-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RjZIlyY1xMAX+k+G7N1V6ORpvObo9QQ09cKEYQ1Yf2qo8qxPrXQcylfc+SslnFVL 7DgaZxGz+TaWS3rzRAmG4w== 0000950131-02-003035.txt : 20020809 0000950131-02-003035.hdr.sgml : 20020809 20020809121429 ACCESSION NUMBER: 0000950131-02-003035 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TERRA INDUSTRIES INC CENTRAL INDEX KEY: 0000722079 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE CHEMICALS [2870] IRS NUMBER: 521145429 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08520 FILM NUMBER: 02724164 BUSINESS ADDRESS: STREET 1: 600 FOURTH ST STREET 2: PO BOX 6000 CITY: SIOUX CITY STATE: IA ZIP: 51102-6000 BUSINESS PHONE: 7122771340 MAIL ADDRESS: STREET 1: 600 FOURTH STREET STREET 2: PO BOX 6000 CITY: SIOUX CITY STATE: IA ZIP: 51102-6000 FORMER COMPANY: FORMER CONFORMED NAME: INSPIRATION RESOURCES CORP DATE OF NAME CHANGE: 19920517 10-Q 1 d10q.txt FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number: 1-8520 TERRA INDUSTRIES INC. (Exact name of registrant as specified in its charter) Maryland 52-1145429 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Terra Centre P.O. Box 6000 600 Fourth Street Sioux City, Iowa 51102-6000 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (712) 277-1340 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] As of July 31, 2002, the following shares of the registrant's stock were outstanding: Common Shares, without par value 76,907,669 shares ================================================================================ PART I. FINANCIAL INFORMATION TERRA INDUSTRIES INC. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (in thousands) (unaudited)
June 30, December 31, June 30, 2002 2001 2001 -------------- -------------- -------------- ASSETS Cash and short-term investments $ 12,718 $ 7,125 $ 12,080 Accounts receivable, less allowance for doubtful accounts of $436, $936, $878 105,298 101,363 116,684 Inventories 91,986 110,027 156,519 Other current assets 22,680 35,142 29,877 - ------------------------------------------------------------------------------------------------------------ Total current assets 232,682 253,657 315,160 - ------------------------------------------------------------------------------------------------------------ Property, plant and equipment, net 802,300 824,982 858,546 Excess of cost over net assets of acquired businesses --- 206,209 215,099 Other assets 47,317 51,195 41,967 - ------------------------------------------------------------------------------------------------------------ Total assets $ 1,082,299 $ 1,336,043 $ 1,430,772 ============================================================================================================ LIABILITIES Debt due within one year $ 135 $ 68 $ 5,047 Accounts payable 66,309 75,077 73,150 Accrued and other liabilities 36,454 42,134 47,763 - ------------------------------------------------------------------------------------------------------------ Total current liabilities 102,898 117,279 125,960 - ------------------------------------------------------------------------------------------------------------ Long-term debt 400,432 436,534 455,273 Deferred income taxes 115,257 112,645 140,894 Other liabilities 65,734 69,639 48,936 Minority interest 100,453 99,167 101,732 - ------------------------------------------------------------------------------------------------------------ Total liabilities and minority interest 784,774 835,264 872,795 - ------------------------------------------------------------------------------------------------------------ STOCKHOLDERS' EQUITY Capital stock Common Shares, authorized 133,500 shares; outstanding 76,420, 76,451 and 75,879 shares 128,652 128,363 128,356 Paid-in capital 555,164 554,850 554,854 Accumulated other comprehensive loss (58,777) (78,470) (74,287) Retained deficit (327,514) (103,964) (50,946) - ------------------------------------------------------------------------------------------------------------ Total stockholders' equity 297,525 500,779 557,977 - ------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 1,082,299 $ 1,336,043 $ 1,430,772 ============================================================================================================
See Accompanying Notes to the Consolidated Financial Statements. 2 TERRA INDUSTRIES INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per-share amounts) (unaudited)
Three Months Ended Six Months Ended June 30, June 30, 2002 2001 2002 2001 ------------ ------------ ------------ ------------ REVENUES Net sales $ 299,516 $ 320,984 $ 512,806 $ 564,852 Other income (loss), net (18) (189) 252 520 - ----------------------------------------------------------------------------------------------------------------- Total revenues 299,498 320,795 513,058 565,372 - ----------------------------------------------------------------------------------------------------------------- COSTS AND EXPENSES Cost of sales 289,214 313,674 495,354 547,545 Selling, general and administrative expense 9,694 10,504 18,482 17,860 Product claim costs --- 14,023 --- 14,023 - ---------------------------------------------------------------------------------------------------------------- 298,908 338,201 513,836 579,428 - ----------------------------------------------------------------------------------------------------------------- Income (loss) from operations 590 (17,406) (778) (14,056) Interest income 113 175 161 1,875 Interest expense (13,348) (13,241) (26,644) (25,823) Minority interest (739) 211 (1,285) (317) - ----------------------------------------------------------------------------------------------------------------- Loss before income taxes and cumulative effect of change in accounting principle (13,384) (30,261) (28,546) (38,321) Income tax benefit 4,899 8,675 10,964 11,496 - ----------------------------------------------------------------------------------------------------------------- Loss before cumulative effect of change in accounting principle (8,485) (21,586) (17,582) (26,825) Cumulative effect of change in accounting principle --- --- (205,968) --- - ----------------------------------------------------------------------------------------------------------------- NET LOSS $ (8,485) $ (21,586) $ (223,550) $ (26,825) ================================================================================================================ Basic and diluted loss per share: Loss before cumulative effect of change in accounting principle $ (0.11) $ (0.29) $ (0.23) $ (0.36) Cumulative effect of change in accounting principle --- --- (2.74) --- - ----------------------------------------------------------------------------------------------------------------- Net loss per share $ (0.11) $ (0.29) $ (2.97) $ (0.36) ================================================================================================================= Basic and diluted weighted average shares outstanding 75,378 75,131 75,203 74,915 =================================================================================================================
