-----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, JMZW9RVs1lK1M0ubHZH+nPPI/NN4aZbNXH3n+bvIBfgnzjZhymhRV1An9aPvefty h9X190B0gmXTEDv13JWJDg== 0000950131-02-000878.txt : 20020415 0000950131-02-000878.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950131-02-000878 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020313 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TERRA INDUSTRIES INC CENTRAL INDEX KEY: 0000722079 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE CHEMICALS [2870] IRS NUMBER: 521145429 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08520 FILM NUMBER: 02574100 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 d10k405.txt 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, 2001 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 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, 2002, was $111,718,194. The number of shares of Common Shares, without par value, outstanding as of March 1, 2002 was 76,472,849. - ================================================================================ DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement for the Annual Meeting of Stockholders of Registrant to be held on April 30, 2002. 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..............................................................................13 Item 4. Submission of matters to a vote of security holders............................................13 Executive officers of Terra....................................................................14 PART II ------- Item 5. Market for Terra's common equity and related stockholder matters...............................15 Item 6. Selected financial data........................................................................15 Item 7. Management's discussion and analysis of financial condition and results of operations......................................................................15 Item 7a. Quantitative and qualitative disclosures about market risk.....................................15 Item 8. Financial statements and supplementary data....................................................15 Item 9. Changes in and disagreements with accountants on accounting and financial disclosure.......................................................................15 PART III -------- Item 10. Directors and executive officers of Terra......................................................16 Item 11. Executive compensation.........................................................................16 Item 12. Security ownership of certain beneficial owners and management.................................16 Item 13. Certain relationships and related transactions.................................................16 PART IV ------- Item 14. Exhibits, financial statement schedules and reports on Form 8-K................................16 Signatures.......................................................................................................22 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, is referred to as "Terra," "we" or "our" throughout this report. References to Terra also include the direct and indirect subsidiaries of Terra Industries Inc. where required by the context. Subsidiaries not wholly-owned by Terra include a limited partnership, Terra Nitrogen Company, L.P., which, through its subsidiary, Terra Nitrogen, L.P., operates Terra's manufacturing facilities in Blytheville, Arkansas and Verdigris, Oklahoma. Terra is the sole general partner and the majority limited partner in Terra Nitrogen Company, L.P. Terra's principal corporate office is located at Terra Centre, 600 Fourth Street, P.O. Box 6000, Sioux City, Iowa 51102-6000 and its telephone number is (712) 277-1340. Business Overview Terra is a leading North American and U.K. producer and marketer of nitrogen products serving both agricultural and industrial end-use markets. Terra is one of the largest North American producers of ammonia, the basic building block of nitrogen fertilizers. We upgrade a significant portion of the ammonia we produce into higher value products, which are easier for agricultural end-users to transport, store and apply to crops than ammonia. In addition, Terra is the largest U.S. producer of methanol. We own eight manufacturing facilities in North America and the U.K. that produce nitrogen products, two of which also produce methanol. Nitrogen is both a global and local commodity: global because it is both produced and traded in almost all regions of the world, local because local fertilizer customers display preferences for nitrogen in one of four basic forms based upon local conditions. The principal forms of nitrogen fertilizer products that are traded globally are ammonia (82% nitrogen by weight) and, to a lesser extent, urea (46% nitrogen by weight) and ammonium nitrate (AN), (34% nitrogen by weight). Urea ammonium nitrate (UAN) has only recently been traded in international markets. It is less likely to be traded because it has a high cost of transportation due to its high water content. Because transportation is a significant component of a customer's total cost, a key to competitiveness in the nitrogen business is to have the lowest delivered cost for the customer's product of choice in the market a producer serves, while providing a reliable source of supply on a continuous basis. The locations of Terra's North American production facilities provide it with a competitive advantage in serving agricultural customers in the corn belt and other major agricultural areas of the United States and Canada. Terra's U.K. facilities are able to serve competitively the entire British agricultural market. Terra's facilities have the following production capacities:
Annual Capacity ------------------------------------------------------------------ Location Ammonia(1) UAN(2) AN(3) Urea(4) Methanol(5) - -------- ---------- --------- --------- ------- ----------- Beaumont, Texas(6) ............. 255,000 -- -- -- 225,000,000 Blytheville, Arkansas .......... 420,000 30,000 -- 480,000 -- Port Neal, Iowa ................ 370,000 810,000 -- 50,000 -- Verdigris, Oklahoma ............ 1,050,000 2,180,000 -- -- -- Woodward, Oklahoma(6) .......... 440,000 340,000 -- 25,000 40,000,000 Courtright, Ontario ............ 480,000 400,000 -- 175,000 -- Severnside, U.K ................ 265,000 -- 500,000 -- -- Billingham, U.K.(7) ............ 550,000 -- 500,000 -- -- --------- --------- --------- ------- ----------- Total .......................... 3,830,000 3,760,000 1,000,000 730,000 265,000,000 ========= ========= ========= ======= ===========
(1) Measured in gross tons of ammonia produced; net tons available for sale will vary with upgrading requirements. Includes ammonia upgraded into other products. (2) Measured in tons of UAN containing 28% nitrogen by weight. (3) Measured in tons. (4) Urea is sold as urea liquor from our Port Neal and Woodward facilities and as granular urea from the Blytheville and Courtright facilities. Production capacities shown are for urea sold as product in tons. (5) Measured in gallons. 1 (6) The Beaumont capacities represent the design capacity of the ammonia loop and revised capacity of the methanol plant following the loss of CO2 feedstock due to shutdown of the DuPont ammonia plant. Plant capacity for Beaumont and Woodward is dependent on the product mix (ammonia/methanol). (7) The Billingham, England facility also produces merchant nitric acid; 2001 sales were 262,084 product tons. The principal customers for Terra's North American nitrogen products are national agricultural retail chains (such as ConAgra and Cargill), farm cooperatives, independent dealers and industrial customers (such as DuPont). Industrial customers use our products in the manufacture of chemicals and plastics such as acrylonitrile, polyurethanes, fibers, explosives and adhesives. Overall, agricultural customers purchased approximately 84% and industrial customers purchased approximately 16% of Terra's North American nitrogen product production in 2000 and 2001. In the U.K., revenues are split approximately evenly between agricultural and industrial customers. Terra's methanol customers are primarily large domestic chemical producers. Terra has a number of long-term methanol sales contracts. Competitive Strengths Leading Market Positions Terra has leading market positions in all of its key products. In the U.S., we are the largest producer of UAN and methanol and the second largest producer of ammonia. In the U.K., we are the largest producer of ammonia and AN. The following table shows our market positions in our principal products: % of Total U.S. U.K. 2001 Terra Capacity Capacity Product Revenues(1) Position Position - ------- ----------- -------- -------- Ammonia ....................... 22.9% 2 1 UAN ........................... 32.7% 1 * AN ............................ 8.8% * 1 Urea .......................... 6.6% 4 * Methanol ...................... 17.3% 1 * (1) Revenues from sales of carbon dioxide and nitrogen products, as well as industrial sales in the U.K., represented 11.7% of our total revenues for 2001. (2) Based on our unit sales and based on total market consumption, including imports, as reported by Fertecon. * Terra does not compete in these markets. Strategically Located Plants with Access to Distribution Infrastructure A critical element of competitiveness in the North American agricultural market is delivered cost to customers. Terra's plants located in the main agricultural areas of the United States provide Terra a significant freight cost advantage over Gulf Coast producers and importers entering through Gulf Coast ports. Four of Terra's facilities are able to provide UAN locally by truck, which offers a competitive advantage in serving agricultural customers due to the high cost of transporting UAN. The location of Terra's Port Neal, Iowa and Courtright, Ontario plants, with low cost access to nearby corn belt markets, allows these plants to be among the most efficient UAN production facilities in North America in terms of delivered cost to end-users. Terra also has access to an extensive distribution infrastructure that provides reliable and cost-effective delivery of products to customers. Our ability to serve customers within our markets is enhanced by our access to competitive multi-modal transportation, including rail systems (BNSF, Union Pacific, Canadian National, CSX), barge, truck and pipeline systems. In addition, we have a terminal network in which we can store up to 500,000 tons of nitrogen products through over 60 terminals located close to our customers. This terminal network helps ensure customers receive our products on a timely basis. Integrated Production of Value-Added Products Terra upgrades a significant portion of the ammonia it produces into higher value products, such as UAN, AN and urea. In 2001, we upgraded 61% of our ammonia production into value-added products. The demand for these value-added products has increased largely at the expense of ammonia demand, and we expect it will continue to do so. Agricultural customers increasingly prefer these products because they are easier to apply and can be mixed with other crop production products, providing significant cost and labor savings. As a result, these products generate higher revenues and margins than ammonia. By producing our own ammonia and upgrading it internally, we are able 2 to operate our ammonia units at higher utilization rates throughout the year and reduce reliance on merchant ammonia sales. In addition, because of UAN's relatively high transportation costs due to its high water content, there is less competition from importers. Terra's Verdigris, Oklahoma facility is the second largest UAN production facility in the world. Strong Plant Operating Efficiency Based on a global survey of 92 ammonia plants worldwide, Terra's five largest North American plants (including our two plants in Verdigris, Oklahoma) ranked in the top half of their peer group for the best calendar month performance in net efficiency during the four-year survey period ending in December 1998. We believe that our Port Neal, Iowa and Courtright, Ontario facilities, together representing more than 25% of our North American capacity, are among the most efficient ammonia plants in North America in terms of natural gas consumption per ton of ammonia produced. We believe we have some of the most efficient UAN plants in North America, including three of the five lowest cost plants in terms of delivered cost to end-users. In addition, we believe we are the most efficient producer of methanol in the United States, in large part as a result of an ammonia production loop at our Beaumont, Texas facility, which produces ammonia as a by-product of the methanol production process. Terra's Beaumont, Texas facility is the largest methanol facility in the U.S. Terra's ammonia facility at Woodward, Oklahoma also uses loop technology to produce methanol, providing us with operational flexibility and helping us to optimize product mix at that site. The high percentage of our sales that are made under contract also allows us to maintain high utilization rates and enhance the efficiency of our operations. Experienced Management Team and Employees Terra Industries' executive officers have an average of 20 years of experience in the fertilizer industry. Michael Bennett, our President and Chief Executive Officer, has been with the company for 28 years. Similarly, our more than 1,200 employees have an average of over 18 years of service with us. The extensive experience and stability of our employee base enable us to operate our plants efficiently with a strong safety record when compared to our peers. Company Strategies Enhance Competitive Position Through Continued Efficiency Improvement Terra intends to continue to improve its competitive position in the worldwide nitrogen fertilizer industry by enhancing the operating and energy efficiency of its plants while rigorously controlling costs. We have implemented a number of cost-saving efficiency initiatives, such as our loop production processes at our Beaumont, Texas and Woodward, Oklahoma plants, in order to increase the overall efficiency and volume throughput of our plants. Since 1998, our selling, general and administrative expenses have declined by 23%. We have upgraded and will continue to upgrade our equipment and processes through prudent investment and personnel training. Use Natural Gas Contracts to Protect Margins Natural gas costs in 2001 comprised approximately 53% of total costs and expenses for Terra's North American nitrogen products business, 25% of total costs and expenses for the U.K. nitrogen products business and 57% of total costs and expenses for the methanol business. It is Terra's normal practice to fix or cap the price of a substantial portion of its future natural gas requirements through supply contracts, financial derivatives and other instruments. These tools are used to lock in margins and protect against an adverse impact on margins due to increases in natural gas costs. Pursue New Market Opportunities Terra will aggressively pursue new market opportunities such as those presented as a result of recent environmental regulations promoting the use of ammonia to clean airborne pollutants emitted by power generating plants. According to the McIlvaine Company, a power industry consultant, these regulations could increase the annual demand for ammonia by up to 2 million tons, or 11% of total 2000 U.S. capacity, by 2004. Terra is working with selected power producers to provide the nitrogen products, storage facilities and handling expertise they need for these purposes. Terra also sees opportunities in pursuing the use of methanol as a fuel for fuel cell-powered cars. 3 Maintain Leadership Position in Our Key Products Terra intends to maintain its leading market positions in its key markets by focusing on being a reliable, low cost producer of our products to our existing customers and by identifying new customers and end markets for its products. Reduce Debt Terra's primary financial strategy is to use a significant portion of its cash flow from operations to reduce indebtedness. Nitrogen Business Segment Terra is a leading producer and marketer of nitrogen products, principally fertilizers. We upgrade a significant portion of the ammonia that we produce into other nitrogen products, such as urea, AN and UAN. Ammonia, urea and UAN are the principal nitrogen products we produce and sell in North America. Terra produces and sells primarily ammonia and AN in the U.K. Other important products that we manufacture in both the U.S. and U.K. include nitric acid and carbon dioxide. These products, along with a portion of our ammonia and urea production, are used as industrial feedstocks and are independent of the agricultural market. Although these different nitrogen products are interchangeable to some extent, each has its own characteristics which make one product or another preferable to the end-user. Terra's plants are designed to provide the products preferred by end-users in the regions in which they are located. These preferences vary according to the crop planted, soil and weather conditions, regional farming practices, relative prices, and the cost and availability of appropriate storage, handling and application equipment. Terra's nitrogen products are described in greater detail below. Ammonia Ammonia is the simplest form of nitrogen fertilizer and is the feedstock for the production of other nitrogen fertilizers, including urea, AN and UAN. Ammonia is also widely used in industrial applications. Ammonia is produced when natural gas reacts with steam and air at high temperatures and pressures in the presence of catalysts. Ammonia has a nitrogen content of 82% by weight and is generally the least expensive form of fertilizer per pound of nitrogen. Although generally the cheapest source of nitrogen available to agricultural customers, ammonia can be less desirable to end-users than UAN or urea because of the need for specialized application equipment and the lack of application flexibility. Urea Terra produces urea for both the fertilizer and animal feed markets by converting ammonia and carbon dioxide into liquid urea, which can be further processed into a solid, granular form. Urea is also used in industrial applications. Granular urea has a nitrogen content of 46% by weight, the highest level for any solid nitrogen product. Terra produces both a granulated form of urea, generally for the fertilizer market, and urea liquor (liquid) for animal feed supplements and industrial applications. Ammonium Nitrate Terra produces AN at two facilities in the U.K. AN is produced by combining nitric acid and ammonia into a liquid form which is then converted to a solid, largely for fertilizer applications. The nitrogen content of AN is 34% by weight. AN is the preferred fertilizer in the British agricultural market. Urea Ammonium Nitrate UAN is a liquid fertilizer and, unlike ammonia, is odorless and does not require refrigeration or pressurization for transportation or storage. UAN is produced by combining liquid urea, liquid ammonium nitrate and water. The nitrogen content of UAN is approximately 28% to 32% by weight. Because of its high water content, UAN is relatively expensive to transport, making this largely a regionally distributed product. 4 UAN can be applied to crops directly or can be mixed with crop production products, permitting the application of several materials simultaneously, 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, providing significant application flexibility. Due to its stability, UAN may be used for no-till row crops where fertilizer is spread on the surface of the soil but may be subject to evaporation losses. Manufacturing Facilities Terra's eight fertilizer manufacturing facilities are 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 our fertilizer manufacturing facilities was 84%, 93% and 96% in 2001, 2000 and 1999, respectively. Our capacity utilization was reduced in 2000 and 2001, reflecting several plant shutdowns due to natural gas prices increasing faster than nitrogen prices. Terra owns all of its manufacturing facilities, unless otherwise indicated below. (See "Methanol Business Segment--Manufacturing Facilities" for a description of our Beaumont, Texas facility.) The Verdigris, Oklahoma facility is one of the largest UAN production facilities in North America. Located at the Verdigris, Oklahoma facility are two ammonia plants, two nitric acid plants, two UAN plants and a port terminal. Terra owns the plants, 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 Terra has an option to renew the lease for an additional five-year term. We also have UAN upgrading capability at our facilities in Port Neal, Iowa; Courtright, Ontario; Woodward, Oklahoma and Blytheville, Arkansas. Terra believes it has some of the most efficient UAN plants in North America, including three of the five lowest cost plants in terms of delivered cost to end-users. The location of our Port Neal, Iowa and Courtright, Ontario plants, with low cost access to nearby corn belt markets, allows these plants to be among the most efficient in North America as measured by delivered cost to the end-user. Because of UAN's relatively high transportation costs due to its water content, there is less competition from importers. Four of our facilities are able to provide UAN locally by truck which also offers a competitive advantage in serving agricultural customers due to the high cost of transporting UAN. The Blytheville, Arkansas facility consists of an ammonia plant, a granular urea plant and a UAN plant. The ammonia plant is leased from the City of Blytheville at a nominal annual rate. The ammonia plant lease is scheduled to expire in November 2004, and we have an option to extend the lease for eleven successive terms of five years each at the same rental rate. Terra has an unconditional option 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 we have an option to extend the lease for three successive terms of five years each at the same rental rate. Terra also has a similar, unconditional option to purchase the urea plant for a nominal price. In the first quarter of 2000, we completed a $61.6 million capital project to add an ammonia production loop to our Beaumont, Texas facility, which has added 255,000 tons of annual ammonia production capacity to the existing methanol production at that site. Marketing and Distribution The principal customers for Terra's North American manufactured nitrogen products are independent dealers, national retail chains, cooperatives and industrial customers. In the U.K., revenues are split approximately evenly between agricultural and industrial customers. Overall, industrial customers purchased approximately 16% of Terra's nitrogen product production in each of 2001 and 2000. At December 31, 2001, we had contracted to sell 13% of our 2002 scheduled nitrogen production at prices indexed to published sources. As part of the sale of our farm service centers and distribution business to the Cenex/Land O'Lakes Agronomy Company ("Cenex/Land O'Lakes") in the second quarter of 1999, Terra entered into an agreement to supply Cenex/Land O'Lakes with nitrogen fertilizer products. Under this agreement, through June 2002, Cenex/Land O'Lakes will purchase from Terra approximately the quantity of product that we supplied to both our own distribution business and to Cenex/Land O'Lakes before the sale of the distribution business. Terra sold 5 approximately 10% and 11% of its North American production to Cenex/Land O'Lakes under this supply agreement in 2001 and 2000, respectively. Under an agreement with Imperial Chemical Industries ("ICI") in connection with our acquisition of ICI's U.K. fertilizer assets, Terra may make payments to ICI based on the market price obtained for AN sales by our U.K. business. Under the terms of this agreement, Terra must make a payment for any year through 2002 in which the average AN price we receive exceeds certain thresholds, up to a maximum payment of (pound)58 million in the aggregate (approximately $83.5 million). In the event Terra has suffered a material business interruption with respect to this facility for 60 days or more in a year in which ICI would be entitled to a payment above a certain amount, and this interruption is not compensated by our insurance, Terra may extend to 2003 the duration of this agreement, in which case the maximum aggregate payment will be increased to (pound)61 million (approximately $87.8 million). Because of these payments, Terra will not benefit fully from the U.K. market price of AN over certain thresholds during the term of this agreement. Terra did not make any payments to ICI under this agreement in 1999, 2000 or 2001, and we will not make any payments in 2002. Terra's production facilities, combined with significant storage capacity at over 60 locations throughout the major fertilizer consuming regions of the U.S. and Canada, position Terra to respond competitively to demand in our markets, a distinct advantage over imports, which face logistical challenges and higher costs in transporting product to end-users in a timely fashion. Methanol Business Segment Product Terra is the leading U.S. producer of methanol. Methanol is used as a feedstock in the production of other chemical products such as formaldehyde, acetic acid and a variety of other chemical intermediates. Another major market for methanol is as a feedstock in the production of MTBE, an oxygenate used as an additive in reformulated gasoline and as an octane enhancer in non-reformulated gasoline. Manufacturing Facilities Terra has two U.S. facilities that produce methanol. Our Beaumont, Texas facility is the largest methanol production plant in the U.S., with approximately 225 million gallons of annual methanol production capacity. This plant produced 201 million, 208 million and 204 million gallons of methanol in 1999, 2000 and 2001, respectively. The Woodward, Oklahoma facility produced approximately 34 million, 36 million and 31 million gallons of methanol in 1999, 2000 and 2001, respectively, and has an annual methanol production capacity of 40 million gallons. Terra owns the plant and processing equipment at the Beaumont facility. The land is leased from E. I. DuPont de Nemours and Company ("DuPont") for a nominal annual rate under a lease agreement which expires in 2090. Because the Beaumont facility is entirely contained within an industrial complex owned and operated by DuPont, Terra depends on DuPont for access to the facility as well as certain essential services. Most of the finished methanol product is shipped to customers through wharf facilities located on DuPont property. Terra depends on DuPont for access to the pipelines used to transport methanol and to obtain natural gas, as well as for certain utilities, wastewater treatment facilities and other essential services. Marketing and Distribution Terra's methanol customers are primarily large, domestic chemical or MTBE producers. We have a number of long-term methanol sales contracts. Terra sold over 86% of our production under such contracts. At December 31, 2001, we had contracted to sell over 70% of our 2002 scheduled production at prices indexed to published sources. Most of these sales contracts cover fixed volumes and have terms of up to three years. 6 Nitrogen Industry Overview Overview The three major nutrients required for plant growth are phosphorous, mined as phosphate rock, potassium, mined as potash, and nitrogen, produced from natural gas. Phosphorus plays a key role in the photosynthesis process. Potassium is an important regulator of plants' physiological functions. Nitrogen, which comprised approximately 60% of worldwide fertilizer consumption in 1999, is an essential element for most organic compounds in plants as it promotes protein formation and is a major component of chlorophyll, which helps to promote green healthy growth and high yields. There are no substitutes for nitrogen fertilizers in the cultivation of high-yield crops. These three nutrients occur naturally in the soil to a certain extent but must be replaced as crops remove them from the soil. Nitrogen, to a greater extent than phosphate and potash, must be reapplied each year in areas of intense agricultural usage because of absorption by crops and its tendency to escape from the soil by evaporation or runoff. Consequently, demand for nitrogen fertilizer tends to be more consistent on a per acre planted basis than demand for phosphate or potash fertilizer. Demand Global demand for fertilizers typically grows at predictable rates and tends to correspond to growth in grain production. Global fertilizer demand is driven in the long term primarily by population growth, increases in disposable income and associated improvements in diet. Short-term demand depends on world economic growth rates and factors creating temporary imbalances in demand. These factors include weather patterns, the level of world grain stocks relative to consumption, agricultural commodity prices, energy prices, crop mix, fertilizer application rates, farm income and temporary disruptions in fertilizer trade from government intervention, such as changes in the buying patterns of China or India. According to the International Fertilizer Industry Association ("IFA"), over the last 37 years global fertilizer demand has grown 4.0% annually with nitrogen demand growing at a faster rate of 5.4% annually. U.S. fertilizer demand has grown 2.5% annually over the last 37 years with U.S. nitrogen demand growing at a faster rate of 3.6% annually. Supply Increased ammonia prices in 1995 led to capacity expansion projects globally that resulted in capacity growth that was substantially greater than demand, causing a structural imbalance in ammonia supply and demand. In addition, foreign government support for domestic production in India, China and the former Soviet Union, has kept uneconomic plants running, further increasing supply. This new global capacity has been partially offset by permanent plant closings in the U.S. since 1998. These U.S. plant closings represent 12.9% of total 1998 capacity, and no new capacity is expected to come on stream in the U.S. in the foreseeable future. The recent increase in natural gas costs in many regions of the world has forced temporary plant closings which, in addition to permanent plant closures, have provided support for nitrogen prices. Imports account for a significant portion of U.S. nitrogen product supply. It is estimated by Fertecon that the United States imports up to one-third of its ammonia and urea requirements. In 2000, total imports of ammonia and urea in the United States were approximately 5.6 million tons and 4.6 million tons, respectively. Producers from the former Soviet Union, Canada, the Middle East, Trinidad and Venezuela are major exporters to the U.S. These export producers are often competitive in regions of close proximity to the point of entry for imports, primarily the Gulf Coast and East Coast of North America. Due to higher freight costs and an underdeveloped distribution infrastructure, importers are less competitive in serving the main corn-growing regions of the U.S., which are more distant from these ports. Importers' advantage increases when natural gas and ammonia prices are high, and decreases when natural gas costs and ammonia prices are low. Outlook Growth in worldwide population and a reduction in the amount of arable land will increase the global demand for fertilizers. According to a United Nations study, worldwide population is projected to grow by approximately 1.5 billion from 2000 to 2020. Based on an industry study, the amount of arable land is forecast to decrease from 0.27 hectares per capita in 1990 to 0.17 hectares per capita in 2025. 