As filed with the Securities and Exchange Commission on July 26, 2005
Registration No. 333-124949
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 3
to
UNDER
THE SECURITIES ACT OF 1933
CF Industries Holdings, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State of Incorporation) |
2870
(Primary Standard Industrial Classification Code Number) |
20-2697511
(I.R.S. Employer Identification No.) |
One Salem Lake Drive
Long Grove, IL 60047
(847) 438-9500
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Douglas C. Barnard
Vice President, General Counsel, and Secretary
CF Industries Holdings, Inc.
One Salem Lake Drive
Long Grove, IL 60047
(847) 438-9500
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to: | ||
Brian W. Duwe
Skadden, Arps, Slate, Meagher & Flom LLP 333 West Wacker Drive Chicago, IL 60606 (312) 407-0700 |
Richard D. Truesdell, Jr.
Davis Polk & Wardwell 450 Lexington Avenue New York, NY 10017 (212) 450-4000 |
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement is declared effective.
If any of the securities being registered on this form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / /
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. / /
CALCULATION OF REGISTRATION FEE
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||||||||
Title of Each Class of
Securities to be Registered |
Amount to be
Registered |
Proposed Maximum Offering Price
per Share |
Proposed Maximum
Aggregate Offering Price(1)(2) |
Amount of
Registration Fee(3) |
||||
---|---|---|---|---|---|---|---|---|
|
||||||||
Common stock, par value $0.01 per share (including rights to acquire Series A junior participating preferred stock pursuant to our rights plan) | 47,437,500 | $17 | $806,437,500 | $94,918 | ||||
|
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
PROSPECTUS (Subject to Completion)
Issued July 26, 2005
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
41,250,000 Shares
CF Industries Holdings, Inc.
COMMON STOCK
CF Industries Holdings, Inc. is offering 41,250,000 shares of its common stock. We intend to use our net proceeds from this offering to make payments to the existing owners of CF Industries, Inc. in connection with a reorganization transaction in which CF Industries, Inc. will become our wholly-owned subsidiary. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price will be between $15.00 and $17.00 per share.
The common stock has been approved for listing, subject to official notice of issuance, on the New York Stock Exchange under the symbol "CF."
Investing in our common stock involves risks. See "Risk Factors" beginning on page 11.
PRICE $ A SHARE
|
Price to
Public |
Underwriting
Discounts and Commissions |
Proceeds to Us
|
|||
---|---|---|---|---|---|---|
Per Share | $ | $ | $ | |||
Total | $ | $ | $ |
We have granted the underwriters the right to purchase up to an additional 6,187,500 shares to cover over-allotments. We intend to use the net proceeds from any shares sold pursuant to the underwriters' over-allotment option to make additional payments to the existing owners of CF Industries, Inc. in connection with the reorganization transaction referred to above.
The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on , 2005.
MORGAN STANLEY | JPMORGAN |
BANC OF AMERICA SECURITIES LLC
CREDIT SUISSE FIRST BOSTON
HARRIS NESBITT
ABN AMRO ROTHSCHILD LLC | CIBC WORLD MARKETS |
, 2005
|
Page
|
|
---|---|---|
Prospectus Summary | 1 | |
Risk Factors | 11 | |
Special Note Regarding Forward-Looking Statements | 22 | |
Market and Industry Data and Forecasts | 23 | |
The Reorganization Transaction | 24 | |
Use of Proceeds | 26 | |
Dividend Policy | 26 | |
Capitalization | 27 | |
Dilution | 29 | |
Selected Historical Financial and Operating Data | 31 | |
Management's Discussion and Analysis of Financial Condition and Results of Operations | 34 | |
Fertilizer Industry Overview | 59 | |
Business | 67 | |
Management | 84 | |
Certain Relationships and Related Party Transactions | 94 | |
Principal Stockholders | 98 | |
Description of Certain Indebtedness | 100 | |
Description of Capital Stock | 102 | |
Shares Eligible for Future Sale | 109 | |
Material U.S. Federal Income Tax Considerations for Non-U.S. Holders | 112 | |
Underwriters | 116 | |
Legal Matters | 121 | |
Experts | 121 | |
Where You Can Find Additional Information | 121 | |
Index to Consolidated Financial Statements | F-1 |
You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is current as of the date of this prospectus.
Until , 2005 (25 days after the commencement of this offering), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
This summary highlights information contained elsewhere in this prospectus. It is not complete and may not contain all the information that may be important to you. You should carefully read the entire prospectus, including the "Risk Factors" and the financial statements and notes to those statements contained elsewhere in this prospectus, before making an investment decision.
CF Industries Holdings, Inc. is a new company formed to hold the existing businesses of CF Industries, Inc. Concurrent with the consummation of this offering, CF Industries, Inc. will become a wholly-owned subsidiary of CF Industries Holdings, Inc. in a merger transaction we refer to as the "Reorganization Transaction."
In this prospectus, all references to "CF Holdings," "the company," "we," "us" and "our" refer to CF Industries Holdings, Inc. and its subsidiaries, including CF Industries, Inc., after giving effect to the Reorganization Transaction, except where the context makes clear that the reference is only to CF Holdings itself and not its subsidiaries. In this prospectus, all references to "CF Industries" refer to CF Industries, Inc. and its subsidiaries prior to giving effect to the Reorganization Transaction, except where the context makes clear that the reference is only to CF Industries itself and not its subsidiaries.
In this prospectus, all references to "our owners" or the "owners of CF Industries" refer to the eight stockholders of CF Industries prior to the consummation of this offering, and all references to our "core market" refer to the states of Illinois, Indiana, Iowa, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota and Wisconsin.
We are one of the largest manufacturers and distributors of nitrogen and phosphate fertilizer products in North America. Our operations are organized into two business segments: the nitrogen fertilizer business and the phosphate fertilizer business. Our principal products in the nitrogen fertilizer business are ammonia, urea and urea ammonium nitrate solution, or UAN. Our principal products in the phosphate fertilizer business are diammonium phosphate, or DAP, and monoammonium phosphate, or MAP. For the twelve months ended June 30, 2004, we supplied approximately 22% of the nitrogen and approximately 14% of the phosphate used in agricultural fertilizer applications in the United States. Our core market and distribution facilities are concentrated in the midwestern U.S. grain-producing states.
Our principal assets include:
For the year ended December 31, 2004, we sold 6.6 million tons of nitrogen fertilizers and 1.9 million tons of phosphate fertilizers, generating net sales of $1.7 billion, net earnings plus interestnet, income tax provision (benefit) and depreciation, depletion and amortization, or EBITDA, of $233.5 million and net earnings of $67.7 million. For the twelve months ended June 30, 2005, we sold 6.9 million tons of
nitrogen fertilizers and 2.0 million tons of phosphate fertilizers, generating net sales of $1.9 billion, EBITDA of $277.3 million and net earnings of $97.6 million.
Company History
We were founded in 1946 as a fertilizer brokerage operation by a group of regional agricultural cooperatives seeking to pool their purchasing power. During the 1960s, we expanded our distribution capabilities and diversified into fertilizer manufacturing through the acquisition of several existing plants and facilities. During the 1970s and again during the 1990s, we expanded our production and distribution capabilities significantly, spending approximately $1 billion in each of these decades.
Through the end of 2002, we operated as a traditional supply cooperative. Our focus was on providing our owners with an assured supply of fertilizer. Typically, over 80% of our annual sales volume was to our owners. Though important, financial performance was subordinate to our mandated supply objective.
In 2002, we reassessed our corporate mission and adopted a new business model that established financial performance, rather than assured supply to our owners, as our principal objective. A critical aspect of our new business model is a more economically driven approach to the marketplace. We now pursue markets and customers and make pricing decisions with a primary focus on enhancing our financial performance. One result of this new approach has been a shift in our customer mix. In 2004, approximately 41% of our sales volume was to unaffiliated customers, more than double the percentage of our sales volume to this group in 2002.
Concurrent with our new approach to the marketplace, we have been implementing other measures to improve the performance of our business. For example, we are focused on improving asset utilization, lowering our cost profile, and reducing our exposure to volatility in raw material and fertilizer prices. These measures, combined with our new approach to the marketplace and a leadership change in mid-2003, positioned us to capitalize on the improving industry conditions that began in the latter half of 2003. Conversion to a public entity through this offering will complete our transition and significantly enhance our competitive position for the future.
Industry Overview and Trends
Fertilizers serve an important role in global agriculture by providing vital nutrients that help increase both the yield and the quality of crops. The three main nutrients required for plant growth are nitrogen, phosphate and potash. According to the International Fertilizer Association, or IFA, global agricultural consumption for the three principal crop nutrients in 2004 was approximately 162 million tons95 million tons of nitrogen (59%), 39 million tons of phosphate (24%) and 28 million tons of potash (17%).
The global fertilizer industry is highly cyclical and capital intensive. The performance of the fertilizer industry is driven by several key factors, including population growth, changes in dietary habits, planted acreage and application rates, available capacity and operating rates, raw material costs, government policies and global trade.
Natural gas is the principal raw material used to produce nitrogen fertilizers and can constitute a substantial majority of the cash cost to produce such fertilizer products in North America. High natural gas prices during the past few years have led to a sharp increase in the cost of producing nitrogen fertilizers and a significant decline in capacity in North America. This decline in capacity, together with a general tightening in the global supply/demand balance, has contributed to higher operating rates and improved fertilizer pricing for North American producers since the middle of 2003.
Phosphate-based fertilizers are produced from phosphate rock, sulfuric acid and ammonia. The principal phosphate fertilizer-producing regions are those with plentiful supplies of phosphate rock. The United States has substantial phosphate rock reserves and is the world's largest phosphate fertilizer
2
producer. In 2004, the United States accounted for approximately 27% of global phosphate fertilizer capacity and exported approximately 45% of its output.
According to Fertecon, a fertilizer industry consultant, global agricultural demand for nitrogen and phosphate fertilizers is expected to grow from 2004 to 2009 at annual rates of 2.2% and 2.7%, respectively.
Competitive Strengths
3
shipment. Our customers' favorable response to this program resulted in approximately 54% of our nitrogen fertilizer sales volume being sold under this program during 2004.
Our Business Strategy
4
The Reorganization Transaction
Concurrent with the closing of this offering, our owners will consummate the Reorganization Transaction in which CF Industries will become our wholly-owned subsidiary.
Pursuant to the Reorganization Transaction, the owners of CF Industries will receive shares of our common stock and cash in exchange for their outstanding equity interests in CF Industries. Assuming an initial public offering price of $16.00 per share, the mid-point of the estimated price range shown on the cover page of this prospectus, the owners of CF Industries will receive initially, in the aggregate, 7,562,500 shares of our common stock and $622.1 million, which represents the estimated proceeds to us from this offering, after deducting underwriting discounts and commissions.
The cash payment and the number of shares issued to the owners of CF Industries will then be adjusted depending on whether the underwriters exercise their over-allotment option to purchase up to 6,187,500 shares of common stock from us. If the over-allotment option is not exercised by the underwriters, upon completion of this offering, the owners of CF Industries will own 13,750,000 shares of our common stock, representing 25% of our outstanding common stock. If the over-allotment option is exercised in full by the underwriters, upon completion of this offering, the owners of CF Industries will own 7,562,500 shares of our common stock, representing approximately 14% of our outstanding common stock.
Net operating loss carryforwards. As of June 30, 2005, we had total net operating loss carryforwards of $279.2 million. A gross deferred tax asset of $111.5 million related to these net operating loss carryforwards is included in deferred income taxes on our June 30, 2005 balance sheet. Because our net operating loss carryforwards were generated from business conducted with our owners when we were a cooperative for tax purposes, there is substantial uncertainty under existing tax law whether any tax benefits from the related deferred tax asset will be realizable after the completion of this offering. As a result of this uncertainty, we will establish a valuation allowance equal to 100% of any of the deferred tax asset remaining after the consummation of this offering relating to the net operating loss carryforwards. We will record a non-cash charge to "Income Tax Expense" in the amount of the valuation allowance in the quarter in which the offering is completed.
We intend to enter into a net operating loss agreement, or NOL Agreement, with the owners of CF Industries in connection with the Reorganization Transaction relating to the treatment of the net operating loss carryforwards. Under the NOL Agreement, in the event that it is finally determined that our net operating loss carryforwards can be used after we are no longer a cooperative, we will pay the owners of CF Industries an amount equal to the federal and state income taxes actually saved after the completion of this offering as a result of the utilization of net operating loss carryforwards related to our former cooperative status. These payments, if any, will be made only after it has been finally determined that utilization of the net operating losses has provided us with actual tax savings. The NOL Agreement will not require that we operate in a way that maximizes the use of our cooperative-related net operating loss carryforwards. Costs incurred after completion of this offering in pursuing a determination regarding the usability of these net operating loss carryforwards will be borne by the owners of CF Industries.
See "The Reorganization Transaction."
Our Corporate Information
Our principal executive offices are located outside of Chicago, Illinois at One Salem Lake Drive, Long Grove, Illinois 60047. Our main telephone number is (847) 438-9500.
5
Common stock offered | 41,250,000 shares | |
Common stock to be issued to the owners of CF Industries in the Reorganization Transaction |
|
13,750,000 shares (including 6,187,500 shares that will be issued to the owners of CF Industries in the Reorganization Transaction, assuming the underwriters do not exercise their over-allotment option) |
Common stock to be outstanding after this offering |
|
55,000,000 shares (including 6,187,500 shares that will either be sold in this offering to the extent the underwriters exercise their over-allotment option or issued to the owners of CF Industries in the Reorganization Transaction to the extent the underwriters do not exercise their over-allotment option) |
Over-allotment option |
|
6,187,500 shares |
Use of proceeds |
|
We estimate that our proceeds from this offering, after deducting underwriting discounts and commissions, will be approximately $622.1 million. We intend to pay $622.1 million to the owners of CF Industries in the Reorganization Transaction. See "Use of Proceeds." |
Proposed New York Stock Exchange symbol |
|
"CF" |
Dividend policy |
|
We intend to pay quarterly cash dividends on our common stock at an annual rate initially equal to approximately 0.5% of the price per share in this offering, commencing in the fourth quarter of 2005. The declaration and payment of future dividends will be at the discretion of our board of directors and will depend upon many factors that are described under "Dividend Policy" and elsewhere in this prospectus. |
Unless otherwise indicated, all information in this prospectus:
Investing in our common stock involves substantial risks. See "Risk Factors" beginning on page 11. You should carefully consider the information in the "Risk Factors" section and all other information included in this prospectus before investing in our common stock.
6
Summary Historical Financial and Operating Data
The following table presents summary historical financial and operating data about us. CF Holdings was formed in April 2005 to serve as a holding company for our businesses. CF Holdings has not commenced operations and has no assets or liabilities. In order to facilitate this offering, we will consummate the Reorganization Transaction in which CF Holdings will become the successor to CF Industries for accounting purposes. See "The Reorganization Transaction."
The following summary historical financial data for CF Industries as of December 31, 2003 and 2004 and for the years ended December 31, 2002, 2003 and 2004 have been derived from CF Industries' audited consolidated financial statements and related notes included elsewhere in this prospectus. The following summary historical balance sheet data for CF Industries as of December 31, 2002 have been derived from CF Industries' unaudited consolidated financial statements, which are not included in this prospectus.
The following summary historical financial data for CF Industries as of June 30, 2005 and for the six months ended June 30, 2004 and 2005 have been derived from CF Industries' unaudited consolidated financial statements and related notes included elsewhere in this prospectus. The following summary historical balance sheet data for CF Industries as of June 30, 2004 have been derived from CF Industries' unaudited consolidated financial statements, which are not included in this prospectus. In the opinion of management, such unaudited historical financial data reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the results for those periods. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year or any future period.
The summary historical financial and operating data should be read in conjunction with the information contained in "Selected Historical Financial and Operating Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and CF Industries' consolidated financial statements and related notes included elsewhere in this prospectus.
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Year ended December 31,
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Six months ended June 30,
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2002
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2003
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2004
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2004
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2005
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(in thousands, except share and per share data)
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Statement of Operations Data: | ||||||||||||||||
Net sales | $ | 1,014,071 | $ | 1,369,915 | $ | 1,650,652 | $ | 845,365 | $ | 1,085,985 | ||||||
Cost of sales | 986,295 | 1,335,508 | 1,434,545 | 744,473 | 935,075 | |||||||||||
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Gross margin | 27,776 | 34,407 | 216,107 | 100,892 | 150,910 | |||||||||||
Selling, general and administrative |
|
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37,317 |
|
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38,455 |
|
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41,830 |
|
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20,302 |
|
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25,270 |
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Other operatingnet | 9,294 | 1,557 | 25,043 | 5,035 | 2,891 | |||||||||||
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Operating earnings (loss) | (18,835 | ) | (5,605 | ) | 149,234 | 75,555 | 122,749 | |||||||||
Interest expense |
|
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23,565 |
|
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23,870 |
|
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22,696 |
|
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11,820 |
|
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10,531 |
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Interest income | (2,209 | ) | (2,260 | ) | (5,901 | ) | (1,990 | ) | (7,683 | ) | ||||||
Minority interest | 6,409 | 6,031 | 23,145 | 9,707 | 12,365 | |||||||||||
Impairment of investments in unconsolidated subsidiaries (1) | | | 1,050 | | | |||||||||||
Other non-operatingnet | (174 | ) | (676 | ) | (778 | ) | (537 | ) | (336 | ) | ||||||
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Earnings (loss) before income taxes | (46,426 | ) | (32,570 | ) | 109,022 | 56,555 | 107,872 | |||||||||
Income tax provision (benefit) |
|
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(16,600 |
) |
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(12,600 |
) |
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41,400 |
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21,477 |
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42,757 |
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Equity in earnings (loss) of unconsolidated subsidiaries | 1,706 | 1,587 | 110 | 237 | 35 | |||||||||||
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Net earnings (loss) | $ | (28,120 | ) | $ | (18,383 | ) | $ | 67,732 | $ | 35,315 | $ | 65,150 | ||||
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Pro Forma Share and Per Share Data (unaudited): (2) | ||||||||||||||||
Pro forma basic and diluted net earnings (loss) per share | $ | (0.51 | ) | $ | (0.33 | ) | $ | 1.23 | $ | 0.64 | $ | 1.18 | ||||
Pro forma weighted average shares outstandingbasic and diluted | 55,000,000 | 55,000,000 | 55,000,000 | 55,000,000 | 55,000,000 |
(footnotes on following page)
7
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Year ended December 31,
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Six months ended June 30,
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2002
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2003
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2004
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2004
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2005
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(in thousands)
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Other Financial Data: | |||||||||||||||
EBITDA (3) | $ | 84,960 | $ | 95,243 | $ | 233,543 | $ | 119,673 | $ | 163,466 | |||||
Depreciation, depletion and amortization | 108,471 | 105,014 | 108,642 | 53,562 | 53,207 | ||||||||||
Capital expenditures | 26,303 | 28,684 | 33,709 | 12,923 | 33,244 |
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Year ended December 31, |
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Six months ended June 30, |
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2002
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2003
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2004
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2004
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2005
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Selected Operating Data: | ||||||||||||||||
Average selling prices (per ton) | ||||||||||||||||
Ammonia | $ | 159 | $ | 236 | $ | 278 | $ | 275 | $ | 310 | ||||||
Urea | 120 | 172 | 205 | 195 | 242 | |||||||||||
UAN | 93 | 119 | 137 | 133 | 161 | |||||||||||
DAP | 146 | 163 | 197 | 190 | 210 | |||||||||||
MAP | 157 | 172 | 204 | 201 | 217 | |||||||||||
Sales volume (in thousand tons) | ||||||||||||||||
Ammonia | 1,435 | 1,475 | 1,438 | 841 | 887 | |||||||||||
Urea | 2,663 | 2,572 | 2,513 | 1,244 | 1,428 | |||||||||||
UAN | 1,926 | 2,228 | 2,593 | 1,339 | 1,431 | |||||||||||
DAP | 1,560 | 1,627 | 1,549 | 810 | 890 | |||||||||||
MAP | 289 | 252 | 351 | 174 | 213 | |||||||||||
Cost of natural gas (per mmBTU) | ||||||||||||||||
Donaldsonville facility | $ | 3.29 | $ | 5.20 | $ | 5.60 | $ | 5.24 | $ | 6.89 | ||||||
Medicine Hat facility | 2.64 | 4.74 | 5.10 | 5.03 | 5.84 | |||||||||||
Average daily market price of natural gas (per mmBTU) |
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Henry Hub (Louisiana) | $ | 3.35 | $ | 5.44 | $ | 5.85 | $ | 5.85 | $ | 6.67 | ||||||
AECO (Alberta) | 2.60 | 4.72 | 5.04 | 5.01 | 5.76 |
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As of December 31, |
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As of June 30, |
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Actual
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Actual
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As Adjusted
(4)
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||||||||||||||||
|
2002
|
2003
|
2004
|
2004
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2005
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2005
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(in thousands)
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Balance Sheet Data: | |||||||||||||||||||
Cash and cash equivalents | $ | 56,536 | $ | 77,146 | $ | 50,003 | $ | 40,565 | $ | 79,436 | $ | 72,836 | |||||||
Short-term investments (5) | 38,417 | 91,725 | 369,290 | 161,974 | 430,894 | 155,402 | |||||||||||||
Total assets | 1,303,532 | 1,404,879 | 1,546,971 | 1,289,632 | 1,500,811 | 1,148,824 | |||||||||||||
Net debt (6) | 271,224 | 290,654 | 51,029 | 114,449 | (130,041 | ) | (94,241 | ) | |||||||||||
Total debt | 326,205 | 293,503 | 258,821 | 284,879 | 250,305 | 4,013 | |||||||||||||
Customer advances | 39,972 | 166,022 | 211,501 | 32,109 | 129,984 | 129,984 | |||||||||||||
Stockholders' equity | 740,929 | 733,511 | 787,289 | 763,586 | 853,037 | 720,137 | (7) |
(footnotes continued on following page)
8
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Year ended December 31,
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Six months ended June 30,
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2002
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2003
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2004
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2004
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2005
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(in thousands)
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Calculation of EBITDA |
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Net earnings (loss) | $ | (28,120 | ) | $ | (18,383 | ) | $ | 67,732 | $ | 35,315 | $ | 65,150 | |||||
Interestnet (a)(b) | 21,356 | 21,610 | 16,795 | 9,830 | 2,848 | ||||||||||||
Income tax provision (benefit) | (16,600 | ) | (12,600 | ) | 41,400 | 21,477 | 42,757 | ||||||||||
Depreciation, depletion and amortization (c) | 108,471 | 105,014 | 108,642 | 53,562 | 53,207 | ||||||||||||
Financing fees (d) | (147 | ) | (398 | ) | (1,026 | ) | (511 | ) | (496 | ) | |||||||
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EBITDA | $ | 84,960 | $ | 95,243 | $ | 233,543 | $ | 119,673 | $ | 163,466 | |||||||
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(footnotes continued on following page)
9
be accrued upon completion of this offering), as described under "ManagementLong-Term Incentive Plan"; and
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As of December 31,
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As of June 30,
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Actual
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Actual
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As Adjusted
(a)
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2002
|
2003
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2004
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2004
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2005
|
2005
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(in thousands)
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Calculation of net debt | |||||||||||||||||||||
Total debt | $ | 326,205 | $ | 293,503 | $ | 258,821 | $ | 284,879 | $ | 250,305 | $ | 4,013 | |||||||||
Less cash, cash equivalents and short-term investments | 94,953 | 168,871 | 419,293 | 202,539 | 510,330 | 228,238 | |||||||||||||||
Plus customer advances | 39,972 | 166,022 | 211,501 | 32,109 | 129,984 | 129,984 | |||||||||||||||
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Net debt | $ | 271,224 | $ | 290,654 | $ | 51,029 | $ | 114,449 | $ | (130,041 | ) | $ | (94,241 | ) | |||||||
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An investment in our common stock involves risks. You should carefully consider the risks described below as well as the other information contained in this prospectus before investing in our common stock. If any of the events contemplated by the following risks actually occur, then our business, financial condition or results of operations could be materially adversely affected. As a result of these and other factors, the value of our common stock could decline, and you may lose all or part of your investment.
Risks Relating to Our Business
Our business is dependent on the price of natural gas in North America, which is both expensive and highly volatile.
Natural gas is the principal raw material used to produce nitrogen fertilizers. We use natural gas both as a chemical feedstock and as a fuel to produce ammonia, urea and UAN. Because all of our nitrogen fertilizer manufacturing facilities are located in the United States and Canada, the price of natural gas in North America directly impacts a substantial portion of our operating expenses. Expenditures on natural gas comprised approximately 61% of the total cost of our nitrogen fertilizer sales in 2004 and a substantially higher percentage of our related cash costs.
The market price for natural gas in North America is significantly higher than the price of natural gas in other major fertilizer-producing regions. For example, during 2004, natural gas prices in the United States (measured at the Henry Hub, near our Donaldsonville, Louisiana facility) averaged approximately $5.85 per mmBTU and in Canada (measured at AECO, near our joint venture's Medicine Hat, Alberta facility) averaged approximately $5.04 per mmBTU. In comparison, during 2004, natural gas prices paid by fertilizer producers are estimated to have been approximately $.90 per mmBTU in Russia and approximately $2.30 per mmBTU in the Republic of Trinidad and Tobago. Many of our competitors benefit from access to lower-priced natural gas through manufacturing facilities or interests in manufacturing facilities located in these regions or other regions with abundant supplies of natural gas.
The price of natural gas in North America is also highly volatile. During 2004, the average daily price ranged from a low of $4.99 per mmBTU during September to a high of $6.63 per mmBTU during December. The volatility of the price of natural gas in North America compounds our competitive disadvantage to some of our competitors, who, in addition to having access to lower-priced natural gas, also benefit from fixed-price natural gas contracts.
As a result of global competition in the fertilizer industry, we may not be able to pass the higher operating costs we incur due to our dependence on North American natural gas through to our customers in the form of higher product prices. Unless prices for natural gas in North America and other fertilizer-producing regions begin to converge, or we are able to reduce our dependence on North American natural gas, the relatively expensive and highly volatile cost of natural gas in North America could make it difficult for us to compete against producers from other parts of the world in certain situations, including those in which an oversupplied market or other factors exert downward pressure on product prices.
Our business is cyclical, which results in periods of industry oversupply during which our results of operations tend to be negatively impacted.
Historically, selling prices for our products have fluctuated in response to periodic changes in supply and demand conditions. Demand is affected by population growth, changes in dietary habits, and planted acreage and application rates, among other things. Supply is affected by available capacity and operating rates, raw material costs, government policies and global trade.
Periods of high demand, high capacity utilization and increasing operating margins tend to result in new plant investment and increased production, causing supply to exceed demand and prices and capacity utilization to decline. Reduced prices restrict investment in new capacity, initiating a new cycle. A
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substantial amount of new ammonia and urea capacity is expected to be added abroad in low-cost regions over the next several years. Future growth in demand for fertilizer may not be sufficient to alleviate any existing or future conditions of excess industry capacity.
During periods of industry oversupply, our results of operations tend to be affected negatively as the price at which we sell our products typically declines, resulting in reduced profit margins, lower production of our products and possible plant closures.
We have a history of losses and may incur losses in the future, which could materially and adversely affect the market price of our common stock.
We incurred net losses for five consecutive years, in 1999 through 2003, prior to earning a profit in the most recent year ended December 31, 2004. In future periods, we may not be able to sustain or increase profitability on a consistent quarterly or annual basis. Failure to maintain consistent profitability may materially and adversely affect the market price of our common stock.
Our products are global commodities, and we face intense global competition from other fertilizer producers.
We are subject to intense price competition from both domestic and foreign sources. Fertilizers are global commodities, with little or no product differentiation, and customers make their purchasing decisions principally on the basis of delivered price and to a lesser extent on customer service and product quality. We compete with a number of domestic and foreign producers, including state-owned and government-subsidized entities. Some of these competitors have greater total resources and are less dependent on earnings from fertilizer sales, which makes them less vulnerable to industry downturns and better positioned to pursue new expansion and development opportunities.
Recent consolidation in the fertilizer industry has increased the resources of several of our competitors, and we expect consolidation among fertilizer producers to continue. In light of this industry consolidation, our competitive position could suffer to the extent we are not able to expand our own resources either through investments in new or existing operations or through acquisitions, joint ventures or partnerships. In the future, we may not be able to find suitable assets to purchase or joint venture or partnership opportunities to pursue. Even if we are able to locate desirable opportunities, we may not be able to acquire desired assets or enter into desired joint ventures or partnerships on economically acceptable terms. Our inability to compete successfully could result in the loss of customers, which could adversely affect our sales and profitability.
China is the largest producer and consumer of fertilizers and has been, and is expected to continue, expanding its fertilizer production capability. This increase in capacity could adversely affect the balance between global supply and demand and may put downward pressure on global fertilizer prices, which could adversely affect our results of operations and financial condition.
We may face increased competition from Russian and Ukrainian urea, which is currently subject to antidumping duty orders that impose significant duties on urea imported into the United States from these two countries. The antidumping orders have been in place since 1987, and there has been almost no urea imported into the United States from Russia or Ukraine since that time. Russia and Ukraine currently have considerable capacity to produce urea and are the world's largest urea exporters. Producers in both countries benefit from natural gas prices that are determined by their governments and which are well below the commercial value of the natural gas, encouraging urea production and export activity.
The U.S. Department of Commerce and the U.S. International Trade Commission are currently reviewing whether the antidumping orders on urea from Russia and Ukraine should be extended for an additional five-year period. Both agencies must make affirmative determinations for the orders to be continued. In May 2005, the Department of Commerce issued an affirmative determination that
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revocation of the orders would be likely to lead to continuation or recurrence of dumping (unfair pricing) of urea by Russian and Ukrainian producers. The International Trade Commission is now considering whether revocation of the orders would be likely to lead to continuation or recurrence of injury to the U.S. urea industry. We currently expect the Commission to issue its final determination in November 2005, but in any event no later than the end of December 2005. For a number of reasons, including underutilized capacity, the attractiveness of the U.S. market and barriers to Russian and Ukrainian urea imports in other key consuming markets, we expect that if the antidumping duties are not extended, imports of Russian and Ukrainian urea into the United States are likely to increase significantly, causing our sales and margins to suffer.
Any decline in U.S. agricultural production or limitations on the use of our products for agricultural purposes could materially adversely affect the market for our products.
Conditions in the U.S. agricultural industry can significantly impact our operating results. The U.S. agricultural industry can be affected by a number of factors, including weather patterns and field conditions, current and projected grain inventories and prices, the domestic and international demand for U.S. agricultural products and U.S. and foreign policies regarding trade in agricultural products.
State and federal governmental policies, including farm subsidies and commodity support programs, may also directly or indirectly influence the number of acres planted, the mix of crops planted and the use of fertilizers for particular agricultural applications. In addition, several states are currently considering limitations on the use and application of chemical fertilizers due to concerns about the impact of these products on the environment.
Adverse weather conditions may decrease demand for our fertilizer products.
Weather conditions that delay or intermittently disrupt field work during the planting and growing season may cause agricultural customers to use different forms of nitrogen fertilizer, which may adversely affect demand for the forms that we sell. Adverse 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 purchase fertilizer from our customers.
Our inability to predict future seasonal fertilizer demand accurately could result in excess inventory, potentially at costs in excess of market value, or product shortages.
The fertilizer business is seasonal. The strongest demand for our products occurs during the spring planting season, with a second period of strong demand following the fall harvest. We and/or our customers generally build inventories during the low demand periods of the year in order to ensure timely product availability during the peak sales seasons. Seasonality is greatest for ammonia due to the limited ability of our customers and their customers to store significant quantities of this product. The seasonality of fertilizer demand results in our sales volumes and net sales being the highest during the spring and our working capital requirements being the highest just prior to the start of the spring season. Our quarterly financial results can vary significantly from one year to the next due to weather-related shifts in planting schedules and purchasing patterns.
If seasonal demand exceeds our projections, our customers may acquire products from our competitors, and our profitability will be negatively impacted. If seasonal demand is less than we expect, we will be left with excess inventory that will have to be stored (in which case our results of operations will be negatively impacted by any related storage costs) and/or liquidated (in which case the selling price may be below our production, procurement and storage costs). The risks associated with excess inventory and product shortages are particularly acute with respect to our nitrogen fertilizer business because of the
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highly volatile cost of natural gas and nitrogen fertilizer prices and the relatively brief periods during which farmers can apply nitrogen fertilizers.
Our customer base is concentrated, with our owners accounting for a substantial portion of our sales.
Prior to the completion of this offering, we have operated as a cooperative, and a substantial portion of our sales have been made to the eight regional agricultural cooperatives that own us. During 2004, our owners purchased approximately 4.5 million tons of fertilizer from us, which represented approximately 53% of our total sales volume. Our business with our owners is relatively concentrated. During 2004, two customers, GROWMARK, Inc., which is one of our owners, and Agriliance, LLC, a 50-50 joint venture between two of our other owners, made combined fertilizer purchases of approximately $688.6 million from us, representing approximately 42% of our total net sales. Under a cooperative structure, our owners benefited from purchases of our fertilizers through their ownership interest in us and our payment to them of patronage dividends in cash and/or patronage preferred stock. After the completion of this offering, our owners are anticipated to own a substantially reduced percentage of our outstanding common stock, and they will no longer be entitled to patronage benefits for purchases of fertilizers from us. As a result of their reduced ownership interest and the elimination of patronage benefits, our owners will have fewer incentives to purchase fertilizers from us after the completion of this offering. In addition, because we depend on our owners for a significant portion of our sales, we may have less flexibility than some of our competitors to diversify our customer base and seek more profitable direct sales to customers of our owners. Any substantial change in purchasing decisions by one or more of our larger owners, whether due to actions by our competitors, our actions in expanding the direct sale of fertilizers to customers of our owners or otherwise, could have a material adverse effect on our business.
A reduction in the use of the forward pricing program by our customers could increase our exposure to changes in natural gas prices and materially adversely affect our operating results, liquidity and financial condition.
In mid-2003, we instituted a forward pricing program. Through our forward pricing program, we offer our customers the opportunity to purchase product on a forward basis at prices and dates we propose. As our customers place forward nitrogen fertilizer orders with us, we effectively fix the cost of natural gas, the largest and most volatile component of our supply cost. Under our forward pricing program, customers pay a substantial portion of the sales price in advance of shipment, which has significantly increased our liquidity. During 2004, approximately 54% of our nitrogen fertilizer sales volume and approximately 14% of our phosphate fertilizer sales volume were sold under this program, and during the first six months of 2005, approximately 68% of our nitrogen fertilizer sales volume and 28% of our phosphate fertilizer sales volume were sold under this program. As of June 30, 2005, approximately 25% of our cash, cash equivalent and short-term investment balance was related to customer advances made for products ordered under this program.
Since its inception in 2003, we have sold an increasing percentage of our nitrogen fertilizers under our forward pricing program. We believe this was primarily due to our customers' desire to fix their costs and reduce their exposure to increased prices during a period of generally increasing prices for nitrogen fertilizers. We do not have experience with the forward pricing program under all market conditions, and our customers may not continue to use the forward pricing program during periods of generally decreasing or stable prices. We have relatively less experience with our forward pricing program as it applies to phosphate fertilizers.
Any reduction in the use of the forward pricing program by our customers due to changing conditions in the fertilizer market or otherwise could increase our exposure to changes in natural gas prices and materially adversely affect our operating results, liquidity and financial condition.
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Our operations involve significant risks and hazards against which we may not be fully insured.
Our operations are subject to hazards inherent in the manufacturing, transportation, storage and distribution of chemical fertilizers. These hazards include: explosions; fires; severe weather and natural disasters; train derailments, collisions, vessel groundings and other transportation and maritime incidents; leaks and ruptures involving storage tanks and pipelines; spills, discharges and releases of toxic or hazardous substances or gases; deliberate sabotage and terrorist incidents; mechanical failures; unscheduled downtime; labor difficulties and other risks. Some of these hazards can cause bodily injury and loss of life, severe damage to or destruction of property and equipment and environmental damage, and they may result in suspension of operations and the imposition of civil or criminal penalties and liabilities. For example, over the course of the past few years, we have been involved in numerous property damage and personal injury lawsuits arising out of an explosion at our Donaldsonville nitrogen fertilizer complex in 2000, in which three people died and several others were injured, as well as personal injury lawsuits arising out of a train derailment near Minot, North Dakota in 2002, in which one person died and numerous others were injured.
Our exposure to these types of risk is increased because of our reliance on a limited number of key facilities. Our nitrogen fertilizer operations are dependent on our nitrogen fertilizer complex in Donaldsonville, Louisiana and our joint venture's nitrogen fertilizer complex in Medicine Hat, Alberta. Our phosphate fertilizer operations are dependent on our phosphate mine and associated beneficiation plant in Hardee County, Florida, our phosphate fertilizer complex in Plant City, Florida and our ammonia terminal in Tampa, Florida. Any suspension of operations at any of these key facilities could adversely affect our ability to produce our products and could have a material adverse effect on our business.
We maintain property, business interruption and casualty insurance policies, but we are not fully insured against all potential hazards and risks incident to our business. If we were to incur significant liability for which we were not fully insured, it could have a material adverse effect on our business, results of operations and financial condition. We are subject to various self-retentions and deductibles under these insurance policies. As a result of market conditions, our premiums, self-retentions and deductibles for certain insurance policies can increase substantially and, in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage.
Expansion of our business may result in unanticipated adverse consequences and may be hindered by the significant resources that would be required for any such expansion.
In the future, we may seek to grow our business by investing in new or existing facilities, making acquisitions or entering into partnerships and joint ventures. Acquisitions, partnerships, joint ventures or investments may require significant managerial attention, which may be diverted from our other activities and may impair the operation of our businesses.
International acquisitions, partnerships, or joint ventures or the international expansion of our business, such as the project we are studying in the Republic of Trinidad and Tobago, could involve additional risks and uncertainties, including:
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Furthermore, any future acquisitions of businesses or facilities could entail a number of additional risks, including:
These risks of unanticipated adverse consequences from any expansion of our business through investments, acquisitions, partnerships or joint ventures are increased due to the significant capital and other resources that we may have to commit to any such expansion. We also face increased exposure to risks related to acquisitions and international operations because our experience with acquisitions and international operations is limited. As a result of these and other factors, including the general economic risk associated with the fertilizer business, we may not be able to realize our projected returns from any future acquisitions, partnerships, joint ventures or other investments.
We may not have access to the funding required for the expansion of our business or such funding may not be available to us on acceptable terms. We may finance the expansion of our business with additional indebtedness and/or by issuing additional equity securities. We could face financial risks associated with incurring additional indebtedness, such as reducing our liquidity and access to financial markets and increasing the amount of cash flow required to service such indebtedness, or associated with issuing additional stock, such as dilution of ownership and earnings.
We are subject to numerous environmental and health and safety laws and regulations, as well as potential environmental liabilities, which may require us to make substantial expenditures.
We are subject to numerous environmental and health and safety laws and regulations in the United States and Canada, including laws and regulations relating to land reclamation; the generation, treatment, storage, disposal and handling of hazardous substances and wastes; and the cleanup of hazardous substance releases. These laws include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act (RCRA), the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), the Toxic Substances Control Act and various other federal, state, provincial, local and international statutes.
As a fertilizer company working with chemicals and other hazardous substances, our business is inherently subject to spills, discharges or other releases of hazardous substances into the environment. Certain environmental laws, including CERCLA, impose joint and several liability, without regard to fault, for cleanup costs on persons who have disposed of or released hazardous substances into the environment. Given the nature of our business, we have incurred, are currently incurring, and will likely in the future periodically incur liabilities under CERCLA and other environmental cleanup laws, at our current or former facilities, adjacent or nearby third-party facilities or offsite disposal locations. The costs associated with future cleanup activities that we may be required to conduct or finance may be material. Additionally, we may become liable to third parties for damages, including personal injury and property damage, resulting from the disposal or release of hazardous substances into the environment.
Violations of environmental and health and safety laws can result in substantial penalties, court orders to install pollution-control equipment, civil and criminal sanctions, permit revocations and facility shutdowns. Environmental and health and safety laws change rapidly and have tended to become more
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stringent over time. As a result, we have not always been and may not always be in compliance with all environmental and health and safety laws and regulations. Additionally, future environmental and health and safety laws and regulations or more vigorous enforcement of current laws and regulations, whether caused by violations of environmental and health and safety laws by us or other chemical fertilizer companies or otherwise, may require us to make substantial expenditures, and our costs to comply with, or any liabilities under, these laws and regulations could have a material adverse effect on our business, financial condition and results of operations.
See "BusinessEnvironment, Health and Safety."
Our operations are dependent on numerous required permits and approvals from governmental authorities.
We hold numerous environmental, mining and other governmental permits and approvals authorizing operations at each of our facilities. Expansion of our operations also is predicated upon securing the necessary environmental or other permits or approvals. A decision by a government agency to deny or delay issuing a new or renewed material permit or approval, or to revoke or substantially modify an existing permit or approval, could have a material adverse effect on our ability to continue operations at the affected facility and on our business, financial condition and results of operations.
In certain cases, as a condition to procuring such permits and approvals, we may be required to comply with financial assurance regulatory requirements. The purpose of these requirements is to assure the government that sufficient company funds will be available for the ultimate closure, post-closure care and/or reclamation at our facilities. Currently, these financial assurance requirements can be satisfied without the need for any expenditure of corporate funds if our financial statements meet certain criteria, referred to as the financial tests. However, pursuant to a recent amendment to Florida's regulations governing financial assurance related to the closure of phosphogypsum stacks, we intend to establish a trust fund to meet such obligations to take advantage of a "Safe Harbor" provision of the new regulations. Additionally, the Florida legislature recently passed a bill that would require mining companies to demonstrate financial responsibility for wetland and other surface water mitigation measures in advance of any mining activities. If this bill becomes law, we may be required to demonstrate financial responsibility for wetland and other surface water mitigation measures if and when we expand our Hardee mining activities to new geographical areas not currently permitted.
Until we begin making contributions to a trust fund under the new rules, we will continue to demonstrate financial assurance through the financial tests. In the event that we are unable to satisfy these financial tests, alternative methods of complying with the financial assurance requirements would require us to expend funds for the purchase of bonds, letters of credit, insurance policies or similar instruments. It is possible that we will not be able to comply with either current or new financial assurances regulations in the future, which could have a material adverse effect on our business, financial condition and results of operations.
As of January 1, 2005, the area permitted by local, state and federal authorities for mining at our Hardee phosphate complex had approximately 60 million tons of recoverable phosphate rock reserves, which will meet our requirements, at current operating rates, for approximately 17 years. Mining of these reserves beyond 2011, however, is subject to extension of our local development authorization by the Hardee County Board of County Commissioners. Additionally, we have initiated the process of applying for authorization and permits to expand the geographical area in which we can mine at our Hardee property. The expanded geographical area has an estimated additional 35 million tons of recoverable phosphate reserves, which will allow us to conduct mining operations at our Hardee property for approximately ten additional years at current operating rates, assuming we secure the authorization and permits to mine in this area. In Florida, local community participation has become an important factor in the authorization and permitting process for mining companies. A denial of the authorizations or permits
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to continue and/or expand our mining operations at our Hardee property would prevent us from mining all of our reserves and have a material adverse effect on our business, financial condition and results of operations.
Likewise, our phosphogypsum stack system at Plant City has sufficient capacity to meet our requirements through 2014 at current operating rates and subject to regular renewals of our operating permits. We have secured the local development authorization to increase the capacity of this stack system. The increased capacity is expected to meet our requirements through 2049 at current operating rates and subject to securing the corresponding operating permits. A decision by the state or federal authorities to deny a renewal of our current permits or to deny operating permits for the expansion of our stack system could have a material adverse effect on our business, financial condition and results of operations.
Acts of terrorism could negatively affect our business.
Like other companies with major industrial facilities, our plants and ancillary facilities may be targets of terrorist activities. Many of these plants and facilities store significant quantities of ammonia and other items that can be volatile if mishandled. Any damage to infrastructure facilities, such as electric generation, transmission and distribution facilities, or injury to employees, who could be direct targets or indirect casualties of an act of terrorism, may affect our operations. Any disruption of our ability to produce or distribute our products could result in a significant decrease in revenues and significant additional costs to replace, repair or insure our assets, which could have a material adverse impact on our financial condition and results of operations. In addition, due to concerns related to terrorism or the potential use of certain fertilizers as explosives, local, state and federal governments could implement new regulations impacting the security of our plants, terminals and warehouses or the transportation and use of fertilizers. These regulations could result in higher operating costs or limitations on the sale of our products and could result in significant unanticipated costs, lower revenues and/or reduced profit margins.
Our operations are dependent upon raw materials provided by third parties and any delay or interruption in the delivery of these raw materials may adversely affect our business.
We use natural gas, ammonia and sulfur as raw materials in the manufacture of fertilizers. We purchase these raw materials from third-party suppliers. These products are transported by barge, truck, rail or pipeline to our facilities by third-party transportation providers or through the use of facilities owned by third parties. Any delays or interruptions in the delivery of these key raw materials, including those caused by capacity constraints; explosions; fires; severe weather and natural disasters; train derailments, collisions, vessel groundings and other transportation and maritime incidents; leaks and ruptures involving pipelines; deliberate sabotage and terrorist incidents; mechanical failures; unscheduled downtime; or labor difficulties, could have a material adverse effect on our business.
The loss of key members of our management may adversely affect our business.
We believe our continued success depends on the collective abilities and efforts of our senior management. The loss of one or more key personnel could have a material adverse effect on our results of operations. Additionally, if we are unable to find, hire and retain needed key personnel in the future, our results of operations could be materially and adversely affected.
As a result of this offering, we will be subject to financial reporting and other requirements for which our accounting, internal audit and other management systems and resources may not be adequately prepared.
As a result of this offering, we will become subject to reporting and other obligations under the Securities Exchange Act of 1934, including the requirements of Section 404 of the Sarbanes-Oxley Act. Section 404 requires annual management assessments of the effectiveness of our internal controls over
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financial reporting and a report by our independent auditors addressing these assessments. These reporting and other obligations will place significant demands on our management, administrative, operational, internal audit and accounting resources. We anticipate that we will need to upgrade our systems; implement additional financial and management controls, reporting systems and procedures; expand our internal audit function; and hire additional accounting, internal audit and finance staff. If we are unable to accomplish these objectives in a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies could be impaired. Any failure to achieve and maintain effective internal controls could have a material adverse effect on our business, operating results and stock price.
Risks Related to this Offering
There is no existing market for our common stock, and if one does not develop, you may not have adequate liquidity.
There has not been a public market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of a trading market on the New York Stock Exchange or otherwise or how liquid that market might become. The initial public offering price for the shares will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering.
Future sales of our shares could depress the market price of our common stock.
Sales of a substantial number of shares of our common stock in the public market or otherwise following this offering, or the perception that such sales could occur, could adversely affect the market price of our common stock. After completion of this offering, there will be approximately 55 million shares of our common stock outstanding. The 41,250,000 shares of common stock being sold in this offering (or 47,437,500 shares if the underwriters exercise the over-allotment option in full) will be freely tradable without restriction or further registration under the Securities Act, unless the shares are purchased by affiliates of our company, as that term is defined in Rule 144 of the Securities Act. All remaining shares were issued and sold by us in private transactions and are eligible for public sale if registered under the Securities Act, or sold in accordance with Rule 144 thereunder. In addition, our amended and restated certificate of incorporation permits the issuance of up to approximately 445 million additional shares of common stock after this offering. Thus, we have the ability to issue substantial amounts of common stock in the future, which would dilute the percentage ownership held by the investors who purchase our shares in this offering. See "Shares Eligible for Future Sale."
We, our directors and executive officers and our owners have agreed with the underwriters not to sell, dispose of, or hedge any of our common stock or securities convertible into or exchangeable for shares of our common stock, subject to specified exceptions, during the period from the date of this prospectus continuing through the date that is 180 days (or one year in the case of our owners) after the date of this prospectus, except with the prior written consent of Morgan Stanley & Co. Incorporated.
Upon consummation of this offering, we will provide our owners the opportunity to enter into a registration rights agreement with us. Pursuant to this agreement, those owners who hold shares of our common stock received in the Reorganization Transaction representing at least 5% of our outstanding common stock will receive certain demand and piggyback registration rights with respect to those shares of common stock that they receive in the Reorganization Transaction. These rights may only be exercised after our owners' lock-up agreements pertaining to this offering expire one year after the date of this prospectus. In the Reorganization Transaction, the owners of CF Industries will receive up to 13,750,000 shares of common stock. Registration of the sale of these shares of our common stock would facilitate their sale into the market. If, upon expiration of the one-year lock-up period, any of our owners sell a large number of shares, the market price of our common stock could decline.
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In addition, prior to the consummation of this offering, we intend to file a registration statement on Form S-8 under the Securities Act to register up to 8,250,000 shares of our common stock for issuance under our 2005 Equity and Incentive Plan. As awards under this plan are granted, vest and are exercised, the shares issued on exercise generally will be available for sale in the open market by holders who are not our affiliates and, subject to the volume and other applicable limitations of Rule 144, by holders who are our affiliates.
The market price of our common stock may be volatile, which could cause the value of your investment to decline significantly.
Securities markets worldwide experience significant price and volume fluctuations, in response to general economic and market conditions and their effect on various industries. This market volatility could cause the price of our common stock to decline significantly and without regard to our operating performance. In addition, the market price of our common stock could decline significantly if our future operating results fail to meet or exceed the expectations of public market analysts and investors.
Some specific factors that may have a significant effect on our common stock market price include:
As a result of these and other factors, you may be unable to resell your shares of our common stock at or above the initial public offering price.
The book value of shares of common stock purchased in the offering may be immediately diluted.
Investors who purchase common stock in the offering may suffer immediate dilution of $3.04 per share in the pro forma net tangible book value per share (assuming an initial public offering price of $16.00 per share, the mid-point of the estimated price range shown on the cover page of this prospectus). See "Dilution."
Although we intend to pay dividends, our financial condition, debt covenants or Delaware law may prohibit us from doing so.
Although we intend to pay quarterly dividends at an annual rate initially equal to approximately 0.5% of the price per share in this offering, commencing in the fourth quarter of 2005, the payment of dividends will be at the discretion of our board of directors and will depend on many factors, including general economic and business conditions, our strategic plans, our financial results and condition and other factors our board of directors deems relevant. Our ability to pay dividends also will be subject to compliance with the covenants in our proposed new senior secured credit facility, which is expected to become effective upon completion of this offering. Dividends may also be limited or prohibited by the terms of any future borrowings or issuances of preferred stock. In addition, applicable law requires that our board of directors determine that we have adequate surplus prior to the declaration of dividends. In the future, we may not pay dividends at the levels currently anticipated or at all.
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Provisions of our amended and restated certificate of incorporation and bylaws could delay or prevent a takeover of us by a third party.
Our amended and restated certificate of incorporation and bylaws could delay, defer or prevent a third party from acquiring us, despite the possible benefit to our stockholders, or otherwise adversely affect the price of our common stock. For example, our amended and restated certificate of incorporation and bylaws will:
These provisions may discourage potential takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of, our common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors other than the candidates nominated by our board. See "Description of Capital Stock" for additional information on the anti-takeover measures applicable to us.
Our stockholder rights plan could prevent you from receiving a premium over the market price for your shares of common stock from a potential acquirer.
We have adopted a stockholder rights plan to become effective upon completion of this offering. This plan will entitle our stockholders to acquire shares of our common stock at a price equal to 50% of the then current market value in limited circumstances when a third party acquires 15% or more of our outstanding common stock or announces its intent to commence a tender offer for at least 15% of our common stock, in each case in a transaction that our board of directors does not approve. Because, under these limited circumstances, all of our stockholders would become entitled to effect discounted purchases of our common stock, other than the person or group that caused the rights to become exercisable, the existence of these rights would significantly increase the cost of acquiring control of our company without the support of our board of directors. The existence of the rights plan could therefore deter potential acquirers and thereby reduce the likelihood that you will receive a premium for your common stock in an acquisition.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are not statements of historical fact and may involve a number of risks and uncertainties. These statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These statements may also relate to our future prospects, developments and business strategies.
We have used the words "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," and similar terms and phrases, including references to assumptions, to identify forward-looking statements in this prospectus. These forward-looking statements are made based on our expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements.
We do not undertake any responsibility to release publicly any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this prospectus. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by the forward-looking statements contained in this prospectus.
Important factors that could cause actual results to differ materially from our expectations are disclosed under "Risk Factors" and elsewhere in this prospectus, including, without limitation, in conjunction with the forward-looking statements included in this prospectus. As stated elsewhere in this prospectus, such factors include, among others:
22
MARKET AND INDUSTRY DATA AND FORECASTS
This prospectus includes market share and industry data and forecasts that we have developed from independent consultant reports, reports from government agencies, publicly available information, various industry publications, other published industry sources and our internal data and estimates. Our internal data, estimates and forecasts are based upon information obtained from our customers, suppliers, trade and business organizations and other contacts in the markets in which we operate and our management's understanding of industry conditions, and such information has not been verified by any independent sources.
Unless otherwise indicated, all financial information and operating data in this prospectus, including tons of product produced and sold, include information for Canadian Fertilizers Limited, or CFL, our consolidated Canadian joint venture in which we own a 66% economic interest. See "BusinessOperating SegmentsNitrogen Fertilizer Business."
Certain market and industry data in this prospectus is presented for twelve-month periods ending June 30, which is a measuring period referred to in the fertilizer industry as a "fertilizer year."
All references to dollars, or $, in this prospectus refer to U.S. dollars, unless otherwise indicated.
23
THE REORGANIZATION TRANSACTION
CF Industries is currently owned by eight regional agricultural cooperatives: CHS Inc., GROWMARK, Inc., Intermountain Farmers Association, La Coop fédérée, Land O'Lakes, Inc., MFA Incorporated, Southern States Cooperative, Incorporated and Tennessee Farmers Cooperative.
As part of the reassessment of CF Industries' corporate mission and adoption of a new business model that began in 2002, the owners of CF Industries undertook an evaluation of the company's capital and ownership structure in light of their increasing desire for liquidity with respect to their investment in the company. After considering their alternatives, the owners determined that this offering best met their objective of providing liquidity for their investment, while at the same time permitting certain owners the opportunity to retain an equity interest in the company.
Concurrent with the closing of this offering, the owners of CF Industries will consummate the Reorganization Transaction, which is designed to facilitate this offering by creating a holding company for our business. The Reorganization Transaction will be effected through a merger of a newly-formed, wholly-owned subsidiary of CF Holdings into CF Industries pursuant to an agreement and plan of merger. The merger and the consummation of this offering will be contingent upon each other and will occur simultaneously. Following the merger, CF Industries will be our wholly-owned subsidiary. The Reorganization Transaction will not affect our operations, which we will continue to conduct through our operating subsidiaries.
Pursuant to the Reorganization Transaction, the owners of CF Industries will receive shares of our common stock and cash in exchange for their outstanding equity interests in CF Industries. Assuming an initial public offering price of $16.00 per share, the mid-point of the estimated price range shown on the cover page of this prospectus, the owners of CF Industries will receive initially, in the aggregate, 7,562,500 shares of our common stock and $622.1 million, which represents the estimated proceeds to us from this offering, after deducting underwriting discounts and commissions.
The cash payment and the number of shares issued to the owners of CF Industries will then be adjusted depending on whether the underwriters exercise their over-allotment option to purchase up to 6,187,500 shares of common stock from us.
If the over-allotment option is not exercised by the underwriters, upon completion of this offering, the owners of CF Industries will own 13,750,000 shares of our common stock, representing 25% of our outstanding common stock. If the over-allotment option is exercised in full by the underwriters, upon completion of this offering, the owners of CF Industries will own 7,562,500 shares of our common stock, representing approximately 14% of our outstanding common stock. The cash payment or stock issuance related to the over-allotment option will be made shortly after the expiration or full exercise of the over-allotment option. For information relating to the number of shares and the amount of cash consideration that will be received by each of CF Industries' owners, see "Certain Relationships and Related Party TransactionsThe Reorganization Transaction."
Net operating loss carryforwards. As of June 30, 2005, we had total net operating loss carryforwards of $279.2 million. A gross deferred tax asset of $111.5 million related to these net operating loss
24
carryforwards is included in deferred income taxes on our June 30, 2005 balance sheet. Because our net operating loss carryforwards were generated from business conducted with our owners when we were a cooperative for tax purposes, there is substantial uncertainty under existing tax law whether any tax benefits from the related deferred tax asset will be realizable after the completion of this offering. As a result of this uncertainty, we will establish a valuation allowance equal to 100% of any of the deferred tax asset remaining after the consummation of this offering relating to the net operating loss carryforwards. We will record a non-cash charge to "Income Tax Expense" in the amount of the valuation allowance in the quarter in which the offering is completed.
We intend to enter into an NOL Agreement with the owners of CF Industries in connection with the Reorganization Transaction relating to the treatment of the net operating loss carryforwards. Under the NOL Agreement, in the event that it is finally determined that our net operating loss carryforwards can be used after we are no longer a cooperative, we will pay the owners of CF Industries an amount equal to the federal and state income taxes actually saved after the completion of this offering as a result of the utilization of net operating loss carryforwards related to our former cooperative status. These payments, if any, will be made only after it has been finally determined that utilization of the net operating losses has provided us with actual tax savings. The NOL Agreement will not require that we operate in a way that maximizes the use of our cooperative-related net operating loss carryforwards. Costs incurred after completion of this offering in pursuing a determination regarding the usability of these net operating loss carryforwards will be borne by the owners of CF Industries.
25
We estimate that we will receive net proceeds of approximately $622.1 million from the sale of shares in this offering, after deducting underwriting discounts and commissions or $715.4 million if the underwriters exercise their over-allotment option in full.
We intend to pay $622.1 million, which represents the proceeds of the offering to us, after deducting underwriting discounts and commissions, to the owners of CF Industries in the Reorganization Transaction. If the underwriters exercise the over-allotment option in full, we expect to pay an estimated additional $93.3 million to the owners of CF Industries in the Reorganization Transaction. For additional information regarding the Reorganization Transaction, see "The Reorganization Transaction."
Total offering expenses are expected to be approximately $5.7 million. As of June 30, 2005, we had accrued and expensed approximately $2.9 million of these expenses. We expect to pay the remaining offering expenses from cash on hand.
We intend to pay quarterly cash dividends on our common stock at an annual rate initially equal to approximately 0.5% of the price per share in this offering, commencing in the fourth quarter of 2005. We expect to pay quarterly dividends at such rate for the foreseeable future. The declaration and payment of dividends to holders of our common stock will be at the discretion of our board of directors and will depend on many factors, including general economic and business conditions, our strategic plans, our financial results and condition, legal requirements and other factors as our board of directors deems relevant. In addition, our proposed new $250 million senior secured credit facility, which we expect to become effective upon completion of this offering, limits our ability to pay dividends, and we may in the future become subject to debt instruments or other agreements that further limit our ability to pay dividends. See "Description of Certain Indebtedness."
26
The following table sets forth our consolidated cash, cash equivalents and short-term investments and capitalization as of June 30, 2005:
27
You should read the information in this table in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements included elsewhere in this prospectus.
|
As of June 30, 2005
|
||||||||
---|---|---|---|---|---|---|---|---|---|
|
Actual
|
As Adjusted
|
|||||||
|
(in thousands)
|
||||||||
Cash, cash equivalents and short-term investments (1) | $ | 510,330 | $ | 228,238 | |||||
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||||||||
Indebtedness (2) : |
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|
|
|
|
|
|
||
Long-term debt, including current portion | $ | 246,292 | $ | | |||||
Notes payable (3) | 4,013 | 4,013 | |||||||
|
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||||||||
Total indebtedness, including current portion | 250,305 | 4,013 | |||||||
|
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||||||||
Stockholders' equity: |
|
|
|
|
|
|
|
||
Patronage preferred stock ($100 par value, 10,000,000 shares authorized, 7,343,018 shares issued and outstanding before adjustments, and none outstanding after adjustments) | 734,302 | | |||||||
Common stock ($1,000 par value, 100 shares authorized, 8 shares issued and outstanding before adjustments, and none outstanding after adjustments) | 8 | | |||||||
Common stock ($0.01 par value, 500,000,000 shares authorized, none outstanding before adjustments, and 55,000,000 shares issued and outstanding after adjustments) | | 550 | |||||||
Paid-in capital | 5,555 | 739,315 | |||||||
Retained earnings | 124,930 | (7,970 | ) | ||||||
Other comprehensive income (loss) | (11,758 | ) | (11,758 | ) | |||||
|
|
||||||||
Total stockholders' equity | 853,037 | 720,137 | (4) | ||||||
|
|
||||||||
Total capitalization | $ | 1,103,342 | $ | 724,150 | |||||
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28
Dilution is the amount by which the offering price paid by the purchasers of the common stock to be sold in this offering will exceed the net tangible book value per share of common stock after the offering. The net tangible book value per share presented below is equal to the amount of our total tangible assets (total assets less intangible assets) less total liabilities as of June 30, 2005, divided by the number of shares of our common stock held by the owners of CF Industries as of such date, assuming for this purpose that we had issued 55,000,000 shares of common stock in exchange for their existing securities. On June 30, 2005, we had a net tangible book value of $843.5 million, or $15.34 per share on the basis described above.
On an adjusted basis, after giving effect to:
our adjusted net tangible book value as of June 30, 2005 would have been $712.6 million, or $12.96 per share of common stock. This represents an immediate decrease in net tangible book value of $2.38 per share to the owners of CF Industries and an immediate dilution in net tangible book value of $3.04 per share to new investors.
The following table illustrates this dilution on a per share basis:
Assumed initial public offering price per share | $ | 16.00 | ||||
Net tangible book value per share as of June 30, 2005 | $ | 15.34 | ||||
Decrease in net tangible book value per share attributable to new investors | 2.38 | |||||
|
||||||
Adjusted net tangible book value per share after giving effect to the offering | 12.96 | |||||
|
||||||
Dilution in net tangible book value per share to new investors | $ | 3.04 | ||||
|
The following table summarizes, on an adjusted basis as of June 30, 2005 after giving effect to the transactions described above, the total number of shares of common stock purchased from us, the total
29
consideration paid to us, and the average price per share paid by the owners of CF Industries and by new investors purchasing shares in this offering:
|
Shares Purchased
|
Total Consideration
|
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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Average Price Per Share
|
||||||||||||
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Number
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Percent
|
Amount
|
Percent
|
|||||||||
Owners | 13,750,000 | 25 | % | $ | 183,577,500 | 22 | % | $ | 13.35 | ||||
New investors | 41,250,000 | 75 | 660,000,000 | 78 | 16.00 | ||||||||
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Total | 55,000,000 | 100 | % | $ | 843,577,500 | 100 | % | ||||||
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|
|
The foregoing computations exclude 2,750,900 shares of common stock (assuming an initial public offering price of $16.00 per share, the mid-point of the estimated price range shown on the cover page of this prospectus) issuable upon the exercise of stock options to be issued in connection with this offering and 5,482,848 shares available for future issuance under our 2005 Equity and Incentive Plan. To the extent the holders exercise these options, or we issue any other shares as incentive compensation under the Plan, there will be further dilution to new investors. See "Management2005 Equity and Incentive Plan." The foregoing computations also exclude 16,252 shares of restricted stock (assuming an initial public offering price of $16.00 per share, the mid-point of the estimated price range shown on the cover page of this prospectus) that we intend to grant on the date of this prospectus to our non-employee directors.
30
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The following table presents selected historical financial and operating data about us. CF Holdings was formed in April 2005 to serve as a holding company for our businesses. CF Holdings has not commenced operations and has no assets or liabilities. In order to facilitate this offering, we will consummate the Reorganization Transaction in which CF Holdings will become the successor to CF Industries for accounting purposes. See "The Reorganization Transaction."
The following selected historical financial data for CF Industries as of December 31, 2003 and 2004 and for the years ended December 31, 2002, 2003, and 2004 have been derived from CF Industries' audited consolidated financial statements and related notes included elsewhere in this prospectus. The following selected historical financial data for CF Industries as of December 31, 2000, 2001 and 2002 and for the years ended December 31, 2000 and 2001 have been derived from CF Industries' unaudited consolidated financial statements, which are not included in this prospectus.
The following selected historical financial data for CF Industries as of June 30, 2005 and for the six months ended June 30, 2004 and 2005 have been derived from CF Industries' unaudited consolidated financial statements and related notes included elsewhere in this prospectus. The following selected historical balance sheet data for CF Industries as of June 30, 2004 have been derived from CF Industries' unaudited consolidated financial statements, which are not included in this prospectus. In the opinion of management, such unaudited historical financial data reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the results for those periods. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year or any future period.
The selected historical financial and operating data should be read in conjunction with the information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and CF Industries' consolidated financial statements and related notes included elsewhere in this prospectus.
|
Year ended December 31,
|
Six months ended June 30,
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||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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2000
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2001
|
2002
|
2003
|
2004
|
2004
|
2005
|
|||||||||||||||
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(in thousands)
|
|||||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||||
Net sales | $ | 1,160,474 | $ | 1,159,603 | $ | 1,014,071 | $ | 1,369,915 | $ | 1,650,652 | $ | 845,365 | $ | 1,085,985 | ||||||||
Cost of sales | 1,127,588 | 1,244,706 | 986,295 | 1,335,508 | 1,434,545 | 744,473 | 935,075 | |||||||||||||||
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Gross margin | 32,886 | (85,103 | ) | 27,776 | 34,407 | 216,107 | 100,892 | 150,910 | ||||||||||||||
Selling, general and administrative |
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|
35,999 |
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|
36,086 |
|
|
37,317 |
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|
38,455 |
|
|
41,830 |
|
|
20,302 |
|
|
25,270 |
|
Other operatingnet | 11,630 | 13,106 | 9,294 | 1,557 | 25,043 | 5,035 | 2,891 | |||||||||||||||
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Operating earnings (loss) | (14,743 | ) | (134,295 | ) | (18,835 | ) | (5,605 | ) | 149,234 | 75,555 | 122,749 | |||||||||||
Interest expense |
|
|
21,087 |
|
|
21,766 |
|
|
23,565 |
|
|
23,870 |
|
|
22,696 |
|
|
11,820 |
|
|
10,531 |
|
Interest income | (6,247 | ) | (4,179 | ) | (2,209 | ) | (2,260 | ) | (5,901 | ) | (1,990 | ) | (7,683 | ) | ||||||||
Minority interest | 2,418 | (3,007 | ) | 6,409 | 6,031 | 23,145 | 9,707 | 12,365 | ||||||||||||||
Impairment of Bartow long-lived assets (1) | 11,404 | | | | | | | |||||||||||||||
Impairment of investments in unconsolidated subsidiaries (2) | | | | | 1,050 | | | |||||||||||||||
Other non-operatingnet | (889 | ) | (445 | ) | (174 | ) | (676 | ) | (778 | ) | (537 | ) | (336 | ) | ||||||||
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|
|
|
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|
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Earnings (loss) before income taxes | (42,516 | ) | (148,430 | ) | (46,426 | ) | (32,570 | ) | 109,022 | 56,555 | 107,872 | |||||||||||
Income tax provision (benefit) |
|
|
(16,700 |
) |
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(59,325 |
) |
|
(16,600 |
) |
|
(12,600 |
) |
|
41,400 |
|
|
21,477 |
|
|
42,757 |
|
Equity in earnings (loss) of unconsolidated subsidiaries | (11 | ) | 507 | 1,706 | 1,587 | 110 | 237 | 35 | ||||||||||||||
Cumulative effect of change in accounting principlenet of taxes (3) | | 14,440 | | | | | | |||||||||||||||
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|
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|
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Net earnings (loss) | $ | (25,827 | ) | $ | (74,158 | ) | $ | (28,120 | ) | $ | (18,383 | ) | $ | 67,732 | $ | 35,315 | $ | 65,150 | ||||
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|
|
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31
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Year ended December 31,
|
Six months ended June 30,
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2000
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2001
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2002
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2003
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2004
|
2004
|
2005
|
||||||||||||||||
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(in thousands, except share and per share data)
|
||||||||||||||||||||||
Pro Forma Share and Per Share Data (unaudited): (4) | |||||||||||||||||||||||
Pro forma basic and diluted net earnings (loss) per share | $ | (0.47 | ) | $ | (1.35 | ) | $ | (0.51 | ) | $ | (0.33 | ) | $ | 1.23 | $ | 0.64 | $ | 1.18 | |||||
Pro forma weighted average shares outstandingbasic and diluted | 55,000,000 | 55,000,000 | 55,000,000 | 55,000,000 | 55,000,000 | 55,000,000 | 55,000,000 | ||||||||||||||||
Other Financial Data: | |||||||||||||||||||||||
EBITDA (5) | $ | 84,643 | $ | (13,709 | ) | $ | 84,960 | $ | 95,243 | $ | 233,543 | $ | 119,673 | $ | 163,466 | ||||||||
Depreciation, depletion and amortization | 112,366 | 102,223 | 108,471 | 105,014 | 108,642 | 53,562 | 53,207 | ||||||||||||||||
Capital expenditures | 52,273 | 41,734 | 26,303 | 28,684 | 33,709 | 12,923 | 33,244 | ||||||||||||||||
Selected Operating Data: |
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Average selling prices (per ton) | |||||||||||||||||||||||
Ammonia | $ | 167 | $ | 205 | $ | 159 | $ | 236 | $ | 278 | $ | 275 | $ | 310 | |||||||||
Urea | 133 | 142 | 120 | 172 | 205 | 195 | 242 | ||||||||||||||||
UAN | 98 | 119 | 93 | 119 | 137 | 133 | 161 | ||||||||||||||||
DAP | 143 | 142 | 146 | 163 | 197 | 190 | 210 | ||||||||||||||||
MAP | 150 | 153 | 157 | 172 | 204 | 201 | 217 | ||||||||||||||||
Sales volume (in thousand tons) | |||||||||||||||||||||||
Ammonia | 1,610 | 1,714 | 1,435 | 1,475 | 1,438 | 841 | 887 | ||||||||||||||||
Urea | 2,528 | 2,188 | 2,663 | 2,572 | 2,513 | 1,244 | 1,428 | ||||||||||||||||
UAN | 1,927 | 1,489 | 1,926 | 2,228 | 2,593 | 1,339 | 1,431 | ||||||||||||||||
DAP | 1,630 | 1,776 | 1,560 | 1,627 | 1,549 | 810 | 890 | ||||||||||||||||
MAP | 372 | 318 | 289 | 252 | 351 | 174 | 213 | ||||||||||||||||
Cost of natural gas (per mmBTU) | |||||||||||||||||||||||
Donaldsonville facility | $ | 3.27 | $ | 4.11 | $ | 3.29 | $ | 5.20 | $ | 5.60 | $ | 5.24 | $ | 6.89 | |||||||||
Medicine Hat facility | 3.23 | 4.21 | 2.64 | 4.74 | 5.10 | 5.03 | 5.84 | ||||||||||||||||
Average daily market price of natural gas (per mmBTU) |
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Henry Hub (Louisiana) | $ | 4.29 | $ | 3.98 | $ | 3.35 | $ | 5.44 | $ | 5.85 | $ | 5.85 | $ | 6.67 | |||||||||
AECO (Alberta) | 3.73 | 3.55 | 2.60 | 4.72 | 5.04 | 5.01 | 5.76 | ||||||||||||||||
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|
As of December 31, |
|
As of June 30, |
|
||||||||||||||||||
|
2000
|
2001
|
2002
|
2003
|
2004
|
2004
|
2005
|
||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||||
Balance Sheet Data: | |||||||||||||||||||||||
Cash and cash equivalents | $ | 144,517 | $ | 48,985 | $ | 56,536 | $ | 77,146 | $ | 50,003 | $ | 40,565 | $ | 79,436 | |||||||||
Short-term investments (6) | 42,526 | 4,550 | 38,417 | 91,725 | 369,290 | 161,974 | 430,894 | ||||||||||||||||
Total assets | 1,593,715 | 1,300,913 | 1,303,532 | 1,404,879 | 1,546,971 | 1,289,632 | 1,500,811 | ||||||||||||||||
Net debt (7) | 298,852 | 291,520 | 271,224 | 290,654 | 51,029 | 114,449 | (130,041 | ) | |||||||||||||||
Total debt | 286,586 | 334,831 | 326,205 | 293,503 | 258,821 | 284,879 | 250,305 | ||||||||||||||||
Customer advances | 199,309 | 10,224 | 39,972 | 166,022 | 211,501 | 32,109 | 129,984 | ||||||||||||||||
Stockholders' equity | 844,726 | 769,475 | 740,929 | 733,511 | 787,289 | 763,586 | 853,037 |
32
accordance with GAAP. Because not all companies use identical calculations, this presentation of EBITDA may not be comparable to other similarly titled measures of other companies.
|
Year ended December 31,
|
Six months ended June 30,
|
|||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2000
|
2001
|
2002
|
2003
|
2004
|
2004
|
2005
|
||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||||
Calculation of EBITDA | |||||||||||||||||||||||
Net earnings (loss) | $ | (25,827 | ) | $ | (74,158 | ) | $ | (28,120 | ) | $ | (18,383 | ) | $ | 67,732 | $ | 35,315 | $ | 65,150 | |||||
Interestnet (a)(b) | 14,840 | 17,587 | 21,356 | 21,610 | 16,795 | 9,830 | 2,848 | ||||||||||||||||
Income tax provision (benefit) | (16,700 | ) | (59,325 | ) | (16,600 | ) | (12,600 | ) | 41,400 | 21,477 | 42,757 | ||||||||||||
Depreciation, depletion and amortization (c) | 112,366 | 102,223 | 108,471 | 105,014 | 108,642 | 53,562 | 53,207 | ||||||||||||||||
Financing fees (d) | (36 | ) | (36 | ) | (147 | ) | (398 | ) | (1,026 | ) | (511 | ) | (496 | ) | |||||||||
|
|
|
|
|
|
|
|||||||||||||||||
EBITDA | $ | 84,643 | $ | (13,709 | ) | $ | 84,960 | $ | 95,243 | $ | 233,543 | $ | 119,673 | $ | 163,466 | ||||||||
|
|
|
|
|
|
|
|
As of December 31,
|
As of June 30,
|
||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2000
|
2001
|
2002
|
2003
|
2004
|
2004
|
2005
|
|||||||||||||||||
|
(in thousands)
|
|||||||||||||||||||||||
Calculation of net debt | ||||||||||||||||||||||||
Total debt | $ | 286,586 | $ | 334,831 | $ | 326,205 | $ | 293,503 | $ | 258,821 | $ | 284,879 | $ | 250,305 | ||||||||||
Less cash, cash equivalents and short-term investments | 187,043 | 53,535 | 94,953 | 168,871 | 419,293 | 202,539 | 510,330 | |||||||||||||||||
Plus customer advances | 199,309 | 10,224 | 39,972 | 166,022 | 211,501 | 32,109 | 129,984 | |||||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||||
Net debt | $ | 298,852 | $ | 291,520 | $ | 271,224 | $ | 290,654 | $ | 51,029 | $ | 114,449 | $ | (130,041 | ) | |||||||||
|
|
|
|
|
|
|
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with the "Selected Historical Financial and Operating Data" and the consolidated financial statements and related notes included elsewhere in this prospectus.