See Accompanying Notes to the Consolidated Financial Statements. 3 TERRA INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Six Months Ended June 30, ------------------------------ 2002 2001 ------------ ------------ OPERATING ACTIVITIES Net loss $ (223,550) $ (26,825) Cumulative effect of change in accounting Principle 205,968 --- Adjustments to reconcile net loss from operations to net cash flows from operating activities: Depreciation and amortization 48,620 58,437 Deferred income taxes (951) (10,819) Minority interest in earnings 1,285 317 Changes in current assets and liabilities: Accounts receivable (2,146) (11,196) Inventories 20,061 (57,873) Other current assets 18,099 (19,133) Accounts payable (10,076) 11,885 Accrued and other liabilities (4,573) (15,458) Other 45 9,283 - ----------------------------------------------------------------------------------------------- Net cash flows from operating activities 52,782 (61,382) - ----------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchase of property, plant and equipment (9,010) (8,364) Other items (2,782) (2,883) - ----------------------------------------------------------------------------------------------- Net cash flows from investing activities (11,792) (11,247) - ----------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Principal payments on long-term debt (36,035) (13,034) Stock issuance-net 603 177 Repurchases of TNCLP common units --- (1,671) Distributions to minority interests --- (2,028) - ----------------------------------------------------------------------------------------------- Net cash flows from financing activities (35,432) (16,556) - ----------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash 35 (160) - ----------------------------------------------------------------------------------------------- Increase (decrease) to cash and short-term investments 5,593 (89,345) Cash and short-term investments at beginning of period 7,125 101,425 - ----------------------------------------------------------------------------------------------- Cash and short-term investments at end of period $ 12,718 $ 12,080 ===============================================================================================
See Accompanying Notes to the Consolidated Financial Statements. 4 TERRA INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY SIX MONTHS ENDED June 30, 2002 AND 2001 (in thousands) (unaudited)
Accumulated Other Capital Paid-In Comprehensive Retained Stock Capital Loss Deficit Total - ------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 2002 $ 128,363 $ 554,850 $ (78,470) $ (103,964) $ 500,779 Comprehensive loss: Net loss --- --- --- (223,550) (223,550) Foreign currency translation adjustment --- --- 13,091 --- 13,091 Change in fair value of derivatives, net of taxes of $4,155 --- --- 6,602 --- 6,602 ------------ Comprehensive loss (203,857) Exercise of stock options 289 314 --- --- 603 - ------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 2002 $ 128,652 $ 555,164 $ (58,777) $ (327,514) $ 297,525 ========================================================================================================================= Accumulated Other Capital Paid-In Comprehensive Retained Stock Capital Loss Deficit Total - ------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 2001 $ 128,283 $ 554,750 $ (48,115) $ (24,121) $ 610,797 Comprehensive loss: Net loss --- --- --- (26,825) (26,825) Foreign currency translation adjustment --- --- (18,844) --- (18,844) Cumulative effect of change in accounting for derivatives, net of taxes of $10,990 --- --- 20,410 --- 20,410 Change in fair value of derivatives, net of taxes of $4,886 --- --- (27,738) --- (27,738) ------------ Comprehensive loss (52,997) Exercise of stock options 73 104 --- --- 177 - ------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 2001 $ 128,356 $ 554,854 $ (74,287) $ (50,946) $ 557,977 =========================================================================================================================
See Accompanying Notes to the Consolidated Financial Statements. 5 TERRA INDUSTRIES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. The accompanying unaudited consolidated financial statements and notes thereto contain all adjustments necessary, in the opinion of management, to summarize fairly the financial position of Terra Industries Inc. and all majority-owned subsidiaries ("Terra") and the results of Terra's operations for the periods presented. Because of the seasonal nature of Terra's operations and effects of weather-related conditions in several of its marketing areas, results of any interim reporting period should not be considered as indicative of results for a full year. These statements should be read in conjunction with Terra's 2001 Annual Report to Stockholders. Certain reclassifications have been made to prior years' financial statements to conform with current year presentation. Basic earning (loss) 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. Inventories consisted of the following: June 30, December 31, June 30, (in thousands) 2002 2001 2001 ---------------------------------------------------------------------------- Raw materials $ 20,425 $ 27,904 $ 27,397 Supplies 27,240 21,471 21,534 Finished goods 44,321 60,652 107,588 ---------------------------------------------------------------------------- Total $ 91,986 $ 110,027 $ 156,519 ============================================================================ The components of accumulated other comprehensive loss at June 30, 2002 consisted of foreign currency translation adjustment, derivatives (net of taxes) and minimum pension liability (net of taxes) in the amounts of $50.0 million, $(2.1) million and $10.9 million, respectively. At June 30, 2001, accumulated other comprehensive loss consisted of foreign currency translation adjustment and derivatives (net of taxes) in the amounts of $67.0 million and $7.3 million, respectively. 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. Realized gains and losses from hedging activities and premiums paid for option contracts are deferred and recognized in the month in which the hedged transactions closed. Swaps, options and other derivative instruments that do not qualify for hedge accounting treatment are marked to market each accounting period. Costs associated with settlement of natural gas purchase contracts and costs for shipping and handling are included in cost of sales. In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("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. 6 2. On July 13, 2001, a British court found Terra Nitrogen (U.K.) Ltd. 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 (Pounds)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 is pursuing Terra's rights against these parties, but there will be no income recognition for those rights until settlements are finalized. Terra is involved in various other legal actions and claims, including environmental matters, arising from the normal course of business. While it is not feasible to predict with certainty the final outcome of these proceedings, management does not believe that these matters, or the U.K. benzene claims, will have a material adverse effect on the results of operations, financial position or net cash flows. 