share: Basic earnings (loss) per share $ (0.25) $ 0.68 $ (0.30) $ (0.50) Diluted earnings (loss) per share (0.25) 0.67 (0.30) (0.50) Dividends 0.05 0.05 0.05 0.05 Common Share Price: High $ 13.13 $ 11.75 $ 9.06 $ 8.06 Low 10.94 8.75 3.88 4.88 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 =========================================================================================
46
Revenues (unaudited) - ---------------------------------------------------------------------------------- (in thousands) 1998 1997 1996 - ---------------------------------------------------------------------------------- Manufactured nitrogen products $ 751,597 $ 621,410 $ 654,486 Methanol 96,547 180,646 132,533 Resale fertilizer 401,447 443,751 386,774 Crop protection products 1,006,173 1,059,077 981,267 Seed 124,928 106,557 90,175 Other 171,326 130,928 71,251 - ---------------------------------------------------------------------------------- Total $2,552,018 $2,542,369 $2,316,486 ================================================================================== Volumes & Prices (unaudited) - ----------------------------------------------------------------------------------- (Excludes the Distribution segment) 1998 1997 - ----------------------------------------------------------------------------------- Sales Realized Sales Realized (quantities in thousands) Volumes Price/unit Volumes Price/unit - ----------------------------------------------------------------------------------- Anhydrous ammonia (tons) 1,349 $ 143 1,182 $ 187 Nitrogen solutions (tons) 3,548 66 3,440 82 Urea (tons) 631 118 671 145 Ammonium nitrate (tons) 809 134 45 149 Methanol (gallons) 285,958 0.34 311,476 0.58 ===================================================================================
STOCKHOLDERS - ---------------------------------------------------------------------------- The Corporation's Common Shares are traded principally on the New York Stock Exchange. At January 31, 1999, 75 million Common Shares were outstanding and held by 4,071 stockholders. 47
Financial Summary - -------------------------------------------------------------------------------------------------------------- (in thousands, except per-share and employee data) 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------- Financial Position Working capital $ 262,283 $ 302,724 $ 187,157 $ 307,873 $ 273,941 Total assets 2,315,147 2,359,954 1,969,365 1,867,858 1,687,970 Long-term debt 497,030 506,568 407,312 411,573 121,384 Stockholders' equity 747,852 790,329 606,092 571,583 418,429 Results of Operations Revenues $ 2,552,018 $ 2,542,369 $ 2,316,486 $ 2,292,173 $ 1,665,947 Costs and expenses (2,506,661) (2,289,053) (2,021,305) (1,914,471) (1,550,652) Infrequent item --- 163,427 --- --- --- Interest income 4,553 6,525 7,102 13,811 5,541 Interest expense (63,649) (63,153) (59,947) (64,897) (22,082) Minority interest (27,510) (27,633) (44,485) (47,234) (8,809) Income tax benefit (provision) 15,000 (122,600) (63,900) (115,500) (33,700) - -------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations (26,249) 209,882 133,951 163,882 56,245 Extraordinary item --- (2,995) --- (4,338) (3,060) Cumulative effect of accounting changes --- --- --- --- 3,376 - -------------------------------------------------------------------------------------------------------------- Net income (loss) $ (26,249) $ 206,887 $ 133,951 $ 159,544 $ 56,561 ============================================================================================================== Basic Earnings (Loss) Per Share: Continuing operations $ (0.35) $ 2.84 $ 1.74 $ 2.03 $ 0.77 Extraordinary item --- (0.04) --- (0.05) (0.04) Cumulative effect of accounting changes --- --- --- --- 0.05 - -------------------------------------------------------------------------------------------------------------- Net Income (Loss) $ (0.35) $ 2.80 $ 1.74 $ 1.98 $ 0.78 ============================================================================================================== Diluted