Our Company
We are one of the largest manufacturers and distributors of nitrogen and phosphate fertilizer products in North America. Our operations are organized into two business segments: the nitrogen fertilizer business and the phosphate fertilizer business. Our principal products in the nitrogen fertilizer business are ammonia, urea and UAN. Our principal products in the phosphate fertilizer business are DAP and MAP. For the twelve months ended June 30, 2004, we supplied approximately 22% of the nitrogen and approximately 14% of the phosphate used in agricultural fertilizer applications in the United States. Our core market and distribution facilities are concentrated in the midwestern U.S. grain-producing states.
Our principal assets include:
Company History
We were founded in 1946 as a fertilizer brokerage operation by a group of regional agricultural cooperatives seeking to pool their purchasing power. During the 1960s, we expanded our distribution capabilities and diversified into fertilizer manufacturing through the acquisition of several existing plants and facilities. During the 1970s and again during the 1990s, we expanded our production and distribution capabilities significantly, spending approximately $1 billion in each of these decades.
Through the end of 2002, we operated as a traditional supply cooperative. Our focus was on providing our owners with an assured supply of fertilizer. Typically, over 80% of our annual sales volume was to our owners. Though important, financial performance was subordinate to our mandated supply objective.
In 2002, we reassessed our corporate mission and adopted a new business model that established financial performance, rather than assured supply to our owners, as our principal objective. A critical aspect of our new business model is a more economically driven approach to the marketplace. We now pursue markets and customers and make pricing decisions with a primary focus on enhancing our financial performance. One result of this new approach has been a shift in our customer mix. In 2004, approximately 41% of our sales volume was to unaffiliated customers, more than double the percentage of our sales volume to this group in 2002.
Concurrent with our new approach to the marketplace, we have been implementing other measures to improve the performance of our business. For example, we are focused on improving asset utilization, lowering our cost profile, and reducing our exposure to volatility in raw material and fertilizer prices. These measures, combined with our new approach to the marketplace and a leadership change in mid-2003, positioned us to capitalize on the improving industry conditions that began in the latter half of 2003.
34
CF Holdings was formed as a Delaware corporation in April 2005 to hold the existing businesses of CF Industries. CF Holdings has not commenced operations and has no assets or liabilities. In order to facilitate this offering, we will consummate the Reorganization Transaction in which CF Industries will become a wholly-owned subsidiary of CF Holdings and CF Holdings will become the successor to CF Industries for accounting purposes. For additional information on the Reorganization Transaction, see "The Reorganization Transaction."
Key Industry Factors
We operate in a highly competitive, global industry. Our products are globally-traded commodities and, as a result, we compete principally on the basis of delivered price and to a lesser extent on customer service and product quality. Moreover, our operating results are influenced by a broad range of factors, including those outlined below.
Global Supply & Demand
Historically, global fertilizer demand has been driven primarily by population growth, changes in dietary habits and planted acreage and application rates, among other things. We expect these key variables to continue to have major impacts on long-term fertilizer demand for the foreseeable future. Short-term fertilizer demand depends on global economic conditions, weather patterns, the level of global grain stocks relative to consumption and farm sector income. Other geopolitical factors like temporary disruptions in fertilizer trade related to government intervention or changes in the buying patterns of key consuming countries such as China, India or Brazil often play a major role in shaping near-term market fundamentals. The economics of fertilizer manufacturing play a key role in decisions to increase or reduce capacity. Supply of fertilizers is generally driven by available capacity and operating rates, raw material costs, government policies and global trade.
Natural Gas Prices
Natural gas is the most significant raw material required in the production of nitrogen fertilizers. For example, in 2004, our natural gas purchases accounted for approximately 61% of our total cost of sales for nitrogen fertilizers. North American natural gas prices have increased substantially and, since 1999, have become significantly more volatile. Our competitive position, on a worldwide basis, has been negatively impacted by the higher price of North American natural gas relative to the gas prices available to fertilizer producers in other regions of the world.
Farmers' Economics
The demand for fertilizer is affected by the aggregate crop planting decisions and fertilizer application rate decisions of individual farmers. Individual farmers make planting decisions based largely on prospective profitability of a harvest, while the specific varieties and amounts of fertilizer they apply depend on factors like their current liquidity, soil conditions, weather patterns and the types of crops planted.
Global Trade in Fertilizer
In addition to the relationship between global supply and demand, profitability within a particular geographic region is determined by the supply/demand balance within that region. Regional supply and demand can be influenced significantly by factors affecting trade within regions. Some of these factors include the relative cost to produce and deliver product, relative currency values and governmental policies affecting trade and other matters. Changes in currency values alter our cost competitiveness relative to producers in other regions of the world.
Imports account for a significant portion of the nitrogen fertilizer consumed in North America. Producers of nitrogen-based fertilizers located in the Middle East, the former Soviet Union, the Republic of Trinidad and Tobago and Venezuela are major exporters to North America.
35
The domestic phosphate fertilizer industry is tied to the global market through its position as the world's largest exporter of DAP/MAP. Historically, China has been a major source of demand for the U.S. phosphate fertilizer industry. China's reliance on imported phosphate fertilizers has decreased over the last three years as a matter of Chinese government policy to achieve self sufficiency in these products. However, growth in demand in other international markets, including Latin America and Western Europe, has largely offset declining imports by China.
Political and Social Government Policies
The political and social policies of governments around the world can result in the restriction of imports, the subsidization of domestic producers and/or the subsidization of exports. Due to the critical role that fertilizers play in food production, the construction and operation of fertilizer plants often are influenced by these political and social objectives.
Factors Affecting Our Results
Net Sales. Our net sales are derived from the sale of nitrogen and phosphate fertilizers and are determined by the quantities of nitrogen and phosphate fertilizers we sell and the selling prices we realize. The volumes, mix and selling prices we realize are determined to a great extent by a combination of global and regional supply and demand factors.
Cost of Sales. Our cost of sales includes manufacturing costs, product purchases and distribution costs. Manufacturing costs, the most significant element of cost of sales, consist primarily of raw materials, maintenance, direct labor and other plant overhead expenses. Purchased product costs primarily include the cost to buy ammonia for use in our phosphate fertilizer business and the cost to purchase nitrogen fertilizers to augment our production. Distribution costs include the cost of freight required to transport finished products from our plants to our distribution facilities and storage costs prior to final shipment to customers.
In mid-2003, we instituted our forward pricing program, which allows us to manage some of the risks created by volatility of fertilizer prices and natural gas costs. Through our forward pricing program, we offer our customers the opportunity to purchase product on a forward basis at prices and dates we propose. As our customers place forward nitrogen fertilizer orders with us, we lock in a substantial portion of the margin on the sale by effectively fixing the cost of natural gas, the largest and most volatile component of our supply cost. See "Forward Pricing Program." As a result of fixing the selling prices of our products under our forward pricing program, often months in advance of their ultimate delivery to customers, our reported selling prices and margins may differ from market spot prices and margins available at the time of shipment.
Selling, General and Administrative Expenses. Our selling, general and administrative expenses mainly consist of salaries and other payroll-related costs for our executive, administrative, legal, financial and marketing functions, as well as certain taxes, insurance and professional service fees. We anticipate incurring higher selling, general and administrative expenses as a public company after the consummation of this offering. These expenses will include additional legal and corporate governance expenses, salary and payroll-related costs for additional accounting staff, director compensation, exchange listing fees, transfer agent and stockholder-related fees and increased premiums for director and officer liability insurance coverage.
Other OperatingNet. Other operatingnet includes the costs associated with our Bartow phosphate facility (which has been largely idle since 1989) and other costs that do not relate directly to our central operations. Bartow facility costs include provisions for phosphogypsum stack and cooling pond closure costs. The term "other costs" refers to amounts recorded for environmental remediation for other areas of our business and litigation expenses.
Interest Expense. Our interest expense includes the interest on our long-term debt and notes payable and amortization of the related fees to execute required financing agreements.
36
Interest Income. Our interest income represents amounts earned on our cash and cash equivalents and short-term investments.
Minority Interest. Amounts reported as minority interest represent the 34% minority interest in the net operating results of CFL, our consolidated Canadian joint venture. We own 49% of the voting common stock of CFL and 66% of CFL's non-voting preferred stock. Two owners of CF Industries own 17% of CFL's voting common stock. The remaining 34% of the voting common stock and non-voting preferred stock of CFL is held by Westco. We designate four members of CFL's nine-member board of directors, which also has one member designated by each of the two owners of CF Industries that own an interest in CFL and three members designated by Westco.
We operate the Medicine Hat facility and purchase approximately 66% of the facility's ammonia and urea production, pursuant to a management agreement and a product purchase agreement. The management agreement and the product purchase agreement are each terminable by either us or CFL upon twelve-months' notice. Westco has the right, but not the obligation, to purchase the remaining 34% of the facility's ammonia and urea production under a similar product purchase agreement. To the extent that Westco does not purchase its 34% of the facility's production, we are obligated to purchase any remaining amounts. Under the product purchase agreements, both we and Westco pay the greater of operating cost or market price for purchases. However, the product purchase agreements also provide that CFL will distribute its net earnings to us and Westco annually based on the respective quantities of product purchased from CFL. Our product purchase agreement also requires us to advance funds to CFL in the event that CFL is unable to meet its debts as they become due. The amount of each advance would be at least 66% of the deficiency and would be more in any year that we purchased more than 66% of Medicine Hat's production. We and Westco currently manage CFL such that each party is responsible for its share of CFL's fixed costs and that CFL's production volume meets the parties' combined requirements. We are currently in discussions with Westco regarding amendments to the CFL agreements, including an amendment to the management agreement that may reduce our management fee in exchange for other consideration.
Impairment of Investments in Unconsolidated Subsidiaries. Impairment of investments in unconsolidated subsidiaries represents the write-down of the carrying value of our investments in our joint ventures.
Income Taxes. Our income taxes reflect our consolidated tax provision or tax benefit as determined under our current status as a nonexempt cooperative. As a cooperative, we may declare distributions in the form of patronage. Patronage is defined as the distribution of the excess of revenues over costs arising from business done with owners of a cooperative. Patronage is deductible for income tax purposes, provided that at least 20% of the total distribution is paid in cash. After the completion of this offering, we will no longer be eligible for taxation as a cooperative, but CFL will continue to operate as a cooperative for Canadian tax purposes. As such, CFL's earnings are, and will continue to be, available for distribution as patronage. Excluding any deductions related to patronage, we are subject to corporate rates as provided under subchapter C of the Internal Revenue Code.
As of December 31, 2004, we had total net operating loss carryforwards of $311.3 million. A gross deferred tax asset of $124.3 million related to these net operating loss carryforwards is included on our December 31, 2004 balance sheet. As of June 30, 2005, total net operating loss carryforwards were $279.2 million, and a related gross deferred tax asset of $111.5 million was included in deferred income taxes. Because our net operating loss carryforwards were generated from business conducted with our owners when we were a cooperative for tax purposes, there is substantial uncertainty under existing tax law whether any tax benefits from the related deferred tax asset will be realizable after the completion of this offering. As a result of this uncertainty, we will establish a valuation allowance equal to 100% of any of the deferred tax asset remaining after the consummation of this offering relating to the net operating loss carryforwards. We will record a non-cash charge to "Income Tax Expense" in the amount of the valuation allowance in the quarter in which the offering is completed.
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We intend to enter into an NOL Agreement with the owners of CF Industries in connection with the Reorganization Transaction relating to the treatment of the net operating loss carryforwards. Under the NOL Agreement, in the event that it is finally determined that our net operating loss carryforwards can be used after we are no longer a cooperative, we will pay the owners of CF Industries an amount equal to the federal and state income taxes actually saved after the completion of this offering as a result of the utilization of net operating loss carryforwards related to our former cooperative status. These payments, if any, will be made only after it has been finally determined that utilization of the net operating losses has provided us with actual tax savings. The NOL Agreement will not require that we operate in a way that maximizes the use of our cooperative-related net operating loss carryforwards. Costs incurred after completion of this offering in pursuing a determination regarding the usability of these net operating loss carryforwards will be borne by the owners of CF Industries.
In the event that it is finally determined that our net operating loss carryforwards can be used when we are no longer a cooperative, we would remove the appropriate portion (up to 100%) of the valuation allowance that we established at the consummation of this offering, thereby increasing our net deferred tax assets, and record a corresponding income tax benefit for the amount of the valuation allowance. We would also record a charge to "Other Non-OperatingNet Expense" and establish a liability to our owners for the amount that the valuation allowance was reduced. When any related tax benefits are realized over time as a result of profitable operations, we will record accounting entries to reduce "Current Income Tax Expense" and "Current Income Taxes Payable" for the amount of those realized tax benefits. We would also record corresponding accounting entries to increase "Deferred Income Tax Expense" and to reduce "Deferred Income Taxes" (Deferred Tax Asset) for those same realized tax benefits. As cash payments are made to our owners for any tax benefits realized pursuant to the NOL Agreement, we will record accounting entries to decrease cash and decrease the liability to our owners for the amount of any such payments.
In 2003, CFL, which operates as a cooperative, received a notice of proposed adjustment from the Canada Revenue Agency, or CRA, as a result of its audit of the tax years 1997 through 2000. The CRA's position was that we did not deal on an arms-length basis with CFL and, therefore, the C$35.8 million in management fees paid by CFL to us for the years under audit should not be allowed as a tax deduction. The total amount of exposure for the years under audit, consisting of income taxes and estimated interest, would have been approximately C$22.2 million. As of December 31, 2004, the CRA had completed the audit with no resulting assessment for the years 1997 through 2000 and confirmed that we and CFL were dealing at arms-length. The CRA further agreed, provided there has been no material change in the facts after 2000, that we and CFL were dealing at arms-length for the years 2001 through 2004. We and CFL believe that there has been no material change in facts. The CRA has reserved the right to audit all years subsequent to 2000, and has reserved the right to reopen the arms-length issue for years after 2004. On May 13, 2005, the Canadian Income Tax Act was amended to disallow the deduction of certain patronage distributions paid after March 22, 2004 to non-arm's length parties. It is unknown what impact, if any, this legislation will have on CFL's deductibility of patronage distributions in future years.
In 2004, the CRA initiated and we settled a Canadian income tax audit of our subsidiary corporation CF Chemicals, Ltd., or CFCL, through which we operate CFL, for the tax years 1997 through 2004. Completion of the audit resolved a transfer pricing issue involving the allocation of certain income from CFL to us and CFCL. The settlement reached with the CRA increased the allocation of the income to CFCL but did not have a material impact on our financial statements.
CFL distributes all of its earnings from the sale of fertilizer as patronage dividends to its customers for fertilizer, including us. For Canadian income tax purposes CFL is permitted to deduct an amount equal to the patronage dividends it paid to its customers, provided that certain Canadian income tax requirements are met. While CFL is not currently under audit by the Canadian tax authorities, CFL has recently received a preliminary inquiry from the CRA which questions whether CFL's past patronage distributions have met the requirements for full deductibility under Canadian income tax law. The past years that would be affected by this inquiry are 2002, 2003 and 2004. While CFL believes its allocation method complied
38
with applicable law, CFL could be subject to Canadian income tax liabilities (exclusive of interest and penalties) for 2002, 2003 and 2004 of $5.8 million, $7.6 million and $24.7 million, respectively, and additional material Canadian income tax liabilities for future periods if its allocation method were determined to fail to meet the requirements for deductibility under Canadian tax law. We have a 66% economic interest in CFL.
Equity in Earnings (Loss) of Unconsolidated Subsidiaries. Equity in earnings (loss) of unconsolidated subsidiaries represents our share of the net earnings (loss) of the joint ventures in which we have an ownership interest.
Recent Developments
On July 15, 2005, we sold our interest in our CF Martin Sulphur joint venture to our joint venture partner, an affiliate of Martin Resource Management, for $18.6 million. The transaction does not have a material impact on our consolidated statement of operations, as the selling price approximated the carrying value of our investment in CF Martin Sulphur. Concurrent with the sale, we entered into a multi-year sulfur supply contract with CF Martin Sulphur.
Results of Operations
The following table presents our consolidated results of operations:
|
Year ended December 31,
|
Six months ended June 30,
|
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2002
|
2003
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2004
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2004
|
2005
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(in thousands)
|
|||||||||||||||
Net sales | $ | 1,014,071 | $ | 1,369,915 | $ | 1,650,652 | $ | 845,365 | $ | 1,085,985 | ||||||
Cost of sales | 986,295 | 1,335,508 | 1,434,545 | 744,473 | 935,075 | |||||||||||
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|
|
|
|
||||||||||||
Gross margin | 27,776 | 34,407 | 216,107 | 100,892 | 150,910 | |||||||||||
Selling, general and administrative |
|
|
37,317 |
|
|
38,455 |
|
|
41,830 |
|
|
20,302 |
|
|
25,270 |
|
Other operatingnet | 9,294 | 1,557 | 25,043 | 5,035 | 2,891 | |||||||||||
|
|
|
|
|
||||||||||||
Operating earnings (loss) | (18,835 | ) | (5,605 | ) | 149,234 | 75,555 | 122,749 | |||||||||
Interest expense |
|
|
23,565 |
|
|
23,870 |
|
|
22,696 |
|
|
11,820 |
|
|
10,531 |
|
Interest income | (2,209 | ) | (2,260 | ) | (5,901 | ) | (1,990 | ) | (7,683 | ) | ||||||
Minority interest | 6,409 | 6,031 | 23,145 | 9,707 | 12,365 | |||||||||||
Impairment of investments in unconsolidated subsidiaries | | | 1,050 | | | |||||||||||
Other non-operatingnet | (174 | ) | (676 | ) | (778 | ) | (537 | ) | (336 | ) | ||||||
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|
|
|
|
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Earnings (loss) before income taxes | (46,426 | ) | (32,570 | ) | 109,022 | 56,555 | 107,872 | |||||||||
Income tax provision (benefit) |
|
|
(16,600 |
) |
|
(12,600 |
) |
|
41,400 |
|
|
21,477 |
|
|
42,757 |
|
Equity in earnings (loss) of unconsolidated subsidiaries | 1,706 | 1,587 | 110 | 237 | 35 | |||||||||||
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|
|
|
|
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Net earnings (loss) | $ | (28,120 | ) | $ | (18,383 | ) | $ | 67,732 | $ | 35,315 | $ | 65,150 | ||||
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|
|
|
|
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Segment Review
Our business is organized and managed internally based on two segments, the nitrogen fertilizer business and the phosphate fertilizer business, which are differentiated primarily by their products, the markets they serve and the regulatory environments in which they operate. The following segment tables exclude information regarding our potash sales that were discontinued in 2003.
Nitrogen Fertilizer Business
The following table presents summary operating data for our nitrogen fertilizer business:
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Year ended December 31,
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Six months ended June 30,
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2002
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2003
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2004
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2004
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2005
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(in thousands, except percentage and price per ton amounts)
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Net sales | $ | 730,360 | $ | 1,058,246 | $ | 1,273,885 | $ | 656,122 | $ | 853,250 | |||||||
Cost of sales | 711,134 | 999,677 | 1,080,086 | 569,335 | 718,905 | ||||||||||||
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|
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Gross margin | $ | 19,226 | $ | 58,569 | $ | 193,799 | $ | 86,787 | $ | 134,345 | |||||||
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|
|
|
|
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Gross margin percentage | 2.6 | % | 5.5 | % | 15.2 | % | 13.2 | % | 15.7 | % | |||||||
Tons of product sold | 6,069 | 6,309 | 6,603 | 3,467 | 3,781 | ||||||||||||
Sales volumes by product |
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|
|
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|
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|
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|
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Ammonia | 1,435 | 1,475 | 1,438 | 841 | 887 | ||||||||||||
Urea | 2,663 | 2,572 | 2,513 | 1,244 | 1,428 | ||||||||||||
UAN | 1,926 | 2,228 | 2,593 | 1,339 | 1,431 | ||||||||||||
Other nitrogen fertilizers | 45 | 34 | 59 | 43 | 35 | ||||||||||||
Average selling price per ton by product |
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|
|
|
|
|
|
|
|
|
|
|
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|
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|
Ammonia | $ | 159 | $ | 236 | $ | 278 | $ | 275 | $ | 310 | |||||||
Urea | 120 | 172 | 205 | 195 | 242 | ||||||||||||
UAN | 93 | 119 | 137 | 133 | 161 |
Phosphate Fertilizer Business
The following table presents summary operating data for our phosphate fertilizer business:
|
Year ended December 31,
|
Six months ended June 30,
|
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|
2002
|
2003
|
2004
|
2004
|
2005
|
||||||||||||
|
(in thousands, except percentage and price per ton amounts)
|
||||||||||||||||
Net sales | $ | 281,848 | $ | 309,798 | $ | 376,767 | $ | 189,243 | $ | 232,735 | |||||||
Cost of sales | 273,363 | 334,053 | 354,459 | 175,138 | 216,170 | ||||||||||||
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|
|
|
|
|||||||||||||
Gross margin | $ | 8,485 | $ | (24,255 | ) | $ | 22,308 | $ | 14,105 | $ | 16,565 | ||||||
|
|
|
|
|
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Gross margin percentage | 3.0 | % | (7.8 | )% | 5.9 | % | 7.5 | % | 7.1 | % | |||||||
Tons of product sold | 1,914 | 1,892 | 1,900 | 984 | 1,103 | ||||||||||||
Sales volumes by product |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DAP | 1,560 | 1,627 | 1,549 | 810 | 890 | ||||||||||||
MAP | 289 | 252 | 351 | 174 | 213 | ||||||||||||
Other phosphate fertilizers | 65 | 13 | | | | ||||||||||||
Domestic vs export sales of DAP/MAP |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic | 1,614 | 1,718 | 1,218 | 634 | 717 | ||||||||||||
Export | 235 | 161 | 682 | 350 | 386 | ||||||||||||
Average selling price per ton by product |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DAP | $ | 146 | $ | 163 | $ | 197 | 190 | $ | 210 | ||||||||
MAP | 157 | 172 | 204 | 201 | 217 |
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Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
Consolidated Operating Results
For the six months ended June 30, 2005, the nitrogen fertilizer industry benefited from tight global supply conditions, while the domestic phosphate fertilizer industry continued to show improvement due primarily to strong export demand. Our total gross margin increased by approximately $50.0 million, or 50%, from $100.9 million for the six months ended June 30, 2004 to $150.9 million for the six months ended June 30, 2005 due largely to improved market conditions and increased sales volume for both nitrogen and phosphate fertilizers. Net earnings improved to $65.2 million for the six months ended June 30, 2005 compared to $35.3 million for the same period in 2004, again reflecting stronger market conditions and increased sales volume for all fertilizers.
Net Sales
Our net sales increased 29% to $1.1 billion in the six months ended June 30, 2005 compared to $0.9 billion in the six months ended June 30, 2004, due to an increase in sales volumes and higher average selling prices. Our total sales volume increased 10% to 4.9 million tons in the six months ended June 30, 2005 versus 4.5 million tons in the six months ended June 30, 2004, due to stronger industry conditions and increased market penetration with unaffiliated customers. Nitrogen fertilizer prices for the six months ended June 30, 2005 averaged 20% higher than the prices for similar products in the comparable period of 2004 reflecting strong demand and tight supply. Phosphate fertilizer prices in the six months ended June 30, 2005 were 10% higher than corresponding prices in the six months ended June 30, 2004, resulting primarily from strong international demand.
Cost of Sales
Total cost of sales of our nitrogen fertilizers averaged $190 per ton in the six months ended June 30, 2005 compared to $164 per ton in the six months ended June 30, 2004, an increase of 16%, primarily due to higher natural gas prices. Compared with the relevant spot prices, our natural gas hedging activities resulted in higher natural gas costs of $8.1 million, which represented about 1% of total cost of sales of our nitrogen fertilizers in the six months ended June 30, 2005. The $8.1 million increase in natural gas costs consisted of a $10.7 million increase due to hedging activities associated with our forward pricing program, partially offset by a $2.6 million decrease resulting from hedging activities unrelated to our forward pricing program. In the six months ended June 30, 2004, compared with relevant spot prices, hedging activities unrelated to our forward pricing program lowered natural gas costs by $20.9 million, while hedging activities associated with our forward pricing program decreased natural gas costs by $2.2 million. Phosphate fertilizer cost of sales averaged $196 per ton in the six months ended June 30, 2005 compared to $178 per ton in the first six months of the prior year, an increase of 10%, mainly due to higher phosphate rock and ammonia costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 25% to $25.3 million in the six months ended June 30, 2005 compared to $20.3 million in the comparable period of 2004. The increase in the six months ended June 30, 2005 was largely due to increased administrative expenses related to preparation for this offering, performance-based management incentive compensation and expenses associated with our investment opportunity in the Republic of Trinidad and Tobago.
Other OperatingNet
Other operatingnet decreased from $5.0 million in the six months ended June 30, 2004 to $2.9 million in the same period of 2005. The $2.1 million decrease was largely due to the fact that, in the six months ended June 30, 2004, Bartow water treatment costs were expensed as incurred, whereas water treatment costs incurred in the comparable period of 2005 were charged against an asset retirement
41
obligation, which was recorded in the fourth fiscal quarter of 2004. For a detailed explanation of the accounting for water treatment costs at Bartow, please refer to note 7 to our audited consolidated financial statements included in this prospectus.
InterestNet
Net interest expense decreased 71% from $9.8 million in the six months ended June 30, 2004 to $2.8 million in the six months ended June 30, 2005. Interest expense decreased 11% from $11.8 million in the six months ended June 30, 2004 to $10.5 million in the comparable period of 2005 primarily due to lower debt outstanding in the six months ended June 30, 2005. Interest income almost quadrupled from $2.0 million in the six months ended June 30, 2004 to $7.7 million in the six months ended June 30, 2005 as a result of higher average balances of invested cash and, to a lesser extent, higher average rates of return.
Minority Interest
Amounts reported as minority interest represent the interest of the 34% minority holder of CFL's common and preferred shares. The increase in the first six months of 2005 was due to improved CFL operating results. The improvement in CFL operating results reflects stronger market conditions for nitrogen fertilizers.
Income Taxes
Income taxes were recorded based on our estimated-annual-effective tax rate, which is based on applicable federal, foreign and state statutory rates. Our effective tax rate increased from 38% in the six months ended June 30, 2004 to 40% in the six months ended June 30, 2005 primarily due to higher effective state income tax rates. Our income tax provision for the six months ended June 30, 2004 was $21.5 million compared to $42.8 million for the comparable period in 2005, primarily due to improved operating results.
Equity in Earnings (Loss) of Unconsolidated Subsidiaries
Equity in earnings of unconsolidated subsidiaries decreased from $237,000 in the six months ended June 30, 2004 to $35,000 in the six months ended June 30, 2005, due to lower operating results of our CF Martin Sulphur joint venture.
Nitrogen Gross Margin
Net Sales. Nitrogen fertilizer net sales increased 30% to $853.3 million in the six months ended June 30, 2005 compared to $656.1 million in the six months ended June 30, 2004, due to both higher average selling prices and an increase in sales volume. Nitrogen fertilizer sales volume increased 9% to 3.8 million tons in the six months ended June 30, 2005 compared to 3.5 million tons in the comparable period of 2004 due to a combination of stronger industry conditions and increased sales volume to unaffiliated customers. Ammonia, urea and UAN sales volume increased by 6%, 15% and 7%, respectively, in the six months ended June 30, 2005 compared to the six months ended June 30, 2004. The increase in ammonia and UAN sales volume in the six months ended June 30, 2005 resulted primarily from increased market penetration with unaffiliated customers. The increase in urea sales volume in the six months ended June 30, 2005 was largely due to stronger industry conditions and increased market penetration. Overall nitrogen fertilizer sales volume to unaffiliated customers increased from 36% of total nitrogen fertilizer sales volume in the six months ended June 30, 2004 to 38% of total nitrogen fertilizer sales volume in the six months ended June 30, 2005. Ammonia, urea and UAN sales prices increased by 13%, 24% and 21%, respectively, in the six months ended June 30, 2005 compared to the same period of the prior year. The increase in ammonia prices in the six months ended June 30, 2005 was due to strong U.S. demand and tight supply conditions in midwestern U.S. markets. Urea prices increased in the six months ended June 30, 2005 due to a tight world market caused by plant outages abroad and the impact of
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increased buying related to demand that had been deferred from previous periods. An improved overall nitrogen market combined with tight supplies supported higher UAN selling prices in the six months ended June 30, 2005.
Cost of Sales. Total cost of sales of our nitrogen fertilizers averaged $190 per ton in the six months ended June 30, 2005 compared to $164 per ton in the six months ended June 30, 2004, an increase of 16%, largely due to higher natural gas prices and higher purchased product costs. The overall weighted average cost of natural gas supplied to our Donaldsonville facility and CFL's Medicine Hat facility increased by 27% in the six months ended June 30, 2005 versus the cost in the comparable period of 2004 due to continued tight market conditions for natural gas. Purchased product costs were approximately $14.2 million higher in the six months ended June 30, 2005 than in the six months ended June 30, 2004, due to the overall increase in nitrogen fertilizer prices previously discussed.
During the six months ended June 30, 2005, we sold approximately 2.6 million tons of nitrogen fertilizers under our forward pricing program, representing approximately 68% of our nitrogen fertilizer sales volume for the six month period. In the comparable period of 2004, we sold approximately 1.7 million tons of nitrogen fertilizers under this program, representing approximately 48% of our nitrogen fertilizer sales volume for the period.
Phosphate Gross Margin
Net Sales. Phosphate fertilizer net sales increased 23% to $232.7 million in the six months ended June 30, 2005 compared to $189.2 million in the six months ended June 30, 2004, due to a combination of increased sales volume and higher average selling prices. Our total level of phosphate fertilizer sales of 1.1 million tons in the six months ended June 30, 2005 represented an increase of 12% compared to the same period of 2004. Within our total phosphate fertilizer sales, sales of DAP/MAP to unaffiliated domestic customers increased by 139%, totaling 201,000 tons in the six months ended June 30, 2005 compared to 84,000 tons in the six months ended June 30, 2004. Our phosphate fertilizer sales volume to unaffiliated customers increased from 44% of total phosphate fertilizer sales volume in the six months ended June 30, 2004 to 53% of total phosphate fertilizer sales volume in the six months ended June 30, 2005. Average phosphate fertilizer prices in the six months ended June 30, 2005 increased by 10% compared to prices in the six months ended June 30, 2004, due largely to strong international phosphate fertilizer demand.
Cost of Sales. Phosphate cost of sales averaged $196 per ton in the six months ended June 30, 2005 compared to $178 per ton in the six months ended June 30, 2004. The 10% increase was mainly due to higher phosphate rock costs, higher ammonia costs and higher fixed costs per ton of production because of lower production levels resulting from scheduled plant turnarounds, partially offset by lower sulfur costs. Phosphate rock costs increased by 32% in the six months ended June 30, 2005 compared to the six months ended June 30, 2004 due primarily to increased costs resulting from less favorable mining conditions in the current period. Ammonia prices increased by 12% in the six months ended June 30, 2005 compared to the six months ended June 30, 2004, reflecting stronger global market conditions mainly in the second quarter of 2005. Sulfur costs decreased 8% during the six months ended June 30, 2005 as compared to the same period of 2004. The sulfur market returned to a balanced condition in the second quarter of 2005 from a surplus in the first quarter of 2005 that was created primarily by lower demand from phosphate producers as a result of plant turnarounds taken during the first quarter of 2005.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Consolidated Operating Results
In 2004, the nitrogen fertilizer industry benefited from tight global supply conditions, while the domestic phosphate fertilizer industry strengthened due to strong export demand. Our total gross margin increased by approximately $181.7 million, or 528%, from $34.4 million in 2003 to $216.1 million in 2004 due largely to improved market conditions for both nitrogen and phosphate fertilizers. Net earnings
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improved to $67.7 million in 2004 compared to a net loss of $18.4 million in 2003, primarily reflecting stronger market conditions for all fertilizers. To a lesser degree, our increased profitability in 2004 was also due to our new approach to the marketplace and measures implemented to improve asset utilization and reduce costs.
Net Sales
Our net sales increased 20% to $1.7 billion in 2004 compared to $1.4 billion in 2003, largely due to higher average selling prices and a slight increase in sales volume. Our total sales volume increased 4% to 8.5 million tons in 2004 versus 8.2 million tons in 2003, due to stronger industry conditions and increased market penetration with unaffiliated customers. Nitrogen fertilizer prices in 2004 averaged 15% higher than the prices for similar products in 2003, reflecting strong demand and tight supply. Phosphate fertilizer prices in 2004 were 21% higher than corresponding prices in 2003, resulting primarily from strong international demand.
Cost of Sales
Total cost of sales of our nitrogen fertilizers averaged $164 per ton in 2004 compared to $158 per ton in 2003, an increase of 4%, primarily due to higher natural gas prices. Compared with the relevant spot prices, our natural gas hedging activities resulted in lower natural gas costs of $19.3 million, which represented about 2% of total cost of sales of our nitrogen fertilizers in 2004. The $19.3 million reduction in natural gas costs consisted of a $30.9 million decrease due to hedging activities unrelated to our forward pricing program, partially offset by an $11.6 million increase resulting from hedging activities associated with our forward pricing program. In 2003, compared with relevant spot prices, hedging activities unrelated to our forward pricing program lowered our natural gas costs by $10.5 million, while hedging activities associated with our forward pricing program increased natural gas costs by $2.1 million. Phosphate fertilizer cost of sales averaged $187 per ton in 2004 compared to $177 per ton in 2003, an increase of 6%, mainly due to higher ammonia costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 9% to $41.8 million in 2004 compared to $38.5 million in 2003. The increase in 2004 was largely due to increased expenses related to performance-based management incentive compensation, which were offset partially by lower payroll costs resulting from staff reductions and lower outside consulting fees.
Other OperatingNet
Other operatingnet increased from $1.6 million in 2003 to $25.0 million in 2004. The $23.4 million increase was due primarily to the following: a $10.5 million credit to Bartow phosphogypsum stack asset retirement costs (related to revised engineering estimates) in 2003 that did not reoccur in 2004; a $7.1 million charge recorded in 2004 for future expenditures to treat water stored in the Bartow phosphogypsum stack system; and a $4.7 million provision recorded in 2004 for other Bartow environmental remediation requirements.
Other operatingnet in 2004 also includes a $3.4 million provision for environmental remediation requirements at our Ahoskie, North Carolina nitrogen facility, which has been closed for 23 years.
InterestNet
Net interest expense decreased 22% from $21.6 million in 2003 to $16.8 million in 2004. Interest expense decreased 5% from $23.9 million in 2003 to $22.7 million in 2004 primarily due to scheduled debt reduction, while interest income increased 161% from $2.3 million in 2003 to $5.9 million in 2004 as a result of higher average balances of invested cash.
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Minority Interest
Amounts reported as minority interest represent the interest of the 34% minority holder of CFL's common and preferred shares. The increase in 2004 was due to improved 2004 CFL operating results. The improvement in CFL operating results reflects stronger market conditions for nitrogen fertilizers.
Impairment of Investments in Unconsolidated Subsidiaries
Impairment of investments in unconsolidated subsidiaries in 2004 consisted of a $1.1 million write-off of our investment in Big Bend Transfer Co., L.L.C., or BBTC, our joint venture to construct and operate a dry sulfur remelting facility in Tampa, Florida. We wrote off our investment in BBTC due to a fundamental shift in the economics of converting dry sulfur to liquid. In the intervening five years since the joint venture discussions were initiated, domestic supplies of attractively-priced molten sulfur have increased substantially pursuant to increased production of cleaner grades of gasoline, which is expected to continue in the future.
Income Taxes
Our effective tax rate in 2004 was 38% compared to 39% in 2003. The decrease in the effective tax rate from 2003 to 2004 was due largely to lower effective state income tax rates. Our income tax provision for 2004 was $41.4 million compared to a net tax benefit of $12.6 million in 2003, primarily due to improved operating results.
Equity in Earnings (Loss) of Unconsolidated Subsidiaries
Equity in earnings of unconsolidated subsidiaries decreased from $1.6 million in 2003 to $110,000 in 2004, due to lower operating results of our CF Martin Sulphur joint venture.
Nitrogen Gross Margin
Net Sales. Nitrogen fertilizer net sales increased 20% to $1.3 billion in 2004 compared to $1.1 billion in 2003, due to both higher average selling prices and an increase in sales volume. Nitrogen fertilizer sales volume increased 5% to 6.6 million tons in 2004 compared to 6.3 million tons in 2003 due to stronger industry conditions and increased market penetration with unaffiliated customers. Declines in ammonia and urea sales volume of 3% and 2%, respectively, in 2004 compared to 2003 were more than offset by a 16% increase in UAN sales volumes. These strong overall UAN sales in 2004 resulted primarily from our continuing efforts to expand our customer base. Overall nitrogen fertilizer sales volume to unaffiliated customers increased from 28% of total nitrogen fertilizer sales volume in 2003 to 40% of total nitrogen fertilizer sales volume in 2004. Overall nitrogen fertilizer prices in 2004 averaged 15% higher than the prices for similar products in 2003 on a per ton of product basis, reflecting strong demand and tight supply caused largely by production outages at foreign producers in the face of continuing strong worldwide demand for nitrogen fertilizers.
Cost of Sales. Total cost of sales of our nitrogen fertilizers averaged $164 per ton in 2004 compared to $158 per ton in 2003, an increase of 4%, due to higher natural gas prices and higher purchased product costs. The overall weighted average cost of natural gas supplied to our Donaldsonville facility and CFL's Medicine Hat facility increased by 8% in 2004 versus the cost in 2003 due to continued tight supply of natural gas and high prices for crude oil and other energy substitutes. Purchased product costs were approximately $16 million higher in 2004 than in 2003, due to the overall increase in nitrogen fertilizer prices previously discussed.
We instituted our forward pricing program in mid-2003. During 2004, we sold approximately 3.6 million tons of nitrogen fertilizers under this program, representing approximately 54% of our nitrogen fertilizer sales volume for the year.
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Phosphate Gross Margin
Net Sales. Phosphate fertilizer net sales increased 22% to $376.8 million in 2004 compared to $309.8 million in 2003, largely due to higher average selling prices. Although our overall level of phosphate fertilizer sales of 1.9 million tons in 2004 approximated 2003 sales, the composition of our 2004 sales shifted significantly, with substantial increases in export sales and sales to unaffiliated domestic customers. Overall export sales of DAP/MAP increased 324%, totaling 682,000 tons in 2004 compared to 161,000 tons in 2003. Phosphate fertilizer sales volume to unaffiliated customers increased from 18% of total phosphate fertilizer sales volume in 2003 to 47% of total phosphate fertilizer sales volume in 2004. Average phosphate fertilizer prices in 2004 increased 21% compared to 2003, due to strong aggregate phosphate fertilizer demand.
Cost of Sales. Phosphate cost of sales averaged $187 per ton in 2004 compared to $177 per ton in 2003, an increase of 6%, mainly due to higher ammonia costs in 2004, partially offset by lower maintenance costs. Compared to 2003, ammonia prices in 2004 increased approximately 24%, primarily reflecting tighter global market conditions. Maintenance costs at our Plant City phosphate fertilizer complex were $6.4 million lower in 2004 than in 2003 due to a higher level of discretionary maintenance projects being completed in 2003.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Consolidated Operating Results
In 2003, tighter global supply and stronger global demand contributed to stronger nitrogen fertilizer industry conditions in the second half of the year, while phosphate fertilizer industry conditions remained at depressed levels throughout the year. Our total gross margin in 2003 increased by approximately $6.6 million, or 24%, from $27.8 million in 2002 to $34.4 million in 2003 due to improved nitrogen fertilizer margins, which more than offset the relative weakness in our phosphate fertilizer business operating results. Our net loss improved to $18.4 million in 2003, compared to $28.1 million in 2002. The adoption of our new approach to the marketplace and other measures we have implemented to improve business performance also contributed to improvement in our operating results.
Net Sales
Our net sales increased 35% to $1.4 billion in 2003 compared to $1.0 billion in 2002 due to higher selling prices and increased sales volume. Our total sales volume increased 3% to 8.2 million tons in 2003 as compared to 8.0 million tons in 2002, with a 47% increase in volumes sold to unaffiliated customers more than offsetting a 7% decline in volumes sold to our owners. Nitrogen fertilizer selling prices in 2003 averaged 40% higher than in 2002. Phosphate fertilizer prices in 2003 were 12% higher than they were in 2002.
Cost of Sales
The cost of sales for our nitrogen fertilizers averaged $158 per ton in 2003 compared to $117 per ton in 2002, an increase of 35%, primarily due to higher natural gas prices. Compared with the relevant spot prices, our natural gas hedging activities resulted in lower natural gas costs of approximately $8.4 million, which represented about 1% of total cost of sales of our nitrogen fertilizers in 2003. The $8.4 million reduction in natural gas costs consisted of a $10.5 million decrease due to hedging activities unrelated to our forward program pricing, partially offset by a $2.1 million increase resulting from hedging activities associated with our forward pricing program. In 2002, our natural gas costs were $9.3 million lower than relevant spot prices due to hedging activities unrelated to our forward pricing program. The cost of sales of our phosphate fertilizers averaged $177 per ton in 2003 compared to $143 per ton in 2002, an increase of 24%, due to higher raw material and maintenance costs.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 3% to $38.5 million in 2003 compared to $37.3 million in 2002, resulting primarily from increases in employee benefit costs.
Other OperatingNet
Other operatingnet decreased from $9.3 million in 2002 to $1.6 million in 2003. In 2003, we recorded a $10.5 million credit to Bartow phosphogypsum stack asset retirement costs as a result of revised engineering estimates.
InterestNet
Net interest expense in 2003 of $21.6 million reflected a slight increase of $254,000 over net interest expense in 2002 due primarily to increased interest expense.
Minority Interest
Amounts reported as minority interest represent the minority interest in CFL. The decrease of $378,000 in minority interest from 2002 to 2003 was due to a decrease in CFL's operating results.
Income Taxes
Our effective tax rate in 2003 was 39% compared to 36% in 2002. The effective tax rate was lower in 2002 as compared to 2003 due primarily to the loss of benefits related to foreign tax credits subsequently converted into foreign tax deductions in 2003, partially offset by higher 2002 effective state income tax rates resulting from a change in the apportionment of income (loss) among various states. The income tax benefit for 2003 was $12.6 million compared to a net benefit of $16.6 million in 2002, primarily due to improved operating results.
Equity in Earnings (Loss) of Unconsolidated Subsidiaries
Equity in earnings of unconsolidated subsidiaries decreased from $1.7 million in 2002 to $1.6 million in 2003, or 7%, due to lower operating results of our CF Martin Sulphur joint venture.
Nitrogen Gross Margin
Net Sales. Nitrogen fertilizer net sales increased 45% to $1.1 billion in 2003 compared to $.7 billion in 2002, due to higher average selling prices and an increase in sales volume. Nitrogen fertilizer sales volumes increased 4% to 6.3 million tons in 2003 compared to 6.1 million tons in 2002. Declines in urea sales volume of 3% in 2003 as compared to 2002 were more than offset by a 3% and 16% increase in ammonia and UAN sales volumes in 2003, respectively. These stronger UAN sales resulted primarily from our efforts to develop business with unaffiliated customers. Overall nitrogen fertilizer sales volume to unaffiliated customers increased from 18% of total nitrogen fertilizer sales volume in 2002 to 28% of total nitrogen fertilizer sales volume in 2003. Nitrogen fertilizer selling prices in 2003 averaged 40% higher than in 2002 on a per ton of product basis, reflecting improving industry conditions. In 2003, average ammonia and urea selling prices increased due to tighter global nitrogen fertilizer markets.
Cost of Sales. The cost of sales for our nitrogen fertilizers averaged $158 per ton in 2003 compared to $117 per ton in 2002, an increase of 35%, primarily due to higher natural gas prices. The overall weighted average cost of natural gas supplied to Donaldsonville and Medicine Hat increased by 63%. The increase in natural gas prices in 2003 was due to increased demand and supply concerns as demand growth exceeded increased natural gas production.
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Phosphate Gross Margin
Net Sales. Phosphate fertilizer net sales in 2003 were $309.8 million, a 10% increase over 2002 primarily due to higher average selling prices. At 1.9 million tons, the sales volume of DAP/MAP for 2003 was approximately equal to the volume of product sold in 2002. Phosphate fertilizer prices in 2003 were 12% higher than they were in 2002.
Cost of Sales. The cost of sales of our phosphate fertilizers averaged $177 per ton in 2003 compared to $143 per ton in 2002, an increase of 24%, due to higher ammonia and sulfur prices and phosphate rock costs and increased maintenance costs. Ammonia prices increased 72% in 2003 compared to 2002, reflecting tighter global market conditions. Partially driven by increased phosphate fertilizer production, sulfur prices increased 42% in 2003 as compared to 2002. Maintenance costs at our Plant City phosphate fertilizer complex were $9.8 million higher in 2003 than in 2002, due to discretionary maintenance projects that had been deferred in earlier periods.
Liquidity and Capital Resources
The primary sources of cash for working capital, capital expenditures and acquisitions are operating cash flow and our senior revolving credit facility. Our primary uses of cash are operating costs, working capital needs, debt service requirements and capital expenditures. Our working capital requirements are affected by several factors, including demand for our products, selling prices for our products, raw material costs, freight costs and seasonality factors inherent in the business.
Cash Balance and Other Liquidity
As of June 30, 2005, we had cash and cash equivalents of $79.4 million, short-term investments of $430.9 million and a $130.0 million current liability attributable to customer advances related to cash deposits received under our forward pricing program. As of December 31, 2004, the comparable amounts were $50.0 million, $369.3 million and $211.5 million, respectively. Short-term investments consist of available-for-sale auction rate securities that are reported at fair value. We believe that our cash, cash equivalents and short-term investments, our operating cash flows and liquidity under our revolving credit facility are adequate to fund our cash requirements for the foreseeable future. As of June 30, 2005 and December 31, 2004, we had $77 million and $120 million available, respectively, under our revolving credit facility.
We reclassified $369.3 million of auction rate securities from cash and cash equivalents to short-term investments on the consolidated balance sheet as of December 31, 2004. This reclassification was also made on prior years' consolidated financial statements to conform to the current year's presentation. On the consolidated cash flow statement, corresponding adjustments have been made to reflect the gross purchases and gross sales and maturities of these securities as investing activities rather than a component of cash and cash equivalents. These reclassifications had no impact on previously reported net income or cash flow from operations.
We offer a forward pricing program to our customers under which product may be ordered for future delivery, with a substantial portion of the sales price being collected before the product is shipped, thereby reducing or eliminating the accounts receivable related to such sales. See "Forward Pricing Program." While customer advances were a significant source of liquidity in 2003, 2004 and the first six months of 2005, the level of sales under the forward pricing program is affected by many factors, including current market conditions and our customers' perceptions of future market fundamentals. If the level of sales under the forward pricing program were to decrease in the future, our cash received from customer advances would likely decrease, and our accounts receivable balances would likely increase. Also, borrowing under our revolving credit facility could become necessary as a further consequence. Future participation in the forward pricing program may not be at the levels that we have experienced over the past two years. Due to our lack of history with this program and the volatility inherent in our business, we cannot estimate the amount of future forward pricing program sales activity.
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Debt
As of June 30, 2005, our long-term debt, including current maturities, totaled $246.3 million, compared to $254.8 million as of December 31, 2004. Notes payable, representing amounts owed to the CFL minority interest holder with respect to advances, were $4.0 million as of June 30, 2005 compared to $4.1 million as of December 31, 2004.
Our long-term debt bears interest at both fixed and variable rates. Notes payable bear interest at a variable rate. Our $140 million revolving credit facility is available through September 26, 2006. This facility is secured by working capital, certain equipment and the Donaldsonville nitrogen fertilizer complex. Borrowing at any time is limited to the lesser of $140 million or the available collateral, offset by customer advances as defined in our senior credit agreement. Available credit as of June 30, 2005 and December 31, 2004, was approximately $77 million and approximately $120 million, respectively. There were no outstanding borrowings under this facility as of June 30, 2005 or December 31, 2004.
We plan to repay our existing term notes and pay the associated make-whole prepayment penalty on these notes with cash on hand and short-term investments shortly after the consummation of this offering. As of July 31, 2005, the outstanding balance of the term notes will be approximately $235.6 million and the associated make-whole penalty will be approximately $28.6 million. We also plan to replace our existing $140 million senior revolving credit facility with a new $250 million senior credit facility to become effective on the completion of this offering. CF Industries has entered into a commitment letter with JPMorgan Securities Inc. and JPMorgan Chase Bank, N.A. for this new facility. See "Description of Certain Indebtedness."
As a result of the proposed repayment of our term notes, we are also considering possible new long-term debt financing opportunities, depending on market conditions and other relevant factors. There can be no assurance, however, that we will be able to raise additional long-term debt financing on terms acceptable to us or at all.
Capital Spending
Capital expenditures are made to sustain our asset base, to increase our capacity and to improve plant efficiency. In response to the difficult industry environment over the last several years, we deferred non-essential capital expenditures whenever it was possible to do so without compromising the operational integrity of our facilities or the safety of our employees. We expect to spend approximately $70 million to $80 million on capital expenditures in each of 2005 and 2006. This amount includes approximately $14 million to $21 million each year for capital expenditures at CFL, of which we are obligated to fund 66%. These amounts do not include expenditures related to opportunities for new investment, such as the project to construct a world-scale ammonia and UAN manufacturing facility in the Republic of Trinidad and Tobago that we are currently studying with Terra Industries and ANSA McAL.
Financial Assurance Requirements
In addition to various operational and environmental regulations related to our phosphate fertilizer business, we are also subject to financial assurance requirements. The purpose of these requirements is to assure the government that sufficient company funds will be available for the ultimate closure, post-closure care and/or reclamation at our facilities. Currently, these financial assurance requirements can be satisfied without the need for any expenditure of corporate funds if our financial statements meet certain criteria, referred to as the financial tests. However, pursuant to a recent amendment to Florida's regulations governing financial assurance related to the closure of phosphogypsum stacks, we intend to establish a trust fund to meet such obligations to take advantage of a "Safe Harbor" provision of the new regulations. Beginning in 2006, we expect to contribute between $2 million and $5 million annually over the next ten years, based upon an assumed rate of return of 4% on invested funds, to a fund earmarked to cover the closure and long-term maintenance and monitoring costs for our phosphogypsum stacks, as well as any costs incurred to manage our wastewater upon closure of the stacks. The amount of money that will have
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accumulated in the trust fund by the end of the ten-year period, including interest earned on contributed funds, is currently expected to be approximately $37 million. After the initial ten years, contributions to the trust fund are expected to average approximately $1 million annually for the following 16 years. The trust fund is expected to approximate $92 million at the end of 26 years assuming a 4% return on the invested funds. The amounts recognized as expense in our operations pertaining to phosphogypsum stack closure and land reclamation are determined and accounted for as described in note 7 to our audited consolidated financial statements included in this prospectus. These amounts are expected to differ from the amounts anticipated to fund the trust, which are based on the guidelines set forth in the Florida regulations. Ultimately, the cash in these trust funds will be used to settle the asset retirement obligations. Additionally, the Florida legislature recently passed a bill that would require mining companies to demonstrate financial responsibility for wetland and other surface water mitigation measures in advance of any mining activities. If this bill becomes law, we may be required to demonstrate financial responsibility for wetland and other surface water mitigation measures if and when we expand our Hardee mining activities to new geographical areas not currently permitted.
Cash Flows
Operating Activities
Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
Net cash generated from operating activities during the first six months of 2005 was $133.0 million compared to $55.1 million in the same period in 2004. An increase in operating earnings of $47.2 million for the six months ended June 30, 2005, along with a $29.7 million decrease in the amount of cash used to fund working capital, accounted for most of the $77.9 million improvement in cash provided by operating activities. Net changes in working capital consumed $33.0 million of cash flow in the first six months of 2005 compared to $62.7 million in the comparable period of 2004. During the first six months of 2005, accounts receivable increased by $48.8 million and customer advances decreased by $81.5 million, resulting in a net use of cash of $130.3 million, which was partially offset by a $91.9 million decrease in inventories. The increase in accounts receivable was due to increased sales volume and higher prices realized for sales on account. The decrease in customer advances was primarily due to lower levels of forward purchases on order as of June 30, 2005 as compared to December 31, 2004. The decreased inventories were largely due to fewer quantities held at June 30, 2005. The primary reason for the $62.7 million use of cash in working capital for the six months ended June 30, 2004 was a $133.9 million decrease in customer advances partially offset by a $17.7 million decrease in accounts receivable and a $46.2 million decrease in inventories. The decrease in customer advances during the six months ended June 30, 2004 was due primarily to lower levels of forward purchases on order as of June 30, 2004 as compared to December 31, 2003.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Net cash generated from operating activities in 2004 was $344.3 million compared to $136.9 million in 2003. The $207.4 million improvement in cash flows from operating activities in 2004 was due primarily to a $154.8 million improvement in operating earnings and a $24.6 million increase in cash generated by changes in working capital. Net changes in working capital generated $100.5 million of cash flow in 2004 compared to $75.9 million generated in 2003. In 2004, accounts receivable decreased by $41.4 million, accounts payable and accrued expenses increased $44.1 million and customer advances increased $45.5 million. The decrease in accounts receivable was due primarily to an increase in sales volume shipped under the forward pricing program for which full payment was received prior to shipment. The increased accounts payable and accrued expenses were largely related to higher trade credit obligations to our gas suppliers, reflecting higher natural gas prices. The increase in customer advances in 2004 was due to expanded participation in our forward pricing program. The net positive effects from the above changes in operating cash flows were partially offset by a $26.4 million increase in inventories due to higher raw material prices and a $4.1 million increase in margin deposits due primarily to higher margin requirements. The primary reason for the $75.9 million source of cash in working capital in 2003 was the $126.1 million
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increase in customer advances due to expanded customer participation in our forward pricing program, which we instituted in 2003. The increase in cash flow from customer advances was partially offset by a $16.6 million increase in accounts receivable, a $21.1 million increase in margin deposits and a $13.6 million increase in inventories. The increase in accounts receivable was due primarily to increased net sales, and the increase in margin deposits was related to natural gas hedges established as of December 31, 2003. The increase in inventories was primarily due to higher raw material prices.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Net cash generated from operating activities in 2003 was $136.9 million compared to $76.9 million in 2002. The increase of $60.0 million in 2003 was primarily due to a $65.2 million increase in cash generated by changes in working capital. Net changes in working capital generated $75.9 million of cash flow in 2003 compared to $10.7 million generated in 2002. Customer advances increased by $126.1 million in 2003 due to expanded customer participation in our forward pricing program, which we instituted in 2003. The increase in cash flow from customer advances was partially offset by a $16.6 million increase in accounts receivable, a $21.1 million increase in margin deposits and a $13.6 million increase in inventories. The increase in accounts receivable was due primarily to increased net sales, and the increase in margin deposits was related to natural gas hedges established as of December 31, 2003. The increase in inventories was primarily due to higher raw material prices. The primary reason for the $10.7 million source of cash in working capital in 2002 was a $29.8 million increase in customer advances, partially offset by a $6.9 million increase in accounts receivable, a $7.2 million increase in margin deposits and a $7.1 million increase in inventories. Customer advances increased due to greater quantities on order and higher selling prices. The increase in accounts receivable was due primarily to higher sales volumes and the increase in margin deposits was related to higher margin requirements. The increase in inventories was primarily due to higher raw material prices.
Investing Activities
Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
Net cash used in investing activities was $82.0 million for the first six months of 2004 compared to $94.9 million in the first six months of 2005. The increase in additions to property, plant and equipment-net in 2005 was due primarily to a $13.1 million increase in plant turnaround costs incurred during the first six months of 2005 as compared to the first six months of 2004. Net purchases of short-term investments were $61.6 million during the six months ended June 30, 2005 as compared to $70.3 million during the same period of the prior year. The level of short-term investments, generally auction rate securities which we liquidate over periods ranging from three to twelve months, is dictated by our current cash position and estimated future requirements.
Years Ended December 31, 2004, 2003 and 2002
Net cash used in investing activities was $59.8 million, $78.6 million and $309.3 million in 2002, 2003 and 2004, respectively. Additions to property, plant and equipment-net accounted for $26.3 million, $28.7 million and $33.7 million in 2002, 2003 and 2004, respectively. These additions were primarily related to operational improvements, maintenance capital, plant turnaround costs and mining dam costs. Cash used to purchase short-term investments of $103.1 million, $226.5 million and $818.8 million was offset by the proceeds generated from the sales and maturities of short-term investments in the amounts of $69.0 million, $173.4 million and $541.2 million in 2002, 2003 and 2004, respectively.
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Financing Activities
Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
Net cash used in financing activities, consisting mainly of payments on long-term debt, was $8.5 million in the first six months of both 2004 and 2005. We had no outstanding borrowings under our revolving credit facilities at the end of the second quarter of either 2005 or 2004.
Years Ended December 31, 2004, 2003 and 2002
Net cash used in financing activities was $9.9 million, $40.5 million and $61.3 million in 2002, 2003 and 2004, respectively. Payments on long-term debt of $21.4 million, $33.4 million and $34.9 million were made in 2002, 2003 and 2004, respectively. We incurred $70.0 million of long-term debt in 2002 and used the proceeds to repay $55.0 million of outstanding borrowings under our revolving credit facility and to refinance $15.0 million of existing long-term debt. At the end of 2003 and 2004, we did not have any outstanding borrowings under our revolving credit facilities. The $21.7 million increase in distributions to minority interest in 2004 was due to the improved financial results of CFL in 2004.
Obligations
Contractual Obligations
The following is a summary of our contractual obligations as of December 31, 2004:
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Payments Due by Period
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2005
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2006
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2007
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2008
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2009
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After
2009 |
Total
|
|||||||||||||||
|
(in thousands)
|
|||||||||||||||||||||
Contractual Obligations | ||||||||||||||||||||||
Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt | $ | 19,917 | $ | 19,917 | $ | 32,416 | $ | 34,500 | $ | 34,500 | $ | 113,500 | $ | 254,750 | ||||||||
Notes payable (1) | | | | | 4,071 | | 4,071 | |||||||||||||||
Interest payments on long-term debt (2) | 18,289 | 17,054 | 15,775 | 13,353 | 10,764 | 16,900 | 92,135 | |||||||||||||||
Other Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases (3) | 9,576 | 6,691 | 3,840 | 2,141 | 783 | 305 | 23,336 | |||||||||||||||
Equipment purchases and plant improvements | 2,681 | | | | | | 2,681 | |||||||||||||||
Purchase obligations (4)(5)(6) | 206,522 | 25,000 | | | | | 231,522 | |||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||
Total | $ | 256,985 | $ | 68,662 | $ | 52,031 | $ | 49,994 | $ | 50,118 | $ | 130,705 | $ | 608,495 | ||||||||
|
|
|
|
|
|
|
52
As of June 30, 2005, we had additional purchase obligations relating to urea and UAN for resale in our markets and ammonia for use in our phosphate fertilizer production. As of June 30, 2005, total payments due during 2006 for purchase obligations were $147.7 million.
Other Long-Term Obligations
As of December 31, 2004, our other liabilities included balances related to asset retirement obligations and environmental remediation liabilities and shutdown costs. The estimated timing and amount of cash outflows associated with these liabilities are as follows:
|
Payments Due by Period
|
||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2005
|
2006
|
2007
|
2008
|
2009
|
After 2009
|
Total
|
||||||||||||||
|
(in thousands)
|
||||||||||||||||||||
Other Long-Term Obligations | |||||||||||||||||||||
Asset retirement obligations (1)(2) |
|
$ |
13,017 |
|
$ |
5,153 |
|
$ |
5,554 |
|
$ |
2,839 |
|
$ |
2,856 |
|
$ |
181,298 |
|
$ |
210,717 |
Environmental remediation liabilities and shutdown costs | 4,230 | 1,005 | 424 | 415 | 350 | 5,250 | 11,674 | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
Total | $ | 17,247 | $ | 6,158 | $ | 5,978 | $ | 3,254 | $ | 3,206 | $ | 186,548 | $ | 222,391 | |||||||
|
|
|
|
|
|
|
The following table details the undiscounted, inflation-adjusted estimated cash flows after 2009 required to settle asset retirement obligations, as discussed above.
|
Payments Due by Period
|
||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010-23
|
2024-30
|
2031-34
|
2035-42
|
2043-47
|
After 2048
|
Total
|
||||||||||||||
|
(in thousands)
|
||||||||||||||||||||
Asset Retirement Obligations After 2009 Cash Flows | $ | 38,695 | $ | 18,319 | $ | 57,058 | $ | 29,248 | $ | 11,756 | $ | 26,222 | $ | 181,298 |
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition, results of operations, liquidity and capital resources is based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles, or GAAP. GAAP requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and
53
related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates. We base our estimates on historical experience, technological assessment and the most recent information available to us. Actual results may differ from these estimates. Changes in estimates that may have a material impact on our results are discussed in the context of the underlying financial statement to which they relate. The following discussion presents information about our most critical accounting policies and estimates.
Revenue Recognition
We recognize revenue when title is transferred to the customer, which can be at the plant gate, a distribution facility, a supplier location or a customer destination. In some cases, application of this policy requires that we make assumptions or estimates regarding a component of revenue, discounts and allowances, or creditworthiness of the customer. We make those estimates based on the most recent information available and historical experience, but they may be affected by subsequent changes in market conditions.
Inventory Valuation
We review our inventory balances at least annually, and more frequently if required by market conditions, to determine if the carrying amount of inventories exceeds their net realizable value. This review process incorporates current industry and customer-specific trends, current operational plans for the inventory and historical price activity of inventory. If the carrying amount exceeds the estimated net realizable value, we would immediately adjust our inventory balances accordingly. If the actual sales price ultimately realized were to be less than our estimate of net realizable value, additional losses would be incurred in the period of liquidation.
Asset Retirement Obligations and Environmental Remediation Liabilities
Costs associated with the closure of our phosphogypsum stack systems at the Bartow and Plant City, Florida phosphate fertilizer complexes, and costs associated with land reclamation activities at our Hardee, Florida phosphate rock mine, are accounted for in accordance with SFAS No. 143 Accounting for Asset Retirement Obligations . If the cost of closure can be reasonably estimated, asset retirement obligations are recognized in the period in which the related assets are put into service. These obligations are capitalized at their present value and a corresponding asset retirement liability is recorded. The liability is adjusted in subsequent periods through accretion expense. Accretion expense represents the increase in the present value of the liability due to the passage of time. The asset retirement costs capitalized as part of the carrying amount of the related asset are depreciated over their estimated useful life. The aggregate carrying value of all of our asset retirement obligations was $52.7 million as of December 31, 2004 and $48.4 million as of June 30, 2005.
Environmental remediation liabilities are recognized when the related costs are considered probable and can be reasonably estimated consistent with the requirements of SFAS No. 5 Accounting for Contingencies . Estimates of these costs are based upon currently available facts, existing technology, site-specific costs and currently enacted laws and regulations. In reporting environmental liabilities, no offset is made for potential recoveries. All liabilities are monitored and adjusted as new facts or changes in law or technology occur. In accordance with GAAP, environmental expenditures are capitalized when such costs provide future economic benefits. Changes in laws, regulations or assumptions used in estimating these costs could have a material impact on our financial statements. The amount recorded for environmental remediation liabilities totaled $11.7 million as of December 31, 2004 and $11.1 million as of June 30, 2005.
The actual amounts to be spent on asset retirement obligations and environmental remediation liabilities will depend on factors such as the timing of activities, refinements in scope, technological developments and cost inflation, as well as present and future environmental laws and regulations. The
54
estimates of amounts to be spent are subject to considerable uncertainty and long timeframes. Changes in these estimates could have a material impact on our results of operations and financial position.
Recoverability of Long-Lived Assets
We review the carrying values of our plant, property and equipment on a regular basis in accordance with SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets . If impairment of an asset has occurred, an impairment charge is recognized immediately. Factors that we must estimate when performing impairment tests include sales volume, prices, inflation, discount rates, exchange rates, tax rates and capital spending. Significant judgment is involved in estimating each of these factors, which include inherent uncertainties. The recoverability of the values associated with our long-lived assets is dependent upon future operating performance of the specific businesses to which the assets are attributed. Certain of the operating assumptions are particularly sensitive to the cyclical nature of the fertilizer business.
Deferred Income Taxes
Our deferred income tax assets and liabilities arise from tax net operating losses and temporary differences between income tax requirements and financial statement reporting. The most salient factors in this regard are typically depreciation and amortization, depletable mineral properties, retirement benefits and asset retirement obligations. We record a valuation allowance if we believe that it is more likely than not that a deferred tax asset will not be realized.
The eventual realization of the deferred tax assets recorded depends on our ability to generate sufficient taxable income in future periods. Sources of future taxable income include reversals of existing temporary differences and operating earnings to be generated in future years. Estimates involving the projection of future earnings are subject to significant uncertainties and, therefore, are highly susceptible to change. Changes in such projections can result in material adjustments to our consolidated income tax provision.
As of December 31, 2004, we had total net operating loss carryforwards of $311.3 million. A gross deferred tax asset of $124.3 million related to these net operating loss carryforwards is included on our December 31, 2004 balance sheet. As of June 30, 2005, total net operating loss carryforwards were $279.2 million, and a related gross deferred tax asset of $111.5 million was included in deferred income taxes. Because our net operating loss carryforwards were generated from business conducted with our owners when we were a cooperative for tax purposes, there is substantial uncertainty under existing tax law whether any tax benefits from the related deferred tax asset will be realizable after the completion of this offering. As a result of this uncertainty, we will establish a valuation allowance equal to 100% of any of the deferred tax asset remaining after the consummation of this offering relating to the net operating loss carryforwards. We will record a non-cash charge to "Income Tax Expense" in the amount of the valuation allowance in the quarter in which the offering is completed.
We intend to enter into an NOL Agreement with the owners of CF Industries in connection with the Reorganization Transaction relating to the treatment of the net operating loss carryforwards. Under the NOL Agreement, in the event that it is finally determined that our net operating loss carryforwards can be used after we are no longer a cooperative, we will pay the owners of CF Industries an amount equal to the federal and state income taxes actually saved after the completion of this offering as a result of the utilization of net operating loss carryforwards related to our former cooperative status. See "The Reorganization Transaction."
Pension Assets and Liabilities
Pension assets and liabilities are affected by the market value of plan assets, estimates of the expected return on plan assets, plan design, actuarial estimates 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
55
plan assets will affect the amount of pension expense ultimately recognized. Our benefit obligation related to our pension plans was $214.6 million at December 31, 2004, which was $41.2 million higher than pension plan assets. The December 31, 2004 benefit obligation was computed based on a 5.75% discount rate, which was based on yields for high-quality corporate bonds with a maturity approximating the duration of our pension liability. Declines in comparable bond yields would increase our benefit obligation. Our net benefit obligation, after deduction of plan assets, could increase or decrease depending on the extent to which returns on pension plan assets are lower or higher than the discount rate. The 8.5% expected long-term rate of return on assets is based on studies of actual rates of return achieved by equity and non-equity investments, both separately and in combination over historical holding periods. We expect contributions to our pension plans to range between $8 million and $9 million annually for 2005 and 2006.