3. Natural gas is the principal raw material used in Terra's production of nitrogen products and methanol. Natural gas prices are volatile and we manage this volatility through the use of derivative commodity instruments. Terra's normal policy is to hedge 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, provided that such arrangements would not result in costs greater than expected selling prices for our finished products. The financial derivatives are traded in months forward and settlement dates are scheduled to coincide with gas purchases during those future periods. These contracts reference physical natural gas prices or appropriate NYMEX futures contract prices. Contract prices are frequently based on prices at the most common and financially liquid location of reference for financial derivatives related to natural gas. However, natural gas supplies for Terra's facilities are purchased for each plant at locations other than reference points, 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. Terra has entered into forward pricing positions for a portion of its natural gas requirements for the remainder of 2002 and part of 2003, consistent with its policy. As a result of its policies, Terra has reduced the potential adverse financial impact of natural gas price increases during the forward pricing period, but conversely, if natural gas prices were to fall, Terra will incur higher costs. Contracts were in place at June 30, 2002 to cover 14% of natural gas requirements for the succeeding twelve months. The June 30, 2002 contracts covered 13% of Terra's expected North American natural gas requirements and 25% of its expected U.K. natural gas requirements. We also use basis swaps to manage some of the basis risk. Unrealized gains from forward pricing positions in North America totaled $0.5 million as of June 30, 2002. In addition, Terra had contracts which would reduce, assuming no decrease in forward natural gas prices at June 30, 2002, the purchase price of about 7 percent of its next 12 months' natural gas needs by $3.2 million. The amount ultimately recognized by Terra will be dependent on published prices in effect at the time of settlement. Terra also had purchase commitments for natural gas in the U.K. at prices $1.7 million lower than June 30, 2002 forward markets. Terra also had $0.4 million of realized gains on closed North America contracts relating to future periods that have been deferred to the respective period. 7 On June 30, 2002, the fair value of derivatives resulted in a $5.3 million increase to current assets, a $0.4 million reduction to current liabilities, a $2.2 million increase in long-term liabilities and a $3.5 million increase, before deferred taxes of $1.4 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. For the six months ended June 30, 2002, Terra recognized gains in cost of sales of $4.3 million on closed forward contracts and contracts de-designated as hedges from the date of de-designation. This was offset by recognized losses in cost of sales of $4.2 million on derivative instruments that do not qualify for hedge accounting treatment being marked to market. 4. Terra classifies its continuing operations into two business segments: nitrogen products and methanol. The nitrogen products business produces and distributes ammonia, urea, nitrogen solutions and ammonium nitrate to farm distributors and industrial users. The methanol business manufactures and distributes methanol which is used in the production of a variety of chemical derivatives and in the production of methyl tertiary butyl ether (MTBE), an oxygenate and an octane enhancer for gasoline. Terra does not allocate interest, income taxes or infrequent items to continuing business segments. Included in Other are general corporate activities not attributable to a specific industry segment. The following summarizes operating results by business segment:
Three Months Ended June 30 Six Months Ended June 30 --------------------------- ---------------------------- (in thousands) 2002 2001 2002 2001 - --------------------------------------------------------------------------------------------------- Revenues - Nitrogen Products $ 257,663 $ 251,620 $ 442,650 $ 451,841 - Methanol 41,853 69,364 70,156 113,011 - Other (18) (189) 252 520 - --------------------------------------------------------------------------------------------------- Total revenues $ 299,498 $ 320,795 $ 513,058 $ 565,372 =================================================================================================== Income (loss) from operations - Nitrogen Products $ 2,204 $ (18,520) $ 2,870 $ (13,848) - Methanol (391) 1,034 (2,914) (973) - Other (1,223) 80 (734) 765 - --------------------------------------------------------------------------------------------------- Total income (loss) from operations $ 590 $ (17,406) $ (778) $ (14,056) ===================================================================================================
5. Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," Terra determined that $206.0 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 is reported as a change in accounting principle during the 2002 first quarter. 8 A reconciliation of the historical impact of the change in accounting principle to earnings per share follows:
Three Months Ended June 30 Six Months Ended June 30 --------------------------- ---------------------------- (in thousands) 2002 2001 2002 2001 - ---------------------------------------------------------------------------------------------------------- Reported net loss $ (8,485) $ (21,586) $ (223,550) $ (26,825) Goodwill amortization, net of taxes --- 4,716 --- 9,416 - ---------------------------------------------------------------------------------------------------------- Adjusted net loss $ (8,485) $ (17,409) $ (223,500) $ (16,870) ========================================================================================================== Reported basic and diluted loss per share $ (0.11) $ (0.29) $ (2.97) $ (0.36) Goodwill amortization, net of taxes --- .05 --- .13 - ---------------------------------------------------------------------------------------------------------- Adjusted basic and diluted loss per share $ (0.11) $ (0.24) $ (2.97) $ (0.23) ==========================================================================================================
6. 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 for June 30, 2002 and 2001 are presented below for purposes of complying with the reporting requirements of the Guarantor Subsidiaries. 9 Condensed Consolidating Statement of Financial Position as of June 30, 2002:
Guarantor Non-Guarantor (in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated - ---------------------------------------------------------------------------------------------------------------------------- Assets Cash $ --- $ --- $ --- $ 78,133 $ (65,415) $ 12,718 Accounts Receivable --- 1,019 37,840 66,439 --- 105,298 Inventories --- --- 27,549 64,437 --- 91,986 Other current assets 8,521 --- 5,782 11,016 (2,639) 22,680 - ---------------------------------------------------------------------------------------------------------------------------- Total current assets 8,521 1,019 71,171 220,025 (68,054) 232,682 - ---------------------------------------------------------------------------------------------------------------------------- Property, plant and equipment, net --- --- 417,330 389,970 (5,000) 802,300 Investments in and advanced to (from) affiliates 649,742 431,680 1,193,110 113,850 (2,388,382) --- Other assets 698 15,173 5,640 25,806 --- 47,317 - ---------------------------------------------------------------------------------------------------------------------------- Total assets $ 658,961 $ 447,872 $ 1,687,251 $ 749,651 $ (2,461,436) $ 1,082,299 ============================================================================================================================ Liabilities Debt due within one year $ --- $ --- $ 82 $ 53 $ --- $ 135 Accounts payable --- 25,951 68,285 40,129 (68,056) 66,309 Accrued and other liabilities 5,639 6,002 16,907 3,817 4,089 36,454 - ---------------------------------------------------------------------------------------------------------------------------- Total current liabilities 5,639 31,953 85,274 43,999 (63,967) 102,898 - ---------------------------------------------------------------------------------------------------------------------------- Long-term debt 200,000 200,000 270 161 1 400,432 Deferred income taxes 115,481 19,802 (7,257) (8,682) (4,087) 115,257 Other liabilities 40,316 13,330 1,909 (10,179) --- 65,734 Minority interest --- 19,649 80,804 --- --- 100,453 - ---------------------------------------------------------------------------------------------------------------------------- Total liabilities 361,436 284,734 161,000 45,657 (68,053) 784,447 - ---------------------------------------------------------------------------------------------------------------------------- Stockholders' Equity Common stock 128,652 --- 73 49,709 (49,782) 128,652 Paid in capital 555,164 150,218 1,656,742 899,962 (2,706,922) 555,164 Accumulated other comprehensive loss (58,777) (58,777) --- (22,473) 81,250 (58,777) Retained earnings (deficit) (327,514) 71,697 (130,564) (223,204) 282,071 (327,514) - ---------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 297,525 163,138 1,526,251 703,994 (2,393,383) 297,525 - ---------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders equity $ 658,961 $ 447,872 $ 1,687,251 $ 749,651 $ (2,461,436) $ 1,082,299 ============================================================================================================================
10 Condensed Consolidating Statement of Operations for the six months ended June 30, 2002:
Guarantor Non-Guarantor (in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated - ---------------------------------------------------------------------------------------------------------------------------- Revenues Net sales $ --- $ --- $ 182,476 $ 325,653 $ 4,677 $ 512,806 Other income, net --- --- 1,415 3,516 (4,679) 252 - ---------------------------------------------------------------------------------------------------------------------------- --- --- 183,891 329,169 (2) 513,058 - ---------------------------------------------------------------------------------------------------------------------------- Cost and Expenses Cost of sales --- --- 187,800 308,837 (1,283) 495,354 Selling, general and administrative expenses 1,501 (498) 12,118 4,732 629 18,482 Equity in the (earnings) loss of subsidiaries 223,153 210,251 (3,219) (5,862) (424,323) --- - ---------------------------------------------------------------------------------------------------------------------------- 224,654 209,753 196,699 307,707 (424,977) 513,836 - ---------------------------------------------------------------------------------------------------------------------------- Income (loss) from operations (224,654) (209,753) (12,808) 21,462 424,975 (778) Interest income 12 92 --- 56 1 161 Interest expense (10,929) (13,241) 2,772 (5,247) 1 (26,644) Minority interest --- (251) (1,034) --- --- (1,285) - ---------------------------------------------------------------------------------------------------------------------------- Income (loss) from operations before taxes and cumulative effect of change in accounting principle (235,571) (223,153) (11,070) 16,271 424,977 (28,546) Income tax (provision) benefit 12,021 --- --- (1,057) --- 10,964 - ---------------------------------------------------------------------------------------------------------------------------- Income (loss) before cumulative effect of change in accounting principle (223,550) (223,153) (11,070) 15,214 424,977 (17,582) Cumulative effect of change in accounting principle --- --- (189,971) (15,997) --- (205,968) - ---------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (223,550) $ (223,153) $ (201,041) $ (783) $ 424,977 $ (223,550) ============================================================================================================================
11 Condensed Consolidating Statement of Cash Flows for the six months ended June 30, 2002:
Guarantor Non-Guarantor (in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------------------------- Operating Activities Net income (loss) $ (223,550) $ (223,153) $ (201,041) $ (783) $ 424,977 $ (223,550) Cumulative effect of change in accounting principle --- --- 189,971 15,997 --- 205,968 Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization --- 1,217 25,354 22,049 --- 48,620 Deferred income taxes (1,437) --- (3,887) (410) 4,783 (951) Minority interest in earnings --- 251 1,034 --- --- 1,285 Equity in earnings (loss) of subsidiaries 223,153 210,251 (3,219) (5,862) (424,323) --- Change in operating assets and liabilities 1,888 (11,799) 35,369 22,367 (26,460) 21,365 Other --- --- --- --- 45 45 - ------------------------------------------------------------------------------------------------------------------------------- Net Cash Flows from Operating Activities 54 (23,233) 43,581 53,358 (20,978) 52,782 - ------------------------------------------------------------------------------------------------------------------------------- Investing Activities Purchase of property, plant and equipment --- --- (1,352) (7,658) --- (9,010) - ------------------------------------------------------------------------------------------------------------------------------- Net Cash Flows from Investing Activities --- --- (1,352) (7,658) --- (9,010) - ------------------------------------------------------------------------------------------------------------------------------- Financing Activities Principal payments on long-term debt --- (36,277) 28 214 --- (36,035) Change in investments and advances from (to) affiliates (1,230) 66,526 (59,894) 24,586 (29,988) --- Stock (repurchase) issuance - net 603 --- --- --- --- 603 Other 573 (7,016) 704 (17,112) 20,069 (2,782) - ------------------------------------------------------------------------------------------------------------------------------- Net Cash Flows from Financing Activities (54) 23,233 (59,162) 7,688 (9,919) (38,214) - ------------------------------------------------------------------------------------------------------------------------------- Effect of Foreign Exchange Rate on Cash --- --- --- --- 35 35 - ------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in Cash and Short-term Investments --- --- (16,933) 53,388 (30,862) 5,593 - ------------------------------------------------------------------------------------------------------------------------------- Cash and Short-term Investments at Beginning of Period --- --- 16,933 24,745 (34,553) 7,125 - ------------------------------------------------------------------------------------------------------------------------------- Cash and Short-term Investments At End of Period $ --- $ --- $ --- $ 78,133 $ (65,415) $ 12,718 ===============================================================================================================================