7 The IFA forecasts that global fertilizer consumption will grow at a rate of 1.9% to 2.8% annually through 2004. Most of the future increase in fertilizer demand is expected to be generated by less developed countries, particularly countries in Southeast Asia and South America, where the agricultural industry does not yet use fertilizer in sufficient amounts to optimize production and where growth rates of population and gross domestic products are expected to continue to increase. According to Fertecon, ammonia consumption in the U.S. will increase by 2.3% annually from 2001 to 2005, from 19.7 million tons to 21.6 million tons. The mix of products used, however, is expected to change. UAN demand is expected to increase more rapidly at the expense of direct ammonia application due to its significant application flexibility and ability to be mixed with other crop production products, which provide significant cost and labor savings. U.S. UAN demand increased from 9.9 million tons in 1990 to 14.6 million tons in 2000, an increase of 48%, and is forecast to increase to 16.9 million tons in 2010, according to Fertecon . A significant amount of new ammonia capacity is expected to come on stream globally from 2001 to 2005. According to Fertecon, global ammonia capacity is forecast to increase from 178.3 million tons to 186.9 million tons during this period, an increase of 4.8%. However, ammonia capacity in the U.S. is forecast to decrease from 18.2 million tons to 16.8 million tons from 2001 to 2005, a decrease of 7.9%. The continued growth in demand for nitrogen products has helped to stabilize global ammonia utilization rates, which averaged 82% between 1997 and 2000. Global ammonia utilization rates are forecast to increase from 82% in 2000 to 86% in 2005 due to increased consumption worldwide. In the U.S., ammonia utilization rates are forecast to increase from 81% in 2001 to 89% in 2005. Due to the Clean Air Act of 1990, as amended, energy providers are required to reduce emissions of nitrogen oxides ("NOX"). This presents a new market opportunity for ammonia, which can be used to remove NOX from air emissions. The McIlvaine Company estimates that the ammonia demand for this new application could increase demand by up to 2 million tons, or 11% of total 2000 U.S. capacity, by 2004. Methanol Industry Overview Overview Methanol is a liquid made primarily from natural gas and is used as a feedstock in the production of formaldehyde, acetic acid, MTBE, and a variety of other chemical intermediates which form the foundation of a large number of secondary derivatives. Formaldehyde is used to produce urea-formaldehyde and phenol-formaldehyde resins, which are used as wood adhesives for plywood, particleboard, oriented strand board, medium-density fiberboard and other engineered wood products. In addition, formaldehyde is also used in the manufacture of elastomers, paints, foams, polyurethane and automotive products. Acetic acid is used as a chemical intermediate to produce adhesives, paper, paints, plastics, resins, solvents, and textiles. MTBE, an oxygenate and octane enhancer, is used to reduce hydrocarbon and carbon monoxide emissions from motor vehicles. Chemical intermediates are used to manufacture de-icer and windshield fluid, antifreeze, herbicides, pesticides, and poultry feed products. Methanol is a typical commodity chemical and the methanol industry is characterized by cycles of oversupply resulting in lower prices and idled capacity, followed by periods of shortage and rapidly rising prices as demand rises and exceeds supply until increased prices justify new plant investments or the re-start of idled capacity. However, the expanding number of different uses for methanol and its derivatives over the last several years has resulted in the methanol industry becoming more complex and subject to increasingly diverse influences on supply and demand. Demand According to an industry source, global methanol demand grew by 3.6% annually from 1997 to 2000. According to Chemical Data Inc., U.S. methanol demand grew by 2.4% annually during the same period. In 2000, formaldehyde, acetic acid and chemical intermediates comprised 34%, 10% and 28% of global demand for methanol, respectively. Due to an increasing range of end uses for methanol, demand has tended to move with the general level of economic activity in methanol's major markets. The significant use of methanol for the production of chemicals used in the building products industry means that building and construction cycles are important factors in determining demand for methanol-based chemicals. MTBE comprised approximately 28% of global demand for methanol in 2000. MTBE is considered the preferred oxygenate by the refining industry and its production has grown rapidly. MTBE production increased from 456 million gallons in 1989 to 1,109 million gallons in 2000. Recently, the state of California adopted regulations 8 that prohibit the addition of MTBE to gasoline after 2002. California's consumption of MTBE comprises approximately 6% of U.S. demand for methanol. Supply Over the past several years significant industry restructuring has taken place with approximately 617 million gallons of North American methanol capacity shut down in 1999, a further rationalization of 150 million gallons in 2000 and 455 million gallons through September 2001. New methanol production facilities have generally been constructed in locations with low-cost natural gas availability, although this advantage is offset by higher distribution costs due to distance from major markets. Outlook According to an industry source, global methanol demand and supply are forecast to increase by 2.8% and 2.2%, respectively, on an annual basis from 2001 to 2004 with global capacity utilization rates forecast to increase from 79% to 80% during this period. In the U.S., methanol demand and capacity are forecast to decrease by 0.6% and 4.7%, respectively, on an annual basis with capacity utilization rates forecast to decrease from 89% to 78% during this period. Global demand for methanol for production of formaldehyde and acetic acid is forecast to grow 3.4% and 3.0% annually, respectively, from 2001 to 2005. A significant factor in the declining forecast for U.S. methanol demand is the projected decrease in demand for MTBE. Principal alternatives to MTBE include ethanol, ETBE, an ethanol derivative, and TAME, which, like MTBE, is produced from methanol. Ethanol, however, has two principal disadvantages. First, it is more expensive than MTBE, although this cost differential has been partially offset by a government subsidy. Second, the volatility of ethanol-oxygenated gasoline exceeds the levels permitted by the 1990 Clean Air Act Amendments, effectively limiting its use as a year-round oxygenate. TAME, a methanol derivative, has a lower volatility than MTBE and could, if widely used, reduce demand for MTBE, but requires the same amount of methanol to produce. As described above, demand for methanol in the manufacture of MTBE is forecast to decline in the U.S. due to regulations adopted in California. Heightened public awareness regarding this issue has resulted in other state and federal initiatives to rescind the federal oxygenate requirements for reformulated gasoline or restrict or prohibit the use of MTBE in particular. For example, California has requested that the U.S. Environmental Protection Agency waive the federal oxygenated fuels requirements for gasoline sold in California. Several bills have been introduced in Congress to accomplish similar goals of curtailing or eliminating the oxygenated fuels requirements in the Clean Air Act, or of curtailing MTBE use. In 1999, the U.S. Senate also passed a non-binding resolution calling for a phase out of MTBE. In addition, on March 20, 2000, the EPA announced its intention to phase-out the use of MTBE under authority of the federal Toxic Substances Control Act. The EPA also called on Congress to restrict the use of MTBE under the Clean Air Act. Any phase-out of or prohibition against the use of MTBE in California, in other states, or nationally may result in a significant reduction in demand for MTBE and result in a material loss in methanol revenues. However, any decrease in MTBE demand may be offset, at least in part, by an increase in methanol demand for industrial applications and growing MTBE demand in Europe and Asia. Methanol is also used to some extent as a direct fuel source. The use of methanol for this purpose historically has been relatively small and sporadic. Recently, there have been several legislative initiatives in the U.S. relating to possible mandated use of alternative fueled or flexible fueled vehicles in certain circumstances. Several automobile manufacturers have developed vehicles able to operate on methanol for such purposes. It is currently not possible to determine the extent to which these initiatives will impact future methanol demand. Credit Our credit terms are generally 15-30 days in the U.S. and 30 days in the U.K., but may be extended for longer periods during certain sales seasons consistent with industry practices. Bad debt writeoffs have been less than $1 million annually for each of the past three years. Seasonality and Volatility The fertilizer business is seasonal, based upon the planting, growing and harvesting cycles. Nitrogen fertilizer inventories must be accumulated to permit uninterrupted customer deliveries, and require significant storage 9 capacity. This seasonality generally results in higher fertilizer prices during peak periods, with prices normally reaching their highest point in the spring, decreasing in the summer, and increasing again in the fall as depleted inventories are restored. Nitrogen fertilizer prices can also be volatile as a result of a number of other factors. The most important of these factors are: . Weather patterns and field conditions (particularly during periods of high fertilizer consumption); . Quantities of fertilizers imported to and exported from North America and imported to the U.K.; . Current and projected grain inventories and prices, which are heavily influenced by U.S. exports and worldwide grain markets; and . Price fluctuations in natural gas, the principal raw material used to produce nitrogen fertilizer and methanol. 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. Price volatility in North American natural gas markets prompted industry-wide curtailment of both nitrogen fertilizer and methanol production in 2000. We idled our Blytheville, Arkansas plant from June through mid-August 2000 and our Blytheville, Arkansas and Beaumont, Texas plants and parts of our Verdigris, Oklahoma plant for the month of December 2000 due to high natural gas costs. During 2000, we produced only 89% and 84% of our ammonia and methanol capacity, respectively, because of plant shutdowns due to high natural gas costs. In January 2001, due to unprecedented natural gas prices of near $10.00/MMBtu, most of our North American production was idled. By the end of that month as natural gas prices declined, we were able to restart production. On June 10, 2001, we once again stopped production at our Blytheville, Arkansas plant. We reopened our Blytheville, Arkansas facility on September 28 and resumed full production on September 30, 2001. While most U.S. methanol is sold pursuant to long-term contracts based on market index pricing and fixed volumes, the spot market price of methanol can be volatile. The industry has experienced cycles of oversupply, resulting in depressed prices and idled capacity, followed by periods of shortages and rapidly rising prices. From the end of 1998 through the end of 1999, methanol sales prices were below the low end of their historic price range; however by early 2000 prices had improved to historic levels. Future demand for methanol will depend in part on the emerging regulatory environment with respect to reformulated gasoline. Raw Materials The principal raw material used to produce manufactured nitrogen products and methanol is natural gas. Natural gas costs in 2001 comprised about 53% of total costs and expenses for our North American nitrogen products business, 25% of total costs and expenses for our U.K. nitrogen products business, and 57% of total costs and expenses associated with our methanol business. We believe there is a sufficient supply of natural gas for the foreseeable future and will, as opportunities present themselves, enter into firm transportation contracts to minimize the risk of interruption or curtailment of natural gas supplies during the peak-demand winter season. Since 1999, Terra's natural gas hedging policy has required us to fix or cap the price of 25% to 80% of our natural gas requirements for a rolling one-year period, and up to 50% of our natural gas requirements for the subsequent two-year period, provided that such arrangements would not result in costs that would be greater than the expected selling prices for our finished products. In response to extremely volatile natural gas costs during the last six months of 2000 and uncertainties regarding the ability of finished goods prices to recover the increases to gas costs, the Board of Directors amended the hedging policy and eliminated the minimum hedge requirement through the end of 2001. Early in 2002, the Board revised the hedging policy to permit hedging of 20% to 80% of our natural gas requirements for the upcoming year and up to 50% of the requirements for the following two-year period. Capping natural gas prices is accomplished through various supply contracts, financial derivatives and other instruments. A significant portion of global nitrogen products and methanol production occurs at facilities with access to low fixed-priced natural gas supplies. These facilities' natural gas costs have been and could continue to be substantially lower than ours. If natural gas prices rise, we may benefit from our use of forward-pricing techniques. Conversely, if natural gas prices fall, we may incur costs above the then available spot market price. The settlement dates of forward-pricing 10 contracts coincide with gas purchase dates. Forward-pricing contracts are based on a specified price referenced to spot market prices or appropriate NYMEX futures contract prices. Transportation Terra uses several modes of transportation to receive materials and distribute products to customers, including railroad cars, common carrier trucks, barges and common carrier pipelines. We use approximately 60 liquid, dry and anhydrous ammonia fertilizer terminal storage facilities in 18 U.S. states and one Canadian province. We also lease a methanol storage facility in Deer Park, Texas. We transport products from this storage facility primarily by marine vessels, rail tank cars and via pipeline to selected customers. Railcars are the major source of transportation at our North American manufacturing facilities. Terra leases approximately 2,120 railcars. Terra also owns 10 nitric acid railcars. In the U.K., Terra's AN production is transported primarily by contract carrier trucks, and ammonia production is transported primarily by pipelines that we own. Terra transports purchased natural gas to our Woodward, Oklahoma facility via both intrastate and interstate pipelines and to Terra's Verdigris, Oklahoma facility via intrastate pipeline. The intrastate pipelines serving Woodward and Verdigris are not open-access carriers, but are nonetheless part of a widespread regional system through which Woodward and Verdigris can receive natural gas from any major Oklahoma source. Terra also has limited access to out-of-state natural gas supplies for these facilities. Terra's Beaumont, Texas facility sources natural gas via four intrastate pipelines. The Courtright, Ontario facility sources natural gas at delivery points at Parkway and Dawn, Ontario and a local utility. We transport purchased natural gas for both our Port Neal, Iowa and Blytheville, Arkansas facilities via interstate, open-access pipelines. At the Billingham and Severnside, England locations, purchased natural gas is transported to the facilities via a nationwide, open-access pipeline system. Research and Development We do not currently have any significant, ongoing research and development efforts. Competition The industries in which Terra operates are highly competitive. Competition in agricultural input markets takes place largely on the basis of price, reliability of supply, delivery time and quality of service. Feedstock availability to production facilities and the cost and efficiency of production, transportation and storage facilities are also important competitive factors. Government intervention in international trade can distort the competitive environment. The relative cost and availability of natural gas are also important competitive factors. Significant determinants of a plant's competitive position are the natural gas acquisition and transportation contracts that a plant negotiates with its major suppliers as well as proximity to natural gas sources and/or end-users. Terra's domestic competitors in the nitrogen fertilizer markets include large farm cooperatives or other independent fertilizer companies. In addition, nitrogen fertilizers imported into the United States compete with domestically produced nitrogen fertilizers, including those produced by Terra. Countries with inexpensive sources of natural gas (whether as a result of government regulation or otherwise) can produce nitrogen fertilizers at a low cost. A substantial amount of new ammonia capacity is expected to be added abroad in the foreseeable future. However, importers face higher transportation costs, which erode their profit margin and competitive pricing position. In the methanol segment, Terra competes with a number of large integrated petrochemical producers, many of which are better capitalized than is Terra. In addition, as the production and trade in methanol have become increasingly globalized, a number of foreign competitors produce methanol primarily for the export market. Many of these foreign competitors have access to favorably priced sources of natural gas and are relatively insensitive to raw material price fluctuations. These advantages are largely offset by high production and transportation costs. However, because of low domestic demand in the country which they produce, these foreign competitors aggressively pursue the U.S. and other export markets. Two new methanol plants commenced production in 2000, including Titan Methanol in Trinidad and NPC in Iran. Methanol prices may be adversely affected by two additional plants - one in Equatorial Guinea, which has recently started production, and one in Argentina, which is expected to begin production before the end of 2002. 11 Nitrogen sales are made through independent retailers, resellers, farmer co-operatives affiliated dealer organizations and brokers. Some North American producers are subsidiaries or divisions of energy or chemical companies while others are owned by farmer co-operatives. Environmental and Other Regulatory Matters Terra's operations are subject to various federal, state and local environmental, health and safety 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 U.K. operations are subject to similar regulations under a variety of acts governing hazardous chemicals, transportation and worker health and safety. We are 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. We take precautions 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/or remediation by federal or state regulatory agencies, Terra may be responsible under CERCLA or analogous laws for all or part of the costs of such investigation and remediation, and damages to natural resources. Terra has been designated as a potentially responsible party ("PRP") under CERCLA and its state analogues with respect to various sites, including the Pinal Creek Drainage Basin Site ("Pinal Site") in Globe/Miami, Arizona based on our prior ownership and operation of copper mining and production facilities there. Under such laws, all PRPs may be held jointly and severally liable for the costs of investigation and/or remediation of an environmentally damaged site regardless of fault or legality of original disposal. The Pinal Site is the subject of on-going cleanup to address releases of acidic metal-bearing solutions from former copper mining and production facilities in the Pinal Site, being performed pursuant to a consent decree entered in 1997 among Inspiration Consolidated Copper Company ("Inspiration"), our subsidiary, as a former owner/operator and the two current owner/operators (collectively with us, the "Group"), and the Arizona Department of Environmental Quality. The parties are jointly and severally liable for the financing and performance of the work; however, Inspiration is not actually participating in the cleanup because it no longer owns assets at the Pinal Site. In a related matter, residents in the area of the Pinal Site brought a class action lawsuit against the Group seeking property damages and medical monitoring for potential personal injuries allegedly related to exposure to contaminated groundwater. All claims have been settled, although plaintiffs have reserved the right to assert individually any personal injury claims. After consideration of such factors as the number and levels of financial responsibility of other PRPs, including ongoing litigation against other PRPs and historic insurance carriers, and the existence of contractual indemnities, we believe that our liability with respect to these matters will not be material. Existing contractual indemnities may be subject to legal challenge, however, there can be no guarantee that they will be upheld or sufficient to cover all costs, or that material expenditures will not be incurred for these matters. Terra retained a small number (less than 10%) of its retail locations after the sale of its distribution business in the second quarter of 1999. Some of these locations are now, or are expected in the future to be, the subject of environmental clean-up activities for which we have retained liability. We do not believe that such environmental costs and liabilities will have a material effect on our results of operations, financial position or net cash flows. With respect to our Verdigris and Blytheville facilities, Freeport-McMoRan Resource Partners, Limited Partnership (a former owner and operator of these facilities) retained liability for certain environmental matters. With respect to our 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 our purchase of the facility in 1991. Likewise, with respect to our Billingham and Severnside, England facilities the seller, ICI, indemnified us, subject to certain conditions, for pre-December 31, 1997 environmental contamination associated with the purchased assets. Known conditions are not expected to result in material expenditures but discovery of unknown conditions or the failure of prior owners and operators and indemnitors to meet their obligations could require significant expenditures. Terra may be required to install additional air and water quality control equipment, such as low NOX burners, scrubbers, ammonia sensors and continuous emission monitors, at certain facilities in order to maintain compliance with applicable environmental requirements. We estimate that the cost of additional equipment to comply with these requirements in 2002 and the next two years will be less than $10 million. Terra endeavors to comply in all material respects with applicable environmental, health and safety regulations and has incurred substantial costs in connection with such compliance. Because these regulations are expected to 12 continue to change and generally be more restrictive than current requirements, the costs of compliance will likely increase. We do not expect our compliance with such regulations to have a material adverse effect on our results of operations, financial position or net cash flows. However, there can be no guarantee that new regulations will not result in material costs. Revenues and Assets Terra's revenues from external customers, measure of profit and loss and total assets for the years 1999-2001 are set forth in the Notes to the Consolidated Financial Statements. Terra's revenues and assets according to geography (U.S., Canada and U.K.) are also set forth in the Notes to the Consolidated Financial Statements. Employees We had 1,248 full-time employees at December 31, 2001, with approximately 470 U.K. employees being covered by the equivalent of a collective bargaining agreement. Item 3. LEGAL MATTERS On July 13, 2001, a British court found Terra Nitrogen (UK) Limited liable for damages associated with recalls of beverages containing carbon dioxide tainted with benzene, plus interest and attorney fees. In addition, there are three similar cases awaiting trial and certain other beverage manufacturers have indicated their intention to file claims for unspecified amounts. We estimate that total claims against Terra from these lawsuits may be (pound)10 million, or approximately $14 million. We have established reserves in this amount to cover estimated losses. Terra has appealed the British court's decision. In addition, we believe we have recourse for these claims against both our insurer and the previous owner of our U.K. operations. (Our insurer had previously paid, without recourse, two recall cost settlements on our behalf, plus a court judgment rendered against us. Nonetheless, the insurer reserved its right to deny coverage in whole or in part for adverse judgments in the remaining cases.) We will vigorously pursue our rights against these parties, but there will be no income recognition for those rights until settlements are finalized. We are involved in various other legal actions and claims, including environmental matters, arising from the normal course of business. While it is not feasible to predict with certainty the final outcome of these proceedings, we do not believe that these matters, or the U.K. benzene claims, will have a material adverse effect on our results of operations, financial position or net cash flows. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No items were submitted to a vote of security holders of Terra during the fourth quarter of 2001. 13 EXECUTIVE OFFICERS OF TERRA The following paragraphs set forth the name, age and offices of each present executive officer of Terra, the period during which each executive officer has served as such and each executive officer's business experience during the past five years:
Present positions and offices with the Company Name and age and principal occupations during the past five years ------------ ---------------------------------------------------- Michael L. Bennett (48) President and Chief Executive Officer of Terra since April 2001; Executive Vice President and Chief Operating Officer of Terra from February 1997 to April 2001; 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. Mark A. Kalafut (48) Vice President, General Counsel and Corporate Secretary of Terra since June 2001; Vice President and Associate General Counsel of Terra from April 1997 through June 2001; Vice President and General Counsel of Terra International from April, 1989 to April, 1997. Francis G. Meyer (50) Senior Vice President and Chief Financial Officer of Terra since November 1995. W. Mark Rosenbury (54) Senior Vice President and Chief Administrative Officer of Terra since August 1999; Vice President, European Operations of Terra and Managing Director of Terra Nitrogen U.K. from January 1998 to August 1999; 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. Wynn S. Stevenson (47) Vice President, Taxes and Corporate Development of Terra since May 1998; Vice President, Taxes of Terra from April 1996 to May 1998; Director, Taxes thereof from June 1992 to April 1996.