Retiree Medical Benefits
Retiree medical benefits are determined on an actuarial basis and are affected by assumptions, including discount rates used to compute the present value of the future obligations and expected increases in health care costs. Changes in the discount rate and differences between actual and expected health care costs will affect the recorded amount of retiree medical benefits expense.
Qualitative and Quantitative Disclosures About Market Risk
We are exposed to the impact of changes in interest rates, foreign currency exchange rates and commodity prices.
Interest Rate Fluctuations
Borrowings under a variable rate term loan and notes payable bear a current market rate of interest such that we are subject to interest rate risk on these borrowings. The revolving credit facility bears a similar risk, but as of December 31, 2004, there were no borrowings under this facility. As of December 31, 2004, a 100 basis point change in interest rates on our floating rate loans, which totaled $25.1 million, would result in a $251,000 change in pretax income on an annual basis.
Foreign Currency Exchange Rates
We are exposed to changes in the value of the Canadian dollar as a result of our 66% economic interest and our 49% common equity interest in CFL. We do not maintain any exchange rate derivatives or hedges related to CFL.
Commodity Prices
Our net sales, cash flows and estimates of future cash flows related to the nitrogen and phosphate fertilizer sales not made under the forward pricing program are sensitive to changes in nitrogen and phosphate fertilizer prices as well as changes in the prices of natural gas and other raw materials. A $1.00 per mmBTU change in the price of natural gas would change the cost to produce a ton of ammonia by approximately $33.
We use natural gas in the manufacture of our nitrogen fertilizer products. Because natural gas prices are volatile, our Natural Gas Acquisition Policy includes the objective of providing protection against significant adverse natural gas price movements. We manage the risk of changes in gas prices through the use of physical gas supply contracts and derivative financial instruments covering periods not exceeding three years. The derivative instruments currently used are swaps, futures and purchased options. These contracts reference primarily NYMEX futures contract prices, which represent fair value at any given time. The related contracts are traded in months forward and settlements are scheduled to coincide with anticipated gas purchases during those future periods. As of December 31, 2004, we hedged approximately 24.8 million mmBTUs of natural gas, most of which related to sales contracted to be sold through our forward pricing program as of December 31, 2004. As of June 30, 2005, we hedged approximately
56
16.3 million mmBTUs of natural gas, most of which related to sales contracted to be sold through our forward pricing program as of June 30, 2005. In the future, we may establish derivative positions in natural gas that are unrelated to forward pricing program contracts if we consider it appropriate to do so.
We designate, document and assess accounting for hedge relationships, which result primarily in cash flow hedges that require us to record the derivatives as assets and liabilities at their fair value on the balance sheet with an offset in other comprehensive income (loss). The gain or loss of an effective cash flow hedge is deferred in other comprehensive income (loss) until the second month after the hedged natural gas is used to manufacture inventoried products, which approximates the period of inventory turns of upgraded products and the release of the cost of the hedged gas to cost of sales. Ineffective hedge gains and losses are recorded immediately in cost of sales.
We purchase ammonia and sulfur for use as raw materials in the production of DAP and MAP. We attempt to include any price fluctuations related to these raw materials in our selling prices of finished products, but there can be no guarantee that significant increases in input prices can always be recovered. We enter into raw material purchase contracts to procure ammonia and sulfur at market prices. A $10 per related ton change in the cost of a ton of ammonia or a long ton of sulfur would change DAP production cost by $2.10 per ton and $3.80 per ton, respectively. We also purchase ammonia, urea and UAN to augment our production.
Forward Pricing Program
In mid-2003, we instituted a program that has reduced the risk inherent in the relationship between volatile fertilizer prices and natural gas costs. Our basic concept (principally applied to nitrogen fertilizers) is to fix the price of our principal raw material, natural gas, coincident with the establishment of the fertilizer sales price, which often occurs months in advance of shipment. Customer advances, which typically represent a substantial portion of the contract price, are received at the time the contract is executed, with any remaining unpaid amount due in the month prior to scheduled shipment. As is the case for all of our sales transactions, revenue is recognized when title transfers upon shipment or delivery of the product to customers. We use derivative instruments, primarily futures and swaps, to fix the natural gas prices for product sold under our forward pricing program. These instruments are classified as cash flow hedges as defined in SFAS No. 133 Accounting for Derivatives and Hedging Activities , and accounted for accordingly. The gains or losses of these hedges are deferred in other comprehensive income and are recognized in operations when the hedged item affects earnings. If any such hedges become ineffective, the gains or losses are recognized immediately in operations.
Some of our customers have been able to apply the forward pricing concept in their dealings with their customers, thereby further integrating their business with ours. For example, our two largest customers, Agriliance and GROWMARK, have electronically integrated their forward pricing offerings with ours.
As a result of the success of our forward pricing program, we have been able, under recent market conditions, both to reduce risks and to add more predictability in our business. In 2003, we sold approximately 1.6 million tons of fertilizer, representing approximately 19% of our sales volume, under the forward pricing program. During 2004, we sold approximately 3.6 million tons of nitrogen fertilizer, representing approximately 54% of our nitrogen fertilizer sales volume, and approximately 273,000 tons of phosphate fertilizer, representing approximately 14% of our phosphate fertilizer sales volume, under the forward pricing program. During the six months ended June 30, 2005, we sold approximately 2.6 million tons of nitrogen fertilizer, representing approximately 68% of our nitrogen fertilizer sales volume, and approximately 312,000 tons of phosphate fertilizer, representing approximately 28% of our phosphate fertilizer sales volume, under the forward pricing program. As of December 31, 2004 and June 30, 2005, we had approximately 1.9 million tons of product and 1.4 million tons of product, respectively, committed to be sold under this program in 2005. The majority of these amounts were scheduled to ship within 150 days of December 31, 2004 and June 30, 2005, respectively.
57
As a result of fixing the selling prices of our products under our forward pricing program, often months in advance of their ultimate delivery to customers, our reported selling prices and margins may differ from market spot prices and margins available at the time of shipment.
Participation in the forward pricing program is affected by market conditions and our customers' expectations. There is no guarantee that we will transact the same percentage of our business under the forward pricing program in the future. Should the level of participation decrease, there is a risk of increased volatility in the operating earnings of future periods.
Discussion of Seasonality Impacts on Operations
Our sales of fertilizers to agricultural customers are typically seasonal in nature. The strongest demand for our products occurs during the spring planting season, with a second period of strong demand following the fall harvest. We and/or our customers generally build inventories during the low demand periods of the year in order to ensure timely product availability during the peak sales seasons. Seasonality is greatest for ammonia due to the limited ability of our customers and their customers to store significant quantities of this product. The seasonality of fertilizer demand results in our sales volumes and net sales being the highest during the spring and our working capital requirements being the highest just prior to the start of the spring season. Our quarterly financial results can vary significantly from one year to the next due to weather-related shifts in planting schedules and purchasing patterns.
58
Market Overview
Fertilizers serve an important role in global agriculture by providing vital nutrients that help increase both the yield and the quality of crops. The three main nutrients required for plant growth are nitrogen, phosphate and potash. Nitrogen promotes protein formation and is a major component of chlorophyll, and as a result nitrogen is essential to healthy plant growth and high crop yields. Phosphate plays a key role in the photosynthesis process (i.e., the production, transportation and accumulation of sugars in the plant). Phosphate is also involved in seed germination and helps plants use water efficiently. Potash improves plant durability, providing protection from drought, disease, weeds, parasites and cold weather and is an important regulator of plants' physiological functions. Phosphate and potash are retained in the soil over time to a much higher degree than nitrogen, which must be reapplied each year to maintain high crop yields.
According to the IFA, global agricultural consumption for the three principal crop nutrients in 2004 was approximately 162 million tons95 million tons of nitrogen (59%), 39 million tons of phosphate (24%) and 28 million tons of potash (17%). These relative percentages have been fairly consistent over time. We are one of the largest manufacturers and distributors of nitrogen and phosphate fertilizers in North America. Agricultural usage accounted for approximately 80% of total global consumption of nitrogen and phosphate fertilizer in 2004. The balance was used primarily in industrial applications. Growers of the major commodity crops are the largest consumers of fertilizer. In the United States, approximately two-thirds of agricultural fertilizer is used to grow corn, wheat, soybeans and cotton. Industrial uses of fertilizers include the production of resins, plastics, synthetic fibers, livestock feed, explosives and detergents and usage in certain pollution control applications.
The global fertilizer industry is highly cyclical and capital intensive. Fertilizers are commodities for which competition occurs principally on the basis of delivered price and to a lesser extent on customer service and product quality. Historically, global fertilizer demand has been driven primarily by population growth and changes in dietary habits, which determine global demand for food. Because arable land is a limiting factor, growth in food production must be achieved through greater crop yields, which in turn results in higher use of crop inputs such as fertilizers and crop chemicals. According to Fertecon, global agricultural demand for nitrogen and phosphate fertilizers is expected to grow from 2004 to 2009 at annual rates of 2.2% and 2.7%, respectively. Supply of nitrogen and phosphate fertilizers is influenced by a broad range of factors, including available capacity and operating rates, raw material costs, government policies and global trade.
Nitrogen Fertilizer Overview
The principal nitrogen fertilizer products, ammonia, urea and UAN, are produced in chemical processes using a hydrocarbon, generally natural gas. These three fertilizers accounted for a combined share of approximately 75% of the U.S. agricultural nitrogen fertilizer market over the last several years. On a global basis, urea is the fastest growing fertilizer and accounts for over half of total agricultural demand. Other products used in the global market include ammonium nitrate, ammonium sulfate, ammonium bicarbonate and nitrogen-based fertilizer compounds.
Global Nitrogen Fertilizer Market
From 1971 through 2004, global agricultural consumption of nitrogen fertilizer has grown at an average rate of 3.1% per year. The only significant downturn in global demand during this time period was in the late 1980s and early 1990s, when the collapse of the former Soviet Union resulted in a dramatic drop in consumption in that region. Excluding use in the former Soviet Union, agricultural consumption over this period has grown at an average rate of 3.5% per year.
59
World Nitrogen Agricultural Fertilizer Consumption
Source: IFA
Changes in global nitrogen fertilizer capacity tend to be less uniform than changes in consumption, resulting in an industry with pronounced cyclicality. Fertilizer manufacturing is capital intensive, requiring large increments of capacity to achieve economies of scale. Adding capacity is typically a lengthy process, generally taking three to five years to design and construct new projects. Historically, large increases in global capacity have tended to follow periods of high industry profitability. For example, strong nitrogen fertilizer profitability during the mid-1990s contributed to an increase in nitrogen fertilizer capacity of about 14 million tons between 1996 and 2002. During this period, global nitrogen fertilizer consumption grew by only 5 million tons. The excess capacity led to a period of depressed profitability, forcing the closure of a number of plants, primarily in the United States and Europe. These closures, combined with a significant level of temporary outages at nitrogen fertilizer plants around the world and growth in demand, restored a more balanced relationship between global supply and demand in 2003 and 2004.
International trade is also a significant factor in the global nitrogen fertilizer market. Fertecon estimates that interregional trade of nitrogen fertilizer accounted for 35% of global consumption in 2004. Countries with supplies of low-priced natural gas, such as the Republic of Trinidad and Tobago and countries in the former Soviet Union and the Arab Gulf, are major nitrogen fertilizer exporters. North America is a large importer of nitrogen fertilizer.
North American Nitrogen Fertilizer Market
In 2004, North America accounted for approximately 12% of global nitrogen fertilizer capacity and 15% of global nitrogen fertilizer consumption. The cost of natural gas, including transportation to the plant, can constitute a substantial majority of the cash cost of producing nitrogen fertilizers in North America. Weak conditions in the global nitrogen fertilizer market in the late 1990s and high natural gas prices in North America from 2001 through 2004 contributed to the closure of approximately 5 million tons of nitrogen fertilizer production capacity in the United States since 1998. As a result, domestic production has declined as a percentage of domestic consumption. This decline in capacity combined with a general tightening in the global supply/demand balance has contributed to higher operating rates and improved fertilizer pricing for North American producers since the middle of 2003. For example, ammonia barge
60
prices at the U.S. Gulf rose from an average of $109 per ton in 1999 to $182 per ton in 2001, to $275 per ton in 2004 and recently to over $300 per ton.
North American Nitrogen Fertilizer Supply/Demand
(1)
Source: Fertecon
The three major U.S. nitrogen fertilizer products are affected by many of the same macroeconomic factors. However, each is impacted by its own specific market dynamics.
Ammonia. Ammonia has a nitrogen content of 82% and is the simplest form of nitrogen fertilizer. In the United States, there are four major uses for ammonia.
61
Due to the gaseous state of ammonia under ambient conditions, the infrastructure required to handle, store and transport ammonia is highly specialized. A substantial portion of the industry's existing ammonia distribution system was developed specifically to carry ammonia from North American production facilities to the midwestern United States and other key domestic markets. The midwestern United States is the largest market for ammonia in the United States, representing 70% of U.S. agricultural consumption. Only a limited amount of infrastructure has been built to import ammonia and move it into the U.S. distribution system. Further, the majority of the storage facilities (large cryogenic tanks) located within the consuming market are owned by domestic producers and tied into the existing distribution system. Due to this structure, we believe the midwestern U.S. agricultural market for ammonia has been impacted less by imports than the U.S. Gulf Coast markets.
Urea. Urea is produced from ammonia and carbon dioxide (a by-product of ammonia production). In its final form, urea is a solid dry product with a nitrogen content of 46%the highest level for any solid nitrogen fertilizer. In contrast to ammonia, imported urea has access to the same U.S. distribution system that is used by domestic producers and, as a result, it can be distributed easily throughout the United States. Relative to domestic producers, many foreign producers have access to significantly lower natural gas costs but incur higher transportation costs and face added logistical challenges in exporting urea to the United States.
UAN. UAN is produced by combining urea, nitric acid and ammonia. UAN is a liquid fertilizer product, with a nitrogen content typically ranging from 28% to 32%. UAN does not need to be refrigerated or pressurized for storage or transportation. UAN can be applied more uniformly than non-liquid forms of fertilizer and can be mixed with herbicides, pesticides and other nutrients, permitting the farmer to apply several materials simultaneously rather than in separate applications. Due to the fact that UAN requires specialized equipment for application, the primary markets for UAN are in the United States and Europe, where the required infrastructure investment has been made. As a result, very little UAN is traded on the global market outside of these regions.
Imports of UAN into the United States have increased in recent years. However, the existing export-oriented capacity outside the United States is currently being fully utilized, and no additional new capacity is currently under construction.
Nitrogen capacities for the major North American producers are shown in the following table:
2004/2005 North American Nitrogen Fertilizer Product Capacities
(Thousand Tons)
|
Total Ammonia
Capacity |
%
|
Dry Urea
Capacity |
%
|
UAN
Capacity (28%) |
%
|
|||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Agrium | 4,646 | 22 | % | 3,334 | 39 | % | 1,015 | 7 | % | ||||
Terra Industries | 3,889 | 18 | 167 | 2 | 4,843 | 35 | |||||||
CF Industries (1) | 3,530 | 17 | 2,540 | 30 | 2,710 | 20 | |||||||
Koch Nitrogen | 3,234 | 15 | 385 | 5 | 1,288 | 9 | |||||||
Potash Corp. | 1,356 | 6 | 688 | 8 | 1,017 | 7 | |||||||
Other | 4,567 | 22 | 1,338 | 16 | 2,989 | 22 | |||||||
|
|
|
|
|
|
||||||||
Total U.S. and Canada | 21,222 | 100 | % | 8,452 | 100 | % | 13,862 | 100 | % | ||||
|
|
|
|
|
|
Source: International Fertilizer Development Center, or IFDC, CF Industries
62
Phosphate Fertilizer Overview
The principal raw materials used in the production of phosphate fertilizers are phosphate rock, sulfuric acid and ammonia. Typically, sulfur is used to make sulfuric acid, which is combined with phosphate rock to produce phosphoric acid. The principal phosphate fertilizer products are DAP and MAP. Both products are produced by reacting phosphoric acid with ammonia to produce a slurry that is then granulated. DAP has a phosphate content of 46% and a nitrogen content of 18%. The primary grade of MAP has a phosphate content of 52% and a nitrogen content of 11%. On a nutrient basis, DAP and MAP accounted for over 70% of U.S. agricultural phosphate fertilizer consumption and almost 70% of global agricultural phosphate fertilizer trade over the last three years.
Global Phosphate Fertilizer Market
The phosphate fertilizer market consists of three sectorsagricultural usage, industrial applications and feed products, with agricultural usage accounting for approximately 85% of the total phosphate fertilizer market. Excluding use in the former Soviet Union, global agricultural consumption of phosphate fertilizers has grown over the last 33 years at an average rate of about 2.0% per year.
World Phosphate Agricultural Fertilizer Consumption
Source: IFA
The use of DAP and MAP has been increasing as a percentage of agricultural usage of phosphate fertilizers. From 1981 through 2004, the combined agricultural usage of DAP and MAP has grown at an average rate of 4.1% per year.
63
World Phosphate Agricultural Fertilizer Consumption
Source: IFA; Fertecon
While phosphate fertilizers can be made by various processes, DAP and MAP are produced from wet process phosphoric acid, or wet acid. Because it takes about 3.5 tons of phosphate rock to produce one ton of wet acid, the major phosphate fertilizer producing regions of the world are in countries that have large, high-quality phosphate rock deposits. The United States is the world's largest producer of phosphoric acid, accounting for approximately 27% of global wet acid capacity, followed by China, Morocco and Russia with approximately 16%, 9% and 8%, respectively.
With production concentrated geographically, interregional trade is a major factor in the global phosphate market. According to Fertecon, interregional trade of DAP and MAP accounted for 43% of global agricultural consumption of these products in 2004. The United States is the world's largest exporter of DAP/MAP. China, Western Europe and Latin America are the largest importers. Over the last three years, global trade with China has declined, but the decline has been offset by higher imports into Latin America and Western Europe.
U.S. Phosphate Market
Approximately 45% of U.S. production of phosphate fertilizers was exported in 2004, with the balance consumed domestically in agriculture and other applications. In 2001, U.S. exports declined due to a drop in shipments to China, but subsequently increased as demand in other export markets strengthened.
64
Total U.S. Phosphate Fertilizer Supply/Demand
(1)
Source: Fertecon
PhosChem is the major phosphate-exporting organization in the United States. PhosChem was formed under the U.S. Webb-Pomerene Act, which allows domestic producers to work together to compete more effectively against other international phosphate suppliers. Prior to 2003, the members of PhosChem accounted for 52% of total U.S. phosphate capacity. Following the 2004 merger between IMC Global and Cargill Crop Nutrition to form Mosaic, PhosChem members now account for 74% of total U.S. wet acid capacity and 72% of U.S. DAP/MAP capacity, giving PhosChem an important role in global trade.
It has become increasingly difficult to develop new phosphate rock mines in the United States due to regulatory and environmental requirements. Several of the smaller phosphate producers do not own phosphate rock supplies. Those without captive supplies are expected to be at an increasing disadvantage with respect to cost and availability of phosphate rock.
65
Phosphate fertilizer capacities for the major U.S. producers are shown in the following table:
2004/2005 U.S. Phosphate Fertilizer Capacity
(Thousand Tons as P
2
O
5
)
|
Wet Acid
Capacity |
%
|
DAP/MAP
Capacity |
%
|
|||||
---|---|---|---|---|---|---|---|---|---|
Mosaic* | 6,245 | 49 | % | 5,427 | 57 | % | |||
Potash Corp.* | 2,753 | 22 | 993 | 11 | |||||
CF Industries | 1,000 | 8 | 1,000 | 11 | |||||
Simplot | 850 | 7 | 641 | 7 | |||||
U.S. Agri-Chemicals | 560 | 5 | 596 | 6 | |||||
Mississippi Phosphates* | 415 | 3 | 399 | 4 | |||||
Other | 813 | 6 | 380 | 4 | |||||
|
|
|
|
||||||
Total U.S. | 12,636 | 100 | % | 9,436 | 100 | % | |||
|
|
|
|
Source: IFDC, CF Industries
66
Our Company
We are one of the largest manufacturers and distributors of nitrogen and phosphate fertilizer products in North America. Our operations are organized into two business segments: the nitrogen fertilizer business and the phosphate fertilizer business. Our principal products in the nitrogen fertilizer business are ammonia, urea and UAN. Our principal products in the phosphate fertilizer business are DAP and MAP. For the twelve months ended June 30, 2004, we supplied approximately 22% of the nitrogen and approximately 14% of the phosphate used in agricultural fertilizer applications in the United States. Our core market and distribution facilities are concentrated in the midwestern U.S. grain-producing states.
Our principal assets include:
For the year ended December 31, 2004, we sold 6.6 million tons of nitrogen fertilizers and 1.9 million tons of phosphate fertilizers, generating net sales of $1.7 billion, EBITDA of $233.5 million and net earnings of $67.7 million. For the twelve months ended June 30, 2005, we sold 6.9 million tons of nitrogen fertilizers and 2.0 million tons of phosphate fertilizers, generating net sales of $1.9 billion, EBITDA of $277.3 million and net earnings of $97.6 million.
Company Evolution
We were founded in 1946 as a fertilizer brokerage operation by a group of regional agricultural cooperatives seeking to pool their purchasing power. During the 1960s, we expanded our distribution capabilities and diversified into fertilizer manufacturing through the acquisition of several existing plants and facilities. During the 1970s and again during the 1990s, we expanded our production and distribution capabilities significantly, spending approximately $1 billion in each of these decades.
Since inception, we have been structured as a cooperative. As we are a cooperative, our owners are our principal customers, and earnings generated on our sales to owners can be distributed to them on a pretax basis in a form called "patronage." Today, we have eight cooperative owners, six of whom conduct business directly with us and two of whom (Land O'Lakes, Inc. and CHS Inc.) conduct business with us through a 50-50 jointly-owned venture called Agriliance, LLC.
Through the end of 2002, we operated as a traditional supply cooperative. Our focus was on providing our owners with an assured supply of fertilizer. Typically, over 80% of our annual sales volume was to our owners. Though important, financial performance was subordinate to our mandated supply objective.
In mid-1998, the domestic fertilizer industry went into a cyclical downturn and our financial performance suffered. This situation led our board of directors and management to reexamine the basic strategy of operating as a traditional supply cooperative. In 2002, we reassessed our corporate mission and adopted a new business model that established financial performance, rather than assured supply to our
67
owners, as our principal objective. While some vestiges of the traditional business approach remain, since the end of 2002 we have been:
While we continue to focus on customer service and supply reliability, we no longer offer our owners an assured supply and other commercial benefits associated with our previous business model.
One result of this new approach has been a shift in our customer mix. In contrast to 2002, when approximately 18% of our sales volume was to unaffiliated customers, approximately 41% of our sales volume was to unaffiliated customers in 2004.
Concurrent with our new approach to the marketplace, we have been implementing other measures to improve the performance of our business, including:
These measures, combined with our new approach to the marketplace and a leadership change in mid-2003, positioned us to capitalize on the improving industry conditions that began in the latter half of 2003. Conversion to a public entity through this offering will complete our transition and significantly enhance our competitive position for the future.
CF Holdings was formed as a Delaware corporation in April 2005 to hold the existing businesses of CF Industries. Concurrent with the completion of this offering, we will consummate the Reorganization Transaction in which CF Industries will become our wholly-owned subsidiary. The Reorganization Transaction will not affect our operations, which we will continue to conduct through our operating subsidiaries. See "The Reorganization Transaction."
Our Competitive Strengths
We believe that the combination of the following competitive strengths distinguishes us from our competitors.
68
facilities, our market shares are even stronger. In our core market of ten midwestern U.S. grain-producing states, we supplied approximately 29% of the nitrogen and approximately 20% of the phosphate used by commercial farmers during this twelve-month period.
In 2004, our owners accounted for approximately 53% of our sales volume. Following this offering, we anticipate that our owners and their affiliates collectively will continue to be significant customers. We have entered into market-based, multi-year supply contracts with them relating to future purchases of fertilizer. See "Certain Relationships and Related Party TransactionsOwner Supply Contracts."
We also operate and have a 66% economic interest in the largest nitrogen fertilizer complex in Canada (located in Medicine Hat, Alberta), which gives us access to the economically attractive markets of western Canada and the northern tier states of the United States. Our Medicine Hat nitrogen fertilizer complex has gross annual production capacities of approximately 1.3 million tons of ammonia and 810,000 tons of granular urea. This facility is able to purchase natural gas at essentially no cost differential to AECO, the most heavily-traded natural gas pricing reference point in Alberta. Over the past five years, the daily price for natural gas at AECO has averaged $.66 per mmBTU less than the daily price at Henry Hub. For example, during 2004, the average daily natural gas price at AECO was $5.04 per mmBTU, while the average daily natural gas price at Henry Hub was $5.85 per mmBTU.
69
Our phosphate fertilizer operations are located in central Florida, the major phosphate-producing region in North America. Our facilities include:
Together, these assets provide us with economical and reliable access to raw materials, cost-competitive conversion of raw materials to finished product, and access to both domestic and international phosphate fertilizer markets. Our Plant City phosphate fertilizer complex has the capacity to produce over two million tons of ammonium phosphate fertilizers (DAP and MAP) per year. Our Hardee rock mine and beneficiation plant have the capacity to supply our Plant City phosphate fertilizer complex with all of its phosphate rock requirements. As of January 1, 2005, it had approximately 17 years of fully-permitted recoverable phosphate reserves remaining at current operating rates. Mining of these reserves beyond 2011 is subject to extension of our local development authorization. Additionally, we have initiated the process of applying for authorization and permits to expand the geographical area at our Hardee property where we can mine. We estimate that we will be able to conduct mining operations at our Hardee property for approximately ten additional years at current operating rates, assuming we secure the authorization and permits to mine in this area. Our ammonia terminal in Tampa includes a 38,000-ton storage tank and access to a deep-water dock. The facility allows us to purchase ammonia from international suppliers for use at our Plant City phosphate fertilizer complex and for resale to other phosphate producers. Our terminal is currently the only one in Tampa capable of accommodating the largest fully-loaded ammonia vessels, which typically carry between 35,000 and 40,000 metric tons of ammonia. Our warehouse in Tampa has a deep-water dock and the capacity to store 75,000 tons of phosphate fertilizer.
Our customers' favorable response to this program resulted in approximately 54% of our nitrogen fertilizer sales volume being sold under this program during 2004. Some of our customers have been able
70
to apply the forward pricing concept in dealings with their customers, thereby further integrating their business with ours. For example, our two largest customers, Agriliance and GROWMARK, have electronically integrated their forward pricing offerings with ours.
Our workforce of over 1,400 full-time employees averages approximately 15 years of service with us. From 1995 to 2004, our voluntary employee turnover (excluding retirements) averaged 3.7% per year. Virtually all of our workforce is non-unionized.
Our Business Strategy
71
strategy, coupled with continued strong relationships with our owners, will allow us to enhance the overall economics of our business.
Operating Segments
Our business is divided into two operating segments, the nitrogen fertilizer business and the phosphate fertilizer business.
Nitrogen Fertilizer Business
We are one of the leading nitrogen fertilizer producers in North America. Our primary nitrogen fertilizer products are ammonia, urea and UAN. Our historical sales of nitrogen fertilizer products are shown in the table below. The sales shown do not reflect amounts used internally in the manufacture of other products (for example in 2004, we used about 2.3 million tons of ammonia in the production of urea and UAN).
|
Year ended December 31,
|
Six months ended June 30,
|
||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2002
|
2003
|
2004
|
2004
|
2005
|
|||||||||||||||||||||
|
Tons
|
Net Sales
|
Tons
|
Net Sales
|
Tons
|
Net Sales
|
Tons
|
Net Sales
|
Tons
|
Net Sales
|
||||||||||||||||
|
($ in millions; tons in thousands)
|
|||||||||||||||||||||||||
Nitrogen Fertilizer Products | ||||||||||||||||||||||||||
Ammonia | 1,435 | $ | 228.7 | 1,475 | $ | 347.4 | 1,438 | $ | 399.5 | 841 | $ | 231.5 | 887 | $ | 274.7 | |||||||||||
Urea | 2,663 | 320.7 | 2,572 | 443.2 | 2,513 | 515.9 | 1,244 | 242.8 | 1,428 | 345.3 | ||||||||||||||||
UAN | 1,926 | 178.9 | 2,228 | 265.2 | 2,593 | 354.1 | 1,339 | 178.7 | 1,431 | 230.3 | ||||||||||||||||
Other nitrogen fertilizers (1) | 45 | 2.1 | 34 | 2.4 | 59 | 4.4 | 43 | 3.1 | 35 | 3.0 | ||||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Nitrogen Fertilizers | 6,069 | $ | 730.4 | 6,309 | $ | 1,058.2 | 6,603 | $ | 1,273.9 | 3,467 | $ | 656.1 | 3,781 | $ | 853.3 | |||||||||||
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|
|
|
|
|
|
|
|
Gross margin for the nitrogen fertilizer business was $19.2 million, $58.6 million and $193.8 million for the fiscal years ended December 31, 2002, 2003 and 2004, respectively. Gross margin for the nitrogen fertilizer business was $86.8 million and $134.3 million for the six months ended June 30, 2004 and 2005, respectively.
Total assets for the nitrogen fertilizer business were $546.9 million, $558.1 million and $530.6 million as of December 31, 2002, 2003 and 2004, respectively. Total assets for the nitrogen fertilizer business were $411.5 million as of June 30, 2005.
72
We operate world-scale nitrogen fertilizer production facilities in Donaldsonville, Louisiana and Medicine Hat, Alberta, Canada. We own the Donaldsonville nitrogen fertilizer complex and have a 66% economic interest in Canadian Fertilizers Limited, or CFL, a Canadian joint venture that owns the Medicine Hat nitrogen fertilizer complex. The combined production capacity of these two facilities represented approximately 17% of North American ammonia capacity, 30% of North American dry urea capacity and 20% of North American UAN capacity in 2004.
The following table summarizes our nitrogen fertilizer production volume for the last five years and each of the six-month periods ended June 30, 2004 and 2005 and current production capacities at our facilities in Donaldsonville, Louisiana and Medicine Hat, Alberta.
Donaldsonville Nitrogen Complex
The Donaldsonville nitrogen fertilizer complex is the largest nitrogen fertilizer production facility in North America. It has four ammonia plants, four urea plants and two UAN plants. It has the capacity to produce annually approximately 2.3 million tons of ammonia (including amounts upgraded into urea and UAN), 2.6 million tons of liquid urea (including amounts upgraded into UAN) and 2.7 million tons of UAN (measured on a 28% nitrogen content basis). With UAN operating at capacity, approximately 1.7 million tons of granular urea can be produced. With UAN operating at reduced rates, approximately 2 million tons of granular urea can be produced.
We believe that our Donaldsonville nitrogen fertilizer complex is the most versatile nitrogen fertilizer production facility in North America. With multiple production units for each product, the complex has considerable flexibility to adjust its shippable product mix efficiently. Donaldsonville is located at the mouth of the Mississippi River and has three docks that can be used simultaneously under most river conditions. In addition, Donaldsonville is located on the Union Pacific railroad and the Kaneb Ammonia Pipeline, providing us with low-cost transportation to our in-market nitrogen fertilizer terminals and warehouses by rail and pipeline, as well as by barge. It is capable of docking and unloading into its storage system ocean-going ship loads of ammonia and UAN, providing us with direct access to global suppliers. The complex has on-site storage for 70,000 tons of ammonia, 135,000 tons of UAN (measured on a 28% nitrogen content basis) and 83,000 tons of granular urea, providing us with flexibility to handle temporary disruptions to shipping activities without impacting production.
73
Medicine Hat Nitrogen Complex
Medicine Hat is the largest nitrogen fertilizer complex in Canada. It has two world-scale ammonia plants that have a gross annual production capacity of approximately 1.3 million tons and a world-scale urea plant that has a gross annual production capacity of 810,000 tons. The complex has on-site storage for 60,000 tons of ammonia and 70,000 tons of urea, providing flexibility to handle temporary disruptions in outbound shipments.
Medicine Hat is owned by CFL. We own 49% of the voting common stock of CFL and 66% of CFL's non-voting preferred stock. Two owners of CF Industries own 17% of CFL's voting common stock. The remaining 34% of the voting common stock and non-voting preferred stock of CFL is held by Westco. We designate four members of CFL's nine-member board of directors, which also has one member designated by each of the two owners of CF Industries that also own an interest in CFL and three members designated by Westco.
We operate the Medicine Hat facility and purchase approximately 66% of the facility's ammonia and urea production, pursuant to a management agreement and a product purchase agreement. The management agreement and the product purchase agreement are each terminable by either us or CFL upon twelve-months' notice. Westco has the right, but not the obligation, to purchase the remaining 34% of the facility's ammonia and urea production under a similar product purchase agreement. To the extent that Westco does not purchase its 34% of the facility's production, we are obligated to purchase any remaining amounts. Under the product purchase agreements, both we and Westco pay the greater of operating cost or market price for purchases. However, the product purchase agreements also provide that CFL will distribute its net earnings to us and Westco annually based on the respective quantities of product purchased from CFL. Our product purchase agreement also requires us to advance funds to CFL in the event that CFL is unable to meet its debts as they become due. The amount of each advance would be at least 66% of the deficiency and would be more in any year that we purchased more than 66% of Medicine Hat's production. We and Westco currently manage CFL such that each party is responsible for its share of CFL's fixed costs and that CFL's production volume meets the parties' combined requirements. We are currently in discussions with Westco regarding amendments to the CFL agreements, including an amendment to the management agreement that may reduce our management fee in exchange for other consideration.
Nitrogen Fertilizer Raw Materials
Natural gas is the principal raw material, as well as the primary fuel source, used in the ammonia production process at both the Donaldsonville and the Medicine Hat facilities. In 2004, our natural gas purchases accounted for approximately 61% of our total cost of sales for nitrogen fertilizers and a substantially higher percentage of our related cash costs. Donaldsonville is located in close proximity to the most heavily-traded natural gas pricing basis in North America, known as the Henry Hub. Medicine Hat is located in close proximity to the most heavily-traded natural gas pricing basis in Canada, known as AECO.
We use a combination of spot and term purchases of varied duration from a variety of suppliers to maintain a reliable, competitively-priced natural gas supply. In addition, we use certain financial instruments to manage natural gas prices.
Operating at capacity, the Donaldsonville nitrogen fertilizer complex consumes approximately 80 billion cubic feet of natural gas per year. The facility has access to five natural gas pipelines and obtains gas from several suppliers. Typically, the largest individual supplier provides less than 40% of the Donaldsonville facility's total daily gas requirement. Operating at capacity, the Medicine Hat complex consumes approximately 43 billion cubic feet of natural gas per year. The facility has access to two natural gas pipelines and obtains gas from numerous suppliers, the largest of which generally provides approximately 25% of plant usage.
74
Nitrogen Fertilizer Distribution
The Donaldsonville nitrogen fertilizer complex, which is located on the Mississippi River, includes a deep-water docking facility, access to an ammonia shipping pipeline and truck and railroad loading capabilities. The Medicine Hat nitrogen fertilizer complex ships our share of ammonia and urea by truck and rail to customers and to our storage facilities in the northern United States and Canada.
Ammonia, urea and UAN from Donaldsonville can be loaded into ocean-going vessels and river barges for direct shipment to domestic customers, transport to storage facilities, or export. We own six ammonia river barges with a total capacity of 16,400 tons. We contract on a dedicated basis for tug services and the operation of these barges. We also contract on a dedicated basis ten UAN river barges, with a total capacity of approximately 30,000 tons. Additional ammonia and UAN barge capacity is contracted for as needed. River transportation for urea is provided primarily under an agreement with one of the major inland river system barge operators.
The Donaldsonville facility is connected to the Kaneb Ammonia Pipeline. This 2,000-mile long ammonia pipeline is used by several nitrogen producers to transport ammonia to over 20 terminals and shipping points located in the midwestern U.S. cornbelt. We are a major customer of this ammonia pipeline. In 2004, approximately 37% of our ammonia shipments from our Donaldsonville nitrogen fertilizer complex were transported via the ammonia pipeline.
We also transport substantial volumes of ammonia, urea and UAN from the Donaldsonville nitrogen fertilizer complex and ammonia and urea from the Medicine Hat nitrogen fertilizer complex by rail. In addition to rail cars provided by the rail carriers, we currently lease 638 ammonia tank cars, 1,048 UAN tank cars and 612 dry product hopper cars.
Phosphate Fertilizer Business
We are a major manufacturer of phosphate fertilizer products. Our main phosphate fertilizer products are DAP and MAP. Our historical sales of phosphate fertilizer products are shown in the table below.
|
Year ended December 31,
|
Six months ended June 30,
|
||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2002
|
2003
|
2004
|
2004
|
2005
|
|||||||||||||||||||||
|
Tons
|
Net Sales
|
Tons
|
Net Sales
|
Tons
|
Net Sales
|
Tons
|
Net Sales
|
Tons
|
Net Sales
|
||||||||||||||||
|
($ in millions; tons in thousands)
|
|||||||||||||||||||||||||
Phosphate Fertilizer Products | ||||||||||||||||||||||||||
DAP | 1,560 | $ | 227.7 | 1,627 | $ | 264.4 | 1,549 | $ | 305.3 | 810 | $ | 154.2 | 890 | $ | 186.5 | |||||||||||
MAP | 289 | 45.3 | 252 | 43.3 | 351 | 71.5 | 174 | 35.0 | 213 | 46.2 | ||||||||||||||||
Other phosphate fertilizers (1) | 65 | 8.8 | 13 | 2.1 | | 0.0 | | | | | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Phosphate Fertilizers | 1,914 | $ | 281.8 | 1,892 | $ | 309.8 | 1,900 | $ | 376.8 | 984 | $ | 189.2 | 1,103 | $ | 232.7 | |||||||||||
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|
|
|
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|
|
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|
Gross margin for the phosphate fertilizer business was $8.5 million, $(24.3) million and $22.3 million for the fiscal years ended December 31, 2002, 2003 and 2004, respectively. Gross margin for the phosphate fertilizer business was $14.1 million and $16.6 million for the six months ended June 30, 2004 and 2005, respectively.
Total assets for the phosphate fertilizer business were $446.6 million, $417.6 million and $414.4 million as of December 31, 2002, 2003 and 2004, respectively. Total assets for the phosphate fertilizer business were $385.1 million as of June 30, 2005.
Our phosphate fertilizer manufacturing operations are located in central Florida and consist of a phosphate fertilizer chemical complex in Plant City and a phosphate rock mine, beneficiation plant and phosphate rock reserves in Hardee County. We own each of these facilities and properties. None of our phosphate facilities or properties are leased or subject to royalty agreements.
75
The following table summarizes our phosphate fertilizer production volumes for the last five years and each of the six-month periods ended June 30, 2004 and 2005 and current production capacities for phosphate-related products.
Hardee County Phosphate Rock Mine
In 1975, we purchased 20,000 acres of land in Hardee County, Florida that was originally estimated to contain in excess of 100 million tons of recoverable rock reserves. Between 1978 and mid-1993, we operated a one-million-ton per year phosphate rock mine on a 5,000-acre portion of these reserves.
In 1992, we initiated a project to expand and relocate mining operations to the remaining 15,000-acre area of the reserve property. The new phosphate rock mine began operations in late 1995 at a cost of $135 million. In 1997, we added approximately 20 million tons to our reserve base through an exchange with a neighboring rock producer. In 1999, we acquired 1,400 acres containing an estimated 8 million tons of additional rock reserves.
The table below shows the estimated reserves, as of January 1, 2005, at the Hardee phosphate complex. The reserves are listed as recoverable tons. Also reflected in the table is the grade of the reserves, expressed as a percentage of bone phosphate of lime, or BPL, or P 2 O 5 . Finally, the table also reflects the average values of the following material contaminants contained in the reserves: ferrous oxide (Fe 2 O 3 ) plus aluminum oxide (Al 2 O 3 ) and magnesium oxide (MgO).
PROVEN AND PROBABLE RESERVES
(1)
CF Industries, Inc.Hardee Phosphate Complex
As of January 1, 2005
|
Recoverable Tons
(2)
(in thousands) |
% BPL
|
% P
2
O
5
|
% Fe
2
O
3
+ Al
2
O
3
|
% MgO
|
|||||
---|---|---|---|---|---|---|---|---|---|---|
Permitted | 59,846 | 64.88 | 29.69 | 2.33 | 0.71 | |||||
Pending Permit | 35,230 | 64.96 | 29.73 | 2.40 | 0.71 | |||||
Total | 95,076 | 64.91 | 29.71 | 2.36 | 0.71 |
Our phosphate reserve estimates are based on geological data assembled and analyzed by our staff geologist. Reserve estimates are periodically updated to reflect actual phosphate rock production, new drilling information and other geological or mining data.
76
Plant City Phosphate Complex
Our Plant City phosphate fertilizer complex is one of the largest phosphate fertilizer facilities in North America. At one million tons per year, its phosphoric acid capacity represents approximately 8% of the total U.S. capacity. All of Plant City's phosphoric acid is converted into ammonium phosphates (DAP and MAP), representing approximately 11% of U.S. capacity for ammonium phosphate fertilizer products. The combination of the Plant City phosphate fertilizer complex and the Hardee mine gives us one of the largest integrated ammonium phosphate fertilizer operations in North America with the only purchased raw materials being sulfur and ammonia.
Bartow Phosphate Complex
We own a complex in Bartow, Florida that has been idle since 1983 except for operation of one sulfuric acid plant in 1996-99 and minor phosphate production runs in 1985 and 1988/89. In 2000, we decided to discontinue maintenance on the phosphate producing portions of the complex. Through 2003, we continued to use the plant's warehouse to provide us with additional storage and shipping capacity. In 2004, we discontinued use of the facility as a warehousing operation. Our current objective is to minimize the ongoing costs related to the facility, including our obligations with respect to closing the phosphogypsum stack and disposing of the site's process water.
Phosphate Raw Materials
Phosphate Rock Supply. Phosphate rock is the basic nutrient source for phosphate fertilizers. Approximately 3.5 tons of phosphate rock are needed to produce one ton of P 2 O 5 (the measure of nutrient content of phosphate fertilizers). Our Plant City phosphate fertilizer complex consumes in excess of three million tons of rock annually. Our phosphate rock mine and associated beneficiation plant in Hardee County, Florida, have the capacity to produce approximately 3.5 million tons of phosphate rock per year. As of January 1, 2005, our rock mine had approximately 17 years of fully-permitted recoverable phosphate reserves remaining at current operating rates. Mining of these reserves beyond 2011 is subject to extension of our local development authorization. Additionally, we have initiated the process of applying for authorization and permits to expand the geographical area at our Hardee property where we can mine. The expanded area has an estimated 35 million tons of recoverable phosphate reserves. We estimate that we will be able to conduct mining operations at our Hardee property for approximately ten additional years at current operating rates, assuming we secure the authorization and permits to mine in this area.
Sulfur Supply. Sulfur is used to produce sulfuric acid, which is combined with phosphate rock to produce phosphoric acid. Approximately three-quarters of a long ton of sulfur is needed to produce one ton of P 2 O 5 . Our Plant City phosphate fertilizer complex uses approximately 750,000 long tons of sulfur annually when operating at capacity. We obtain liquid sulfur from several domestic and foreign producers under contracts of varied duration. Since 2001, our largest liquid sulfur supplier has been CF Martin Sulphur. CF Martin Sulphur was created in November 2000 as a joint venture between us and Martin Resource Management and certain of its affiliates, or Martin. On July 15, 2005, we sold our interest in CF Martin Sulphur to Martin. Concurrent with the sale, we entered into a multi-year sulfur supply contract with CF Martin Sulphur.
Ammonia Supply. In addition to its 46% phosphate nutrient content, DAP has a nitrogen content of 18%. MAP has a nitrogen content of 11%. Ammonia is the primary source of nitrogen in DAP and MAP. Operating at capacity, our Plant City phosphate fertilizer complex consumes approximately 400,000 tons of ammonia annually.
Most of the ammonia used at our Plant City phosphate fertilizer complex is shipped by rail from our ammonia storage facility located in Tampa, Florida. This facility, acquired in 1992, consists of a 38,000-ton ammonia storage tank, access to a deep-water dock that is capable of discharging ocean-going vessels, rail and truck-loading facilities and a contract that entitles us to 50% of the capacity of an ammonia pipeline connecting the tank to three central Florida phosphate plants (our Plant City phosphate fertilizer complex is not on the pipeline). The pipeline contract expires in November 2005, and we are currently in discussions
77
regarding an extension of our capacity rights. In addition to supplying our Plant City phosphate fertilizer complex, our Tampa ammonia distribution system is used to support ammonia sales to other Florida phosphate producers and other customers. Sales of ammonia from our Tampa terminal are reported in our nitrogen business segment. The ammonia supply for Tampa is purchased from offshore sources, providing us with access to the broad international ammonia market.
Phosphate Distribution
We operate a phosphate warehouse located at a deep-water port facility in Tampa, Florida. A majority of the phosphate fertilizer produced at Plant City is shipped by truck or rail to our Tampa warehouse, where it is loaded onto vessels for sale in the export market, for sale to domestic customers or for transport across the Gulf of Mexico to the Mississippi River. In 2004, our Tampa warehouse handled approximately 1.2 million tons of phosphate fertilizers, or about 65% of our production for that year. The remainder of our phosphate fertilizer production is transported by truck or rail directly to customers or to in-market storage facilities.
Phosphate fertilizer shipped across the Gulf of Mexico to the Mississippi River is transferred into river barges near New Orleans. Phosphate fertilizer in these river barges is transported to our storage facilities or sold directly to customers. River transportation is provided primarily under an agreement with one of the major inland river system barge operators.
Storage Facilities and Other Properties
We currently own or rent space at 48 in-market storage terminals and warehouses located in a 16-state region stretching from the east coast of the United States to Washington State to Texas. Including storage at our production facilities and at the Tampa warehouse and ammonia terminal, we have an aggregate storage capacity for approximately two million tons of fertilizer. We believe our storage system is the most extensive in North America.
Our storage capabilities are summarized in the following table.
|
Ammonia
|
UAN
(1)
|
Dry Products
(2)
|
||||||||||
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|
Number of
Facilities |
Capacity
(Tons) |
Number of
Facilities |
Capacity
(Tons) |
Number of
Facilities |
Capacity
(Tons) |
|||||||
|
(tons in thousands)
|
||||||||||||
Plants | 2 | 130 | 1 | 135 | 3 | 210 | |||||||
Tampa Port | 1 | 38 | | 1 | 75 | ||||||||
|
|
|
|||||||||||
168 | 135 | 285 | |||||||||||
In-Market Locations |
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned | 20 | 680 | 9 | 245 | 5 | 369 | |||||||
Rentals (3) & other | | | 12 | 165 | 2 | 37 | |||||||
|
|
|
|
|
|
||||||||
Total in-market | 20 | 680 | 21 | 410 | 7 | 406 | |||||||
|
|
|
|||||||||||
Total Storage Capacity |
|
|
|
848 |
|
|
|
545 |
|
|
|
691 |
|
|
|
|
In addition to these facilities, we also own our corporate headquarters, which is located in Long Grove, Illinois.
78
Customers
The principal customers for our nitrogen and phosphate fertilizers are cooperatives and independent fertilizer distributors. Since our formation in 1946, most of our sales have been to the regional agricultural cooperatives that have owned us. Following adoption of our new business model in 2002, we have significantly broadened and adjusted our customer base and expanded our export sales. For example, in 2004, ConAgra, our largest unaffiliated customer, accounted for approximately 8% of our sales volume. The following table sets forth the sales to our owners, unaffiliated customers and Westco for the past three years and the first six months of 2005.
|
Year ended December 31,
|
|
|
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Six months ended
June 30, 2005 |
|||||||||||||||||
|
2002
|
2003
|
2004
|
|||||||||||||||
|
Sales
|
Percent
|
Sales
|
Percent
|
Sales
|
Percent
|
Sales
|
Percent
|
||||||||||
|
(tons in millions)
|
|||||||||||||||||
Owners | 6.01 | 75 | % | 5.59 | 68 | % | 4.47 | 53 | % | 2.61 | 53 | % | ||||||
Unaffiliated Customers | ||||||||||||||||||
Domestic | 1.20 | 15 | 1.97 | 24 | 2.83 | 33 | 1.62 | 34 | ||||||||||
Export | .25 | 3 | .16 | 2 | .68 | 8 | .39 | 8 | ||||||||||
Westco | .54 | 7 | .50 | 6 | .52 | 6 | .26 | 5 | ||||||||||
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Total | 8.00 | 100 | % | 8.22 | 100 | % | 8.50 | 100 | % | 4.88 | 100 | % | ||||||
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We have entered into market-based, multi-year supply contracts with our owners and their affiliates relating to future purchases of fertilizer products. See "Certain Relationships and Related Party TransactionsOwner Supply Contracts."
During 2004, two customersGROWMARK, Inc., which is one of our owners, and Agriliance, LLC, a 50-50 joint venture between two of our other ownersmade combined fertilizer purchases of approximately $688.6 million from us, representing approximately 42% of our total net sales. A loss of either of these customers could have a material adverse effect on our results of operations.
Sales to Agriliance, LLC accounted for 44% of our total net sales in 2002; 41% of our total net sales in 2003 and 29% of our total net sales in 2004. With respect to our nitrogen fertilizer business, sales to Agriliance, LLC represented 46% of net sales in 2002; 40% of net sales in 2003, and 31% of net sales in 2004. With respect to our phosphate fertilizer business, sales to Agriliance, LLC represented 40% of net sales in 2002; 45% of net sales in 2003, and 24% of net sales in 2004.
Sales to GROWMARK, Inc. accounted for 17% of our total net sales in 2002; 15% of our total net sales in 2003 and 13% of our total net sales in 2004. With respect to our nitrogen fertilizer business, sales to GROWMARK, Inc. represented 17% of net sales in 2002; 15% of net sales in 2003, and 13% of net sales in 2004. With respect to our phosphate fertilizer business, sales to GROWMARK, Inc. represented 18% of net sales in 2002; 14% of net sales in 2003, and 11% of net sales in 2004.
Competition
Our markets are intensely competitive, based primarily on delivered price and to a lesser extent on customer service and product quality. During the peak demand periods, product availability and delivery time also play a role in the buying decisions of customers.
In the nitrogen fertilizer business, our primary North American-based competitors are Agrium, Terra Industries and Koch Nitrogen. There is also significant competition from product sourced from regions of the world with low natural gas costs. Because urea is the most widely-traded fertilizer product and there are limited barriers to entry, competition from foreign-sourced product is particularly acute with respect to urea.
In the phosphate fertilizer business, our primary North American-based competitors are Mosaic, Potash Corp. and Simplot. Historically, imports have not been a factor, as the United States is a large net exporter of phosphate fertilizers.
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Seasonality
The sales patterns of all five of our products are seasonal. The strongest demand for our products occurs during the spring planting season, with a second period of strong demand following the fall harvest. We and/or our customers generally build inventories during the low demand periods of the year in order to ensure timely product availability during the peak sales seasons. Seasonality is greatest for ammonia due to the limited ability of our customers and their customers to store significant quantities of this product. The seasonality of fertilizer demand results in our sales volumes and net sales being the highest during the spring and our working capital requirements being the highest just prior to the start of the spring season. Our quarterly financial results can vary significantly from one year to the next due to weather-related shifts in planting schedules and purchasing patterns.
Financial Information About Foreign and Domestic Sales and Operations
The amount of net sales attributable to our sales to foreign and domestic markets over the last three fiscal years and the carrying value of our foreign and domestic assets is set forth under note 28 to our audited consolidated financial statements included in this prospectus.
Environment, Health and Safety
We are subject to numerous environmental, health and safety laws and regulations, including laws and regulations relating to land reclamation; the generation, treatment, storage, disposal and handling of hazardous substances and wastes; and the cleanup of hazardous substance releases. These laws include the Clean Air Act, the Clean Water Act, RCRA, CERCLA, the Toxic Substances Control Act and various other federal, state, provincial, local and international statutes. Violations can result in substantial penalties, court orders to install pollution-control equipment, civil and criminal sanctions, permit revocations and facility shutdowns. In addition, environmental, health and safety laws and regulations may impose joint and several liability, without regard to fault, for cleanup costs on potentially responsible parties who have released or disposed of hazardous substances into the environment.
We have received notices from time to time from governmental agencies or third parties alleging that we are a potentially responsible party at certain sites under CERCLA or other environmental cleanup laws. We are currently involved in remediation activities at certain of our current and former facilities. We are also participating in the cleanup of third-party sites at which we have disposed of wastes. In April 2002, we were asked by the current owner of a former phosphate mine and manufacturing facility that we operated in the late 1950s and early 1960s located in Georgetown Canyon, Idaho, to contribute to a remediation of this property. We declined to participate in the cleanup. It is our understanding that the current owner is undertaking an investigation of the environmental conditions at the site. We do not know if a final remedy has been identified by the current owner and approved by the state. We anticipate that the current owner may bring a lawsuit against us seeking contribution for the cleanup costs, although we do not have sufficient information to determine when such a suit may be brought. We are not able to estimate at this time our potential liability with respect to the remediation of this property. Based on currently available information, we do not expect that any remedial or financial obligations we may be subject to involving other sites will have a material adverse effect on our business, financial condition or results of operations.
In December 2004, the United States Environmental Protection Agency, or EPA, inspected our Plant City, Florida phosphate fertilizer complex for compliance with RCRA, the federal statute that governs the generation, transportation, treatment, storage and disposal of hazardous wastes. This inspection was undertaken as part of a broad enforcement initiative commenced by the EPA to evaluate whether mineral processing and mining facilities, including, in particular, phosphoric acid production facilities, are in compliance with RCRA, and the extent to which such facilities' waste management practices have impacted the environment. In January 2005, EPA returned to the Plant City phosphate fertilizer complex and took samples of soils, groundwater and various waste streams at the facility. We have not yet received the results of the inspection from EPA. Accordingly, we do not know at this time whether the EPA intends to bring an enforcement action against us alleging violations of RCRA or other environmental laws at this facility. If an enforcement action is brought by EPA, we could be subject to fines or penalties and required
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to undertake other actions, including additional environmental investigations, at this facility. In addition to Plant City, we understand that the EPA will also inspect our Bartow facility, where we formerly manufactured phosphoric acid, in connection with this enforcement initiative. To date, we have not been contacted by the EPA with respect to the Bartow facility.
We expect continued government and public emphasis on environmental issues will result in increased future investments for environmental controls at ongoing operations. Our environmental, health and safety capital expenditures in 2004 were approximately $1.6 million. We have budgeted $5.6 million and $3.9 million for environmental, health and safety capital expenditures for 2005 and 2006, respectively. Environmental, health and safety laws and regulations are complex, change frequently and have tended to become more stringent over time. As a result we may be required to incur additional expenditures to comply with these laws and regulations, and they could have a material adverse effect on our business, financial condition and results of operations.
Our phosphate operations in Florida are subject to regulations governing the closure and long-term maintenance of our phosphogypsum stack systems. In accordance with those regulations, we have closed the old phosphogypsum stack system at the Plant City phosphate fertilizer complex and are in the process of closing the phosphogypsum stack system at the Bartow phosphate complex.
At our Bartow phosphate complex, we estimate that we will spend between $3.0 million and $4.0 million per year during the years 2005 through 2007 and an additional $14.3 million, in the aggregate, in subsequent years to complete the closure of the phosphogypsum stack and cooling pond. At the Plant City phosphate complex, we estimate that from 2022 to 2026, we will spend roughly $2.3 million per year to close the phosphogypsum stack currently in use, and an additional $3.2 million, in the aggregate, during the years 2034 through 2038 to complete closure of the cooling pond.
Cost estimates for closure of our old phosphogypsum stack systems are based on formal closure plans submitted to the State of Florida, which are subject to revision during negotiations over the next several years. Moreover, the time frame involved in the closure of our phosphogypsum stack systems extends as far as the year 2057. Accordingly, the actual amount to be spent will also depend upon factors such as the timing of activities, refinements in scope, technological developments, cost inflation and changes in applicable laws and regulations. These costs estimates may also increase if the Plant City phosphogypsum stack is further expanded.
The present value of the closure costs for the phosphogypsum stack systems has been accrued in accordance with SFAS No. 143. As of December 31, 2004, reserves recorded in our financial statements for these closure costs totaled $33.9 million. This estimate includes $15.4 million to treat water at both the Bartow facility and the Plant City facility. The costs to treat water at Bartow are estimated to be $7.1 million and are anticipated to be incurred through 2023. The estimates for water treatment at Plant City are $8.3 million and are expected to be incurred in the 2031 to 2057 time frame.
We have an asset retirement obligation at CFL's Medicine Hat facility for certain decommissioning and land reclamation activities upon cessation of operations. We also have an asset retirement obligation at our Donaldsonville, Louisiana nitrogen complex for reclamation of two effluent ponds upon cessation of operations. We have determined that no reasonable estimate of these obligations can be made because a date or range of dates for cessation of operations is not determinable.
We hold numerous environmental and mining permits authorizing operations at our facilities. A decision by a government agency to deny or delay issuing a new or renewed material permit or approval, or to revoke or substantially modify an existing permit, could have a material adverse effect on our ability to continue operations at the affected facility. Any future expansion of our existing operations is also predicated upon securing the necessary environmental or other permits or approvals.
As of January 1, 2005, the area permitted for mining at our Hardee phosphate complex had approximately 60 million tons of recoverable phosphate rock reserves, which will meet our requirements, at current production rates, for approximately 17 years. We have secured the necessary permits to mine these reserves from the Florida Department of Environmental Protection and the U.S. Army Corps of
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Engineers. Mining of these reserves beyond 2011 is subject to extension of our local development authorization by the Hardee County Board of County Commissioners. Additionally, we have initiated the process of applying for authorization and permits to expand the geographical area in which we can mine at our Hardee property. The expanded geographical area has an estimated additional 35 million tons of recoverable phosphate reserves, which will allow us to conduct mining operations at our Hardee property for approximately ten additional years at current operating rates, assuming we secure the authorization and permits to mine in this area. The estimated recoverable phosphate reserves are reflective of the anticipated permittable mining areas based on recent similar permitting efforts. An assessment of the wetlands subject to the jurisdiction of the Florida Department of Environmental Protection and the Army Corps of Engineers is underway for this expanded area. In Florida, local community participation has become an important factor in the authorization and permitting process for mining companies. A denial of the authorizations or permits to continue and/or expand our mining operations at our Hardee property would prevent us from mining all of our reserves and have a material adverse effect on our business, financial condition and results of operations.
Likewise, our phosphogypsum stack system at Plant City has sufficient capacity to meet our requirements through 2014 at current operating rates and subject to regular renewals of our operating permits. We have secured the local development authorization to increase the capacity of this stack system. The increased capacity is expected to meet our requirements through 2049 at current operating rates and subject to securing the corresponding operating permits. A decision by the state or federal authorities to deny a renewal of our current permits or to deny operating permits for the expansion of our stack system could have a material adverse effect on our business, financial condition and results of operations.
In certain cases, as a condition to procuring such permits and approvals, we may be required to comply with financial assurance regulatory requirements. The purpose of these requirements is to assure the government that sufficient company funds will be available for the ultimate closure, post-closure care and/or reclamation at our facilities. Currently, these financial assurance requirements can be satisfied without the need for any expenditure of corporate funds if our financial statements meet certain criteria, referred to as the financial tests. However, pursuant to a recent amendment to Florida's regulations governing financial assurance related to the closure of phosphogypsum stacks, we intend to establish a trust fund to meet such obligations to take advantage of a "Safe Harbor" provision of the new regulations. Beginning in 2006, we expect to contribute between $2 million and $5 million annually over the next ten years, based upon an assumed rate of return of 4% on invested funds, to a fund earmarked to cover the closure and long-term maintenance and monitoring costs of our phosphogypsum stacks, as well as any costs incurred to manage our wastewater upon closure of the stacks. The amount of money that will have accumulated in the trust fund by the end of the ten-year period, including interest earned on contributed funds, is currently expected to be approximately $37 million. After the initial ten years, contributions to the trust fund are expected to average approximately $1 million annually for the following 16 years. The trust fund is expected to approximate $92 million at the end of 26 years assuming a 4% return on the invested funds. Additionally, the Florida legislature recently passed a bill that would require mining companies to demonstrate financial responsibility for wetland and other surface water mitigation measures in advance of any mining activities. If this bill becomes law, we may be required to demonstrate financial responsibility for wetland and other surface water mitigation measures if and when we expand our Hardee mining activities to new geographical areas not currently permitted.
Several of our permits require us to reclaim any property disturbed by our operations, including our mining permit at the Hardee phosphate complex. At our Hardee property, we currently mine approximately 300 to 400 acres of land each year, all of which must be reclaimed. The costs to reclaim this land vary based on the type of land involved and range from $2,400 to $17,800 an acre, with an average of $5,500 an acre. The present value of our estimated costs to reclaim previously mined land at the Hardee phosphate complex totals approximately $19 million. We do not anticipate our reclamation obligations at our Hardee property or other facilities will have a material adverse effect on our business, financial condition and results of operations.
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We manufacture, process, store, handle, distribute and transport ammonia, which is highly volatile. The mishandling of ammonia or an accidental release can cause fires, explosions, severe property damage, injuries to humans and the environment and possible disruptions in our operations. This could in turn result in civil lawsuits and regulatory actions by governmental agencies, which could lead to significant liabilities. In addition, we may incur significant liabilities associated with the use of railcars to transport our products, including ammonia and other potentially dangerous materials. A railcar accident involving this dangerous cargo could result in catastrophic circumstances, including fires, explosions, accidents and severe pollution. Such mishandling or accident could result in significant liability in civil suits and government enforcement actions. In May 2000, we experienced an explosion at our Donaldsonville nitrogen fertilizer complex. Three people died and several others were injured in this explosion and we currently are involved in numerous lawsuits involving this tragedy. We are also involved in personal injury lawsuits arising out of a train derailment near Minot, North Dakota in 2002, in which one person died and numerous others were injured. Although we do not anticipate that the outcome of these lawsuits will have a material adverse effect on our operations, we cannot assure you that these or future lawsuits will not be material.
We are also subject to the Occupational Safety and Health Act, the regulations of the Occupational Safety and Health Administration ("OSHA") and state statutes and regulations concerning employee health and safety matters. Recently, OSHA issued a notice to its regional offices and applicable state health and safety regulatory authorities stating that it has identified serious hazards at our facilities relating to the electrical classification of our ammonia compressor rooms and the fall protection equipment we use for our employees who work atop railcars. The notice also specifies certain corrective actions that OSHA has requested that we take relating to these matters. OSHA issued this notice following the inspection of certain of our facilities in connection with our participation in OSHA's Voluntary Protection Program, a voluntary program that recognizes health and safety achievements. The failure to take the requested corrective action could result in the commencement of enforcement proceedings against us and/or OSHA removing us from the Voluntary Protection Program. We disagree with OSHA's position on these matters and are currently evaluating possible responses to the OSHA notice. We also do not believe that the costs associated with implementing the corrective actions requested by OSHA, if we ultimately were to undertake such actions, would have a material adverse effect on our business, financial condition, results of operations or cash flow.
Employees and Labor Relations
As of June 30, 2005, we had approximately 1,400 full-time and 100 part-time employees. Of these employees, 25 operators at one of our storage facilities are represented by a collective bargaining agreement with the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union or United Steel Workers.
Legal Proceedings
From time to time, we are involved in litigation and administrative proceedings which arise in the ordinary course of our business. Recently, we have been involved in numerous property damage and personal injury lawsuits arising out of an explosion at our Donaldsonville nitrogen fertilizer complex in 2000, in which three people died and several others were injured, as well as personal injury lawsuits arising out of a train derailment near Minot, North Dakota in 2002, in which one person died and numerous others were injured. We are also currently a defendant in numerous lawsuits in which the plaintiffs claim they were exposed to asbestos at our facilities, and we anticipate that we will be subject to additional claims relating to asbestos exposure in the future. We do not believe that any of the lawsuits or proceedings in which we are currently involved, either individually or in the aggregate, are likely to have a material adverse effect on our business, financial condition, results of operations or cash flows.
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In connection with this offering, we intend to amend and restate our certificate of incorporation and by-laws. The following summary of our management and directors contains reference to provisions of the amended and restated certificate of incorporation and by-laws, including the classification of the board of directors and the election and term of service of directors, that will be in effect upon the completion of this offering.
The following table identifies our executive officers and current directors and director nominees who will be serving upon completion of this offering, and their ages as of July 15, 2005.
Prior to the consummation of this offering, we expect to appoint four new independent directors, consisting of Robert C. Arzbaecher, Wallace W. Creek, David R. Harvey and Edward A. Schmitt. They have each consented to serve as directors.
Name
|
Age
|
Position
|
||
---|---|---|---|---|
Stephen R. Wilson | 56 | President, Chief Executive Officer and Chairman of the Board | ||
Ernest Thomas | 51 | Senior Vice President and Chief Financial Officer | ||
David J. Pruett | 51 | Senior Vice President, Operations | ||
Douglas C. Barnard | 46 | Vice President, General Counsel, and Secretary | ||
Stephen G. Chase | 53 | Vice President, Corporate Planning and Business Development | ||
William G. Eppel | 61 | Vice President, Human Resources | ||
Philipp P. Koch | 53 | Vice President, Raw Materials Procurement | ||
Fernando A. Mugica | 54 | Vice President, Supply and Logistics | ||
Monty R. Summa | 52 | Vice President, Sales | ||
Robert D. Webb | 62 | Vice President and Corporate Controller | ||
Robert C. Arzbaecher | 45 | Director Nominee | ||
Wallace W. Creek | 66 | Director Nominee | ||
David R. Harvey | 66 | Director Nominee | ||
Edward A. Schmitt | 58 | Director Nominee |
Each officer serves at the discretion of our board of directors and holds office until his or her successor is elected and qualified or until his or her earlier resignation or removal.
The following sets forth certain biographical information with respect to our executive officers and current director and nominees who will be serving upon completion of this offering:
Stephen R. Wilson has served as our president and chief executive officer since October 2003 and served as interim president and chief executive officer from July 2003 through October 2003. Mr. Wilson has been a member of CF Holdings' board since April 2005 and chairman of the board since July 2005. Mr. Wilson joined us in 1991 as senior vice president and chief financial officer, following a lengthy career with Inland Steel Industries, Inc. Mr. Wilson is a certified public accountant, and he holds B.A. and M.B.A. degrees from Northwestern University.
Ernest Thomas has served as our senior vice president and chief financial officer since May 2004. From November 2002 to August 2003, Mr. Thomas served as chief financial officer and treasurer of Tower Automotive, Inc., a supplier of structural metal products for the automotive industry. From August 2003 to May 2004, Mr. Thomas was not employed. He spent the previous four years with Modine Manufacturing Co., a manufacturer of heat-transfer components and systems, serving as chief financial officer from October 2000 to October 2002 and as a group vice president from August 1998 to October 2000. Prior to joining Modine, Mr. Thomas spent over nine years with Eaton Corporation, a diversified industrial manufacturer of systems and controls, primarily in senior operating positions, and over eleven years on the General Motors financial staff. On February 2, 2005, Tower Automotive, Inc. filed a voluntary petition in
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the United States Bankruptcy Court for the Southern District of New York seeking reorganization relief under the provisions of Chapter 11 of the United States Bankruptcy Code. Mr. Thomas holds a B.A. degree from Bluffton College and an M.B.A. degree from Miami University of Ohio.
David J. Pruett joined us in July 2005 as senior vice president, operations. Prior to joining us, Mr. Pruett worked for Dyno Nobel, Inc., a global, Norwegian-owned explosives company. From January 2003 to August 2004, he held the position of vice president, merger implementation to manage the merger of Dyno Nobel with the Ensign Bickford Company; and from May 1996 to January 2003, he served as vice president, manufacturing, sourcing and logistics for Dyno Nobel North America. Mr. Pruett was not employed from August 2004 through July 2005. Mr. Pruett has a B.S. degree in Chemistry and an M.S. degree in Pulp and Paper Chemistry from Michigan Technological University. He earned his Ph.D. in Analytical Chemistry from Michigan State University.
Douglas C. Barnard has served as our vice president, general counsel, and secretary since January 2004. From January 2001 to July 2003, Mr. Barnard served as an executive vice president and general counsel of Bcom3 Group, Inc., an advertising and marketing communication services group (including service from January 2003 to July 2003 in a successor corporation formed to market and sell securities received in the sale of Bcom3 Group). From July 2003 until January 2004, Mr. Barnard was not employed. From August 2000 to January 2001, he was a partner in the law firm of Kirkland and Ellis. Previously, from August 1996 to July 2000, Mr. Barnard was vice president, general counsel, and secretary of LifeStyle Furnishings International Ltd., a manufacturer and distributor of residential furniture and decorative fabrics. He holds a B.S. degree from the Massachusetts Institute of Technology, a J.D. degree from the University of Minnesota and an M.B.A. degree from the University of Chicago.
Stephen G. Chase has served as our vice president, corporate planning and business development since March 2001. Mr. Chase joined us in 1975 after earning an M.B.A. degree from the University of Chicago. He also has a B.S. degree in management engineering from Rensselaer Polytechnic Institute. During his career with us, Mr. Chase has served in a number of key positions, including director, operations planning and director, corporate planning and analysis.
William G. Eppel has served as our vice president, human resources since 1993. Since Mr. Eppel joined us in 1977, he has served in several key human resources positions. Mr. Eppel holds a B.A. in business administration from Michigan State University.
Philipp P. Koch has served as our vice president, raw materials procurement since July 2003. Before joining us, Mr. Koch spent nearly 25 years in the energy industry with Amoco Corporation and BP PLC, from January 1980 to July 2003. He has extensive international and domestic energy experience in the areas of supply and trading. Mr. Koch has a B.A. degree from Greenville College and an M.B.A. degree from DePaul University.
Fernando A. Mugica has served as our vice president, supply and logistics since March 2004. Mr. Mugica joined us in 1977 and has served in a number of key positions in the supply and logistics function during his career. Mr. Mugica holds a B.S. in systems engineering from the University of Illinois and an M.B.A from DePaul University.
Monty R. Summa has served as our vice president, sales since August 2003. Mr. Summa served as president of Sabre Initiatives, LLC, a cooperative buying group owned by independent agricultural retailers from March 2000 to August 2003. From 1997 to 2000, he was vice president of the Distribution Division for Terra Industries, a manufacturer and distributor of nitrogen fertilizer products. Mr. Summa holds a B.A. degree in marketing from Northwest Missouri State University.
Robert D. Webb has served as our vice president and corporate controller since 1997. Mr. Webb joined us in 1978 and has held several senior level management positions within the finance and accounting areas, including acting chief financial officer from July 2003 to May 2004. Prior to joining us, he spent 13 years
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with Arthur Andersen & Co. Mr. Webb holds a B.S. in accounting from Northern Illinois University and is a certified public accountant.
Robert C. Arzbaecher is a nominee to our board of directors and has consented to serve as a director. Mr. Arzbaecher has served as chairman of the board of Actuant Corporation, a manufacturer and marketer of industrial products and systems, since 2001 and president and chief executive officer of Actuant Corporation since 2000. From 1992 until 2000, Mr. Arzbaecher held various financial positions with Applied Power, Inc., Actuant's predecessor, the most recent of which was chief financial officer. Prior to 1992, Mr. Arzbaecher held various financial positions with Grabill Aerospace, Farley Industries and Grant Thornton, a public accounting firm. Mr. Arzbaecher is a certified public accountant.