12 Condensed Consolidating Statement of Financial Position as of June 30, 2001:
Guarantor Non-Guarantor (in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------------------------- Assets Cash $ --- $ 5,008 $ 62,216 $ --- $ (55,144) $ 12,080 Accounts Receivable --- 5 52,821 63,858 --- 116,684 Inventories --- --- 49,087 107,432 --- 156,519 Other current assets (5,328) 10,167 2,938 22,800 (700) 29,877 - ------------------------------------------------------------------------------------------------------------------------------- Total current assets (5,328) 15,180 167,062 194,090 (55,844) 315,160 - ------------------------------------------------------------------------------------------------------------------------------- Property, plant and equipment, net 32 --- 458,847 402,840 (3,173) 858,546 Excess of cost over net assets of acquired businesses --- --- 198,812 16,287 --- 215,099 Investments in and advanced to (from) affiliates 1,082,662 478,964 1,253,816 262,512 (3,077,954) --- Other assets 5,042 3,854 10,987 22,084 --- 41,967 - ------------------------------------------------------------------------------------------------------------------------------- Total assets $ 1,082,408 $ 497,998 $ 2,089,524 $ 897,813 $ (3,136,971) $ 1,430,772 =============================================================================================================================== Liabilities Debt due within one year $ --- $ --- $ 47 $ 5,000 $ --- $ 5,047 Accounts payable 1 36,673 28,802 62,818 (55,144) 73,150 Accrued and other liabilities 8,140 324 21,408 18,591 (700) 47,763 - ------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 8,141 36,997 50,257 86,409 (55,844) 125,960 - ------------------------------------------------------------------------------------------------------------------------------- Long-term debt 358,755 --- 962 95,556 --- 455,273 Deferred income taxes 135,873 5,242 (1,820) (2,841) 4,440 140,894 Other liabilities 21,662 14,281 589 12,404 --- 48,936 Minority interest --- 19,939 81,793 --- --- 101,732 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities 524,431 76,459 131,781 191,528 (51,404) 872,795 - ------------------------------------------------------------------------------------------------------------------------------- Stockholders' Equity Common stock 128,356 --- 73 49,710 (49,783) 128,356 Paid in capital 554,854 150,218 1,856,742 918,888 (2,925,848) 554,854 Accumulated other comprehensive loss (74,287) (74,287) (2,729) (71,558) 148,574 (74,287) Retained earnings (deficit) (50,946) 345,608 103,657 (190,755) (258,510) (50,946) - ------------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 557,977 421,539 1,957,743 706,285 (3,085,567) 557,977 - ------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders equity $ 1,082,408 $ 497,998 $ 2,089,524 $ 897,813 $ (3,136,971) $ 1,430,772 ===============================================================================================================================
13 Condensed Consolidating Statement of Operations for the six months ended June 30, 2001:
Guarantor Non-Guarantor (in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------------------------- Revenues Net sales $ --- $ --- $ 229,346 $ 335,506 $ --- $ 564,852 Other income, net --- --- 940 (420) --- 520 - ------------------------------------------------------------------------------------------------------------------------------- --- --- 230,286 335,086 --- 565,372 - ------------------------------------------------------------------------------------------------------------------------------- Cost and Expenses Cost of sales --- --- 234,897 312,648 --- 547,545 Selling, general and administrative expenses 1,077 2,109 11,852 2,822 --- 17,860 Product claim costs --- --- --- 14,023 --- 14,023 Equity in the (earnings) loss of subsidiaries 10,678 13,532 (7,831) (1,284) (15,095) --- - ------------------------------------------------------------------------------------------------------------------------------- 11,755 15,641 238,918 328,209 (15,095) 579,428 - ------------------------------------------------------------------------------------------------------------------------------- Income (loss) from operations (11,755) (15,641) (8,632) 6,877 15,095 (14,056) Interest income 41 1,657 4,233 --- (4,056) 1,875 Interest expense (20,184) (1,072) (135) (8,488) 4,056 (25,823) Minority interest --- (62) (255) --- --- (317) - ------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (31,898) (15,118) (4,789) (1,611) 15,095 (38,321) Income tax (provision) benefit 5,073 4,440 --- 1,983 --- 11,496 - ------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (26,825) $ (10,678) $ (4,789) $ 372 $ 15,095 $ (26,825) ===============================================================================================================================
14 Condensed Consolidating Statement of Cash Flows for the six months ended June 30, 2001:
Guarantor Non-Guarantor (in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------------------------- Operating Activities Net income (loss) $ (26,825) $ (10,678) $ (4,789) $ 372 $ 15,095 $ (26,825) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization 4 1,919 30,147 26,367 --- 58,437 Deferred income taxes (14,848) (11,940) (1,820) (6,796) 24,585 (10,819) Minority interest in earnings --- 62 255 --- --- 317 Equity in earnings (loss) of subsidiaries 10,678 13,532 (7,831) (1,284) (15,095) --- Change in operating assets and liabilities 8,521 21,014 (30,232) (6,616) (84,462) (91,775) Other --- --- 1,935 7,348 --- 9,283 - ------------------------------------------------------------------------------------------------------------------------------- Net Cash Flows from Operating Activities (22,470) 13,909 (12,335) 19,391 (59,877) (61,382) - ------------------------------------------------------------------------------------------------------------------------------- Investing Activities Purchase of property, plant and equipment --- --- (2,190) (6,174) --- (8,364) Other --- --- --- (2,883) --- (2,883) - ------------------------------------------------------------------------------------------------------------------------------- Net Cash Flows from Investing Activities --- --- (2,190) (9,057) --- (11,247) - ------------------------------------------------------------------------------------------------------------------------------- Financing