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. 14 PART II ------- Item 5. MARKET FOR TERRA'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Information with respect to the market for Terra's common equity and related stockholder matters contained in Exhibit 13 hereto (primarily under the headings "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 Exhibit 13 hereto (primarily under the heading "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 Exhibit 13 hereto (primarily under the heading "Financial Review") is incorporated herein by reference. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information with respect to quantitative and qualitative disclosures about market risk contained in Exhibit 13 hereto (primarily under the subheading "Risk Management and Financial Instruments" of the "Financial Review" discussion) 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 heading "Quarterly Financial and Stock Market Data (Unaudited)" contained in Exhibit 13 hereto are incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There has been no change in accountants, nor has there been any matter of accounting principles or practices or financial disclosure, which in either case is required to be reported pursuant to this Item 9. 15 PART III -------- Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF TERRA. Information with respect to directors of Terra under the caption "Election of Directors" in the Proxy Statement for the Annual Meeting of Stockholders of Terra to be held on April 30, 2002, is incorporated herein by reference. Information with respect to executive officers of Terra appears under the caption "Executive Officers of Terra" 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 April 30, 2002, 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 April 30, 2002, 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 April 30, 2002, 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 Exhibit 13 hereof). Consolidated Statements of Financial Position at December 31, 2001 and 2000. Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999. Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999. Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999. Notes to the Consolidated Financial Statements. Responsibility for Financial Statements. Independent Auditors' Report. Quarterly Production Data (Unaudited). Quarterly Financial and Stock Market Data (Unaudited). Volumes and Prices (Unaudited). Stockholders. Financial Summary. 16 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 10.1.22 are incorporated herein by reference. (c) Reports on Form 8-K Form 8-K dated October 10, 2001, announcing completion of a new $175.0 million revolving credit facility and issuance of $200.0 million of 12 7/8% Senior Secured Notes due in 2008. (d) Exhibit 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. 3.3 Certificate of Incorporation of Terra Capital, Inc. filed as Exhibit 3.i.(a) to Terra Capital, Inc.'s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference. 3.4 Certificate of Incorporation of Beaumont Ammonia Inc. filed as Exhibit 3.i.(b) to Terra Capital, Inc.'s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference. 3.5 Certificate of Incorporation of Beaumont Holdings Corporation filed as Exhibit 3.i.(c) to Terra Capital, Inc.'s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference. 3.6 Certificate of Incorporation of BMC Holdings Inc. filed as Exhibit 3.i.(d) to Terra Capital, Inc.'s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference. 3.7 Certificate of Incorporation of Port Neal Corporation filed as Exhibit 3.i.(e) to Terra Capital, Inc.'s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference. 3.8 Certificate of Incorporation of Terra (UK) Holdings Inc. filed as Exhibit 3.i.(f) to Terra Capital, Inc.'s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference.
17 3.9 Certificate of Incorporation of Terra Capital Holdings, Inc. filed as Exhibit 3.i.(g) to Terra Capital, Inc.'s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference. 3.10 Certificate of Incorporation of Terra International (Oklahoma) Inc. filed as Exhibit 3.i.(k) to Terra Capital, Inc.'s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference. 3.11 Certificate of Incorporation of Terra International, Inc. filed as Exhibit 3.i.(l) to Terra Capital, Inc.'s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference. 3.12 Certificate of Incorporation of Terra Methanol Corporation filed as Exhibit 3.i.(m) to Terra Capital, Inc.'s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference. 3.13 Certificate of Incorporation of Terra Nitrogen Corporation filed as Exhibit 3.i.(n) to Terra Capital, Inc.'s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference. 3.14 Certificate of Incorporation of Terra Real Estate Corporation filed as Exhibit 3.i.(o) to Terra Capital, Inc.'s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference. 3.15 By-Laws of Terra Capital, Inc. filed as Exhibit 3.ii.(a) to Terra Capital, Inc.'s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference. 3.16 By-Laws of Beaumont Ammonia Inc. filed as Exhibit 3.ii.(b) to Terra Capital, Inc.'s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference. 3.17 By-Laws of Beaumont Holdings Corporation filed as Exhibit 3.ii.(c) to Terra Capital, Inc.'s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference. 3.18 By-Laws of BMC Holdings, Inc. filed as Exhibit 3.ii.(d) to Terra Capital, Inc.'s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference. 3.19 By-Laws of Port Neal Corporation filed as Exhibit 3.ii.(e) to Terra Capital, Inc.'s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference. 3.20 By-Laws of Terra (UK) Holdings Inc. filed as Exhibit 3.ii.(f) to Terra Capital, Inc.'s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference. 3.21 By-Laws of Terra Capital Holdings, Inc. filed as Exhibit 3.ii.(g) to Terra Capital, Inc.'s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference. 3.22 By-Laws of Terra International (Oklahoma) Inc. filed as Exhibit 3.ii.(i) to Terra Capital, Inc.'s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference. 3.23 By-Laws of Terra International, Inc. filed as Exhibit 3.ii.(j) to Terra Capital, Inc.'s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference. 3.24 By-Laws of Terra Methanol Corporation filed as Exhibit 3.ii.(k) to Terra Capital, Inc.'s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference. 3.25 By-Laws of Terra Nitrogen Corporation filed as Exhibit 3.ii.(l) to Terra Capital, Inc.'s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference.
18 3.26 By-Laws of Terra Real Estate Corporation filed as Exhibit 3.ii.(m) to Terra Capital, Inc.'s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference. 4.1 Indenture dated as of June 22, 1995 between Terra Industries and First Trust National Association, as trustee, including form of Exchange Note, filed as Exhibit 4.1 to Terra Industries' Registration Statement on Form S-4, as amended (File No. 33-60853), is incorporated herein by reference. 4.2 Indenture dated as of October 10, 2001 among Terra Capital, Inc., Certain guarantors and U.S. Bank National Association, as trustee, including the form of note, filed as Exhibit 4.1 to Terra Industries' Form 8-K dated October 10, 2001, is incorporated herein by reference. 4.3 Amended and Restated Credit Agreement dated as of October 10, 2001 among Terra Capital, Inc., Terra Nitrogen (U.K.) Limited, and Terra Nitrogen, Limited Partnership, certain guarantors, certain lenders, certain issuing banks and Citicorp USA, Inc., filed as Exhibit 4.2 to Terra Industries' Form 8-K dated October 10, 2001, is incorporated herein by reference. 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. 10.1.6.a. Amendment to the Terra Industries Inc. Excess Benefit Plan, dated July 26, 2000, filed as Exhibit 10.1.6.a to Terra Industries' Form 10-K for the year ended December 31, 2000, as 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. 10.1.8.a. Amendment No. 2 to the Terra Industries Inc. Supplemental Deferred Compensation Plan, dated July 26, 2000, filed as Exhibit 10.1.8.a to the Terra Industries' Form 10-K for the year ended December 31, 2000, 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. 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.
19 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 10.1.13 to Terra Industries' Form 10-K for the year ended December 31, 1999, 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 10.1.14 to Terra Industries' Form 10-K for the year ended December 31, 1999, is incorporated herein by reference. 10.1.15 Form of Performance Share Award 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, 1998, is incorporated herein by reference. 10.1.16* Retirement and Consulting Agreement for Burton M. Joyce, dated April 26, 2001. 10.1.17 Form of Executive Retention Agreement for Other Executive Officers, filed as Exhibit 10.1.19 to Terra Industries' Form 10-K for the year ended December 31, 1998, is incorporated herein by reference. 10.1.18* 2002 Incentive Award Program for Officers and Key Employees of Terra Industries. 10.1.19 Form of Non-Employee Director Stock Option Agreement under the 1997 Stock Incentive Plan, filed as Exhibit 10.2.21 to Terra Industries' Form 10-Q for the quarter ended September 30, 1999, is incorporated herein by reference. 10.1.20 Amendment No. 1 dated as of February 20, 1997 to the 1997 Stock Incentive Plan filed as Exhibit 10.1.21 to Terra Industries' Form 10-K for the year ended December 31, 1999, is incorporated herein by reference. 10.1.21 Form of Performance Share Award of Terra Industries under its 1997 Stock Incentive Plan, dated February 16, 2000, filed as Exhibit 10.1.22 of the Terra Industries; Form 10-K for the year ended December 31, 2000, is incorporated herein by reference. 10.1.22 Form of Non-Employee Director Performance Share Award of Terra Industries under its 1997 Stock Incentive Plan, dated May 2, 2000, filed as Exhibit 10.1.23 to the Terra Industries' Form 10-K for the year ended December 31, 2000, is incorporated herein by reference. 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 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.
20 10.7 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. 10.8 ** 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. 10.9 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. 10.10 Asset Sale and Purchase Agreement dated as of May 3, 1999 by and between Terra Industries Inc. and Cenex/Land O'Lakes Agronomy Company, filed as Exhibit 10.12 to Terra Industries' Form 8-K dated May 3, 1999, 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, 2001. 21 * Subsidiaries of Terra Industries. 24 * Powers of Attorney.
- -------------------------------------------------------------------------------- * Filed herewith. ** Confidential treatment requested. 21 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 13, 2002 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 - ---------------------------------- Henry R. Slack /s/ Michael L. Bennett Director, President and Chief Executive Officer - ---------------------------------- (Principal Executive Officer) Michael L. Bennett /s/ Francis G. Meyer Senior Vice President and Chief Financial Officer - ---------------------------------- (Principal Financial Officer and Controller/Principal Accounting Officer) Francis G. Meyer * Director - ---------------------------------- Edward G. Beimfohr * Director - ---------------------------------- Edward M. Carson * Director - ---------------------------------- Thomas H. Claiborne * Director - ---------------------------------- Eric K. Diack * Director - ---------------------------------- David E. Fisher * Director - ---------------------------------- Martha O. Hesse * Director, Vice Chairman of the Board - ---------------------------------- Burton M. Joyce * Director - ---------------------------------- William R. Loomis, Jr. * Director - ---------------------------------- John R. Norton III
Date: March 13, 2002 *By: /s/ MARK A. KALAFUT ------------------- Mark A. Kalafut Attorney-in-Fact 22 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, is included in the Terra Industries Annual Report, Footnote 21, Column 1, "Parent." II Valuation and Qualifying Accounts: Years Ended December 31, 2001, 2000 and 1999.....................S-3
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 SCHEDULE ---------------------------- TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF TERRA INDUSTRIES INC.: We have audited the consolidated financial statements of Terra Industries Inc. and subsidiaries as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001, and have issued our report thereon dated January 31, 2002. Such financial statements and report are included in the 2001 Annual Report to Stockholders of Terra Industries Inc. and are incorporated herein by reference. Our audits also included the financial statement schedule of Terra Industries Inc. and subsidiaries listed in Item 14(a) of this Form 10-K. This financial statement schedule is 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 schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Omaha, Nebraska January 31, 2002 INDEPENDENT AUDITORS' CONSENT ----------------------------- We consent to the incorporation by reference in Registration Statements Nos. 333-32869, 33-46735, 33-46734 and 33-30058 of Terra Industries Inc. and subsidiaries on Forms S-8 and Registration Statements Nos. 2-90808, 2-84876 and 2-84669 of Terra Industries Inc. and subsidiaries on Form S-3 of our reports dated January 31, 2002, appearing in and incorporated by reference in the Annual Report on Form 10-K of Terra Industries Inc. and subsidiaries for the year ended December 31, 2001. DELOITTE & TOUCHE LLP Omaha, Nebraska March 13, 2002 S-2 SCHEDULE II TERRA INDUSTRIES INC. VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 2001, 2000, and 1999 --------------------------------------------- (in thousands)
Additions Less Write-offs, Balance at Charged to and Transfers, Balance Beginning Costs and Net of at End Description of Period Expenses Recoveries of Period Year Ended December 31, 2001: - ----------------------------- Allowance for Doubtful Accounts Continuing operations $ 889 $ 7 $ 40 $ 936 Discontinued operations - Included in other assets 6,359 0 (2,040) 4,319 ----------------------------------------------------- $ 7,248 $ 7 $ (2,000) $ 5,255 Year Ended December 31, 2000: - ----------------------------- Allowance for Doubtful Accounts Continuing operations $ 491 $ 593 $ (195) $ 889 Discontinued operations - Included in other current assets 12,533 0 (6,174) 6,359 ----------------------------------------------------- $13,024 $ 593 $ (6,369) $ 7,248 Year Ended December 31, 1999: - ----------------------------- Allowance for Doubtful Accounts Continuing operations $ 938 $ 104 $ (551) $ 491 Discontinued operations - Included in other current assets 14,196 4,582 (6,245) 12,533 ----------------------------------------------------- $15,134 $ 4,686 $ (6,796) $13,024
S-3 EX-10.1.16 3 dex10116.txt RETIREMENT & CONSULTING AGREEMENT BURTON M JOYCE RETIREMENT AND CONSULTING AGREEMENT This Retirement and Consulting Agreement ("Agreement") made and entered into this 26th day of April, 2001, by and between BURTON M. JOYCE, hereinafter referred to as "Executive", and TERRA INDUSTRIES INC., a Maryland corporation having offices at 600 Fourth Street, Sioux City, Iowa 51101, which, including its subsidiary and affiliate companies, is hereinafter referred to as "Company" or "Terra". WHEREAS, the parties agree that Executive will retire from active employment with Terra as set forth below; and WHEREAS, the parties desire that the Executive provide certain consulting services during the term of this Agreement; and WHEREAS, the parties desire that Executive be provided certain payments and other benefits in connection with such retirement and as consideration for such consulting services. NOW, THEREFORE, the parties hereto mutually agree as follows: 1. Retirement; Employment Termination ---------------------------------- Executive agrees to retire effective April 26, 2001 and hereby resigns as President and Chief Executive Officer of Terra as of such date. Executive agrees to serve as a director of the Company and as Vice-Chairman of the Board of Directors for a one-year period commencing on the date of the annual meeting of shareholders of the Company on April 26, 2001. Executive also agrees to serve as Chairman of the Board of Directors of Terra Nitrogen Corporation for a one year period. Executive's membership and offices on these Boards of Directors may be extended by mutual agreement. 2. Payments/Benefits ------------------ a. Consulting Payments. As consideration for Executive's consulting ------------------ services described in Section 4 hereof, the Company shall pay Executive $550,000 in four equal quarterly installments on August 1, 2001, November 1, 2001, February 1, 2002, and May 1, 2002. The Company shall also pay Executive $550,000 per year for the balance of the consulting period, such payments to be made on June 1, 2002, June 1, 2003, June 1, 2004, and June 1, 2005. b. Retirement Benefits. Executive agrees to elect joint and survivor ------------------- benefits under the Retirement Plan of Terra Industries Inc. (the "Qualified Plan") and under the Terra Industries Inc. Excess Benefit Plan (the "SERP") commencing May 1, 2004. The Company agrees to pay Executive, and his surviving spouse in the case of his death, -2- during each month in which payments are made to either of them pursuant to the Company's Qualified Plan and SERP, an amount equal to $30,000 less the sum of the payments payable from these two plans during that month. c. Health Insurance Benefits. Executive shall be provided with ------------------------- medical and dental insurance benefits (subject to Executive's payment of any contribution to the cost of such benefits required from employees of the Company generally) at substantially the level provided to Executive prior to the retirement effective date until May 1, 2004. After that date Executive shall qualify for the Company's retiree medical and dental benefits program based on credited service of 17.8 years. d. Life and Other Insurance Benefits. Executive shall be provided --------------------------------- with insurance coverage under the Company's Basic and Optional Life Insurance Plans, Accidental Death and Dismemberment Plan, and Short- and Long-Term Disability Plans (subject to Executive's payment of any contribution to the cost of such insurance coverage required from employees of the Company generally) at substantially the levels provided to Executive prior to retirement until May 1, 2004. -3- e. Restricted Stock and Stock Options. Executive's ----------------------------------- previously-granted stock options and restricted stock shall continue to vest according to their terms for a period of 12 months after the effective date of his retirement, at which time all outstanding but unvested restricted stock and stock options shall immediately vest. All of Executive's stock options shall be exercisable until May 1, 2003. f. Reimbursement of Office Expenses. The Company agrees to reimburse -------------------------------- the Executive up to $65,000 for the cost of secretarial services and office space at a location other than Terra Centre for a three-year period until May 1, 2004. 3. Executive Retention Agreement ------------------------------ Upon execution of this Agreement by Executive and Company, the parties' Executive Retention Agreement dated December 31, 1998 shall terminate and be null and void. Executive acknowledges that no change of control or other event has occurred to trigger a payment of benefits to Executive under the Executive Retention Agreement or any other agreement or benefit plan. However, the Company agrees to reimburse Executive on a grossed-up basis in the event any excise tax becomes payable by him under Section 4999 of the Internal Revenue Code with respect to any payments made hereunder. -4- 4. Consulting Services ------------------- Executive Agrees to provide consulting services to the Company for a five-year period commencing on April 26, 2001, the effective date of his retirement. Executive shall consult with the Company with respect to strategic issues, capital structure, mergers and acquisitions, and other issues as requested by the Company's Board of Directors and the President and Chief Executive Officer. Terra shall pay all reasonable and documented travel or related expenses incurred by Executive in connection with the provision of such services. The consulting period may be terminated by either party effective May 1, 2004. In the event of such termination, the Company shall pay the Executive $1,100,000 in a lump sum on June 1, 2004 in satisfaction of all remaining consulting fee payments hereunder. 5. Executive Covenants ------------------- a. Confidentiality. Executive acknowledges that during his --------------- employment with Terra he has seen, worked with, and had access to information relating to employees employed by Terra and its subsidiaries, and other information relating to Terra's business not available to the general public ("Confidential Information"). Executive agrees that he shall not disclose any Confidential Information to any third party or -5- use or disclose the Confidential Information or his knowledge thereof in working for future clients or employers. The term "Confidential Information" shall include only information relating specifically to Terra's products, business or employees not available to the general public and shall not include general, publicly-available information. Executive certifies that upon termination of his consultancy with Terra he will take no papers, records or documents of any kind containing or referring to Confidential Information. b. Nondisclosure. Neither Executive nor the Company shall disclose ------------- the existence of this Agreement or its terms to anyone except (i) those outside advisors of Executive and Company 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 promises made by the parties ------- and the payments to be made by Terra under this Agreement, the sufficiency of which is hereby acknowledged, Executive, with the intention of binding himself, his heirs, executors and assigns, hereby releases and forever discharges Terra and any entity related to Terra, as well as its or their predecessors, successors and assigns, -6- officers, directors, attorneys, agents, representatives, and employees, past, present and future, individually and collectively, from any and all claims, demands, causes of actions or liabilities, which Executive ever had, or now has, or may have upon or by reason of any matter, cause or thing whatsoever, whether known or unknown, suspected or unsuspected, arising out of or in any way connected with his employment and/or the termination thereof. Without limiting the generality of the foregoing, this release applies to any right which Executive has or may have to commence or maintain a charge or action alleging discrimination under any federal, state or local statute (whether before a court or an administrative agency), including the Age Discrimination in Employment Act of 1967, Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act of 1990, and the Employee Retirement Income Security Act of 1974, and any right which Executive has or may have to commence or maintain a claim or action alleging wrongful termination, breach or contract, defamation, commission of tort, or any combination thereof, whether based in law or in equity. Executive agrees not to make, assert or maintain any charge, claim, demand or action which would be covered by -7- this release. If Executive breaches this provision, he agrees to indemnify Terra against all liability, costs and expenses, including reasonable attorneys' fees, related to such breach. 6. ADEA Waiver and Full Understanding of Terms ------------------------------------------- Executive acknowledges that this Agreement includes a waiver of any rights and claims arising under the Age Discrimination in Employment Act of 1967. Executive understands he is not waiving rights or claims that may arise after the date this Agreement is executed. Executive acknowledges that the consideration he is receiving in exchange for his waiver of the rights and claims specified herein exceeds anything of value to which he already is entitled. Executive acknowledges that he was advised to consult with an attorney prior to executing this Agreement. Executive acknowledges that he has entered into this Agreement knowingly and voluntarily with full understanding of its terms and after having had the opportunity to seek and receive advice and counsel from his attorney. Executive acknowledges that he was given a period of at least twenty-one (21) days within which to consider this Agreement and has waived said period. Executive understands that he may revoke this Agreement during the seven (7) days following the execution of this Agreement and that the Agreement shall not become effective or enforceable until that seven (7) day revocation period has expired. -8- 7. Withholding ----------- Notwithstanding any other provision hereof, the 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. 8. Memberships/Company Assets -------------------------- Executive will relinquish any corporate-paid memberships, except where pre-paid, held in his name at the effective day of his retirement. Executive will also return to the Company any Company-owned assets in his possession at the end of the consulting period described in this Agreement. 9. 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. 10. Arbitration ----------- Any dispute or controversy between the Company and the Executive, whether arising out of or relating to this Agreement or otherwise, shall be settled by arbitration administered in Sioux City, Iowa in accordance with the Commercial Arbitration Rules of the American -9- Arbitration Association then in effect, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction. The Company shall pay the cost of any arbitration conducted hereunder. 11. Attorney Fees ------------- The Company shall reimburse the Executive for any reasonable attorney fees incurred by him in connection with his pursuing or defending (or preparing to pursue or defend), whether in arbitration or litigation, any claim or dispute involving the interpretation and performance of this Agreement. 12. Successors. ---------- The Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, expressly, absolutely and unconditionally to 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 or assignment had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor or assign to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 12 or which becomes bound by all -10- the terms and provisions of this Agreement by operation of law or otherwise. 13. Entire Agreement --------------- This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and, except as expressly provided herein, supersedes all other agreements concerning employment termination between the Company and Executive. This Agreement may be changed only by a written agreement executed by the Company and Executive. * * * -11- WHEREFORE, the parties have executed this Agreement on the 26th day of April, 2001. EXECUTIVE: TERRA INDUSTRIES INC: /s/ B. M. Joyce /s/ Edward G. Beimfohr - ---------------------------------------- ------------------------------------ Burton M. Joyce By: 4/26/01 4/26/01 - ---------------------------------------- ------------------------------------ Date Date -12- EX-10.1.18 4 dex10118.txt 2002 INCENTIVE AWARD PROGRAM FOR OFFICERS TERRA INDUSTRIES INC. INCENTIVE AWARD PROGRAM FOR OFFICERS & KEY EMPLOYEES 2002 ---- 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 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. and subsidiaries whose efforts are expected to contribute significantly to the success and accomplishment of the Company's 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 2002 incentive pool. Each officer and key employee participating in this plan will be assigned a target incentive expressed as a percentage of year-end base salary. The Chief Executive Officer and his direct reports are responsible for approving each plan participant's individual goals as soon as practicable in 2002 (See Section IV below). The importance of each goal is reflected in the weight assigned to it; each participant's goals will sum to one hundred percent (100%). These individual goals will be used in determining the participant's final incentive payment. Each plan participant must periodically report on his/her goal achievement to the Chief Executive Officer. IV. Funding the Officers and Key Employees Incentive Award Program -------------------------------------------------------------- The 2002 Plan divides the incentive awards between a portion based upon Company financial performance and a portion based upon individual performance on personal goals (up to 34% of each participant's target bonus). However, awards for achieving individual performance goals may not be paid if the Personnel Committee of the Board of Directors and the Chief Executive Officer determine that the Company's financial performance does not justify such awards. The funding for the Company's financial performance portion of the incentive award pool is based on Terra Industries Inc.'s actual 2002 results. Budgeted 2002 results, which is based on forecasts of nitrogen products and methanol selling prices and natural gas costs, does not justify an award. Consequently, the Company`s financial performance portion of the pool starts to fund at fifty percent (50%) when the Company's actual 2002 income from continuing operations ("income") is $20 million and increases by one percent (1%) for each additional $0.5 million of net income. Any funding for actual 2002 income which is more than $95 million is at the discretion of the Personnel Committee of the Board of Directors and the Chief Executive Officer. 