Earnings (Loss) Per Share: Continuing operations $ (0.35) $ 2.80 $ 1.72 $ 2.01 $ 0.77 Extraordinary item --- (0.04) --- (0.05) (0.04) Cumulative effect of accounting changes --- --- --- --- 0.05 - -------------------------------------------------------------------------------------------------------------- Net Income (Loss) $ (0.35) $ 2.76 $ 1.72 $ 1.96 $ 0.78 ============================================================================================================== Dividends Per Share $ 0.20 $ 0.18 $ 0.15 $ 0.10 $ 0.08 ============================================================================================================== Capital Expenditures $ 100,414 $ 85,109 $ 185,649 $ 177,129 $ 31,213 ============================================================================================================== Permanent employees at end of period 4,185 4,435 3,575 3,415 3,210 ==============================================================================================================
EX-21 8 SUBSIDIARIES OF TERRA TERRA INDUSTRIES INC. MAJORITY AND PARTIALLY OWNDED SUBSDIARIES MARCH 10, 1999
Percentage Percentage Name of Company Held by TRA Held by Sub Jurisdiction - --------------- ----------- ----------- ------------ I. El Rancho Rock & Sand, Inc. 100 California II. Hudson Bay Gold Inc. 100 Canada III. Inspiration Coal Inc. 100 Delaware IV. Inspiration Coal Development Company 100 Delaware which owns - ---------------------------------- A. Ashland Mining Corporation 100 W. Virginia B. Briarwood Mining Inc. 100 Virginia C. Plateau Fuels, Inc. 100 Kentucky D. Southern Floyd Coal, Inc. 100 Kentucky V. Inspiration Consolidated Copper Company 100 Maine which owns - ---------------------------------- A. Black Pine Mining Company 100 Montana B. Inspiration Development Company 100 Delaware VI. Inspiration Gold Incorporated 100 Delaware VII. Terra Capital Holdings, Inc. 100 Delaware which owns - ---------------------------------- A. Terra Capital, Inc. 100 Delaware which owns - ---------------------------------- 1. Terra Methanol Corporation 100 Delaware 2. Terra International, Inc. 100 Delaware which owns - ---------------------------------- a. Farmbelt Chemicals, Inc. 100 Delaware b. Farmers Agricultural Credit Corporation 100 Iowa c. Northern Agricultural Credit Corporation 100 Minnesota d. Terra International (Oklahoma) Inc. 100 Delaware e. Terra Real Estate Corporation 100 Iowa f. Terra Real Estate Development Corporation 100 Iowa g. Terra Express, Inc. 100 Delaware h. Omnium, LLC 50 Missouri
TERRA INDUSTRIES INC. MAJORITY AND PARTIALLY OWNDED SUBSDIARIES MARCH 10, 1999
Percentage Percentage Name of Company Held by TRA Held by Sub Jurisdiction - --------------- ----------- ----------- ------------ A. Terra Capital, Inc. (continued) ------------------------------------- 2. Terra International, Inc. (continued) i. Terra International (Canada) Inc. 100 Ontario, Canada which owns - ------------------------------------------ 1. Terra Nitrogen (U.K.) Limited 100 England 2. Belmont Farm Supply Inc. 50 Federal 3. Bluewater Agromart Limited 50 Ontario 4. Brussels Agromart Ltd. 50 Ontario 5. Cardinal Farm Supply Limited 50 Ontario 6. Fingal Farm Supply Limited 50 Ontario 7. Grand Falls Agromart Ltd. 50 Federal 8. Hartland Agromart Ltd. 50 Federal 9. Harvex Agromart Inc. 50 Ontario 10. Hoegy's Farm Supply Limited 50 Ontario 11. Lakeside Grain & Feed Limited 50 Ontario 12. Macroblend Limited 50 Ontario 13. Maple Farm Supply Limited 50 Ontario 14. Max Underhill's Farm Supply Limited 50 Ontario 15. Munro Agromart Ltd. 50 Ontario 16. Oakwood Agromart Ltd. 50 Ontario 17. Oxford Agropro Ltd. 50 Ontario 18. Scotland Agromart Ltd. 50 Ontario 19. Setterington's Fertilizer Service Limited 50 Ontario 20. Sprucedale Agromart Limited 50 Ontario 21. Tri-County Agromart Ltd. 50 Ontario j. Royster-Clark, Inc. 40 Delaware k. Port Neal Corporation 100 Delaware l. Delta Data Systems, Inc. 100 Mississippi