Activities Principal payments on long-term debt --- --- (7,965) (5,069) --- (13,034) Change in investments and advances from (to) affiliates 22,380 (85,923) 77,492 (27,861) 13,912 --- Stock issuance - net 177 --- --- --- --- 177 Distributions to minority interests --- (337) (1,691) --- --- (2,028) Repurchase of TNLP common Units --- (1,671) --- --- --- (1,671) Other 73 2,231 (2,939) 10,134 (9,499) --- - ------------------------------------------------------------------------------------------------------------------------------- Net Cash Flows from Financing Activities 22,630 (85,700) 64,897 (22,796) 4,413 (16,556) - ------------------------------------------------------------------------------------------------------------------------------- Effect of exchange rates on cash (160) (160) --- (160) 320 (160) - ------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in Cash and Short-term Investments --- (71,951) 50,372 (12,622) (55,144) (89,345) - ------------------------------------------------------------------------------------------------------------------------------- Cash and Short-term Investments at Beginning of Period --- 76,959 11,844 12,622 --- 101,425 - ------------------------------------------------------------------------------------------------------------------------------- Cash and Short-term Investments At End of Period $ --- $ 5,008 $ 62,216 $ --- $ (55,144) $ 12,080 ===============================================================================================================================
15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Critical Accounting Policies The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America for interim reporting purposes. The preparation of these financial statements requires us to make estimates and judgments that affect the amount of assets, liabilities, revenues and expenses at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. Our critical accounting policies are described below. Impairments of long-lived assets - We record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of these items. Our cash flow estimates are based on historical results adjusted to reflect our best estimate of future market and operating conditions. The net carrying value of assets not recoverable is reduced to fair value. Our estimates of fair value represent our best estimate based on industry trends and reference to market rates and transactions. Pension assets and liabilities - Pension assets and liabilities are affected by the estimated market value of plan assets, estimates of the expected return on plan assets and discount rates. Actual changes in the fair market value of plan assets and differences between the actual return on plan assets and the expected return on plan assets will affect the amount of pension expense ultimately recognized. Post-retirement benefits - Post-retirement benefits are determined on an actuarial basis and are affected by assumptions including the discount rate and expected trends in health care costs. Changes in the discount rate and differences between actual and expected health care costs will affect the recorded amount of post-retirement benefits expense ultimately recognized. 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. Revenue includes amounts paid by customers for shipping and handling. Deferred income taxes - Deferred income tax assets and liabilities are based on the differences between the financial statement carrying amounts and the tax bases as well as temporary differences resulting from differing treatment of items for tax and accounting purposes. Deferred tax assets are regularly reviewed for recoverability and a valuation allowance is established based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. If we continue to operate at a loss or are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, a valuation allowance against all or a significant portion of our deferred tax assets may be required. Inventory valuation - Inventories are stated at the lower of cost or estimated net realizable value. The average cost of inventories is determined using the first-in, first-out method. The nitrogen and methanol 16 industries are characterized by rapid change in both demand and pricing. Rapid declines in demand could result in temporary or permanent curtailment of production, while rapid declines in price could result in a lower of cost or market adjustment. RESULTS OF OPERATIONS QUARTER ENDED JUNE 30, 2002 COMPARED WITH QUARTER ENDED JUNE 30, 2001 Consolidated Results Terra reported a net loss of $8.5 million for the 2002 second quarter compared with a net loss of $21.6 million in 2001. The reduced 2002 loss was primarily related to increased operating income as the result of higher sales volumes and 2001 charges for product claim costs. Terra classifies its operations into two business segments: nitrogen products and methanol. The nitrogen products segment represents operations directly related to the wholesale sales of nitrogen products from Terra's ammonia production and upgrading facilities. The methanol segment represents wholesale sales of methanol produced by Terra's two methanol manufacturing plants. Total revenues and operating income (loss) by segment for the three-month period ended June 30, 2002 and 2001 follow:
(in thousands) 2002 2001 - --------------------------------------------------------------------------------------- REVENUES: Nitrogen Products $ 257,663 $ 251,620 Methanol 41,853 69,364 Other (18) (189) - --------------------------------------------------------------------------------------- $ 299,498 $ 320,795 ======================================================================================= OPERATING INCOME (LOSS): Nitrogen Products, before product claim costs $ 2,204 $ (4,497) Less product claim costs --- (14,023) - --------------------------------------------------------------------------------------- Net nitrogen products 2,204 (18,520) Methanol (391) 1,034 Other income - net (1,223) 80 - --------------------------------------------------------------------------------------- $ 590 $ (17,406) =======================================================================================
Nitrogen Products Volumes and prices for the six-month periods ended June 30, 2002 and 2001 follow: VOLUMES AND PRICES
2002 2001 - -------------------------------------------------------------------------------------------- Sales Average Sales Average (quantities in thousands of tons) Volumes Unit Price Volumes Unit Price - -------------------------------------------------------------------------------------------- Ammonia 452 $ 149 357 $ 221 Nitrogen solutions 1,301 73 801 124 Urea 166 119 139 147 Ammonium nitrate 208 116 115 128 - --------------------------------------------------------------------------------------------