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 Chief Executive Officer and, where applicable, his direct reports. 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. However, funding of the individual performance awards pool is at the discretion of the Personnel Committee of the Board of Directors and the Chief Executive Officer. V. Basis of the Incentive Award ---------------------------- The starting point in determining each participant's incentive award is the evaluation of the individual goals. The participant's individual raw award is calculated by taking each participant's year-end salary times his/her targeted incentive percentage and then times his/her individual goal achievement. 2 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 targeted percentage award (or a portion of his/her index used to calculate this pool) which is then adjusted by the Company's financial 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. 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 any 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 Company 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. All changes are subject to final approval of the Chief Executive Officer. VII. Payment of Award ---------------- The incentive award will be paid to 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. 3 VIII. Special Provisions ------------------ 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. 4 EX-13 5 dex13.txt FINANCIAL REVIEW & CONSOLIDATED FIN STATEMENTS Exhibit 13 TERRA INDUSTRIES INC. 2001 ANNUAL REPORT FINANCIAL SECTION 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 Volumes and Prices Stockholders Financial Summary Directors and Management Investor Information FINANCIAL REVIEW OVERVIEW OF CONSOLIDATED RESULTS We reported net losses of $80 million in 2001, $10 million in 2000 and $90 million in 1999 with losses per share of $1.06, $0.14 and $1.20, respectively. Revenues from continuing operations totaled $1,037 million in 2001, $1,063 million in 2000 and $833 million in 1999. Net income for 2001 was reduced $2.1 million ($0.03 per share) for the write-off of deferred financing fees in connection with early retirement of debt. During 1999, we sold our Distribution business segment which generated a 1999 loss of $10.5 million ($0.14 per share). In addition, 1999 net income was reduced $9.3 million ($0.12 per share) due to the write-off of deferred financing fees in connection with the early retirement of debt. The net loss from continuing operations was $78 million in 2001, $10 million in 2000 and $70 million in 1999. Fluctuations in the net loss from continuing operations from 1999 through 2001 are largely due to changes in the selling prices of nitrogen products and methanol that we manufactured and changes in the cost of natural gas, our primary raw material. FINANCIAL COMPARABILITY On June 30, 1999, we sold our Distribution business segment effective as of March 31, 1999, for net proceeds of $335.1 million as discussed further at Note 2 to the Consolidated Financial Statements. Sale proceeds were used primarily to repay seasonal debt and redeem outstanding minority preferred limited interest in a partnership that operates our methanol plant located in Beaumont, Texas. FACTORS THAT AFFECT OPERATING RESULTS Factors that may affect our future operating results include: the relative balance of supply and demand for nitrogen fertilizers, industrial nitrogen and methanol, the availability and cost of natural gas, the number of planted acres - - which is affected by both worldwide demand and governmental policies, the types of crops planted, the effects general weather patterns have on the timing and duration of fieldwork for crop planting and harvesting, the effect of environmental legislation on supply and demand for our products, the availability of financing sources to fund seasonal working capital needs, and the potential for interruption to operations due to accident or natural disasters. The principal raw material used to produce nitrogen products and methanol is natural gas. Natural gas costs in 2001 accounted for about 53% of total costs and expenses for our North American nitrogen products business, 25% of total costs and expenses for our U.K. nitrogen products business and 57% of total costs and expenses for our methanol business. A significant increase in the price of natural gas that is not hedged or recovered through an increase in the price of our related nitrogen and methanol products would have an adverse effect on our business, financial condition and results. During parts of 2000 and 2001, price volatility in North American natural gas markets prompted industry-wide curtailments of nitrogen and methanol production. We produced only 93% and 81% of our total nitrogen capacity and only 76% and 74% of our methanol capacity in 2000 and 2001, respectively, because of plant shutdowns and production curtailments related to high natural gas costs and to balance inventory levels with demand. A portion of global nitrogen products and methanol production is at facilities with access to fixed-price natural gas supplies that have been, and could continue to be, priced substantially lower than our natural gas. 2 We enter into forward pricing arrangements for some of our natural gas requirements so long as such arrangements would not result in costs greater than expected selling prices for our finished products. Under those conditions, our normal natural gas forward pricing policy is to effectively fix or cap the price of between 25% and 80% of our natural gas requirements for a one-year period and up to 50% of our natural gas requirements for the subsequent two-year period through supply contracts, financial derivatives and other instruments. In response to extremely volatile natural gas costs during 2001 and uncertainties regarding the ability of finished goods prices to recover the increases to natural gas costs, we amended our normal policy and eliminated the minimum hedge requirement through the end of 2002. As a result, December 31, 2001, forward positions covered only 21% of our expected 2002 natural gas requirements. Prices for nitrogen products are influenced by the world supply and demand balance for ammonia and other nitrogen-based products. Long-term demand is affected by population growth and rising living standards that determine food consumption. Short-term demand is affected by world economic conditions and international trade decisions. In addition, 2001 demand was reduced, in part, due to relatively high nitrogen prices in contrast to low grain prices. Supply is affected by increasing 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. Methanol is used as a raw material in the production of formaldehyde, methyl tertiary butyl ether (MTBE), acetic acid and numerous other chemical derivatives. Methanol's price is influenced by the supply and demand for each of these products. Environmental initiatives to ban or reduce the use of MTBE as a fuel additive, such as those currently underway in California, could significantly affect demand for methanol. Weather can have a significant effect on demand for our products. Weather conditions that delay or intermittently disrupt field work during the planting and growing seasons may cause agricultural customers to use forms of nitrogen fertilizer that are more or less favorable to our products. Weather conditions following harvest may delay or eliminate opportunities to apply fertilizer in the fall. Weather can also have an adverse effect on crop yields, which lowers the income of growers and could impair their ability to pay for crop inputs purchased from our dealer customers. Conversely, low crop yields often increase planted acres in the subsequent season, which in turn, increase the demand for nitrogen fertilizer. Our nitrogen business segment is seasonal, with more nitrogen products used during the second quarter in conjunction with spring planting activity than in any other quarter. Due to the seasonality of the business and the relatively brief periods during which customers can use products, we and/or our customers generally build inventories during the second half of the year in order to ensure product availability during the peak sales season. For our current level of sales, we require lines of credit to fund inventory increases and to support customer credit terms. We believe that our credit facilities are adequate for expected production levels in 2002. Our manufacturing operations may be subject to significant interruption if one or more of our facilities were to experience a major accident or damage from severe weather or other natural disaster. We currently maintain insurance, including business interruption insurance, which we believe is sufficient to allow us to withstand major damage to any of our facilities. 3 RISK MANAGEMENT AND FINANCIAL INSTRUMENTS Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in financial and commodity market prices and rates. We use 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. Our general policy is to avoid unnecessary risk and to limit, to the extent practical, risks associated with operating activities. Our management may not engage in activities that expose Terra to speculative or non-operating risks and is expected to limit risks to acceptable levels. The use of derivative financial instruments is consistent with our overall business objectives. Derivatives are used to manage operating risk within the limits established by our 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 natural gas purchase transactions, and to protect against foreign exchange rate movements between different currencies that impact revenue and earnings expressed in U.S. dollars. Foreign Currency Fluctuations Our policy is 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 forecasted requirements. The primary currencies to which we are exposed are the Canadian dollar and the British pound. At December 31, 2001, we had no forward positions in any foreign currency. Natural Gas Prices - North American Operations Natural gas is the principal raw material used to manufacture nitrogen and methanol. Natural gas prices are volatile and we manage this volatility through the use of derivative commodity instruments. Since 1999, our normal policy was to hedge 25-80% of our natural gas requirements for the upcoming 12 months and up to 50% of requirements for the following 24-month period provided that such arrangements would not result in costs greater than expected selling prices for our finished products. In response to extremely volatile natural gas costs during 2001, we amended our policy and eliminated the 25% minimum hedge requirement through the end of 2002. Early in 2002, we revised our hedging policy to permit hedging of 20 - 80% of our natural gas requirements for the upcoming 12 months and up to 50% of the requirements for the following 24 month period. Annual North American natural gas requirements are approximately 134 million MMBtu. We have hedged approximately 20% of our expected 2002 North American requirements and none of our requirements beyond December 31, 2002. The fair value of these instruments is estimated based on published reference prices, quoted market prices from brokers and realized gains or losses. These instruments fixed natural gas prices $2.5 million higher than published prices for December 31, 2001 forward markets. Market risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse price change. As of December 31, 2001 our market risk exposure related to future hedged natural gas requirements was $3.9 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. 4 Natural Gas Prices - United Kingdom Operations To meet natural gas production requirements at our United Kingdom production facilities, we generally enter into one- or two-year gas supply contracts with fixed prices for 25-80% of total volume requirements. Annual procurement requirements for U.K. natural gas are approximately 26 million MMBtu. As of December 31, 2001, we had fixed-price contracts for 25% of our expected 2002 U.K. natural gas requirements and none of our 2003 natural gas requirements. Our U.K. fixed-price contracts for 2002 natural gas were at prices $4.4 million lower than published prices for December 31, 2001, forward markets. We do not use derivative commodity instruments for our United Kingdom natural gas needs. Interest Rate Fluctuations Our policy is to limit the extent of uncapped, variable rate debt to no more than 50% of our total outstanding debt. We manage interest rate risk to reduce the potential volatility of earnings that may arise from changes in interest rates. The table below provides information about our derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, including debt obligations and interest rate swaps. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted average interest rates by expected maturity dates. Notional amounts are used to calculate contractual payments to be exchanged under the contract.
Interest Rate Sensitivity (in millions) Expected Maturity Date ----------------------------------------------------------------------------- 2002 2003 2004 2005 2006 Thereafter Total Fair Value ------ ------ ------ ------ ------ ---------- ------ ---------- Long-Term Debt Senior Notes fixed rate ($U.S) $ -- $ -- $ -- $200.0 $ -- $ -- $200.0 $214.2 Average interest rate 10.50% 10.50% 10.50% 10.50% -- -- -- -- Senior Secured Notes, fixed rate (($U.S.) -- -- -- -- -- 200.0 200.0 195.3 Average interest rate 12.88% 12.88% 12.88% 12.88% 12.88% 12.88% -- -- Revolving credit facility ($U.S.) -- -- -- 36.3 -- -- 36.3 36.3 Variable interest rate, LIBOR based 4.66% 4.66% 4.66% 4.66% -- -- -- -- Other debt, various rates ($U.S) 0.1 0.1 0.1 -- -- -- 0.3 0.3 Average interest rate 12.01% 12.03% 12.29% -- -- -- -- -- ----------------------------------------------------------------------------- Total Long-Term Debt $ 0.1 $ 0.1 $ 0.1 $236.3 $ -- $200.0 $436.6 $446.1 ============================================================================= Short-Term Borrowings Revolving credit facility, notional amount ($U.S.) $175.0 $175.0 $175.0 $175.0 -- -- -- -- Variable interest rate: LIBOR based 4.66% 4.66% 4.66% 4.66% -- -- -- -- Interest Rate Swap Variable to fixed, notional amount (U.S.) $100.0 -- -- -- -- -- -- $(3.8) Average Pay rate 6.05% -- -- -- -- -- -- -- Average receive rate LIBOR -- -- -- -- -- -- -- =============================================================================
5 RESULTS OF CONTINUING OPERATIONS - 2001 COMPARED WITH 2000 Consolidated Results We reported a 2001 net loss from continuing operations of $79.8 million on revenues of $1,037 million compared with a loss of $10.2 million on revenues of $1,063 million in 2000. Basic and diluted loss per share for 2001 was $1.03 compared with $0.14 for 2000. The increase in the 2001 loss was largely due to higher natural gas costs, lower sales volumes, and product recall costs, partially offset by higher product prices. We classify our operations into two business segments: Nitrogen Products and Methanol. The Nitrogen Products segment represents the sales of nitrogen products including that produced at our ammonia manufacturing and upgrading facilities. The Methanol segment represents wholesale sales of methanol including that produced at our two methanol manufacturing facilities. Total revenues and operating income (loss) by segment for the years ended December 31, 2001 and 2000 follow: (in thousands) 2001 2000 - -------------------------------------------------------------------------------- REVENUES: Nitrogen Products $ 863,512 $ 916,959 Methanol 169,098 136,781 Other revenues 4,700 9,270 - -------------------------------------------------------------------------------- $1,037,310 $1,063,010 ================================================================================ OPERATING INCOME (LOSS): Nitrogen Products $ (48,476) $ 28,639 Methanol (11,739) 12,395 Other expense - net (1,603) 1,773 - -------------------------------------------------------------------------------- $ (61,818) $ 42,807 ================================================================================ Nitrogen Products Volumes and prices for 2001 and 2000 follow: Volumes and Prices - -------------------------------------------------------------------------------- 2001 2000 - -------------------------------------------------------------------------------- Sales Average Sales Average (quantities in thousands of tons) Volumes Unit Price Volumes Unit Price - -------------------------------------------------------------------------------- Ammonia 1,195 $187 1,418 $162 Nitrogen solutions 3,296 97 3,990 79 Urea 451 142 474 136 Ammonium nitrate 682 127 1,000 118 - -------------------------------------------------------------------------------- Nitrogen products revenues declined by $53.5 million to $863.5 million for 2001 compared with 2000 primarily as a result of lower sales volumes for all products. Sales volumes declined largely because of lower production rates, fewer acres planted to corn, wheat and other crops and reduced application rates because of low grain prices and high fertilizer costs. Sales volumes of ammonium nitrate, which is the primary form of fertilizer we sell in the United Kingdom, were also reduced as the result of foot and mouth disease and extremely wet conditions that limited planted acres. A substantial portion of the revenue shortfall from lower sales volumes was offset by higher 2001 prices as compared to the previous year. Price 6 increases were realized primarily during the first half of 2001 as the result of lower nitrogen supplies caused by industry-wide production curtailments beginning during the second half of 2000 in response to unprecedented increases to natural gas costs. As compared to 2000, higher 2001 selling prices offset the effects of higher natural gas costs. Natural gas costs, net of forward pricing gains or losses, increased to $3.93/MMBtu in 2001 from $3.02/MMBtu the previous year. Forward pricing contracts reduced 2001 natural gas costs by $5.5 million. The nitrogen products segment reported an operating loss of $48.5 million and operating income of $28.6 million for 2001 and 2000, respectively. Approximately $50 million of the operating results decline was due to lower sales volumes. Sales volumes reflected reduced production rates from our manufacturing plants in response to higher gas costs, lower customer demand and increased competition from nitrogen fertilizer imports. Nitrogen products costs in 2001 also included a $14 million charge to reflect the estimated value of claims associated with recalls of beverages containing carbon dioxide tainted with benzene and $6 million for equipment write-off and employee termination costs related to our decision to stop sodium nitrite production. Our sales of sodium nitrite were $4.4 million and $5.4 million in 2001 and 2000, respectively. Methanol Methanol revenues were $169.1 million compared with $136.8 million for the years ended December 31, 2001 and 2000, respectively. Average methanol sales prices increased to $0.56 per gallon in 2001 from $0.53 per gallon in 2000 primarily as the result of higher natural gas costs and a decrease in domestic supplies during the first half of 2001. Methanol sales volumes increased by 21% to 310 million gallons for 2001 compared with 2000, as the result of Terra's expanding our customer base to levels that match our total production capacities. The methanol segment reported an operating loss of $11.7 million for 2001 compared to operating income of $12.4 million for 2001. The decline in operating results was primarily due to higher natural gas costs that, including forward pricing gains or losses, increased total 2001 costs by about $25.0 million. Average natural gas costs in our methanol business increased to $4.04/MMBtu in 2001 from $3.06/MMBtu during 2000. Forward pricing contracts increased 2001 natural gas costs by $3.6 million. Other Income - Net We had $1.6 million of losses from other operating activities in 2001 compared to $1.8 million of other operating income in 2000. The 2001 loss represents increased charges for deferred financing costs and increased legal fees related to general corporate activities not allocable to any particular business segment. Insurance Settlement Costs During 2000, we incurred $6.0 million of legal and other professional fees in connection with a lawsuit to recover costs from the 1994 explosion at our Port Neal facility. These expenses were related to the insurance recovery gain reported in our 1997 financial statements and, consequently, were excluded from the determination of 2000 operating income. 7 Interest Expense - Net Net interest expense was $50.2 million in 2001 compared with $47.6 million in 2000. Interest expense increased $1.9 million due to higher interest rates associated with $200 million of long-term debt issued in October 2001 and an additional $1.4 million due to a 30-day waiting period from issuance of the new debt before existing debt balances could be repaid. Minority Interest Minority interest represents interest in the earnings of the publicly held common units of Terra Nitrogen Company, L.P. (TNCLP). Minority interest benefits totaled $2.2 million in 2001 compared with $5.4 million of minority interest charges in 2000. The 2001 benefit is directly related to TNCLP losses as the result of higher natural gas costs and lower sales volumes of nitrogen products than in 2000. Income Taxes Income tax benefits were recorded at an effective rate of 29% for 2001 compared with 37% for 2000. The decline in the benefit rate for 2001 is due to expense provisions and reserves taken for financial reporting purposes that will not be deductible for tax purposes. RESULTS OF CONTINUING OPERATIONS - 2000 COMPARED WITH 1999 Consolidated Results We reported a 2000 net loss from continuing operations of $10.2 million on revenues of $1,063 million compared with a loss of $70.1 million on revenues of $833 million in 1999. Basic and diluted loss per share for 2000 was $0.14 compared with $0.94 for 1999. Lower industry supplies for both nitrogen and methanol products resulted in higher product prices and was the principal factor causing the reduced net loss for 2000. Total revenues and operating income (loss) by segment for the years ended December 31, 2000 and 1999 follow: (in thousands) 2000 1999 - -------------------------------------------------------------------------------- REVENUES: Nitrogen Products $ 916,959 $ 745,901 Methanol 136,781 85,178 Other revenues 9,270 2,364 - -------------------------------------------------------------------------------- $ 1,063,010 $ 833,443 ================================================================================ OPERATING INCOME (LOSS): Nitrogen Products $ 28,639 $ (43,909) Methanol 12,395 (15,210) Other expense - net 1,773 (3,923) - -------------------------------------------------------------------------------- $ 42,807 $ (63,042) ================================================================================ 8 Nitrogen Products Volumes and prices for 2000 and 1999 follow: Volumes and Prices - ------------------------------------------------------------------------------- 2000 1999 - ------------------------------------------------------------------------------- Sales Average Sales Average (quantities in thousands of tons) Volumes Unit Price Volumes Unit Price - ------------------------------------------------------------------------------- Ammonia 1,418 $162 1,417 $122 Nitrogen solutions 3,990 79 3,682 62 Urea 474 136 563 99 Ammonium nitrate 1,000 118 83 113 - ------------------------------------------------------------------------------- Nitrogen products revenues increased by $171.1 million to $917.0 million for 2000 in comparison with 1999 primarily as a result of higher prices for all products. Ammonia, nitrogen solutions, urea and ammonium nitrate prices increased by 33%, 27%, 37% and 4%, respectively, resulting in a $144.3 million increase to revenues. Higher prices for ammonia, nitrogen solution and urea were due to lower North American nitrogen supplies as a result of reduced industry-wide production levels since mid-1999. The closure of nitrogen production facilities that directly competed with our plants was the primary reason for the increase to 2000 sales volumes of nitrogen solutions and ammonium nitrate. The nitrogen products segment reported operating income of $28.6 million and an operating loss of $43.9 million for 2000 and 1999, respectively. The $72.5 million improvement was primarily related to $148.6 million realized in 2000 as the result of higher prices, partly offset by a $82.9 million increase to natural gas costs. Natural gas costs, net of forward pricing gains or losses, increased to $3.02/MMBtu in 2000 from $2.32/MMBtu the previous year. Forward pricing contracts reduced 2000 natural gas costs by $76.9 million. Higher sales volumes, reduced freight costs and lower maintenance spending contributed approximately $7.0 million to 2000 operating income. Methanol Methanol revenues were $136.8 million compared with $85.2 million for the years ended December 31, 2000 and 1999, respectively. Average methanol sales prices increased to $0.53 per gallon in 2000 from $0.35 per gallon in 1999 primarily as the result of reduced production rates and permanent closure of some North American production facilities in response to high natural gas costs and increased offshore competition. Methanol sales volumes increased by 5% to 257 million gallons for 2000 compared with 1999 primarily as the result of a two-month shutdown at the Beaumont plant during the 1999 first quarter. The methanol segment reported operating income of $12.4 million for 2000 compared to an operating loss of $15.2 million for 1999. The improved operating results were primarily due to higher methanol prices, which contributed $47.6 million to 2000 revenues. Natural gas costs, including forward pricing gains or losses, increased to $3.06/MMBtu in 2000 from $2.32/MMBtu during 1999 and increased total 2000 costs by $20.1 million. Forward pricing contracts reduced 2000 natural gas costs by $17.2 million. Other Expense - Net We had $1.8 million of other operating income in 2000 compared to $3.9 million of other operating expenses in 1999. The 1999 expenses included allocations of $3.5 million in administrative expenses to discontinued Distribution operations sold during the 1999 first half. 9 Insurance Settlement Costs During 2000, we incurred $6.0 million of legal and other professional fees in connection with a lawsuit to recover costs from the 1994 explosion at our Port Neal facility. These expenses were related to the insurance recovery gain reported in our 1997 financial statements and, consequently, were excluded from the determination of 2000 operating income. Interest Expense - Net Net interest expense was $47.6 million in 2000 compared with $44.7 million in 1999. The increase to net interest expense is primarily related to 1999 interest income of $6.3 million realized in connection with the sale of the Distribution business segment. Minority Interest Minority interest represents interest in