TERRA INDUSTRIES INC. MAJORITY AND PARTIALLY OWNDED SUBSDIARIES MARCH 10, 1999
Percentage Percentage Name of Company Held by TRA Held by Sub Jurisdiction - --------------- ----------- ----------- ------------ 3. BMC Holdings, Inc. 100 Delaware which owns - --------------------------- a. Beaumont Methanol, Limited Partnership/1/ 58 Delaware which owns - --------------------------- 1. Terra (U.K.) Holdings Inc. 100 Delaware which owns - ------------------------------------------------------ a. Beaumont Ammonia Inc. 100 Delaware 4. Terra Nitrogen Corporation 100 Delaware which owns - ------------------------------------ a. Terra Nitrogen Company, L.P./2/ 70 Delaware which owns - ------------------------------------ 1. Terra Nitrogen, Limited Partnership/3/ 99 Delaware a. Oklahoma Co2 Partnership 50 Oklahoma 5. Terra Capital Funding LLC/4/ 99 Delaware a. Terra Funding Corporation/5/ 100 Delaware VIII. Western Gold Exploration and Mining Company, Limited Partnership 50 Delaware
- ----------------------- /1/Terra Methanol Corporation is 1% General Partner. /2/Terra Nitrogen Corporation's interest includes 1.0101% as General Partner and some of TNCLP is owned directly by Terra Capital, Inc. /3/Terra Nitrogen Corporation is 1% General Partner. /4/Terra Capital Holdings, Inc. has a 1% interest. /5/An outside investor owns one share of Class SV Preferred Shares with limited voting rights. EX-24 9 POWER OF ATTORNEY 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, 1998 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, 1999. /s/ Edward G. Beimfohr ---------------------------- EDWARD G. BEIMFOHR 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, 1998 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, 1999. /s/ Carole L. Brookins -------------------------- CAROLE L. BROOKINS 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, 1998 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, 1999. /s/ Edward M. Carson ----------------------- EDWARD M. CARSON 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, 1998 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, 1999. /s/ David E. Fisher -------------------------------------------------- DAVID E. FISHER 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, 1998 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, 1999. /s/ Burton M. Joyce ----------------------------------------------- BURTON M. JOYCE 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, 1998 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, 1999. /s/ Anthony W. Lea ----------------------------------- ANTHONY W. LEA 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, 1998 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, 1999. /s/ John R. Norton, III ------------------------------------ JOHN R. NORTON III 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, 1998 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, 1999. /s/ Henry R. Slack ------------------------------------ HENRY R. SLACK 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, 1998 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, 1999. /s/ Francis G. Meyer ------------------------------------------------- FRANCIS G. MEYER 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, 1998 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, 1999. /s/ William R. Loomis, Jr. -------------------------------------------------- WILLIAM R. LOOMIS, JR. EX-27 10 FINANCIAL DATA SCHEDULE
5 This Schedule contains summary financial information extracted from the consolidated statement of financial position of Terra Industries inc. as of December 31, 1998 and the related consolidated statement of income for the year the ended. 1000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 114,905 26,738 153,885 (15,134) 419,704 738,690 1,527,900 (368,587) 2,315,147 476,407 487,560 0 0 127,887 619,965 2,315,147 2,472,961 2,552,018 2,152,392 2,152,392 0 9,633 63,649 (41,249) (15,000) (26,249) 0 0 0 (26,249) (0.35) (0.35)
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