Wallace W. Creek is a nominee to our board of directors and has consented to serve as a director. Mr. Creek served as controller of General Motors Corporation from 1992 to 2002 and held several executive positions in finance at GM over a 43-year career. Mr. Creek was senior vice president of finance of Collins & Aikman, a leading manufacturer of automotive interior components, from December 2002 to June 2004. He is also a director of Columbus McKinnon Corporation.
David R. Harvey is a nominee to our board of directors and has consented to serve as a director. Mr. Harvey has served as chairman of the board of Sigma-Aldrich Corporation, a manufacturer and distributor of biochemical and organic chemicals, since January 2001 and as chief executive officer since November 1999. From 1986 until 1999, he served as Chief Operating Officer of Sigma-Aldrich Corporation. Prior to 1986, Mr. Harvey served in various executive positions at Aldrich Chemical Company, including president and vice presidentEurope, and in various sales and marketing positions at Shell International Chemical Company. Mr. Harvey has served as a director of Sigma-Aldrich Corporation since 1981.
Edward A. Schmitt is a nominee to our board of directors and has consented to serve as a director. Mr. Schmitt has served as chairman of the board of Georgia Gulf Corporation, a major manufacturer of chemical products, since September 2001; as chief executive officer since April 1998; and as president since December 1997. From 1985 until 1997, he held various manufacturing and executive positions with Georgia Gulf, including executive vice president in February 1997. Prior to 1985, Mr. Schmitt held manufacturing and engineering positions with Georgia-Pacific Corporation (Georgia Gulf was created in 1985 from Georgia-Pacific's commodity chemicals division), Allied Chemical Corporation, and the Aluminum Company of America.
In addition, we anticipate that William Davisson, John E. Gherty and John D. Johnson will be added to our board after the consummation of this offering.
William Davisson has served as the chief executive officer of GROWMARK, Inc., one of our owners, since 1998, and as a member of CF Industries' board since 1999. Mr. Davisson served as chairman of CF Industries' board from 2002 to 2004. Mr. Davisson has worked in the GROWMARK system his entire career, since 1970, and he is a certified public accountant.
John E. Gherty has served as the president and chief executive officer of Land O'Lakes, one of our owners, since 1989, and as a member of CF Industries' board since 1993. Mr. Gherty served as chairman of CF Industries' board from 2000 to 2002. Mr. Gherty has announced he will be retiring from Land O'Lakes at the end of December 2005.
John D. Johnson has served as the president and chief executive officer of CHS Inc. (formerly Cenex Harvest States), one of our owners, and as a member of CF Industries' board, since 2000. Mr. Johnson joined Harvest States, a predecessor to CHS, in 1976, and he served as president and chief executive officer of Harvest States from 1995 to 1998. From 1998 to 2000, Mr. Johnson served as general manager and president of CHS. Mr. Johnson currently serves as chairman of CF Industries' board, and he is also a director of Gold Kist Inc.
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Board of Directors
Our board of directors currently consists of one member. Prior to the completion of this offering, our certificate of incorporation will be amended to divide our board into three classes, with one class being elected each year. Each director will serve a three-year term, with termination staggered according to class, except that Class I directors will have an initial term expiring in 2006, Class II directors will have an initial term expiring in 2007 and Class III directors will have an initial term expiring in 2008. Class I will be comprised of David R. Harvey. Class II will be comprised of Robert C. Arzbaecher and Edward A. Schmitt. Class III will be comprised of Wallace W. Creek and Stephen R. Wilson. Under the rules of the New York Stock Exchange, a majority of the board must be independent on or before the date that is one year after the consummation of this offering. We intend to comply with this requirement as it becomes applicable to us.
Committees of the Board of Directors
We will have three board committees: an audit committee; a corporate governance and nominating committee; and a compensation committee.
Audit Committee
Our audit committee's main function will be to oversee our accounting and financial reporting processes, internal systems of control, independent auditor relationships, and the audits of our financial statements. The audit committee will be comprised of not fewer than three directors elected by a majority of the board. After this offering, our audit committee will consist of Robert C. Arzbaecher, Wallace W. Creek and David R. Harvey. Wallace W. Creek will be the chairman of our audit committee and our audit committee financial expert (as defined under applicable SEC rules). Our board has determined that each of the directors serving on our audit committee is independent within the meaning of the rules of the SEC and under the corporate governance rules of the New York Stock Exchange.
Corporate Governance and Nominating Committee
Our corporate governance and nominating committee's main functions will be to assist our board of directors by identifying individuals qualified to serve as directors, consistent with criteria set by our board, and also to assist our board of directors with respect to corporate governance matters. The corporate governance and nominating committee will be comprised of not fewer than three directors elected by a majority of the board. After this offering, our corporate governance and nominating committee will consist of Wallace W. Creek, David R. Harvey and Edward A. Schmitt. David R. Harvey will be the chairman of our corporate governance and nominating committee. Our board has determined that each of the directors serving on our corporate governance and nominating committee is independent under the corporate governance rules of the New York Stock Exchange.
Compensation Committee
Our compensation committee's main function will be to assist our board of directors in determining the development plans and compensation of our senior management and directors. The compensation committee will be comprised of not fewer than three directors elected by a majority of the board. After this offering, our compensation committee will consist of Robert C. Arzbaecher, Wallace W. Creek and Edward A. Schmitt. Robert C. Arzbaecher will be the chairman of our compensation committee. Each member of our compensation committee will be an "outside" director, as that term is defined in Section 162(m) of the Internal Revenue Code, and a "non-employee" director, within the meaning of Rule 16b-3 under the Securities Exchange Act. Our board has determined that each of the directors serving on our compensation committee is independent under the corporate governance rules of the New York Stock Exchange.
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Director Compensation
The non-employee directors on our board will be paid an annual retainer of $30,000 and will receive restricted shares annually with a value of $65,000. The restricted shares will vest on the date of the first annual meeting of our shareholders following the date of grant or after one year of service on the board, whichever occurs first. The chairperson of the audit committee will also receive an additional annual retainer of $5,000. Board members will receive an additional annual cash payment of $1,500 for each board meeting attended in person, $500 for each telephonic board meeting, $1,250 for each board committee meeting, and $425 for each telephonic board committee meeting.
Compensation Committee Interlocks and Insider Participation
None of the members of our compensation committee is an officer or employee of our company. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any other entity that has one or more executive officers serving on our board of directors or compensation committee.
Executive Compensation
The following table sets forth information regarding the compensation we paid our president and chief executive officer, our former executive vice president and chief operating officer and each of our three other most highly compensated executive officers for the year ended December 31, 2004. We refer to these individuals, collectively, as the named executive officers.
|
Annual Compensation
|
|
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Name and Principal Position
|
Other Annual
Compensation (2) |
All Other
Compensation (3) |
||||||||||
Salary
|
Bonus
(1)
|
|||||||||||
Stephen R. Wilson
President and Chief Executive Officer |
$ | 636,400 | $ | 890,960 | $ | 2,642 | $ | 59,742 | ||||
John H. Sultenfuss
(4)
Executive Vice President and Chief Operating Officer |
450,000 | 500,000 | 2,751 | 43,266 | ||||||||
Ernest Thomas
(5)
Senior Vice President and Chief Financial Officer |
202,692 | 200,000 | | 17,343 | ||||||||
Douglas C. Barnard
(6)
Vice President, General Counsel, and Secretary |
240,385 | 175,000 | | 21,413 | ||||||||
Philipp P. Koch
Vice President, Raw Materials Procurement |
229,942 | 165,000 | 4,491 | 19,783 |
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Change in Control Agreements
Messrs. Barnard, Koch, Thomas and Wilson, as well as certain other of our executive officers have entered into change in control agreements with us. Under the terms of these agreements, each of these executives is entitled to receive certain payments and benefits from us if the executive's employment is terminated by us without "cause" (other than by reason of the executive's death or disability), or the executive resigns because of "good reason," in either case within the period of 24 months following (or in certain cases prior to) a change in control (as defined in the agreements) (a "qualifying termination").
Under the change in control agreements, an executive will be deemed to have good reason if:
Following a qualifying termination, the change in control agreements provide for (i) a lump sum payment equal to two times (three times in the case of Mr. Wilson) the sum of the executive's base salary and target bonus, (ii) welfare benefit continuation for a period of two years (three years in the case of Mr. Wilson) and (iii) a pro-rata bonus for the year of termination, assuming target levels of performance or, if higher, actual year-to-date performance. In addition, if the executive is otherwise eligible to participate in the applicable plan, the executive will receive a cash payment equal to the actuarial value of two additional years (three years in the case of Mr. Wilson) of age and service credit under our Retirement Income Plan; will be credited with two additional years of age and service credit under the related excess retirement plan (three years in the case of Mr. Wilson); and will receive a cash payment equal to contributions that we would have made to our Thrift Savings Plan and the related excess savings plan on behalf of the executive for a period of two years (three years in the case of Mr. Wilson). If the executive is not fully vested in his or her benefits under the Thrift Savings Plan and the related excess savings plan, he or she will receive a cash payment equal to his or her unvested benefits under such plans. The executive will not be obligated to seek other employment in mitigation of the payments and benefits to be provided, and no such other employment will reduce our obligation to make such payments and to provide such benefits to the executive under the agreements.
The change in control agreements further provide that, if any of the payments to the executive becomes subject to the excise tax imposed by Section 4999 of the Internal Revenue Code, the executive will be entitled to receive an additional gross-up payment such that, after payment by the executive of all taxes, including any excise tax imposed upon the gross-up payment, the executive will receive the net after-tax benefit that the executive would have received had the excise tax not been imposed.
The executive will be required to sign a release of claims in favor of us as a condition to receiving any such payments or benefits under the change in control agreements.
2005 Equity and Incentive Plan
Our board of directors has adopted the CF Industries Holdings, Inc. 2005 Equity and Incentive Plan, which we refer to as the "plan." The purpose of the plan is to provide an incentive to our employees, officers, consultants and non-employee directors to increase their efforts and to promote our business.
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The plan authorizes our compensation committee, which administers the plan, to grant the following awards:
Share Reserve
8,250,000 shares of our common stock are reserved and available for issuance under the plan, but no more than 2,887,500 shares of our common stock are available for issuance under the plan for any awards other than stock options and stock appreciation rights. If any outstanding award expires for any reason or is settled in cash, any unissued shares subject to the award will again be available for issuance under the plan. If a participant pays the exercise price of an option by delivering to us previously owned shares, only the number of shares we issue in excess of the surrendered shares will count against the plan's share limit. Also, if the full number of shares subject to an option is not issued upon exercise for any reason (including to satisfy a tax withholding obligation), only the net number of shares actually issued upon exercise will count against the plan's share limit.
Individual Award Limits
The plan provides that no more than 1,237,500 shares underlying stock options may be granted to a participant in any one calendar year in the form of stock options and stock appreciation rights, and that no more than 618,750 shares underlying any other award may be granted to a participant in any one calendar year in the form of any other award under the plan. The maximum value of the aggregate payment that any participant may receive with respect to any cash-based awards under the plan is $3 million in respect of any annual performance period and $3 million per year under any performance period in excess of one year.
162(m)
Under section 162(m) of the Internal Revenue Code, a public company generally may not deduct compensation in excess of $1 million paid to its chief executive officer and the four next most highly compensated executive officers. Until the annual meeting of our stockholders in 2009, or until the plan is materially amended, if earlier, awards granted under the plan will be exempt from the deduction limits of section 162(m). In order for awards granted after the expiration of this grace period to be exempt, the plan must be re-submitted for approval of our stockholders.
Performance Goals
Under the plan, our compensation committee may determine that vesting or payment of an award under the plan will be subject to the attainment of one or more performance goals with respect to a performance period. Performance periods are determined by our compensation committee but are not
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shorter than twelve months. The performance goals may include any or a combination of, or a specified change in, the following:
Termination of Employment
Unless otherwise provided by our compensation committee in the award agreement, upon termination of a participant's employment or service, the participant will forfeit any outstanding awards.
Change in Control
Upon a change in control (as defined in the plan) the restrictions, limitations and conditions applicable to outstanding awards will lapse, performance goals will be deemed to be fully achieved and the awards will become fully vested (and in the case of options, exercisable).
Transferability of Awards
Unless otherwise provided by our compensation committee, awards granted under the plan generally may not be transferred by a grantee other than by will or the laws of descent and distribution and may be exercised during the grantee's lifetime only by the grantee or his or her guardian or legal representative.
Term of the Plan, Amendment or Termination of the Plan
No award may be granted under the plan after the tenth anniversary of the effective date of the plan. Our board of directors may amend, alter, suspend, discontinue or terminate the plan at any time, provided that no such amendment, alteration, suspension, discontinuance or termination will be made without stockholder approval if such approval is, in the board's determination, necessary to comply with any tax or regulatory requirement. No amendment to or termination of the plan may adversely affect any awards granted under the plan without the participant's permission.
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New Plan Benefits
In connection with this offering, the following grants of stock options will be made to the following individuals (assuming an initial public offering price of $16.00 per share, the mid-point of the estimated price range shown on the cover page of this prospectus).
2005 Equity and Incentive Plan
|
||
---|---|---|
Name and Position
|
Shares
|
|
Stephen R. Wilson, President and Chief Executive Officer | 1,173,400 | |
Ernest Thomas, Senior Vice President and Chief Financial Officer | 244,100 | |
Douglas C. Barnard, Vice President, General Counsel, and Secretary | 164,100 | |
Philipp P. Koch, Vice President, Raw Materials Procurement | 122,400 | |
All executive officers |
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2,376,800 |
All employees other than executive officers | 374,100 |
In addition, each of our non-employee directors will receive a grant of 4,063 shares of restricted stock on the date of this prospectus (assuming an initial public offering price of $16.00 per share, the mid-point of the estimated price range shown on the cover page of this prospectus).
Defined Benefit Pension Plans
We maintain noncontributory defined benefit pension plans for employees whose covered employment commenced on or before December 31, 2003, including certain of the named executive officers.
The annual retirement benefit under our defined benefit plans is based on years of eligible service multiplied by a percent of the highest average earnings of the retiree (as defined in the plan) during any 60 consecutive months. Benefits are paid on a straight line annuity basis, but married participants are paid a reduced qualified joint and survivor annuity unless they elect a straight line annuity.
The amounts shown in the following table include an annualized payout assuming retirement at age 65 (before any reduction for social security benefits) of both qualified pension funds, as capped by legislation, and additional funds from the Executive Compensation Equalization and Deferral Plan, a non-qualified supplemental pension plan, designed to restore a participant's benefits under the qualified pension plan which are reduced by certain limiting provisions of the Internal Revenue Code.
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Our named executive officers have credited years of service as follows: Mr. Koch1 year and Mr. Wilson13 years. Mr. Sultenfuss retired on February 17, 2005, with 32 years of credited service under the plans. Messrs. Barnard and Thomas are ineligible to participate in these plans, since their employment commenced in 2004, after the plans had been closed to new participants.
Long-Term Incentive Plan
The CF Industries, Inc. Long-Term Incentive Plan, or the LTIP, which was established on January 1, 2004, provides for long-term, performance-based cash incentive awards to corporate officers and other management employees who can have a significant impact on our long-term financial performance. The initial performance period runs from January 1, 2004 through December 31, 2006. A second performance period began on January 1, 2005 and runs until December 31, 2007.
Upon completion of this offering the LTIP will be terminated. Aggregate payments to all participants under the plan in connection with the termination of the LTIP are expected to be approximately $3,800,000. Each of our named executive officers will receive approximately the following payments with respect to the termination of the LTIP: Mr. Wilson, $1,207,100; Mr. Sultenfuss, $180,600; Mr. Thomas, $334,900; Mr. Barnard, $153,600; and Mr. Koch, $153,600.
Annual Incentive Plan
The CF Industries, Inc. Annual Incentive Plan, or the AIP, which was established on January 1, 2004, provides for annual performance-based cash awards to our corporate officers and other management employees who have the ability to contribute meaningfully to our business results. Each participant is assigned a target award opportunity ranging from 16% to 70% of base salary depending on the participant's compensation and responsibility level. Minimum awards are 0% and maximum awards are 200% of target. Achievement of awards depends on our pre-tax return on equity and the performance of the individual participant. Payment of approved awards is made in cash during the first two and one-half months of the calendar year following the completion of the applicable plan year. In the event of termination of employment other than for disability, death, or retirement, awards relating to the plan year in which termination occurs are forfeited. Upon a Change in Control (as defined in the AIP), company and individual performance results will be determined year-to-date for the then current plan year and, based on these results, awards will be paid in cash to participants on a pro-rata basis within 45 days following the Change in Control.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Prior to the completion of this offering, CF Industries' owners each owned more than 5% of its common stock, and each nominated one person to serve on CF Industries' board of directors.
Historical Product Purchases
In 2002, 2003, 2004 and the first six months of 2005, CF Industries' owners purchased substantial quantities of chemical fertilizers from us as shown in the following table.
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Year ended December 31,
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Six months ended June 30,
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2002
|
2003
|
2004
|
2005
|
||||||||||||||||||
|
Purchases
(in millions) |
Percent of
Total Net Sales |
Purchases
(in millions) |
Percent of
Total Net Sales |
Purchases
(in millions) |
Percent of
Total Net Sales |
Purchases
(in millions) |
Percent of
Total Net Sales |
||||||||||||||
Agriliance, LLC (1) | $ | 448.8 | 44 | % | $ | 559.7 | 41 | % | $ | 481.8 | 29 | % | $ | 313.0 | 29 | % | ||||||
GROWMARK, Inc. | 172.1 | 17 | 202.9 | 15 | 206.8 | 13 | 144.1 | 13 | ||||||||||||||
Southern States Cooperative, Incorporated | 66.5 | 7 | 76.8 | 6 | 73.1 | 4 | 54.8 | 5 | ||||||||||||||
MFA Incorporated | 46.7 | 5 | 52.0 | 4 | 66.4 | 4 | 56.7 | 5 | ||||||||||||||
Tennessee Farmers Cooperative | 33.0 | 3 | 37.9 | 3 | 37.8 | 2 | 17.9 | 2 | ||||||||||||||
La Coop fédérée | 16.3 | 2 | 24.9 | 2 | 14.0 | 1 | 14.5 | 1 | ||||||||||||||
Intermountain Farmers Association | 2.8 | | 2.0 | | 1.7 | | 1.6 | | ||||||||||||||
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Total | $ | 786.2 | 78 | % | $ | 956.2 | 71 | % | $ | 881.6 | 53 | % | $ | 602.6 | 55 | % | ||||||
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In addition to purchasing fertilizer from us, some of our owners also contract with us to store fertilizer products at certain of our warehouses. In connection with these storage arrangements, we received approximately $362,000 from Agriliance, LLC and approximately $100,000 from MFA Incorporated in 2004.
Owner Supply Contracts
We have entered into multi-year supply contracts with six of our owners and Agriliance LLC, a 50-50 joint venture between two of our other owners, Land O'Lakes, Inc. and CHS Inc., relating to future purchases of fertilizer products. The initial terms of the supply contracts last until June 30, 2008 for the contracts with six of our owners, and until June 30, 2010 with Agriliance, LLC. The term will be automatically extended for successive one-year periods unless a termination notice is given by either party.
Each contract specifies a sales target volume and a requirement volume for the first contract year. The requirement volume is a percentage of the sales target volume and represents the volume of fertilizer that we are obligated to sell, and the customer is obligated to purchase, during the first contract year. Thereafter, the sales target volume is subject to yearly adjustment by mutual agreement or, failing such agreement, to an amount specified by us which is not less than 95% nor more than 100% of the prior year's sales target volume. The requirement volume is also subject to yearly adjustment to an amount specified by the customer which is not less than 65% nor more than 100% of the then applicable sales target volume. The contracts also contain reciprocal "meet or release" provisions pursuant to which each party must provide the other party with notice and the opportunity to match a transaction with a third party if such a transaction would impact the party's willingness or ability to supply or purchase, as the case may be, the then applicable sales target volume. The "meet or release" provisions may not, however, reduce the requirements volume. The aggregate requirement volumes under these seven contracts for the 12 months ending June 30, 2006 represents approximately 88% of the volume of fertilizer products purchased by our owners in the twelve-month period ending June 30, 2005.
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The prices for product sold under the supply contracts will vary depending on the type of sale selected by the customer. The customer may select (i) cash sales at prices that are published in our weekly cash price list, (ii) index sales at a published index price, (iii) forward pricing sales under our forward pricing program and (iv) sales negotiated between the parties. The supply contracts also provide for performance incentives based on (i) the percentage of the sales target volume actually purchased, (ii) the timing of purchases under our forward pricing program, (iii) the amount of purchases under our forward pricing program, (iv) specifying a requirement volume in excess of the then applicable minimum requirement volume and (v) quantity discounts for overall volume.
We have agreed with our owners that the price they receive for cash sales, index sales and forward pricing sales are the same prices we charge all of our customers and that the performance incentives offered to them will be equal to the highest comparable incentives offered to other requirements contract customers. We believe the performance incentives offered to our owners under the supply contracts are consistent with the incentives offered to similarly situated customers in our industry in transactions between unaffiliated parties. We also expect that any future supply contracts following the offering with the former owners of CF Industries will be on terms no less favorable to us than could be obtained from unaffiliated parties.
Our supply contracts with Agriliance, LLC, GROWMARK, Inc. and MFA Incorporated also provide them with a right of first offer for the purchase of certain of our storage and terminal facilities. A portion of GROWMARK, Inc.'s requirement volume is also contingent on the purchase from GROWMARK, Inc. by one of its customers of specified amounts of certain fertilizer products.
The Reorganization Transaction
Pursuant to the Reorganization Transaction, the owners of CF Industries will receive shares of our common stock and cash in exchange for their outstanding equity interests in CF Industries. Assuming an initial public offering price of $16.00 per share, the mid-point of the estimated price range shown on the cover page of this prospectus, the owners of CF Industries will receive initially, in the aggregate, 7,562,500 shares of our common stock and $622.1 million, which represents the estimated proceeds to us from this offering, after deducting underwriting discounts and commissions.
The cash payment and the number of shares issued to the owners of CF Industries will then be adjusted depending on whether the underwriters exercise their over-allotment option to purchase up to 6,187,500 shares of common stock from us.
The cash payment or stock issuance related to the over-allotment option will be made shortly after the expiration or full exercise of the over-allotment option.
The following table shows the owners of CF Industries, the number of shares we intend to issue to each and the cash payments to each. The information is presented assuming either no exercise or full exercise by the underwriters of the over-allotment option. The cash payments to the parties assume a
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public offering price of $16.00 per share, the midpoint of the range set estimated price forth on the cover page of this prospectus, less underwriting discounts and commissions.
|
Assuming No Exercise of
Over-Allotment Option |
Assuming Full Exercise of Over-Allotment Option
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Name
|
Shares
Issued |
Total Cash
Payments |
Shares
Issued |
Total Cash
Payments |
|||||||
CHS Inc. | 2,304,035 | $ | 138,063,713 | 2,150,396 | $ | 140,380,584 | |||||
GROWMARK, Inc. | 5,412,104 | 122,421,783 | 5,412,104 | 122,421,783 | |||||||
Intermountain Farmers Association | 26,832 | 1,607,823 | | 2,012,445 | |||||||
La Coop fédérée | 200,336 | 12,004,665 | | 15,025,736 | |||||||
Land O'Lakes, Inc. | 4,205,829 | 252,024,156 | | 315,448,071 | |||||||
MFA Incorporated | 526,761 | 31,564,846 | | 39,508,394 | |||||||
Southern States Cooperative, Incorporated | 617,172 | 36,982,552 | | 46,289,510 | |||||||
Tennessee Farmers Cooperative | 456,931 | 27,380,462 | | 34,270,977 | |||||||
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|
|
|
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Total | 13,750,000 | $ | $622,050,000 | 7,562,500 | $ | 715,357,500 | |||||
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Net operating loss carryforwards. As of June 30, 2005, we had total net operating loss carryforwards of $279.2 million. A gross deferred tax asset of $111.5 million related to these net operating loss carryforwards is included in deferred income taxes on our June 30, 2005 balance sheet. Because our net operating loss carryforwards were generated from business conducted with our owners when we were a cooperative for tax purposes, there is substantial uncertainty under existing tax law whether any tax benefits from the related deferred tax asset will be realizable after the completion of this offering. As a result of this uncertainty, we will establish a valuation allowance equal to 100% of any of the deferred tax asset remaining after the consummation of this offering relating to the net operating loss carryforwards. We will record a non-cash charge to "Income Tax Expense" in the amount of the valuation allowance in the quarter in which the offering is completed.
We intend to enter into an NOL Agreement with the owners of CF Industries in connection with the Reorganization Transaction relating to the treatment of the net operating loss carryforwards. Under the NOL Agreement, in the event that it is finally determined that our net operating loss carryforwards can be used after we are no longer a cooperative, we will pay the owners of CF Industries an amount equal to the federal and state income taxes actually saved after the completion of this offering as a result of the utilization of net operating loss carryforwards related to our former cooperative status. These payments, if any, will be made only after it has been finally determined that utilization of the net operating losses has provided us with actual tax savings. The NOL Agreement will not require that we operate in a way that maximizes the use of our cooperative-related net operating loss carryforwards. Costs incurred after completion of this offering in pursuing a determination regarding the usability of these net operating loss carryforwards will be borne by the owners of CF Industries.
Hayes Terminal
We have entered into an agreement with GROWMARK, Inc., one of our owners, pursuant to which we will sell GROWMARK, Inc. certain assets of our former terminal in Hayes, Illinois for a gross purchase price of $200,000. We have not operated this terminal since 1987. Our board of directors approved this transaction in July 2004, and we believe it contains such terms and conditions as would have occurred in an arms-length transaction.
Canadian Fertilizers Limited
Two of our owners, GROWMARK, Inc. and La Coop fédérée, hold interests in CFL, our Canadian joint venture. GROWMARK, Inc. owns 9% of the outstanding common stock of CFL, and La Coop fédérée owns 8% of the outstanding common stock of CFL. See "BusinessOperating SegmentsNitrogen Fertilizer BusinessMedicine Hat Nitrogen Complex."
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Registration Rights Agreement
Upon consummation of this offering, we will provide our owners the opportunity to enter into a registration rights agreement with us. Pursuant to this agreement, those owners who hold shares of our common stock received in the Reorganization Transaction representing at least 5% of our outstanding common stock will receive certain demand and piggyback registration rights with respect to those shares of common stock. These shares are referred to as registrable securities. These rights may only be exercised after our owners' lock-up agreements pertaining to this offering expire one year after the date of this prospectus. Under the registration rights agreement, the holders of not less than 25% of the outstanding registrable securities may request up to two demand registrations. Pursuant to the registration rights agreement, we are required to pay all registration expenses required to register the registrable securities, subject to certain limitations.
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The following table sets forth, as of July 15, 2005, certain information regarding the beneficial ownership of our common stock by:
Beneficial ownership is determined according to the rules of the SEC, and generally means that a person has beneficial ownership of a security if he or she possesses sole or shared voting or investment power of that security, and includes options that are currently exercisable or exercisable within 60 days. Each director, officer or 5% or more stockholder, as the case may be, has furnished us with information with respect to beneficial ownership. Except as otherwise indicated, we believe that the beneficial owners of common stock listed below, based on the information each of them has given to us, have sole investment and voting power with respect to their shares, except where community property laws may apply.
No shares of our common stock will be outstanding prior to the completion of the offering. Percentage of beneficial ownership prior to the offering is based on our owners' beneficial ownership of equity securities of CF Industries. The number of shares and percentage of beneficial ownership after the offering set forth below is based on shares of our common stock to be issued and outstanding immediately after this offering, including 6,187,500 shares that will either be issued to the underwriters upon the exercise of their over-allotment option or issued to the owners of CF Industries in the Reorganization Transaction upon the expiration of the underwriters' over-allotment option, assuming no exercise of that option and including 16,252 shares of restricted stock (assuming an initial public offering price of $16.00 per share, the mid-point of the estimated price range shown on the cover page of this prospectus) that we intend to grant on the date of this prospectus under our 2005 Equity and Incentive Plan to our non-employee directors.
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Beneficial Ownership After Offering
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Assuming the Underwriters'
Over-allotment Option is Not Exercised |
Assuming the Underwriters'
Over-allotment Option is Exercised in Full |
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Name of Beneficial Owner
|
Percent Beneficial Ownership
Prior to Offering |
||||||||||
Shares
|
Percent
|
Shares
|
Percent
|
||||||||
CHS Inc. (1) | 20.8 | % | 2,304,035 | 4.2 | % | 2,150,396 | 3.9 | % | |||
GROWMARK, Inc. (2) | 24.6 | 5,412,104 | 9.8 | 5,412,104 | 9.8 | ||||||
Land O'Lakes, Inc. (3) | 38.0 | 4,205,830 | 7.6 | | | ||||||
Southern States Cooperative, Incorporated (4) | 5.6 | 617,172 | 1.1 | | | ||||||
Douglas C. Barnard (5) | | | | | | ||||||
Philipp P. Koch (5) | | | | | | ||||||
John H. Sultenfuss (5) | | | | | | ||||||
Ernest Thomas (5) | | | | | | ||||||
Stephen R. Wilson (5) | | | | | | ||||||
Robert C. Arzbaecher (6) | | 4,063 | * | 4,063 | * | ||||||
Wallace W. Creek (7) | | 4,063 | * | 4,063 | * | ||||||
David R. Harvey (8) | | 4,063 | * | 4,063 | * | ||||||
Edward A. Schmitt (9) | | 4,063 | * | 4,063 | * | ||||||
All directors and executive officers as a group (14 persons) | | 16,252 | * | 16,252 | * |
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DESCRIPTION OF CERTAIN INDEBTEDNESS
CF Industries has entered into a commitment letter with J.P. Morgan Securities Inc. and JPMorgan Chase Bank, N.A., pursuant to which J.P. Morgan Securities has agreed to arrange and syndicate a senior secured revolving credit facility in an aggregate amount of $250.0 million on the terms and conditions set forth in the commitment letter and an associated term sheet.
Pursuant to such commitment letter and term sheet, effective upon the consummation of the offering and other specified conditions, CF Industries will enter into the revolving credit facility under a credit agreement with a syndicate of lenders including JPMorgan Chase, which also will serve as administrative agent under the facility. The following description of the credit facility is subject to finalization of the loan documentation. There can, however, be no assurance that CF Industries will be able to reach agreement on the final documentation for the credit facility on terms acceptable to it or at all.
The credit agreement, subject to the terms and conditions set forth therein, will provide CF Industries with a senior secured revolving credit facility for borrowing up to $250.0 million for working capital and general corporate purposes, including up to $50.0 million which will be available for the issuance of letters of credit. On the effective date of the credit agreement, we do not expect that there will be any loans or letters of credit outstanding under the credit facility. Availability under the revolving facility will be limited by a borrowing base equal to the value of a specified percentage of eligible receivables, plus the value of a specified percentage of eligible inventory, plus a property, plant and equipment component (capped at $75,000,000 in the aggregate) to be determined based on specified percentages of eligible fixed assets (including the real property) located at the Donaldsonville, Louisiana, facility and other eligible real property, if any, (each subject to caps), less certain reserve requirements.
Term
All outstanding borrowings under the credit facility will be scheduled to mature on the fifth anniversary of the effective date of the credit agreement.
Interest and Fees
For purposes of calculating interest, revolving loans under the credit facility will be designated as Eurodollar rate loans or base rate loans.
Eurodollar rate loans are to bear interest at the London interbank eurodollar rate, adjusted for reserves, plus a borrowing margin that varies from 1.375% to 1.625%, depending on CF Industries' average daily availability under the credit facility for a period to be determined. Interest on Eurodollar rate loans will be payable at the end of the applicable interest period in the case of interest periods of one, two or three months and every three months in the case of interest periods that exceed three months.
Base rate loans are to bear interest at (a) the greater of (i) the rate most recently announced by JPMorgan Chase as its "prime rate" or (ii) the federal funds rate plus 1 / 2 of 1% per annum plus (b) a borrowing margin that varies from 0.00% to 0.375%, depending on CF Industries' average daily availability under the credit facility for a period to be determined. Interest on base rate loans will be payable monthly in arrears.
Letters of credit issued under the credit facility will accrue fees at the applicable Eurodollar rate borrowing margin.
CF Industries will pay a fee on the average daily unused portion of the revolving commitment at a rate that varies from 0.25% to 0.35%, depending on CF Industries' average daily availability under the credit facility for a period to be determined, payable monthly in arrears.
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Security and Guarantees
The credit facility will provide that any loans made thereunder and any swap or other hedging arrangements entered into with any of the lenders will be obligations of CF Industries and guaranteed on a secured basis by CF Holdings and its material domestic subsidiaries and, unless otherwise agreed by the lenders, each of the future direct and indirect domestic subsidiaries of CF Industries and CF Holdings. The obligations of the loan parties under the credit facility will be secured by first-priority liens or pledges (subject to permitted liens) on 100% of the equity interests of each loan party's present and future direct and indirect domestic subsidiaries other than certain excluded domestic subsidiaries and on 65% of the equity interests of each loan party's present and future first-tier foreign subsidiaries. Additionally, the obligations will be secured by a first priority lien on the real property of CF Industries located in Donaldsonville, Louisiana, and on substantially all of the personal property and assets, both tangible and intangible, of CF Industries, as well as first priority liens on additional real property of CF Industries that, at the direction of CF Industries, will be included in the borrowing base.
Covenants
The credit facility will contain representations, affirmative covenants, negative covenants and financial covenants that will restrict CF Industries, CF Holdings and their respective subsidiaries' ability to do specified things, including but not limited to:
Additionally, if average daily availability under the credit facility for a period to be determined is less than $50.0 million, CF Industries will be required to maintain a minimum fixed charge coverage ratio.
Mandatory Prepayment
At any time after the average excess availability under the credit facility is less than or equal to $75,000,000, CF Industries will be required to repay borrowings, without any corresponding reduction in the lenders' commitment under the credit facility, in an amount equal to 100% of the net cash proceeds of certain asset sales and issuances of equity interests by any loan party and upon receipt of insurance or condemnation proceeds in excess of $5,000,000.
Events of Default
The loan documentation for the credit facility will contain customary events of default, including, but not limited to, specified change of control events and cross defaults to other material indebtedness of the loan parties for purposes of the credit facility.
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In connection with this offering, we will amend and restate our certificate of incorporation and by-laws. The following summary of our capital stock does not relate to our current certificate of incorporation or by-laws, but rather is a description of our capital stock pursuant to the amended and restated certificate of incorporation and by-laws that will be in effect upon completion of this offering. The following summary does not purport to be complete and is subject to, and is qualified in its entirety by, the provisions of our amended and restated certificate of incorporation and bylaws, forms of which are filed as exhibits to the registration statement of which this prospectus forms a part, and by the applicable provisions of Delaware law.
Our authorized capital stock will consist of 500,000,000 shares of common stock, par value $.01 per share, and 50,000,000 shares of preferred stock, par value $.01 per share. Upon consummation of this offering and the Reorganization Transaction, we expect to have 55,000,000 shares of our common stock issued and outstanding, including 6,187,500 shares that will either be sold in this offering to the extent the underwriters exercise their over-allotment option or issued to the owners of CF Industries in the Reorganization Transaction to the extent the underwriters do not exercise their over-allotment option.
Common Stock
Voting
The holders of our common stock are entitled to one vote for each share held of record on each matter submitted to a vote of stockholders, including the election of directors, and do not have any right to cumulate votes in the election of directors.
Dividends
Subject to the rights and preferences of the holders of any series of preferred stock which may at the time be outstanding, holders of our common stock are entitled to such dividends as our board of directors may declare out of funds legally available.
Liquidation rights
In the event of any liquidation, dissolution or winding-up of our affairs, after payment of all of our debts and liabilities and subject to the rights and preferences of the holders of any outstanding shares of any series of our preferred stock, the holders of our common stock will be entitled to receive the distribution of any of our remaining assets.
Other matters
Holders of our common stock have no conversion, preemptive or other subscription rights and there are no redemption rights or sinking fund provisions with respect to the common stock. The shares of our common stock to be sold in this offering when issued and paid for will be validly issued, fully paid and non-assessable.
Preferred Stock
We are authorized to issue up to 50,000,000 shares of preferred stock. Our amended and restated certificate of incorporation authorizes our board, without any further stockholder action or approval, to issue these shares in one or more classes or series, to establish from time to time the number of shares to be included in each class or series and to fix the rights, preferences and privileges of the shares of each wholly unissued class or series and any of its qualifications, limitations or restrictions. Our board may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of our common stock. In connection with our rights plan,
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500,000 shares of preferred stock will be designated as Series A junior participating preferred stock. See "Rights Plan." We currently have no plans to issue any shares of preferred stock.
Certain Provisions
Provisions of our amended and restated certificate of incorporation, bylaws and Delaware law, which are summarized below, may be deemed to have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a stockholder might consider in such stockholder's best interest, including those attempts that might result in a premium over the market price for our common stock.
Classified board of directors
Our amended and restated certificate of incorporation provides for a board of directors divided into three classes, with one class to be elected each year to serve for a three-year term. The provision for a classified board will have the effect of making it more difficult for stockholders to change the composition of our board.
Number of directors; removal for cause; filling vacancies
Our amended and restated certificate of incorporation provides that our board of directors will consist of not less than three nor more than fifteen members, the exact number of which will be fixed from time to time by our board. Upon completion of this offering, the size of our board will be fixed at five directors.
Under the General Corporation Law of the State of Delaware, or the DGCL, unless otherwise provided in our amended and restated certificate of incorporation, directors serving on a classified board may be removed by the stockholders only for cause. Our amended and restated certificate of incorporation provides that directors may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least two-thirds of the voting power of the issued and outstanding shares of our capital stock entitled to vote generally at an election of directors. Our amended and restated certificate of incorporation and bylaws also provide that any newly created directorships on our board may only be filled by a majority of the board then in office, provided that a quorum is present, and any other vacancy occurring on the board may only be filled by a majority of the board then in office, even if less than a quorum, or by a sole remaining director. Any director elected in accordance with the preceding sentence will hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified. No decrease in the number of directors constituting the board of directors shall have the effect of shortening the term of any incumbent director.
The director removal and vacancy provisions will make it more difficult for a stockholder to remove incumbent directors and simultaneously gain control of the board by filling vacancies created by such removal with its own nominees.
Special meetings of stockholders
Our amended and restated certificate of incorporation and bylaws deny stockholders the right to call a special meeting of stockholders. Our amended and restated certificate of incorporation and bylaws provide that a special meeting of stockholders may be called only by our board of directors, the chairman of our board or our President.
Stockholder action by written consent
Our amended and restated certificate of incorporation requires all stockholder actions to be taken by a vote of the stockholders at an annual or special meeting and denies the ability of stockholders to act by written consent without a meeting.
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Stockholder proposals
At an annual meeting of stockholders, only business that is properly brought before the meeting will be conducted or considered. To be properly brought before an annual meeting of stockholders, business must be specified in the notice of the meeting (or any supplement to that notice), brought before the meeting by or at the direction of the board (or any duly authorized committee of the board) or properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must:
To be timely, a stockholder's notice must be delivered to or mailed and received at our principal executive offices not less than 90 days nor more than 120 days prior to the anniversary date of the last annual meeting; provided, however, that in the event that the annual meeting is called for a date that is not within 30 days before or after the anniversary date, notice by the stockholder must be received not later than the close of business on the 10th day following the day on which notice of the date of the annual meeting was mailed or public disclosure of the date of the annual meeting was made, whichever first occurs.
To be in proper written form, a stockholder's notice to the secretary must set forth as to each matter the stockholder proposes to bring before the annual meeting:
Similarly, at a special meeting of stockholders, only such business as is properly brought before the meeting will be conducted or considered. To be properly brought before a special meeting, business must be specified in the notice of the meeting (or any supplement to that notice) given by or at the direction of the board of directors, the chairman of our board or our President.
Nomination of candidates for election to our board
Under our bylaws, only persons who are properly nominated will be eligible for election to be members of our board. To be properly nominated, a director candidate must be nominated at an annual meeting of the stockholders or any special meeting called for the purpose of electing directors by or at the direction of our board (or any duly authorized committee of the board) or properly nominated by a stockholder. To properly nominate a director, a stockholder must:
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To be timely, a stockholder's notice must be delivered to or mailed and received at our principal executive offices:
To be in proper written form, a stockholder's notice to the secretary must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a director if elected and must set forth:
Amendment of certificate of incorporation and bylaws
Our amended and restated certificate of incorporation generally requires the approval of the holders of at least two-thirds of the voting power of the issued and outstanding shares of our capital stock entitled to vote generally at an election of directors to amend certain provisions of our certificate of incorporation described in this section. Our amended and restated certificate of incorporation and bylaws provide that
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the holders of at least two-thirds of the voting power of the issued and outstanding shares of our capital stock entitled to vote generally at an election of directors have the power to amend or repeal our bylaws. In addition, our amended and restated certificate of incorporation grants our board of directors the authority to amend and repeal our bylaws without a stockholder vote in any manner not inconsistent with the laws of the State of Delaware or our amended and restated certificate of incorporation.
Rights Plan
Each share of common stock has attached to it one right. Each right entitles the holder to purchase one one-thousandth of a share of a new series of our preferred stock designated as Series A junior participating preferred stock at an exercise price of $90, subject to adjustment. The following summary description of the rights agreement does not purport to be complete and is qualified in its entirety by reference to the rights agreement between us and The Bank of New York, as rights agent, a copy of which is filed as an exhibit to the registration statement of which this prospectus is a part.
Rights will only be exercisable under limited circumstances specified in the rights agreement when there has been a distribution of the rights and such rights are no longer redeemable by us. A distribution of the rights would occur upon the earlier of:
The rights will expire at 5:00 P.M. (New York City time) on the tenth anniversary of the closing of this offering, unless such date is extended or the rights are earlier redeemed or exchanged by us.
If any person or group acquires shares representing 15% or more of the outstanding shares of our common stock, the rights will entitle a holder, other than such person, any member of such group or related person, all of whose rights will be null and void, to acquire a number of additional shares of our common stock having a market value of twice the exercise price of each right. If we are involved in a merger or other business combination transaction, each right will entitle its holder to purchase, at the right's then-current exercise price, a number of shares of the acquiring or surviving company's common stock having a market value at that time of twice the rights' exercise price.
Up to and including the tenth business day following a public announcement that a person or group of affiliated or associated persons has acquired beneficial ownership of 15% or more of the outstanding shares of our common stock, other than as a result of repurchases of stock by us, we may redeem the rights in whole, but not in part, at a price of $.001 per right (adjusted as appropriate for any stock split, stock dividend or similar transaction), payable in cash, common stock or other consideration that we deemed appropriate. Promptly upon our election to redeem the rights, the rights will terminate and the only right of the holders of rights will be to receive the redemption price.
At any time after any person or group acquires 15% or more of the outstanding shares of our common stock, and prior to the acquisition by such person or group of 50% or more of the outstanding shares of our common stock, our board of directors may exchange the rights (other than rights owned by such person, group or related parties which have become void) in whole or in part, for one share of our common stock per right or for one one-thousandth of a share of our Series A junior participating preferred stock (or a share of a class or series of our preferred stock or other security having equivalent rights, preferences and privilege) per right, subject, in each case, to adjustment.
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Until a right is exercised, the holder of the right, as such, will have no rights as a stockholder of our company, including, without limitation, no right to vote or to receive dividends. While the distribution of the rights will not be taxable to stockholders or to us, stockholders may, depending upon the circumstances, recognize taxable income in the event that the rights become exercisable for our common stock or other consideration or for common stock of the acquiring or surviving company or in the event of the redemption of the rights as set forth above.
Any of the provisions of the rights agreement may be amended by our board of directors prior to the distribution of the rights. After such distribution, the provisions of the rights agreement may be amended by our board of directors in order to cure any ambiguity, to correct or supplement any defective or inconsistent provision, to shorten or lengthen any time period or to make changes which do not adversely affect the interests of holders of rights (other than any persons or groups who have acquired 15% or more of the outstanding shares of our common stock). The foregoing notwithstanding, no amendment may be made at such time as the rights are not redeemable (other than to cure an ambiguity or to correct or supplement a defective or inconsistent provision of the rights agreement).
The existence of the rights agreement and the rights is intended to deter coercive or partial offers which may not provide fair value to all stockholders and to enhance our ability to represent all of our stockholders and thereby maximize stockholder value.
Delaware Law
We will be subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. In general, those provisions prohibit a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless:
Section 203 defines "business combination" to include the following:
In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling, controlled by, or under common control with any of these entities or persons.
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Limitations on Liability and Indemnification of Directors and Officers
We have adopted provisions in our amended and restated certificate of incorporation that limit or eliminate the personal liability of our directors to the maximum extent permitted by the DGCL. The DGCL expressly permits a corporation to provide that its directors will not be liable for monetary damages for a breach of their fiduciary duties as directors, except for liability:
These limitations of liability do not generally affect the availability of equitable remedies such as injunctive relief or rescission. Our amended and restated certificate of incorporation and bylaws also authorize us to indemnify our officers, directors, employees and other agents to the fullest extent permitted under the DGCL and we may advance expenses to our directors, officers, employees and other agents in connection with a legal proceeding, subject to limited exceptions.
As permitted by the DGCL, our amended and restated certificate of incorporation and bylaws provide that:
We intend to enter into separate indemnification agreements with each of our board members and officers that will require us to indemnify them to the fullest extent permitted by the DGCL. These indemnification agreements will also require us to advance any expenses incurred by the board members and officers as a result of any proceeding against them as to which they could be indemnified.
The limited liability and indemnification provisions in our amended and restated certificate of incorporation and bylaws and in any indemnification agreements we enter into may discourage stockholders from bringing a lawsuit against our board members for breach of their fiduciary duties and may reduce the likelihood of derivative litigation against our board members and officers, even though a derivative action, if successful, might otherwise benefit us and our stockholders. A stockholder's investment in us may be adversely affected to the extent we pay the costs of settlement or damage awards against our directors and officers under these indemnification provisions.
At present, there is no pending litigation or proceeding involving any of our directors, officers, employees or agents in which indemnification by us is sought, nor are we aware of any threatened litigation or proceeding that may result in a claim for indemnification.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is The Bank of New York.
Listing
The common stock has been approved for listing, subject to official notice of issuance, on the New York Stock Exchange under the symbol "CF."
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering there has been no public market for our common stock, and a significant public market for our common stock may never develop or be sustained after this offering. We cannot predict the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. As described below, only a limited number of shares will be available for sale shortly after this offering due to contractual and legal restrictions on resale. However, sales of our common stock in the public market after the restrictions lapse, or the perception that these sales may occur, could cause the market price of our common stock to decline.
Upon completion of this offering, we expect to have 55,000,000 outstanding shares of common stock, including shares that will either be issued to the underwriters upon exercise of their over-allotment option or to the owners of CF Industries in the Reorganization Transaction upon the expiration of the underwriter's over-allotment option, assuming no exercise of that option.
The 41,250,000 shares of common stock being sold in this offering (or 47,437,500 shares if the underwriters exercise the over-allotment option in full) will be freely tradable without restriction or further registration under the Securities Act, unless the shares are purchased by affiliates of our company, as that term is defined in Rule 144 of the Securities Act. All remaining shares were issued and sold by us in private transactions and are eligible for public sale if registered under the Securities Act, or sold in accordance with Rule 144 thereunder.
Lock-Up Agreements
We, our directors, our executive officers and all of our owners have agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, we and they will not, during the period ending 180 days (or one year in the case of our owners) after the date of this prospectus:
whether any such transaction described above is to be settled by delivery of our common stock or such other securities, in cash or otherwise. The restrictions described in this paragraph do not apply to:
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strategic investments, provided that the actual issuance of shares of our common stock occurs after the expiration of the 180-day restricted period;
However, in the circumstances described under the last five bullet points above, each donee, trust or transferee shall agree to be subject to similar restrictions described above, and no filing (other than a Form 5) under Section 16(a) of the Securities Exchange Act, reporting a reduction in beneficial ownership of shares of our common stock, shall be required or shall be voluntarily made during the 180-day or one-year restricted period described above.
The 180-day or one-year restricted period described above is subject to extension such that, in the event that either (1) during the last 17 days of the applicable restricted period, we issue an earnings release or material news or a material event relating to us occurs or (2) prior to the expiration of the applicable restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the applicable restricted period, the "lock-up" restrictions described above will, subject to limited exceptions, continue to apply until the expiration of the 18-day period beginning on the earnings release or the occurrence of the material news or material event.
Eligibility of Restricted Shares for Sale in the Public Market
Rule 144
In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned restricted securities for at least one year, including the holding period of any prior owner other than an affiliate, and who files a Form 144 with respect to this sale, is entitled to sell
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within any three-month period commencing 90 days after the date of this prospectus a number of shares of common stock that does not exceed the greater of:
Sales under Rule 144 are also subject to restrictions relating to manner of sale and the availability of current public information about us.
Rule 144(k)
A person who is not deemed to have been our affiliate at any time during the 90 days immediately preceding a sale and who has beneficially owned his or her shares for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell these shares of common stock pursuant to Rule 144(k) without regard to the volume limitations, manner of sale provisions, public information or notice requirements of Rule 144. Affiliates must always sell pursuant to Rule 144, even after the applicable holding periods have been satisfied.
Equity Compensation
We intend to file a registration statement on Form S-8 under the Securities Act covering the 8,250,000 shares that will be reserved for issuance under our 2005 Equity and Incentive Plan. This Form S-8 registration statement is expected to be filed prior to the consummation of this offering, and the Form S-8 will automatically become effective upon filing. Accordingly, shares registered under this registration statement will, subject to Rule 144 provisions applicable to affiliates, be available for sale in the open market, unless these shares are subject to vesting restrictions with us or are otherwise subject to the contractual restrictions described above. On the date of this prospectus, we intend to grant options exercisable for 2,750,900 shares of our common stock (assuming an initial public offering price of $16.00 per share, the mid-point of the estimated price range shown on the cover page of this prospectus), with a per share exercise price equal to the public offering price, to our executive officers and certain of our employees and 16,252 shares of restricted common stock (assuming an initial public offering price of $16.00 per share, the mid-point of the estimated price range shown on the cover page of this prospectus), to each of our non-employee directors.
Registration Rights
Upon consummation of this offering, we will provide our owners the opportunity to enter into a registration rights agreement with us. Pursuant to this agreement, those owners who hold shares of our common stock received in the Reorganization Transaction representing at least 5% of our outstanding common stock will receive certain demand and piggyback registration rights with respect to those shares of common stock that they receive in the Reorganization Transaction. These rights may only be exercised after our owners' lock-up agreements pertaining to this offering expire one year after the date of this prospectus. In the Reorganization Transaction, the owners of CF Industries will receive up to 13,750,000 shares of common stock. Registration of the sale of these shares of our common stock would facilitate their sale into the market. If, upon expiration of the one-year lock-up period, any of our owners sell a large number of shares, the market price of our common stock could decline.
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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
The following discussion is a summary of the material U.S. federal income tax considerations generally applicable to the purchase, ownership and disposition of our common stock by Non-U.S. Holders (as defined below). This summary deals only with our common stock held as capital assets by holders who purchase common stock in this offering. This discussion does not cover all aspects of U.S. federal income taxation that may be relevant to the purchase, ownership or disposition of our common stock by prospective investors in light of their particular circumstances. In particular, this discussion does not address all of the tax considerations that may be relevant to certain types of investors subject to special treatment under U.S. federal income tax laws, such as:
Furthermore, this summary is based upon the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the Treasury regulations promulgated thereunder and administrative and judicial interpretations thereof, all as of the date hereof. Such authorities may be repealed, revoked, modified or subject to differing interpretations, possibly on a retroactive basis, so as to result in U.S. federal income tax consequences different from those discussed below. We have not received a ruling from the Internal Revenue Service (the "IRS") with respect to any of the matters discussed herein. This discussion does not address any state, local or non-U.S. tax considerations.
For purposes of this summary, a "U.S. Holder" means a beneficial owner of our common stock that is for U.S. federal income tax purposes one of the following:
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If a partnership or other entity or arrangement treated as a partnership for U.S. federal income tax purposes holds our common stock, the U.S. federal income tax treatment of a partner in such partnership will generally depend upon the status of the partner and the activities of the partnership. If you are a partnership or a partner of a partnership holding our common stock, we particularly urge you to consult your own tax advisors.
If you are considering the purchase of our common stock, we urge you to consult your own tax advisors concerning the particular U.S. federal income tax
consequences to you of the purchase, ownership and disposition of our common stock, as well as any consequences to you arising under state, local and non- U.S.
tax laws.
The following discussion applies only to Non-U.S. Holders. A "Non-U.S. Holder" is a beneficial owner of our common stock (other than a partnership or an entity or arrangement treated as a partnership for U.S. federal income tax purposes) that is not a U.S. Holder. Special rules may apply to you if you are a "controlled foreign corporation" or a "passive foreign investment company" or are otherwise subject to special treatment under the Code. Any such holders should consult their own tax advisors to determine the U.S. federal income, state, local and non-U.S. tax consequences that may be relevant to them.
Dividends
Dividends paid to you (to the extent paid out of our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes) generally will be subject to U.S. federal withholding tax at a 30% rate or such lower rate as may be specified by an applicable tax treaty. However, dividends that are effectively connected with a trade or business you conduct within the United States, or, if certain tax treaties apply, are attributable to a permanent establishment you maintain in the United States, are not subject to the U.S. federal withholding tax, but instead are subject to U.S. federal income tax on a net income basis at the applicable graduated individual or corporate rates. Special certification and disclosure requirements must be satisfied for effectively connected income to be exempt from withholding. If you are a corporation, any such effectively connected dividends that you receive may be subject to an additional branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.
If you wish to claim the benefit of an applicable treaty rate for dividends paid on our common stock, you must provide the withholding agent with a properly executed IRS Form W-8BEN, claiming an exemption from or reduction in withholding under the applicable income tax treaty. In the case of common stock held by a foreign intermediary (other than a "qualified intermediary"), the intermediary generally must provide an IRS Form W-8IMY and attach thereto an appropriate certification by each beneficial owner for which it is receiving the dividends.
If you are eligible for a reduced rate of U.S. federal withholding tax pursuant to an applicable income tax treaty, you may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS.
Sale, Exchange or Other Taxable Disposition of Common Stock
You generally will not be subject to U.S. federal income tax with respect to gain recognized on a sale, exchange or other taxable disposition of shares of our common stock unless:
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If you are an individual and are described in the first bullet above, you will be subject to tax on any gain derived from the sale, exchange or other taxable disposition under regular graduated U.S. federal income tax rates. If you are an individual and are described in the second bullet above, you will be subject to a flat 30% tax on any gain derived from the sale, exchange or other taxable disposition that may be offset by U.S. source capital losses (even though you are not considered a resident of the United States). If you are a corporation and are described in the first bullet above, you will be subject to tax on your gain under regular graduated U.S. federal income tax rates and, in addition, may be subject to the branch profits tax on your effectively connected earnings and profits for the taxable year, which would include such gain, at a rate of 30% or at such lower rate as may be specified by an applicable income tax treaty, subject to adjustments.
We believe that we may be a "United States real property holding corporation" for U.S. federal income tax purposes. Generally, a corporation is a U.S. real property holding corporation if the fair market value of its U.S. real property interests, as defined in the Code and applicable regulations, equals or exceeds 50% of the aggregate fair market value of its worldwide real property interests and its other assets used or held for use in a trade or business. If we are a U.S. real property holding corporation and you are a holder of greater than 5% of the total fair market value of our common stock, you should consult your tax advisor.
U.S. Federal Estate Tax
Shares of our common stock held by an individual Non-U.S. Holder at the time of his or her death will be included in such Non-U.S. Holder's gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise.
Information Reporting and Backup Withholding
You may be subject to information reporting and backup withholding with respect to any dividends on, and the proceeds from dispositions of, our common stock paid to you, unless you comply with certain reporting procedures (usually satisfied by providing an IRS Form W-8BEN) or otherwise establish an exemption. Additional rules relating to information reporting requirements and backup withholding with respect to the payment of proceeds from the disposition of shares of our common stock will apply as follows:
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In addition, the amount of any dividends paid to you and the amount of tax, if any, withheld from such payment generally must be reported annually to you and the IRS. The IRS may make such information available under the provisions of an applicable income tax treaty to the tax authorities in the country in which you reside.
Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your U.S. federal income tax liability provided the required information is timely furnished by you to the IRS. Non-U.S. Holders should consult their own tax advisors regarding the filing of a U.S. tax return for claiming a refund of such backup withholding.
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Under the terms and subject to the conditions contained in an underwriting agreement dated the date of this prospectus, the underwriters named below, for whom Morgan Stanley & Co. Incorporated and J.P. Morgan Securities Inc. are acting as representatives, have severally agreed to purchase, and we have agreed to sell to them, severally, the number of shares indicated below:
Name
|
Number of
Shares |
||
---|---|---|---|
Morgan Stanley & Co. Incorporated | |||
J.P. Morgan Securities Inc. | |||
Banc of America Securities LLC | |||
Credit Suisse First Boston LLC | |||
Harris Nesbitt Corp. | |||
ABN AMRO Rothschild LLC | |||
CIBC World Markets Corp. | |||
|
|||
Total | 41,250,000 | ||
|
The underwriters are offering the shares of common stock subject to their acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of common stock offered by this prospectus if any such shares are taken. However, the underwriters are not required to take or pay for the shares covered by the underwriters' over-allotment option described below.
The underwriters initially propose to offer part of the shares of common stock directly to the public at the public offering price listed on the cover page of this prospectus and part to certain dealers at a price that represents a concession not in excess of $ a share under the public offering price. Any underwriter may allow, and such dealers may reallow, a concession not in excess of $ a share to other underwriters or to certain dealers. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representatives.
We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of 6,187,500 additional shares of common stock at the public offering price set forth on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of common stock offered by this prospectus. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase about the same percentage of the additional shares of common stock as the number listed next to the underwriter's name in the preceding table bears to the total number of shares of common stock listed next to the names of all underwriters in the preceding table. If the underwriters' option is exercised in full, the total price to the public would be $ , the total underwriters' discounts and commissions would be $ , and total proceeds to us would be $ .
The underwriters have informed us that they do not intend sales to discretionary accounts to exceed 5% of the total number of shares of common stock offered by them.
The common stock has been approved for listing, subject to official notice of issuance, on the New York Stock Exchange under the symbol "CF."
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We, our directors, our executive officers and all of our owners have agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, we and they will not, during the period ending 180 days (or one year in the case of our owners) after the date of this prospectus:
whether any such transaction described above is to be settled by delivery of our common stock or such other securities, in cash or otherwise. The restrictions described in this paragraph do not apply to:
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However, in the circumstances described under the last five bullet points above, each donee, trust or transferee shall agree to be subject to similar restrictions described above, and no filing (other than a Form 5) under Section 16(a) of the Securities Exchange Act, reporting a reduction in beneficial ownership of shares of our common stock, shall be required or shall be voluntarily made during the 180-day or one-year restricted period described above.
The 180-day or one-year restricted period described above is subject to extension such that, in the event that either (1) during the last 17 days of the applicable restricted period, we issue an earnings release or material news or a material event relating to us occurs or (2) prior to the expiration of the applicable restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the applicable restricted period, the "lock-up" restrictions described above will, subject to limited exceptions, continue to apply until the expiration of the 18-day period beginning on the earnings release or the occurrence of the material news or material event.
The estimated offering expenses payable by us, in addition to the underwriting discounts and commissions, are approximately $5.7 million, which includes legal, accounting and printing costs and various other fees associated with registering and listing our common stock. As of June 30, 2005, we had expensed and incurred approximately $2.9 million of these expenses.
The following table shows the underwriting discounts and commissions that we are to pay to the underwriters in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters' over-allotment option to purchase additional shares of our common stock.
|
No Exercise
|
Full Exercise
|
||||
---|---|---|---|---|---|---|
Per share | $ | $ | ||||
Total | $ | $ |
In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may sell more shares than they are obligated to purchase under the underwriting agreement, creating a short position. A short sale is covered if the short position is no greater than the number of shares available for purchase by the underwriters under the over-allotment option. The underwriters can close out a covered short sale by exercising the over-allotment option or purchasing shares in the open market. In determining the source of shares to close out a covered short sale, the underwriters will consider, among other things, the open market price of shares compared to the price available under the over-allotment option. The underwriters may also sell shares in excess of the over-allotment option, creating a naked short position. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering. As an additional means of facilitating the offering, the underwriters may bid for, and purchase, shares of common stock in the open market to stabilize the price of the common stock. The underwriting syndicate may also reclaim selling concessions allowed to an underwriter or a dealer for distributing the common stock in this offering, if the syndicate repurchases
118
previously distributed common stock to cover syndicate short positions or to stabilize the price of the common stock. These activities may raise or maintain the market price of the common stock above independent market levels or prevent or retard a decline in the market price of the common stock. The underwriters are not required to engage in these activities, and may end any of these activities at any time.
A prospectus in electronic format may be made available on the web sites maintained by one or more underwriters. The underwriters may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the representatives to underwriters that may make Internet distributions on the same basis as other allocations.
Other than the prospectus in electronic format, the information on any underwriter's web site and any information contained in any other web site maintained by an underwriter is not part of the prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or any underwriter in its capacity as an underwriter and should not be relied upon by investors.
From time to time, certain of the underwriters and their respective affiliates have provided, and continue to provide, investment banking and other services to us for which they receive customary fees and commissions. An affiliate of Harris Nesbitt Corp. acts as the administrative agent and a lender under our existing revolving credit facility. J.P. Morgan Securities Inc. and Harris N.A., an affiliate of Harris Nesbitt Corp., have agreed to act as co-lead arrangers, and JPMorgan Chase Bank, N.A., an affiliate of J.P. Morgan Securities, has agreed to act as the administrative agent and one of the proposed lenders, under our proposed new $250 million senior secured credit facility, which we expect to become effective upon completion of this offering. Affiliates of certain other underwriters may also participate in this facility.
We and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act.
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive, each underwriter has represented and agreed that with effect from and including the date on which the Prospectus Directive is implemented in that Member State it has not made and will not make an offer of shares of our common stock to the public in that Member State, except that it may, with effect from and including such date, make an offer of shares of our common stock to the public in that Member State:
For the purposes of the above, the expression an "offer of shares of our common stock to the public" in relation to any shares of our common stock in any Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the shares of our common stock to be offered so as to enable an investor to decide to purchase or subscribe the shares of our common stock, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in that Member State.
Each underwriter has represented and agreed that it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to
119
engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000) in connection with the issue or sale of the shares of our common stock in circumstances in which Section 21(1) of such Act does not apply to us and it has complied and will comply with all applicable provisions of such Act with respect to anything done by it in relation to any shares of our common stock in, from or otherwise involving the United Kingdom.
Directed Share Program
At our request, the underwriters will reserve for sale, at the initial public offering price, up to 825,000 shares offered in this prospectus for our directors, officers, employees and former officers. The number of shares of common stock available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares which are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered in this prospectus.
Pricing of the Offering
Prior to this offering, there has been no public market for the shares of our common stock. The initial public offering price will be determined by negotiations between us and the representatives of the underwriters. We and the representatives will consider the following factors in determining the initial public offering price: our future prospects and those of our industry in general; our sales, earnings and certain other financial and operating information in recent periods; investor demand for our common stock, and the price-earnings ratios, price-sales ratios, market prices of securities and certain financial and operating information of companies engaged in activities similar to ours. The estimated initial public offering price range set forth on the cover page of this preliminary prospectus is subject to change as a result of market conditions and other factors.
120
The validity of the shares of our common stock offered by this prospectus will be passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, Chicago, Illinois. Certain legal matters relating to this offering will be passed upon for the underwriters by Davis Polk & Wardwell, New York, New York.
The consolidated financial statements and schedule of CF Industries, Inc. as of December 31, 2004 and 2003, and for each of the years in the three-year period ended December 31, 2004, have been included herein and in the registration statement in reliance upon the reports of KPMG LLP, independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.
The estimates of our phosphate reserves referred to in this prospectus and the registration statement, to the extent described in this prospectus and the registration statement, have been prepared by us and audited by John T. Boyd Company, an independent mining and geological consulting company.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a Registration Statement on Form S-1 under the Securities Act with respect to the common stock offered in this prospectus. This prospectus, filed as part of the registration statement, does not contain all of the information set forth in the registration statement and its exhibits and schedules, portions of which have been omitted as permitted by the rules and regulations of the SEC. For further information about us and our common stock, we refer you to the registration statement and to its exhibits and schedules. Statements in this prospectus about the contents of any contract, agreement or other document are not necessarily complete and, in each instance, we refer you to the copy of such contract, agreement or document filed as an exhibit to the registration statement, with each such statement being qualified in all respects by reference to the document to which it refers. Anyone may inspect the registration statement and its exhibits and schedules without charge at the Public Reference Room the SEC maintains at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain copies of all or any part of these materials from the SEC upon the payment of certain fees prescribed by the SEC. You may obtain further information about the operation of the SEC's Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also inspect these materials and other information without charge at a website maintained by the SEC. The address of this site is http://www.sec.gov.
Upon completion of this offering, we will become subject to the informational requirements of the Exchange Act and will be required to file reports, proxy statements and other information with the SEC. You will be able to inspect and copy these reports, proxy statements and other information at the Public Reference Room of the SEC as described above or inspect them without charge at the SEC's website.
121
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm | F-2 | ||
Consolidated Year-End Financial Statements: | |||
Consolidated Statements of Operations for the Years Ended December 2002, 2003 and 2004 | F-3 | ||
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 2002, 2003 and 2004 | F-4 | ||
Consolidated Balance Sheets as of December 31, 2003 and 2004 | F-5 | ||
Consolidated Statements of Stockholders' Equity for the Years Ended December 2002, 2003 and 2004 | F-6 | ||
Consolidated Statements of Cash Flows for the Years Ended December 2002, 2003 and 2004 | F-7 | ||
Notes to Consolidated Year-End Financial Statements | F-8 | ||
Unaudited Consolidated Financial Statements: |
|
|
|
Consolidated Statements of Operations for the Six Months Ended June 30, 2004 and 2005 (unaudited) | F-34 | ||
Consolidated Statements of Comprehensive Income (Loss) for the Six Months Ended June 30, 2004 and 2005 (unaudited) | F-35 | ||
Consolidated Balance Sheets as of December 31, 2004 and June 30, 2005 (unaudited as to June 30, 2005) | F-36 | ||
Consolidated Statements of Stockholders' Equity for the Six Months Ended June 30, 2004 and 2005 (unaudited) | F-37 | ||
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2005 (unaudited) | F-38 | ||
Notes to Unaudited Consolidated Financial Statements | F-39 | ||
Financial Statement Schedule |
|
II-3 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board of Directors and Stockholders
CF Industries, Inc.:
We have audited the consolidated financial statements of CF Industries, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CF Industries, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004 in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP | |
Chicago, Illinois May 13, 2005 |
|
F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
|
Years Ended December 31,
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2002
|
2003
|
2004
|
|||||||
|
(in thousands)
|
|||||||||
Net sales | $ | 1,014,071 | $ | 1,369,915 | $ | 1,650,652 | ||||
Cost of sales | 986,295 | 1,335,508 | 1,434,545 | |||||||
|
|
|
||||||||
Gross margin | 27,776 | 34,407 | 216,107 | |||||||
Selling, general and administrative |
|
|
37,317 |
|
|
38,455 |
|
|
41,830 |
|
Other operatingnet | 9,294 | 1,557 | 25,043 | |||||||
|
|
|
||||||||
Operating earnings (loss) |
|
|
(18,835 |
) |
|
(5,605 |
) |
|
149,234 |
|
Interest expense |
|
|
23,565 |
|
|
23,870 |
|
|
22,696 |
|
Interest income | (2,209 | ) | (2,260 | ) | (5,901 | ) | ||||
Minority interest | 6,409 | 6,031 | 23,145 | |||||||
Impairment of investments in unconsolidated subsidiaries | | | 1,050 | |||||||
Other non-operatingnet | (174 | ) | (676 | ) | (778 | ) | ||||
|
|
|
||||||||
Earnings (loss) before income taxes |
|
|
(46,426 |
) |
|
(32,570 |
) |
|
109,022 |
|
Income tax provision (benefit) |
|
|
(16,600 |
) |
|
(12,600 |
) |
|
41,400 |
|
Equity in earnings (loss) of unconsolidated subsidiaries |
|
|
1,706 |
|
|
1,587 |
|
|
110 |
|
|
|
|
||||||||
Net earnings (loss) |
|
$ |
(28,120 |
) |
$ |
(18,383 |
) |
$ |
67,732 |
|
|
|
|
See Accompanying Notes to Consolidated Year-End Financial Statements.
F-3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
Years Ended December 31,
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2002
|
2003
|
2004
|
||||||||
|
(in thousands)
|
||||||||||
Net earnings (loss) | $ | (28,120 | ) | $ | (18,383 | ) | $ | 67,732 | |||
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustmentno tax effect |
|
|
154 |
|
|
4,663 |
|
|
393 |
|
|
Unrealized gain (loss) on hedging derivativesnet of taxes |
|
|
|
|
|
5,722 |
|
|
(7,844 |
) |
|
Unrealized gain (loss) on securitiesnet of taxes |
|
|
(155 |
) |
|
155 |
|
|
|
|
|
Minimum pension liability adjustmentnet of taxes |
|
|
(425 |
) |
|
425 |
|
|
(6,503 |
) |
|
|
|
|
|||||||||
(426 | ) | 10,965 | (13,954 | ) | |||||||
|
|
|
|||||||||
Comprehensive income (loss) | $ | (28,546 | ) | $ | (7,418 | ) | $ | 53,778 | |||
|
|
|
See Accompanying Notes to Consolidated Year-End Financial Statements.