the earnings of the publicly held common units of Terra Nitrogen Company, L.P. (TNCLP) and, in 1999, a third-party's limited partnership interest in Beaumont Methanol, Limited Partnership (BMLP). Minority interest charges totaled $5.4 million in 2000 and $8.3 million in 1999. Minority interest charges (credits) relating to TNCLP totaled $5.4 million in 2000 and $(1.1) million in 1999. The increased 2000 charge is directly related to higher TNCLP earnings as the result of increasing nitrogen prices. Minority interest charges for the limited partnership interest in BMLP was $9.4 million in 1999. The Corporation redeemed the third-party's BMLP interests on June 30, 1999, and thereby eliminated subsequent charges to earnings related to the BMLP partnership interest. Income Taxes Income tax expense was recorded at an effective rate of 37.1% for 2000 compared with 39.6% for 1999; these amounts reflect statutory rates in effect during both periods. LIQUIDITY AND CAPITAL RESOURCES Our primary uses of funds will be to fund our working capital requirements, make payments on our debt and other obligations and make capital expenditures. The principal sources of funds will be cash flow from operations and borrowings under available bank facilities. Net cash used in 2001 operations was $25.4 million, composed of $8.7 million of cash provided from operating activities less $34.1 million used to fund increases to working capital balances. The increase to working capital balances reflected low balances at December 31, 2000, as the result of plant shutdowns and curtailments in the 2000 fourth quarter in response to high natural gas costs. Cash provided from operating activities was $158.3 million less than that of 2000 as the result of lower 2001 operating income and the increase in working capital. During 2001, we issued $200 million of senior secured notes. These notes will mature on October 15, 2008, and bear interest at a rate of 12 7/8%, payable semi-annually. These notes are unconditionally guaranteed by Terra Industries Inc. and its wholly owned U.S. subsidiaries. These notes and guarantees are secured by a first priority security interest in our ownership and leasehold interest in substantially all of the real property, machinery and equipment owned or leased by Terra Capital and the guarantors and 10 certain other assets. The Indenture governing these notes contains a series of covenants that will limit, among other things, our ability to: incur additional debt; pay dividends on common stock of Terra Industries Inc. or repurchase shares of such common stock; make investments (other than in Terra Capital or any guarantor); use assets as security in other transactions; sell any of our principal production facilities or sell other assets outside the ordinary course of business; enter into transactions with affiliates; limit dividends or other payments by our restricted subsidiaries to us; enter into sale and leaseback transactions; engage in other businesses; sell all or substantially all of our assets or merge with or into other companies; or reduce our insurance coverage. In addition, we are obligated to offer to repurchase these notes upon a Change of Control (as defined in the Indenture) at a cash price equal to 101% of the aggregate principal amount outstanding at that time, plus accrued interest to the date of purchase. The Indenture governing these notes contains events of default and remedies customary for a financing of this type. Offering proceeds, existing cash balances and revolving credit lines were used to retire $159 million of senior notes and $99 million of bank term notes due in 2003. We have a $175 million revolving credit facility that expires in June 2005. Borrowing availability under the credit facility is generally based on 85% of eligible accounts receivable and 65% of eligible inventory, less outstanding letters of credit. At December 31, 2001, we had outstanding revolving credit borrowings of $36.3 million which, combined with $17.1 million in outstanding letters of credit, resulted in remaining borrowing availability of approximately $60 million under the facility. We are required under the credit facility to maintain $30 million minimum borrowing availability at all times. We expect the facility to be adequate to meet our operating cash needs. The credit facility also requires that we adhere to certain limitations on additional debt, capital expenditures, acquisitions, liens, asset sales, investments, prepayments of subordinated indebtedness, changes in lines of business and transactions with affiliates. In addition, we are required to maintain minimum levels of earnings before interest, income taxes, depreciation, amortization and other non-cash items (as defined in the credit facility) for the preceding 12 months (LTM) computed on a quarterly basis. The minimum LTM requirement under the facility is $40 million at March 31, 2002, $60 million at June 30, 2002, $75 million at September 30, 2002 and $90 million at December 31, 2002 and each quarter thereafter. During 2001, Terra Industries Inc. realized $66 million of earnings before interest, income taxes, depreciation, amortization and other non-cash items (as defined in the financing agreement); consequently, 2002 amounts will need to be $24 million higher than in 2001 to meet the credit facility covenants. Failure to meet these covenants would require us to incur additional costs to amend the bank facilities or could result in termination of the facilities. Contractual obligations and commitments to make future payments were as follows at December 31, 2001: Payments Due In -------------------------------------------------- Less than Two to Four to (in millions) One Year Three Years Five Years Thereafter - -------------------------------------------------------------------------------- Long-term debt $ 0.1 $ 0.2 $ 236.3 $ 200.0 Operating leases 14.9 21.4 13.9 12.4 Purchase obligations 16.0 -- -- -- - -------------------------------------------------------------------------------- Total $ 31.0 $ 21.6 $ 250.2 $ 212.4 ================================================================================ During 2001 and 2000, we funded plant and equipment purchases of $15.2 million and $12.2 million, respectively, primarily for replacement or stay-in-business capital needs. During 1999, we funded capital expenditures of $51.9 million, which included $31.7 million to complete construction of an ammonia production loop that was placed in operation during the 2000 first quarter at our Beaumont, Texas, methanol plant. We expect 2002 plant and equipment purchases to approximate $30 million consisting primarily of the expenditures for routine replacement of equipment at manufacturing facilities. 11 On December 17, 1997, we announced that we were resuming purchases of common units of TNCLP on the open market and through privately negotiated transactions. We acquired 183,500, 316,500 and 609,200 common units during 2001, 2000 and 1999, respectively. Additional purchases of TNCLP common units are restricted under the terms of our revolving credit agreement as described therein. During 2001 and 2000, we distributed $2.0 million and $1.1 million, respectively, to the minority TNCLP common unitholders. TNCLP distributions are based on "Available Cash" (as defined in the Partnership Agreement). In 1999, we distributed a preferred return of $9.4 million to BMLP's minority partner, and paid a dividend of $0.07 per Common Share which totaled $5.3 million. We redeemed the BMLP minority interest on June 30, 1999, and thereby eliminated future cash requirements to fund payments to the BMLP minority partner. On August 3, 1999, the Board of Directors suspended our payment of a regular quarterly dividend on common stock. On June 30, 1999 we sold our Distribution business segment to Cenex/Land O'Lakes Agronomy Company for $485 million. Sales proceeds contributed $335.1 million to 1999 cash flows. Net sales proceeds were used to redeem the outstanding minority interest in BMLP for $225 million, fund termination of the accounts receivable securitization program and repay outstanding borrowings under our revolving credit facility. Cash balances at December 31, 2001 were $7.1 million, all of which is unrestricted. RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") approved the issuance of Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business combinations entered into subsequent to June 30, 2001 to be accounted for using the purchase method of accounting. SFAS No. 142 provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be tested for impairment annually. These standards are effective for us beginning January 1, 2002. The historical impact of amortizing goodwill (and other intangible assets with indefinite lives) increased our net loss for the years ended December 31, 2001, 2000 and 1999 by $18.8 million, $19.3 million and $19.3 million, respectively. On January 1, 2002, we adopted this statement, which resulted in a $206.2 million write-off of assets previously classified as "excess of cost over net assets of acquired businesses". The asset write-off will be classified as a change in accounting principle in our 2002 financial statements. In July 2001, the FASB voted to issue SFAS No. 143, "Accounting for Asset Retirement Obligations". This standard requires us to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and effective for our fiscal year 2003. We have not yet quantified the impact, if any, arising from adoption of this standard. In August 2001, the FASB voted to issue SFAS No. 144, "Accounting for the Impairment of Long-lived Assets". This standard requires that we recognize an impairment loss if the carrying amount of a long-lived asset or asset group is not recoverable and exceeds its fair value. It is effective our fiscal year 2002. We do not expect the impact, if any, arising from adoption of this standard to be material to our financial position. PENDING CHANGE OF CONTROL Anglo American plc, through a wholly-owned subsidiary, owns 49.1% of our outstanding shares. Anglo American has announced its intention to dispose of its interest in Terra with the timing based on market and other considerations. 12 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: changes in financial markets, 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. 13 CONFIDENTIAL 14
Consolidated Statements of Financial Position =================================================================================== At December 31, - ----------------------------------------------------------------------------------- (in thousands) 2001 2000 - ----------------------------------------------------------------------------------- Assets Cash and short-term investments $ 7,125 $ 101,425 Accounts receivable, less allowance for doubtful accounts of $936 and $889 101,363 107,299 Inventories 110,027 101,526 Other current assets 35,142 17,448 - ----------------------------------------------------------------------------------- Total current assets 253,657 327,698 - ----------------------------------------------------------------------------------- Property, plant and equipment, net 824,982 902,801 Excess of cost over net assets of acquired businesses 206,209 231,372 Other assets 51,195 50,681 - ----------------------------------------------------------------------------------- Total assets $1,336,043 $1,512,552 =================================================================================== Liabilities Debt due within one year $ 68 $ 5,546 Accounts payable 75,077 62,820 Accrued and other liabilities 42,134 60,324 - ----------------------------------------------------------------------------------- Total current liabilities 117,279 128,690 - ----------------------------------------------------------------------------------- Long-term debt 436,534 467,808 Deferred income taxes 112,645 156,475 Other liabilities 69,639 43,508 Minority interest 99,167 105,274 Commitments and contingencies (Note 12) - ----------------------------------------------------------------------------------- Total liabilities and minority interest 835,264 901,755 - ----------------------------------------------------------------------------------- Stockholders' Equity Capital stock Common Shares, authorized 133,500 shares; 76,451 and 75,885 shares outstanding 128,363 128,283 Paid-in capital 554,850 554,750 Accumulated other comprehensive loss (78,470) (48,115) Retained deficit (103,964) (24,121) - ----------------------------------------------------------------------------------- Total stockholders' equity 500,779 610,797 - ----------------------------------------------------------------------------------- Total liabilities and stockholders' equity $1,336,043 $1,512,552 ===================================================================================
See accompanying Notes to the Consolidated Financial Statements. CONFIDENTIAL 15
Consolidated Statements of Operations ================================================================================================================ Year ended December 31, - ---------------------------------------------------------------------------------------------------------------- (in thousands, except per-share amounts) 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------- Revenues Net sales $ 1,032,610 $ 1,053,452 $ 824,992 Other income, net 4,700 9,558 8,451 - ---------------------------------------------------------------------------------------------------------------- 1,037,310 1,063,010 833,443 - ---------------------------------------------------------------------------------------------------------------- Cost and Expenses Cost of sales 1,047,219 975,966 847,190 Selling, general and administrative expense 37,886 44,237 49,295 Product claim costs 14,023 -- -- - ---------------------------------------------------------------------------------------------------------------- 1,099,128 1,020,203 896,485 - ---------------------------------------------------------------------------------------------------------------- Income (loss) from operations (61,818) 42,807 (63,042) Insurance settlement costs -- (5,968) -- Interest income 3,364 3,869 8,361 Interest expense (53,594) (51,511) (53,076) Minority interest 2,247 (5,379) (8,341) - ---------------------------------------------------------------------------------------------------------------- Loss from continuing operations before income taxes (109,801) (16,182) (116,098) Income tax benefit (32,088) (6,000) (46,000) - ---------------------------------------------------------------------------------------------------------------- Loss from continuing operations (77,713) (10,182) (70,098) Loss from discontinued operations: Loss from operations, net of income taxes -- -- (5,800) Loss on disposition, net of income taxes -- -- (4,724) Extraordinary loss on early retirement of debt, net of income taxes (2,130) -- (9,265) - ---------------------------------------------------------------------------------------------------------------- Net Loss $ (79,843) $ (10,182) $ (89,887) ================================================================================================================ Basic and Diluted Loss Per Share: Continuing operations $ (1.03) $ (0.14) $ (0.94) Discontinued operation -- -- (0.14) Extraordinary loss on early retirement of debt (0.03) -- (0.12) - ---------------------------------------------------------------------------------------------------------------- Net Loss Per Share $ (1.06) $ (0.14) $ (1.20) ================================================================================================================
See accompanying Notes to the Consolidated Financial Statements. CONFIDENTIAL 16
Consolidated Statements of Cash Flows ============================================================================================ Year ended December 31, - -------------------------------------------------------------------------------------------- (in thousands) 2001 2000 1999 - -------------------------------------------------------------------------------------------- Operating Activities Net loss $ (79,843) $ (10,182) $ (89,887) Adjustments to reconcile net loss to net cash flows from operating activities: Loss from discontinued operations -- -- 10,524 Extraordinary loss on early retirement of debt 2,130 -- 9,265 Depreciation and amortization 121,181 114,901 101,588 Deferred income taxes (32,533) 1,881 2,805 Minority interest in earnings (loss) (2,247) 5,379 8,341 Change in current assets and liabilities: Accounts receivable 4,184 (7,644) (5,663) Accounts receivable securitization -- -- (136,000) Inventories (10,635) 28,388 11,454 Other current assets (20,808) 13,981 1,329 Accounts payable 13,366 (22,978) (9,669) Accrued and other liabilities (19,878) 11,078 (62,520) Other (354) (1,975) 4,573 - -------------------------------------------------------------------------------------------- Net Cash Flows From Operating Activities (25,437) 132,829 (153,860) - -------------------------------------------------------------------------------------------- Investing Activities Purchase of property, plant and equipment (15,204) (12,219) (51,899) Discontinued operations -- -- 335,129 Other (1,813) (4,962) (4,531) - -------------------------------------------------------------------------------------------- Net Cash Flows From Investing Activities (17,017) (17,181) 278,699 - -------------------------------------------------------------------------------------------- Financing Activities Net short-term borrowings (repayments) -- (6,000) 6,000 Issuance of long-term debt 200,000 -- -- Principal payments on long-term debt (236,752) (7,107) (16,569) Stock issuance - net 180 7 13 Distributions to minority interests (2,028) (1,119) (9,429) Repurchase of TNCLP common units (1,671) (2,414) (5,994) Deferred financing costs and bond discounts (11,442) (6,697) -- Redemption of minority interest in subsidiary -- -- (225,000) Dividends -- -- (5,281) - -------------------------------------------------------------------------------------------- Net Cash Flows From Financing Activities (51,713) (23,330) (256,260) - -------------------------------------------------------------------------------------------- Effect of Exchange Rate Changes on Cash (133) (683) (432) - -------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Short-Term Investments (94,300) 91,635 (131,853) Cash and Short-Term Investments at Beginning of Year 101,425 9,790 141,643 - -------------------------------------------------------------------------------------------- Cash and Short-Term Investments at End of Year $ 7,125 $ 101,425 $ 9,790 ============================================================================================ Interest Paid $ 50,130 $ 50,851 $ 55,379 ============================================================================================ Income Taxes Received $ (288) $ (14,058) $ (20,285) ============================================================================================
See accompanying Notes to the Consolidated Financial Statements. CONFIDENTIAL 17
Consolidated Statements of Changes in Stockholders' Equity ============================================================================================================================== Accumulated Capital Stock Other Retained Comprehensive ----------------- Paid-In Comprehensive Earnings (in thousands) Income (Loss) Shares Amount Capital Loss (Deficit) Total - ------------------------------------------------------------------------------------------------------------------------------ January 1, 1999 75,465 $127,887 $552,893 $(14,157) $ 81,229 $747,852 - ------------------------------------------------------------------------------------------------------------------------------ Comprehensive Income Net loss $ (89,887) -- -- -- -- (89,887) (89,887) Foreign currency translation adjustments 4,305 -- -- -- 4,305 -- 4,305 --------- Total $ (85,582) ========= Exercise of stock options, net 3 3 10 -- -- 13 Stock Incentive Plan (159) -- -- -- -- -- Dividends -- -- -- -- (5,281) (5,281) - ------------------------------------------------------------------------------------------------------------------------------ December 31, 1999 75,309 $127,890 $552,903 $ (9,852) $ (13,939) $657,002 - ------------------------------------------------------------------------------------------------------------------------------ Comprehensive Income Net loss $ (10,182) -- -- -- -- (10,182) (10,182) Foreign currency translation adjustments (38,263) -- -- -- (38,263) -- (38,263) --------- Total $ (48,445) ========= Exercise of stock options, net 5 5 2 -- -- 7 Stock Incentive Plan 571 388 1,845 -- -- 2,233 - ------------------------------------------------------------------------------------------------------------------------------ December 31, 2000 75,885 $128,283 $554,750 $(48,115) $ (24,121) $610,797 - ------------------------------------------------------------------------------------------------------------------------------ Comprehensive Income Net loss $ (79,843) -- -- -- -- (79,843) (79,843) Foreign currency translation adjustments (14,957) -- -- -- (14,957) -- (14,957) Cumulative effect of change in accounting for derivative financial instruments 31,400 -- -- -- 31,400 -- 31,400 Income tax effect of change in accounting (10,990) -- -- -- (10,990) -- (10,990) Change in fair value of derivatives, net of taxes (24,922) -- -- -- (24,922) -- (24,922) Minimum pension liability, net of taxes (10,886) -- -- -- (10,886) -- (10,886) --------- Total $(110,198) ========= Exercise of stock options, net 80 80 100 -- -- 180 Stock Incentive Plan 486 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------ December 31, 2001 76,451 $128,363 $554,850 $(78,470) $(103,964) $500,779 ==============================================================================================================================
See accompanying Notes to the Consolidated Financial Statements. CONFIDENTIAL 18 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 (Terra). All significant intercompany accounts and transactions have been eliminated. Minority interest in earnings and ownership has been recorded for the percentage of limited partnership common units not owned by Terra Industries Inc. for each respective period presented. Description of business: Terra produces nitrogen products for agricultural dealers and industrial users, and methanol for industrial users. Foreign exchange: Results of operations for the foreign subsidiaries are translated using average currency exchange rates during the period; 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. Cash and short-term investments: Terra 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 average cost or estimated net realizable value. The average 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 three to 18 years for plants and equipment. Maintenance and repair costs are expensed as incurred. 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. Debt issuance costs: The costs related to the issuance of debt are amortized over the life of the debt on a straight-line method. Excess of costs over net assets of acquired businesses: Terra 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 evaluates the recoverability of this asset through an assessment of expected cash flows from future operations as discussed below. These assets were written off through a charge that will be reported as the cumulative effect of accounting change during the 2002 first quarter. Impairment of long-lived assets: In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", Terra reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future cash flows expected to result from the use of the asset (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized based on the difference between the carrying amount and the fair value of the asset. To date, no such impairment has occurred. CONFIDENTIAL 19 Accumulated other comprehensive loss: The components of accumulated other comprehensive loss at December 31, 2001, consisted of foreign currency translation adjustment, derivatives (net of taxes) and minimum pension liability (net of taxes) in the amounts of $63.1 million, $4.5 million and $10.9 million, respectively. At December 31, 2000, accumulated other comprehensive loss consisted of $48.1 million in foreign currency translation adjustments. Revenue recognition: Revenue is recognized when title to finished product passes to the customer. Revenue is recognized as the net amount to be received after deducting estimated amounts for discounts and trade allowances. Revenues include amounts paid by customers for shipping and handling. Cost of sales and 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). Costs associated with settlement of natural gas purchase contracts and costs for shipping and handling are included in cost of sales. Stock-based compensation: Terra accounts for its employee stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, which utilizes the intrinsic value method. Terra follows the disclosure provisions and accounts for non-employee stock-based compensation in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation. 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. Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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: Terra reclassified freight costs previously reported as a reduction of revenues to cost of sales in accordance with the Financial Accounting Standards Board's Emerging Issues Task Force No. 00-10, "Accounting for Shipping and Handling Fees and Costs". As a result, revenues and cost of sales increased by $61.9 million and $59.1 million in 2000 and 1999, respectively. Certain other reclassifications have been made to prior years' financial statements to conform with current year presentation. Recently issued accounting standards: On January 1, 2001, Terra adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" (see Note 13 - Derivative Financial Instruments). CONFIDENTIAL 20 In June 2001, the Financial Accounting Standards Board ("FASB") approved the issuance of SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." These standards establish accounting and reporting for business combinations. SFAS No. 141 requires all business combinations entered into subsequent to June 30, 2001, to be accounted for using the purchase method of accounting. SFAS No. 142 provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be tested for impairment on an annual basis. These standards are effective for Terra on January 1, 2002. The historical impact of not amortizing goodwill (and other intangible assets with indefinite lives) would have been to decrease the net loss for the years ended December 31, 2001, 2000 and 1999 by $18.8 million, $19.3 million and $19.3 million, respectively. Adoption of these standards on January 1, 2002 resulted in the determination that $206.2 million of assets classified as "Excess of cost over net assets of acquired businesses" suffered impairment and had no value. Consequently, these assets were written off through a charge that will be reported as a change in accounting principle during the 2002 first quarter. In July 2001, the FASB voted to issue SFAS No. 143, "Accounting for Asset Retirement Obligations". This standard requires Terra to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and is effective for Terra's fiscal year 2003. Terra has not yet quantified the impact, if any, arising from the adoption of this standard. In August 2001, the FASB voted to issue SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets". This standard requires Terra to recognize an impairment loss if the carrying amount of a long-lived asset or asset group is not recoverable and exceeds its fair value and is effective for Terra's fiscal year 2002. Terra does not expect the adoption of this standard to have a material effect on its consolidated financial statements. 2. Discontinued Operations On June 30, 1999, Terra sold its Distribution business segment to Cenex/Land O' Lakes Agronomy Company for $335.1 million, net of seasonal working capital increases from December 31, 1998, and closing costs. Included in the sale were Terra's approximately 400 retail farm service centers in the U.S. and Canada, and its 50% ownership position in the Omnium chemical formulation plants. The accompanying consolidated statements of operations, financial position and cash flows have been restated for prior periods to segregate results of operations and net assets associated with the discontinued Distribution business segment. 3. Earnings Per Share The following table provides a reconciliation between Basic and Diluted Loss Per Share.