17 Nitrogen products segment revenues increased $6.1 million to $257.7 million in the 2002 second quarter compared with $251.6 million in the 2001 second quarter. The effects of higher 2002 sales volumes were mostly offset by lower selling prices. Sales volumes in 2001 were unusually low because of production curtailments in response to natural gas costs, record levels of imported nitrogen products and reduced nitrogen fertilizer demand. The decline to selling prices from last year reduced 2002 second quarter revenues by $105.2 million primarily as the result of an higher industry-wide inventories at the start of the 2002 planting season as compared to serious supply concerns in 2001 created by North American production curtailments in response to natural gas costs. The nitrogen products segment had operating income of $2.2 million for the second quarter of 2002 compared with an operating loss of $4.5 million before product claim costs for the 2001 second quarter. The effect of lower selling prices on 2002 operating income was partly offset by higher sales volumes and lower natural gas costs. Natural gas costs decreased $55 million from the 2001 second quarter as unit costs, net of forward pricing gains and losses, were $2.86/MMBtu during the 2002 second quarter compared to $4.45/MMBtu during the same 2001 period. As a result of forward price contracts, second quarter 2002 natural gas costs for the nitrogen products segment were $6.9 million lower than spot prices. Methanol For the three months ended June 30, 2002 and 2001 the Methanol segment had revenues of $41.9 million and $69.4 million, respectively. Sales volumes decreased 9% from prior year levels and selling prices declined from $.71/gallon in 2001 to $.47/gallon in 2002. The methanol segment had an operating loss of $0.4 million for the 2002 second quarter compared to operating income of $1.0 million for the 2001 second quarter. The decrease to operating income was due to lower prices and volumes. These factors were partially offset by lower natural gas costs, which net of forward pricing gains and losses, were $3.07/MMBtu during the 2002 second quarter compared to $4.83/MMBtu during the 2001 period. As a result of forward pricing contracts, second quarter 2002 natural gas costs for the methanol were $2.1 million lower than spot prices. Other Income - Net Terra had other operating losses of $1.2 million in the 2002 second quarter compared to $0.1 million operating income in the 2001 second quarter. The increase to expenses relate primarily to fees associated with credit agreement amendments and legal expenses related to discontinued operations. Product Claim Costs During the 2001 second quarter, and based on the finding of a British court, Terra recorded a $14 million charge to reflect the estimated value of claims (plus interest and attorney fees) associated with recalls of carbonated beverages containing carbon dioxide tainted with benzene. Terra's management believes it has recourse for these claims against its insurer and the previous owner of Terra's U.K. operations. Management is pursuing Terra's rights against these parties, but there will be no income recognition for those rights until settlements are finalized. 18 Interest Expense - Net Interest expense, net of interest income, totaled $13.2 million during the 2002 second quarter compared with $13.1 million for the prior year period. Minority Interest Minority interest represents third-party interests in the earnings of the publicly held common units of Terra Nitrogen Company, L.P. (TNCLP). Minority interest charges of $0.7 million were recorded for the 2002 second quarter as the result of TNCLP income, which were included in their entirety in consolidated operating results. The increased charge as compared to the 2001 second quarter reflected higher nitrogen earnings for TNCLP. Income Taxes Income taxes for the second quarter 2002 were recorded at an effective tax rate of 40%, Terra's estimated annual effective tax rate. SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2001 Consolidated Results Terra reported a net loss before cumulative effect of change in accounting principle of $17.6 million for the six months ended June 30, 2002 with a net loss of $26.8 million in 2001. The reduction in the 2002 loss was primarily related to higher operating income as the result of lower natural gas costs, higher sales volumes, and 2001 product claim costs, partially offset by lower product prices. Terra classifies its operations into two business segments: nitrogen products and methanol. The nitrogen products segment represents operations directly related to the wholesale sales of nitrogen products from Terra's ammonia production and upgrading facilities. The methanol segment represents wholesale sales of methanol produced by Terra's two methanol manufacturing plants. Total revenues and operating income (loss) by segment for the six-month periods ended June 30, 2002 and 2001 follows:
(in thousands) 2002 2001 - --------------------------------------------------------------------------------------- REVENUES: Nitrogen Products $ 442,650 $ 451,841 Methanol 70,156 113,011 Other 252 520 - --------------------------------------------------------------------------------------- $ 513,058 $ 565,372 ======================================================================================= OPERATING INCOME (LOSS): Nitrogen Products, before product claim costs $ 2,870 $ 175 Less product claim costs --- (14,023) - --------------------------------------------------------------------------------------- Net nitrogen products 2,870 (13,848) Methanol (2,914) (973) Other income - net (734) 765 - --------------------------------------------------------------------------------------- $ (778) $ (14,056) =======================================================================================
19 Nitrogen Products Volumes and prices for the six-month periods ended June 30, 2002 and 2001 follow: VOLUMES AND PRICES
2002 2001 - ---------------------------------------------------------------------------------------------- Sales Average Sales Average (quantities in thousands of tons) Volumes Unit Price Volumes Unit Price - ---------------------------------------------------------------------------------------------- Ammonia 793 $ 142 540 $ 234 Nitrogen solutions 1,937 71 1,335 129 Urea 344 113 229 166 Ammonium nitrate 451 119 233 135 - ----------------------------------------------------------------------------------------------