F-4
|
December 31,
|
||||||||
---|---|---|---|---|---|---|---|---|---|
|
2003
|
2004
|
|||||||
|
(in thousands)
|
||||||||
Assets | |||||||||
Current assets: | |||||||||
Cash and cash equivalents | $ | 77,146 | $ | 50,003 | |||||
Short-term investments | 91,725 | 369,290 | |||||||
Accounts receivable | 92,821 | 41,510 | |||||||
Income taxes receivable | 823 | 1,764 | |||||||
Inventories | 206,284 | 233,547 | |||||||
Deferred income taxes | 3,493 | 33,501 | |||||||
Other | 53,690 | 59,182 | |||||||
|
|
||||||||
Total current assets | 525,982 | 788,797 | |||||||
Investments in unconsolidated subsidiaries |
|
|
21,470 |
|
|
18,666 |
|
||
Property, plant and equipmentnet |
|
|
708,696 |
|
|
645,595 |
|
||
Goodwill |
|
|
1,327 |
|
|
1,327 |
|
||
Deferred income taxes |
|
|
129,252 |
|
|
74,909 |
|
||
Other assets |
|
|
18,152 |
|
|
17,677 |
|
||
|
|
||||||||
Total assets | $ | 1,404,879 | $ | 1,546,971 | |||||
|
|
||||||||
Liabilities and Stockholders' Equity | |||||||||
Current liabilities: | |||||||||
Notes payable | $ | 3,836 | $ | | |||||
Accounts payable and accrued expenses | 132,935 | 169,237 | |||||||
Customer advances | 166,022 | 211,501 | |||||||
Distributions payable to minority interest | 6,866 | 5,631 | |||||||
Current portion of long-term debt | 34,917 | 19,917 | |||||||
Other | 4,939 | 18,517 | |||||||
|
|
||||||||
Total current liabilities | 349,515 | 424,803 | |||||||
|
|
||||||||
Noncurrent liabilities: |
|
|
|
|
|
|
|
||
Notes payable | | 4,071 | |||||||
Long-term debt | 254,750 | 234,833 | |||||||
Other | 52,447 | 83,203 | |||||||
|
|
||||||||
Total noncurrent liabilities | 307,197 | 322,107 | |||||||
|
|
||||||||
Minority interest |
|
|
14,656 |
|
|
12,772 |
|
||
|
|
||||||||
Stockholders' equity: |
|
|
|
|
|
|
|
||
Patronage preferred stock$100 par value, 10,000,000 shares authorized, 7,343,018 shares outstanding | 734,302 | 734,302 | |||||||
Common stock$1,000 par value, 100 shares authorized, 8 shares outstanding | 8 | 8 | |||||||
Paid-in capital | 5,555 | 5,555 | |||||||
Retained earnings (accumulated deficit) | (7,952 | ) | 59,780 | ||||||
Accumulated other comprehensive income (loss) | 1,598 | (12,356 | ) | ||||||
|
|
||||||||
Total stockholders' equity | 733,511 | 787,289 | |||||||
|
|
||||||||
Total liabilities and stockholders' equity | $ | 1,404,879 | $ | 1,546,971 | |||||
|
|
See Accompanying Notes to Consolidated Year-End Financial Statements.
F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
|
Patronage
Preferred Stock |
Common
Stock |
Paid-In
Capital |
Retained
Earnings |
Accumulated
Other Comprehensive Income (Loss) |
Total
|
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(in thousands)
|
||||||||||||||||||||
Balance at December 31, 2001 | $ | 734,301 | $ | 9 | $ | 5,555 | $ | 38,551 | $ | (8,941 | ) | $ | 769,475 | ||||||||
Add (deduct): | |||||||||||||||||||||
Net loss | | | | (28,120 | ) | | (28,120 | ) | |||||||||||||
Other comprehensive loss | | | | | (426 | ) | (426 | ) | |||||||||||||
|
|
|
|
|
|
||||||||||||||||
Balance at December 31, 2002 |
|
|
734,301 |
|
|
9 |
|
|
5,555 |
|
|
10,431 |
|
|
(9,367 |
) |
|
740,929 |
|
||
Add (deduct): | |||||||||||||||||||||
Net loss | | | | (18,383 | ) | | (18,383 | ) | |||||||||||||
Member stock transfers and redemptions | 1 | (1 | ) | | | | | ||||||||||||||
Other comprehensive income | | | | | 10,965 | 10,965 | |||||||||||||||
|
|
|
|
|
|
||||||||||||||||
Balance at December 31, 2003 |
|
|
734,302 |
|
|
8 |
|
|
5,555 |
|
|
(7,952 |
) |
|
1,598 |
|
|
733,511 |
|
||
Add (deduct): | |||||||||||||||||||||
Net earnings | | | | 67,732 | | 67,732 | |||||||||||||||
Other comprehensive loss | | | | | (13,954 | ) | (13,954 | ) | |||||||||||||
|
|
|
|
|
|
||||||||||||||||
Balance at December 31, 2004 | $ | 734,302 | $ | 8 | $ | 5,555 | $ | 59,780 | $ | (12,356 | ) | $ | 787,289 | ||||||||
|
|
|
|
|
|
See Accompanying Notes to Consolidated Year-End Financial Statements.
F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Cash Provided (Used)
Years Ended December 31, |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2002
|
2003
|
2004
|
||||||||||
|
(in thousands)
|
||||||||||||
Operating Activities: | |||||||||||||
Net earnings (loss) | $ | (28,120 | ) | $ | (18,383 | ) | $ | 67,732 | |||||
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities | |||||||||||||
Minority interest | 6,409 | 6,031 | 23,145 | ||||||||||
Depreciation, depletion and amortization | 108,471 | 105,014 | 108,642 | ||||||||||
Deferred income taxes | (15,800 | ) | (13,500 | ) | 33,800 | ||||||||
Equity in earnings of unconsolidated subsidiaries | (1,706 | ) | (1,587 | ) | (110 | ) | |||||||
Changes in: | |||||||||||||
Accounts receivable | (6,866 | ) | (16,629 | ) | 41,396 | ||||||||
Margin deposits | (7,234 | ) | (21,085 | ) | (4,051 | ) | |||||||
Inventories | (7,118 | ) | (13,557 | ) | (26,429 | ) | |||||||
Accounts payable and accrued expenses | 2,172 | 1,089 | 44,080 | ||||||||||
Customer advancesnet | 29,747 | 126,050 | 45,479 | ||||||||||
Othernet | (3,076 | ) | (16,525 | ) | 10,579 | ||||||||
|
|
|
|||||||||||
Net cash provided by operating activities | 76,879 | 136,918 | 344,263 | ||||||||||
|
|
|
|||||||||||
Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|||
Additions to property, plant and equipmentnet | (26,303 | ) | (28,684 | ) | (33,709 | ) | |||||||
Purchases of short-term investments | (103,075 | ) | (226,499 | ) | (818,797 | ) | |||||||
Sales and maturities of short-term investments | 68,952 | 173,374 | 541,232 | ||||||||||
Investments in unconsolidated subsidiaries | (291 | ) | (372 | ) | (37 | ) | |||||||
Distributions from unconsolidated subsidiaries | 900 | 3,600 | 2,000 | ||||||||||
|
|
|
|||||||||||
Net cash used in investing activities | (59,817 | ) | (78,581 | ) | (309,311 | ) | |||||||
|
|
|
|||||||||||
Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|||
Short-term debtnet | (55,000 | ) | | | |||||||||
Proceeds from long-term borrowings | 70,000 | | | ||||||||||
Payments on long-term debt | (21,416 | ) | (33,417 | ) | (34,917 | ) | |||||||
Repayment of notes payable | (2,320 | ) | | | |||||||||
Distributions to minority interest | | (4,638 | ) | (26,325 | ) | ||||||||
Othernet | (1,176 | ) | (2,426 | ) | (50 | ) | |||||||
|
|
|
|||||||||||
Net cash used in financing activities | (9,912 | ) | (40,481 | ) | (61,292 | ) | |||||||
|
|
|
|||||||||||
Effect of exchange rate changes on cash and cash equivalents |
|
|
401 |
|
|
2,754 |
|
|
(803 |
) |
|||
|
|
|
|||||||||||
Increase in cash and cash equivalents |
|
|
7,551 |
|
|
20,610 |
|
|
(27,143 |
) |
|||
Cash and cash equivalents at beginning of year |
|
|
48,985 |
|
|
56,536 |
|
|
77,146 |
|
|||
|
|
|
|||||||||||
Cash and cash equivalents at end of year | $ | 56,536 | $ | 77,146 | $ | 50,003 | |||||||
|
|
|
See Accompanying Notes to Consolidated Year-End Financial Statements.
F-7
NOTES TO CONSOLIDATED YEAR-END FINANCIAL STATEMENTS
1. Significant Accounting Policies
Description of Business
CF Industries, Inc. manufactures and distributes nitrogen and phosphate fertilizer products in North America.
Consolidation
The Company's consolidated financial statements include the accounts of CF Industries, Inc. (CF), all majority-owned subsidiaries and variable interest entities in which the Company is the primary beneficiary after elimination of intercompany transactions and balances.
Consolidated subsidiaries include Canadian Fertilizers Limited (CFL), a Canadian joint venture that owns the nitrogen complex in Medicine Hat, Alberta, Canada and supplies fertilizer products to CF and the other joint venture partner. The Medicine Hat fertilizer complex is the largest nitrogen fertilizer complex in Canada, with two world-scale ammonia plants, a world-scale urea plant and on-site storage for both ammonia and urea. CFL's sales revenue was $148.5 million, $237.3 million and $309.2 million for 2002, 2003 and 2004, respectively. CFL's assets were $101.7 million and $97.0 million at December 31, 2003 and 2004, respectively.
CF owns 49% of CFL's voting common shares and 66% of CFL's nonvoting preferred shares. Two owners of CF also own 17% of CFL's voting shares. The Company has determined that CFL is a variable interest entity and that the Company is the primary beneficiary. Amounts reported as minority interest represent the interests of the 34% holder of CFL's common and preferred shares and the holders of 17% of CFL's common shares. Consolidation of CFL results in a cumulative foreign currency translation adjustment, which is reported in other comprehensive income (loss).
CF operates the Medicine Hat facility and purchases approximately 66% of the facility's ammonia and urea production, pursuant to a management agreement and a product purchase agreement. The management agreement and the product purchase agreement are each terminable by either CF or CFL upon twelve-months' notice. Western Co-operative Fertilizers Limited (Westco) has the right, but not the obligation, to purchase the remaining 34% of the facility's ammonia and urea production under a similar product purchase agreement. To the extent that Westco does not purchase its 34% of the facility's production, CF is obligated to purchase any remaining amounts. Under the product purchase agreements, both CF and Westco pay the greater of operating cost or market price for purchases. However, the product purchase agreements also provide that CFL will distribute its net earnings to CF and Westco annually based on their respective quantities of product purchased from CFL. The product purchase agreement also requires CF to advance funds to CFL in the event that CFL is unable to meet its debts as they become due. The amount of each advance would be at least 66% of the deficiency and would be more in any year that CF purchased more than 66% of Medicine Hat's production. CF and Westco currently manage CFL such that each party is responsible for its share of CFL's fixed costs and that CFL's production volume meets the parties' combined requirements.
Revenue Recognition
Revenue is recognized when title transfers to the customer, which can be at the plant gate, a distribution facility, a supplier location or a customer destination. Shipping and handling costs are included in cost of sales.
F-8
Cash Equivalents and Short-Term Investments
Cash equivalents include highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less. Short-term investments consist of available-for-sale auction rate securities that are reported at fair value.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined on a first-in, first-out or average basis.
Investments in Unconsolidated Subsidiaries
The investments in CF Martin Sulphur, L.P. and Big Bend Transfer Co., L.L.C. are accounted for under the equity method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation, depletion and amortization are computed using the units-of-production method for production assets and the straight-line method for other assets. Depreciable lives are as follows:
|
Years
|
|
---|---|---|
Mobile and office equipment | 3 to 18 | |
Production and related assets | 10 to 15 | |
Distribution facilities | 10 | |
Mining assets, phosphogypsum stacks and land improvements | 20 | |
Buildings | 45 |
Expenditures related to scheduled major maintenance of production facilities (plant turnarounds) are deferred when incurred and amortized to production costs on a straight-line basis during the period until the next scheduled turnaround, generally 2.5 to 5 years.
Recoverability of Long-Lived Assets
The Company reviews property, plant and equipment and other long-lived assets in order to assess recoverability based on expected future undiscounted cash flows whenever events or circumstances indicate that the carrying value may not be recoverable. If the sum of the expected future net cash flows is less than the carrying value, an impairment loss is recognized. The impairment loss is measured as the amount by which the carrying value exceeds the fair value of the asset.
Goodwill
Goodwill represents the excess of the purchase price of an acquired entity over the amounts assigned to the assets acquired and liabilities assumed. Goodwill is no longer amortized but is reviewed for impairment annually or more frequently if certain impairment conditions arise. After analysis, goodwill that is deemed impaired is written down to fair value.
F-9
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities relate to tax net operating losses and temporary differences between income tax and financial statement reporting, principally for depreciation and amortization, depletable mineral properties, retirement benefits and asset retirement obligations. Realization of deferred tax assets is dependent on the ability of the Company to generate sufficient taxable income in future periods. A valuation allowance is required to be established if it becomes more likely than not that a deferred tax asset will not be realized.
Derivative Financial Instruments
The Company accounts for derivatives in accordance with Statement of Financial Accounting Standards (SFAS) No. 133 Accounting for Derivative Instruments and Hedging Activities as amended by subsequent standards. Under these standards, derivatives are recognized in the consolidated balance sheets at fair value and changes in their fair value are recognized in earnings unless hedge accounting is elected or the normal purchase and sale exemption applies. For a derivative designated and qualified as a cash flow hedge, the effective portion of the change in fair value is recorded in other comprehensive income (OCI) and is recognized in operations when the hedged item affects earnings. Any ineffective portion of a change in the fair value of a derivative designated as a cash flow hedge is recognized immediately in operations. See Note 22 for information on derivative financial instruments relating to CF's forward pricing program.
Environmental
Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and that do not provide current or future economic benefits are expensed. Expenditures that provide future economic benefits are capitalized. Liabilities are recorded when environmental assessments and/or remedial efforts are required and the costs can be reasonably estimated.
Use of Estimates
The consolidated financial statements and accompanying notes, which are prepared in conformity with accounting principles generally accepted in the United States of America, include amounts which are based on management's best judgments and estimates. Actual results could differ from those estimates.
2. New Accounting Standards
Following are summaries of recently issued accounting pronouncements which are or may be applicable to the Company's consolidated financial statements.
F-10
Modernization Act of 2003 for employers who sponsor postretirement health care plans that provide prescription drug benefits, and requires employers to provide certain disclosures regarding the effect of the federal subsidy provided by the Act. The FSP is generally effective for interim or annual periods beginning after June 15, 2004. The adoption of FSP No. 106-2 in 2004 did not impact the Company's consolidated financial statements.
3. Retirement and Incentive Plans
CF and its subsidiaries maintain noncontributory defined benefit pension plans. As a result of an amendment to CF's U.S. plan effective January 1, 2004, employees who began employment after December 31, 2003 are not eligible to participate in the plan.
The Company also provides group medical insurance to its retirees. Retirees in the U.S. are eligible to continue until age 65 the same Company subsidized medical coverage provided to active employees. After a participant becomes eligible for Medicare, generally at age 65, the offered coverage is a Medicare supplement and the participant pays the entire cost of the coverage. Retirees in Canada are eligible to
F-11
continue until age 65 the same Company subsidized coverage in both the provincial health care plan and the supplemental medical plan provided to active employees. At age 65, the Company provided medical coverage ceases.
Plan assets, benefit obligations, funded status and amounts recognized in the consolidated balance sheets for the Company's U.S. and Canadian plans as of the measurement date of December 31 are as follows:
|
Pension Plan
|
Retiree Medical
|
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
December 31,
|
December 31,
|
||||||||||||
|
2003
|
2004
|
2003
|
2004
|
||||||||||
|
(in thousands)
|
|||||||||||||
Change in plan assets | ||||||||||||||
Fair value of plan assets at January 1 | $ | 127,283 | $ | 155,046 | $ | | $ | | ||||||
Return on plan assets | 26,559 | 17,015 | | | ||||||||||
Funding contributions | 7,022 | 7,736 | | | ||||||||||
Benefit payments | (5,818 | ) | (6,402 | ) | | | ||||||||
|
|
|
|
|||||||||||
Fair value of plan assets at December 31 | 155,046 | 173,395 | | | ||||||||||
|
|
|
|
|||||||||||
Change in benefit obligation | ||||||||||||||
Benefit obligation at January 1 | (165,341 | ) | (187,101 | ) | (19,458 | ) | (23,979 | ) | ||||||
Service cost | (5,482 | ) | (5,843 | ) | (947 | ) | (1,227 | ) | ||||||
Interest cost | (10,762 | ) | (11,528 | ) | (1,417 | ) | (1,712 | ) | ||||||
Net benefit payments | 5,818 | 6,402 | 1,146 | 1,220 | ||||||||||
Change in assumptions and other | (11,334 | ) | (16,482 | ) | (3,303 | ) | (5,712 | ) | ||||||
|
|
|
|
|||||||||||
Benefit obligation at December 31 | (187,101 | ) | (214,552 | ) | (23,979 | ) | (31,410 | ) | ||||||
|
|
|
|
|||||||||||
Excess of benefit obligation over plan assets | (32,055 | ) | (41,157 | ) | (23,979 | ) | (31,410 | ) | ||||||
Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions | 32,908 | 45,884 | 5,494 | 10,615 | ||||||||||
Minimum pension liability adjustment | | (11,527 | ) | | | |||||||||
Unrecognized transition obligation (asset) | (52 | ) | (56 | ) | 2,883 | 2,607 | ||||||||
|
|
|
|
|||||||||||
Accrued asset (liability) included in the consolidated balance sheet at December 31 | $ | 801 | $ | (6,856 | ) | $ | (15,602 | ) | $ | (18,188 | ) | |||
|
|
|
|
Amounts recognized in the consolidated balance sheets consist of the following:
|
Pension Plan
|
Retiree Medical
|
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
December 31,
|
December 31,
|
|||||||||||
|
2003
|
2004
|
2003
|
2004
|
|||||||||
|
(in thousands)
|
||||||||||||
Prepaid (accrued) amount recognized | $ | 801 | $ | 4,671 | $ | (15,602 | ) | $ | (18,188 | ) | |||
Intangible asset | | (688 | ) | | | ||||||||
Accumulated other comprehensive lossgross | | (10,839 | ) | | | ||||||||
|
|
|
|
||||||||||
Accrued asset (liability) | $ | 801 | $ | (6,856 | ) | $ | (15,602 | ) | $ | (18,188 | ) | ||
|
|
|
|
F-12
The accumulated other comprehensive loss related to the minimum pension liability adjustment in 2004 was reduced by an income tax benefit of $4.3 million, resulting in a net charge to other comprehensive loss of $6.5 million in 2004 (see Note 23).
CF's estimated U.S. pension funding contribution in 2005 is $7.0 million. Expected future pension benefit payments are $7.5 million in 2005, $8.1 million in 2006, $8.6 million in 2007, $9.2 million in 2008, $10.0 million in 2009 and $61.3 million during the five years thereafter. Expected U.S. future retiree medical benefit payments are $1.5 million in 2005, $1.6 million in 2006, $1.8 million in 2007, $1.9 million in 2008, $2.0 million in 2009 and $13.0 million during the five years thereafter.
The following assumptions were used in determining the benefit obligation at December 31 for the Company's primary (U.S.) plans. The assumptions used for the Canadian plans are substantially similar to those used for the primary plans.
|
Pension Plan
|
Retiree Medical
|
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2002
|
2003
|
2004
|
2002
|
2003
|
2004
|
|||||||
Discount rate | 6.75 | % | 6.25 | % | 5.75 | % | 6.75 | % | 6.25 | % | 5.75 | % | |
Rate of increase in future compensation | 5.5 | % | 5.0 | % | 5.0 | % | n/a | n/a | n/a | ||||
Expected long-term rate of return on assets | 8.5 | % | 8.5 | % | 8.5 | % | n/a | n/a | n/a |
The 8.5% expected long-term rate of return on assets is based on studies of actual rates of return achieved by equity and non-equity investments both separately and in combination over historical holding periods.
The objectives of the investment policy with respect to the primary pension plan are to administer the assets of the plan for the benefit of the participants in compliance with all laws and regulations, and to establish an asset mix that provides for diversification of assets and generation of returns at an acceptable level of risk. The policy considers circumstances such as participant demographics, time horizon to retirement and liquidity needs, and provides guidelines for asset allocation, planning horizon, general portfolio issues and investment manager evaluation criteria as well as monitoring and control procedures. The current target asset allocation is 65% equity and 35% non-equity, which has been determined based on studies of actual historical rates of return and plan needs and circumstances.
The allocation of pension assets by major asset category based on fair value for the primary plan is as follows:
|
Asset Allocation
December 31, |
||||
---|---|---|---|---|---|
|
2003
|
2004
|
|||
Equity securities | 66 | % | 64 | % | |
Debt securities | 32 | 33 | |||
Other | 2 | 3 | |||
|
|
||||
100 | % | 100 | % | ||
|
|
The health care cost trend rate used to determine the primary (U.S.) retiree medical benefit obligation is 9.25% in 2003 and 8.5% in 2004, grading down to 6.0% in 2008 and thereafter. A
F-13
one-percentage-point change in the assumed health care cost trend rate at December 31, 2004 would have the following effects:
|
One-Percentage-Point
|
|||||
---|---|---|---|---|---|---|
|
Increase
|
Decrease
|
||||
Effect on: | ||||||
Total of service and interest cost components for 2004 | 13 | % | (11 | )% | ||
Benefit obligation at December 31, 2004 | 10 | % | (9 | )% |
Net pension/retiree medical expense included the following components:
|
Pension Plan
|
Retiree Medical
|
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Years Ended December 31,
|
Years Ended December 31,
|
||||||||||||||||
|
2002
|
2003
|
2004
|
2002
|
2003
|
2004
|
||||||||||||
|
(in thousands)
|
|||||||||||||||||
Service cost for benefits earned during the period | $ | 4,980 | $ | 5,482 | $ | 5,843 | $ | 730 | $ | 947 | $ | 1,227 | ||||||
Interest cost on projected benefit obligation | 10,232 | 10,762 | 11,528 | 1,198 | 1,417 | 1,712 | ||||||||||||
Expected return on plan assets | (13,718 | ) | (13,500 | ) | (13,932 | ) | | | | |||||||||
Amortization of transition obligation | (47 | ) | (52 | ) | (56 | ) | 479 | 553 | 326 | |||||||||
Amortization of prior service cost | 105 | 106 | 108 | | | | ||||||||||||
Actuarial loss (gain) | (642 | ) | 58 | 144 | | 10 | 518 | |||||||||||
|
|
|
|
|
|
|||||||||||||
Net expense | $ | 910 | $ | 2,856 | $ | 3,635 | $ | 2,407 | $ | 2,927 | $ | 3,783 | ||||||
|
|
|
|
|
|
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Act) was signed into law. The Act provides a prescription drug benefit and a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. Based on information currently available, the Company's actuaries have determined that the benefit under the CF plan is not actuarially equivalent to the Medicare Part D benefit and that the Company is not eligible for the subsidy. Therefore, the impact on the Company's retiree medical cost is zero.
The Company also has a thrift savings plan covering substantially all employees. Under the plan, the Company contributes a fixed percentage of base salary to employees' accounts and matches employee contributions up to a specified limit. The Company contributed $5.9 million and $5.6 million to the plan in 2003 and 2004, respectively. There was no Company contribution in 2002.
The Company established the Annual Incentive Plan effective January 1, 2004. The aggregate award under the plan is based on pre-determined targets for pre-tax return on equity each year. Awards are accrued during the year and paid in the first quarter of the subsequent year. The Company recognized expense of $6.7 million for this plan in 2004. For its previous incentive plans, the Company recognized expense of $1.5 million and $1.2 million in 2002 and 2003, respectively.
The Company established a long term incentive plan effective January 1, 2004. Plan participants will receive a specified percentage of aggregate value created as defined upon completion of a three-year performance measurement period. The initial performance measurement period began January 1, 2004 and a new performance measurement period will begin each January 1 thereafter. Value created is based
F-14
on specified return on equity targets. The plan is unfunded. The Company recognized expense of $311 thousand for this plan in 2004. For its previous plan, the Company recognized expense of $971 thousand and $536 thousand in 2002 and 2003, respectively.
In addition to qualified defined benefit pension plans, the Company also maintains nonqualified supplemental pension plans which are designed to restore participants' benefits under the qualified plans that are reduced by certain limiting provisions of the Internal Revenue Code and a closed plan in which no current employees are eligible to participate. The Company recognized expense of $472 thousand, $393 thousand and $441 thousand for these plans in 2002, 2003 and 2004, respectively.
4. Other OperatingNet
Details of other operating costs are as follows:
|
Years Ended December 31,
|
||||||||
---|---|---|---|---|---|---|---|---|---|
|
2002
|
2003
|
2004
|
||||||
|
(in thousands)
|
||||||||
Bartow facility costs | $ | 9,794 | $ | 952 | $ | 8,148 | |||
Bartow water treatment costs | | | 7,077 | ||||||
Other environmental costs | | | 8,116 | ||||||
Litigation costs | (500 | ) | 605 | 1,702 | |||||
|
|
|
|||||||
$ | 9,294 | $ | 1,557 | $ | 25,043 | ||||
|
|
|
Bartow facility costs include water treating expenditures and provisions for phosphogypsum stack closure and cooling pond closure. Bartow costs for 2003 are net of a $10.5 million credit for a change in estimate related to phosphogypsum stack closure costs (see Asset Retirement ObligationsNote 7).
A $7.1 million provision has been recognized in 2004 for a retirement obligation related to the treatment of water at the Bartow facility. Refer to Note 7 for additional information.
Other environmental costs in 2004 includes a $4.7 million provision, based on an assessment performed in late 2004 that identified certain measures, which if completed in the near-term, would allow the Company to reduce the long-term costs related to the demolition, removal and disposal of certain environmental materials and equipment at the Bartow phosphate complex. Also included, based on a review in late 2004, is a $3.4 million additional provision for an ongoing groundwater recovery and land application program at the site of a former nitrogen manufacturing facility.
Litigation costs represent costs (recoveries) associated with legal actions to which the Company is a party. Such costs are recorded when they are considered probable and can be reasonably estimated. Recoveries are recorded when realized.
F-15
5. Interest Expense
Details of interest expense are as follows:
|
Years Ended December 31,
|
||||||||
---|---|---|---|---|---|---|---|---|---|
|
2002
|
2003
|
2004
|
||||||
|
(in thousands)
|
||||||||
Long-term debt | $ | 22,455 | $ | 22,308 | $ | 19,787 | |||
Short-term debt | 325 | 87 | | ||||||
Notes payable | 194 | 145 | 162 | ||||||
Fees on financing agreements | 591 | 1,330 | 2,747 | ||||||
|
|
|
|||||||
$ | 23,565 | $ | 23,870 | $ | 22,696 | ||||
|
|
|
6. Interest Income
Details of interest income are as follows:
|
Years Ended December 31,
|
||||||||
---|---|---|---|---|---|---|---|---|---|
|
2002
|
2003
|
2004
|
||||||
|
(in thousands)
|
||||||||
Interest on cash, cash equivalents and short-term investments | $ | 1,468 | $ | 1,639 | $ | 5,287 | |||
Patronage refunds from CoBank | 563 | 534 | 499 | ||||||
Finance charges and other | 178 | 87 | 115 | ||||||
|
|
|
|||||||
$ | 2,209 | $ | 2,260 | $ | 5,901 | ||||
|
|
|
7. Asset Retirement Obligations
The Company's phosphate operations in Florida are subject to regulations governing the construction, operation, closure and long-term maintenance of phosphogypsum stack systems and regulations concerning site reclamation for phosphate rock mines. Costs associated with the closure of the Company's phosphogypsum stack systems at the Bartow and Plant City phosphate complexes, and costs associated with reclamation activities at the Company's Hardee phosphate rock mine, are accounted for in accordance with SFAS No. 143 Accounting for Asset Retirement Obligations .
The Company's asset retirement obligations are included in other noncurrent liabilities and accrued expenses. The balances and changes thereto are summarized below.
|
Year Ended December 31
|
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Phosphogypsum Stack
Costs |
Mine Reclamation
Costs |
|||||||||||||||||
|
2002
|
2003
|
2004
|
2002
|
2003
|
2004
|
|||||||||||||
|
(in thousands)
|
||||||||||||||||||
Obligation at January 1 | $ | 42,170 | $ | 37,422 | $ | 23,431 | $ | 11,309 | $ | 13,849 | $ | 14,092 | |||||||
Accretion expense | 3,384 | 3,004 | 1,887 | 905 | 1,115 | 1,127 | |||||||||||||
Liabilities incurred | | | 15,439 | 1,183 | 735 | 1,163 | |||||||||||||
Expenditures | (6,180 | ) | (7,439 | ) | (8,006 | ) | (203 | ) | (662 | ) | (981 | ) | |||||||
Change in estimate | (1,952 | ) | (9,556 | ) | 1,147 | 655 | (945 | ) | 3,420 | ||||||||||
|
|
|
|
|
|
||||||||||||||
Obligation at December 31 | $ | 37,422 | $ | 23,431 | $ | 33,898 | $ | 13,849 | $ | 14,092 | $ | 18,821 | |||||||
|
|
|
|
|
|
F-16
The liability for phosphogypsum stack costs includes the original portion of the Plant City stack, an expansion of the Plant City stack opened in 1999, the Bartow stack, cooling ponds at Bartow and Plant City and as of December 31, 2004, water treatment at Bartow and Plant City, as described below. The actual amounts to be spent will depend on factors such as the timing of activities, refinements in scope, technological developments, cost inflation and changes in regulations. It is possible that these factors could change at any time and impact the estimates. As described further below, the estimated time frame involved in completing the asset retirement activities extends as far as the year 2057. Additional asset retirement obligations may be incurred in the future due to further expansion of the Plant City stack.
The Company expects to incur expenditures to treat water stored in the Bartow and Plant City phosphogypsum stack and cooling pond systems during the process of closure. Until 2004, management believed that it was not possible to reasonably estimate the quantity or timing of such water treatment, if any, because the need to treat water at any particular time may arise from factors other than the process of stack closure and therefore, that a reasonable estimate of future water treatment costs associated solely with closure could not be made. In late 2004, the Florida Department of Environmental Protection (DEP) published proposed revisions to the regulations governing closure and long-term maintenance of phosphogypsum stack systems. The revisions became effective in July 2005. The revised regulations add specific requirements for inclusion of water management plans and estimated costs based on assumed end-of-life closure of the entire stack system. As a result of evaluating the new DEP requirements, in 2004, management determined that, based on experience with closure activities to date and development of refined assumptions, amounts for water treatment directly associated with ultimate closure of the Plant City stack system and the Bartow stack system can now be reasonably estimated.
Closure expenditures for the original portion of the Plant City phosphogypsum stack are expected to be complete in 2005. Closure activities on the Bartow stack are expected to continue through the year 2007 and closure of the Bartow cooling pond is estimated to occur in the years 2016 to 2023. Closure expenditures for the Plant City stack expansion are estimated to occur in the 2022 to 2026 timeframe and closure of the Plant City cooling pond is estimated to occur in the years 2034 to 2038. Water treatment expenditures at Bartow are estimated to extend through 2023, and such expenditures at Plant City are estimated to occur in the 2031 to 2057 time frame.
The $15.4 million identified as liabilities incurred in 2004 represents the Company's estimate of water treatment obligations. This amount consists of $7.1 million for Bartow which was charged to other operating expenses in 2004 rather than capitalized because Bartow is a closed facility, and $8.3 million for Plant City which was capitalized as property, plant and equipment and will be depreciated over a twenty-year period beginning in 2005.
The $9.6 million change in estimate in phosphogypsum stack closure costs in 2003 was primarily the result of a revised closure plan for the Bartow phosphogypsum stack and cooling pond systems. The previous plan anticipated significant costs related to closure of the cooling pond. Stack closure activities have now progressed to the point where it has been determined that the cooling pond will be closed in a less costly manner. The revised plan maintains conformance with existing permits and regulatory requirements.
In connection with its phosphate fertilizer business, the Company is subject to financial assurance requirements. The purpose of these requirements is to assure the government that sufficient Company funds will be available for the ultimate closure, post-closure care and/or reclamation at its facilities. Currently, these financial assurance requirements can be satisfied without the need for any expenditure of corporate funds if the Company's financial statements meet certain criteria, referred to as the financial
F-17
tests. However, pursuant to a recent amendment to Florida's regulations governing financial assurance related to the closure of phosphogypsum stacks, the Company intends to establish a trust fund to meet such obligations to take advantage of a "Safe Harbor" provision of the new regulations. Beginning in 2006, the Company expects to contribute between $2 million and $5 million annually over the next ten years, based upon an assumed rate of return of 4% on invested funds, to a fund earmarked to cover the closure and long-term maintenance and monitoring costs for its phosphogypsum stacks, as well as any costs incurred to manage its wastewater upon closure of the stacks. The amount of money that will have accumulated in the trust fund by the end of the ten-year period, including interest earned on contributed funds, is currently expected to be approximately $37 million. After the initial ten years, contributions to the trust fund are expected to average approximately $1 million annually for the following 16 years. The trust fund is expected to approximate $92 million at the end of 26 years assuming a 4% return on the invested funds. The amounts recognized as expense in the Company's operations pertaining to phosphogypsum stack closure and land reclamation are determined and accounted for as described above. These amounts are expected to differ from the amounts anticipated to fund the trust, which are based on the guidelines set forth in the Florida regulations. Ultimately, the cash in these trust funds will be used to settle the asset retirement obligations.
Additionally, the Florida legislature recently passed a bill that would require mining companies to demonstrate financial responsibility for wetland and other surface water mitigation measures in advance of any mining activities. If this bill becomes law, the Company may be required to demonstrate financial responsibility for wetland and other surface water mitigation measures associated with its Hardee mining activities.
The Company has an asset retirement obligation at CFL's Medicine Hat facility for certain decommissioning and land reclamation activities upon cessation of operations. The Company also has an asset retirement obligation at its Donaldsonville, Louisiana nitrogen complex for reclamation of two effluent ponds upon cessation of operations. The Company has determined that no reasonable estimate of these obligations can be made because a date or range of dates for cessation of operations is not determinable. In reaching this conclusion the historical performance, planned maintenance and asset replacements or upgrades have been taken into account. The possibility of changes in technology and the risk of obsolescence have also been considered.
8. Minority Interest
In accordance with CFL's governing agreements, CFL earnings are available for distribution to its Members based on approval by the CFL shareholders. Amounts reported as minority interest in the consolidated statements of operations represent the interest of the 34% shareholder of CFL in the distributed and undistributed earnings of CFL. The minority interest in CFL earnings for 2002, 2003, and 2004 consist of earnings distributions of $4.4 million, $6.8 million and $25.4 million, respectively, and undistributed current year earnings (loss) of $2.0 million, ($.8 million) and ($2.3 million), respectively. Amounts reported as minority interest on the consolidated balance sheets represent the interests of the holder of 34% of CFL's preferred stock and the holders of 51% of CFL's common stock.
9. Impairment of Investments in Unconsolidated Subsidiaries
The impairment of investments in unconsolidated subsidiaries of $1.1 million in 2004 consists of a write-off of the carrying value of the Company's investment in Big Bend Transfer Co., L.L.C. (Refer to Note 14 for additional information).
F-18
10. Income Taxes
CF is a nonexempt cooperative. Patronage is a preexisting obligation of CF, with the form and amount of the patronage distributions authorized annually by the Stockholders pursuant to recommendations by the Board of Directors. Patronage is deductible for income tax purposes provided at least twenty percent of the total distribution is paid in cash. In general, patronage-sourced earnings retained and nonpatronage-sourced earnings are taxed at normal corporate rates.
CF had no earnings from Member business in 2002 or 2003 to be distributed as patronage. In 2004, earnings from Member business were retained in order to utilize net operating loss carryforwards, thereby realizing the associated deferred tax assets.
CFL operates as a cooperative and distributes all of its earnings as patronage to its Members. CFL's patronage distributions are subject to the approval of its Shareholders pursuant to recommendations by its Board of Directors. Patronage distributions are deductible for income tax purposes; therefore, no provision for income taxes is required.
The components of the Company's earnings (loss) before income taxes are:
|
Years Ended December 31,
|
||||||||
---|---|---|---|---|---|---|---|---|---|
|
2002
|
2003
|
2004
|
||||||
|
(in thousands)
|
||||||||
Domestic | $ | (46,767 | ) | $ | (33,312 | ) | $ | 107,555 | |
Non-U.S. | 341 | 742 | 1,467 | ||||||
|
|
|
|||||||
$ | (46,426 | ) | $ | (32,570 | ) | $ | 109,022 | ||
|
|
|
The Company's income tax provision (benefit) consisted of the following:
|
Years Ended December 31,
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2002
|
2003
|
2004
|
||||||||
|
(in thousands)
|
||||||||||
Current | |||||||||||
Federal | $ | (1,400 | ) | $ | (100 | ) | $ | 4,300 | |||
Foreign | 900 | 1,200 | 3,800 | ||||||||
State | (300 | ) | (200 | ) | (500 | ) | |||||
|
|
|
|||||||||
(800 | ) | 900 | 7,600 | ||||||||
|
|
|
|||||||||
Deferred | |||||||||||
Federal | (10,700 | ) | (10,900 | ) | 27,800 | ||||||
State | (5,100 | ) | (2,600 | ) | 6,000 | ||||||
|
|
|
|||||||||
(15,800 | ) | (13,500 | ) | 33,800 | |||||||
|
|
|
|||||||||
Income tax expense (benefit) | (16,600 | ) | (12,600 | ) | 41,400 | ||||||
Tax effect of equity in earnings of unconsolidated subsidiaries |
|
|
1,100 |
|
|
1,000 |
|
|
100 |
|
|
Tax effects of items in other comprehensive income (loss): | |||||||||||
Unrealized gain (loss) on hedging derivatives | | 3,800 | (5,200 | ) | |||||||
Unrealized gain (loss) on securities | (100 | ) | 100 | | |||||||
Minimum pension liability adjustment | (300 | ) | 300 | (4,300 | ) | ||||||
|
|
|
|||||||||
Total income tax provision (benefit) on comprehensive income (loss) | $ | (15,900 | ) | $ | (7,400 | ) | $ | 32,000 | |||
|
|
|
F-19
Differences in the expected income tax provision (benefit) based on statutory rates and the income tax provision (benefit) reflected in the consolidated statements of operations are summarized below:
|
Years Ended December 31,
|
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2002
|
2003
|
2004
|
|||||||||||||
|
(in thousands, except percentages)
|
|||||||||||||||
Earnings (loss) before income taxes | $ | (46,426 | ) | $ | (32,570 | ) | $ | 109,022 | ||||||||
|
|
|
|
|
|
|||||||||||
Expected tax at U.S. statutory rate | (16,249 | ) | 35.0 | % | (11,400 | ) | 35.0 | % | 38,158 | 35.0 | % | |||||
State income taxes, net of federal | (3,743 | ) | 8.1 | (1,738 | ) | 5.4 | 3,495 | 3.2 | ||||||||
Foreign tax rate differential | 3,237 | (7.0 | ) | 538 | (1.7 | ) | 93 | 0.1 | ||||||||
Permanent differences and other | 155 | (0.3 | ) | | | (346 | ) | (0.3 | ) | |||||||
|
|
|
|
|
|
|||||||||||
Income tax at effective rate | $ | (16,600 | ) | 35.8 | % | $ | (12,600 | ) | 38.7 | % | $ | 41,400 | 38.0 | % | ||
|
|
|
|
|
|
The Company's deferred tax assets and deferred tax liabilities are as follows:
|
December 31,
|
|||||||
---|---|---|---|---|---|---|---|---|
|
2003
|
2004
|
||||||
|
(in thousands)
|
|||||||
Deferred tax assets | ||||||||
Net operating loss carryover | $ | 163,832 | $ | 124,321 | ||||
Asset retirement obligations | 9,525 | 13,538 | ||||||
Accumulated other comprehensive loss | | 5,750 | ||||||
Retirement benefits | 6,162 | 7,117 | ||||||
Other | 12,108 | 16,103 | ||||||
|
|
|||||||
191,627 | 166,829 | |||||||
|
|
|||||||
Deferred tax liabilities | ||||||||
Depletable mineral properties | (24,745 | ) | (26,427 | ) | ||||
Depreciation and amortization | (19,171 | ) | (23,844 | ) | ||||
Accumulated other comprehensive income | (3,815 | ) | | |||||
Other | (11,151 | ) | (8,148 | ) | ||||
|
|
|||||||
(58,882 | ) | (58,419 | ) | |||||
|
|
|||||||
Valuation allowance | | | ||||||
|
|
|||||||
Net deferred tax asset | 132,745 | 108,410 | ||||||
Less amount in current assets | 3,493 | 33,501 | ||||||
|
|
|||||||
Noncurrent asset | $ | 129,252 | $ | 74,909 | ||||
|
|
The Company has net operating loss carryforwards of $311.3 million that will expire in the following years: $27.4 million in 2020, $166.1 million in 2021, $64.3 million in 2022 and $53.5 million in 2023. Deferred tax assets include the tax benefit of the net operating loss carryforwards whose realization is dependent on the ability of the Company to generate sufficient taxable income prior to their expiration. The Company evaluates the recoverability of these loss carryforwards using various estimation processes. The accuracy of such estimates is dependent on underlying assumptions such as future product prices and volumes, which are sensitive to the cyclical nature of the Company's business and require a significant amount of judgment. To the extent that future taxable income is less than estimated amounts, realization of the loss carryforwards could potentially be materially impacted. Although realization is subject to such
F-20
uncertainty, management believes that it is more likely than not that sufficient future taxable income will be generated within the carryforward periods.
In 2003, the Company's subsidiary corporation CFL received a notice of proposed adjustment from the Canada Revenue Agency (CRA) as a result of its audit of the tax years 1997 through 2000. The CRA's position was that CFL and CF do not deal on an arms-length basis and therefore that the tax deduction for management fees paid to CF for the years under audit should not be allowed. As of December 31, 2004, the CRA has completed the audit with no resulting assessment for the years 1997 through 2004. The CRA has reserved the right to reopen the arms-length issue in future audits after 2004.
On March 23, 2004, the 2004 Canadian Federal Budget was presented which included an amendment to the Income Tax Act that would disallow the deduction of certain patronage distributions paid after March 22, 2004 to non-arm's length persons. In the settlement of CFL's audit for the tax years 1997 through 2000, the CRA agreed that CFL has operated at arm's length with CF with respect to the deductibility of patronage payments to CF for the 2004 taxation year. However it is unknown what impact, if any, this legislation will have on the deductibility of CFL's future patronage distributions.
In 2004, the CRA initiated and the Company settled a Canadian income tax audit of its subsidiary corporation CF Chemicals, Ltd. (CFCL), through which the Company operates CFL, for the tax years 1997 through 2004. Completion of the audit resolved a transfer pricing issue involving the allocation of certain income from CFL to the Company and CFCL. The settlement reached with the CRA increased the allocation of the income to CFCL and will result in the assessment of Canadian and provincial income tax of approximately $2.2 million. The settlement agreement will not have a material impact on these financial statements.
11. Accounts Receivable
Accounts receivable consist of the following:
|
December 31,
|
|||||
---|---|---|---|---|---|---|
|
2003
|
2004
|
||||
|
(in thousands)
|
|||||
Trade | $ | 89,874 | $ | 37,934 | ||
Other | 2,947 | 3,576 | ||||
|
|
|||||
$ | 92,821 | $ | 41,510 | |||
|
|
12. Inventories
Inventories consist of the following:
|
December 31,
|
|||||
---|---|---|---|---|---|---|
|
2003
|
2004
|
||||
|
(in thousands)
|
|||||
Fertilizer | $ | 161,098 | $ | 188,291 | ||
Spare parts, raw materials and supplies | 45,186 | 45,256 | ||||
|
|
|||||
$ | 206,284 | $ | 233,547 | |||
|
|
F-21
13. Other Current Assets and Other Current Liabilities
Other current assets consist of the following:
|
December 31,
|
|||||
---|---|---|---|---|---|---|
|
2003
|
2004
|
||||
|
(in thousands)
|
|||||
Margin deposits | $ | 32,938 | $ | 37,731 | ||
Unrealized gains on natural gas derivatives | 13,167 | 16,402 | ||||
Prepaid expenses | 5,151 | 5,049 | ||||
Purchased product prepayments | 2,434 | | ||||
|
|
|||||
$ | 53,690 | $ | 59,182 | |||
|
|
Other current liabilities of $4.9 million and $18.5 million at December 31, 2003 and 2004, respectively, consist of unrealized losses on natural gas derivatives.
14. Investments in Unconsolidated Subsidiaries
Investments in unconsolidated subsidiaries consist of the following:
|
December 31,
|
|||||
---|---|---|---|---|---|---|
|
2003
|
2004
|
||||
|
(in thousands)
|
|||||
Investment in CF Martin Sulphur, L.P. | $ | 20,352 | $ | 18,666 | ||
Investment in Big Bend Transfer Co., L.L.C. | 1,118 | | ||||
|
|
|||||
$ | 21,470 | $ | 18,666 | |||
|
|
The Company has a 50% ownership interest in CF Martin Sulphur, L.P. (CFMS), a molten sulfur handling joint venture, which is a sulfur supplier to the central Florida phosphate industry. The Company's purchases from CFMS were $15.2 million in 2003 and $23.7 million in 2004. Accounts payable to CFMS totaled $867 thousand at December 31, 2003 and $2.3 million at December 31, 2004.
The Company also has a one-third ownership interest in Big Bend Transfer Co., L.L.C., a joint venture with plans to develop a facility to convert imported dry sulfur into liquid. In the intervening five years since the joint venture discussions were initiated, domestic supplies of attractively-priced molten sulfur have increased substantially pursuant to increased production of cleaner grades of gasoline, which is expected to continue in the future. As a result of this fundamental shift in the economics of converting dry sulfur to liquid, management no longer believes that the carrying value of the investment can be recovered. Accordingly, an impairment loss of $1.1 million was recognized in 2004.
F-22
15. Property, Plant and EquipmentNet
Property, plant and equipmentnet consists of the following:
|
December 31,
|
|||||
---|---|---|---|---|---|---|
|
2003
|
2004
|
||||
|
(in thousands)
|
|||||
Land | $ | 29,040 | $ | 29,083 | ||
Mineral properties | 187,005 | 187,077 | ||||
Manufacturing plants | 1,838,564 | 1,890,622 | ||||
Distribution facilities and other | 221,012 | 221,288 | ||||
Construction in progress | 11,955 | 11,685 | ||||
|
|
|||||
2,287,576 | 2,339,755 | |||||
Less accumulated depreciation, depletion and amortization | 1,578,880 | 1,694,160 | ||||
|
|
|||||
$ | 708,696 | $ | 645,595 | |||
|
|
16. Other Assets
Other assets are summarized as follows:
|
December 31,
|
|||||
---|---|---|---|---|---|---|
|
2003
|
2004
|
||||
|
(in thousands)
|
|||||
Nonqualified employee benefit trusts | $ | 7,112 | $ | 6,676 | ||
Investment in CoBank | 4,869 | 5,118 | ||||
Deferred financing agreement fees | 3,468 | 2,492 | ||||
Other | 2,703 | 3,391 | ||||
|
|
|||||
$ | 18,152 | $ | 17,677 | |||
|
|
17. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
|
December 31,
|
|||||
---|---|---|---|---|---|---|
|
2003
|
2004
|
||||
|
(in thousands)
|
|||||
Accounts payable | $ | 37,998 | $ | 43,617 | ||
Accrued natural gas | 53,785 | 73,480 | ||||
Payroll and employee related costs | 10,769 | 17,012 | ||||
Asset retirement obligations | 7,093 | 10,992 | ||||
Other | 23,290 | 24,136 | ||||
|
|
|||||
$ | 132,935 | $ | 169,237 | |||
|
|
Payroll and employee related costs includes accrued salaries and wages, vacation, incentive plans and payroll taxes. Asset retirement obligations are the current portion of the Company's asset retirement obligations. Other includes accrued interest, property taxes, maintenance and professional services.
F-23
18. Customer Advances
Customer advances represent cash received from customers following acceptance of orders under a forward pricing program. The Company offers such forward pricing program to its customers whereby product may be ordered for future delivery with a substantial portion of the purchase price generally being collected by the time the product is shipped, thereby reducing or eliminating accounts receivable from customers upon shipment. Revenue is recognized when title transfers upon shipment or delivery of the product to customers. The Company hedges the natural gas cost for product to be delivered under such programs at the time the orders are accepted. As of December 31, 2004, the Company had approximately 1.9 million tons of product committed to be sold under the forward pricing program in 2005.
19. Long-Term Debt, Credit Agreement and Notes Payable
Long-term debt is summarized as follows:
|
December 31,
|
|||||
---|---|---|---|---|---|---|
|
2003
|
2004
|
||||
|
(in thousands)
|
|||||
7.17% note with insurance company due in annual installments through 2013 | $ | 100,000 | $ | 90,000 | ||
7.28% notes with insurance companies due in annual installments from 2007 through 2012 | 75,000 | 75,000 | ||||
9.02% notes with insurance companies due in annual installments from 2008 through 2012 | 35,000 | 35,000 | ||||
6.44% note with CoBank due in quarterly installments from 2008 through 2012 | 25,000 | 25,000 | ||||
Variable rate note with CoBank due in annual installments through 2007 (average 5.37% as of December 31, 2004) | 28,000 | 21,000 | ||||
7.05% note with CoBank due in quarterly installments through 2007 | 11,667 | 8,750 | ||||
7.32% note with insurance company due in annual installments through 2004 | 15,000 | | ||||
|
|
|||||
Total long-term debt | 289,667 | 254,750 | ||||
Less current portion | 34,917 | 19,917 | ||||
|
|
|||||
$ | 254,750 | $ | 234,833 | |||
|
|
Long-Term Debt
The Company's long-term borrowing agreements require maintenance of specified minimum net worth levels and maximum debt ratios, and contain covenants restricting cash patronage, redemptions of capital stock and other standard covenants. The agreements with CoBank also require investments in that bank. In conjunction with the establishment of the new Harris revolving credit agreement, the Company's existing term loan agreements were amended in 2003 to provide the term lenders with a subordinated security interest in the same assets that are pledged under the 2003 revolving credit agreement.
Long-term debt maturities for the five years succeeding December 31, 2004 are $19.9 million in each of the years 2005 and 2006, $32.4 million in 2007 and $34.5 million in each of the years 2008 and 2009.
Credit Agreement
In 2003, the Company established a $140 million revolving line of credit with Harris Trust and Savings Bank (Harris) and six other lending institutions, which is available through September 26, 2006. The agreement is secured by working capital, certain equipment and the Donaldsonville production facility.
F-24
Restrictive covenants under the agreement are those common to asset based agreements. Borrowing at any time is limited to the lesser of $140 million or the available collateral (including offset of customer advances) as defined in the agreement. At December 31, 2004, there was approximately $120 million of available credit (based on available collateral) and there were no outstanding borrowings under the revolver.
Notes Payable
From time to time, CFL receives advances from the CFL minority interest holder to finance major capital expenditures. The advances currently outstanding are evidenced by an unsecured promissory note due December 31, 2009 and bear interest at market rates. The amount shown as notes payable represents the advances payable to the CFL minority interest holder.
20. Leases
Future minimum lease payments under noncancelable operating leases at December 31, 2004 are:
|
Operating
Lease Payments |
||
---|---|---|---|
|
(in thousands)
|
||
2005 | $ | 9,576 | |
2006 | 6,691 | ||
2007 | 3,840 | ||
2008 | 2,141 | ||
2009 | 783 | ||
Thereafter | 305 | ||
|
|||
Future minimum operating lease payments | $ | 23,336 | |
|
Total rent expense for cancelable and noncancelable operating leases was $15.0 million for the year ended December 31, 2002, $14.6 million for 2003 and $14.7 million for 2004.
21. Other Noncurrent Liabilities
Other noncurrent liabilities consist of the following:
|
December 31,
|
||||||
---|---|---|---|---|---|---|---|
|
2003
|
2004
|
|||||
|
(in thousands)
|
||||||
Asset retirement obligations | $ | 37,523 | $ | 52,719 | |||
Less: Current portion in accrued expenses | 7,093 | 10,992 | |||||
|
|
||||||
Noncurrent portion | 30,430 | 41,727 | |||||
Benefit plans and deferred compensation | 21,570 | 31,352 | |||||
Environmental costs and other | 447 | 10,124 | |||||
|
|
||||||
$ | 52,447 | $ | 83,203 | ||||
|
|
Asset retirement obligations are for phosphogypsum stack closure costs and mine reclamation costs (see Note 7). Benefit plans and deferred compensation include liabilities for pensions, retiree medical benefits, and the noncurrent portion of incentive plans (see Note 3). Environmental costs and other for
F-25
2004 consist of the noncurrent portions of the liability for environmental items included in other operating costs (see Note 4), including the Bartow demolition and removal costs and a groundwater recovery program at the site of a former nitrogen manufacturing facility.
22. Derivative Financial Instruments
The Company uses natural gas in the manufacture of its nitrogen fertilizer products. Because natural gas prices are volatile, the Company's Natural Gas Acquisition Policy includes the objective of providing protection against significant adverse natural gas price movements. The Company manages the risk of changes in gas prices through the use of physical gas supply contracts and derivative financial instruments covering periods not exceeding 3 years. The derivative instruments currently used are swaps, futures and purchased options. These contracts reference primarily NYMEX futures contract prices, which represent fair value at any given time. The contracts are traded in months forward and settlements are scheduled to coincide with anticipated gas purchases during those future periods.
The Company classifies a derivative financial instrument as a hedge if all of the following conditions are met: 1) the item to be hedged must expose the Company to commodity price risk, 2) it must be probable that the results of the hedge position substantially offset the effects of price changes on the hedged item (i.e., there is a high correlation between the hedge position and changes in market value of the hedged item) and 3) the derivative financial instrument must be designated as a hedge of the item at the inception of the hedge. The Company uses derivative instruments, primarily futures and swaps, to fix the natural gas price for product sold under its forward pricing program.
The Company designates, documents and assesses accounting for hedge relationships, which result primarily in cash flow hedges that require the Company to record the derivatives as assets and liabilities at their fair value on the balance sheet with an offset in OCI. The gain or loss of an effective cash flow hedge is deferred in OCI until the second month after the hedged natural gas is used to manufacture inventoried products, which approximates the period of inventory turns of upgraded products and the release of the cost of the hedged gas to cost of sales. Ineffective hedge gains and losses are recorded immediately in cost of sales.
Compared with spot prices, natural gas hedging activities decreased costs at the Company's Donaldsonville Nitrogen Complex by approximately $9.5 million in 2003 and $22.1 million in 2004. The Company recorded a net ineffective gain of $338 thousand in 2003 and a net ineffective loss of $259 thousand in 2004. Cash flows related to natural gas hedges are reported as cash flows from operating activities.
The Company's natural gas requirements typically range from 100 million to 125 million MMBtus annually. At December 31, 2004, derivative contracts were in place to cover approximately 25% of the Company's anticipated natural gas requirements for 2005. These hedge positions extend through December 2005. Open natural gas derivative contracts at December 31, 2003 and 2004 are summarized
F-26
below. Unrealized gains and losses are reported in other current assets and other current liabilities, respectively.
23. Stockholders' Equity
Patronage preferred stock consists of Member investments and patronage issues. In addition, a Base Capital Plan exists which is used to adjust each Member's current investment in CF on an equitable basis over time to correspond with the volume of business transacted by each Member.
CF also has the following classes of stock authorized, none of which were outstanding at December 31, 2004 or 2003: 7.5% cumulative senior preferred stock, $100 par value, 5,000 shares authorized; and 8% special preferred stock, $100 par value, 500,000 shares authorized.
Stockholders' equity also includes accumulated other comprehensive income (loss), which consists of the following components:
|
Foreign
Currency Translation Adjustment |
Unrealized
Gain (Loss) on Securities |
Unrealized
Gain (Loss) on Derivatives |
Minimum
Pension Liability Adjustment |
Accumulated
Other Comprehensive Income (Loss) |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(in thousands)
|
|||||||||||||||
Balance at December 31, 2001 | $ | (8,941 | ) | $ | | $ | | $ | | $ | (8,941 | ) | ||||
Net Change | 154 | (155 | ) | | (425 | ) | (426 | ) | ||||||||
|
|
|
|
|
||||||||||||
Balance at December 31, 2002 | (8,787 | ) | (155 | ) | | (425 | ) | (9,367 | ) | |||||||
Net Change | 4,663 | 155 | 5,722 | 425 | 10,965 | |||||||||||
|
|
|
|
|
||||||||||||
Balance at December 31, 2003 | (4,124 | ) | | 5,722 | | 1,598 | ||||||||||
Net Change | 393 | | (7,844 | ) | (6,503 | ) | (13,954 | ) | ||||||||
|
|
|
|
|
||||||||||||
Balance at December 31, 2004 | $ | (3,731 | ) | $ | | $ | (2,122 | ) | $ | (6,503 | ) | $ | (12,356 | ) | ||
|
|
|
|
|
The unrealized gain or loss on derivatives is related to natural gas hedges. As described in Note 1, these amounts are reclassified into earnings as the product ultimately manufactured with the hedged gas is sold. The $5.7 million balance at December 31, 2003 consists of a gross unrealized gain on open positions of $13.4 million (see Note 22), offset by primarily losses on closed positions of $3.9 million and a deferred income tax effect of $3.8 million. The $2.1 million balance at December 31, 2004 consists of a gross unrealized loss on open positions of $18.2 million (see Note 22), offset by primarily gains on closed positions of $14.7 million and a deferred income tax effect of $1.4 million. The amount shown as net change in OCI is the net change associated with current period hedging transactions. The amount of reclassification into earnings as a result of the discontinuance of cash flow hedges was zero for both 2003
F-27
and 2004. Virtually all of the balance at December 31, 2004 is expected to be reclassified into earnings during 2005.
The $425 thousand charge in 2002 related to the minimum pension liability adjustment is net of a deferred tax benefit of $283 thousand. The 2002 amounts reversed in 2003. The $6.5 million charge for the minimum pension liability adjustment in 2004 is net of a deferred tax benefit of $4.3 million.
The $155 thousand charge resulting from the unrealized loss on securities in 2002 is net of a deferred tax benefit of $103 thousand. These amounts reversed in 2003.
24. Disclosures about Fair Value of Financial Instruments
The estimated fair value of the Company's significant financial instruments not discussed elsewhere is described below. All financial instruments are held or issued for purposes other than trading.
Cash Equivalents and Short-Term Investments
The carrying values of cash equivalents and short-term investments approximate fair value because of the short maturities and the highly liquid nature of these investments.
Investments in Unconsolidated Subsidiaries
The carrying values of the Company's investments in CF Martin Sulphur, L.P. and Big Bend Transfer Co., L.L.C. approximate fair value.
Notes Payable
The carrying value of notes payable approximates fair value because they bear interest at market rates.
Long-Term Debt
The fair value of the Company's long-term debt is estimated based on current rates available to the Company for debt of similar remaining maturities. The estimated fair values of long-term debt at December 31, 2003 and 2004 are $300.6 million and $296.7 million, respectively. The rates used to determine these amounts are not necessarily indicative of rates that the Company could obtain in a current market transaction.
25. Litigation and Contingencies
The Company from time to time is subject to ordinary, routine legal proceedings related to the usual conduct of its business. The Company also is involved in proceedings regarding public utility and transportation rates, environmental matters, taxes and permits relating to the operations of its various plants and facilities. The Company believes that the ultimate outcome of these matters will not have a material adverse effect on the Company's consolidated financial position or results of operations.
F-28
26. Other Financial Statement Data
The following provides additional information relating to cash flow activities:
|
Years Ended December 31,
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2002
|
2003
|
2004
|
|||||||
|
(in thousands)
|
|||||||||
Cash paid (received) during the year for: | ||||||||||
Interest | $ | 23,048 | $ | 24,424 | $ | 24,122 | ||||
Income taxesnet of refunds | (1,480 | ) | 888 | 8,717 |
27. Reclassification
Certain items in the prior year's consolidated financial statements have been reclassified to conform to the current year's presentation and certain items previously presented in the current year's consolidated financial statements have been reclassified.
On the consolidated balance sheet, the Company's investments in auction rate securities have been reclassified from cash and cash equivalents to short-term investments. On the consolidated cash flow statement, corresponding adjustments have been made to reflect the gross purchases and gross sales and maturities of these securities as investing activities rather than a component of the change in cash and cash equivalents. These reclassifications had no impact on previously reported net income or cash flow from operations.
28. Segment Disclosures
The Company is organized and managed internally based on two segments, which are differentiated primarily by their products, the markets they serve and the regulatory environments in which they operate. The two segments are the nitrogen and phosphate fertilizer businesses.
Segment data for sales, cost of sales, gross margin, depreciation, depletion and amortization, capital expenditures, and assets for 2002, 2003, and 2004 are as follows. Other sales, costs and gross margin represent the Company's potash sales that were discontinued in 2003. Other assets, capital expenditures
F-29
and depreciation include amounts attributable to the corporate headquarters and unallocated corporate assets.
|
Nitrogen
|
Phosphate
|
Other
|
Consolidated
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(in thousands)
|
|||||||||||||
Year ended December 31, 2002 | ||||||||||||||
Net sales | ||||||||||||||
Anhydrous ammonia | $ | 228,684 | $ | | $ | | $ | 228,684 | ||||||
Granular urea | 320,651 | | | 320,651 | ||||||||||
UAN solutions | 178,912 | | | 178,912 | ||||||||||
DAP | | 227,718 | | 227,718 | ||||||||||
MAP | | 45,321 | | 45,321 | ||||||||||
Other | 2,113 | 8,809 | 1,863 | 12,785 | ||||||||||
|
|
|
|
|||||||||||
730,360 | 281,848 | 1,863 | 1,014,071 | |||||||||||
Cost of sales | 711,134 | 273,363 | 1,798 | 986,295 | ||||||||||
|
|
|
|
|||||||||||
Gross margin | $ | 19,226 | $ | 8,485 | $ | 65 | $ | 27,776 | ||||||
Depreciation, depletion and amortization |
|
$ |
72,641 |
|
$ |
34,932 |
|
$ |
898 |
|
$ |
108,471 |
||
Capital expenditures | 15,139 | 10,466 | 698 | 26,303 | ||||||||||
December 31, 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
||
(unaudited) | ||||||||||||||
Assets | $ | 546,851 | $ | 446,630 | $ | 310,051 | $ | 1,303,532 |
|
Nitrogen
|
Phosphate
|
Other
|
Consolidated
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(in thousands)
|
|||||||||||||
Year ended December 31, 2003 | ||||||||||||||
Net sales | ||||||||||||||
Anhydrous ammonia | $ | 347,390 | $ | | $ | | $ | 347,390 | ||||||
Granular urea | 443,192 | | | 443,192 | ||||||||||
UAN solutions | 265,225 | | | 265,225 | ||||||||||
DAP | | 264,437 | | 264,437 | ||||||||||
MAP | | 43,290 | | 43,290 | ||||||||||
Other | 2,439 | 2,071 | 1,871 | 6,381 | ||||||||||
|
|
|
|
|||||||||||
1,058,246 | 309,798 | 1,871 | 1,369,915 | |||||||||||
Cost of sales | 999,677 | 334,053 | 1,778 | 1,335,508 | ||||||||||
|
|
|
|
|||||||||||
Gross margin | $ | 58,569 | $ | (24,255 | ) | $ | 93 | $ | 34,407 | |||||
Depreciation, depletion and amortization |
|
$ |
69,866 |
|
$ |
33,974 |
|
$ |
1,174 |
|
$ |
105,014 |
||
Capital expenditures | 14,207 | 13,711 | 766 | 28,684 | ||||||||||
December 31, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
||
Assets | $ | 558,101 | $ | 417,625 | $ | 429,153 | $ | 1,404,879 |
F-30
|
Nitrogen
|
Phosphate
|
Other
|
Consolidated
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(in thousands)
|
|||||||||||||
Year ended December 31, 2004 | ||||||||||||||
Net sales | ||||||||||||||
Anhydrous ammonia | $ | 399,486 | $ | | $ | | $ | 399,486 | ||||||
Granular urea | 515,927 | | | 515,927 | ||||||||||
UAN solutions | 354,077 | | | 354,077 | ||||||||||
DAP | | 305,273 | | 305,273 | ||||||||||
MAP | | 71,452 | | 71,452 | ||||||||||
Other | 4,395 | 42 | | 4,437 | ||||||||||
|
|
|
|
|||||||||||
1,273,885 | 376,767 | | 1,650,652 | |||||||||||
Cost of sales | 1,080,086 | 354,459 | | 1,434,545 | ||||||||||
|
|
|
|
|||||||||||
Gross margin | $ | 193,799 | $ | 22,308 | $ | | $ | 216,107 | ||||||
Depreciation, depletion and amortization |
|
$ |
71,412 |
|
$ |
35,071 |
|
$ |
2,159 |
|
$ |
108,642 |
||
Capital expenditures | 13,847 | 16,175 | 3,687 | 33,709 | ||||||||||
December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
||
Assets | $ | 530,604 | $ | 414,419 | $ | 601,948 | $ | 1,546,971 |
Enterprise-wide data by geographic region is as follows:
|
Year Ended December 31
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2002
|
2003
|
2004
|
||||||||
|
(in thousands)
|
||||||||||
Sales by geographic region | |||||||||||
Nitrogen |
|
|
|
|
|
|
|
|
|
||
U.S. | $ | 650,678 | $ | 927,437 | $ | 1,115,007 | |||||
Canada | 77,816 | 130,809 | 158,878 | ||||||||
Export | 1,866 | | | ||||||||
|
|
|
|||||||||
730,360 | 1,058,246 | 1,273,885 | |||||||||
|
|
|
|||||||||
Phosphate | |||||||||||
U.S. | 238,743 | 274,973 | 230,778 | ||||||||
Canada | 10,841 | 10,515 | 13,756 | ||||||||
Export | 32,264 | 24,310 | 132,233 | ||||||||
|
|
|
|||||||||
281,848 | 309,798 | 376,767 | |||||||||
|
|
|
|||||||||
Potash |
|
|
1,863 |
|
|
1,871 |
|
|
|
||
|
|
|
|||||||||
Consolidated | $ | 1,014,071 | $ | 1,369,915 | $ | 1,650,652 | |||||
|
|
|
F-31
|
December 31,
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2002
|
2003
|
2004
|
|||||||
|
(in thousands)
|
|||||||||
Property, plant and equipmentnet by geographic region | ||||||||||
U.S. | $ | 742,865 | $ | 673,789 | $ | 613,838 | ||||
Canada | 34,450 | 34,907 | 31,757 | |||||||
|
|
|
||||||||
Consolidated | $ | 777,315 | $ | 708,696 | $ | 645,595 | ||||
|
|
|
Data regarding major customers the sales to which represent at least ten percent of the Company's consolidated revenues are as follows:
|
Year Ended December 31
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2002
|
2003
|
2004
|
|||||||
|
(in thousands)
|
|||||||||
Sales by major customer | ||||||||||
Agriliance, LLC | $ | 448,843 | $ | 559,745 | $ | 481,784 | ||||
GROWMARK, Inc. | 172,088 | 202,905 | 206,775 | |||||||
Others | 393,140 | 607,265 | 962,093 | |||||||
|
|
|
||||||||
Consolidated | $ | 1,014,071 | $ | 1,369,915 | $ | 1,650,652 | ||||
|
|
|
Sales to each major customer are generated from both the nitrogen and phosphate business segments.
29. Quarterly DataUnaudited
The following tables present the Company's unaudited quarterly results of operations for the eight quarters ended December 31, 2004. This quarterly information has been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflects all adjustments necessary for the fair representation of the information for the periods presented. This data should be read in conjunction with the audited financial statements and related disclosures. Operating results for any quarter apply to that quarter only and are not necessarily indicative of results for any future period.
F-32
|
Three Months Ended,
|
||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
March 31
|
June 30
|
September 30
|
December 31
|
|||||||||||||||||||||
2003 Quarterly Results of Operations
|
As Previously Reported
|
Restated (a)
|
As Previously Reported
|
Restated (a)
|
As Previously Reported
|
Restated (a)
|
As Previously Reported
|
Restated (a)
|
|||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||||||
Net sales | $ | 229,583 | $ | 229,583 | $ | 404,998 | $ | 404,998 | $ | 313,626 | $ | 313,626 | $ | 421,708 | $ | 421,708 | |||||||||
Cost of sales | 234,984 | 236,254 | 403,709 | 408,286 | 295,822 | 304,469 | 400,993 | 386,499 | |||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
Gross margin | (5,401 | ) | (6,671 | ) | 1,289 | (3,288 | ) | 17,804 | 9,157 | 20,715 | 35,209 | ||||||||||||||
Selling, general and administrative | 9,438 | 9,438 | 9,627 | 9,627 | 9,463 | 9,463 | 9,927 | 9,927 | |||||||||||||||||
Other operatingnet | 2,937 | 2,937 | 2,931 | 2,931 | 3,509 | 3,509 | (7,820 | ) | (7,820 | )(b) | |||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
Operating earnings (loss) | (17,776 | ) | (19,046 | ) | (11,269 | ) | (15,846 | ) | 4,832 | (3,815 | ) | 18,608 | 33,102 | ||||||||||||
Interestnet | 4,722 | 4,722 | 5,455 | 5,455 | 5,564 | 5,564 | 5,869 | 5,869 | |||||||||||||||||
Minority interest | 795 | 795 | (1,147 | ) | (1,147 | ) | 3,361 | 3,361 | 3,022 | 3,022 | |||||||||||||||
Other non-operatingnet | (208 | ) | (208 | ) | 30 | 30 | (871 | ) | (871 | ) | 373 | 373 | |||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
Earnings (loss) before income taxes | (23,085 | ) | (24,355 | ) | (15,607 | ) | (20,184 | ) | (3,222 | ) | (11,869 | ) | 9,344 | 23,838 | |||||||||||
Income tax expense (benefit) | (8,931 | ) | (9,422 | ) | (6,038 | ) | (7,809 | ) | (1,246 | ) | (4,591 | ) | 3,615 | 9,222 | |||||||||||
Equity in earnings of unconsolidated subsidiaries | 414 | 414 | 549 | 549 | 345 | 345 | 279 | 279 | |||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
Net earnings (loss) | $ | (13,740 | ) | $ | (14,519 | ) | $ | (9,020 | ) | $ | (11,826 | ) | $ | (1,631 | ) | $ | (6,933 | ) | $ | 6,008 | $ | 14,895 | |||
|
|
|
|
|
|
|
|
|
Three Months Ended,
|
||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
March 31
|
June 30
|
September 30
|
December 31
|
|||||||||||||||||||||
2004 Quarterly Results of Operations
|
As Previously Reported
|
Restated (a)
|
As Previously Reported
|
Restated (a)
|
As Previously Reported
|
Restated (a)
|
As Previously Reported
|
Restated (a)
|
|||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||||||
Net sales | $ | 324,664 | $ | 324,664 | $ | 520,701 | $ | 520,701 | $ | 326,694 | $ | 326,694 | $ | 478,593 | $ | 478,593 | |||||||||
Cost of sales | 291,081 | 288,802 | 450,567 | 455,671 | 272,889 | 282,781 | 420,008 | 407,291 | |||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
Gross margin | 33,583 | 35,862 | 70,134 | 65,030 | 53,805 | 43,913 | 58,585 | 71,302 | |||||||||||||||||
Selling, general and administrative | 10,188 | 10,188 | 10,114 | 10,114 | 9,864 | 9,864 | 11,664 | 11,664 | |||||||||||||||||
Other operatingnet | 2,143 | 2,143 | 2,892 | 2,892 | 1,721 | 1,721 | 18,287 | 18,287 | (c) | ||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
Operating earnings | 21,252 | 23,531 | 57,128 | 52,024 | 42,220 | 32,328 | 28,634 | 41,351 | |||||||||||||||||
Interestnet | 4,810 | 4,810 | 5,020 | 5,020 | 3,993 | 3,993 | 2,972 | 2,972 | |||||||||||||||||
Minority interest | 5,141 | 5,141 | 4,566 | 4,566 | 5,403 | 5,403 | 8,035 | 8,035 | |||||||||||||||||
Impairment of investments in unconsolidated subsidiaries | | | | | | | 1,050 | 1,050 | |||||||||||||||||
Other non-operatingnet | | | (537 | ) | (537 | ) | (149 | ) | (149 | ) | (92 | ) | (92 | ) | |||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
Earnings before income taxes | 11,301 | 13,580 | 48,079 | 42,975 | 32,973 | 23,081 | 16,669 | 29,386 | |||||||||||||||||
Income tax expense | 4,292 | 5,157 | 18,257 | 16,320 | 12,521 | 8,764 | 6,330 | 11,159 | |||||||||||||||||
Equity in earnings (loss) of unconsolidated subsidiaries | 146 | 146 | 91 | 91 | (14 | ) | (14 | ) | (113 | ) | (113 | ) | |||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
Net earnings | $ | 7,155 | $ | 8,569 | $ | 29,913 | $ | 26,746 | $ | 20,438 | $ | 14,303 | $ | 10,226 | $ | 18,114 | |||||||||
|
|
|
|
|
|
|
|
F-33
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
|
Six Months Ended June 30,
|
||||||
---|---|---|---|---|---|---|---|
|
2004
|
2005
|
|||||
|
(unaudited)
(in thousands) |
||||||
Net sales | $ | 845,365 | $ | 1,085,985 | |||
Cost of sales | 744,473 | 935,075 | |||||
|
|
||||||
Gross margin | 100,892 | 150,910 | |||||
Selling, general and administrative | 20,302 | 25,270 | |||||
Other operatingnet | 5,035 | 2,891 | |||||
|
|
||||||
Operating earnings | 75,555 | 122,749 | |||||
Interest expense | 11,820 | 10,531 | |||||
Interest income | (1,990 | ) | (7,683 | ) | |||
Minority interest | 9,707 | 12,365 | |||||
Other non-operatingnet | (537 | ) | (336 | ) | |||
|
|
||||||
Earnings before income taxes | 56,555 | 107,872 | |||||
Income tax provision | 21,477 | 42,757 | |||||
Equity in earnings of unconsolidated subsidiaries | 237 | 35 | |||||
|
|
||||||
Net earnings | $ | 35,315 | $ | 65,150 | |||
|
|
See Accompanying Notes to Unaudited Consolidated Financial Statements.