(in thousands, except per-share data) 2001 2000 1999 - ---------------------------------------------------------------------------------------- Basic and diluted loss per share computation: Loss from continuing operations $(77,713) $(10,182) $(70,098) Loss from discontinued operations -- -- (10,524) - ---------------------------------------------------------------------------------------- Loss before extraordinary item (77,713) (10,182) (80,622) Extraordinary loss on debt retirement (2,130) -- (9,265) - ---------------------------------------------------------------------------------------- Loss applicable to common shareholders $(79,843) $(10,182) $(89,887) ======================================================================================== Basic and diluted weighted average shares outstanding 75,118 74,707 74,703 ======================================================================================== Loss per share from continuing operations $ (1.03) $ (0.14) $ (0.94) Loss per share from discontinued operations -- -- (0.14) - ---------------------------------------------------------------------------------------- Loss per share before extraordinary item (1.03) (0.14) (1.08) Extraordinary loss per share (0.03) -- (0.12) - ---------------------------------------------------------------------------------------- Basic and diluted loss per share $ (1.06) $ (0.14) $ (1.20) ========================================================================================
CONFIDENTIAL 21 4. Inventories Inventories consisted of the following at December 31: (in thousands) 2001 2000 - -------------------------------------------------------------------------------- Raw materials $ 27,904 $ 24,085 Supplies 21,471 20,918 Finished goods 60,652 56,523 - -------------------------------------------------------------------------------- Total $110,027 $101,526 ================================================================================ 5. Other Current Assets Other current assets consisted of the following at December 31: (in thousands) 2001 2000 - -------------------------------------------------------------------------------- Prepaid insurance $13,405 $ 6,169 Prepaid natural gas 5,520 -- Other current assets 16,217 11,279 - -------------------------------------------------------------------------------- Total $35,142 $17,448 ================================================================================ 6. Property, Plant and Equipment, Net Property, plant and equipment, net consisted of the following at December 31: (in thousands) 2001 2000 - ------------------------------------------------------------------------------- Land and buildings $ 67,647 $ 69,136 Plant and equipment 1,208,169 1,216,066 Construction in progress 10,679 11,378 - ------------------------------------------------------------------------------- 1,286,495 1,296,580 Less accumulated depreciation and amortization (461,513) (393,779) - ------------------------------------------------------------------------------- Total $ 824,982 $ 902,801 =============================================================================== 7. Product Claim Costs On July 13, 2001, a British court found Terra Nitrogen (U.K.) Limited liable for damages associated with May 1998 recalls of carbonated beverages containing carbon dioxide tainted with benzene, plus interest and attorney fees. In addition, there are two similar cases awaiting trial and certain other beverage manufacturers have indicated their intention to file claims for unspecified amounts. Management estimates total claims against Terra from these lawsuits may be (pound)10 million, or $14 million. Terra has established reserves to cover estimated losses. In addition to Terra's plan to appeal the British court's decision, Terra's management also believes it has recourse for these claims against both its insurer and the previous owner of Terra's U.K. operations. Management will vigorously pursue Terra's rights against these parties, but there will be no income recognition for those rights until settlements are finalized. 8. Insurance Settlement Costs During 2000, Terra incurred $6.0 million of legal and other professional fees in connection with a lawsuit to recover losses related to a 1994 explosion at Terra's Port Neal facility. These costs were related to an insurance recovery gain reported in Terra's 1997 financial statements which was excluded from the determination of operating income. CONFIDENTIAL 22 9. Debt Due Within One Year Debt due within one year consisted of the following at December 31: (in thousands) 2001 2000 - -------------------------------------------------------------------------------- Current maturities of long-term debt $ 68 $5,546 ================================================================================ Weighted average short-term borrowings $334 $ 536 ================================================================================ Weighted average interest rate 6.56% 10.75% ================================================================================ In October 2001, concurrent with the issuance of the 12.875% Senior Secured Notes (see Note 11 - Long-Term Debt), Terra entered into an amended and restated revolving credit facility that increased the commitments under its revolving credit facility from $115.6 million to $175 million, and extended the revolving credit facility maturity from January 2, 2003 to June 30, 2005. The revolving credit facility is secured by substantially all of the assets of Terra Industries Inc. and its subsidiaries other than the assets collateralizing the Senior Secured Notes. Borrowing availability is generally based on 85% of eligible accounts receivable and 65% of eligible inventory less outstanding letters of credit issued under the facility. Borrowings under the revolving credit facility will bear interest at a floating rate, which can be either a base rate, or, at Terra's option, a LIBOR rate, which was 4.66% at December 31, 2001. The base rate is the highest of 1) Citibank, N.A.'s base rate 2) the federal funds effective rate, plus one-half percent (0.50%) per annum or 3) the base three month certificate of deposit rate, plus one-half percent (0.50%) per annum, plus an applicable margin in each case. LIBOR loans will bear interest at LIBOR plus an applicable margin. The initial applicable margin for base rate loans and LIBOR loans are 1.75% and 2.75%, respectively. The revolving credit facility requires an initial one-half percent (0.50%) commitment fee on the difference between committed amounts and amounts actually borrowed. At December 31, 2001 there were $17.1 million of outstanding letters of credit under the facility for recorded liabilities. We are required under the credit facility to maintain $30 million minimum borrowing availability at all times. We expect the facility to be adequate to meet our operating cash needs. The credit facility also requires that we adhere to certain limitations on additional debt, capital expenditures, acquisitions, liens, asset sales, investments, prepayments of subordinated indebtedness, changes in lines of business and transactions with affiliates. In addition, we are required to maintain minimum levels of earnings before interest, income taxes, depreciation, amortization and other non-cash items (as defined in the credit facility) for the preceding 12 months (LTM) computed on a quarterly basis. The minimum LTM requirement under the facility is $40 million at March 31, 2002, $60 million at June 30, 2002, $75 million at September 30, 2002 and $90 million at December 31, 2002 and each quarter thereafter. During 2001, Terra Industries Inc. realized $66 million of earnings before interest, income taxes, depreciation, amortization and other non-cash items (as defined in the financing agreement); consequently, 2002 amounts will need to be $24 million higher than in 2001 to meet the credit facility covenants. Failure to meet these covenants would require us to incur additional costs to amend the bank facilities or could result in termination of the facilities. 10. Accrued and Other Liabilities Accrued and other liabilities consisted of the following at December 31: (in thousands) 2001 2000 - -------------------------------------------------------------------------------- Customer deposits $ 3,596 $ 5,821 Payroll and benefit costs 10,901 12,359 Deferred natural gas hedging gain -- 9,207 Deferred taxes 5,301 4,310 Accrued interest 7,972 5,531 Other 14,364 23,096 - -------------------------------------------------------------------------------- Total $42,134 $60,324 ================================================================================ CONFIDENTIAL 23 11. Long-Term Debt Long-term debt consisted of the following at December 31: (in thousands) 2001 2000 - -------------------------------------------------------------------------------- Senior Secured Notes, 12.875%, due 2008 $200,000 $ -- Senior Notes, 10.5%, due 2005 200,000 200,000 Revolving credit facility, due 2005 36,277 -- Senior Notes, 10.75%, paid in 2001 -- 158,755 Bank Term Notes, paid in 2001 -- 59,375 Asset based Term Facility, paid in 2001 -- 46,250 Industrial Development Revenue, paid in 2001 -- 7,820 Other 325 1,154 - -------------------------------------------------------------------------------- 436,602 473,354 Less current maturities 68 5,546 - -------------------------------------------------------------------------------- Total $436,534 $467,808 ================================================================================ On October 10, 2001, Terra Capital, Inc., ("TCAPI") a wholly owned subsidiary of Terra Industries Inc., issued $200 million of 12.875% Senior Secured Notes due in 2008. The notes were priced at 99.43% to yield 13%. The estimated fees and expenses of the transaction total $11.4 million. The proceeds were used to repay existing debt. The notes are secured by a first priority interest in ownership or leasehold interest in substantially all real property, machinery and equipment owned or leased by Terra Capital and the guaranteeing subsidiaries, the limited partnership's interest in Terra Nitrogen Company, L.P. owned by Terra Capital and the guaranteeing subsidiaries, and certain intercompany notes issued to Terra Capital by non-guaranteeing subsidiaries. Payment obligations under the Senior Secured Notes are fully and unconditionally guaranteed on a joint and several basis by Terra Industries Inc. ("Parent") and its wholly owned U.S. subsidiaries ("the Guarantor Subsidiaries"). Terra Nitrogen Limited Partnership, Terra Nitrogen Company, L.P. and the Parent's foreign subsidiaries will not guarantee the notes (see Note 21 - Guarantor Subsidiaries for condensed consolidating financial information). Terra Industries' ability to receive dividends from its subsidiaries is limited by the credit agreement to amounts required for the funding of operating expenses and debt service (not to exceed $40 million per year), income tax payments on the earnings of Terra Capital and its subsidiaries and liabilities associated with discontinued operations (not to exceed $5 million per year). In addition, dividends to Terra Industries are permitted for the purpose of retiring the 10.5% Senior Notes due in 2005 or purchasing common units in TNCLP subject to credit agreement restrictions on such purchases. The Indenture governing these notes contains a series of covenants that will limit, among other things, our ability to: incur additional debt; pay dividends on common stock of Terra Industries Inc. or repurchase shares of such common stock; make investments (other than in Terra Capital or any guarantor); use assets as security in other transactions; sell any of our principal production facilities or sell other assets outside the ordinary course of business; enter into transactions with affiliates; limit dividends or other payments by our restricted subsidiaries to us; enter into sale and leaseback transactions; engage in other businesses; sell all or substantially all of our assets or merge with or into other companies; or reduce our insurance coverage. In addition, we are obligated to offer to repurchase these notes upon a Change of Control (as defined in the Indenture) at a cash price equal to 101% of the aggregate principal amount outstanding at that time, plus accrued interest to the date of purchase. The Indenture governing these notes contains events of default and remedies customary for a financing of this type. Offering proceeds, existing cash balances and revolving credit lines were used to retire $159 million of senior notes and $99 million of bank term notes due in 2003. The 10.5% unsecured Senior Notes are redeemable at the option of Terra, in whole or part, at any time at 102.625% of their principal amount, plus accrued interest on or after June 15, 2002. Scheduled principal payments for each of the five years 2002 through 2006 are $0.1 million, $0.1 million, $0.1 million, $236.3 million and $0, respectively. CONFIDENTIAL 24 12. Commitments and Contingencies Terra and its subsidiaries are committed to various non-cancelable operating leases for equipment, railcars and production, office and storage facilities expiring on various dates through 2017. Total minimum rental payments are as follows: (in thousands) - -------------------------------------------------------------------------------- 2002 $14,912 2003 12,418 2004 8,988 2005 8,195 2006 5,734 2007 and thereafter 12,304 - -------------------------------------------------------------------------------- Total $62,551 ================================================================================ Total rental expense for continuing operations under all leases, including short-term cancelable operating leases, was approximately $15.3 million, $18.0 million and $20.6 million for the years ended December 31, 2001, 2000 and 1999, respectively. Terra is liable for retiree medical benefits of employees of coal mining operations sold in 1993, under the Coal Industry Retiree Health Benefit Act of 1992, which mandated liability for certain retiree medical benefits for union coal miners. Terra has provided reserves adequate to cover the estimated present value of these liabilities at December 31, 2001. Terra 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 Terra, except for the items discussed in Note 7. In conjunction with the 1997 acquisition of the U.K. nitrogen fertilizer manufacturing plants, Terra will be required to make a payment to the seller for each year through 2002 if average ammonium nitrate prices exceed certain thresholds during any year, subject to maximum payments of (pound)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, Terra will not benefit fully from the U.K. price of ammonium nitrate of certain thresholds during the term of this agreement. No payments were due under this agreement in 2001, 2000 or 1999. 13. Derivative Financial Instruments Terra manages risk using derivative financial instruments for (a) changes in natural gas supply prices and (b) interest rate fluctuations and (c) currency. Derivative financial instruments have credit risk and market risk. To manage credit risk, Terra enters into derivative transactions only with counter-parties who are currently rated BBB or better or equivalent as recognized by a national rating agency. Terra will not enter into transactions with a counter-party 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. Terra classifies a derivative financial instrument as a hedge if all of the following conditions are met: 1. The item to be hedged must expose Terra 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. CONFIDENTIAL 25 Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities" requires that all derivative instruments, whether designated in hedging relationships or not, be recorded in the balance sheet at fair value. If the derivative is designated as a fair value hedge, the change in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of the changes in fair value of the derivative are recorded in other comprehensive income (OCI) and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. Terra has designated its natural gas derivative instruments as cash flow hedges. The effective portion of the cash flow hedge is deferred in OCI until the natural gas it relates to is purchased and used in production at which time it is reclassified from OCI to earnings. Natural Gas Prices - United Kingdom Operations - To meet natural gas production requirements at Terra's United Kingdom production facilities, Terra enters into one- or two-year term gas supply contracts with fixed prices to be delivered to our production facilities for generally 25-80% of total volume requirements. As of December 31, 2001, Terra had fixed-price contracts for 25% of its 2002 United Kingdom natural gas requirements and none of its 2003 United Kingdom natural gas requirements. Terra 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 Terra's production facilities are purchased at market prices. Natural gas market prices are volatile and Terra 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 Terra'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. Annual consolidated production requirements are approximately 160 million MMBtu. Contracts and firm purchase commitments were in place at December 31, 2001, to cover approximately 21% of 2002 natural gas requirements. A swap is a contract between Terra 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 Terra 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. The following summarizes open natural gas contracts at December 31, 2001 and 2000: (in thousands) 2001 2000 - -------------------------------------------------------------------------------- Contract Unrealized Contract Unrealized MMBtu Gain (Loss) MMBtu Gain (Loss) - -------------------------------------------------------------------------------- Swaps 15,100 $ (2,543) 10,180 $ 24,399 Options -- -- 9,070 (2,280) - -------------------------------------------------------------------------------- 15,100 $ (2,543) 19,250 $ 22,119 ================================================================================ Basis swaps 797 $ (28) 6,590 $ 426 ================================================================================ 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 closes. 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 CONFIDENTIAL 26 natural gas contract prices. Realized losses on closed contracts relating to future periods as of December 31, 2001 were $0.9 million. Cash flows related to natural gas hedging are reported as cash flows from operating activities. Compared with spot prices, natural gas hedging activities increased Terra's North American natural gas costs by approximately $15.2 million during 2001 and reduced 2000 and 1999 natural gas costs by approximately $76.8 and $6.4 million, respectively. Interest Rate Fluctuations - In 1997, Terra entered into interest rate swap agreements to fix the interest rate on $100 million of its floating rate obligations at an average base rate of approximately 6.05% per annum. The interest rate swap agreements were designated as hedges and 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 Terra's derivative financial instruments at December 31, 2001 and 2000. 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. 2001 2000 - -------------------------------------------------------------------------------- Carrying Fair Carrying Fair (in millions) Amount Value Amount Value - -------------------------------------------------------------------------------- Natural gas $ 0.9 $ (3.5) $ 10.0 $ 32.5 Interest rate -- (3.8) -- (1.1) =============================================================================== The following methods and assumptions were used to estimate the fair value of each class of derivative financial instrument: Natural gas futures, swaps, options and basis swaps: Estimated based on published referenced prices and quoted market prices from brokers. Interest rate swap agreements: Estimated based on quotes from the market makers of these instruments. On January 1, 2001 Terra adopted SFAS 133 which resulted in a cumulative $23.3 million increase to current assets, a $9.2 million reduction to current liabilities, a $1.1 million increase in long-term debt and a $31.4 million increase, before deferred taxes of $11.0 million, to accumulated OCI, which reflected the effective portion of the derivatives designated as cash flow hedges. The increase to current assets was to recognize the value of open natural gas contracts, the reduction to current liabilities was to reclassify deferred gains on closed contracts relating to future periods and the increase to long-term debt related to interest rate hedges. The changes in the components of accumulated OCI related to derivatives during the year follow: CONFIDENTIAL 27
Net Unrealized Unrealized Gain Accumulated Gain (Loss) Realized Gain (Loss) on Other on Natural Gas (Loss) Deferred to Interest Rate Comprehensive (in thousands) Hedging Activity Future Periods Hedge Income - -------------------------------------------------------------------------------------------------------------- Balance January 1, 2001 $ 23,300 $ 9,200 $(1,100) $ 31,400 Net unrealized loss arising during period (2,571) (912) (3,791) (7,274) Transfer net gain (loss) realized to production costs and interest expense (23,300) (9,200) 1,100 (31,400) - -------------------------------------------------------------------------------------------------------------- Balance December 31, 2001 (2,571) (912) (3,791) (7,274) Deferred tax effect 977 347 1,438 2,762 - -------------------------------------------------------------------------------------------------------------- Balance Net of Tax December 31, 2001 $ (1,594) $ (565) $(2,353) $ (4,512) ==============================================================================================================
14. Financial Instruments and Concentrations of Credit Risk The following table presents the carrying amounts and estimated fair values of Terra's financial instruments at December 31, 2001 and 2000. 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. 2001 2000 - -------------------------------------------------------------------------------- Carrying Fair Carrying Fair (in millions) Amount Value Amount Value - -------------------------------------------------------------------------------- Financial Assets Cash and short-term investments $ 7.1 $ 7.1 $ 101.4 $101.4 Receivables 101.4 101.4 107.3 107.3 Equity and other investments 2.2 2.2 1.9 1.9 Other assets 0.8 0.8 5.1 4.6 Financial Liabilities Long-term debt 436.5 446.1 473.4 483.1 ================================================================================ The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Cash and receivables: The carrying amounts approximate fair value because of the short maturity of those instruments. Equity and other investments: Investments in untraded companies are valued on the basis of management's estimates and, when available, comparisons with similar companies whose shares are publicly traded. Other assets: The amounts reported relate to notes receivable obtained from sale of previous operating assets. The fair value is estimated based on current interest rates and repayment terms of the individual notes. Short-term borrowings and long-term debt: The fair value of Terra's short-term borrowings and 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 Terra for debt of the same remaining maturities. Concentration of Credit Risk - Terra 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 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, Terra limits the amount of credit exposure in any one type of investment instrument. CONFIDENTIAL 28 Financial Instruments - At December 31, 2001, Terra had letters of credit outstanding totaling $17.1 million, guaranteeing various insurance and financing activities. 15. Stockholders' Equity Terra allocates $1.00 per share upon the issuance of Common Shares to the Common Share capital account. The Common Shares have no par value. At December 31, 2001, 0.6 million Common Shares were reserved for issuance upon award of restricted shares and exercise of employee stock options. Terra has authorized 16,500,000 Trust Shares for issuance. There were no Trust Shares outstanding at December 31, 2001. 16. Stock-Based Compensation Terra 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 (income) expense related to stock-based compensation was $(0.7) million, $1.7 million and $0.9 million for the years ended December 31, 2001, 2000 and 1999, respectively. Terra's 1997 Stock Incentive Plan authorized granting directors and 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, 2001. Options generally may not be exercised prior to one year or more than 10 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 Terra's Common Shares. The restricted shares are entitled to normal voting rights and earn dividends as declared during the performance periods. At December 31, 2001, 0.6 million Common Shares were available for grant under the 1997 Plan. A summary of Terra's stock-based compensation activity related to stock options for the years ended December 31 follows: (options in thousands)
- ------------------------------------------------------------------------------------------ 2001 2000 1999 ----------------- ----------------- ----------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Number Price Number Price Number Price - ------------------------------------------------------------------------------------------ Outstanding - beginning of year 2,256 $ 5.16 3,015 $ 6.76 2,151 $ 10.35 Granted -- -- -- -- 1,522 3.32 Expired/terminated 92 6.98 754 11.71 655 10.45 Exercised 80 2.47 5 1.43 3 4.11 - ------------------------------------------------------------------------------------------ Outstanding - end of year 2,084 $ 5.19 2,256 $ 5.16 3,015 $ 6.76 - ------------------------------------------------------------------------------------------
CONFIDENTIAL 29 The following table summarizes information about stock options outstanding and exercisable at December 31, 2001:
(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 - ------------------------------------------------------------------------------------ $ 1.00 $ 3.99 1,382 8.00 years $ 3.43 898 $ 3.45 4.00 7.99 309 1.18 5.08 306 5.06 8.00 14.99 393 3.98 11.43 393 11.43 - ------------------------------------------------------------------------------------ Total 2,084 6.23 $ 5.19 1,597 $ 5.73 ====================================================================================
