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 =====================================================================================================