F-34
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
Six Months Ended June 30,
|
|||||||
---|---|---|---|---|---|---|---|---|
|
2004
|
2005
|
||||||
|
(unaudited)
(in thousands) |
|||||||
Net earnings | $ | 35,315 | $ | 65,150 | ||||
Other comprehensive income (loss): | ||||||||
Foreign currency translation adjustmentno tax effect | (933 | ) | (290 | ) | ||||
Unrealized gain (loss) on hedging derivativesnet of taxes | (4,304 | ) | 888 | |||||
|
|
|||||||
(5,237 | ) | 598 | ||||||
|
|
|||||||
Comprehensive income | $ | 30,078 | $ | 65,748 | ||||
|
|
See Accompanying Notes to Unaudited Consolidated Financial Statements.
F-35
UNAUDITED CONSOLIDATED BALANCE SHEETS
|
December 31, 2004
|
June 30,
2005 |
|||||||
---|---|---|---|---|---|---|---|---|---|
|
|
(unaudited)
|
|||||||
|
(in thousands)
|
||||||||
Assets | |||||||||
Current assets: | |||||||||
Cash and cash equivalents | $ | 50,003 | $ | 79,436 | |||||
Short-term investments | 369,290 | 430,894 | |||||||
Accounts receivable | 41,510 | 88,209 | |||||||
Income taxes receivable | 1,764 | 3,685 | |||||||
Inventories | 233,547 | 141,386 | |||||||
Deferred income taxes | 33,501 | 27,452 | |||||||
Other | 59,182 | 21,284 | |||||||
|
|
||||||||
Total current assets | 788,797 | 792,346 | |||||||
Investments in unconsolidated subsidiaries | 18,666 | 18,723 | |||||||
Property, plant and equipmentnet | 645,595 | 626,000 | |||||||
Deferred income taxes | 74,909 | 46,884 | |||||||
Goodwill | 1,327 | 1,327 | |||||||
Other assets | 17,677 | 15,531 | |||||||
|
|
||||||||
Total assets | $ | 1,546,971 | $ | 1,500,811 | |||||
|
|
||||||||
Liabilities and Stockholders' Equity |
|
|
|
|
|
|
|
||
Current liabilities: | |||||||||
Accounts payable and accrued expenses | $ | 169,237 | $ | 152,390 | |||||
Customer advances | 211,501 | 129,984 | |||||||
Distributions payable to minority interest | 5,631 | 5,550 | |||||||
Current portion of long-term debt | 19,917 | 19,917 | |||||||
Other | 18,517 | 2,857 | |||||||
|
|
||||||||
Total current liabilities | 424,803 | 310,698 | |||||||
|
|
||||||||
Noncurrent liabilities: | |||||||||
Notes payable | 4,071 | 4,013 | |||||||
Long-term debt | 234,833 | 226,375 | |||||||
Other | 83,203 | 81,810 | |||||||
|
|
||||||||
Total noncurrent liabilities | 322,107 | 312,198 | |||||||
|
|
||||||||
Minority interest | 12,772 | 24,878 | |||||||
|
|
||||||||
Stockholders' equity: | |||||||||
Patronage preferred stock$100 par value, 10,000,000 shares authorized, 7,343,018 shares outstanding | 734,302 | 734,302 | |||||||
Common stock$1,000 par value, 100 shares authorized, 8 shares outstanding | 8 | 8 | |||||||
Paid-in capital | 5,555 | 5,555 | |||||||
Retained earnings | 59,780 | 124,930 | |||||||
Accumulated other comprehensive loss | (12,356 | ) | (11,758 | ) | |||||
|
|
||||||||
Total stockholders' equity | 787,289 | 853,037 | |||||||
|
|
||||||||
Total liabilities and stockholders' equity | $ | 1,546,971 | $ | 1,500,811 | |||||
|
|
See Accompanying Notes to Unaudited Consolidated Financial Statements.
F-36
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
|
Six Months Ended June 30, 2005
|
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Patronage Preferred Stock
|
Common Stock
|
Paid-In Capital
|
Retained Earnings
|
Accumulated Other Comprehensive Income (Loss)
|
Total
|
||||||||||||||
|
(unaudited)
(in thousands) |
|||||||||||||||||||
Balance at December 31, 2004 | $ | 734,302 | $ | 8 | $ | 5,555 | $ | 59,780 | $ | (12,356 | ) | $ | 787,289 | |||||||
Add (deduct): | ||||||||||||||||||||
Net earnings | | | | 65,150 | | 65,150 | ||||||||||||||
Other comprehensive income | | | | | 598 | 598 | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Balance at June 30, 2005 | $ | 734,302 | $ | 8 | $ | 5,555 | $ | 124,930 | $ | (11,758 | ) | $ | 853,037 | |||||||
|
|
|
|
|
|
See Accompanying Notes to Unaudited Consolidated Financial Statements.
F-37
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Six Months Ended June 30,
|
||||||||
---|---|---|---|---|---|---|---|---|---|
|
2004
|
2005
|
|||||||
|
(unaudited)
(in thousands) |
||||||||
Operating Activities: | |||||||||
Net earnings | $ | 35,315 | $ | 65,150 | |||||
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities | |||||||||
Minority interest | 9,707 | 12,365 | |||||||
Depreciation, depletion and amortization | 53,562 | 53,207 | |||||||
Deferred income taxes | 21,628 | 33,455 | |||||||
Equity in earnings of unconsolidated subsidiaries | (388 | ) | (57 | ) | |||||
Changes in: | |||||||||
Accounts receivable | 17,668 | (48,757 | ) | ||||||
Margin deposits | 13,530 | 21,858 | |||||||
Inventories | 46,158 | 91,936 | |||||||
Accounts payable and accrued expenses | (6,143 | ) | (16,477 | ) | |||||
Customer advancesnet | (133,912 | ) | (81,517 | ) | |||||
Othernet | (1,977 | ) | 1,839 | ||||||
|
|
||||||||
Net cash provided by operating activities | 55,148 | 133,002 | |||||||
|
|
||||||||
Investing Activities: | |||||||||
Additions to property, plant and equipmentnet | (12,923 | ) | (33,244 | ) | |||||
Purchases of short-term investments | (318,698 | ) | (320,708 | ) | |||||
Sales and maturities of short-term investments | 248,449 | 259,104 | |||||||
Distributions from unconsolidated subsidiaries | 1,200 | | |||||||
|
|
||||||||
Net cash used in investing activities | (81,972 | ) | (94,848 | ) | |||||
|
|
||||||||
Financing Activities: | |||||||||
Payments on long-term debt | (8,458 | ) | (8,458 | ) | |||||
Othernet | (35 | ) | | ||||||
|
|
||||||||
Net cash used in financing activities | (8,493 | ) | (8,458 | ) | |||||
|
|
||||||||
Effect of Exchange Rate Changes on Cash and Cash Equivalents | (1,264 | ) | (263 | ) | |||||
|
|
||||||||
Increase (decrease) in cash and cash equivalents | (36,581 | ) | 29,433 | ||||||
Cash and cash equivalents at beginning of period | 77,146 | 50,003 | |||||||
|
|
||||||||
Cash and cash equivalents at end of period | $ | 40,565 | $ | 79,436 | |||||
|
|
See Accompanying Notes to Unaudited Consolidated Financial Statements.
F-38
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and disclosures applicable to
June 30, 2004 and 2005 are unaudited)
1. Basis of Presentation
The accompanying interim financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal and recurring adjustments, necessary for the fair representation of the information for the periods presented. This data should be read in conjunction with the audited financial statements and related disclosures. Operating results for any period presented apply to that period only and are not necessarily indicative of results for any future period.
In the Company's December 31, 2004 consolidated balance sheet, certain items have been reclassified to conform to the consolidated balance sheet as of June 30, 2005. In particular, the Company's investments in auction rate securities have been reclassified from cash and cash equivalents to short-term investments.
2. New Accounting Standards
Following are summaries of recently issued accounting pronouncements which are or may be applicable to the Company's consolidated financial statements.
2003 . This FSP provides guidance on accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 for employers who sponsor postretirement health care plans that provide prescription drug benefits, and requires employers to provide certain disclosures regarding the effect of the federal subsidy provided by the Act. The FSP is generally effective for interim or annual periods beginning after June 15, 2004. The adoption of FSP No. 106-2 in 2004 did not impact the Company's consolidated financial statements.
F-39
the fair value of the liability can be reasonably estimated. FIN No. 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company has not yet determined the impact of FIN No. 47 on its consolidated financial statements.
3. Pension and Other Postretirement Benefits
CF and its subsidiaries maintain noncontributory defined benefit pension plans. As a result of an amendment to CF's U.S. plan effective January 1, 2004, employees who began employment after December 31, 2003 are not eligible to participate in the plan.
The Company also provides group medical insurance to its retirees. Retirees in the U.S. are eligible to continue until age 65 the same Company subsidized medical coverage provided to active employees. After a participant becomes eligible for Medicare, generally at age 65, the offered coverage is a Medicare supplement and the participant pays the entire cost of the coverage. Retirees in Canada are eligible to continue until age 65 the same Company subsidized coverage in both the provincial health care plan and the supplemental medical plan provided to active employees. At age 65, the Company provided medical coverage ceases.
F-40
Net pension/retiree medical expense included the following components:
|
Pension Plans
Six Months Ended June 30, |
Retiree Medical
Six Months Ended June 30, |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2004
|
2005
|
2004
|
2005
|
||||||||
|
(in thousands)
|
|||||||||||
Service cost for benefits earned during the period | $ | 3,931 | $ | 3,329 | $ | 508 | $ | 591 | ||||
Interest cost on projected benefit obligation | 7,861 | 6,022 | 706 | 904 | ||||||||
Expected return on plan assets | (9,556 | ) | (6,907 | ) | | | ||||||
Amortization of transition obligation | (23 | ) | (30 | ) | 142 | 166 | ||||||
Amortization of prior service cost | 71 | 132 | | | ||||||||
Actuarial loss | 70 | 752 | 212 | 243 | ||||||||
|
|
|
|
|||||||||
Net expense | $ | 2,354 | $ | 3,298 | $ | 1,568 | $ | 1,904 | ||||
|
|
|
|
CF's estimated funding contribution to its U.S. pension plan in 2005 is $7.0 million. No funding contributions were made to the U.S. plan during the six months ended June 30, 2005.
In addition to qualified defined benefit pension plans, the Company also maintains nonqualified supplemental pension plans which are designed to restore participants' benefits under the qualified plans that are reduced by certain limiting provisions of the Internal Revenue Code and a closed plan in which no current employees are eligible to participate. The Company recognized expense for these plans of $185 thousand and $166 thousand for the six months ended June 30, 2004 and 2005, respectively.
4. Inventories
Inventories consist of the following:
|
December 31,
2004 |
June 30,
2005 |
||||
---|---|---|---|---|---|---|
|
(in thousands)
|
|||||
Fertilizer | $ | 188,291 | $ | 96,356 | ||
Spare parts, raw materials and supplies | 45,256 | 45,030 | ||||
|
|
|||||
$ | 233,547 | $ | 141,386 | |||
|
|
5. Derivative Financial Instruments
The Company uses natural gas in the manufacture of its nitrogen fertilizer products. Because natural gas prices are volatile, the Company's Natural Gas Acquisition Policy includes the objective of providing protection against significant adverse natural gas price movements. The Company manages the risk of changes in gas prices through the use of physical gas supply contracts and derivative financial instruments covering periods not exceeding 3 years. The derivative instruments currently used are swaps and futures. These contracts reference primarily NYMEX futures contract prices, which represent fair value at any given time. The contracts are traded in months forward and settlements are scheduled to coincide with anticipated gas purchases during those future periods.
F-41
The Company classifies a derivative financial instrument as a hedge if all of the following conditions are met: 1) the item to be hedged must expose the Company to commodity price risk, 2) it must be probable that the results of the hedge position substantially offset the effects of price changes on the hedged item (i.e., there is a high correlation between the hedge position and changes in market value of the hedged item) and 3) the derivative financial instrument must be designated as a hedge of the item at the inception of the hedge. The Company uses derivative instruments primarily to fix the natural gas price for product sold under its forward pricing program.
The Company designates, documents and assesses accounting for hedge relationships, which result primarily in cash flow hedges that require the Company to record the derivatives as assets and liabilities at their fair value on the balance sheet with an offset in other comprehensive income (OCI). The gain or loss of an effective cash flow hedge is deferred in OCI until the second month after the hedged natural gas is used to manufacture inventoried products, which approximates the period of inventory turns of upgraded products and the release of the cost of the hedged gas to cost of sales. Ineffective hedge gains and losses are recorded immediately in cost of sales.
Compared with spot gas prices, hedging activities decreased natural gas costs at the Company's Donaldsonville Nitrogen Complex by approximately $23.3 million for the six months ended June 30, 2004 and increased natural gas costs by approximately $6.7 million for the six months ended June 30, 2005. The ineffective gain recognized was zero for the six months ended June 30, 2004 and was $217 thousand for the six months ended June 30, 2005. Cash flows related to natural gas hedges are reported as cash flows from operating activities.
The Company's natural gas requirements typically range from 100 million to 125 million MMBtus annually. At June 30, 2005, derivative positions were in place to cover approximately 23% of the Company's anticipated natural gas requirements through March 2006. Open natural gas derivative contracts at December 31, 2004 and June 30, 2005 are summarized below.
|
December 31, 2004
|
June 30, 2005
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
Contract
MMBtu |
Net Unrealized
Loss |
Contract
MMBtu |
Net Unrealized
Gain (Loss) |
|||||||
|
(Millions)
|
(Thousands)
|
(Millions)
|
(Thousands)
|
|||||||
Swaps | 20.4 | $ | (14,077 | ) | 12.0 | $ | 1,352 | ||||
Futures | 4.4 | (4,172 | ) | 4.3 | (1 | ) | |||||
|
|
|
|
||||||||
24.8 | $ | (18,249 | ) | 16.3 | $ | 1,351 | |||||
|
|
|
|
F-42
Reconciliation of the unrealized gains and losses to amounts reported on the balance sheet at December 31, 2004 and June 30, 2005 are as follows:
|
December 31, 2004
|
June 30, 2005
|
||||||
---|---|---|---|---|---|---|---|---|
|
(in thousands)
|
(in thousands)
|
||||||
Open positions: | ||||||||
Unrealized gains in other current assets | $ | 268 | $ | 4,208 | ||||
Unrealized losses in other current liabilities | (18,517 | ) | (2,857 | ) | ||||
|
|
|||||||
(18,249 | ) | 1,351 | ||||||
Plus: Closed positions for forward months settled in cash | (1,681 | ) | (270 | ) | ||||
Plus: Closed positions from prior months in other current assets | 16,134 | (2,894 | ) | |||||
Less: Ineffective gain (loss) included in earnings | (259 | ) | 217 | |||||
|
|
|||||||
Gross amount in accumulated other comprehensive loss | (3,537 | ) | (2,030 | ) | ||||
Less: Deferred income tax effect | (1,415 | ) | (796 | ) | ||||
|
|
|||||||
Net amount in accumulated other comprehensive loss | $ | (2,122 | ) | $ | (1,234 | ) | ||
|
|
6. Other Comprehensive Income
Stockholders' equity includes accumulated other comprehensive loss, which consists of the following components:
|
Foreign
Currency Translation Adjustment |
Unrealized
Gain (Loss) on Derivatives |
Minimum
Pension Liability Adjustment |
Accumulated
Other Comprehensive Income (Loss) |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(in thousands)
|
||||||||||||
Balance at December 31, 2004 | $ | (3,731 | ) | $ | (2,122 | ) | $ | (6,503 | ) | $ | (12,356 | ) | |
Net change | (290 | ) | 888 | | 598 | ||||||||
|
|
|
|
||||||||||
Balance at June 30, 2005 | $ | (4,021 | ) | $ | (1,234 | ) | $ | (6,503 | ) | $ | (11,758 | ) | |
|
|
|
|
The unrealized gain or loss on derivatives is related to natural gas hedges. As described in Note 5, these amounts are reclassified into earnings as the product ultimately manufactured with the hedged gas is sold. The amount shown as net change in OCI is the net change associated with current period hedging transactions.
7. Litigation and Contingencies
The Company from time to time is subject to ordinary, routine legal proceedings related to the usual conduct of its business. The Company also is involved in proceedings regarding public utility and transportation rates, environmental matters, taxes and permits relating to the operations of its various plants and facilities. The Company believes that the ultimate outcome of these matters will not have a material adverse effect on the Company's consolidated financial position or results of operations.
F-43
8. Segment Disclosures
The Company is organized and managed internally based on two segments, which are differentiated primarily by their products, the markets they serve and the regulatory environments in which they operate. The two segments are the nitrogen and phosphate fertilizer businesses.
Segment data for sales, cost of sales and gross margin for the six months ended June 30, 2004 and 2005, and assets at December 31, 2004 and June 30, 2005, are as follows. Other assets include amounts attributable to the corporate headquarters and unallocated corporate assets.
|
Nitrogen
|
Phosphate
|
Other
|
Consolidated
|
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(in thousands)
|
||||||||||||||
Operating Results | |||||||||||||||
Six Months Ended June 30, 2004 | |||||||||||||||
Net sales | |||||||||||||||
Anhydrous ammonia | $ | 231,509 | $ | | $ | | $ | 231,509 | |||||||
Granular urea | 242,806 | | | 242,806 | |||||||||||
UAN solutions | 178,670 | | | 178,670 | |||||||||||
DAP | | 154,208 | | 154,208 | |||||||||||
MAP | | 34,994 | | 34,994 | |||||||||||
Other | 3,137 | 41 | | 3,178 | |||||||||||
|
|
|
|
||||||||||||
656,122 | 189,243 | | 845,365 | ||||||||||||
Cost of sales | 569,335 | 175,138 | | 744,473 | |||||||||||
|
|
|
|
||||||||||||
Gross margin | $ | 86,787 | $ | 14,105 | $ | | $ | 100,892 | |||||||
Six Months Ended June 30, 2005 | |||||||||||||||
Net sales | |||||||||||||||
Anhydrous ammonia | $ | 274,717 | $ | | $ | | $ | 274,717 | |||||||
Granular urea | 345,262 | | | 345,262 | |||||||||||
UAN solutions | 230,321 | | | 230,321 | |||||||||||
DAP | | 186,527 | | 186,527 | |||||||||||
MAP | | 46,208 | | 46,208 | |||||||||||
Other | 2,950 | | | 2,950 | |||||||||||
|
|
|
|
||||||||||||
853,250 | 232,735 | | 1,085,985 | ||||||||||||
Cost of sales | 718,905 | 216,170 | | 935,075 | |||||||||||
|
|
|
|
||||||||||||
Gross margin | $ | 134,345 | $ | 16,565 | $ | | $ | 150,910 | |||||||
Assets | |||||||||||||||
December 31, 2004 | $ | 530,604 | $ | 414,419 | $ | 601,948 | $ | 1,546,971 | |||||||
June 30, 2005 | $ | 411,453 | $ | 385,120 | $ | 704,238 | $ | 1,500,811 |
9. Income Taxes
CFL distributes all of its earnings from the sale of fertilizer as patronage dividends to its customers for fertilizer, including the Company. For Canadian income tax purposes CFL is permitted to deduct an amount equal to the patronage dividends it paid to its customers, provided that certain Canadian income tax requirements are met. While CFL is not currently under audit by the Canadian tax authorities, CFL received a preliminary inquiry from the CRA during the second quarter of 2005 which questions whether
F-44
CFL's past patronage distributions have met the requirements for full deductibility under Canadian income tax law. The past years that would be affected by this inquiry are 2002, 2003 and 2004. While CFL believes its allocation method complied with applicable law, CFL could be subject to Canadian income tax liabilities (exclusive of interest and penalties) for 2002, 2003 and 2004 of $5.8 million, $7.6 million and $24.7 million, respectively, and additional material Canadian income tax liabilities for future periods if its allocation method were determined to fail to meet the requirements for deductibility under Canadian tax law. The Company has a 66% economic interest in CFL.
10. Subsequent Event
On July 15, 2005, the Company sold its interest in CF Martin Sulphur, L.P. to the other joint venture partner, an affiliate of Martin Resource Management, for $18.6 million. The transaction does not have a material impact on the Company's consolidated statement of operations, as the selling price approximated the carrying value of the Company's investment in CF Martin Sulphur, L.P. Concurrent with the sale, the Company entered into a multi-year sulfur supply contract with CF Martin Sulphur, L.P.
F-45
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by us in connection with the sale of the common stock being registered. All amounts, except the SEC registration fee, the NASD filing fee, and the New York Stock Exchange listing fee, are estimates.
SEC registration fee | $ | 94,918 | |
NASD filing fee | 75,500 | ||
NYSE listing fee and expenses | 250,000 | ||
Printing and engraving expenses | 450,000 | ||
Legal fees and expenses | 2,500,000 | ||
Accounting fees and expenses | 1,100,000 | ||
Transfer agent and registrar fees and expenses | 1,700 | ||
Directors and officers insurance premiums | 900,000 | ||
Engineering expenses | 41,865 | ||
Miscellaneous fees and expenses | 275,000 | ||
|
|||
Total | $ | 5,688,983 | |
|
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102(b)(7) of the General Corporation Law of the State of Delaware (the "DGCL") allows a corporation to eliminate the personal liability of directors to a corporation or its stockholders for monetary damages for a breach of a fiduciary duty as a director, except where the director breached his duty of loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated a law, authorized the payment of a dividend or approved a stock repurchase or redemption in violation of Delaware corporate law or obtained an improper personal benefit.
Section 145 of the DGCL empowers a Delaware corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation) by reason of the fact that such person is or was a director, officer, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. The indemnity may include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided that such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person's conduct was unlawful. A Delaware corporation may indemnify directors, officers, employees and other agents of such corporation in an action by or in the right of a corporation under the same conditions against expenses (including attorneys' fees) actually and reasonably incurred by the person in connection with the defense and settlement of such action or suit, except that no indemnification is permitted without judicial approval if the person to be indemnified has been adjudged to be liable to the corporation. Where a present or former director or officer of the corporation is successful on the merits or otherwise in the defense of any action, suit or proceeding referred to above or in defense of any claim, issue or matter therein, the corporation must indemnify such person against the expenses (including attorneys' fees) which he or she actually and reasonably incurred in connection therewith.
II-1
Section 174 of the DGCL provides, among other things, that a director who willfully or negligently approves of an unlawful payment of dividends or an unlawful stock purchase or redemption, may be held liable for such actions. A director who was either absent when the unlawful actions were approved or dissented at the time, may avoid liability by causing his or her dissent to such actions to be entered into the books containing the minutes of the meetings of the board of directors at the time such action occurred or immediately after such absent director receives notice of the unlawful acts.
The registrant's Amended and Restated Certificate of Incorporation contains provisions that provide for indemnification of officers and directors and their heirs and representatives to the full extent permitted by, and in the manner permissible under, the DGCL.
As permitted by Section 102(b)(7) of the DGCL, the registrant's Amended and Restated Certificate of Incorporation contains a provision eliminating the personal liability of a director to the registrant or its stockholders for monetary damages for breach of fiduciary duty as a director, subject to some exceptions.
The registrant maintains, at its expense, a policy of insurance which insures its directors and officers, subject to exclusions and deductions as are usual in these kinds of insurance policies, against specified liabilities which may be incurred in those capacities.
Pursuant to the underwriting agreement, in the form filed as an exhibit to this registration statement, the underwriters will agree to indemnify directors and our officers and persons controlling us, within the meaning of the Securities Act against certain liabilities that might arise out of or are based upon certain information furnished to us by any such underwriter.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
None.
Report of Independent Registered Public Accounting Firm
The
Board of Directors and Stockholders
CF Industries, Inc.:
Under date of May 13, 2005, we reported on the consolidated balance sheets of CF Industries, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2004, which are included in the prospectus. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule in the registration statement. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/
KPMG LLP
Chicago, Illinois
May 13, 2005
II-2
(b) Financial Statement Schedule
Valuation and Qualifying AccountsYear 2002
(000s)
|
Beginning
Balance |
Charged to Costs
and Expenses |
Charged to
Other Accounts |
Deductions
Amt |
Description
|
Ending
Balance |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Accounts Receivable | ||||||||||||||||||
Allowance for Bad Debts | $ | 889 | $ | 11 | $ | 0 | $ | (265 | ) | Accounts not collectible | $ | 635 |
Valuation and Qualifying AccountsYear 2003
(000s)
|
Beginning
Balance |
Charged to Costs
and Expenses |
Charged to
Other Accounts |
Deductions
Amt |
Description
|
Ending
Balance |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Accounts Receivable | ||||||||||||||||||
Allowance for Bad Debts | $ | 635 | $ | 25 | $ | 0 | $ | (100 | ) | Accounts not collectible | $ | 560 |
Valuation and Qualifying AccountsYear 2004
(000s)
|
Beginning
Balance |
Charged to Costs
and Expenses |
Charged to
Other Accounts |
Deductions
Amt |
Description
|
Ending
Balance |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Accounts Receivable | ||||||||||||||||||
Allowance for Bad Debts | $ | 560 | $ | 143 | $ | 0 | $ | (169 | ) | Accounts not collectible | $ | 534 |
See Accompanying Report of Independent Registered Public Accounting Firm.
II-3
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
|
Exhibit No.
|
Description
|
|
---|---|---|---|
1.1 | Form of Underwriting Agreement* | ||
2.1 | Agreement and Plan of Merger dated as of July 21, 2005, by and among CF Industries Holdings, Inc., CF Merger Corp. and CF Industries, Inc. | ||
3.1 | Form of Amended and Restated Certificate of Incorporation | ||
3.2 | Form of Amended and Restated By-laws** | ||
4.1 | Specimen common stock certificate** | ||
4.2 | Rights Agreement, dated as of July 21, 2005, between the Registrant and The Bank of New York, as the Rights Agent | ||
4.3 | Form of Registration Rights Agreement | ||
5.1 | Opinion of Skadden, Arps, Slate, Meagher & Flom LLP | ||
10.1 | Multiple Year Contract for the Purchase and Sale of Fertilizer by and between CF Industries, Inc. and Agriliance, LLC dated as of June 20, 2005** | ||
10.2 | Multiple Year Contract for the Purchase and Sale of Fertilizer by and between CF Industries, Inc. and GROWMARK, Inc. dated as of June 20, 2005** | ||
10.3 | Multiple Year Contract for the Purchase and Sale of Fertilizer by and between CF Industries, Inc. and Southern States Cooperative, Incorporated dated as of June 20, 2005** | ||
10.4 | Change in Control Severance Agreement, effective as of April 29, 2005, by and among CF Industries, Inc., CF Industries Holdings, Inc. and Stephen R. Wilson** | ||
10.5 | Change in Control Severance Agreement, effective as of April 29, 2005, by and among CF Industries, Inc., CF Industries Holdings, Inc. and Ernest Thomas** | ||
10.6 | Change in Control Severance Agreement, effective as of April 29, 2005, by and among CF Industries, Inc., CF Industries Holdings, Inc. and Douglas C. Barnard** | ||
10.7 | Change in Control Severance Agreement, effective as of April 29, 2005, by and among CF Industries, Inc., CF Industries Holdings, Inc. and Stephen G. Chase** | ||
10.8 | Change in Control Severance Agreement, effective as of April 29, 2005, by and among CF Industries, Inc., CF Industries Holdings, Inc. and Philipp P. Koch** | ||
10.9 | Change in Control Severance Agreement, effective as of April 29, 2005, by and among CF Industries, Inc., CF Industries Holdings, Inc. and Monty R. Summa** | ||
10.10 | Form of Indemnification Agreement with Officers and Directors** | ||
10.11 | CF Industries Holdings, Inc. 2005 Equity and Incentive Plan | ||
10.12 | Form of Non-Qualified Stock Option Award Agreement | ||
10.13 | Form of Non-Employee Director Restricted Stock Agreement | ||
10.14 | Form of Change in Control Severance Agreement with Officers | ||
10.15 | Non-Employee Director Compensation Policy | ||
10.16 | Form of Change in Control Severance Agreement with David J. Pruett | ||
10.17 | Form of Net Operating Loss Agreement | ||
10.18 | CF Industries, Inc. Annual Incentive Plan | ||
21.1 | Subsidiaries of Registrant** | ||
23.1 | Consent of KPMG LLP, independent registered public accounting firm | ||
23.2 | Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.1) | ||
23.3 | Consent of John T. Boyd Company** | ||
24.1 | Power of Attorney (included on signature page)** | ||
99.1 | Consent of Director Nominee (Robert C. Arzbaecher)** | ||
99.2 | Consent of Director Nominee (Wallace W. Creek)** | ||
99.3 | Consent of Director Nominee (David R. Harvey)** | ||
99.4 | Consent of Director Nominee (Edward A. Schmitt)** |
II-4
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Long Grove, State of Illinois, on July 25, 2005.
CF INDUSTRIES HOLDINGS, INC. | ||||
|
|
By: |
|
/s/ STEPHEN R. WILSON Name: Stephen R. Wilson Title: President and Chief Executive Officer |
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities indicated on July 25, 2005.
Signature
|
Title
|
|
||
---|---|---|---|---|
|
|
|
|
|
/s/
STEPHEN R. WILSON
Stephen R. Wilson |
President and Chief Executive Officer, Director
(Principal Executive Officer) |
|||
/s/ ERNEST THOMAS Ernest Thomas |
|
Senior Vice President and Chief Financial Officer (Principal Financial Officer) |
|
|
/s/ ROBERT D. WEBB Robert D. Webb |
|
Vice President and Corporate Controller (Principal Accounting Officer) |
|
|
|
Exhibit No.
|
Description
|
|
---|---|---|---|
1.1 | Form of Underwriting Agreement* | ||
2.1 | Agreement and Plan of Merger dated as of July 21, 2005, by and among CF Industries Holdings, Inc., CF Merger Corp. and CF Industries, Inc. | ||
3.1 | Form of Amended and Restated Certificate of Incorporation | ||
3.2 | Form of Amended and Restated By-laws** | ||
4.1 | Specimen common stock certificate** | ||
4.2 | Rights Agreement, dated as of July 21, 2005, between the Registrant and The Bank of New York, as the Rights Agent | ||
4.3 | Form of Registration Rights Agreement | ||
5.1 | Opinion of Skadden, Arps, Slate, Meagher & Flom LLP | ||
10.1 | Multiple Year Contract for the Purchase and Sale of Fertilizer by and between CF Industries, Inc. and Agriliance, LLC dated as of June 20, 2005** | ||
10.2 | Multiple Year Contract for the Purchase and Sale of Fertilizer by and between CF Industries, Inc. and GROWMARK, Inc. dated as of June 20, 2005** | ||
10.3 | Multiple Year Contract for the Purchase and Sale of Fertilizer by and between CF Industries, Inc. and Southern States Cooperative, Incorporated dated as of June 20, 2005** | ||
10.4 | Change in Control Severance Agreement, effective as of April 29, 2005, by and among CF Industries, Inc., CF Industries Holdings, Inc. and Stephen R. Wilson** | ||
10.5 | Change in Control Severance Agreement, effective as of April 29, 2005, by and among CF Industries, Inc., CF Industries Holdings, Inc. and Ernest Thomas** | ||
10.6 | Change in Control Severance Agreement, effective as of April 29, 2005, by and among CF Industries, Inc., CF Industries Holdings, Inc. and Douglas C. Barnard** | ||
10.7 | Change in Control Severance Agreement, effective as of April 29, 2005, by and among CF Industries, Inc., CF Industries Holdings, Inc. and Stephen G. Chase** | ||
10.8 | Change in Control Severance Agreement, effective as of April 29, 2005, by and among CF Industries, Inc., CF Industries Holdings, Inc. and Philipp P. Koch** | ||
10.9 | Change in Control Severance Agreement, effective as of April 29, 2005, by and among CF Industries, Inc., CF Industries Holdings, Inc. and Monty R. Summa** | ||
10.10 | Form of Indemnification Agreement with Officers and Directors** | ||
10.11 | CF Industries Holdings, Inc. 2005 Equity and Incentive Plan | ||
10.12 | Form of Non-Qualified Stock Option Award Agreement | ||
10.13 | Form of Non-Employee Director Restricted Stock Agreement | ||
10.14 | Form of Change in Control Severance Agreement with Officers | ||
10.15 | Non-Employee Director Compensation Policy | ||
10.16 | Form of Change in Control Severance Agreement with David J. Pruett | ||
10.17 | Form of Net Operating Loss Agreement | ||
10.18 | CF Industries, Inc. Annual Incentive Plan | ||
21.1 | Subsidiaries of Registrant** | ||
23.1 | Consent of KPMG LLP, independent registered public accounting firm | ||
23.2 | Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.1) | ||
23.3 | Consent of John T. Boyd Company** | ||
24.1 | Power of Attorney (included on signature page)** | ||
99.1 | Consent of Director Nominee (Robert C. Arzbaecher)** | ||
99.2 | Consent of Director Nominee (Wallace W. Creek)** | ||
99.3 | Consent of Director Nominee (David R. Harvey)** | ||
99.4 | Consent of Director Nominee (Edward A. Schmitt)** |
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this " Agreement "), dated as of July 21, 2005, by and among CF Industries Holdings, Inc., a Delaware corporation (" Parent "), CF Merger Corp., a Delaware corporation and a wholly-owned subsidiary of Parent (" Sub "), and CF Industries, Inc., a Delaware corporation (the " Company ") (certain defined terms used herein and in the attachments hereto have meanings set forth in Attachment A hereto).
WHEREAS, Parent has been formed to facilitate a reorganization of the Company in connection with an initial public offering of Parent's common stock;
WHEREAS, the respective Boards of Directors of Sub and the Company each have determined that it is advisable and in the best interests of their respective companies and stockholders to enter into a business combination by means of the merger of Sub with and into the Company (the " Merger "), upon the terms and subject to the conditions set forth herein;
WHEREAS, concurrently herewith, the stockholders of the Company have delivered to the Company a Written Consent and Acknowledgment, in which, among, other things, (i) the stockholders of the Company have unanimously approved and adopted in all respects this Agreement and the transactions contemplated hereby, including the Merger and (ii) certain stockholders have made certain elections and designations provided for under this Agreement with respect to the types of consideration available under this Agreement; and
WHEREAS, Parent, Sub and the Company desire to make certain representations, warranties, covenants and agreements in connection with the Merger and also to prescribe various conditions to the Merger.
NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements contained in this Agreement, the parties hereto agree as follows:
ARTICLE I
The Merger
Section 1.1 The Merger. Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the DGCL, Sub shall be merged with and into the Company at the Effective Time. Following the Merger, the separate corporate existence of Sub shall cease, and the Company shall continue as the surviving corporation (the " Surviving Corporation ") and shall succeed to and assume all the rights and obligations of Sub in accordance with the DGCL.
Section 1.2 Closing. The Closing shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 333 West Wacker Drive, Chicago, Illinois, as soon as practicable, after satisfaction or waiver of the conditions set forth in Article VI (other than conditions that by their terms are to be satisfied at the Closing, but subject to the satisfaction or waiver of such conditions at the Closing), unless another place, time and date are agreed to in writing by Parent and the Company.
Section 1.3 Effective Time. Subject to the provisions of this Agreement, as soon as practicable after the Closing, the parties shall file the Certificate of Merger with the Secretary of State of the State of Delaware executed in accordance with the relevant provisions of the DGCL and shall make all other filings or recordings required under the DGCL in order to effect the Merger. The Merger shall become effective at such time as the Certificate of Merger is duly filed with the Secretary of State of the State of Delaware, or at such other time as Parent and the Company shall agree as specified in the Certificate of Merger (the time the Merger becomes effective being, the " Effective Time ").
Section 1.4 Effects of the Merger. The Merger shall have the effects set forth in Section 259 of the DGCL.
Section 1.5 Certificate of Incorporation and By-Laws.
(a) The certificate of incorporation of the Company, as in effect immediately prior to the Effective Time, shall upon the Effective Time be amended and restated in full to read as set forth in Exhibit A and as so amended and restated shall be the certificate of incorporation of the Surviving Corporation.
(b) The by-laws of Sub, as in effect immediately prior to the Effective Time, shall be the by-laws of the Surviving Corporation, except as to the name of the Surviving Corporation, which shall be CF Industries, Inc.
Section 1.6 Directors. The directors of Sub immediately prior to the Effective Time shall be the directors of the Surviving Corporation, until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be.
Section 1.7 Officers. The officers of the Company immediately prior to the Effective Time shall be the officers of the Surviving Corporation, until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be.
ARTICLE II
Effect of the Merger on the Capital Stock of the
Constituent Corporations; Exchange of Certificates
Section 2.1 Effect on Capital Stock. As of the Effective Time, by virtue of the Merger and without any action on the part of the holder of any shares of capital stock of the Company or Sub:
(a) Capital Stock of Sub. Each issued and outstanding share of capital stock of Sub shall be converted into and become one validly issued, fully paid and nonassessable share of common stock, par value $.01 per share, of the Surviving Corporation.
(b) Cancellation of Certain Treasury Stock. Each share of Patronage Preferred Stock that is owned by the Company or any Company Subsidiary (collectively, " Treasury Shares ") shall automatically be canceled and retired and shall cease to exist, and no consideration shall be delivered in exchange therefor. For the avoidance of doubt, Treasury Shares shall not be deemed to be issued and shall not be included for the purposes of any calculations pursuant to this Agreement.
(c) Cancellation of Company Common Stock, Senior Preferred Stock and Special Preferred Stock. Each share of Company Common Stock, Senior Preferred Stock and Special Preferred Stock shall automatically be canceled and retired and shall cease to exist, and no consideration shall be delivered in exchange therefor.
(d) Conversion of Patronage Preferred Stock. Each issued and outstanding share of Patronage Preferred Stock (other than shares to be canceled in accordance with Section 2.1(b)) shall be converted into, and become exchangeable for, in accordance with Section 2.2, (i) the Cash Consideration, (ii) the Stock Consideration or (iii) the Cash Consideration subject to receipt of Stock Consideration in lieu thereof as set forth in Section 2.3 (the " Contingent Consideration "), upon surrender, in the manner provided in Section 2.4, of the certificate that formerly evidenced such share of Patronage Preferred Stock.
Section 2.2 Allocation.
Shares of Patronage Preferred Stock shall be allocated amongst the types of Merger Consideration as set forth on Attachment B hereto. Notwithstanding anything to the contrary in this Agreement, (i) the aggregate number of shares of Patronage Preferred Stock to be converted into the right to receive Cash Consideration in the Merger (" Cash Shares ") shall be equal to the Offered Amount, (ii) the aggregate number of shares of Patronage Preferred Stock to be converted into the right to receive Stock Consideration in the Merger (" Stock Shares ") shall be equal to the Retained Amount and (iii) the aggregate number of shares of Patronage Preferred Stock to be converted into the right to receive Contingent Consideration in the Merger (" Contingent Shares ") shall be equal to the Contingent Amount.
Section 2.3 Contingent Consideration
Contingent Shares shall be converted into the right to receive Cash Consideration or Stock Consideration as set forth on Attachment C hereto.
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Section 2.4 Exchange of Certificates.
(a) Upon surrender of a Certificate for cancellation to the Surviving Corporation, together with a letter of transmittal, duly completed and validly executed, and such other documents as may reasonably be required by the Surviving Corporation, and in the case of Contingent Consideration, promptly after the expiration or exercise in full of the Over Allotment Option, the holder of such Certificate shall be entitled to receive in exchange therefor the applicable Merger Consideration (and, if applicable, the right to receive cash in lieu of fractional shares and any distributions pursuant to Sections 2.4(b) and 2.4(c)) for each share of Patronage Preferred Stock theretofore represented by such Certificate, and the Certificate so surrendered shall forthwith be canceled. Until surrendered as contemplated by this Section 2.4(a), each Certificate shall be deemed after the Effective Time to represent only the right to receive the applicable Merger Consideration (and, if applicable, the right to receive cash in lieu of fractional shares and any distributions pursuant to Sections 2.4(b) and 2.4(c)), without interest thereon.
(b) Distributions with Respect to Unexchanged Shares; Voting. All shares of Parent Common Stock to be issued pursuant to the Merger shall be deemed issued and outstanding as of the Effective Time and whenever a dividend or other distribution is declared by Parent in respect of the Parent Common Stock, the record date for which is at or after the Effective Time, that declaration shall include dividends or other distributions in respect of all shares issuable pursuant to this Agreement, provided that no dividends or other distributions declared or made in respect of the Parent Common Stock after the Effective Time shall be paid to the holder of any unsurrendered Certificate with respect to the shares of Parent Common Stock represented thereby until the holder of such Certificate shall surrender such Certificate in accordance with this Section 2.4. Thereafter, subject to the effect of applicable laws, following surrender of any such Certificate, there shall be issued and/or paid to the holder of the certificates representing whole shares of Parent Common Stock issued in exchange therefor, without interest, (A) at the time of such surrender, the dividends or other distributions with a record date at or after the Effective Time theretofore payable with respect to such whole shares of Parent Common Stock and not paid and (B) at the appropriate payment date, the dividends or other distributions payable with respect to such whole shares of Parent Common Stock with a record date at or after the Effective Time but with a payment date subsequent to surrender.
(c) Fractional Shares. Notwithstanding any other provision of this Agreement, no fractional shares of Parent Common Stock will be issued and any holder of Patronage Preferred Stock entitled to receive a fractional share of Parent Common Stock but for this Section 2.4(c) shall be entitled to receive a cash payment in lieu thereof, which payment shall equal the product of (i) such holder's proportionate interest in such share of Parent Common Stock, and (ii) the Public Offering Price.
(d) No Further Ownership Rights in Company Common Stock. All Merger Consideration (and, if applicable, the right to receive cash in lieu of fractional shares and any distributions pursuant to Sections 2.4(b) and 2.4(c)) paid in accordance with the terms of this Section 2.4 upon conversion of any shares of Patronage Preferred Stock shall be deemed to have been paid in full satisfaction of all rights pertaining to such shares of Patronage Preferred Stock. At the Effective Time, the stock transfer books of the Company shall be closed, and there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares of Patronage Preferred Stock that were outstanding immediately prior to the Effective Time. If, after the Effective Time, any Certificates are presented to the Surviving Corporation or Parent for any reason, they shall be canceled and exchanged as provided in this Article II.
(e) No Liability. Neither Parent nor the Surviving Corporation shall be liable to any holder of a Certificate for any Merger Consideration (and, if applicable, the right to receive cash in lieu of fractional shares and any distributions pursuant to Sections 2.4(b) and 2.4(c)) delivered to a public official pursuant to any applicable abandoned property, escheat or similar applicable Law.
(f) Lost Certificates. If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such Certificate to be lost, stolen or destroyed and, if required by the Surviving Corporation, the posting by such Person of a bond in such reasonable amount as the Surviving Corporation may direct as indemnity against any claim that may be made against it with respect to such Certificate, the Surviving Corporation shall issue in exchange for such lost, stolen or destroyed Certificate the Merger Consideration deliverable in respect thereof.
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(g) Withholding of Tax. The Surviving Corporation or Parent shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of Patronage Preferred Stock such amounts as the Surviving Corporation or Parent, as the case may be, is required to deduct and withhold with respect to such payment under the Code or any provisions of state, local or foreign Tax law. Any amounts so withheld shall be treated for all purposes of this Agreement as having been paid to the holder of the Patronage Preferred Stock in respect of which such deduction and withholding was made.
Section 2.5 Adjustment of Merger Consideration. Without limiting or in any way modifying the covenant of the Company set forth in Section 5.1, if prior to the Effective Time the outstanding shares of Patronage Preferred Stock shall have been changed into a different number of shares or a different class, by reason of any stock dividend, reclassification, recapitalization, split, division, combination, exchange of shares or similar transaction, the Merger Consideration shall be proportionately adjusted to reflect such change.
Section 2.6 Securities Laws Shares of Parent Common Stock issued as Stock Consideration will not be registered under the Securities Act of 1933, as amended, or under any applicable state laws and cannot be transferred, sold, assigned, pledged, hypothecated or otherwise disposed of unless they are registered under such act or an exemption from registration is available. Certificates evidencing such shares shall contain the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE " 1933 ACT "), OR UNDER ANY APPLICABLE STATE LAWS. THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED BY THE REGISTERED OWNER HEREOF FOR INVESTMENT AND NOT WITH A VIEW TO OR FOR SALE IN CONNECTION WITH ANY DISTRIBUTION THEREOF WITHIN THE MEANING OF THE 1933 ACT. NO TRANSFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION OF THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE MADE EXCEPT (A) PURSUANT TO A REGISTRATION STATEMENT EFFECTIVE UNDER THE 1933 ACT OR (B) IF THE COMPANY HAS BEEN FURNISHED WITH AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH TRANSFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF THE 1933 ACT AND THE RULES AND REGULATIONS THEREUNDER."
ARTICLE III
Representations and Warranties of the Company
The Company hereby represents and warrants to Parent and Sub as follows:
Section 3.1 Organization, Standing and Corporate Power. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own, lease, possess and operate its properties and assets and to carry on its business as now being conducted.
Section 3.2 Capital Structure. The authorized capital stock of the Company consists of 5,000 shares of Senior Preferred Stock, 500,000 shares of Special Preferred Stock, 10,000,000 shares of Patronage Preferred Stock and 100 shares of Common Stock. As of the date hereof, (a) 0 shares of Senior Preferred Stock are issued and outstanding, (b) 0 shares of Special Preferred Stock are issued and outstanding, (c) 7,343,018 shares of Patronage Preferred Stock are issued and outstanding and (d) 8 shares of Company Common Stock are issued and outstanding. Except as set forth above, as of the date hereof, no shares of capital stock or other voting securities of the Company are issued, reserved for issuance or outstanding. All outstanding shares of capital stock of the Company are duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights. There are no bonds, debentures, notes or other indebtedness of the Company or any Company Subsidiaries having the right to vote (or convertible into securities having the right to vote) on any matters on which stockholders of the Company may vote (" Voting Debt "). There are no securities, options, warrants, calls, conversion rights, stock appreciation rights, redemption rights, repurchase rights, preemptive rights, subscriptions or other rights, commitments, agreements, arrangements or undertakings of any kind to which the Company or any Company Subsidiary is a party, or by which either is
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bound, obligating the Company or any Company Subsidiary to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other securities or assets of the Company or any Company Subsidiary or obligating the Company or any Company Subsidiary to issue, grant, extend or enter into any such security, option, warrant, call, conversion right, stock appreciation right, redemption right, repurchase right, preemptive right, subscription or other right, commitment, agreement, arrangement or undertaking. There are no outstanding contractual obligations of the Company to repurchase, redeem or otherwise acquire any shares of capital stock of the Company.
Section 3.3 Authority; Noncontravention.
(a) The Company has all necessary corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated by this Agreement. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate action on the part of the Company. This Agreement has been duly executed and delivered by the Company and constitutes (assuming due authorization, execution and delivery by Parent and Sub) a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms.
(b) The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated by this Agreement and compliance with the provisions of this Agreement shall not, (i) conflict with, or result in any violation of, the certificate of incorporation or by-laws of the Company or any of the Subsidiary Organizational Documents, (ii) conflict with, or result in any violation of, any United States or foreign Law applicable to the Company or any Company Subsidiary or by which any property or asset of the Company or any Company Subsidiary is bound or affected or (iii) result in any breach of, or constitute a default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, amendment, cancellation or acceleration of any obligation or to a loss of a material benefit under, or result in the creation of any Liens in or upon any of the properties or assets of the Company or any Company Subsidiary, pursuant to any loan or credit agreement, note, bond, mortgage, indenture, lease, license, sublease, easement, covenant, condition, restriction, contract, instrument, permit, concession, franchise license or other instrument or obligation.
(c) No consent, approval, Order or authorization of, or registration, declaration or filing with, or notification to, any Governmental Entity is required by or with respect to the Company or any Company Subsidiaries in connection with the execution and delivery of this Agreement by the Company or the consummation by the Company of the transactions contemplated by this Agreement, except the filing of the Certificate of Merger with the Secretary of State of the State of Delaware and appropriate documents with the relevant authorities of other states in which the Company or any of the Company Subsidiaries is qualified to do business.
ARTICLE IV
Representations and Warranties of Parent and Sub
Parent and Sub hereby represent and warrant to the Company as follows:
Section 4.1 Organization, Standing and Corporate Power. Each of Parent and Sub is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated and has all requisite corporate power and authority to own, lease, possess and operate its properties and assets and to carry on its business as now being conducted.
Section 4.2 Capital Structure. At the Effective Time, the authorized capital stock of Parent shall consist of 500,000,000 shares of Common Stock and 50,000,000 shares of Preferred Stock, par value $0.01 per share (" Parent Preferred Stock "). Subject to the receipt of the applicable consideration therefor as contemplated by this Agreement, all shares of the capital stock of Parent that may be issued pursuant to this Agreement will be duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights.
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Section 4.3 Authority; Noncontravention.
(a) Parent and Sub each have all necessary corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated by this Agreement. The execution, delivery and performance of this Agreement by Parent and Sub and the consummation by Parent and Sub of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate action on the part of each of Parent and Sub. This Agreement has been duly executed and delivered by Parent and Sub and constitutes (assuming due authorization, execution and delivery by the Company) a valid and binding obligation of each of Parent and Sub, enforceable against each of Parent and Sub in accordance with its terms.
(b) The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated by this Agreement and compliance with the provisions of this Agreement shall not, (i) conflict with, or result in any violation of, the certificate of incorporation or by-laws of either of Parent or Sub, (ii) conflict with, or result in any violation of, any United States or foreign Law applicable to Parent or Sub or by which any property or asset of Parent or Sub is bound or affected, or (iii) result in any breach of, or constitute a default (with or without notice or lapse of time, or both) under any loan or credit agreement, note, bond, mortgage, indenture, lease, contract, instrument, permit, concession, franchise license or other instrument or obligation.
(c) No consent, approval, Order or authorization of, or registration, declaration or filing with, or notification to, any Governmental Entity is required by or with respect to Parent or Sub in connection with the execution and delivery of this Agreement by the Parent and Sub or the consummation by Parent or Sub of the transactions contemplated by this Agreement, except the filing of the Certificate of Merger with the Secretary of State of the State of Delaware.
ARTICLE V
Covenants
Section 5.1 Conduct of Business. During the period from the date of this Agreement to the Effective Time, the Company shall not:
(a) (i) declare, set aside or pay any dividends on, or make any other distributions (whether in cash, stock or property), in respect of, any of its capital stock, other than dividends and distributions by a direct or indirect wholly-owned Subsidiary to its parent, (ii) split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, (iii) purchase, redeem or otherwise acquire any shares of capital stock of the Company or any Company Subsidiary or any other securities thereof or any rights, warrants or options to acquire any such shares or other securities, or (iv) adopt a plan of complete or partial liquidation (or resolutions providing for or authorizing such liquidation), dissolution, merger, consolidation, restructuring, recapitalization or reorganization of the Company or any of the Company Subsidiaries (other than the Merger);
(b) issue, deliver, sell, grant or encumber or authorize the issuance, delivery, sale, grant or encumbrance of, (i) any shares of its capital stock, (ii) any Voting Debt or other voting securities, (iii) any securities convertible into or exchangeable for, or any options, warrants or rights to acquire, any such shares, voting securities or convertible or exchangeable securities or (iv) any "phantom" stock, "phantom" stock rights, stock appreciation rights or stock-based performance units;
(c) amend its certificate of incorporation, by-laws or other comparable charter or organizational documents; or
(d) authorize any of, or commit or agree to take any of, the foregoing actions.
Section 5.2 Indemnification.
(a) Parent and Sub agree that all rights to indemnification for acts or omissions occurring prior to the Effective Time now existing in favor of the directors or officers of the Company (each an " Indemnified Party ") as provided in its certificate of incorporation or bylaws shall survive the Merger and shall continue in full force and effect in accordance with their terms for a period of six (6) years
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following the Effective Time, and accordingly, during such period, the Surviving Corporation shall indemnify the Indemnified Parties to the same extent as such Indemnified Parties are entitled to indemnification.
(b) The provisions of this Section 5.2 are intended to be for the benefit of, and shall be enforceable by, each Indemnified Party and his or her heirs and representatives.
ARTICLE VI
Conditions Precedent
Section 6.1 Conditions to Each Party's Obligation to Effect the Merger. The respective obligation of each party to effect the Merger is subject to the satisfaction or waiver on or prior to the Closing Date of the following conditions: (i) the Minimum Equity Value shall be met and (ii) all conditions to the obligations of the underwriters set forth in the Underwriting Agreement shall have been satisfied or waived, other than a condition therein that all of the conditions to the transactions contemplated hereby have been satisfied or waived, and the consummation of the initial public offering of Parent Common Stock contemplated by the Underwriting Agreement shall be occurring concurrently with the consummation of the transactions contemplated hereby.
ARTICLE VII
Termination
Section 7.1 Termination. This Agreement may be terminated, and the Merger contemplated hereby may be abandoned, at any time prior to the Effective Time:
(a) by mutual written consent of Parent and the Company; or
(b) by Parent or the Company (i) upon the termination of the Underwriting Agreement pursuant to its terms or (ii) if the Effective Time has not occurred by December 31, 2005.
Section 7.2 Effect of Termination. In the event of termination of this Agreement by either the Company or Parent as provided in Section 7.1, this Agreement shall forthwith become void and have no effect, and there shall be no liability or obligation on the part of Parent, Sub or the Company, other than with respect to this Section 7.2 and Article VIII, which provisions shall survive such termination.
ARTICLE VIII
General Provisions
Section 8.1 Nonsurvival of Representations and Warranties. None of the representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time. This Section 8.1 shall not limit any covenant or agreement of the parties which by its terms contemplates performance after the Effective Time.
Section 8.2 Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be deemed given if delivered personally or sent by nationally recognized overnight courier (providing proof of delivery) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):
if to Parent or Sub, to:
CF
Industries Holdings, Inc.
One Salem Lake Drive
Long Grove, IL 60047-8402
Attention: General Counsel
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if to the Company, to:
CF
Industries, Inc.
One Salem Lake Drive
Long Grove, IL 60047-8402
Attention: General Counsel
Section 8.3 Interpretation. When a reference is made in this Agreement to a Section, Annex or Schedule, such reference shall be to a Section of, or an Annex or Schedule to, this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." The words "hereof," "herein", and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms.
Section 8.4 Counterparts. This Agreement may be executed (including by facsimile transmission) in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties.
Section 8.5 Entire Agreement; No Third-Party Beneficiaries. This Agreement and the agreements referred to herein constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, among the parties with respect transactions contemplated by this Agreement. Other than Section 5.2 of this Agreement, no provision of this Agreement is intended to confer upon any Person other than the parties hereto any rights or remedies.
Section 8.6 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, regardless of the applicable principles of conflict of laws thereof.
Section 8.7 Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned, in whole or in part, by operation of law or otherwise by any of the parties without the prior written consent of the other parties, except that Sub may assign, in its sole discretion, any or all of its rights, interests and obligations under this Agreement to Parent or to any direct wholly-owned Subsidiary of Parent, but no such assignment shall relieve Sub of any of its obligations hereunder. Any purported assignment without such consent shall be void. Subject to the preceding sentences, this Agreement shall be binding upon, inure to the benefit of and be enforceable by, the parties and their respective successors and assigns.
Section 8.8 Enforcement. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any federal court located in the State of Delaware or in any Delaware state court, this being in addition to any other remedy to which they are entitled at law or in equity. In addition, each of the parties hereto (a) consents to submit itself to the personal jurisdiction of any federal court located in the State of Delaware or of any Delaware state court in the event any dispute arises out of this Agreement or the transactions contemplated by this Agreement, (b) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court, (c) agrees that it will not bring any action relating to this Agreement or the transactions contemplated by this Agreement in any court other than a court of the United States located in the State of Delaware or a Delaware state court and (d) waives any right to trial by jury with respect to any action related to arising out of this Agreement or any of the transactions contemplated hereby.
Section 8.9 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible to the
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fullest extent permitted by applicable Law in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible.
Section 8.10 Amendment. This Agreement may be amended by the parties hereto at any time; provided that no amendment shall be made which by law requires further approval by the Company's stockholders without obtaining such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties.
Section 8.11 Extension; Waiver. At any time prior to the Effective Time, the parties may (a) extend the time for the performance of any of the obligations or other acts of the other parties, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto or (c) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. The failure of any party to this Agreement to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of such rights.
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IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement to be signed by their respective officers thereunto duly authorized, all as of the date first written above.
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CF INDUSTRIES HOLDINGS, INC. |
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/s/ STEPHEN R. WILSON |
Name: Stephen R. Wilson
Title: President and Chief Executive Officer |
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CF MERGER CORP. |
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By: |
/s/ STEPHEN R. WILSON |
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Name: Stephen R. Wilson Title: President and Chief Executive Officer |
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CF INDUSTRIES, INC. |
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By: |
/s/ STEPHEN R. WILSON |
Name: Stephen R. Wilson
Title: President and Chief Executive Officer |
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Attachment A
Defined Terms
As used in this Agreement (including the attachments), the following terms shall have the following meanings:
" Agreement " has the meaning set forth in the Preamble.
" Base Amount " means 4,405,811 shares of Patronage Preferred Stock
" Cash Consideration " means an amount of cash equal to the product of (i) the Patronage Preferred Value and (ii) a fraction (x) the numerator of which is the Purchase Price and (y) the denominator of which is the Public Offering Price.
" Cash Shares " has the meaning set forth in Section 2.2.
" Certificate of Merger " means a certificate of merger to be filed with the Secretary of State of the State of Delaware to effect the Merger.
" Certificates " means certificates evidencing shares of Patronage Preferred Stock entitled to receive the Merger Consideration pursuant to Section 2.1(d).
" Closing " means the closing of the Merger.
" Closing Date " means the date of the Closing.
" Code " the Internal Revenue Code of 1986, as amended.
" Company " has the meaning set forth in the Preamble.
" Company Common Stock " means Common Stock, par value $1,000.00 per share, of the Company.
" Company Subsidiary " means each Person which is a Subsidiary of the Company.
" Contingent Amount " means a number of shares of Patronage Preferred Stock equal to 15% of the Offered Amount.
" Contingent Consideration " has the meaning set forth in Section 2.1(d).
" Contingent Shares " has the meaning set forth in Section 2.2.
" control " means, as to any Person, the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. The term " controlled " shall have a correlative meaning.
" DGCL " means the Delaware General Corporation Law, as amended from time to time.
" Effective Time " has the meaning set forth in Section 1.3.
" Eligible Amount " means a number equal to the fraction (i) the numerator of which is the product of (x) the Exercised Over Allotment Amount and (y) the Public Offering Price and (ii) the denominator of which is the Patronage Preferred Value.
" Excess Amount " has the meaning set forth in Attachment B.
" Exercised Over Allotment Amount " means the aggregate number of all " additional shares " of Parent Common Stock actually purchased, if any, pursuant to the Over Allotment Option at such time as the option expires or is exercised in full.
" Governmental Entity " means any:
(i) federal, state, local, municipal or foreign government;
(ii) governmental or quasi-governmental authority of any nature (including any governmental agency, branch, board, department, official, instrumentality or entity and any court or other tribunal);
(iii) multi-national organization or body; or
(iv) body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory, or taxing authority or power of any nature.
" Indemnified Party " has the meaning set forth in Section 5.2(a).
" Laws " means statutes, laws, ordinances, regulations, rules, judgments, codes, executive orders, injunctions, decrees and orders of any Governmental Entity.
" Liens " means liens, charges, security interests, options, claims, mortgages, pledges, or other encumbrances and restrictions of any nature whatsoever.
" Merger " has the meaning set forth in the Preamble.
" Merger Consideration " means the Cash Consideration, the Stock Consideration and the Contingent Consideration, as applicable.
" Minimum Equity Value " means the dollar amount established by the Stockholders in the Written Consent and Acknowledgement as the minimum acceptable sum of (i) the product of the Public Offering Price and the Retained Amount and (ii) the product of the Purchase Price and the sum of the Contingent Amount and Offered Amount.
" Offered Amount " means the number of shares of Patronage Preferred Stock designated by the Pricing Committee of the Board of Directors of the Company on or prior to the date the Underwriting Agreement is executed and delivered by Parent; provided , however , that the Offered Amount shall be within the range established by the Stockholders in the Written Consent and Acknowledgement.
" Order " means with respect to any Person, any award, decision, injunction, judgment, stipulation, order, ruling, subpoena, writ, decree, consent decree, or verdict entered, issued, made, or rendered by any court, administrative agency, arbitrator or other Governmental Entity affecting such Person or any of its properties.
" Over Allotment Option " means the over allotment option provided for in the Underwriting Agreement.
" Parent " has the meaning set forth in the Preamble.
" Parent Common Stock " means the Common Stock, par value $0.01 per share, of Parent.
" Parent Preferred Stock " has the meaning set forth in Section 4.2.
" Patronage Preferred Stock " means the Patronage Preferred Stock, par value $100.00 per share, of the Company.
" Patronage Preferred Value " means an amount equal to the product of (i) the aggregate number of " firm shares " of Parent Common Stock to be purchased by the underwriters pursuant to the Underwriting Agreement, (ii) the Public Offering Price and (iii) 1/Offered Amount.
" Person " means any individual, firm, corporation (including any non-profit corporation), general or limited partnership, company, limited liability company, trust, joint venture, estate, association, organization, labor union, or other entity or Governmental Entity.
" Public Offering Price " means the " public offering price " to be paid for each share of Parent Common Stock by the public pursuant to the Underwriting Agreement; provided , however , that the Public Offering Price shall be approved by the Pricing Committee of the Board of Directors of the Company on or prior to the date the Underwriting Agreement is executed and delivered by Parent.
" Purchase Price " means the " purchase price " to be paid for each share of Parent Common Stock by the underwriters pursuant to the Underwriting Agreement; provided , however , that the Purchase Price shall be approved by the Pricing Committee of the Board of Directors of the Company on or prior to the date the Underwriting Agreement is executed and delivered by Parent.
" Remaining Contingent Amount " has the meaning set forth in Attachment B.
" Retained Amount " means a number of shares of Patronage Preferred Stock equal to 7,343,018 minus (i) the Offered Amount and (ii) the Contingent Amount.
" Senior Preferred Stock " means the Senior Preferred Stock, par value $100.00 per share, of the Company.
" Special Preferred Stock " means the Special Preferred Stock, par value $100.00 per share, of the Company.
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" Stock Shares " has the meaning set forth in Section 2.2.
" Stock Consideration " means a number of shares of Parent Common Stock equal to (i) the Patronage Preferred Value divided by (ii) the Public Offering Price.
" Sub " has the meaning set forth in the Preamble.
" Subsidiary " or " Subsidiaries " means, with respect to any Person, any corporation, association, general or limited partnership, company, limited liability company, trust, joint venture, organization or other entity of which more than 50% of the total voting power of shares of capital stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by (i) such Person, (ii) such Person and one or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such Person.
" Subsidiary Organizational Documents " means the certificate of incorporation and by-laws or similar organizational documents of each Company Subsidiary.
" Surviving Corporation " has the meaning set forth in Section 1.1.
" Tax " or " Taxes " means any and all present or future taxes (including income, gross receipt, minimum or alternative minimum taxable income, sales, rental, use, turnover, value added taxes that are in the nature of sales and use taxes, property (tangible and intangible), transfer, capital, excise and stamp taxes), licenses, levies, imposts, duties, recording charges or fees, charges, assessments and withholdings of any nature whatsoever, together with any and all assessments, penalties, fines, additions thereto and interest thereon, in each case, imposed by any Governmental Entity.
" Topoff Amount " has the meaning set forth in Attachment B.
" Tranche One " has the meaning set forth in Attachment B.
" Tranche Two " has the meaning set forth in Attachment B.
" Tranche Three " has the meaning set forth in Attachment B.
" Treasury Shares " has the meaning set forth in Section 2.1(b).
" Underwriting Agreement " means the underwriting agreement associated with the initial public offering of Parent Common Stock.
" Voting Debt " has the meaning set forth in Section 3.2.
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Attachment B
Allocation of Merger Consideration
Shares of Patronage Preferred Stock shall be allocated amongst the types of Merger Consideration as follows:
1. first to Cash Shares on a pro rata basis based on the number of shares of Patronage Preferred Stock held by each holder until the lesser of the Base Amount or the Offered Amount is reached;
2. second, if the Offered Amount exceeds the Base Amount (such excess number of shares of Patronage Preferred Stock, the " Excess Amount "), to Cash Shares on a pro rata basis based on the number of shares of Patronage Preferred Stock held by each holder until the Excess Amount is reached; provided , however , that any holder of Patronage Preferred Stock may elect not to participate in the allocation provided by this paragraph and then the Excess Amount shall be allocated on a pro rata basis among the holders of Patronage Preferred Stock who did not make such an election based on the number of shares of Patronage Preferred Stock held by each such holder;
3. third, if the Offered Amount is less than the Base Amount (the number of shares of Patronage Preferred Stock Preferred Stock equal to such difference, the " Topoff Amount "), to Contingent Shares (which shall be deemed to be in " Tranche One " for purposes of this Agreement) on a pro rata basis based on the number of shares of Patronage Preferred Stock held by each holder until the lesser of the Contingent Amount or the Topoff Amount is reached;
4. fourth, if either
(A) the Offered Amount is less than the Base Amount and the Contingent Amount is greater than the Topoff Amount (such excess number of shares of Patronage Preferred Stock, the " Remaining Contingent Amount ") or
(B) the Offered Amount is greater than or equal to the Base Amount, to Contingent Shares (which shall be deemed to be in " Tranche Two " for purposes of this Agreement) on a pro rata basis based on the number of shares of Patronage Preferred Stock held by each holder until the Remaining Contingent Amount or the Contingent Amount, as applicable, is reached, provided , however , no allocation of Contingent Shares shall be made pursuant to this paragraph to any holder of Patronage Preferred Stock who elected not to participate in an allocation of the Excess Amount; provided further , however, that a holder (other than a holder who elected not to participate in an allocation of the Excess Amount) may elect not to receive what would otherwise be its full allocation of Contingent Shares to the extent such election and reduction in its allocation results in all remaining shares of Patronage Preferred Stock that are held by other holders of Patronage Preferred Stock (other than a holder who elected not to participate in an allocation of the Excess Amount) being Contingent Shares, and in the event such election results in a reduction in the number of Contingent Shares that are allocated to the electing holder, then any Contingent Shares that are allocated to a holder making such an election shall be deemed to be in " Tranche Three " for purposes of this Agreement (but no such election shall be effective unless the Offered Amount is greater than or equal to 5,507,264); and
5. fifth, all remaining shares of Patronage Preferred Stock shall be allocated to Stock Shares; provided , however , if a holder of Patronage Preferred Stock has made the election contemplated by paragraph 4 and such election is effective, a number of shares of Patronage Preferred Stock held by such electing holder equal to the difference between (i) the number of Contingent Shares that would have otherwise been allocated to the stockholder making such election but for such election and (ii) the number of Contingent Shares allocated to such stockholder taking into account such election shall not be converted into Stock Shares until the Eligible Amount is determined and if paragraph 3 of Attachment C is not applicable, all such shares shall be deemed to be Contingent Shares in Tranche Two, any Contingent Shares held by such holder previously in Tranche Three shall also be deemed to be in Tranche Two and any excess Contingent Shares previously allocated to other holders of Preferred Stock as a result of such election shall be allocated to Stock Shares.
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Attachment C
Conversion of Contingent Shares
Contingent Shares shall be converted into the right to receive Cash Consideration or Stock Consideration as follows.:
1. Unless paragraph 3 below applies, if the Eligible Amount is equal to the number of Contingent Shares, all Contingent Shares shall be converted into the right to receive the Cash Consideration.
2. Alternatively, if the Eligible Amount is less than the number of Contingent Shares, and there are Contingent Shares in Tranche One:
(a) A number of Contingent Shares, if any, equal to the Eligible Amount shall be converted into the right to receive the Cash Consideration as follows:
(1) first, all Contingent Shares in Tranche One shall be converted into the right to receive the Cash Consideration on a pro-rata basis (based on each holder's aggregate number of Contingent Shares in Tranche One), and
(2) second, to extent the Eligible Amount exceeds the number of Contingent Shares in Tranche One, Contingent Shares in Tranche Two shall be converted into the right to receive the Cash Consideration on a pro-rata basis (based on each holder's aggregate number of Contingent Shares in Tranche Two); and
(b) Any remaining Contingent Shares not converted into the right to receive the Cash Consideration pursuant to paragraph 2(a) above shall be converted into the right to receive the Stock Consideration.