Nitrogen products segment revenues declined $9.1 million to $442.7 million in the 2002 first half compared with $451.8 million in the 2001 first half. Selling prices declined $143 million as the result of increased nitrogen fertilizer supplies in contrast to the previous year when high natural gas costs resulted in industry-wide production curtailments leading up to the 2001 planting season. Most of the revenue shortfall from lower sales prices was offset by higher 2002 volumes as compared to last year's first half. Sales volumes in 2001 were depressed due to lower production rates, reduced demand in response to high prices and increased competition from imports. The nitrogen products segment had operating income of $2.9 million for the first half of 2002 compared with operating income of $0.2 million before product claim costs for the 2001 first half. The increase in operating income was primarily related to lower natural gas costs and higher selling volumes, offset in part by lower sales prices. Natural gas costs declined almost $159 million over the 2001 first half as unit costs, net of forward pricing gains and losses, increased to $2.79/MMBtu, during the 2002 first half. As a result of forward price contracts, first half 2002 natural gas costs for the nitrogen products segment were $4.3 million lower than spot prices as the result of forward price contracts. Methanol For the six months ended June 30, 2002 and 2001 the methanol segment had revenues of $70 million and $113.0 million, respectively. Sales volumes increased 10% from prior year levels, but selling prices declined from $.72/gallon in 2001 to $.41/gallon in 2002. The methanol segment generated a $2.9 million operating loss in the 2002 first half compared to a $1.0 million operating loss in the 2001 first half. The higher operating loss reflects lower selling prices that were only partly offset by lower costs and increased volumes. The major cost decrease was to natural gas costs which, net of forward pricing gains and losses, decreased to $2.80/MMBtu, during the 2002 first half compared to $5.06/MMBtu during the 2001 period. First half 2002 natural gas costs were $0.7 million lower than spot prices as a result of forward pricing contracts. Product Claim Costs Based on the finding of British court, during the 2001 first half Terra recorded a $14 million charge to reflect the estimated value of claims (plus interest and attorney fees) associated with recalls of carbonated beverages containing carbon dioxide tainted with benzene. Terra's management believes it has recourse for these claims against its insurer and the previous owner of Terra's U.K. operations. Management is pursuing Terra's rights against these parties, but there will be no income recognition for those rights until settlements are finalized. 20 Other Income - Net Terra had other operating losses of $0.8 million in the 2002 first half compared to $0.8 million operating income in the 2001 first half. The increase in expenses primarily related to fees associated with credit agreement amendments and legal expenses related to discontinued operations. Interest Expense - Net Interest expense, net of interest income, totaled $26.5 million during the 2001 first half compared with $23.9 million for the prior year period. The increase is attributable to the higher cost of borrowing related to the October 2001 issuance of Senior Secured Notes. Minority Interest Minority interest represents third-party interests in the earnings of the publicly held common units of Terra Nitrogen Company, L.P. (TNCLP). Minority interest charges of $1.3 million were recorded for the 2002 first half as the result of TNCLP earnings, which were included in their entirety in consolidated operating results. The increased charge as compared to the 2001 first half reflected higher nitrogen earnings for TNCLP. Income Taxes Income taxes for the first half of 2002 were recorded at an effective tax rate of 40%, Terra's estimated annual effective tax rate. 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 generated from operations in the first six months of 2002 was $52.8 million, composed of $31.4 million of cash provided from operating activities and $21.4 million of decreases to working capital balances. The decrease in working capital primarily consisted of lower accounts receivable, inventories and other current assets. 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 June 30, 2002, we had no outstanding revolving credit borrowings and $19.0 million in outstanding letters of credit, resulting in remaining borrowing availability of approximately $108 million under the facility. 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 June, 2002 our credit facility was amended to remove the required minimum level of earnings before interest, income taxes, depreciation, amortization and other non-cash items ("EBITDA") as long as our borrowing availability is $60 million or more. If our borrowing availability falls below $60 million after December 31, 2002, we are required to have achieved minimum EBITDA of $60 million during the most recent four quarters. Prior to December 31, 2002, a reduced EBITDA requirement is in effect, which is $45 million for the four quarters ending June 30, 2002 and $50 million for the four quarters ending September 30, 2002. 21 During the first half of 2002 and 2001, we funded plant and equipment purchases of $9 million and $8.4 million, respectively, primarily for replacement or stay-in-business capital needs. We expect 2002 plant and equipment purchases to approximate $25 million consisting primarily of the expenditures for routine replacement of equipment at manufacturing facilities. 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 common units during the first quarter of 2001 at a cost of $1.7 million. Additional purchases of TNCLP common units are restricted under the terms of our revolving credit agreement as described therein. During the first six months of 2001 we distributed $2.0 million to the minority TNCLP common unitholders. TNCLP distributions are based on "Available Cash" (as defined in the Partnership Agreement). On July 22, 2002, the Partnership declared a $3.8 million distribution ($0.20 per common unit) payable August 26 to record holders as of August 5, 2002. Cash balances at June 30, 2002 were $12.7 million, all of which is unrestricted. POTENTIAL CHANGE OF CONTROL Anglo American plc, through its wholly-owned subsidiaries, owns 49.1% of Terra Industries' outstanding shares. Anglo American has made public its intention to dispose of its interest in Terra Industries with the timing based on market and other conditions. 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 Terra's most recent Form 10-K. 22 Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1340 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K Form 8-K dated June 28, 2002, announcing amendment of the Company's bank credit facility maturing on June 30, 2005. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TERRA INDUSTRIES INC. Date: August 8, 2002 /s/ Francis G. Meyer ------------------------------------------ Francis G. Meyer Senior Vice President and Chief Financial Officer and a duly authorized signatory 23 EX-99.1 3 dex991.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1340 Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Terra Industries Inc. (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "report"), the undersigned Chief Executive Officer and Chief Financial Officer of the Company hereby certify, pursuant to 18 U.S.C. (S)1350, as adopted pursuant to (S)906 of the Sarbanes-Oxley Act of 2002 that based on their best knowledge: 1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and 2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report. /s/ MICHAEL L. BENNETT - ----------------------------------------------- Michael L. Bennett, Chief Executive Officer /s/ FRANCIS G. MEYER - ----------------------------------------------- Francis G. Meyer, Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----