There were 1,258,000 and 1,464,000 options exercisable at December 31, 2000 and 1999, respectively. The weighted average fair value of options granted was $1.54 per option for 1999. The fair value of options granted was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions: 1999 - -------------------------------------------------------------------------------- Risk-free interest rate 5.95% Dividend yield 1.37% Expected volatility 57.00% Expected life (years) 4.0 ================================================================================ There were 591,000 restricted shares granted during 2001 with a weighted average fair value of $2.92 per share and 699,000 restricted shares granted during 2000 with a weighted average fair value of $2.14 per share. There were no restricted shares granted during 1999. In 2001, 105,900 shares previously awarded at a weighted average fair value of $14.60 per share were forfeited by the recipients. The pro forma impact on net loss and diluted loss per share of accounting for stock-based compensation using the fair value method required by SFAS 123, Accounting for Stock-Based Compensation follows: (in thousands, except per-share data) 2001 2000 1999 - -------------------------------------------------------------------------------- Net loss As reported $(79,843) $(10,182) $ (89,887) Pro forma (80,031) (11,123) (90,754) Diluted loss per share As reported $ (1.06) $ (0.14) $ (1.20) Pro forma (1.07) (0.15) (1.21) ================================================================================ 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 Benefit Plans Terra and its subsidiaries maintain pension plans that cover substantially all salaried and hourly employees. Benefits are based on a pay formula. The plans' assets consist principally of equity securities and corporate and government debt securities. Terra and its subsidiaries also have certain non-qualified pension plans covering executives, which are unfunded. Terra 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, including $10.6 million of 1999 curtailment benefits which were included in discontinued operations, follow: CONFIDENTIAL 30 (in thousands) 2001 2000 1999 - ------------------------------------------------------------------------------- Service cost $ 6,351 $ 6,856 $ 9,185 Interest cost 11,815 11,614 11,325 Expected return on plan assets (15,050) (14,361) (13,243) Amortization of prior service cost 37 37 42 Amortization of actuarial loss -- 1 1,471 Amortization of net asset (401) (314) (306) Curtailment benefit -- -- (10,556) Termination charge 1,560 -- -- - ------------------------------------------------------------------------------- Pension expense (credit) $ 4,312 $ 3,833 $ (2,082) =============================================================================== The following table reconciles the plans' funded status to amounts included in the Consolidated Statements of Financial Position at December 31: (in thousands) 2001 2000 - ------------------------------------------------------------------------------- Change in Benefit Obligation Benefit Obligation-beginning of year $ 178,702 $ 170,879 Service cost 6,350 6,856 Interest cost 11,815 11,614 Participants' contributions 468 850 Termination charge 1,560 -- Actuarial (gain) loss (4,532) 2,410 Foreign currency exchange rate changes (2,988) (6,074) Benefits paid (5,121) (7,833) - ------------------------------------------------------------------------------- Benefit Obligation-end of year 186,254 178,702 - ------------------------------------------------------------------------------- Change in Plan Assets Fair value plan assets-beginning of year 177,019 168,133 Actual return on plan assets (27,028) 20,892 Foreign currency exchange rate changes (3,216) (6,522) Employer contribution 607 1,127 Participants' contributions 348 1,222 Benefits paid (5,121) (7,833) - ------------------------------------------------------------------------------- Fair value plan assets-end of year 142,609 177,019 - ------------------------------------------------------------------------------- Funded status (43,645) (1,683) Unrecognized net actuarial (gain) loss 23,807 (3,391) Unrecognized prior service cost 197 200 Unrecognized net transition asset 1,024 (678) - ------------------------------------------------------------------------------- Accrued benefit cost $ (18,617) $ (5,552) =============================================================================== CONFIDENTIAL 31 Terra recorded the unfunded accumulated benefits obligation of the qualified pension plans of $18.1 million, which originated in 2001 in long-term liabilities at December 31, 2001. The offsetting minimum pension charge of $10.9 million was made to other comprehensive loss, net of deferred taxes of $7.2 million. The non-qualified pension plans are unfunded and have an Accumulated Benefit Obligation of $6.0 million and $4.8 million at December 31, 2001 and 2000, respectively, which is included in other liabilities. 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, 2001 were as follows: 2001 2000 1999 - ---------------------------------------------------------------------------- Weighted average discount rate 7.3% 6.9% 7.1% Long-term per annum compensation increase 4.0% 4.3% 4.1% Long-term return on plan assets 8.8% 8.8% 8.9% ============================================================================ Terra also sponsors a qualified savings plan covering most full-time North American 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 Terra's matching contribution to the savings plan totaled $1.4 million in 2001, $1.4 million in 2000 and $2.9 million in 1999. 18. Post-Retirement Benefits Terra also provides health care benefits for eligible retired employees. 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 to participate in the plan if they elected to on or before January 1, 2002. Participant contributions and co-payments are subject to escalation. The following table indicates the components of the post-retirement medical benefits obligation included in Terra's Consolidated Statements of Financial Position at December 31: (in thousands) 2001 2000 - ------------------------------------------------------------------------------- Change in Benefit Obligation Benefit Obligation-beginning of year $ 3,794 $ 3,247 Service cost 12 21 Interest cost 260 220 Participants' contributions 323 314 Actuarial (gain) loss (415) 885 Foreign currency exchange rate changes (29) (11) Benefits paid (809) (882) - ------------------------------------------------------------------------------- Benefit Obligation-end of year 3,136 3,794 - ------------------------------------------------------------------------------- Change in Plan Assets Fair value plan assets-beginning of year -- -- Employer contribution 486 568 Participants' contributions 323 314 Benefits paid (809) (882) - ------------------------------------------------------------------------------- Fair value plan assets-end of year -- -- - ------------------------------------------------------------------------------- Funded status (3,136) (3,794) Unrecognized net actuarial gain (998) (569) Unrecognized prior service cost (120) (170) Employer contribution 118 -- - ------------------------------------------------------------------------------- Accrued benefit cost $(4,136) $(4,533) =============================================================================== CONFIDENTIAL 32 Net periodic post-retirement medical benefit (income) expense consisted of the following components: (in thousands) 2001 2000 1999 - ------------------------------------------------------------------------------- Service cost $ 12 $ 21 $ 85 Interest cost 260 220 295 Amortization of prior service cost (36) (270) (525) Amortization of actuarial gain (129) (657) (429) Effect of curtailment benefit -- -- (9) - ------------------------------------------------------------------------------- Post-retirement medical benefit (income) expense $ 107 $(686) $(583) =============================================================================== Terra limits its future obligation for post-retirement medical benefits by capping at 5% the annual rate of increase in the cost of claims it assumes under the plan. The weighted average discount rate used in determining the accumulated post-retirement medical benefit obligation was 7.4% in 2001 and 7.5% in 2000 and 1999. The assumed annual health care cost trend rate was 5% in 2001 and is assumed to remain at that level thereafter. A 1% increase in the assumed health care cost trend rate would increase total service and interest cost by $3,000 while a 1% decline would decrease cost by $31,000. 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 $330,000. 19. Income Taxes Components of the income tax provision (benefit) applicable to continuing operations are as follows: (in thousands) 2001 2000 1999 - -------------------------------------------------------------------------------- Current: Federal $(33,684) $(21,451) $(18,659) Foreign (52) 215 -- State (5,447) (1,592) (2,355) - ------------------------------------------------------------------------------- (39,183) (22,828) (21,014) - ------------------------------------------------------------------------------- Deferred: Federal 9,899 9,612 (20,843) Foreign (4,670) 6,842 (2,940) State 1,866 374 (1,203) - ------------------------------------------------------------------------------- 7,095 16,828 (24,986) - ------------------------------------------------------------------------------- Total income tax benefit $(32,088) $ (6,000) $(46,000) =============================================================================== The following table reconciles the income tax provision (benefit) per the Consolidated Statements of Operations to the federal statutory provision:
(in thousands) 2001 2000 1999 - ------------------------------------------------------------------------------------- Loss from continuing operations before taxes: Domestic $ (74,427) $ (36,782) $(102,707) Foreign (35,374) 20,600 (13,391) - ------------------------------------------------------------------------------------- $(109,801) $ (16,182) $(116,098) ===================================================================================== Statutory income tax provision (benefit): Domestic $ (26,049) $ (12,874) $ (35,947) Foreign (11,521) 7,107 (4,306) - ------------------------------------------------------------------------------------- (37,570) (5,767) (40,253) Purchased Canadian tax benefit -- (1,750) 215 Foreign adjustments 6,801 -- -- Non-deductible expenses, primarily goodwill 6,216 6,152 6,125 State and local income taxes (2,482) (1,126) (2,688) Other (5,053) (3,509) (9,399) - ------------------------------------------------------------------------------------- Income tax benefit $ (32,088) $ (6,000) $ (46,000) =====================================================================================
CONFIDENTIAL 33 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 assets (liabilities) were as follows: (in thousands) 2001 2000 - ------------------------------------------------------------------------------- Current deferred tax liability Accrued liabilities $ (5,568) $ (4,962) Inventory valuation 267 652 - ------------------------------------------------------------------------------- Net current deferred tax liability (5,301) (4,310) - ------------------------------------------------------------------------------- Non-current deferred tax liability Depreciation (196,190) (187,369) Investments in partnership (23,684) (26,460) U.S. international tax allowance (9,682) (9,682) U.K. intercompany interest (3,815) (3,815) Unfunded employee benefits 7,725 12,106 Discontinued business costs 4,540 7,538 Valuation allowance (21,276) (21,276) NOL, capital loss and tax credit carryforwards 127,563 84,464 Accumulated other comprehensive income 10,046 -- Other (7,872) (11,981) - ------------------------------------------------------------------------------- Net noncurrent deferred tax liability (112,645) (156,475) - ------------------------------------------------------------------------------- Net deferred tax liability $(117,946) $(160,785) =============================================================================== During 1996, after receiving a favorable ruling from Revenue Canada, Terra refreshed its tax basis in plant and equipment at its Canadian subsidiary by entering into a transaction with a Canadian subsidiary of Anglo American, plc, resulting in a deferred tax asset for Terra. The valuation of this tax basis was challenged by Revenue Canada in 2000. Terra's tax basis in certain other plants was also refreshed in 2001 due to ownership changes. Tax benefits of approximately $80 million related to these basis differences have not been recognized, pending ultimate resolution of these matters. The deferred tax asset related to NOLs includes $21.3 million which Terra's management believes more likely than not will not be realized. Therefore, a valuation allowance of $21.3 million has been provided by Terra. Terra will continue to assess the recoverablility for these NOLs and to the extent it is determined that such valuation allowance is no longer required the tax benefit of these NOLs will be recognized at such time. These NOLs expire in 2011 and 2012. Components of income tax provision (benefit) included in net income other than from continuing operations are as follows: (in thousands) 2001 2000 1999 - ---------------------------------------------------------------------------- Current: Federal $ (913) $ -- $(10,655) State -- -- (3,070) - ---------------------------------------------------------------------------- $ (913) $ -- $(13,725) ============================================================================ CONFIDENTIAL 34 20. Industry Segment Data Terra operates in two principal industry segments - Nitrogen Products and Methanol. The Nitrogen Products business produces and distributes ammonia, urea, nitrogen solutions, ammonium nitrate and other nitrogen products to agricultural 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. Terra does not allocate interest, income taxes or infrequent items to the business segments. Included in Other are general corporate activities not attributable to a specific industry segment. The following summarizes additional information about Terra's industry segments:
Nitrogen (in thousands) Products Methanol Other Total - ------------------------------------------------------------------------------------- 2001 Revenues $ 863,512 $ 169,098 $ 4,700 $ 1,037,310 Operating loss (48,476) (11,739) (1,603) (61,818) Total assets 1,161,797 152,540 21,706 1,336,043 Depreciation and amortization 91,023 17,209 12,949 121,181 Capital expenditures 13,251 1,861 92 15,204 Equity earnings 953 -- -- 953 Equity investments 2,218 -- -- 2,218 Minority interest in earnings (2,247) -- -- (2,247) ===================================================================================== 2000 Revenues $ 916,959 $ 136,781 $ 9,270 $ 1,063,010 Operating earnings 28,639 12,395 1,773 42,807 Total assets 1,247,678 175,929 88,945 1,512,552 Depreciation and amortization 89,861 12,957 12,083 114,901 Capital expenditures 6,364 3,098 2,757 12,219 Equity earnings 843 -- -- 843 Equity investments 1,865 -- -- 1,865 Minority interest in earnings 5,379 -- -- 5,379 ===================================================================================== 1999 Revenues $ 745,901 $ 85,178 $ 2,364 $ 833,443 Operating loss (43,909) (15,210) (3,923) (63,042) Total assets 1,413,225 175,151 13,069 1,601,445 Depreciation and amortization 75,082 12,701 13,805 101,588 Capital expenditures 40,626 1,422 9,851 51,899 Equity earnings 787 -- -- 787 Equity investments 1,822 -- -- 1,822 Minority interest in earnings (1,088) 9,429 -- 8,341 =====================================================================================
The following summarizes geographic information about Terra:
Revenues Long-lived Assets ------------------------------------ ------------------------------------ (in thousands) 2001 2000 1999 2001 2000 1999 - -------------------------------------------------------------------------------------------- United States $ 741,586 $ 749,145 $ 546,199 $ 797,064 $ 867,762 $ 938,365 Canada 59,993 45,868 41,376 46,172 49,467 56,897 United Kingdom 235,731 267,997 245,868 239,150 267,625 312,501 - -------------------------------------------------------------------------------------------- $1,037,310 $1,063,010 $ 833,443 $1,082,386 $1,184,854 $1,307,763 ============================================================================================
CONFIDENTIAL 35 21. Guarantor Subsidiaries Terra Industries Inc. (the "parent") files a consolidated United States federal income tax return. Beginning in 1995, the parent adopted tax sharing agreements, under which all domestic operating subsidiaries provide for and remit income taxes to the parent based on their pretax accounting income, adjusted for permanent differences between pretax accounting income and taxable income. The tax sharing agreements allocated the benefits of operating losses and temporary differences between financial reporting and tax basis income to the parent. Condensed consolidating financial information regarding the Parent, Terra Capital Inc. ("TCAPI"), the Guarantor Subsidiaries and subsidiaries of the Parent that are not guarantors of the Senior Secured Notes (see Note 11 - Long-term Debt) for December 31, 2001, 2000 and 1999 are presented below for purposes of complying with the reporting requirements of the Guarantor Subsidiaries. Condensed Consolidating Statement of Financial Position for the Year Ended December 31, 2001:
Guarantor Non-Guarantor (in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated - -------------------------------------------------------------------------------------------------------------------------- Assets Cash and short-term investments $ -- $ -- $ 16,933 $ 24,745 $ (34,553) $ 7,125 Accounts receivable -- 82 28,991 72,290 -- 101,363 Inventories -- -- 27,257 82,770 -- 110,027 Other current assets 5,723 -- 11,140 19,183 (904) 35,142 - ------------------------------------------------------------------------------------------------------------------------- Total current assets 5,723 82 84,321 198,988 (35,457) 253,657 - ------------------------------------------------------------------------------------------------------------------------- Property, plant and equipment, net -- -- 438,322 388,059 (1,399) 824,982 Excess of cost over net assets of acquired businesses -- -- 189,971 16,238 -- 206,209 Investments in and advanced to (from) affiliates 851,972 699,656 1,334,201 113,382 (2,999,211) -- Other assets 774 10,901 9,315 26,283 3,922 51,195 - ------------------------------------------------------------------------------------------------------------------------- Total assets $ 858,469 $ 710,639 $ 2,056,130 $ 742,950 $(3,032,145) $ 1,336,043 ========================================================================================================================= Liabilities Debt due within one year $ -- $ -- $ 68 $ -- $ -- $ 68 Accounts payable 78 412 32,075 42,512 -- 75,077 Accrued and other liabilities 875 42,403 15,113 11,416 (27,673) 42,134 - ------------------------------------------------------------------------------------------------------------------------- Total current liabilities 953 42,815 47,256 53,928 (27,673) 117,279 - ------------------------------------------------------------------------------------------------------------------------- Long-term debt 200,000 236,277 257 -- -- 436,534 Deferred income taxes 116,918 19,802 (3,370) (8,272) (12,433) 112,645 Other liabilities 39,819 14,819 760 11,707 2,534 69,639 Minority interest -- 19,436 79,731 -- -- 99,167 - ------------------------------------------------------------------------------------------------------------------------- Total liabilities 357,690 333,149 124,634 57,363 (37,572) 835,264 - ------------------------------------------------------------------------------------------------------------------------- Stockholders' Equity Common stock 128,363 -- 73 49,709 (49,782) 128,363 Paid in capital 554,850 150,218 1,856,742 918,888 (2,925,848) 554,850 Accumulated other comprehensive income (loss) (78,470) (67,584) 2,398 (68,826) 134,012 (78,470) Retained earnings (deficit) (103,964) 294,856 72,283 (214,184) (152,955) (103,964) - ------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 500,779 377,490 1,931,496 685,587 (2,994,573) 500,779 - ------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 858,469 $ 710,639 $ 2,056,130 $ 742,950 $(3,032,145) $ 1,336,043 =========================================================================================================================
CONFIDENTIAL 36 Condensed Consolidating Statement of Operations for the Year Ended December 31, 2001:
Guarantor Non-Guarantor (in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------- Revenues Net sales $ -- $ -- $ 411,346 $ 621,163 $ 101 $ 1,032,610 Other income, net (2) -- 1,932 2,071 699 4,700 - ----------------------------------------------------------------------------------------------------------------------- (2) -- 413,278 623,234 800 1,037,310 - ----------------------------------------------------------------------------------------------------------------------- Cost and Expenses Cost of sales -- -- 438,444 605,122 3,653 1,047,219 Selling, general and administrative expenses 2,533 3,960 25,977 9,313 (3,897) 37,886 Product claim costs -- -- -- 14,023 14,023 - ----------------------------------------------------------------------------------------------------------------------- 2,533 3,960 464,421 628,458 (244) 1,099,128 - ----------------------------------------------------------------------------------------------------------------------- Loss from operations (2,535) (3,960) (51,143) (5,224) 1,044 (61,818) Interest income 465 3,685 -- 600 (1,386) 3,364 Interest expense (36,558) (10,352) 7,081 (14,997) 1,232 (53,594) Minority interest -- 440 1,807 -- -- 2,247 Equity in the earnings (loss) of subsidiaries (64,503) (56,264) 6,088 (8,154) 122,833 -- - ----------------------------------------------------------------------------------------------------------------------- Loss from continuing operations before income taxes (103,131) (66,451) (36,167) (27,775) 123,723 (109,801) Income tax benefit (23,288) (4,078) -- (4,721) (1) (32,088) - ----------------------------------------------------------------------------------------------------------------------- Loss from continuing operations (79,843) (62,373) (36,167) (23,054) 123,724 (77,713) Extraordinary loss on early retirement of debt, net of taxes -- (2,130) -- -- -- (2,130) - ----------------------------------------------------------------------------------------------------------------------- Net Loss $ (79,843) $ (64,503) $ (36,167) $ (23,054) $ 123,724 $ (79,843) =======================================================================================================================
CONFIDENTIAL 37 Condensed Consolidating Statement of Cash Flows for the Year Ended December 31, 2001:
Guarantor Non-Guarantor (in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------- Operating Activities Net loss $ (79,843) $ (64,503) $(36,167) $ (23,054) $ 123,724 $ (79,843) Adjustments to reconcile net loss to net cash flows from operating activities: Extraordinary loss on early retirement of debt -- 2,130 -- -- -- 2,130 Depreciation and amortization -- 3,271 66,336 51,574 -- 121,181 Deferred income taxes (33,803) 2,620 (3,370) (12,227) 14,247 (32,533) Minority interest in earnings -- (440) (1,807) -- -- (2,247) Equity in earnings (loss) of subsidiaries 64,503 56,264 (6,088) 8,154 (122,833) -- Change in operating assets and liabilities (6,101) 37,159 4,376 (14,945) (54,260) (33,771) Other -- -- -- -- (354) (354) - ----------------------------------------------------------------------------------------------------------------------- Net Cash Flows from Operating Activities (55,244) 36,501 23,280 9,502 (39,476) (25,437) - ----------------------------------------------------------------------------------------------------------------------- Investing Activities Purchase of property, plant and equipment -- -- (4,809) (10,395) -- (15,204) Other -- -- -- -- (1,813) (1,813) - ----------------------------------------------------------------------------------------------------------------------- Net Cash Flows from Investing Activities -- -- (4,809) (10,395) (1,813) (17,017) - ----------------------------------------------------------------------------------------------------------------------- Financing Activities Issuance of long-term debt -- 200,000 -- -- -- 200,000 Principal payments on long-term debt (158,755) 36,28 (8,650) (105,625) -- (236,752) Change in investments and advances from (to) affiliates 197,032 (339,731) 495 114,397 27,807 -- Stock issuance - net 180 -- -- -- -- 180 Distributions to minority interests -- (337) (1,691) -- -- (2,028) Repurchase of TNCLP common units -- (1,671) -- -- -- (1,671) Deferred financing costs and bond discounts -- (11,442) -- -- -- (11,442) Other 16,787 3,443 (3,536) 4,377 (21,071) -- - ----------------------------------------------------------------------------------------------------------------------- Net Cash Flows from Financing Activities 55,244 (113,460) (13,382) 13,149 6,736 (51,713) - ----------------------------------------------------------------------------------------------------------------------- Effect of Foreign Exchange Rate on Cash -- -- -- (133) -- (133) - ----------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Short-term Investments -- (76,959) 5,089 12,123 (34,553) (94,300) - ----------------------------------------------------------------------------------------------------------------------- Cash and Short-term investments at Beginning of Year -- 76,959 11,844 12,622 -- 101,425 - ----------------------------------------------------------------------------------------------------------------------- Cash and Short-term Investments At End of Year $ -- $ -- $ 16,933 $ 24,745 $ (34,553) $ 7,125 =======================================================================================================================
CONFIDENTIAL 38 Condensed Consolidating Statement of Financial Position for the Year Ended December 31, 2000:
Guarantor Non-Guarantor (in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------------------ Consolidated Assets Cash and short-term investments $ -- $ 76,959 $ 11,844 $ 12,622 $ -- $ 101,425 Accounts receivable -- -- 38,653 68,646 -- 107,299 Inventories -- -- 32,199 69,327 -- 101,526 Other current assets 8,155 22 6,208 17,521 (14,458) 17,448 - ------------------------------------------------------------------------------------------------------------------------ Total current assets 8,155 76,981 88,904 168,116 (14,458) 327,698 - ------------------------------------------------------------------------------------------------------------------------ Property, plant and equipment, net -- -- 479,881 426,890 (3,970) 902,801 Excess of cost over net assets of acquired businesses -- -- 207,652 23,720 -- 231,372 Investments in and advanced to (from) affiliates 1,141,732 437,026 1,264,050 296,124 (3,138,932) -- Other assets 5,151 5,772 10,458 25,392 3,908 50,681 - ------------------------------------------------------------------------------------------------------------------------ Total assets $ 1,155,038 $ 519,779 $2,050,945 $ 940,242 $(3,153,452) $ 1,512,552 ======================================================================================================================== Liabilities Debt due within one year $ -- $ -- $ 546 $ 5,000 $ -- $ 5,546 Accounts payable -- 2,989 17,048 42,783 -- 62,820 Accrued and other liabilities 9,486 2,607 35,498 15,368 (2,635) 60,324 - ------------------------------------------------------------------------------------------------------------------------ Total current liabilities 9,486 5,596 53,092 63,151 (2,635) 128,690 - ------------------------------------------------------------------------------------------------------------------------ Long-term debt 358,755 -- 8,428 100,625 -- 467,808 Deferred income taxes 150,721 17,182 -- 3,955 (15,383) 156,475 Other liabilities 25,279 14,518 699 3,681 (669) 43,508 Minority interest -- 19,653 85,621 -- -- 105,274 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities 544,241 56,949 147,840 171,412 (18,687) 901,755 - ------------------------------------------------------------------------------------------------------------------------ Stockholders' Equity Common stock 128,283 -- 73 49,710 (49,783) 128,283 Paid in capital 554,750 150,218 1,798,968 905,816 (2,855,002) 554,750 Accumulated other comprehensive loss (48,115) (48,114) -- (48,114) 96,228 (48,115) Retained earnings (deficit) (24,121) 360,726 104,064 (138,582) (326,208) (24,121) - ------------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 610,797 462,830 1,903,105 768,830 (3,134,765) 610,797 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 1,155,038 $ 519,779 $2,050,945 $ 940,242 $(3,153,452) $ 1,512,552 ========================================================================================================================