3. Alternatively, if the Offered Amount is greater than or equal to 5,507,264, any holder has elected to have any Contingent Shares it receives deemed to be in Tranche Three for purposes of this Agreement, and the Eligible Amount is greater than or equal to the number of Contingent Shares in Tranche Two after taking into account such holder's election:
(a) A number of Contingent Shares, if any, equal to the Eligible Amount shall be converted into the right to receive the Cash Consideration as follows:
(1) first, all Contingent Shares in Tranche Two shall be converted into the right to receive the Cash Consideration on a pro-rata basis (based on each holder's aggregate number of Contingent Shares in Tranche Two), and
(2) second, to extent the Eligible Amount exceeds the number of Contingent Shares in Tranche Two, Contingent Shares in Tranche Three shall be converted into the right to receive the Cash Consideration on a pro-rata basis (based on each holder's aggregate number of Contingent Shares in Tranche Three); and
(b) Any remaining Contingent Shares not converted into the right to receive the Cash Consideration pursuant to paragraph 3(a) above shall be converted into the right to receive the Stock Consideration.
(4) Alternatively, if none of paragraph 1, 2 or 3 above applies, then:
(a) A number of Contingent Shares, if any, equal to the Eligible Amount shall be converted into the right to receive the Cash Consideration on a pro-rata basis (based on each holder's aggregate number of Contingent Shares), and
(b) Any remaining Contingent Shares not converted into the right to receive the Cash Consideration pursuant to paragraph 4(a) above shall be converted into the right to receive the Stock Consideration.
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EXHIBIT A
FORM OF AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CF INDUSTRIES, INC.
FIRST : The name of the Corporation is CF Industries, Inc. (hereinafter the "Corporation").
SECOND : The address of the registered office of the Corporation in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at that address is The Corporation Trust Company.
THIRD : The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware as set forth in Title 8 of the Delaware Code (the "GCL").
FOURTH : The total number of shares of stock which the Corporation shall have authority to issue is 1000 shares of Common Stock, each having a par value of one penny ($.01).
FIFTH : The following provisions are inserted for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its directors and stockholders:
(1) The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors.
(2) The directors shall have concurrent power with the stockholders to make, alter, amend, change, add to or repeal the By-Laws of the Corporation.
(3) The number of directors of the Corporation shall be as from time to time fixed by, or in the manner provided in, the By-Laws of the Corporation. Election of directors need not be by written ballot unless the By-Laws so provide.
(4) No director shall be personally liable to the Corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the GCL or (iv) for any transaction from which the director derived an improper personal benefit. Any repeal or modification of this Article FIFTH by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification.
(5) In addition to the powers and authority hereinbefore or by statute expressly conferred upon them, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, subject, nevertheless, to the provisions of the GCL, this Certificate of Incorporation, and any By-Laws adopted by the stockholders; provided , however , that no By-Laws hereafter adopted by the stockholders shall invalidate any prior act of the directors which would have been valid if such By-Laws had not been adopted.
SIXTH : Meetings of stockholders may be held within or without the State of Delaware, as the By-Laws may provide. The books of the Corporation may be kept (subject to any provision contained in the GCL) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the By-Laws of the Corporation.
SEVENTH : The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation.
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AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CF INDUSTRIES HOLDINGS, INC.
Pursuant
to Sections 241 and 245 of the
Delaware General Corporation Law
CF Industries Holdings, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the " DGCL "), does hereby certify as follows:
1. The name of the corporation is CF Industries Holdings, Inc. (the " Corporation "). The Corporation was originally incorporated under the name CF Industries Holdings, Inc. The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on April 15, 2005.
2. The Corporation has not received payment for any of its stock.
3. This Amended and Restated Certificate of Incorporation was duly adopted by the Board of Directors of the Corporation (the "Board of Directors") in accordance with Sections 241 and 245 of the DGCL.
The text of the Certificate of Incorporation is hereby amended and restated in its entirety to read as follows:
ARTICLE I
The name of the Corporation is CF Industries Holdings, Inc.
ARTICLE II
The address of the registered office of the Corporation in the State of Delaware is 1209 Orange Street, Wilmington, County of New Castle. The name of its registered agent is The Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the DGCL.
ARTICLE IV
(A) Authorized Capital Stock . The total number of shares of stock which the Corporation shall have authority to issue is 550,000,000 shares of capital stock, consisting of (i) 500,000,000 shares of common stock, par value $0.01 per share (the "Common Stock") and (ii) 50,000,000 shares of preferred stock, par value $0.01 per share (the "Preferred Stock").
(B) Preferred Stock . Except as provided in Article IV(C), with respect to Series A Junior Participating Preferred Stock (as hereinafter defined), the Board of Directors is hereby expressly authorized to provide for the issuance of all or any shares of the Preferred Stock in one or more classes or series, and to fix for each such class or series such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions adopted by the Board of Directors providing for the issuance of such class or series, including, without limitation, the authority to provide that any such class or series may be (i) subject to redemption at such time or times and at such price or prices; (ii) entitled to receive dividends (which may be cumulative or non-cumulative) at such rates, on such conditions, and at such times, and payable in preference to, or in such relation to, the dividends payable on any other class or classes or any other series; (iii) entitled to such rights upon the dissolution of, or upon any distribution of the assets of, the Corporation; or (iv) convertible into, or exchangeable for, shares of any other class or classes of stock,
or of any other series of the same or any other class or classes of stock, of the Corporation at such price or prices or at such rates of exchange and with such adjustments; all as may be stated in such resolution or resolutions.
(C) Series A Junior Participating Preferred Stock . There is hereby created a series of Preferred Stock, designated Series A Junior Participating Preferred Stock having the terms, rights and privileges set forth in Exhibit A attached hereto.
(D) Power to Sell and Purchase Shares . Subject to the requirements of applicable law, the Corporation shall have the power to issue and sell all or any part of any shares of any class of stock herein or hereafter authorized to such persons, and for such consideration, as the Board of Directors shall from time to time, in its discretion, determine, whether or not greater consideration could be received upon the issue or sale of the same number of shares of another class, and as otherwise permitted by law. Subject to the requirements of applicable law, the Corporation shall have the power to purchase any shares of any class of stock herein or hereafter authorized from such persons, and for such consideration, as the Board of Directors shall from time to time, in its discretion, determine, whether or not less consideration could be paid upon the purchase of the same number of shares of another class, and as otherwise permitted by law.
ARTICLE V
The following provisions are inserted for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its directors and stockholders:
(A) The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors.
(B) The Board of Directors shall consist of not less than 3 or more than 15 members, the exact number of which shall be fixed from time to time by resolution adopted by the affirmative vote of a majority of the entire Board of Directors.
(C) The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. The initial division of the Board of Directors into classes shall be made by the decision of the affirmative vote of a majority of the entire Board of Directors. The term of the initial Class I directors shall terminate on the date of the 2006 annual meeting; the term of the initial Class II directors shall terminate on the date of the 2007 annual meeting; and the term of the initial Class III directors shall terminate on the date of the 2008 annual meeting. At each succeeding annual meeting of stockholders beginning in 2006, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director.
(D) A director shall hold office until the annual meeting for the year in which his or her term expires and until his or her successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office.
(E) Subject to the terms of any one or more classes or series of Preferred Stock, any vacancy on the Board of Directors that results from an increase in the number of directors may only be filled by a majority of the Board of Directors then in office, provided that a quorum is present, and any other vacancy occurring on the Board of Directors may only be filled by a majority of the Board of Directors then in office, even if less than a quorum, or by a sole remaining director. Any director of any class elected to fill a vacancy resulting from an increase in the number of directors of such class shall hold office for a term that shall coincide with the remaining term of that class. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of his predecessor. Subject to the rights, if any, of the holders of shares of Preferred Stock then outstanding, any or all of the directors of the Corporation may be removed from office at any time, but
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only for cause and only by the affirmative vote of the holders of at least two-thirds of the voting power of the Corporation's then issued and outstanding capital stock entitled to vote generally at an election of directors of the Corporation. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this Amended and Restated Certificate of Incorporation applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Article V unless expressly provided by such terms.
(F) In addition to the powers and authority hereinbefore or by statute expressly conferred upon them, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, subject, nevertheless, to the provisions of the DGCL, this Amended and Restated Certificate of Incorporation, and any By-Laws adopted by the stockholders; provided , however , that no By-Laws hereafter adopted by the stockholders shall invalidate any prior act of the directors which would have been valid if such By-Laws had not been adopted.
ARTICLE VI
No director shall be personally liable to the Corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the DGCL as the same exists or may hereafter be amended. If the DGCL is amended hereafter to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent authorized by the DGCL, as so amended. Any repeal or modification of this Article VI shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification.
ARTICLE VII
The Corporation shall indemnify its directors and officers to the fullest extent authorized or permitted by law, as now or hereafter in effect, and such right to indemnification shall continue as to a person who has ceased to be a director or officer of the Corporation and shall inure to the benefit of his or her heirs, executors and personal and legal representatives; provided , however , that, except for proceedings to enforce rights to indemnification, the Corporation shall not be obligated to indemnify any director or officer (or his or her heirs, executors or personal or legal representatives) in connection with a proceeding (or part thereof) initiated by such person unless such proceeding (or part thereof) was authorized or consented to by the Board of Directors. The right to indemnification conferred by this Article VII shall include the right to be paid by the Corporation the expenses incurred in defending or otherwise participating in any proceeding in advance of its final disposition.
The Corporation may, to the extent authorized from time to time by the Board of Directors, provide rights to indemnification and to the advancement of expenses to employees and agents of the Corporation similar to those conferred in this Article VII to directors and officers of the Corporation.
The rights to indemnification and to the advancement of expenses conferred in this Article VII shall not be exclusive of any other right which any person may have or hereafter acquire under this Amended and Restated Certificate of Incorporation, the By-Laws of the Corporation, any statute, agreement, vote of stockholders or disinterested directors or otherwise.
Any repeal or modification of this Article VII shall not adversely affect any rights to indemnification and to the advancement of expenses of a director or officer of the Corporation existing at the time of such repeal or modification with respect to any acts or omissions occurring prior to such repeal or modification.
ARTICLE VIII
Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation, and the ability of the stockholders to consent in writing to the taking of any action is hereby specifically denied.
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ARTICLE IX
(A) Meetings of stockholders may be held within or without the State of Delaware, as the By-Laws may provide. The books of the Corporation may be kept (subject to any provision contained in the DGCL) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the By-Laws of the Corporation.
(B) Unless otherwise required by law, special meetings of stockholders, for any purpose or purposes, may be called by (i) the Chairman of the Board of Directors, if there be one, (ii) the President or (iii) the Board of Directors. The ability of the stockholders to call a special meeting of stockholders is hereby specifically denied.
ARTICLE X
In furtherance and not in limitation of the powers conferred upon it by the laws of the State of Delaware, the Board of Directors shall have the power to adopt, amend, alter or repeal the Corporation's By-Laws. The affirmative vote of at least a majority of the entire Board of Directors shall be required to adopt, amend, alter, change or repeal the Corporation's By-Laws. The Corporation's By-Laws also may be adopted, amended, altered, changed or repealed by the affirmative vote of the holders of at least two-thirds of the voting power of the Corporation's then issued and outstanding capital stock entitled to vote generally at an election of directors of the Corporation.
ARTICLE XI
The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Amended and Restated Certificate of Incorporation in the manner now or hereafter prescribed in this Amended and Restated Certificate of Incorporation, the Corporation's By-Laws or the DGCL, and all rights herein conferred upon stockholders are granted subject to such reservation; provided , however , that, notwithstanding any other provision of this Amended and Restated Certificate of Incorporation (and in addition to any other vote that may be required by law), the affirmative vote of the holders of at least two-thirds of the voting power of the Corporation's then issued and outstanding capital stock entitled to vote generally at an election of directors of the Corporation shall be required to amend, alter, change or repeal, or to adopt any provision inconsistent with Articles V , VIII , IX and X of this Amended and Restated Certificate of Incorporation or this Article XI .
IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated Certificate of Incorporation to be executed on its behalf this day of , 2005.
CF INDUSTRIES HOLDINGS, INC. | ||
By:
|
||
Name: | ||
Title: |
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SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
Section 1. Designation and Amount. The shares of such series shall be designated as "Series A Junior Participating Preferred Stock" and the number of shares constituting such series shall be 500,000.
Section 2. Dividends and Distributions.
(a) Subject to the prior and superior rights of the holder of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series A Junior Participating Preferred Stock with respect to dividends, the holders of shares of Series A Junior Participating Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the 15th day of [May, August, November and February] in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Junior Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $0.01 or (b) subject to the provision for adjustment hereinafter set forth, 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, par value $0.01 per share, of the Corporation (the "Common Stock") since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Junior Participating Preferred Stock. In the event the Corporation shall at any time after [ ], 2005 (the "Effective Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
(b) The Corporation shall declare a dividend or distribution on the Series A Junior Participating Preferred Stock as provided in Paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $0.01 per share on the Series A Junior Participating Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date.
(c) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Junior Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Junior Participating Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Junior Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof.
A-8
Section 3. Voting Rights. The holders of shares of Series A Junior Participating Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Junior Participating Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time after the Effective Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
(B) Except as otherwise provided herein or by law, the holders of shares of Series A Junior Participating Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation.
(C) (i) If at any time dividends on any Series A Junior Participating Preferred Stock shall be in arrears in an amount equal to six (6) quarterly dividends thereon, the occurrence of such contingency shall mark the beginning of a period (herein called a "default period") which shall extend until such time when all accrued and unpaid dividends for all previous quarterly dividend periods and for the current quarterly dividend period on all shares of Series A Junior Participating Preferred Stock then outstanding shall have been declared and paid or set apart for payment. During each default period, all holders of Preferred Stock (including holders of the Series A Junior Participating Preferred Stock) with dividends in arrears in an amount equal to six (6) quarterly dividends thereon, voting as a class, irrespective of series, shall have the right to elect two (2) directors.
(ii) During any default period, such voting right of the holders of Series A Junior Participating Preferred Stock may be exercised initially at a special meeting called pursuant to subparagraph (iii) of this Section 3(C) or at any annual meeting of stockholders, and thereafter at annual meetings of stockholders, provided that neither such voting right nor the right of the holders of any other series of Preferred Stock, if any, to increase, in certain cases, the authorized number of directors shall be exercised unless the holders of ten percent (10%) in number of shares of Preferred Stock outstanding shall be present in person or by proxy. The absence of a quorum of the holders of Common Stock shall not affect the exercise by the holders of Preferred Stock of such voting right. At any meeting at which the holders of Preferred Stock shall exercise such voting right initially during an existing default period, they shall have the right, voting as a class, to elect directors to fill such vacancies, if any, in the Board of Directors as may then exist up to two (2) directors or, if such right is exercised at an annual meeting, to elect two (2) directors. If the number which may be so elected at any special meeting does not amount to the required number, the holders of the Preferred Stock shall have the right to make such increase in the number of directors as shall be necessary to permit the election by them of the required number. After the holders of the Preferred Stock shall have exercised their right to elect directors in any default period and during the continuance of such period, the number of directors shall not be increased or decreased except by vote of the holders of Preferred Stock as herein provided or pursuant to the rights of any equity securities ranking senior to or pari passu with the Series A Junior Participating Preferred Stock.
(iii) Unless the holders of Preferred Stock shall, during an existing default period, have previously exercised their right to elect directors, the Board of Directors may order, or any stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding, irrespective of series, may request, the calling of a special meeting of the holders of Preferred Stock, which meeting shall thereupon be called by the President, a Vice-President or the Secretary of the Corporation. Notice of such meeting and of any annual meeting at which holders of Preferred Stock are entitled to vote pursuant to this Paragraph (C)(iii) shall be given to each holder of record of Preferred Stock by mailing a copy of such notice to him at his last address as the same appears on the books of the Corporation. Such meeting shall be called for a time not earlier than 20 days and not later than 60 days after such
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order or request or in default of the calling of such meeting within 60 days after such order or request, such meeting may be called on similar notice by any stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding. Notwithstanding the provisions of this Paragraph (C)(iii), no such special meeting shall be called during the period within 60 days immediately preceding the date fixed for the next annual meeting of the stockholders.
(iv) In any default period, the holders of Common Stock, and other classes of stock of the Corporation if applicable, shall continue to be entitled to elect the whole number of directors until the holders of Preferred Stock shall have exercised their right to elect two (2) directors voting as a class, after the exercise of which right (x) the directors so elected by the holders of Preferred Stock shall continue in office until their successors shall have been elected by such holders or until the expiration of the default period, and (y) any vacancy in the Board of Directors may (except as provided in Paragraph (C)(ii) of this Section 3) be filled by vote of a majority of the remaining directors theretofore elected by the holders of the class of stock which elected the director whose office shall have become vacant. References in this Paragraph (C) to directors elected by the holders of a particular class of stock shall include directors elected by such directors to fill vacancies as provided in clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the right of the holders of Preferred Stock as a class to elect directors shall cease, (y) the term of any directors elected by the holders of Preferred Stock as a class shall terminate, and (z) the number of directors shall be such number as may be provided for in the certificate of incorporation or by-laws irrespective of any increase made pursuant to the provisions of Paragraph (C)(ii) of this Section 3 (such number being subject, however, to change thereafter in any manner provided by law or in the certificate of incorporation or by-laws). Any vacancies in the Board of Directors effected by the provisions of clauses (y) and (z) in the preceding sentence may be filled by a majority of the remaining directors.
(D) Except as set forth herein, holders of Series A Junior Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Junior Participating Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Junior Participating Preferred Stock outstanding shall have been paid in full, the Corporation shall not
(i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock;
(ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, except dividends paid ratably on the Series A Junior Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Junior Participating Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares of Series A Junior Participating Preferred Stock, or any shares of stock ranking on a parity with the Series A Junior Participating Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights
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and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under Paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Junior Participating Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein.
Section 6. Liquidation, Dissolution or Winding Up. (A) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Series A Junior Participating Preferred Stock shall have received an amount equal to $1,000 per share of Series A Participating Preferred Stock, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "Series A Liquidation Preference"). Following the payment of the full amount of the Series A Liquidation Preference, no additional distributions shall be made to the holders of shares of Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the "Common Adjustment") equal to the quotient obtained by dividing (i) the Series A Liquidation Preference by (ii) 1,000 (as appropriately adjusted as set forth in subparagraph (C) below to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii), the "Adjustment Number"). Following the payment of the full amount of the Series A Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Series A Junior Participating Preferred Stock and Common Stock, respectively, holders of Series A Junior Participating Preferred Stock and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to 1 with respect to such Preferred Stock and Common Stock, on a per share basis, respectively.
(B) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of preferred stock, if any, which rank on a parity with the Series A Junior Participating Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock.
(C) In the event the Corporation shall at any time after the Effective Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Junior Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding
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Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Junior Participating Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series A Junior Participating Preferred Stock shall not be redeemable.
Section 9. Ranking. The Series A Junior Participating Preferred Stock shall rank junior to all other series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise.
Section 10. Amendment. At any time when any shares of Series A Junior Participating Preferred Stock are outstanding, neither the Amended and Restated Certificate of Incorporation of the Corporation nor this Certificate of Designation shall be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Junior Participating Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding shares of Series A Junior Participating Preferred Stock, voting separately as a class.
Section 11. Fractional Shares. Series A Junior Participating Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Junior Participating Preferred Stock.
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Exhibit 4.2
RIGHTS AGREEMENT
dated as of
July 21, 2005
between
CF Industries Holdings, Inc.
and
The Bank of New York
Rights Agent
|
|
Page
|
|
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Section 1. | Certain Definitions | 1 | |
Section 2. | Appointment of Rights Agent | 3 | |
Section 3. | Issuance of Rights Certificates | 3 | |
Section 4. | Form of Rights Certificates | 4 | |
Section 5. | Countersignature and Registration | 5 | |
Section 6. | Transfer, Split-Up, Combination and Exchange of Rights Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates | 6 | |
Section 7. | Exercise of Rights; Purchase Price; Expiration Date of Rights | 6 | |
Section 8. | Cancellation and Destruction of Rights Certificates | 7 | |
Section 9. | Reservation and Availability of Capital Stock | 8 | |
Section 10. | Preferred Stock Record Date | 9 | |
Section 11. | Adjustment of Purchase Price, Number and Kind of Shares or Number of Rights | 9 | |
Section 12. | Certificate of Adjusted Purchase Price or Number of Shares | 14 | |
Section 13. | Consolidation, Merger or Sale or Transfer of Assets Cash Flow or Earning Power | 14 | |
Section 14. | Fractional Rights and Fractional Shares | 16 | |
Section 15. | Rights of Action | 16 | |
Section 16. | Agreement of Rights Holders | 17 | |
Section 17. | Rights Certificate Holder Not Deemed a Stockholder | 17 | |
Section 18. | Concerning the Rights Agent | 17 | |
Section 19. | Merger or Consolidation or Change of Name of Rights Agent | 18 | |
Section 20. | Duties of Rights Agent | 18 | |
Section 21. | Change of Rights Agent | 19 | |
Section 22. | Issuance of New Rights Certificates | 20 | |
Section 23. | Redemption and Termination | 20 | |
Section 24. | Exchange | 21 | |
Section 25. | Notice of Certain Events | 21 | |
Section 26. | Notices | 22 | |
Section 27. | Supplements and Amendments | 22 | |
Section 28. | Successors | 23 | |
Section 29. | Determinations and Actions by the Board of Directors, etc. | 23 | |
Section 30. | Benefits of this Agreement | 23 | |
Section 31. | Severability | 23 | |
Section 32. | Governing Law | 23 | |
Section 33. | Counterparts | 23 | |
Section 34. | Descriptive Headings | 23 | |
EXHIBITS |
|||
Exhibit A | Form of Certificate of Designation, Preferences and Rights | ||
Exhibit B | Form of Rights Certificate | ||
Exhibit C | Form of Summary of Rights |
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RIGHTS AGREEMENT, dated as of July 21, 2005 (the " Agreement "), between CF Industries Holdings, Inc., a Delaware corporation (the " Company "), and The Bank of New York, a New York banking corporation (the " Rights Agent ").
W I T N E S S E T H
WHEREAS, effective as of July 21, 2005 (the " Effective Date "), the Board of Directors of the Company authorized the issuance of one Right (as such number may hereinafter be adjusted pursuant to the provisions of Section 11(p) hereof) for each share of common stock, par value $0.01 per share, of the Company (the "Common Stock") issued between the Effective Date (whether originally issued or delivered from the Company's treasury) and the Distribution Date (as hereinafter defined), each Right initially representing the right to purchase one one-thousandth of a share of Series A Junior Participating Preferred Stock of the Company (the " Preferred Stock ") having the rights, powers and preferences set forth in the form of Certificate of Designation, Preferences and Rights attached hereto as Exhibit A, upon the terms and subject to the conditions hereinafter set forth (the " Rights ");
NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the following terms have the meanings indicated:
(a) " Acquiring Person " shall mean any Person who or which, together with all Affiliates and Associates of such Person, shall be the Beneficial Owner of 15% or more of the shares of Common Stock then outstanding, but shall not include (i) the Company, (ii) any Subsidiary of the Company, (iii) any employee benefit plan of the Company, or of any Subsidiary of the Company, or any Person or entity organized, appointed or established by the Company for or pursuant to the terms of any such plan, (iv) any Person who becomes the Beneficial Owner of fifteen percent (15%) or more of the shares of Common Stock then outstanding as a result of a reduction in the number of shares of Common Stock outstanding due to the repurchase of shares of Common Stock by the Company unless and until such Person, after becoming aware that such Person has become the Beneficial Owner of fifteen percent (15%) or more of the then outstanding shares of Common Stock, acquires beneficial ownership of additional shares of Common Stock representing one percent (1%) or more of the shares of Common Stock then outstanding, or (v) any such Person who has reported or is required to report such ownership (but less than 20%) on Schedule 13G under the Exchange Act (or any comparable or successor report) or on Schedule 13D under the Exchange Act (or any comparable or successor report) which Schedule 13D does not state any intention to or reserve the right to control or influence the management or policies of the Company or engage in any of the actions specified in Item 4 of such schedule (other than the disposition of the Common Stock) and, within 10 Business Days of being requested by the Company to advise it regarding the same, certifies to the Company that such Person acquired shares of Common Stock in excess of 14.9% inadvertently or without knowledge of the terms of the Rights and who or which, together with all Affiliates and Associates, thereafter does not acquire additional shares of Common Stock while the Beneficial Owner of 15% or more of the shares of Common Stock then outstanding; provided , however , that if the Person requested to so certify fails to do so within 10 Business Days, then such Person shall become an Acquiring Person immediately after such 10-Business-Day period.
(b) " Act " shall mean the Securities Act of 1933, as amended.
(c) " Adjustment Shares " shall have the meaning set forth in Section 11(a)(ii) hereof.
(d) " Affiliate " and " Associate " shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act.
(e) A Person shall be deemed the " Beneficial Owner " of, and shall be deemed to " beneficially own ," any securities:
(i) which such Person or any of such Person's Affiliates or Associates, directly or indirectly, has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (whether or not in writing) or upon the exercise of conversion rights, exchange rights, other rights, warrants or options, or otherwise; provided , however , that a Person shall not be deemed the "Beneficial Owner" of, or to "beneficially own," (A) securities tendered pursuant to a tender or exchange offer made by such
Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange, (B) securities issuable upon exercise of Rights at any time prior to the occurrence of a Triggering Event (as hereinafter defined), or (C) securities issuable upon exercise of Rights from and after the occurrence of a Triggering Event which Rights were acquired by such Person or any of such Person's Affiliates or Associates prior to the Distribution Date (as hereinafter defined) or pursuant to Section 3(a) or Section 22 hereof (the " Original Rights ") or pursuant to Section 11(i) hereof in connection with an adjustment made with respect to any Original Rights;
(ii) which such Person or any of such Person's Affiliates or Associates, directly or indirectly, has the right to vote or dispose of or has "beneficial ownership" of (as determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Exchange Act), including pursuant to any agreement, arrangement or understanding, whether or not in writing; provided , however , that a Person shall not be deemed the "Beneficial Owner" of, or to "beneficially own," any security under this subparagraph (ii) as a result of an agreement, arrangement or understanding to vote such security if such agreement, arrangement or understanding: (A) arises solely from a revocable proxy given in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable provisions of the General Rules and Regulations under the Exchange Act, and (B) is not reportable by such Person on Schedule 13D under the Exchange Act (or any comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly, by any other Person (or any Affiliate or Associate thereof) with which such Person (or any of such Person's Affiliates or Associates) has any agreement, arrangement or understanding (whether or not in writing), for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy as described in the proviso to subparagraph (ii) of this paragraph (d)) or disposing of any voting securities of the Company; provided , however , that nothing in this paragraph (d) shall cause a Person engaged in business as an underwriter of securities to be the "Beneficial Owner" of, or to "beneficially own," any securities acquired through such Person's participation in good faith in a firm commitment underwriting until the expiration of forty days after the date of such acquisition, and then only if such securities continue to be owned by such Person at such expiration of forty days.
(f) " Business Day " shall mean any day other than a Saturday, Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close.
(g) " Close of business " on any given date shall mean 5:00 P.M., New York City time, on such date; provided , however , that if such date is not a Business Day, it shall mean 5:00 P.M., New York City time, on the next succeeding Business Day.
(h) " Common Stock " shall mean the common stock, par value $0.01 per share, of the Company, except that "Common Stock" when used with reference to any Person other than the Company shall mean the capital stock of such Person with the greatest voting power, or the equity securities or other equity interest having power to control or direct the management, of such Person.
(i) " Common Stock Equivalents " shall have the meaning set forth in Section 11(a)(iii) hereof.
(j) " Current Market Price " shall have the meaning set forth in Section 11(d)(i) hereof.
(k) " Current Value " shall have the meaning set forth in Section 11(a)(iii) hereof.
(l) " Distribution Date " shall have the meaning set forth in Section 3(a) hereof.
(m) " Effective Date " shall have the meaning set forth in the Recitals of this Agreement.
(n) " Equivalent Preferred Stock " shall have the meaning set forth in Section 11(b) hereof.
(o) " Exchange Act " shall mean the Securities Exchange Act of 1934, as amended.
(p) " Exchange Ratio " shall have the meaning set forth in Section 24(a) hereof.
(q) " Expiration Date " shall have the meaning set forth in Section 7(a) hereof.
(r) " Final Expiration Date " shall have the meaning set forth in Section 7(a) hereof.
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(s) " Person " shall mean any individual, firm, corporation, partnership, limited liability company, limited liability partnership, trust, syndicate or other entity and includes, without limitation, an unincorporated group of persons who, by formal or informal agreement or arrangement (whether or not in writing), have embarked on a common purpose or act.
(t) " Preferred Stock " shall mean shares of Series A Junior Participating Preferred Stock, par value $0.01 per share, of the Company, and, to the extent that there are not a sufficient number of shares of Series A Junior Participating Preferred Stock authorized to permit the full exercise of the Rights, any other series of preferred stock of the Company designated for such purpose containing terms substantially similar to the terms of the Series A Junior Participating Preferred Stock.
(u) " Principal Party " shall have the meaning set forth in Section 13(b) hereof.
(v) " Purchase Price " shall have the meaning set forth in Section 4(a) hereof.
(w) " Redemption Price " shall have the meaning set forth in Section 23(a) hereof.
(x) " Rights " shall have the meaning set forth in the preamble of this Agreement.
(y) " Rights Agent " shall have the meaning set forth in the preamble of this Agreement.
(z) " Rights Certificates " shall have the meaning set forth in Section 3(a) hereof.
(aa) " Section 11(a)(ii) Event " shall mean any event described in Section 11(a)(ii) hereof.
(bb) " Section 11(a)(ii) Trigger Date " shall have the meaning set forth in Section 11(a)(ii) hereof.
(cc) " Section 13 Event " shall mean any event described in clauses (x), (y) or (z) of Section 13(a) hereof.
(dd) " Spread " shall have the meaning set forth in Section 11(a)(iii) hereof.
(ee) " Stock Acquisition Date " shall mean the first date of public announcement (which, for purposes of this definition, shall include, without limitation, a report filed or amended pursuant to Section 13(d) under the Exchange Act) by the Company or an Acquiring Person that an Acquiring Person has become such.
(ff) " Subsidiary " shall mean, with reference to any Person, any corporation of which an amount of voting securities sufficient to elect at least a majority of the directors of such corporation is beneficially owned, directly or indirectly, by such Person, or otherwise controlled by such Person.
(gg) " Substitution Period " shall have the meaning set forth in Section 11(a)(iii) hereof.
(hh) " Summary of Rights " shall have the meaning set forth in Section 3(b) hereof.
(ii) " Trading Day " shall have the meaning set forth in Section 11(d)(i) hereof.
(jj) " Triggering Event " shall mean any Section 11(a)(ii) Event or any Section 13 Event.
Section 2. Appointment of Rights Agent. The Company hereby appoints the Rights Agent to act as agent for the Company in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Company may from time to time appoint such co-rights agents as it may deem necessary or desirable.
Section 3. Issuance of Rights Certificates.
(a) Until the earlier of (i) the close of business on the tenth Business Day after the Stock Acquisition Date, or (ii) the close of business on the tenth Business Day (or such later date as the Board shall determine) after the date that a tender or exchange offer by any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company, or any Person or entity organized, appointed or established by the Company for or pursuant to the terms of any such plan) is first published or sent or given within the meaning of Rule 14d-2(a) of the General Rules and Regulations under the Exchange Act, if upon consummation thereof, such Person would become an Acquiring Person (the earlier of (i) and (ii) being herein referred to as the " Distribution Date "), (x) the Rights will be evidenced (subject to the provisions of paragraphs (b) and (c) of this Section 3) by the certificates for the Common Stock or, in the case of uncertificated shares, the balances indicated in the book-entry account system of the transfer agent for the Common Stock registered in the names of the
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holders of the Common Stock (which shares of Common Stock shall be deemed also to be certificates for Rights) and not by separate certificates, and (y) the Rights will be transferable only in connection with the transfer of the underlying shares of Common Stock (including a transfer to the Company). As soon as practicable after the Distribution Date, the Rights Agent will send by first-class, insured, postage-prepaid mail, to each record holder of the Common Stock as of the close of business on the Distribution Date, at the address of such holder shown on the records of the Company, one or more rights certificates, in substantially the form of Exhibit B hereto (the " Rights Certificates "), evidencing one Right for each share of Common Stock so held, subject to adjustment as provided herein. In the event that an adjustment in the number of Rights per share of Common Stock has been made pursuant to Section 11(p) hereof, at the time of distribution of the Rights Certificates, the Company shall make the necessary and appropriate rounding adjustments (in accordance with Section 14(a) hereof) so that Rights Certificates representing only whole numbers of Rights are distributed and cash is paid in lieu of any fractional Rights. As of and after the Distribution Date, the Rights will be evidenced solely by such Rights Certificates.
(b) The Company will make available, as promptly as practicable, a copy of a Summary of Rights, in substantially the form attached hereto as Exhibit C (the " Summary of Rights ") to any holder of Rights who may so request from time to time prior to the Expiration Date. Until the Distribution Date, the Rights will be evidenced by the certificates for the Common Stock or, in the case of uncertificated shares, the balances indicated in the book-entry account system of the transfer agent for the Common Stock, and the registered holders of the Common Stock shall also be the registered holders of the associated Rights. Until the earlier of the Distribution Date or the Expiration Date (as such term is defined in Section 7(a) hereof), the transfer of any shares of Common Stock in respect of which Rights have been issued shall also constitute the transfer of the Rights associated with such shares of Common Stock.
(c) Rights shall be issued in respect of all shares of Common Stock which are issued (whether originally issued or from the Company's treasury) after the Effective Date but prior to the earlier of the Distribution Date or the Expiration Date or, in certain circumstances provided in Section 22 hereof, after the Distribution Date. Certificates representing such shares of Common Stock shall also be deemed to be certificates for Rights, and shall bear the following legend:
This certificate also evidences and entitles the holder hereof to certain Rights as set forth in the Rights Agreement between CF Industries Holdings, Inc. (the "Company") and the Rights Agent thereunder (the "Rights Agent") as from time to time amended (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal offices of the Company. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. The Company will mail to the holder of this certificate a copy of the Rights Agreement, as in effect on the date of mailing, without charge, promptly after receipt of a written request therefor. Under certain circumstances set forth in the Rights Agreement, Rights issued to, or held by, any Person who is, was or becomes an Acquiring Person or any Affiliate or Associate thereof (as such terms are defined in the Rights Agreement), whether currently held by or on behalf of such Person or by any subsequent holder, may become null and void.
With respect to such certificates containing the foregoing legend, until the earlier of (i) the Distribution Date or (ii) the Expiration Date, the Rights associated with the Common Stock represented by such certificates shall be evidenced by such certificates alone and registered holders of Common Stock shall also be the registered holders of the associated Rights, and the transfer of any of such certificates shall also constitute the transfer of the Rights associated with the Common Stock represented by such certificates.
Section 4. Form of Rights Certificates.
(a) The Rights Certificates (and the forms of election to purchase and of assignment to be printed on the reverse thereof) shall each be substantially in the form set forth in Exhibit B hereto and may have such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any applicable law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Rights may from time to time be listed, or to conform to usage. Subject to the provisions of Section 11 and Section 22 hereof, the Rights Certificates, whenever distributed, shall be dated as of the Effective Date and on their face shall entitle the holders thereof to purchase such number of one one-thousandths of a share of Preferred Stock as shall be set forth
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therein at the price set forth therein (such exercise price per one one-thousandth of a share, the " Purchase Price "), but the amount and type of securities purchasable upon the exercise of each Right and the Purchase Price thereof shall be subject to adjustment as provided herein.
(b) Any Rights Certificate issued pursuant to Section 3(a), Section 11(i) or Section 22 hereof that represents Rights beneficially owned by: (i) an Acquiring Person or any Associate or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such, or (iii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person to holders of equity interests in such Acquiring Person or to any Person with whom such Acquiring Person has any continuing agreement, arrangement or understanding regarding the transferred Rights or (B) a transfer which the Board of Directors of the Company has determined is part of a plan, arrangement or understanding which has as a primary purpose or effect the avoidance of Section 7(e) hereof, and any Rights Certificate issued pursuant to Section 6 or Section 11 hereof upon transfer, exchange, replacement or adjustment of any other Rights Certificate referred to in this sentence, shall contain (to the extent feasible) the following legend:
The Rights represented by this Rights Certificate are or were beneficially owned by a Person who was or became an Acquiring Person or an Affiliate or Associate of an Acquiring Person (as such terms are defined in the Rights Agreement). Accordingly, this Rights Certificate and the Rights represented hereby may become null and void in the circumstances specified in Section 7(e) of the Rights Agreement.
Section 5. Countersignature and Registration.
(a) The Rights Certificates shall be executed on behalf of the Company by its Chairman of the Board, its President or any Vice President, either manually or by facsimile signature, and shall have affixed thereto the Company's seal or a facsimile thereof which shall be attested by the Secretary or an Assistant Secretary of the Company, either manually or by facsimile signature. The Rights Certificates shall be countersigned by the Rights Agent, either manually or by facsimile signature and shall not be valid for any purpose unless so countersigned. In case any officer of the Company who shall have signed any of the Rights Certificates shall cease to be such officer of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Rights Certificates, nevertheless, may be countersigned by the Rights Agent and issued and delivered by the Company with the same force and effect as though the person who signed such Rights Certificates had not ceased to be such officer of the Company; and any Rights Certificates may be signed on behalf of the Company by any person who, at the actual date of the execution of such Rights Certificate, shall be a proper officer of the Company to sign such Rights Certificate, although at the date of the execution of this Rights Agreement any such person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep, or cause to be kept, at its principal office or offices designated as the appropriate place for surrender of Rights Certificates upon exercise or transfer, books for registration and transfer of the Rights Certificates issued hereunder. Such books shall show the names and addresses of the respective holders of the Rights Certificates, the number of Rights evidenced on its face by each of the Rights Certificates and the date of each of the Rights Certificates.
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Section 6. Transfer, Split-Up, Combination and Exchange of Rights Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates.
(a) Subject to the provisions of Section 4(b), Section 7(e) and Section 14 hereof, at any time after the close of business on the Distribution Date, and at or prior to the close of business on the Expiration Date, any Rights Certificate or Certificates (other than Rights Certificates representing Rights that may have been exchanged pursuant to Section 24 hereof) may be transferred, split up, combined or exchanged for another Rights Certificate or Certificates, entitling the registered holder to purchase a like number of one one-thousandths of a share of Preferred Stock (or, following a Triggering Event, Common Stock, other securities, cash or other assets, as the case may be) as the Rights Certificate or Certificates surrendered then entitles such holder (or former holder in the case of a transfer) to purchase. Any registered holder desiring to transfer, split up, combine or exchange any Rights Certificate or Certificates shall make such request in writing delivered to the Rights Agent, and shall surrender the Rights Certificate or Certificates to be transferred, split up, combined or exchanged at the principal office or offices of the Rights Agent designated for such purpose. Neither the Rights Agent nor the Company shall be obligated to take any action whatsoever with respect to the transfer of any such surrendered Rights Certificate until the registered holder shall have completed and signed the certificate contained in the form of assignment on the reverse side of such Rights Certificate and shall have provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. Thereupon the Rights Agent shall, subject to Section 4(b), Section 7(e), Section 14 hereof and Section 24 hereof, countersign and deliver to the Person entitled thereto a Rights Certificate or Rights Certificates, as the case may be, as so requested. The Company may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split up, combination or exchange of Rights Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Rights Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, and reimbursement to the Company and the Rights Agent of all reasonable expenses incidental thereto, and upon surrender to the Rights Agent and cancellation of the Rights Certificate, if mutilated, the Company will execute and deliver a new Rights Certificate of like tenor to the Rights Agent for countersignature and delivery to the registered owner in lieu of the Rights Certificate so lost, stolen, destroyed or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights.
(a) Subject to Section 7(e) hereof, at any time after the Distribution Date the registered holder of any Rights Certificate may exercise the Rights evidenced thereby (except as otherwise provided herein including, without limitation, the restrictions on exercisability set forth in Section 9(c), Section 11(a)(iii) and Section 23(a) hereof) in whole or in part upon surrender of the Rights Certificate, with the form of election to purchase and the certificate on the reverse side thereof duly executed, to the Rights Agent at the principal office or offices of the Rights Agent designated for such purpose, together with payment of the aggregate Purchase Price with respect to the total number of one one-thousandths of a share (or other securities, cash or other assets, as the case may be) as to which such surrendered Rights are then exercisable, at or prior to the earlier of (i) 5:00 P.M., New York City time, on July 21, 2015, or such later date as may be established by the Board of Directors prior to the expiration of the Rights (such date, as it may be extended by the Board, the (" Final Expiration Date "), (ii) the time at which the Rights are redeemed as provided in Section 23 hereof or (iii) the time at which the Rights may be exchanged as provided in Section 24 hereof (the earlier of (i), (ii) and (iii) being herein referred to as the " Expiration Date ").
(b) The Purchase Price for each one one-thousandth of a share of Preferred Stock pursuant to the exercise of a Right initially shall be $90, shall be subject to adjustment from time to time as provided in Section 11 and Section 13(a) hereof and shall be payable in accordance with paragraph (c) below.
(c) Upon receipt of a Rights Certificate representing exercisable Rights, with the form of election to purchase and the certificate duly executed, accompanied by payment, with respect to each Right so exercised, of the Purchase Price per one one-thousandth of a share of Preferred Stock (or other shares, securities, cash or other assets, as the case may be) to be purchased as set forth below and an amount equal to any applicable transfer tax, the Rights Agent shall, subject to Section 20(k) hereof, thereupon promptly (i) (A) requisition from any transfer agent of the shares of Preferred Stock (or make available, if the Rights Agent is the transfer agent for such shares) certificates for the total number of one one-thousandths of a share of
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Preferred Stock to be purchased and the Company hereby irrevocably authorizes its transfer agent to comply with all such requests, or (B) if the Company shall have elected to deposit the total number of shares of Preferred Stock issuable upon exercise of the Rights hereunder with a depositary agent, requisition from the depositary agent depositary receipts representing such number of one one-thousandths of a share of Preferred Stock as are to be purchased (in which case certificates for the shares of Preferred Stock represented by such receipts shall be deposited by the transfer agent with the depositary agent) and the Company will direct the depositary agent to comply with such request, (ii) requisition from the Company the amount of cash, if any, to be paid in lieu of fractional shares in accordance with Section 14 hereof, (iii) after receipt of such certificates or depositary receipts, cause the same to be delivered to or, upon the order of the registered holder of such Rights Certificate, registered in such name or names as may be designated by such holder, and (iv) after receipt thereof, deliver such cash, if any, to or upon the order of the registered holder of such Rights Certificate. The payment of the Purchase Price (as such amount may be reduced pursuant to Section 11(a)(iii) hereof) shall be made in cash or by certified bank check or bank draft payable to the order of the Company. In the event that the Company is obligated to issue other securities (including Common Stock) of the Company, pay cash and/or distribute other property pursuant to Section 11(a) hereof, the Company will make all arrangements necessary so that such other securities, cash and/or other property are available for distribution by the Rights Agent, if and when appropriate. The Company reserves the right to require prior to the occurrence of a Triggering Event that, upon any exercise of Rights, a number of Rights be exercised so that only whole shares of Preferred Stock would be issued.
(d) In case the registered holder of any Rights Certificate shall exercise less than all the Rights evidenced thereby, a new Rights Certificate evidencing the Rights remaining unexercised shall be issued by the Rights Agent and delivered to, or upon the order of, the registered holder of such Rights Certificate, registered in such name or names as may be designated by such holder, subject to the provisions of Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary, from and after the first occurrence of a Section 11(a)(ii) Event, any Rights beneficially owned by (i) an Acquiring Person or an Associate or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such, or (iii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person to holders of equity interests in such Acquiring Person or to any Person with whom the Acquiring Person has any continuing agreement, arrangement or understanding regarding the transferred Rights or (B) a transfer which the Board of Directors of the Company has determined is part of a plan, arrangement or understanding which has as a primary purpose or effect the avoidance of this Section 7(e), shall become null and void without any further action and no holder of such Rights shall have any rights whatsoever with respect to such Rights, whether under any provision of this Agreement or otherwise. The Company shall use all reasonable efforts to insure that the provisions of this Section 7(e) and Section 4(b) hereof are complied with, but shall have no liability to any holder of Rights Certificates or any other Person as a result of its failure to make any determinations with respect to an Acquiring Person or any of its Affiliates, Associates or transferees hereunder.
(f) Notwithstanding anything in this Agreement to the contrary, neither the Rights Agent nor the Company shall be obligated to undertake any action with respect to a registered holder upon the occurrence of any purported exercise as set forth in this Section 7 unless such registered holder shall have (i) completed and signed the certificate contained in the form of election to purchase set forth on the reverse side of the Rights Certificate surrendered for such exercise, and (ii) provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Rights Certificates. All Rights Certificates surrendered for the purpose of exercise, transfer, split-up, combination or exchange shall, if surrendered to the Company or any of its agents, be delivered to the Rights Agent for cancellation or in cancelled form, or, if surrendered to the Rights Agent, shall be cancelled by it, and no Rights Certificates shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall so cancel and retire, any other Rights Certificate purchased or acquired by the Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all cancelled Rights Certificates to the Company, or shall, at the written request of the
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Company, destroy such cancelled Rights Certificates, and in such case shall deliver a certificate of destruction thereof to the Company.
Section 9. Reservation and Availability of Capital Stock.
(a) The Company covenants and agrees that it will cause to be reserved and kept available out of its authorized and unissued shares of Preferred Stock (and, following the occurrence of a Triggering Event, out of its authorized and unissued shares of Common Stock and/or other securities or out of its authorized and issued shares held in its treasury), the number of shares of Preferred Stock (and, following the occurrence of a Triggering Event, Common Stock and/or other securities) that, as provided in this Agreement including Section 11(a)(iii) hereof, will be sufficient to permit the exercise in full of all outstanding Rights.
(b) So long as the shares of Preferred Stock (and, following the occurrence of a Triggering Event, Common Stock and/or other securities) issuable and deliverable upon the exercise of the Rights may be listed on any national securities exchange, the Company shall use its best efforts to cause, from and after such time as the Rights become exercisable (but only to the extent that it is reasonably likely that the Rights will be exercised), all shares reserved for such issuance to be listed on such exchange upon official notice of issuance upon such exercise.
(c) The Company shall use its best efforts to (i) file, as soon as practicable following the earliest date after the first occurrence of a Section 11(a)(ii) Event on which the consideration to be delivered by the Company upon exercise of the Rights has been determined pursuant to this Agreement (including in accordance with Section 11(a)(iii) hereof), or as soon as is required by law following the Distribution Date, a registration statement under the Act, with respect to the securities purchasable upon exercise of the Rights on an appropriate form, (ii) cause such registration statement to become effective as soon as practicable after such filing, and (iii) cause such registration statement to remain effective (with a prospectus at all times meeting the requirements of the Act) until the earlier of (A) the date as of which the Rights are no longer exercisable for such securities, and (B) the date of the expiration of the Rights. The Company will also take such action as may be appropriate under, or to ensure compliance with, the securities or "blue sky" laws of the various states in connection with the exercisability of the Rights. The Company may temporarily suspend, for a period of time not to exceed ninety (90) days after the date set forth in clause (i) of the first sentence of this Section 9(c), the exercisability of the Rights in order to prepare and file such registration statement and permit it to become effective. Upon any such suspension, the Company shall issue a public announcement stating that the exercisability of the Rights has been temporarily suspended, as well as a public announcement at such time as the suspension has been rescinded. In addition, if the Company shall determine that a registration statement is required following the Distribution Date, the Company may temporarily suspend the exercisability of the Rights until such time as a registration statement has been declared effective. Notwithstanding any provision of this Agreement to the contrary, the Rights shall not be exercisable in any jurisdiction if the requisite qualification in such jurisdiction shall not have been obtained, the exercise thereof shall not be permitted under applicable law, or a registration statement shall not have been declared effective.
(d) The Company covenants and agrees that it will take all such action as may be necessary to ensure that all one one-thousandths of a share of Preferred Stock (and, following the occurrence of a Triggering Event, Common Stock and/or other securities) delivered upon exercise of Rights shall, at the time of delivery of such shares (subject to payment of the Purchase Price), be duly and validly authorized and issued and fully paid and nonassessable.
(e) The Company further covenants and agrees that it will pay when due and payable any and all federal and state transfer taxes and charges which may be payable in respect of the issuance or delivery of the Rights Certificates and of any certificates for a number of one one-thousandths of a share of Preferred Stock (or Common Stock and/or other securities, as the case may be) upon the exercise of Rights. The Company shall not, however, be required to pay any transfer tax which may be payable in respect of any transfer or delivery of Rights Certificates to a Person other than, or the issuance or delivery of a number of one one-thousandths of a share of Preferred Stock (or Common Stock and/or other securities, as the case may be) in respect of a name other than that of the registered holder of the Rights Certificates evidencing Rights surrendered for exercise or to issue or deliver any certificates for a number of one one-thousandths of a share of Preferred Stock (or Common Stock and/or other securities, as the case may be) in a name other than that of the registered holder upon the exercise of any Rights until such tax shall have been paid (any
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such tax being payable by the holder of such Rights Certificates at the time of surrender) or until it has been established to the Company's satisfaction that no such tax is due.
Section 10. Preferred Stock Record Date. Each person in whose name any certificate for a number of one one-thousandths of a share of Preferred Stock (or Common Stock and/or other securities, as the case may be) is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of such fractional shares of Preferred Stock (or Common Stock and/or other securities, as the case may be) represented thereby on, and such certificate shall be dated, the date upon which the Rights Certificate evidencing such Rights was duly surrendered and payment of the Purchase Price (and all applicable transfer taxes) was made; provided, however, that if the date of such surrender and payment is a date upon which the Preferred Stock (or Common Stock and/or other securities, as the case may be) transfer books of the Company are closed, such Person shall be deemed to have become the record holder of such shares (fractional or otherwise) on, and such certificate shall be dated, the next succeeding Business Day on which the Preferred Stock (or Common Stock and/or other securities, as the case may be) transfer books of the Company are open. Prior to the exercise of the Rights evidenced thereby, the holder of a Rights Certificate shall not be entitled to any rights of a stockholder of the Company with respect to shares for which the Rights shall be exercisable, including, without limitation, the right to vote, to receive dividends or other distributions or to exercise any preemptive rights, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or Number of Rights. The Purchase Price, the number and kind of shares covered by each Right and the number of Rights outstanding are subject to adjustment from time to time as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the date of this Agreement (A) declare a dividend on the Preferred Stock payable in shares of Preferred Stock, (B) subdivide the outstanding Preferred Stock, (C) combine the outstanding Preferred Stock into a smaller number of shares, or (D) issue any shares of its capital stock in a reclassification of the Preferred Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), except as otherwise provided in this Section 11(a) and Section 7(e) hereof, the Purchase Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of shares of Preferred Stock or capital stock, as the case may be, issuable on such date, shall be proportionately adjusted so that the holder of any Right exercised after such time shall be entitled to receive, upon payment of the Purchase Price then in effect, the aggregate number and kind of shares of Preferred Stock or capital stock, as the case may be, which, if such Right had been exercised immediately prior to such date and at a time when the Preferred Stock transfer books of the Company were open, such holder would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification. If an event occurs which would require an adjustment under both this Section 11(a)(i) and Section 11(a)(ii) hereof, the adjustment provided for in this Section 11(a)(i) shall be in addition to, and shall be made prior to, any adjustment required pursuant to Section 11(a)(ii) hereof.
(ii) In the event any Person shall, at any time after the Effective Date, become an Acquiring Person, unless the event causing such Person to become an Acquiring Person is a transaction set forth in Section 13(a) hereof, then, promptly following the occurrence of such event, proper provision shall be made so that each holder of a Right (except as provided below and in Section 7(e) hereof) shall thereafter have the right to receive, upon exercise thereof at the then current Purchase Price in accordance with the terms of this Agreement, in lieu of a number of one one-thousandths of a share of Preferred Stock, such number of shares of Common Stock of the Company as shall equal the result obtained by (x) multiplying the then current Purchase Price by the then number of one one-thousandths of a share of Preferred Stock for which a Right was exercisable immediately prior to the first occurrence of a Section 11(a)(ii) Event, and (y) dividing that product (which, following such first occurrence, shall thereafter be referred to as the "Purchase Price" for each Right and for all purposes of this Agreement) by 50% of the Current Market Price (determined pursuant to Section 11(d) hereof) per share of Common Stock on the date of such first occurrence (such number of shares, the " Adjustment Shares ").
(iii) In the event that the number of shares of Common Stock which is authorized by the Company's certificate of incorporation, but not outstanding or reserved for issuance for purposes other than upon exercise of the Rights, is not sufficient to permit the exercise in full of the Rights in
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accordance with the foregoing subparagraph (ii) of this Section 11(a), the Company shall (A) determine the value of the Adjustment Shares issuable upon the exercise of a Right (the " Current Value "), and (B) with respect to each Right (subject to Section 7(e) hereof), make adequate provision to substitute for the Adjustment Shares, upon the exercise of a Right and payment of the applicable Purchase Price, (1) cash, (2) a reduction in the Purchase Price, (3) Common Stock or other equity securities of the Company (including, without limitation, shares, or units of shares, of preferred stock, such as the Preferred Stock, which the Board has deemed to have essentially the same value or economic rights as shares of Common Stock (such shares of preferred stock being referred to as " Common Stock Equivalents ")), (4) debt securities of the Company, (5) other assets, or (6) any combination of the foregoing, having an aggregate value equal to the Current Value (less the amount of any reduction in the Purchase Price), where such aggregate value has been determined by the Board based upon the advice of a nationally recognized investment banking firm selected by the Board; provided , however , that if the Company shall not have made adequate provision to deliver value pursuant to clause (B) above within thirty (30) days following the later of (x) the first occurrence of a Section 11(a)(ii) Event and (y) the date on which the Company's right of redemption pursuant to Section 23(a) expires (the later of (x) and (y) being referred to herein as the " Section 11(a)(ii) Trigger Date "), then the Company shall be obligated to deliver, upon the surrender for exercise of a Right and without requiring payment of the Purchase Price, shares of Common Stock (to the extent available) and then, if necessary, cash, which shares and/or cash have an aggregate value equal to the Spread. For purposes of the preceding sentence, the term " Spread " shall mean the excess of (i) the Current Value over (ii) the Purchase Price. If the Board determines in good faith that it is likely that sufficient additional shares of Common Stock could be authorized for issuance upon exercise in full of the Rights, the thirty (30) day period set forth above may be extended to the extent necessary, but not more than ninety (90) days after the Section 11(a)(ii) Trigger Date, in order that the Company may seek shareholder approval for the authorization of such additional shares (such thirty (30) day period, as it may be extended, is herein called the " Substitution Period "). To the extent that the Company determines that action should be taken pursuant to the first and/or third sentences of this Section 11(a)(iii), the Company (1) shall provide, subject to Section 7(e) hereof, that such action shall apply uniformly to all outstanding Rights, and (2) may suspend the exercisability of the Rights until the expiration of the Substitution Period in order to seek such shareholder approval for such authorization of additional shares and/or to decide the appropriate form of distribution to be made pursuant to such first sentence and to determine the value thereof. In the event of any such suspension, the Company shall issue a public announcement stating that the exercisability of the Rights has been temporarily suspended, as well as a public announcement at such time as the suspension is no longer in effect. For purposes of this Section 11(a)(iii), the value of each Adjustment Share shall be the Current Market Price per share of the Common Stock on the Section 11(a)(ii) Trigger Date and the per share or per unit value of any Common Stock Equivalent shall be deemed to equal the Current Market Price per share of the Common Stock on such date.
(b) In case the Company shall fix a record date for the issuance of rights, options or warrants to all holders of Preferred Stock entitling them to subscribe for or purchase (for a period expiring within forty-five (45) calendar days after such record date) Preferred Stock (or shares having the same rights, privileges and preferences as the shares of Preferred Stock (" Equivalent Preferred Stock ")) or securities convertible into Preferred Stock or Equivalent Preferred Stock at a price per share of Preferred Stock or per share of Equivalent Preferred Stock (or having a conversion price per share, if a security convertible into Preferred Stock or Equivalent Preferred Stock) less than the Current Market Price (as determined pursuant to Section 11(d) hereof) per share of Preferred Stock on such record date, the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the number of shares of Preferred Stock outstanding on such record date, plus the number of shares of Preferred Stock which the aggregate offering price of the total number of shares of Preferred Stock and/or Equivalent Preferred Stock so to be offered (and/or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such Current Market Price, and the denominator of which shall be the number of shares of Preferred Stock outstanding on such record date, plus the number of additional shares of Preferred Stock and/or Equivalent Preferred Stock to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible). In case such subscription price may be paid by delivery of consideration, part or all of which may be in a form other than cash, the value of such consideration shall be as determined in good faith by the Board of Directors of the Company, whose determination shall be
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described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holders of the Rights. Shares of Preferred Stock owned by or held for the account of the Company shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever such a record date is fixed, and in the event that such rights or warrants are not so issued, the Purchase Price shall be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for a distribution to all holders of Preferred Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing corporation), cash (other than a regular quarterly cash dividend out of the earnings or retained earnings of the Company), assets (other than a dividend payable in Preferred Stock, but including any dividend payable in stock other than Preferred Stock) or evidences of indebtedness, or of subscription rights or warrants (excluding those referred to in Section 11(b) hereof), the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the Current Market Price (as determined pursuant to Section 11(d) hereof) per share of Preferred Stock on such record date, less the fair market value (as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent) of the portion of the cash, assets or evidences of indebtedness so to be distributed or of such subscription rights or warrants applicable to a share of Preferred Stock, and the denominator of which shall be such Current Market Price (as determined pursuant to Section 11(d) hereof) per share of Preferred Stock. Such adjustments shall be made successively whenever such a record date is fixed, and in the event that such distribution is not so made, the Purchase Price shall be adjusted to be the Purchase Price which would have been in effect if such record date had not been fixed.
(d) (i) For the purpose of any computation hereunder, other than computations made pursuant to Section 11(a)(iii) hereof, the Current Market Price per share of Common Stock on any date shall be deemed to be the average of the daily closing prices per share of such Common Stock for the thirty (30) consecutive Trading Days immediately prior to such date, and for purposes of computations made pursuant to Section 11(a)(iii) hereof, the Current Market Price per share of Common Stock on any date shall be deemed to be the average of the daily closing prices per share of such Common Stock for the ten (10) consecutive Trading Days immediately following such date; provided , however , that in the event that the Current Market Price per share of the Common Stock is determined during a period following the announcement by the issuer of such Common Stock of (A) a dividend or distribution on such Common Stock payable in shares of such Common Stock or securities convertible into shares of such Common Stock (other than the Rights), or (B) any subdivision, combination or reclassification of such Common Stock, and the ex-dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification shall not have occurred prior to the commencement of the requisite thirty (30) Trading Day or ten (10) Trading Day period, as set forth above, then, and in each such case, the Current Market Price shall be properly adjusted to take into account ex-dividend trading. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the shares of Common Stock are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the shares of Common Stock are listed or admitted to trading or, if the shares of Common Stock are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers Automated Quotation System (" NASDAQ ") or such other system then in use, or, if on any such date the shares of Common Stock are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Common Stock selected by the Board. If on any such date no market maker is making a market in the Common Stock, the fair value of such shares on such date as determined in good faith by the Board shall be used. The term " Trading Day " shall mean a day on which the principal national securities exchange on which the shares of Common Stock are listed or admitted to trading is open for the transaction of business or, if the shares of Common Stock are not listed or admitted to trading on any national securities exchange, a Business Day. If the Common Stock is not publicly held or not so listed or traded, Current Market Price per share shall mean the fair value per share as determined in good faith by
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the Board, whose determination shall be described in a statement filed with the Rights Agent and shall be conclusive for all purposes.
(ii) For the purpose of any computation hereunder, the Current Market Price per share of Preferred Stock shall be determined in the same manner as set forth above for the Common Stock in clause (i) of this Section 11(d) (other than the last sentence thereof). If the Current Market Price per share of Preferred Stock cannot be determined in the manner provided above or if the Preferred Stock is not publicly held or listed or traded in a manner described in clause (i) of this Section 11(d), the Current Market Price per share of Preferred Stock shall be conclusively deemed to be an amount equal to 1,000 (as such number may be appropriately adjusted for such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock occurring after the date of this Agreement) multiplied by the Current Market Price per share of the Common Stock. If neither the Common Stock nor the Preferred Stock is publicly held or so listed or traded, Current Market Price per share of the Preferred Stock shall mean the fair value per share as determined in good faith by the Board, whose determination shall be described in a statement filed with the Rights Agent and shall be conclusive for all purposes.
(e) Anything herein to the contrary notwithstanding, no adjustment in the Purchase Price shall be required unless such adjustment would require an increase or decrease of at least one percent (1%) in the Purchase Price; provided , however , that any adjustments which by reason of this Section 11(e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made to the nearest cent or to the nearest ten-thousandth of a share of Common Stock or other share or one-millionth of a share of Preferred Stock, as the case may be. Notwithstanding the first sentence of this Section 11(e), any adjustment required by this Section 11 shall be made no later than the earlier of (i) three (3) years from the date of the transaction which mandates such adjustment, or (ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to Section 11(a)(ii) or Section 13(a) hereof, the holder of any Right thereafter exercised shall become entitled to receive any shares of capital stock other than Preferred Stock, thereafter the number of such other shares so receivable upon exercise of any Right and the Purchase Price thereof shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Preferred Stock contained in Sections 11(a), (b), (c), (e), (g), (h), (i), (j), (k) and (m), and the provisions of Sections 7, 9, 10, 13 and 14 hereof with respect to the Preferred Stock shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any adjustment made to the Purchase Price hereunder shall evidence the right to purchase, at the adjusted Purchase Price, the number of one one-thousandths of a share of Preferred Stock purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided in Section 11(i), upon each adjustment of the Purchase Price as a result of the calculations made in Sections 11(b) and (c), each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Purchase Price, that number of one one-thousandths of a share of Preferred Stock (calculated to the nearest one-millionth) obtained by (i) multiplying (x) the number of one one-thousandths of a share covered by a Right immediately prior to this adjustment, by (y) the Purchase Price in effect immediately prior to such adjustment of the Purchase Price, and (ii) dividing the product so obtained by the Purchase Price in effect immediately after such adjustment of the Purchase Price.
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(i) The Company may elect on or after the date of any adjustment of the Purchase Price to adjust the number of Rights, in lieu of any adjustment in the number of one one-thousandths of a share of Preferred Stock purchasable upon the exercise of a Right. Each of the Rights outstanding after the adjustment in the number of Rights shall be exercisable for the number of one one-thousandths of a share of Preferred Stock for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that number of Rights (calculated to the nearest one-ten-thousandth) obtained by dividing the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase Price in effect immediately after adjustment of the Purchase Price. The Company shall make a public announcement of its election to adjust the number of Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be made. This record date may be the date on which the Purchase Price is adjusted or any day thereafter, but, if the Rights Certificates have been issued, shall be at least ten (10) days later than the date of the public announcement. If Rights Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Section 11(i), the Company shall, as promptly as practicable, cause to be distributed to holders of record of Rights Certificates on such record date Rights Certificates evidencing, subject to Section 14 hereof, the additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the Company, shall cause to be distributed to such holders of record in substitution and replacement for the Rights Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Company, new Rights Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Rights Certificates so to be distributed shall be issued, executed and countersigned in the manner provided for herein (and may bear, at the option of the Company, the adjusted Purchase Price) and shall be registered in the names of the holders of record of Rights Certificates on the record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or the number of one one-thousandths of a share of Preferred Stock issuable upon the exercise of the Rights, the Rights Certificates theretofore and thereafter issued may continue to express the Purchase Price per one one-thousandth of a share and the number of one one-thousandth of a share which were expressed in the initial Rights Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment reducing the Purchase Price below the then stated value, if any, of the number of one one-thousandths of a share of Preferred Stock issuable upon exercise of the Rights, the Company shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable such number of one one-thousandths of a share of Preferred Stock at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an adjustment in the Purchase Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event the issuance to the holder of any Right exercised after such record date the number of one one-thousandths of a share of Preferred Stock and other capital stock or securities of the Company, if any, issuable upon such exercise over and above the number of one one-thousandths of a share of Preferred Stock and other capital stock or securities of the Company, if any, issuable upon such exercise on the basis of the Purchase Price in effect prior to such adjustment; provided , however , that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares (fractional or otherwise) or securities upon the occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Purchase Price, in addition to those adjustments expressly required by this Section 11, as and to the extent that in their good faith judgment the Board of Directors of the Company shall determine to be advisable in order that any (i) consolidation or subdivision of the Preferred Stock, (ii) issuance wholly for cash of any shares of Preferred Stock at less than the Current Market Price, (iii) issuance wholly for cash of shares of Preferred Stock or securities which by their terms are convertible into or exchangeable for shares of Preferred Stock, (iv) stock dividends or (v) issuance of rights, options or warrants referred to in this Section 11, hereafter made by the Company to holders of its Preferred Stock shall not be taxable to such stockholders.
(n) The Company covenants and agrees that it shall not, at any time after the Distribution Date, (i) consolidate with any other Person (other than a Subsidiary of the Company in a transaction which
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complies with Section 11(o) hereof), (ii) merge with or into any other Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(o) hereof), or (iii) sell or transfer (or permit any Subsidiary to sell or transfer), in one transaction, or a series of related transactions, assets, cash flow or earning power aggregating more than 50% of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person or Persons (other than the Company and/or any of its Subsidiaries in one or more transactions each of which complies with Section 11(o) hereof), if (x) at the time of or immediately after such consolidation, merger or sale there are any rights, warrants or other instruments or securities outstanding or agreements in effect which would substantially diminish or otherwise eliminate the benefits intended to be afforded by the Rights or (y) prior to, simultaneously with or immediately after such consolidation, merger or sale, the shareholders of the Person who constitutes, or would constitute, the "Principal Party" for purposes of Section 13(a) hereof shall have received a distribution of Rights previously owned by such Person or any of its Affiliates and Associates.
(o) The Company covenants and agrees that, after the Distribution Date, it will not, except as permitted by Section 23 or Section 26 hereof, take (or permit any Subsidiary to take) any action if at the time such action is taken it is reasonably foreseeable that such action will diminish substantially or otherwise eliminate the benefits intended to be afforded by the Rights.
(p) Anything in this Agreement to the contrary notwithstanding, in the event that the Company shall at any time after the Effective Date and prior to the Distribution Date (i) declare a dividend on the outstanding shares of Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding shares of Common Stock, or (iii) combine the outstanding shares of Common Stock into a smaller number of shares, the number of Rights associated with each share of Common Stock then outstanding, or issued or delivered thereafter but prior to the Distribution Date, shall be proportionately adjusted so that the number of Rights thereafter associated with each share of Common Stock following any such event shall equal the result obtained by multiplying the number of Rights associated with each share of Common Stock immediately prior to such event by a fraction the numerator which shall be the total number of shares of Common Stock outstanding immediately prior to the occurrence of the event and the denominator of which shall be the total number of shares of Common Stock outstanding immediately following the occurrence of such event.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares. Whenever an adjustment is made as provided in Section 11 and Section 13 hereof, the Company shall (a) promptly prepare a certificate setting forth such adjustment and a brief statement of the facts accounting for such adjustment, (b) promptly file with the Rights Agent, and with each transfer agent for the Preferred Stock and the Common Stock, a copy of such certificate and (c) if a Distribution Date has occurred, mail a brief summary thereof to each holder of a Rights Certificate. The Rights Agent shall be fully protected in relying on any such certificate and on any adjustment therein contained.
Section 13. Consolidation, Merger or Sale or Transfer of Assets Cash Flow or Earning Power.
(a) In the event that, following the Stock Acquisition Date, directly or indirectly, (x) the Company shall consolidate with, or merge with and into, any other Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(o) hereof), and the Company shall not be the continuing or surviving corporation of such consolidation or merger, (y) any Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(o) hereof) shall consolidate with, or merge with or into, the Company, and the Company shall be the continuing or surviving corporation of such consolidation or merger and, in connection with such consolidation or merger, all or part of the outstanding shares of Common Stock shall be changed into or exchanged for stock or other securities of any other Person or cash or any other property, or (z) the Company shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise transfer), in one transaction or a series of related transactions, assets, cash flow or earning power aggregating more than 50% of the assets, cash flow or earning power of the Company and its Subsidiaries (taken as a whole) to any Person or Persons (other than the Company or any Subsidiary of the Company in one or more transactions each of which complies with Section 11(o) hereof), then, and in each such case, proper provision shall be made so that: (i) each holder of a Right, except as provided in Section 7(e) hereof, shall thereafter have the right to receive, upon the exercise thereof at the then current Purchase Price in accordance with the terms of this Agreement, such number of validly authorized and issued, fully paid, non-assessable and freely tradeable shares of Common Stock of the Principal Party (as such term is hereinafter defined), not subject to any liens, encumbrances, rights of first refusal or other
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adverse claims, as shall be equal to the result obtained by (1) multiplying the then current Purchase Price by the number of one one-thousandths of a share of Preferred Stock for which a Right is exercisable immediately prior to the first occurrence of a Section 13 Event (or, if a Section 11(a)(ii) Event has occurred prior to the first occurrence of a Section 13 Event, multiplying the number of such one one-thousandths of a share for which a Right was exercisable immediately prior to the first occurrence of a Section 11(a)(ii) Event by the Purchase Price in effect immediately prior to such first occurrence of a Section 11(a)(ii) Event), and (2) dividing that product (which, following the first occurrence of a Section 13 Event, shall be referred to as the "Purchase Price" for each Right and for all purposes of this Agreement) by 50% of the Current Market Price (determined pursuant to Section 11(d)(i) hereof) per share of the Common Stock of such Principal Party on the date of consummation of such Section 13 Event; (ii) such Principal Party shall thereafter be liable for, and shall assume, by virtue of such Section 13 Event, all the obligations and duties of the Company pursuant to this Agreement; (iii) the term "Company" shall thereafter be deemed to refer to such Principal Party, it being specifically intended that the provisions of Section 11 hereof shall apply only to such Principal Party following the first occurrence of a Section 13 Event; (iv) such Principal Party shall take such steps (including, but not limited to, the reservation of a sufficient number of shares of its Common Stock) in connection with the consummation of any such transaction as may be necessary to assure that the provisions hereof shall thereafter be applicable, as nearly as reasonably may be, in relation to its shares of Common Stock thereafter deliverable upon the exercise of the Rights; and (v) the provisions of Section 11(a)(ii) hereof shall be of no effect following the first occurrence of any Section 13 Event.
(b) " Principal Party " shall mean:
(i) in the case of any transaction described in clause (x) or (y) of the first sentence of Section 13(a), the Person that is the issuer of any securities into which shares of Common Stock of the Company are converted in such merger or consolidation, and if no securities are so issued, the Person that is the other party to such merger or consolidation; and
(ii) in the case of any transaction described in clause (z) of the first sentence of Section 13(a), the Person that is the party receiving the greatest portion of the assets, cash flow or earning power transferred pursuant to such transaction or transactions;
provided , however , that in any such case, (1) if the Common Stock of such Person is not at such time and has not been continuously over the preceding twelve (12) month period registered under Section 12 of the Exchange Act, and such Person is a direct or indirect Subsidiary of another Person the Common Stock of which is and has been so registered, "Principal Party" shall refer to such other Person; and (2) in case such Person is a Subsidiary, directly or indirectly, of more than one Person, the Common Stock of two or more of which are and have been so registered, "Principal Party" shall refer to whichever of such Persons is the issuer of the Common Stock having the greatest aggregate market value.