CONFIDENTIAL 39 Condensed Consolidating Statement of Operations for the Year Ended December 31, 2000:
Guarantor Non-Guarantor (in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated - -------------------------------------------------------------------------------------------------------------------- Consolidated Revenues Net sales $ -- $ -- $ 383,628 $ 669,824 $ -- $ 1,053,452 Other income, net -- 401 4,205 4,952 -- 9,558 - -------------------------------------------------------------------------------------------------------------------- -- 401 387,833 674,776 -- 1,063,010 - -------------------------------------------------------------------------------------------------------------------- Cost and Expenses Cost of sales -- -- 376,337 595,376 -- 971,713 Selling, general and administrative expenses 1,471 1,089 31,709 14,221 -- 48,490 - -------------------------------------------------------------------------------------------------------------------- 1,471 1,089 408,046 609,597 -- 1,020,203 - -------------------------------------------------------------------------------------------------------------------- Income (loss) from operations (1,471) (688) (20,213) 65,179 -- 42,807 Insurance settlement costs -- -- (5,968) -- -- (5,968) Interest income 6 3,994 13,814 353 (14,298) 3,869 Interest expense (42,006) (792) (747) (22,894) 14,928 (51,511) Minority interest -- (995) (4,384) -- -- (5,379) Equity in the earnings (loss) of subsidiaries 20,232 17,300 42,199 19,402 (99,133) -- - -------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes (23,239) 18,819 24,701 62,040 (98,503) (16,182) Income tax provision (benefit) (13,057) 7,500 -- 7,057 (7,500) (6,000) - -------------------------------------------------------------------------------------------------------------------- Net Income (Loss) $(10,182) $ 11,319 $ 24,701 $ 54,983 $ (91,003) $ (10,182) ====================================================================================================================
CONFIDENTIAL 40 Condensed Consolidating Statement of Cash Flows for the Year Ended December 31, 2000:
Guarantor Non-Guarantor (in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated - ---------------------------------------------------------------------------------------------------------------------- Operating Activities Net income (loss) $(10,182) $ 11,319 $ 24,701 $ 54,983 $(91,003) $ (10,182) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization -- 925 63,733 50,243 -- 114,901 Deferred income taxes 76,326 (57,328) 92 3,092 (20,301) 1,881 Minority interest in earnings -- 996 4,383 -- -- 5,379 Equity in earnings (loss) of subsidiaries (20,232) (17,300) (42,199) (19,402) 99,133 -- Other non-cash items 286 -- -- -- (286) -- Change in operating assets and liabilities (4,422) (31,337) 29,811 33,410 (4,637) 22,825 Other -- -- -- -- (1,975) (1,975) - ---------------------------------------------------------------------------------------------------------------------- Net Cash Flows from Operating Activities 41,776 (92,725) 80,521 122,326 (19,069) 132,829 - ---------------------------------------------------------------------------------------------------------------------- Investing Activities Purchase of property, plant and equipment -- -- (1,676) (10,543) -- (12,219) Other -- -- (3,863) 25,836 (26,935) (4,962) - ---------------------------------------------------------------------------------------------------------------------- Net Cash Flows from Investing Activities -- -- (5,539) 15,293 (26,935) (17,181) - ---------------------------------------------------------------------------------------------------------------------- Financing Activities Net short-term borrowings (repayments) -- (6,000) -- -- -- (6,000) Principal payments on long-term debt -- -- (2,493) (4,614) -- (7,107) Change in investments and advances from (to) affiliates (44,024) 181,367 (99,343) (99,934) 61,934 -- Stock issuance - net 2,240 -- -- -- (2,233) 7 Distributions to minority interests -- (207) (912) -- -- (1,119) Repurchase of TNCLP common units -- (2,414) -- -- -- (2,414) Deferred financing costs -- (6,697) -- -- -- (6,697) Other -- 4,135 11,157 (912) (14,380) -- - ---------------------------------------------------------------------------------------------------------------------- Net Cash Flows from Financing Activities (41,784) 170,184 (91,591) (105,460) 45,321 $ (23,330) - ---------------------------------------------------------------------------------------------------------------------- Effect of Foreign Exchange Rate on Cash -- (683) -- (683) 683 (683) - ---------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Short-term Investments (8) 76,776 (16,609) 31,476 -- 91,635 - ---------------------------------------------------------------------------------------------------------------------- Cash and Short-term investments at Beginning of Year 8 183 28,453 (18,854) -- 9,790 - ---------------------------------------------------------------------------------------------------------------------- Cash and Short-term Investments At End of Year $ -- $ 76,959 $ 11,844 $ 12,622 $ -- $ 101,425 ======================================================================================================================
CONFIDENTIAL 41 Condensed Consolidating Statement of Operations for the Year Ended December 31, 1999:
Guarantor Non-Guarantor (in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------------------- Revenues Net sales $ -- $ -- $ 278,063 $ 546,929 $ -- $ 824,992 Other income, net -- 129 (1,610) 16,202 (6,270) 8,451 - ------------------------------------------------------------------------------------------------------------------------- -- 129 276,453 563,131 (6,270) 833,443 - ------------------------------------------------------------------------------------------------------------------------- Cost and expenses Cost of sales -- -- 323,045 518,016 -- 841,061 Selling, general and administrative expenses 5,521 214 7,877 48,794 (6,982) 55,424 - ------------------------------------------------------------------------------------------------------------------------- 5,521 214 330,922 566,810 (6,982) 896,485 - ------------------------------------------------------------------------------------------------------------------------- Loss from operations (5,521) (85) (54,469) (3,679) 712 (63,042) Interest income 729 2,669 19,029 436 (14,502) 8,361 Interest expense (38,966) (3,111) 1,408 (26,331) 13,924 (53,076) Minority interest -- (1,385) (6,956) -- -- (8,341) Equity in the earnings (loss) of subsidiaries (52,479) (60,390) (4,024) (7,229) 124,122 -- - ------------------------------------------------------------------------------------------------------------------------- Loss from continuing operations before income taxes (96,237) (62,302) (45,012) (36,803) 124,256 (116,098) Income tax provision (benefit) (26,139) (19,610) (21,632) (4,029) 25,410 (46,000) - ------------------------------------------------------------------------------------------------------------------------- Loss from continuing operations (70,098) (42,692) (23,380) (32,774) 98,846 (70,098) Income (loss) from discontinued operations: Loss from operations, net of taxes (5,800) -- (5,800) -- 5,800 (5,800) Income (loss) from disposition, net of taxes (4,725) -- (6,285) 1,561 4,725 (4,724) Extraordinary loss on early retirement of debt, net of taxes (9,264) (9,265) -- -- 9,264 (9,265) - ------------------------------------------------------------------------------------------------------------------------- Net Loss $(89,887) $ (51,957) $ (35,465) $ (31,213) $ 118,635 $ (89,887) =========================================================================================================================
CONFIDENTIAL 42 Condensed Consolidating Statement of Cash Flows for the Year Ended December 31, 1999:
Guarantor Non-Guarantor (in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------- Operating Activities Net loss $(89,887) $ (51,957) $ (35,465) $ (31,213) $ 118,635 $ (89,887) Adjustments to reconcile net loss to net cash flows from operating activities: Loss from discontinued operations 10,524 -- 10,524 -- (10,524) 10,524 Extraordinary loss on early retirement of debt 9,264 9,265 -- -- (9,264) 9,265 Depreciation and amortization -- -- 60,877 40,700 11 101,588 Deferred income taxes (13,882) 74,510 (93,325) 863 34,639 2,805 Minority interest in earnings -- 1,385 6,956 -- -- 8,341 Equity in earnings (loss) of subsidiaries 52,479 60,390 4,024 7,229 (124,122) -- Change in operating assets and liabilities (18,809) 19,243 (67,646) (155,314) 21,457 (201,069) Other 19,653 -- -- -- (15,080) 4,573 - ----------------------------------------------------------------------------------------------------------------------- Net Cash Flows from Operating Activities (30,658) 112,836 (114,055) (137,735) 15,752 (153,860) - ----------------------------------------------------------------------------------------------------------------------- Investing Activities Purchase of property, plant and equipment -- -- (49,283) (2,616) -- (51,899) Discontinued operations -- -- 335,129 -- -- 335,129 Other -- -- -- -- (4,531) (4,531) - ----------------------------------------------------------------------------------------------------------------------- Net Cash Flows from Investing Activities -- -- 285,846 (2,616) (4,531) 278,699 - ----------------------------------------------------------------------------------------------------------------------- Financing Activities Net short-term borrowings -- 6,000 -- -- -- 6,000 Principal payments on long-term debt -- -- (657) (15,912) -- (16,569) Change in investments and advances from (to) affiliates 29,895 (157,688) (7,927) 144,579 (8,859) -- Stock issuance - net 13 -- -- -- -- 13 Distributions to minority Interests -- (1,565) (7,864) -- -- (9,429) Repurchase of TNCLP common units -- (5,994) -- -- -- (5,994) Redemption of minority interests in subsidiary -- -- (225,000) -- -- (225,000) Dividends (5,283) -- -- -- 2 (5,281) Other -- 19,798 4,075 (21,077) (2,796) -- - ----------------------------------------------------------------------------------------------------------------------- Net Cash Flows from Financing Activities 24,625 (139,449) (237,373) 107,590 (11,653) (256,260) - ----------------------------------------------------------------------------------------------------------------------- Effect of Foreign Exchange Rate on Cash -- (432) -- (432) 432 (432) - ----------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Short-term Investments (6,033) (27,045) (65,582) (33,193) -- (131,853) - ----------------------------------------------------------------------------------------------------------------------- Cash and Short-term investments at Beginning of Year 6,041 27,228 94,035 14,339 -- 141,643 - ----------------------------------------------------------------------------------------------------------------------- Cash and Short-term Investments At End of Year $ 8 $ 183 $ 28,453 $ (18,854) $ -- $ 9,790 =======================================================================================================================
CONFIDENTIAL 43 22. Agreements of Limited Partnerships Terra Nitrogen Company, L.P. (TNCLP) In accordance with the TNCLP limited partnership agreement, quarterly distributions to unitholders and TNC are made in an amount equal to 100% of its available cash, as defined in the partnership agreement. 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. If at any time less than 25% of the issued and outstanding units are held by non-affiliates of the general partner, TNCLP may call, or assign to the general partner or its affiliates, its right to acquire all such outstanding units held by non-affiliated persons with 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. Terra owned 75.1% of the Common Units at December 31, 2001. The publicly held TNCLP Common Units are reflected in the financial statements as minority interest. Beaumont Methanol, Limited Partnership (BMLP) Terra repurchased the limited interest in BMLP on June 30, 1999 for $225 million with proceeds from sale of the Distribution business. The limited BMLP interest had received a first priority return from BMLP approximating an annual rate of LIBOR plus 3.17% on its $225 million investment. 23. Pending Change of Control Anglo American plc, through a wholly-owned subsidiary, owns 49.1% of Terra's outstanding shares. Anglo American has made public its intention to dispose of its interest in Terra with the timing based on market and other conditions. CONFIDENTIAL 44 RESPONSIBILITY FOR FINANCIAL STATEMENTS The accompanying Consolidated Financial Statements of Terra Industries Inc. and its subsidiaries have been prepared in conformity with accounting principles generally accepted in the United States of America 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. Terra 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 internal audit. Terra 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 audit and the independent accountants. The independent accountants and internal audit 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. Michael L. Bennett Francis G. Meyer President and Senior Vice President and Chief Executive Officer Chief Financial Officer CONFIDENTIAL 45 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, 2001 and 2000, 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, 2001. These financial statements are the responsibility of Terra's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Omaha, Nebraska January 31, 2002 CONFIDENTIAL 46 Quarterly Production Data (unaudited)
- ---------------------------------------------------------------------------------------------- Quarter Quarter Quarter Quarter Year Ended Ended Ended Ended Ended March 31 June 30 Sept. 30 Dec. 31 Dec. 31 - ---------------------------------------------------------------------------------------------- 2001 Net Production (tons): Anhydrous ammonia 268,054 288,739 307,125 316,495 1,180,413 Nitrogen solutions (28% basis) 830,251 752,966 811,458 930,419 3,325,094 Urea 63,895 94,707 37,269 156,442 352,314 Ammonium nitrate 167,239 183,410 213,824 203,626 768,099 Methanol (million gallons) 41.8 72.5 69.9 52.0 236.2 - ---------------------------------------------------------------------------------------------- 2000 Net Production (tons): Anhydrous ammonia 321,651 397,667 321,942 273,968 1,315,228 Nitrogen solutions (28% basis) 997,694 937,822 856,018 891,889 3,683,423 Urea 170,187 77,203 66,188 97,757 411,335 Ammonium nitrate 231,278 263,292 263,551 258,878 1,016,999 Methanol (million gallons) 62.6 66.3 66.8 48.3 244.0 ==============================================================================================
Quarterly Financial and Stock Market Data (unaudited) (certain items have beenreclassified from prior period reporting)
- ---------------------------------------------------------------------------------------------- (in thousands, except per-share data and stock prices) March 31, June 30, Sept. 30, Dec. 31, - ---------------------------------------------------------------------------------------------- 2001 Total revenues $ 244,577 $ 320,795 $ 237,705 $ 234,233 Operating income (loss) 3,350 (17,406) (26,208) (21,554) Net loss (5,239) (21,586) (24,136) (28,882) Per Share: Basic and diluted loss per share $ (0.07) $ (0.29) $ (0.32) (0.38) Earnings before interest, taxes, depreciation and amortization $ 31,912 $ 12,152 $ 3,010 $ 12,406 Common Share Price: High $ 4.75 $ 4.75 $ 3.79 $ 3.67 Low 2.31 2.95 2.05 1.90 - ---------------------------------------------------------------------------------------------- 2000 Total revenues $ 239,588 $ 286,432 $ 265,109 $ 271,881 Operating income (loss) (15,914) 18,326 27,257 13,138 Net income (loss) (19,615) (832) 6,196 4,069 Per Share: Basic and diluted earnings (loss) per share $ (0.26) $ (0.01) $ 0.08 0.05 Earnings before interest, taxes, depreciation and amortization $ 9,125 $ 40,486 $ 55,316 $ 41,434 Common Share Price: High $ 3.88 $ 2.88 $ 2.25 $ 2.81 Low 1.94 1.06 1.06 1.75 ==============================================================================================
CONFIDENTIAL 47 Volumes & Prices (unaudited) - -------------------------------------------------------------------------------- 2001 2000 - -------------------------------------------------------------------------------- Sales Realized Sales Realized (quantities in thousands) Volumes Price/unit Volumes Price/unit - -------------------------------------------------------------------------------- Anhydrous ammonia (tons) 1,195 $ 187 1,418 $ 162 Nitrogen solutions (tons) 3,296 97 3,990 79 Urea (tons) 451 142 474 136 Ammonium nitrate (tons) 682 127 1,000 118 Methanol (gallons) 310,596 0.56 256,812 0.53 ================================================================================ STOCKHOLDERS - -------------------------------------------------------------------------------- Terra's Common Shares are traded principally on the New York Stock Exchange. At December 31, 2001, 76.5 million Common Shares were outstanding and held by 3,697 stockholders. CONFIDENTIAL 48
Financial Summary - ----------------------------------------------------------------------------------------------------- (in thousands, except per-share and employee data) 2001 2000 1999 1998 1997 - ----------------------------------------------------------------------------------------------------- Financial Position Working capital $ 136,378 $ 199,008 $ 152,959 $ 262,283 $ 302,724 Total assets 1,336,043 1,512,552 1,601,445 2,037,768 2,177,157 Long-term debt 436,534 473,354 480,461 497,030 506,568 Stockholders' equity 500,779 610,797 657,002 747,852 790,329 Results of Operations Revenues $ 1,037,310 $ 1,063,010 $ 833,443 $ 909,968 $ 862,790 Costs and expenses (1,099,128) (1,020,203) (896,485) (899,754) (666,015) Infrequent item -- (5,968) -- -- 163,427 Interest income 3,364 3,869 8,361 326 208 Interest expense (53,594) (51,511) (53,076) (51,122) (48,400) Minority interest 2,247 (5,379) (8,341) (27,510) (27,633) Income tax benefit (provision) 32,088 6,000 46,000 24,761 (104,862) - ----------------------------------------------------------------------------------------------------- Income (loss) from continuing operations (77,713) (10,182) (70,098) (43,331) 179,515 Income (loss) from discontinued operations -- -- (10,524) 17,082 30,367 Extraordinary item (2,130) -- (9,265) -- (2,995) - ----------------------------------------------------------------------------------------------------- Net Income (Loss) $ (79,843) $ (10,182) $ (89,887) $ (26,249) $ 206,887 ===================================================================================================== Basic Earnings (Loss) Per Share: Continuing operations $ (1.03) $ (0.14) $ (0.94) $ (0.58) $ 2.43 Discontinued operations -- -- (0.14) 0.23 0.41 Extraordinary item (0.03) -- (0.12) -- (0.04) - ----------------------------------------------------------------------------------------------------- Net Income (Loss) $ (1.06) $ (0.14) $ (1.20) $ (0.35) $ 2.80 ===================================================================================================== Diluted Earnings (Loss) Per Share: Continuing operations $ (1.03) $ (0.14) $ (0.94) $ (0.58) $ 2.39 Discontinued operations -- -- (0.14) 0.23 0.41 Extraordinary item (0.03) -- (0.12) -- (0.04) - ----------------------------------------------------------------------------------------------------- Net Income (Loss) $ (1.06) $ (0.14) $ (1.20) $ (0.35) $ 2.76 ===================================================================================================== Earnings Before Interest, Taxes, Depreciation and Amortization (Unaudited) $ 59,480 $ 146,361 $ 10,146 $ 100,839 $ 268,828 ===================================================================================================== Dividends Per Share $ -- $ -- $ 0.07 $ 0.20 $ 0.18 ===================================================================================================== Capital Expenditures $ 15,204 $ 12,219 $ 51,899 $ 55,327 $ 48,417 ===================================================================================================== Full-time employees at end of period (unaudited) 1,248 1,279 1,351 4,185 4,435 =====================================================================================================
EX-21 6 dex21.txt SUBSIDIARIES OF TERRA INDUSTRIES Exhibit 21 TERRA INDUSTRIES INC. MAJORITY AND PARTIALLY OWNED SUBSIDIARIES December 31, 2001
Percentage Percentage Name of Company Held by TRA Held by Sub Jurisdiction - --------------- ----------- ----------- ------------ I. Inspiration Coal Inc. 100 Delaware II. Inspiration Consolidated Copper Company 100 Maine which owns ---------- A. Inspiration Development Company 100 Delaware III. Inspiration Gold Incorporated 100 Delaware IV. 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. Terra International (Oklahoma) Inc. 100 Delaware b. Terra Real Estate Corporation 100 Iowa c. Terra Real Estate Development Corporation 100 Iowa d. Terra Express, Inc. 100 Delaware e. Terra International (Canada) Inc. 100 Ontario, Canada which owns ---------- 1. Terra Nitrogen (U.K.) Limited 100 England f. Port Neal Corporation 100 Delaware 3. BMC Holdings, Inc. 100 Delaware which owns ---------- a. Beaumont Holdings Corporation 100 Delaware which owns ---------- 1. Terra (U.K.) Holdings Inc./1/ 73 Delaware which owns ---------- a. Beaumont Ammonia Inc. 100 Delaware
- ----------------------- /1 Terra Methanol Corporation owns 27% of Terra (U.K.) Holdings, Inc./ TERRA INDUSTRIES INC. MAJORITY AND PARTIALLY OWNED SUBSIDIARIES December 31, 2001
Percentage Percentage Name of Company Held by TRA Held by Sub Jurisdiction - --------------- ----------- ----------- ------------ 4. Terra Nitrogen Corporation 100 Delaware which owns ---------- a. Terra Nitrogen Company, L.P./2/ 75 Delaware which owns ---------- 1. Terra Nitrogen, Limited Partnership/3/ 100 Delaware a. Oklahoma Co2 Partnership 50 Oklahoma
- ----------------------- /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./ EX-24 7 dex24.txt POWERS OF ATTORNEY Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, That I, EDWARD G. BEIMFOHR hereby constitute and appoint Mark A. Kalafut, Francis G. Meyer and Michael L. Bennett, 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, 2000 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 20th day of February, 2002. /s/ Edward G. Beimfohr --------------------------- EDWARD G. BEIMFOHR POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, That I, MARTHA O. HESSE hereby constitute and appoint Mark A. Kalafut, Francis G. Meyer and Michael L. Bennett, 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, 2000 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 20th day of February, 2002. /s/ Martha O. Hesse --------------------------- MARTHA O. HESSE POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, That I, EDWARD M. CARSON hereby constitute and appoint Mark A. Kalafut, Francis G. Meyer and Michael L. Bennett, 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, 2000 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 20th day of February, 2002. /s/ Edward M. Carson --------------------------- EDWARD M. CARSON POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, That I, THOMAS H. CLAIBORNE hereby constitute and appoint Mark A. Kalafut, Francis G. Meyer and Michael L. Bennett, 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, 2000 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 20th day of February, 2002. /s/ Thomas H. Claiborne --------------------------- THOMAS H. CLAIBORNE POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, That I, ERIC K. DIACK hereby constitute and appoint Mark A. Kalafut, Francis G. Meyer and Michael L. Bennett, 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, 2000 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 20th day of February, 2002. /s/ Eric K. Diack --------------------------- ERIC K. DIACK POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, That I, DAVID E. FISHER hereby constitute and appoint Mark A. Kalafut, Francis G. Meyer and Michael L. Bennett, 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, 2000 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 20th day of February, 2002. /s/ David E. Fisher --------------------------- DAVID E. FISHER POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, That I, JOHN R. NORTON III hereby constitute and appoint Mark A. Kalafut, Francis G. Meyer and Michael L. Bennett, 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, 2000 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 20th day of February, 2002. /s/ John R. Norton --------------------------- JOHN R. NORTON III POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, That I, HENRY R. SLACK hereby constitute and appoint Mark A. Kalafut, Francis G. Meyer and Michael L. Bennett, 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, 2000 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 20th day of February, 2002. /s/ Henry R. Slack --------------------------- HENRY R. SLACK POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, That I, WILLIAM R. LOOMIS, JR. hereby constitute and appoint Mark A. Kalafut, Francis G. Meyer and Michael L. Bennett, 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, 2000 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 20th day of February, 2002. /s/ William R. Loomis --------------------------- WILLIAM R. LOOMIS, JR. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, That I, BURTON M. JOYCE hereby constitute and appoint Mark A. Kalafut, Francis G. Meyer and Michael L. Bennett, 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, 2000 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 20th day of February, 2002. /s/ Burton M. Joyce --------------------------- BURTON M. JOYCE -----END PRIVACY-ENHANCED MESSAGE-----