(c) The Company shall not consummate any such consolidation, merger, sale or transfer unless the Principal Party shall have a sufficient number of authorized shares of its Common Stock which have not been issued or reserved for issuance to permit the exercise in full of the Rights in accordance with this Section 13 and unless prior thereto the Company and such Principal Party shall have executed and delivered to the Rights Agent a supplemental agreement providing for the terms set forth in paragraphs (a) and (b) of this Section 13 and further providing that, as soon as practicable after the date of any consolidation, merger or sale of assets mentioned in paragraph (a) of this Section 13, the Principal Party will
(i) prepare and file a registration statement under the Act, with respect to the Rights and the securities purchasable upon exercise of the Rights on an appropriate form, and will use its best efforts to cause such registration statement to (A) become effective as soon as practicable after such filing and (B) remain effective (with a prospectus at all times meeting the requirements of the Act) until the Expiration Date; and
(ii) take all such other action as may be necessary to enable the Principal Party to issue the securities purchasable upon exercise of the Rights, including but not limited to the registration or qualification of such securities under all requisite securities laws of jurisdictions of the various states and the listing of such securities on such exchanges and trading markets as may be necessary or appropriate; and
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(iii) will deliver to holders of the Rights historical financial statements for the Principal Party and each of its Affiliates which comply in all respects with the requirements for registration on Form 10 under the Exchange Act.
The provisions of this Section 13 shall similarly apply to successive mergers or consolidations or sales or other transfers. In the event that a Section 13 Event shall occur at any time after the occurrence of a Section 11(a)(ii) Event, the Rights which have not theretofore been exercised shall thereafter become exercisable in the manner described in Section 13(a).
Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of Rights, except prior to the Distribution Date as provided in Section 11(p) hereof, or to distribute Rights Certificates which evidence fractional Rights. In lieu of such fractional Rights, the Company shall pay to the registered holders of the Rights Certificates with regard to which such fractional Rights would otherwise be issuable, an amount in cash equal to the same fraction of the current market value of a whole Right. For purposes of this Section 14(a), the current market value of a whole Right shall be the closing price of the Rights for the Trading Day immediately prior to the date on which such fractional Rights would have been otherwise issuable. The closing price of the Rights for any day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Rights are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Rights are listed or admitted to trading, or if the Rights are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by NASDAQ or such other system then in use or, if on any such date the Rights are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Rights, selected by the Board of Directors of the Company. If on any such date no such market maker is making a market in the Rights, the fair value of the Rights on such date as determined in good faith by the Board of Directors of the Company shall be used.
(b) The Company shall not be required to issue fractions of shares of Preferred Stock (other than fractions which are integral multiples of one one-thousandth of a share of Preferred Stock) upon exercise of the Rights or to distribute certificates which evidence fractional shares of Preferred Stock (other than fractions which are integral multiples of one one-thousandth of a share of Preferred Stock). In lieu of fractional shares of Preferred Stock that are not integral multiples of one one-thousandth of a share of Preferred Stock, the Company may pay to the registered holders of Rights Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current market value of one one-thousandth of a share of Preferred Stock. For purposes of this Section 14(b), the current market value of one one-thousandth of a share of Preferred Stock shall be one one-thousandth of the closing price of a share of Preferred Stock (as determined pursuant to Section 11(d)(ii) hereof) for the Trading Day immediately prior to the date of such exercise.
(c) Following the occurrence of a Triggering Event, the Company shall not be required to issue fractions of shares of Common Stock upon exercise of the Rights or to distribute certificates which evidence fractional shares of Common Stock. In lieu of fractional shares of Common Stock, the Company may pay to the registered holders of Rights Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current market value of one (1) share of Common Stock. For purposes of this Section 14(c), the current market value of one share of Common Stock shall be the closing price per share of Common Stock (as determined pursuant to Section 11(d)(i) hereof) on the Trading Day immediately prior to the date of such exercise.
(d) The holder of a Right by the acceptance of the Rights expressly waives his right to receive any fractional Rights or any fractional shares upon exercise of a Right, except as permitted by this Section 14.
Section 15. Rights of Action. All rights of action in respect of this Agreement are vested in the respective registered holders of the Rights Certificates (and, prior to the Distribution Date, the registered holders of the Common Stock); and any registered holder of any Rights Certificate (or, prior to the Distribution Date, of the Common Stock), without the consent of the Rights Agent or of the holder of any
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other Rights Certificate (or, prior to the Distribution Date, of the Common Stock), may, in his own behalf and for his own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company to enforce, or otherwise act in respect of, his right to exercise the Rights evidenced by such Rights Certificate in the manner provided in such Rights Certificate and in this Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and shall be entitled to specific performance of the obligations hereunder and injunctive relief against actual or threatened violations of the obligations hereunder of any Person subject to this Agreement.
Section 16. Agreement of Rights Holders. Every holder of a Right by accepting the same consents and agrees with the Company and the Rights Agent and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of Common Stock;
(b) after the Distribution Date, the Rights Certificates are transferable only on the registry books of the Rights Agent if surrendered at the principal office or offices of the Rights Agent designated for such purposes, duly endorsed or accompanied by a proper instrument of transfer and with the appropriate forms and certificates fully executed;
(c) subject to Section 6(a) and Section 7(f) hereof, the Company and the Rights Agent may deem and treat the person in whose name a Rights Certificate (or, prior to the Distribution Date, the associated Common Stock certificate or, in the case of uncertificated shares, the associated balance indicated in the book-entry account system of the transfer agent for the Common Stock) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Rights Certificates or the associated Common Stock certificate or, in the case of uncertificated shares, the associated balance indicated in the book-entry account system of the transfer agent for the Common Stock, made by anyone other than the Company or the Rights Agent) for all purposes whatsoever, and neither the Company nor the Rights Agent, subject to the last sentence of Section 7(e) hereof, shall be required to be affected by any notice to the contrary; and
(d) notwithstanding anything in this Agreement to the contrary, neither the Company nor the Rights Agent shall have any liability to any holder of a Right or other Person as a result of its inability to perform any of its obligations under this Agreement by reason of any preliminary or permanent injunction or other order, decree or ruling issued by a court of competent jurisdiction or by a governmental, regulatory or administrative agency or commission, or any statute, rule, regulation or executive order promulgated or enacted by any governmental authority, prohibiting or otherwise restraining performance of such obligation; provided , however , the Company must use its best efforts to have any such order, decree or ruling lifted or otherwise overturned as soon as possible.
Section 17. Rights Certificate Holder Not Deemed a Stockholder. No holder, as such, of any Rights Certificate shall be entitled to vote, receive dividends or be deemed for any purpose the holder of the number of one one-thousandths of a share of Preferred Stock or any other securities of the Company which may at any time be issuable on the exercise of the Rights represented thereby, nor shall anything contained herein or in any Rights Certificate be construed to confer upon the holder of any Rights Certificate, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in Section 25 hereof), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by such Rights Certificate shall have been exercised in accordance with the provisions hereof.
Section 18. Concerning the Rights Agent.
(a) The Company agrees to pay to the Rights Agent reasonable compensation for all services rendered by it hereunder and, from time to time, on demand of the Rights Agent, its reasonable expenses and counsel fees and disbursements and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability, or expense, incurred without gross negligence, bad faith or willful misconduct on the part of the Rights Agent, for anything done or omitted by the Rights Agent in connection with the acceptance and administration of this Agreement, including the costs and expenses of defending against any claim of liability in the premises.
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(b) The Rights Agent shall be protected and shall incur no liability for or in respect of any action taken, suffered or omitted by it in connection with its administration of this Agreement in reliance upon any Rights Certificate or certificate for Common Stock or, in the case of uncertificated shares, the associated balance indicated in the book-entry account system of the transfer agent for the Common Stock, or for other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement, or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper Person or Persons.
Section 19. Merger or Consolidation or Change of Name of Rights Agent.
(a) Any corporation into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent shall be a party, or any legal business entity succeeding to the corporate trust, stock transfer or other shareholder services business of the Rights Agent or any successor Rights Agent, shall be the successor to the Rights Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto; but only if such legal business entity would be eligible for appointment as a successor Rights Agent under the provisions of Section 21 hereof. In case at the time such successor Rights Agent shall succeed to the agency created by this Agreement, any of the Rights Certificates shall have been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of a predecessor Rights Agent and deliver such Rights Certificates so countersigned; and in case at that time any of the Rights Certificates shall not have been countersigned, any successor Rights Agent may countersign such Rights Certificates either in the name of the predecessor or in the name of the successor Rights Agent; and in all such cases such Rights Certificates shall have the full force provided in the Rights Certificates and in this Agreement.
(b) In case at any time the name of the Rights Agent shall be changed and at such time any of the Rights Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Rights Certificates so countersigned; and in case at that time any of the Rights Certificates shall not have been countersigned, the Rights Agent may countersign such Rights Certificates either in its prior name or in its changed name; and in all such cases such Rights Certificates shall have the full force provided in the Rights Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Rights Certificates, by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal counsel for the Company), and the opinion of such counsel shall be full and complete authorization and protection to the Rights Agent as to any action taken or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter (including, without limitation, the identity of any Acquiring Person and the determination of Current Market Price) be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by the Chairman of the Board, the President, any Vice President, the Treasurer, any Assistant Treasurer, the Secretary or any Assistant Secretary of the Company and delivered to the Rights Agent; and such certificate shall be full authorization to the Rights Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its own gross negligence, bad faith or willful misconduct; provided, however, that the Rights Agent shall not be liable for indirect, special, consequential or punitive damages.
(d) The Rights Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Rights Certificates or be required to verify the same (except as to its countersignature on such Rights Certificates), but all such statements and recitals are and shall be deemed to have been made by the Company only.
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(e) The Rights Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the validity or execution of any Rights Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Rights Certificate; nor shall it be responsible for any adjustment required under the provisions of Section 11, Section 13 or Section 24 hereof or responsible for the manner, method or amount of any such adjustment or the ascertaining of the existence of facts that would require any such adjustment (except with respect to the exercise of Rights evidenced by Rights Certificates after actual notice of any such adjustment); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any shares of Common Stock or Preferred Stock to be issued pursuant to this Agreement or any Rights Certificate or as to whether any shares of Common Stock or Preferred Stock will, when so issued, be validly authorized and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from the Chairman of the Board, the President, any Vice President, the Secretary, any Assistant Secretary, the Treasurer or any Assistant Treasurer of the Company, and to apply to such officers for advice or instructions in connection with its duties, and it shall not be liable for any action taken or suffered to be taken by it in good faith in accordance with instructions of any such officer.
(h) The Rights Agent and any stockholder, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Rights Agent under this Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent shall not be answerable or accountable for any act, default, neglect or misconduct of any such attorneys or agents or for any loss to the Company resulting from any such act, default, neglect or misconduct; provided, however, reasonable care was exercised in the selection and continued employment thereof.
(j) No provision of this Agreement shall require the Rights Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of its rights if there shall be reasonable grounds for believing that repayment of such funds or adequate indemnification against such risk or liability is not reasonably assured to it.
(k) If, with respect to any Rights Certificate surrendered to the Rights Agent for exercise or transfer, the certificate attached to the form of assignment or form of election to purchase, as the case may be, has either not been completed or indicates an affirmative response to clause 1 and/or 2 thereof, the Rights Agent shall not take any further action with respect to such requested exercise or transfer without first consulting with the Company.
Section 21. Change of Rights Agent. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon thirty (30) days' notice in writing mailed to the Company, and to each transfer agent of the Common Stock and Preferred Stock, by registered or certified mail, and, if such resignation occurs after the Distribution Date, to the registered holders of the Rights Certificates by first-class mail. The Company may remove the Rights Agent or any successor Rights Agent upon thirty (30) days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Common Stock and Preferred Stock, by registered or certified mail, and, if such removal occurs after the Distribution Date, to the holders of the Rights Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Rights Agent. If the Company shall fail to make such appointment within a period of thirty (30) days after giving notice of such removal or after it has been
19
notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Rights Certificate (who shall, with such notice, submit his Rights Certificate for inspection by the Company), then any registered holder of any Rights Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be (a) a legal business entity organized and doing business under the laws of the United States or of the State of New York or of any other state of the United States, in good standing, having an office in the State of New York, which is authorized under such laws to exercise corporate trust, stock transfer or shareholder services powers and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $50,000,000 or (b) an affiliate of a legal business entity described in clause (a) of this sentence. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment, the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common Stock and the Preferred Stock, and, if such appointment occurs after the Distribution Date, mail a notice thereof in writing to the registered holders of the Rights Certificates. Failure to give any notice provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be.
Section 22. Issuance of New Rights Certificates. Notwithstanding any of the provisions of this Agreement or of the Rights to the contrary, the Company may, at its option, issue new Rights Certificates evidencing Rights in such form as may be approved by the Board of Directors to reflect any adjustment or change in the Purchase Price and the number or kind or class of shares or other securities or property purchasable under the Rights Certificates made in accordance with the provisions of this Agreement. In addition, in connection with the issuance or sale of shares of Common Stock following the Distribution Date and prior to the redemption or expiration of the Rights, the Company (a) shall, with respect to shares of Common Stock so issued or sold pursuant to the exercise of stock options or under any employee plan or arrangement, granted or awarded as of the Distribution Date, or upon the exercise, conversion or exchange of securities hereinafter issued by the Company, and (b) may, in any other case, if deemed necessary or appropriate by the Board of Directors of the Company, issue Rights Certificates representing the appropriate number of Rights in connection with such issuance or sale; provided, however, that (i) no such Rights Certificate shall be issued if, and to the extent that, the Company shall be advised by counsel that such issuance would create a significant risk of material adverse tax consequences to the Company or the Person to whom such Rights Certificate would be issued, and (ii) no such Rights Certificate shall be issued if, and to the extent that, appropriate adjustment shall otherwise have been made in lieu of the issuance thereof.
Section 23. Redemption and Termination.
(a) The Board of Directors of the Company may, at its option, at any time prior to the earlier of (i) the close of business on the tenth Business Day following the Stock Acquisition Date, or (ii) the Final Expiration Date, direct the Company to, and if so directed, the Company shall, redeem all but not less than all of the then outstanding Rights at a redemption price of $0.001 per Right, as such amount may be appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such redemption price being hereinafter referred to as the " Redemption Price "). Notwithstanding anything contained in this Agreement to the contrary, the Rights shall not be exercisable after the first occurrence of a Section 11(a)(ii) Event until such time as the Company's right of redemption hereunder has expired. The Company may, at its option, pay the Redemption Price in cash, shares of Common Stock (based on the Current Market Price, as defined in Section 11(d)(i) hereof, of the Common Stock at the time of redemption) or any other form of consideration deemed appropriate by the Board of Directors.
(b) Immediately upon the action of the Board of Directors of the Company ordering the redemption of the Rights, evidence of which shall have been filed with the Rights Agent and without any further action and without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price for each Right so held. Promptly after the action of the Board of Directors ordering the redemption of the Rights, the Company shall give notice of such redemption to the Rights Agent and the holders of the then outstanding Rights by mailing such notice to all such holders at each holder's last address as it appears upon the registry books of the Rights Agent or, prior to
20
the Distribution Date, on the registry books of the transfer agent for the Common Stock. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made.
Section 24. Exchange.
(a) The Board of Directors of the Company may, at its option, at any time after any Person becomes an Acquiring Person, exchange all or part of the then outstanding and exercisable Rights (which shall not include Rights that have become void pursuant to the provisions of Section 7(e) hereof) for Common Stock at an exchange ratio of one share of Common Stock per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such exchange ratio being hereinafter referred to as the " Exchange Ratio "). Notwithstanding the foregoing, the Board of Directors of the Company shall not be empowered to effect such exchange at any time after any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or any such Subsidiary, or any entity holding Common Stock for or pursuant to the terms of any such plan), together with all Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or more of the Common Stock then outstanding.
(b) Immediately upon the action of the Board of Directors of the Company ordering the exchange of any Rights pursuant to subsection (a) of this Section 24 and without any further action and without any notice, the right to exercise such Rights shall terminate and the only right thereafter of a holder of such Rights shall be to receive that number of shares of Common Stock equal to the number of such Rights held by such holder multiplied by the Exchange Ratio. The Company shall promptly give public notice of any such exchange; provided , however , that the failure to give, or any defect in, such notice shall not affect the validity of such exchange. The Company promptly shall mail a notice of any such exchange to all of the holders of such Rights at their last addresses as they appear upon the registry books of the Rights Agent. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange of the Common Stock for Rights will be effected and, in the event of any partial exchange, the number of Rights which will be exchanged. Any partial exchange shall be effected pro rata based on the number of Rights (other than Rights which have become void pursuant to the provisions of Section 7(e) hereof) held by each holder of Rights.
(c) In any exchange pursuant to this Section 24, the Company, at its option, may substitute Preferred Stock (or Equivalent Preferred Stock, as such term is defined in paragraph (b) of Section 11 hereof) for Common Stock exchangeable for Rights, at the initial rate of one one-thousandth of a share of Preferred Stock (or Equivalent Preferred Stock) for each share of Common Stock, as appropriately adjusted to reflect stock splits, stock dividends and other similar transactions after the date hereof.
(d) In the event that there shall not be sufficient shares of Common Stock issued but not outstanding or authorized but unissued to permit any exchange of Rights as contemplated in accordance with this Section 24, the Company shall take all such action as may be necessary to authorize additional shares of Common Stock for issuance upon exchange of the Rights.
(e) The Company shall not be required to issue fractions of shares of Common Stock or to distribute certificates which evidence fractional shares of Common Stock. In lieu of such fractional shares of Common Stock, there shall be paid to the registered holders of the Rights Certificates with regard to which such fractional shares of Common Stock would otherwise be issuable, an amount in cash equal to the same fraction of the current market value of a whole share of Common Stock. For the purposes of this subsection (e), the current market value of a whole share of Common Stock shall be the closing price of a share of Common Stock (as determined pursuant to the second sentence of Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of exchange pursuant to this Section 24.
Section 25. Notice of Certain Events.
(a) In case the Company shall propose, at any time after the Distribution Date, (i) to pay any dividend payable in stock of any class to the holders of Preferred Stock or to make any other distribution to the holders of Preferred Stock (other than a regular quarterly cash dividend out of earnings or retained earnings of the Company), or (ii) to offer to the holders of Preferred Stock rights or warrants to subscribe for or to purchase any additional shares of Preferred Stock or shares of stock of any class or any other securities,
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rights or options, or (iii) to effect any reclassification of its Preferred Stock (other than a reclassification involving only the subdivision of outstanding shares of Preferred Stock), or (iv) to effect any consolidation or merger into or with any other Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(o) hereof), or to effect any sale or other transfer (or to permit one or more of its Subsidiaries to effect any sale or other transfer), in one transaction or a series of related transactions, of more than 50% of the assets, cash flow or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person or Persons (other than the Company and/or any of its Subsidiaries in one or more transactions each of which complies with Section 11(o) hereof), or (v) to effect the liquidation, dissolution or winding up of the Company, then, in each such case, the Company shall give to each holder of a Rights Certificate, to the extent feasible and in accordance with Section 26 hereof, a notice of such proposed action, which shall specify the record date for the purposes of such stock dividend, distribution of rights or warrants, or the date on which such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution, or winding up is to take place and the date of participation therein by the holders of the shares of Preferred Stock, if any such date is to be fixed, and such notice shall be so given in the case of any action covered by clause (i) or (ii) above at least twenty (20) days prior to the record date for determining holders of the shares of Preferred Stock for purposes of such action, and in the case of any such other action, at least twenty (20) days prior to the date of the taking of such proposed action or the date of participation therein by the holders of the shares of Preferred Stock, whichever shall be the earlier.
(b) In case any of the events set forth in Section 11(a)(ii) hereof shall occur, then, in any such case, (i) the Company shall as soon as practicable thereafter give to each holder of a Rights Certificate, to the extent feasible and in accordance with Section 26 hereof, a notice of the occurrence of such event, which shall specify the event and the consequences of the event to holders of Rights under Section 11(a)(ii) hereof, and (ii) all references in the preceding paragraph to Preferred Stock shall be deemed thereafter to refer to Common Stock and/or, if appropriate, other securities.
Section 26. Notices.
(a) Notices or demands authorized by this Agreement to be given or made by the Rights Agent or by the holder of any Rights Certificate to or on the Company shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing by the Rights Agent with the Company) as follows:
CF
Industries Holdings, Inc.
One Salem Lake Drive
Long Grove, Illinois 60047
Attention: Corporate Secretary
(b) Subject to the provisions of Section 21, any notice or demand authorized by this Agreement to be given or made by the Company or by the holder of any Rights Certificate to or on the Rights Agent shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing by the Rights Agent with the Company) as follows:
The
Bank of New York
101 Barclay Street, 11 East
New York, New York 10286
Attention: Stock Transfer Administration
(c) Notices or demands authorized by this Agreement to be given or made by the Company or the Rights Agent to the holder of any Rights Certificate (or, if prior to the Distribution Date, to the holder of shares of Common Stock) shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Company.
Section 27. Supplements and Amendments. Prior to the Distribution Date, the Company and the Rights Agent shall, if the Company so directs, supplement or amend any provision of this Agreement without the approval of any holders of shares of Common Stock. From and after the Distribution Date, the Company and the Rights Agent shall, if the Company so directs, supplement or amend this Agreement without the approval of any holders of Rights Certificates in order (i) to cure any ambiguity, (ii) to correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, (iii) to shorten or lengthen any time period hereunder or (iv) to change or supplement the provisions hereunder in any manner which the Company may deem necessary or desirable and which shall
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not adversely affect the interests of the holders of Rights Certificates (other than an Acquiring Person or an Affiliate or Associate of an Acquiring Person). Upon the delivery of a certificate from an appropriate officer of the Company which states that the proposed supplement or amendment is in compliance with the terms of this Section 27, the Rights Agent shall execute such supplement or amendment. Notwithstanding anything herein to the contrary, this Agreement may not be amended (other than pursuant to clauses (i) or (ii) of the preceding sentence) at a time when the Rights are not redeemable.
Section 28. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder.
Section 29. Determinations and Actions by the Board of Directors, etc. For all purposes of this Agreement, any calculation of the number of shares of Common Stock or any other class of capital stock outstanding at any particular time, including for purposes of determining the particular percentage of such outstanding shares of Common Stock of which any Person is the Beneficial Owner, shall be made in accordance with the last sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange Act. The Board of Directors of the Company shall have the exclusive power and authority to administer this Agreement and to exercise all rights and powers specifically granted to the Board or to the Company, or as may be necessary or advisable in the administration of this Agreement, including, without limitation, the right and power to (i) interpret the provisions of this Agreement, and (ii) make all determinations deemed necessary or advisable for the administration of this Agreement (including a determination to redeem or not redeem the Rights or to amend the Agreement). All such actions, calculations, interpretations and determinations (including, for purposes of clause (y) below, all omissions with respect to the foregoing) which are done or made by the Board in good faith, shall (x) be final, conclusive and binding on the Company, the Rights Agent, the holders of the Rights and all other parties, and (y) not subject the Board or any of the directors on the Board to any liability to the holders of the Rights.
Section 30. Benefits of this Agreement. Nothing in this Agreement shall be construed to give to any Person other than the Company, the Rights Agent and the registered holders of the Rights Certificates (and, prior to the Distribution Date, registered holders of the Common Stock) any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the Rights Certificates (and, prior to the Distribution Date, registered holders of the Common Stock).
Section 31. Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated; provided, however, that notwithstanding anything in this Agreement to the contrary, if any such term, provision, covenant or restriction is held by such court or authority to be invalid, void or unenforceable and the Board of Directors of the Company determines in its good faith judgment that severing the invalid language from this Agreement would adversely affect the purpose or effect of this Agreement, the right of redemption set forth in Section 23 hereof shall be reinstated and shall not expire until the close of business on the tenth Business Day following the date of such determination by the Board of Directors.
Section 32. Governing Law; Jurisdiction; Waiver of Jury Trial. This Agreement, each Right and each Rights Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts made and to be performed entirely within such State; provided , however , that the rights, obligations and duties of the Rights Agent shall be governed by and construed in accordance with the laws of the State of New York. The parties agree that all actions and proceedings against the Rights Agent or commenced by the Rights Agent, in each case, arising out of this Agreement or any of the transactions contemplated hereby, shall be brought in the U.S. District Court in the Southern District of New York or in a New York State Court in the County of New York, and, in connection with any such action or proceeding, the parties agree to submit to jurisdiction of, and venue in, such court. Each of the parties hereto also irrevocably waives all right to trial by jury in any such action or proceeding.
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Section 33. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument.
Section 34. Descriptive Headings. Descriptive headings of the several sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, all as of the day and year first above written.
CF INDUSTRIES HOLDINGS, INC. | |||
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By: |
Name: Title: |
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THE BANK OF NEW YORK |
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By: |
Name: Title: |
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
CF INDUSTRIES HOLDINGS, INC.
Section 1. Designation and Amount . The shares of such series shall be designated as "Series A Junior Participating Preferred Stock" and the number of shares constituting such series shall be 500,000.
Section 2. Dividends and Distributions .
(a) Subject to the prior and superior rights of the holder of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series A Junior Participating Preferred Stock with respect to dividends, the holders of shares of Series A Junior Participating Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the 15th day of [May, August, November and February] in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Junior Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $0.01 or (b) subject to the provision for adjustment hereinafter set forth, 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, par value $0.01 per share, of the Corporation (the "Common Stock") since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Junior Participating Preferred Stock. In the event the Corporation shall at any time after [ ], 2005 (the "Effective Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
(b) The Corporation shall declare a dividend or distribution on the Series A Junior Participating Preferred Stock as provided in Paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $0.01 per share on the Series A Junior Participating Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date.
(c) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Junior Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Junior Participating Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Junior Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof.
Ex. A-1
Section 3. Voting Rights . The holders of shares of Series A Junior Participating Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Junior Participating Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time after the Effective Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
(B) Except as otherwise provided herein or by law, the holders of shares of Series A Junior Participating Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation.
(C) (i) If at any time dividends on any Series A Junior Participating Preferred Stock shall be in arrears in an amount equal to six (6) quarterly dividends thereon, the occurrence of such contingency shall mark the beginning of a period (herein called a "default period") which shall extend until such time when all accrued and unpaid dividends for all previous quarterly dividend periods and for the current quarterly dividend period on all shares of Series A Junior Participating Preferred Stock then outstanding shall have been declared and paid or set apart for payment. During each default period, all holders of Preferred Stock (including holders of the Series A Junior Participating Preferred Stock) with dividends in arrears in an amount equal to six (6) quarterly dividends thereon, voting as a class, irrespective of series, shall have the right to elect two (2) directors.
(ii) During any default period, such voting right of the holders of Series A Junior Participating Preferred Stock may be exercised initially at a special meeting called pursuant to subparagraph (iii) of this Section 3(C) or at any annual meeting of stockholders, and thereafter at annual meetings of stockholders, provided that neither such voting right nor the right of the holders of any other series of Preferred Stock, if any, to increase, in certain cases, the authorized number of directors shall be exercised unless the holders of ten percent (10%) in number of shares of Preferred Stock outstanding shall be present in person or by proxy. The absence of a quorum of the holders of Common Stock shall not affect the exercise by the holders of Preferred Stock of such voting right. At any meeting at which the holders of Preferred Stock shall exercise such voting right initially during an existing default period, they shall have the right, voting as a class, to elect directors to fill such vacancies, if any, in the Board of Directors as may then exist up to two (2) directors or, if such right is exercised at an annual meeting, to elect two (2) directors. If the number which may be so elected at any special meeting does not amount to the required number, the holders of the Preferred Stock shall have the right to make such increase in the number of directors as shall be necessary to permit the election by them of the required number. After the holders of the Preferred Stock shall have exercised their right to elect directors in any default period and during the continuance of such period, the number of directors shall not be increased or decreased except by vote of the holders of Preferred Stock as herein provided or pursuant to the rights of any equity securities ranking senior to or pari passu with the Series A Junior Participating Preferred Stock.
(iii) Unless the holders of Preferred Stock shall, during an existing default period, have previously exercised their right to elect directors, the Board of Directors may order, or any stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding, irrespective of series, may request, the calling of a special meeting of the holders of Preferred Stock, which meeting shall thereupon be called by the President, a Vice-President or the Secretary of the Corporation. Notice of such meeting and of any annual meeting at which holders of Preferred Stock are entitled to vote pursuant to this Paragraph (C)(iii) shall be given to each holder of record of Preferred Stock by mailing a copy of such notice to him at his last address as the same appears on the books of the Corporation. Such meeting shall be called for a time not earlier than 20 days and not later than 60 days after such order or request or in default of the calling of such meeting within 60 days after such order or request, such meeting may be called on similar notice by any
Ex. A-2
stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding. Notwithstanding the provisions of this Paragraph (C)(iii), no such special meeting shall be called during the period within 60 days immediately preceding the date fixed for the next annual meeting of the stockholders.
(iv) In any default period, the holders of Common Stock, and other classes of stock of the Corporation if applicable, shall continue to be entitled to elect the whole number of directors until the holders of Preferred Stock shall have exercised their right to elect two (2) directors voting as a class, after the exercise of which right (x) the directors so elected by the holders of Preferred Stock shall continue in office until their successors shall have been elected by such holders or until the expiration of the default period, and (y) any vacancy in the Board of Directors may (except as provided in Paragraph (C)(ii) of this Section 3) be filled by vote of a majority of the remaining directors theretofore elected by the holders of the class of stock which elected the director whose office shall have become vacant. References in this Paragraph (C) to directors elected by the holders of a particular class of stock shall include directors elected by such directors to fill vacancies as provided in clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the right of the holders of Preferred Stock as a class to elect directors shall cease, (y) the term of any directors elected by the holders of Preferred Stock as a class shall terminate, and (z) the number of directors shall be such number as may be provided for in the certificate of incorporation or by-laws irrespective of any increase made pursuant to the provisions of Paragraph (C)(ii) of this Section 3 (such number being subject, however, to change thereafter in any manner provided by law or in the certificate of incorporation or by-laws). Any vacancies in the Board of Directors effected by the provisions of clauses (y) and (z) in the preceding sentence may be filled by a majority of the remaining directors.
(D) Except as set forth herein, holders of Series A Junior Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action.
Section 4. Certain Restrictions .
(A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Junior Participating Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Junior Participating Preferred Stock outstanding shall have been paid in full, the Corporation shall not
(i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock;
(ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, except dividends paid ratably on the Series A Junior Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Junior Participating Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares of Series A Junior Participating Preferred Stock, or any shares of stock ranking on a parity with the Series A Junior Participating Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes.
Ex. A-3
(B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under Paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares . Any shares of Series A Junior Participating Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein.
Section 6. Liquidation, Dissolution or Winding Up . (A) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Series A Junior Participating Preferred Stock shall have received an amount equal to $1,000 per share of Series A Participating Preferred Stock, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "Series A Liquidation Preference"). Following the payment of the full amount of the Series A Liquidation Preference, no additional distributions shall be made to the holders of shares of Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the "Common Adjustment") equal to the quotient obtained by dividing (i) the Series A Liquidation Preference by (ii) 1,000 (as appropriately adjusted as set forth in subparagraph (C) below to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii), the "Adjustment Number"). Following the payment of the full amount of the Series A Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Series A Junior Participating Preferred Stock and Common Stock, respectively, holders of Series A Junior Participating Preferred Stock and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to 1 with respect to such Preferred Stock and Common Stock, on a per share basis, respectively.
(B) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of preferred stock, if any, which rank on a parity with the Series A Junior Participating Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock.
(C) In the event the Corporation shall at any time after the Effective Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Junior Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Junior Participating Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the
Ex. A-4
number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
Section 8. No Redemption . The shares of Series A Junior Participating Preferred Stock shall not be redeemable.
Section 9. Ranking . The Series A Junior Participating Preferred Stock shall rank junior to all other series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise.
Section 10. Amendment . At any time when any shares of Series A Junior Participating Preferred Stock are outstanding, neither the Amended and Restated Certificate of Incorporation of the Corporation nor this Certificate of Designation shall be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Junior Participating Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding shares of Series A Junior Participating Preferred Stock, voting separately as a class.
Section 11. Fractional Shares . Series A Junior Participating Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Junior Participating Preferred Stock.
Ex. A-5
[Form of Rights Certificate]
Certificate No. R- | Rights |
NOT EXERCISABLE AFTER , 2015 OR EARLIER EXPIRATION OR REDEMPTION BY THE COMPANY IN ACCORDANCE WITH THE TERMS OF THE RIGHTS AGREEMENT. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY, AT $.001 PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON (AS SUCH TERM IS DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SECTION 7(e) OF SUCH AGREEMENT.](1)
Rights Certificate
[THE COMPANY]
This certifies that , or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of the Rights Agreement, dated as of , 2005 (the "Rights Agreement"), between CF Industries Holdings, Inc., a Delaware corporation (the "Company"), and The Bank of New York, a New York banking corporation (the "Rights Agent"), to purchase from the Company at any time prior to 5:00 P.M. (New York City time) on , 2015 (unless such date is extended prior thereto by the Board of Directors) at the office or offices of the Rights Agent designated for such purpose, or its successors as Rights Agent, one one-thousandth of a fully paid, non-assessable share of Series A Junior Participating Preferred Stock (the "Preferred Stock") of the Company, at a purchase price of $ per one one-thousandth of a share (the "Purchase Price"), upon presentation and surrender of this Rights Certificate with the Form of Election to Purchase and related Certificate duly executed. The number of Rights evidenced by this Rights Certificate (and the number of shares which may be purchased upon exercise thereof) set forth above, and the Purchase Price per share set forth above, are the number and Purchase Price as of , 2005, based on the Preferred Stock as constituted at such date. The Company reserves the right to require prior to the occurrence of a Triggering Event (as such term is defined in the Rights Agreement) that a number of Rights be exercised so that only whole shares of Preferred Stock will be issued.
Upon the occurrence of a Section 11(a)(ii) Event (as such term is defined in the Rights Agreement), if the Rights evidenced by this Rights Certificate are beneficially owned by (i) an Acquiring Person or an Affiliate or Associate of any such Acquiring Person (as such terms are defined in the Rights Agreement), (ii) a transferee of any such Acquiring Person, Associate or Affiliate, or (iii) under certain circumstances specified in the Rights Agreement, a transferee of a person who, after such transfer, became an Acquiring Person, or an Affiliate or Associate of an Acquiring Person, such Rights shall become null and void and no holder hereof shall have any right with respect to such Rights from and after the occurrence of such Section 11(a)(ii) Event.
As provided in the Rights Agreement, the Purchase Price and the number and kind of shares of Preferred Stock or other securities, which may be purchased upon the exercise of the Rights evidenced by this Rights Certificate are subject to modification and adjustment upon the happening of certain events, including Triggering Events.
This Rights Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement, which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of
Ex. B-1
rights, obligations, duties and immunities hereunder of the Rights Agent, the Company and the holders of the Rights Certificates, which limitations of rights include the temporary suspension of the exercisability of such Rights under the specific circumstances set forth in the Rights Agreement. Copies of the Rights Agreement are on file at the above-mentioned office of the Rights Agent and are also available upon written request to the Rights Agent.
This Rights Certificate, with or without other Rights Certificates, upon surrender at the principal office or offices of the Rights Agent designated for such purpose, may be exchanged for another Rights Certificate or Rights Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate number of one one-thousandths of a share of Preferred Stock as the Rights evidenced by the Rights Certificate or Rights Certificates surrendered shall have entitled such holder to purchase. If this Rights Certificate shall be exercised in part, the holder shall be entitled to receive upon surrender hereof another Rights Certificate or Rights Certificates for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced by this Certificate may be redeemed by the Company at its option at a redemption price of $.001 per Right at any time prior to the earlier of the close of business on (i) the tenth Business Day following the Stock Acquisition Date (as such time period may be extended pursuant to the Rights Agreement), and (ii) the Final Expiration Date. In addition, under certain circumstances following the Stock Acquisition Date, the Rights may be exchanged, in whole or in part, for shares of the Common Stock, or shares of preferred stock of the Company having essentially the same value or economic rights as such shares. Immediately upon the action of the Board of Directors of the Company authorizing any such exchange, and without any further action or any notice, the Rights (other than Rights which are not subject to such exchange) will terminate and the Rights will only enable holders to receive the shares issuable upon such exchange.
No fractional shares of Preferred Stock will be issued upon the exercise of any Right or Rights evidenced hereby (other than fractions which are integral multiples of one one-thousandth of a share of Preferred Stock, which may, at the election of the Company, be evidenced by depositary receipts), but in lieu thereof a cash payment will be made, as provided in the Rights Agreement. The Company, at its election, may require that a number of Rights be exercised so that only whole shares of Preferred Stock would be issued.
No holder of this Rights Certificate shall be entitled to vote or receive dividends or be deemed for any purpose the holder of shares of Preferred Stock or of any other securities of the Company which may at any time be issuable on the exercise hereof, nor shall anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give consent to or withhold consent from any corporate action, or, to receive notice of meetings or other actions affecting stockholders (except as provided in the Rights Agreement), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by this Rights Certificate shall have been exercised as provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Rights Agent.
Ex. B-2
WITNESS the facsimile signature of the proper officers of the Company and its corporate seal.
Dated as of , | ||||
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CF INDUSTRIES HOLDINGS, INC. |
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THE BANK OF NEW YORK |
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[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Rights Certificate.)
FOR VALUE RECEIVED hereby sells, assigns and transfers unto (Please print name and address of transferee) this Rights Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint Attorney, to transfer the within Rights Certificate on the books of the within named Company, with full power of substitution.
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Certificate
The undersigned hereby certifies by checking the appropriate boxes that:
(1) this Rights Certificate o is o is not being sold, assigned and transferred by or on behalf of a Person who is or was an Acquiring Person or an Affiliate or Associate of any such Acquiring Person (as such terms are defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned, it o did o did not acquire the Rights evidenced by this Rights Certificate from any Person who is, was or subsequently became an Acquiring Person or an Affiliate or Associate of an Acquiring Person.
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NOTICE
The signature to the foregoing Assignment and Certificate must correspond to the name as written upon the face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever.
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires
to exercise Rights represented
by the Rights Certificate.)
The undersigned hereby irrevocably elects to exercise Rights represented by this Rights Certificate to purchase the shares of Preferred Stock issuable upon the exercise of the Rights (or such other securities of the Company or of any other person which may be issuable upon the exercise of the Rights) and requests that certificates for such shares be issued in the name of and delivered to:
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insert social security
or other identifying number
(Please print name and address) |
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If such number of Rights shall not be all the Rights evidenced by this Rights Certificate, a new Rights Certificate for the balance of such Rights shall be registered in the name of and delivered to:
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insert social security
or other identifying number
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Dated: | |||
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Signature |
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Signature Guaranteed: |
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Certificate
The undersigned hereby certifies by checking the appropriate boxes that:
(1) the Rights evidenced by this Rights Certificate o are o are not being exercised by or on behalf of a Person who is or was an Acquiring Person or an Affiliate or Associate of any such Acquiring Person (as such terms are defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned, it o did o did not acquire the Rights evidenced by this Rights Certificate from any Person who is, was or became an Acquiring Person or an Affiliate or Associate of an Acquiring Person.
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NOTICE
The signature to the foregoing Election to Purchase and Certificate must correspond to the name as written upon the face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever.
SUMMARY OF RIGHTS TO PURCHASE
PREFERRED STOCK
Effective July 21, 2005 (the "Effective Date"), the Board of Directors of CF Industries Holdings, Inc. (the "Company") authorized the issuance of one Right for each share of Common Stock of the Company issued between the Effective Date and the Distribution Date (as defined below). Each Right entitles the registered holder to purchase from the Company a unit consisting of one one-thousandth of a share (a "Unit") of Series A Junior Participating Preferred Stock, par value $0.01 per share (the "Series A Preferred Stock") at a Purchase Price of $90.00 per Unit, subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement (the "Rights Agreement") between the Company and The Bank of New York, as Rights Agent.
Initially, the Rights will be attached to all Common Stock certificates or, in the case of uncertificated shares, the associated balance indicated in the book-entry account system of the transfer agent for the Common Stock, representing shares then outstanding, and no separate Rights Certificates will be distributed. Subject to certain exceptions specified in the Rights Agreement, the Rights will separate from the Common Stock and a Distribution Date will occur upon the earlier of (i) 10 business days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired beneficial ownership of 15% or more of the outstanding shares of Common Stock (the "Stock Acquisition Date"), other than as a result of repurchases of stock by the Company or certain inadvertent actions by institutional or certain other stockholders or (ii) 10 business days (or such later date as the Board shall determine) following the commencement of a tender offer or exchange offer that would result in a person or group becoming an Acquiring Person. Until the Distribution Date, (i) the Rights will be evidenced by shares of Common Stock and will be transferred with and only with such Common Stock, (ii) new Common Stock certificates issued after the Effective Date will contain a notation incorporating the Rights Agreement by reference and (iii) the surrender for transfer of any certificates for Common Stock outstanding will also constitute the transfer of the Rights associated with the Common Stock represented by such certificate. Pursuant to the Rights Agreement, the Company reserves the right to require prior to the occurrence of a Triggering Event (as defined below) that, upon any exercise of Rights, a number of Rights be exercised so that only whole shares of Preferred Stock will be issued.
The Rights are not exercisable until the Distribution Date and will expire at 5:00 P.M. (New York City time) on July 21, 2015, unless such date is extended or the Rights are earlier redeemed or exchanged by the Company as described below.
As soon as practicable after the Distribution Date, Rights Certificates will be mailed to holders of record of the Common Stock as of the close of business on the Distribution Date and, thereafter, the separate Rights Certificates alone will represent the Rights. Except as otherwise determined by the Board of Directors, only shares of Common Stock issued prior to the Distribution Date will be issued with Rights.
In the event that a Person becomes an Acquiring Person, each holder of a Right will thereafter have the right to receive, upon exercise, Common Stock (or, in certain circumstances, cash, property or other securities of the Company) having a value equal to two times the exercise price of the Right. Notwithstanding any of the foregoing, following the occurrence of the event set forth in this paragraph, all Rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by any Acquiring Person will be null and void. However, Rights are not exercisable following the occurrence of the event set forth above until such time as the Rights are no longer redeemable by the Company as set forth below.
For example, at an exercise price of $90 per Right, each Right not owned by an Acquiring Person (or by certain related parties) following an event set forth in the preceding paragraph would entitle its holder to purchase $180 worth of Common Stock (or other consideration, as noted above) for $90. Assuming that the Common Stock had a per share value of $16 at such time, the holder of each valid Right would be entitled to purchase 11.25 shares of Common Stock for $90.
In the event that, at any time following the Stock Acquisition Date, (i) the Company engages in a merger or other business combination transaction in which the Company is not the surviving corporation, (ii) the Company engages in a merger or other business combination transaction in which the Company is
Ex. C-1
the surviving corporation and the Common Stock of the Company is changed or exchanged, or (iii) 50% or more of the Company's assets, cash flow or earning power is sold or transferred, each holder of a Right (except Rights which have previously been voided as set forth above) shall thereafter have the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the exercise price of the Right. The events set forth in this paragraph and in the second preceding paragraph are referred to as the "Triggering Events."
At any time after a person becomes an Acquiring Person and prior to the acquisition by such person or group of fifty percent (50%) or more of the outstanding Common Stock, the Board may exchange the Rights (other than Rights owned by such person or group which have become void), in whole or in part, at an exchange ratio of one share of Common Stock, or one one-thousandth of a share of Preferred Stock (or of a share of a class or series of the Company's preferred stock having equivalent rights, preferences and privileges), per Right (subject to adjustment).
The Purchase Price payable, and the number of Units of Preferred Stock or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Preferred Stock, (ii) if holders of the Preferred Stock are granted certain rights or warrants to subscribe for Preferred Stock or convertible securities at less than the current market price of the Preferred Stock, or (iii) upon the distribution to holders of the Preferred Stock of evidences of indebtedness or assets (excluding regular quarterly cash dividends) or of subscription rights or warrants (other than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments amount to at least 1% of the Purchase Price. No fractional Units will be issued and, in lieu thereof, an adjustment in cash will be made based on the market price of the Preferred Stock on the last trading date prior to the date of exercise.
At any time until ten business days following the Stock Acquisition Date, the Company may redeem the Rights in whole, but not in part, at a price of $.001 per Right (payable in cash, Common Stock or other consideration deemed appropriate by the Board of Directors). Immediately upon the action of the Board of Directors ordering redemption of the Rights, the Rights will terminate and the only right of the holders of Rights will be to receive the $.001 redemption price.
Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. While the distribution of the Rights will not be taxable to stockholders or to the Company, stockholders may, depending upon the circumstances, recognize taxable income in the event that the Rights become exercisable for Common Stock (or other consideration) of the Company or for common stock of the acquiring company or in the event of the redemption of the Rights as set forth above.
Any of the provisions of the Rights Agreement may be amended by the Board of Directors of the Company prior to the Distribution Date. After the Distribution Date, the provisions of the Rights Agreement may be amended by the Board in order to cure any ambiguity, to make changes which do not adversely affect the interests of holders of Rights, or to shorten or lengthen any time period under the Rights Agreement. The foregoing notwithstanding, no amendment may be made at such time as the Rights are not redeemable.
A copy of the Rights Agreement will be filed with the Securities and Exchange Commission as an Exhibit to a Registration Statement on Form 8-A/Current Report on Form 8-K. A copy of the Rights Agreement is available free of charge from the Rights Agent. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, which is incorporated herein by reference.
Ex. C-2
REGISTRATION RIGHTS AGREEMENT (as amended from time to time, this "Agreement"), dated as of [ ], 2005, by and between CF Industries Holdings, Inc., a Delaware corporation (the " Company ") on the one hand, and each of the stockholders listed on the signature pages to this Agreement (each individually a " Stockholder " and, collectively, the " Stockholders ") on the other hand.
W I T N E S S E T H
WHEREAS, the parties hereto wish to enter into this Registration Rights Agreement to memorialize their agreement regarding registration rights with respect to the Company.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:
1.1 Definitions. The following terms when used in this Agreement shall have the following meanings (such definitions to be equally applicable to the singular and plural forms thereof):
" Affiliate " of any Person means any other Person which directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such Person. The term "control" (including the terms "controlling," "controlled by" and "under common control with") as used with respect to any Person means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise.
" Agreement " shall have the meaning provided in the Introduction.
" Board " shall mean the Board of Directors of the Company.
" Commission " shall mean the Securities and Exchange Commission.
" Common Stock " shall mean the common stock, par value $.01 per share of the Company.
" Company " shall have the meaning provided in the Introduction.
" Demand Registration " shall have the meaning provided in Section 2.1.
" Exchange Act " shall mean the Securities Exchange Act of 1934, as amended.
" Holder " means any Stockholder that holds Registrable Securities and any transferees of such Registrable Securities provided that such transfer is made in accordance with the terms of this Agreement; provided , however , that such Stockholder or transferee, as the case may be, holds Registrable Securities representing not less than 5% of the then outstanding Common Stock. For purposes of this Agreement, the Company may deem and treat the registered holder of Registrable Securities as the Holder and absolute owner thereof, and the Company shall not be affected by any notice to the contrary.
" Merger Agreement " shall mean the Agreement and Plan of Merger, dated as of [ ], 2005, by and among the Company, CF Merger Corp., and CF Industries, Inc.
" Person " shall mean any natural person, corporation, firm, limited liability company, partnership, association, government, governmental agency or other entity, whether acting in an individual, fiduciary or other capacity.
" Piggyback Registration " shall have the meaning provided in Section 3.1.
" Prospectus " shall mean the prospectus included in any registration statement, as amended or supplemented by any prospectus supplement with respect of the terms of the offering of any security of the Company covered by such registration statement and all other amendments or supplements to the prospectus, including post effective amendments, and all material incorporated, or deemed to be incorporated, by reference in such prospectus.
" Registrable Securities " shall mean any shares of Common Stock issued to a Stockholder pursuant to the Merger Agreement and any equity securities of the Company issued or issuable with respect to any such
Common Stock by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise, except, in the case of any such securities issued with respect to Common Stock, for any such securities that are not "restricted securities," as such term is defined in Rule 144(a) under the Securities Act. As to any particular Registrable Securities, such securities shall cease to be Registrable Securities when (a) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (b) they shall have been distributed to the public pursuant to Rule 144 (or any successor provision) under the Securities Act, (c) they shall have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent disposition of them shall not require registration or qualification of them under the Securities Act or any similar state law then in force, (d) they become eligible for resale pursuant to Rule 144(k) (or any successor provision) under the Securities Act, or (e) they shall have ceased to be outstanding.
" Registration " shall have the meaning provided in Section 2.1.
" Registration Expenses " shall have the meaning provided in Section 6.1.
" Restricted Period " means the one-year "Restricted Period" set forth in those certain Lock-Up Agreements, dated as of [ ], 2005, executed and delivered by the Stockholders in connection with the initial public offering of the Company's common stock, as such one-year period may be extended in accordance with the terms of such Lock-Up Agreements.
" Rule 144 " shall mean Rule 144 promulgated under the Securities Act.
" Securities Act " shall mean the Securities Act of 1933, as amended.
ARTICLE II
DEMAND REGISTRATIONS
2.1 Requests for Registration. Subject to the terms and conditions hereof, at any time after the expiration of the Restricted Period, if any Holder or Holders who hold not less than 25% of the then outstanding Registrable Securities request in writing registration under the Securities Act of any of its or their Registrable Securities (a " Registration "), which request specifies the approximate number of Registrable Securities requested to be registered, then within ten (10) days after receipt of any such request, the Company shall give written notice of such requested Registration to all other Holders and shall include in the Registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein within 15 days after the date of mailing of the Company's notice. The Registration requested pursuant to this Section 2.1 is referred to herein as a " Demand Registration ".
2.2 Registration. Holders shall be entitled to not more than two (2) Demand Registrations, in the aggregate. Subject to the limitations set forth in this Section 2.2 and in Section 2.4, no more than one Demand Registration may be requested in any six-month period. The Company shall pay all Registration Expenses in connection with each Demand Registration. No request for a Demand Registration shall be permitted unless the Registrable Securities sought to be included in such Demand Registration have an expected market value of at least $25 million. A Registration shall not count as a Demand Registration until it has become effective, and any Registration shall not count as a Demand Registration unless the initiating Holder or Holders and other Holders are able to register and sell at least 50% of the Registrable Securities requested to be included in such Registration.
2.3 Priority on Demand Registrations. If a Demand Registration is an underwritten offering and the managing underwriters advise the Company in writing that in their opinion the number of Registrable Securities and other securities requested to be included in such offering, exceeds the number of Registrable Securities and other securities, if any, which can be sold in an orderly manner in such offering and/or that the number of shares of Registrable Securities proposed to be included in such offering would adversely affect the price per share of the Common Stock, the Company shall include in the Registration, prior to the inclusion of any securities which are not Registrable Securities, the number of Registrable Securities requested to be included which, in the opinion of the underwriters, can be so sold, pro rata (or as may have otherwise been agreed among the Holders of Registrable Securities to be included in such Registration) among the respective Holders thereof on the basis of the amount of Registrable Securities requested to be registered by each such Holder; provided that if the number of Registrable Securities to be included in the Registration is less than 75% of the number requested to be so included, the Holders of Registrable Securities covered by such Demand Registration shall be entitled to withdraw such request, upon the
affirmative vote of Holders holding at least 66% of such Registrable Securities, and, if such request is withdrawn, the Demand Registration shall not count as a permitted Demand Registration hereunder, and the Company shall pay all Registration Expenses in connection with the withdrawn Registration. Any Persons who participate in Demand Registrations not at the Company's expense must pay their share of the Registration Expenses as provided in Article VI.
2.4 Restrictions on Registrations. The Company shall not be obligated to effect any Demand Registration within six months after the effective date of a Registration demanded by the holders of registration rights under a Registration in which the Holders were given Piggyback Rights pursuant to Article III. The Company may, not more than twice in any 12-month period, postpone for up to 90 days the filing or the effectiveness of a registration statement for a Demand Registration if the Board determines in good faith that (i) such postponement is necessary in order to avoid premature disclosure of a matter the Board has determined would not be in the best interest of the Company to be disclosed at such time or (ii) the Demand Registration would materially and adversely impact the Company; provided , that in such event, the Holders of Registrable Securities covered by the Demand Registration shall be entitled, upon the affirmative vote of holders holding at least 66% of such Registrable Securities, to withdraw such request and, if such request is withdrawn, the Demand Registration shall not count as a permitted Demand Registration hereunder, and the Company shall pay all Registration Expenses in connection with the withdrawn Registration; provided further , that upon the election of the Company and upon notice to the Holders of Registrable Securities to be included in such Registration, one such postponement may be extended to not more than 120 days at the sole discretion of the Company.
2.5 Selection of Underwriters. In connection with a Demand Registration, the Company shall select the investment banker(s) and manager(s) to administer the offering.
ARTICLE III
PIGGYBACK REGISTRATIONS
3.1 Right to Piggyback. Subject to the terms and conditions hereof, at any time after the Restricted Period whenever the Company proposes to register (including for this purpose a Registration effected by the Company for shareholders other than Holders) any of its securities under the Securities Act (other than (i) a Registration under Article II hereof, (ii) a Registration of securities solely relating to an offering and sale pursuant to any employee stock plan or other employee benefit plan arrangement, including any registration on Form S-8 (or any successor form thereto) or (iii) a Registration of securities issued in an acquisition or business combination including any Registration on Form S-4 (or any successor form thereto)) (a " Piggyback Registration "), the Company shall give at least 20 days' written notice to all Holders of the Company's intention to effect such a Registration and shall include in the Registration, subject to any agreement among the Holders to be included in such Registration, all Registrable Securities with respect to which the Company has received written requests for inclusion therein within 10 days after the receipt of the Company's notice.
3.2 Piggyback Expenses. The Registration Expenses of the Holders shall be paid by the Company in all Piggyback Registrations.
3.3 Priority on Primary Registrations. If a Piggyback Registration is an underwritten primary Registration on behalf of the Company and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such Registration exceeds the number which can be sold in an orderly manner in such offering and/or that the number of securities proposed to be included in such offering would adversely affect the price per share of the Common Stock, the Company shall include in the Registration (i) first, the securities the Company proposes to sell, and (ii) second, the Registrable Securities requested to be included in the Registration pro rata among the Holders on the basis of the number of shares proposed to be registered by each or as such holders may otherwise agree, and (iii) third, other securities requested to be included in the Registration pro rata among the holders of such other securities on the basis of the number of shares requested to be registered by each such holder or as such holders may otherwise agree.
3.4 Priority on Secondary Registrations. If a Piggyback Registration is an underwritten secondary Registration on behalf of holders of the Company's securities other than Registrable Securities and the managing underwriters advise the Company in writing that, in their opinion, the number of securities requested to be included in the Registration exceeds the number which can be sold in an orderly manner in such offering and/or that the number of securities proposed to be included in such offering would adversely affect the price per share of the Common Stock, the Company shall include in the Registration (i) first, the
securities requested to be included therein by the holders requesting such Registration pro rata among the holders of such other securities on the basis of the number of shares requested to be registered by each such holder or as such holders may otherwise agree, (ii) second, the Registrable Securities requested to be included in such Registration pro rata among the Holders on the basis of the number of shares proposed to be registered by each or as such Holders may otherwise agree, and (iii) third, other securities requested to be included in the Registration pro rata among the holders of such other securities on the basis of the number of shares requested to be registered by each such holder or as such holders may otherwise agree.
3.5 Selection of Underwriters. If any Piggyback Registration is an underwritten offering, the Company shall select the investment banker(s) and manager(s) to administer the offering.
4.1 General. Each Holder agrees not to effect any sale, distribution or other transfer (including sales pursuant to Rule 144) of equity securities of the Company, or any securities convertible into or exchangeable or exercisable for such securities, during a period of up to 180 days (as may be requested by the Company and the managing underwriters) following any underwritten, registered public offering of Common Stock, beginning on the effective date of such underwritten, registered offering (except for sales of such securities as part of such underwritten, registered offering) whether or not the Holder sold shares in such offering, unless the managing underwriters otherwise agree.
ARTICLE V
REGISTRATION PROCEDURES
5.1 Registration Procedures. Whenever the Holders have requested that any Registrable Securities be registered pursuant to this Agreement, the Company shall use its best efforts to effect the Registration and the sale of such Registrable Securities in accordance with the intended method of disposition thereof, and pursuant thereto the Company shall as expeditiously as possible:
(a) Prepare and, in the case of a Demand Registration, no later than 60 days after a request for a Demand Registration, file with the Commission a registration statement with respect to such Registrable Securities and use its best efforts to cause the registration statement to become effective and remain effective until the earlier of (i) the date when all Registrable Securities covered by the registration statement have been sold, or (ii) 120 days from the effective date of the registration statement; provided , that before filing a registration statement or Prospectus or any amendments or supplements thereto, furnish to the Holders of Registrable Securities covered by such registration statement and the underwriter or underwriters, if any, copies of all such documents proposed to be filed, including documents incorporated by reference in the Prospectus and, if requested by such Holders, the exhibits incorporated by reference, and such Holders shall have the opportunity to object to any information pertaining to such Holders that is contained therein and the Company will make the corrections reasonably requested by such Holders with respect to such information prior to filing any registration statement or amendment thereto or any Prospectus or any supplement thereto; provided further , that the period for the preparation and filing of a Demand Registration shall be 120 days if a request for a Demand Registration is made in the first 45 days of any year;
(b) Prepare and file with the Commission such amendments and supplements to the registration statement and the Prospectus used in connection therewith as may be necessary to keep the registration statement effective for the period referred to in Section 5.1(a) and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by the registration statement during such period in accordance with the intended methods of disposition by the sellers thereof as set forth in the registration statement;
(c) Furnish to each seller of Registrable Securities such number of copies of the registration statement, each amendment and supplement thereto, the Prospectus included in the registration statement (including each preliminary prospectus) and such other documents as such Holder may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Holder;
(d) Use commercially reasonable efforts to register or qualify such Registrable Securities under such other securities or blue sky laws of such jurisdictions as any Holder thereof reasonably requests
and do any and all other acts and things which may be reasonably necessary or advisable to enable such Holder to consummate the disposition in such jurisdictions of the Registrable Securities owned by such Holder; provided , however , provided, that the Company will not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subparagraph (d), (ii) subject itself to taxation in any such jurisdiction or (iii) consent to general service of process in any such jurisdiction;
(e) Notify each such Holder, at any time when a Prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the Prospectus included in such registration statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading, and, at the request of any such Holder, the Company shall prepare a supplement or amendment to the Prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such Prospectus shall not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading;
(f) Promptly notify each seller of Registrable Securities and the underwriter or underwriters, if any: (i) when the registration statement, any pre-effective amendment, the Prospectus or any Prospectus supplement or post-effective amendment to the registration statement has been filed and, with respect to the registration statement or any post-effective amendment, when the same has become effective, (ii) of any written request by the Commission for amendments or supplements to the registration statement or Prospectus, (iii) of the notification to the Company by the Commission of its initiation of any proceeding with respect to the issuance by the Commission of any stop order suspending the effectiveness of the registration statement, (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification of any Registrable Securities for sale under the applicable securities or blue sky laws of any jurisdiction and (v) of any other material written communication from the Commission relating to the registration statement or the Prospectus.
(g) Cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by the Company are then listed and, if not so listed, to be listed on the NASD automated quotation system;
(h) Provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such registration statement;
(i) Make available, for inspection by any seller of Registrable Securities, any underwriter participating in any disposition pursuant to such registration statement, and any attorney, accountant or other agent retained by any such seller or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors, employees and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement;
(j) Make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months beginning with the first day of the Company's first full calendar quarter after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 1l(a) of the Securities Act and Rule 158 thereunder; and
(k) If requested, cause to be delivered, immediately prior to the effectiveness of the registration statement (and, in the case of an underwritten offering, at the time of delivery of any Registrable Securities sold pursuant thereto), letters from the Company's independent certified public accountants addressed to each selling Holder (unless such selling Holder does not provide to such accountants the appropriate representation letter required by rules governing the accounting profession) and each underwriter, if any, stating that such accountants are independent public accountants within the meaning of the Securities Act and the applicable rules and regulations adopted by the Commission thereunder, and otherwise in customary form and covering such financial and accounting matters as are customarily covered by letters of the independent certified public accountants delivered in connection with primary or secondary underwritten public offerings, as the case may be;
(l) In connection with an underwritten offering, (i) make such representations and warranties to such selling Holders and the underwriters with respect to the Registrable Securities and the registration statement as are customarily made by issuers to underwriters in primary or secondary underwritten offerings, (ii) obtain opinions of counsel to the Company and updates thereof addressed to each selling Holder and the underwriters covering the matters customarily covered in opinions requested in primary or secondary underwritten offerings, and (iii) make available, on a reasonable basis, senior management personnel of the Company to participate in, and cause them to cooperate with the selling Holders or the
managing underwriter in any underwritten offering in connection with "road show" and other customary marketing activities, including "one on one" meetings with prospective purchasers of the Registrable Securities to be sold in the underwritten offering.
ARTICLE VI
REGISTRATION EXPENSES
6.1 In General. All expenses incident to the Company's performance of or compliance with this Agreement, including without limitation, all Registration and filing fees, fees and expenses of compliance with securities or blue sky laws, printing expenses, messenger and delivery expenses, and fees and disbursements of counsel for the Company and all independent certified public accountants, underwriters (excluding discounts and commissions and transfer taxes, if any, attributable to the sale of Registrable Securities) and other Persons retained by the Company (all such expenses being herein called " Registration Expenses "), shall be borne by the Company, and the Company shall pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit or quarterly review, the expense of any liability insurance and the expenses and fees for listing the securities to be registered on each securities exchange on which similar securities issued by the Company are then listed or on the NASD automated quotation system.
6.2 Reimbursement by the Company. In connection with each Registration, the Company shall reimburse the Holders covered by such Registration for the reasonable fees and disbursements of one counsel chosen by the Holders of a majority of the Registrable Securities covered by such Registration.
6.3 Obligations of the Holders of Securities . To the extent registration expenses are not required to be paid by the Company, each Holder of securities included in any Registration hereunder shall pay those registration expenses allocable to the registration of such Holder's securities so included, and any registration expenses not so allocable shall be borne by all sellers of securities included in the Registration in proportion to the aggregate selling price of the securities to be so registered.
7.1 In General. The Company shall indemnify, to the fullest extent permitted by law, each Holder, its officers, directors and Affiliates and each Person who controls such Holder (within the meaning of the Securities Act) against all losses, claims, damages, liabilities and expenses arising out of or based upon any untrue or alleged untrue statement of material fact contained in any registration statement, Prospectus or preliminary Prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading or any violation or alleged violation by the Company of the Securities Act, the Exchange Act or applicable blue sky laws, except insofar as the same are made in reliance and in conformity with information relating to such Holder furnished in writing to the Company by such Holder expressly for use therein or caused by such Holder's failure to deliver to such Holder's immediate purchaser a copy of the registration statement or Prospectus or any amendments or supplements thereto (if the same was required by applicable law to be so delivered) after the Company has furnished such Holder with a sufficient number of copies of the same. In connection with an underwritten offering, the Company shall indemnify such underwriters, their officers and directors and each Person who controls such underwriters (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of the Holders.
7.2 Information from the Holders. In connection with any registration statement in which a Holder is participating, each such Holder shall furnish to the Company in writing such information and affidavits as the Company reasonably requests for use in connection with any such registration statement or Prospectus and, shall indemnify, to the fullest extent permitted by law, the Company, its officers, directors Affiliates, and each Person who controls the Company (within the meaning of the Securities Act) against all losses, claims, damages, liabilities and expenses arising out of or based upon any untrue or alleged untrue statement of material fact contained in the registration statement, Prospectus or preliminary Prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that the same are made in reliance and in conformity with information relating to such Holder furnished in writing to the Company by such Holder expressly for use therein or caused by such Holder's failure to deliver to such Holder's immediate purchaser a copy of the registration statement or Prospectus or any amendments or
supplements thereto (if the same was required by applicable law to be so delivered) after the Company has furnished such Holder with a sufficient number of copies of the same; provided, however, that the obligation to indemnify shall be several, not joint and several, among such Holders and the liability of each such Holder shall be in proportion to and limited to the net amount received by such Holder from the sale of Registrable Securities pursuant to such registration statement.
7.3 Notice of Claim. Any Person entitled to indemnification hereunder shall (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party shall not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent will not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim shall not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party there may be one or more legal or equitable defenses available to such indemnified party which are in addition to or may conflict with those available to another indemnified party with respect to such claim. Failure to give prompt written notice shall not release the indemnifying party from its obligations hereunder.
7.4 Survival of Indemnification. The indemnification provided for under this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling Person of such indemnified party and shall survive the transfer of securities.
7.5 Contribution. If the indemnification provided for in or pursuant to this Article VII is due in accordance with the terms hereof, but is held by a court to be unavailable or unenforceable in respect of any losses, claims, damages, liabilities or expenses referred to herein, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified Person as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions which result in such losses, claims, damages, liabilities or expenses as well as any other relevant equitable considerations. The relative fault of the indemnifying party on the one hand and of the indemnified Person on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party, and by such party's relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. In no event shall the liability of any selling Holder be greater in amount than the amount of net proceeds received by such Holder upon such sale or the amount for which such indemnifying party would have been obligated to pay by way of indemnification if the indemnification provided for under Section 7.1 or 7.2 hereof had been available under the circumstances.
ARTICLE VIII
PARTICIPATION IN UNDERWRITTEN REGISTRATIONS
8.1 Participation in Underwritten Registrations. No Person may participate in any Registration hereunder which is underwritten unless such Person (a) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Company and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements.
ARTICLE IX
REPORTS UNDER THE SECURITIES LAWS
9.1 Reports Under the Securities Laws. With a view to making available to the Holders the benefits of Rule 144 and any other rule or regulation of the Commission that may at any time permit a Holder to sell securities of the Company to the public without Registration, the Company agrees to:
(a) File with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and
(b) Furnish to any holder so long as the Holder owns any of the Registrable Securities forthwith upon request a written statement by the Company that it has complied with the reporting requirements of the Securities Act and the Exchange Act.
ARTICLE X
TRANSFER OF REGISTRATION RIGHTS
10.1 Transfer of Registration Rights. Provided that the Company is given prompt written notice by a Holder of any transfer of Registrable Securities by such Holder stating the name and address of the transferee of such Registrable Securities and identifying the securities with respect to which the rights under this Agreement are being assigned and such transferee agrees in writing to be bound by the terms and conditions of this Agreement, the rights of the Holder under this Agreement may be transferred in whole or in part at any time to any such transferee, so long as such transfer of securities is in accordance with all applicable state and federal securities laws and regulations. The Company shall be responsible for the Registration Expenses of any transferee or assignee pursuant to this Section 10.1 to the same extent as the original transferor.
ARTICLE XI
INFORMATION BY HOLDERS OF REGISTRABLE SECURITIES
11.1 Reporting of Sales. Each Holder shall report to the Company sales made pursuant to any Registration of such Registrable Securities.
12.1 Notices. Any notice, demand, offer, or other instrument required or permitted to be given pursuant to this Agreement shall be in writing signed by the party giving such notice and shall, to the extent reasonably practicable, be sent by telecopy (with confirmation of receipt), and if not reasonably practicable to send by telecopy, then by hand delivery, overnight courier or certified mail (return receipt requested), to the other parties at the addresses set forth below:
If to the Company:
CF
Industries Holdings, Inc.
One Salem Lake Drive
Long Grove, IL 60047
Attention: General Counsel
Facsimile:
If to a Stockholder, to the address(es) set forth on the counterpart signature pages of this Agreement signed by such Stockholder.
If to a transferee Holder, to the address of such Holder set forth in the transfer documentation provided to the Company;
Each party may change the place to which notice shall be sent or delivered or specify one additional address to which copies of notices may be sent, in either case by similar notice sent or delivered in like manner to the other parties. Without limiting any other means by which a party may be able to prove that a notice has been received by the other party, a notice shall be deemed to be duly received: (a) if sent by hand or overnight courier, the date when duly delivered at the address of the recipient; (b) if sent by certified mail, the date of the return receipt; or (c) if sent by telecopy, upon receipt by the sender of an acknowledgment or transmission report generated by the machine from which the telecopy was sent indicating that the telecopy was sent in its entirety to the recipient's telecopy number.
12.2 Captions. Titles or captions of Sections or Articles contained in this Agreement are inserted only as a matter of convenience and for reference, and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision hereof.
12.3 Amendment. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given without the prior written consent of the Holders of a majority of the Registrable Securities;
provided , however , that without a Holder's written consent no such amendment, modification, supplement or waiver shall affect adversely such Holder's rights hereunder in a discriminatory manner inconsistent with its adverse effects on rights of other Holders hereunder (other than as reflected by the different number of shares held by such Holder); provided , further , that the consent or agreement of the Company shall be required with regard to any termination, amendment, modification or supplement of, or waivers or consents to departures from, the terms hereof, which affect the Company's obligations hereunder.
12.4 Waiver. Any waiver of any term or condition shall not be construed as a waiver of any subsequent breach or a subsequent waiver of the same term or condition, or as a waiver of any other term or condition, of this Agreement. The failure of any party to assert any of its rights hereunder shall not constitute a waiver of any of such rights.
12.5 Survival. The several indemnities, agreements, representations, warranties and each other provision set forth in this Agreement and made pursuant hereto shall remain in full force and effect regardless of any investigation (or statement as to the results thereof) made by or on behalf of any party, any director or officer of such party, or any controlling person of any of the foregoing, and shall survive the transfer of any Registrable Securities, and the indemnification and contribution provisions set forth in Article VII shall survive termination of this Agreement.
12.6 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one and the same instrument.
12.7 Entire Agreement; Assignment. This Agreement and any agreement, document or schedule attached hereto or thereto or referred to herein or therein, constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, of the parties with respect to the subject matter hereof. Any oral representations or modifications concerning this instrument shall be of no force or effect unless contained in a subsequent written modification signed by the party to be charged. The registration rights of any Holder under this Agreement with respect to any Registrable Securities may be transferred and assigned in accordance with this Agreement. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto, and their respective successors and permitted assigns.
12.8 Severability. If any provision of this Agreement is invalid or unenforceable, the balance of this Agreement shall remain in full force and effect, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon any such determination that any provision of this Agreement is invalid or unenforceable, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the greatest extent possible.
12.9 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. Each of the parties hereto agrees that process may be served upon them in any manner authorized by the laws of the State of Delaware for such persons and waives and covenants not to assert or plead any objection which they might otherwise have to such jurisdiction and such process.
12.10 Consent to Jurisdiction. Without limiting the provisions of Article VII hereof, the parties agree that any legal proceeding by or against any party or with respect to or arising out of this Agreement may be brought in or removed to the United States District Court for the State of Delaware or in any Delaware state court, as the party or parties instituting such legal action or proceeding may elect. By execution and delivery of this Agreement, each party irrevocably and unconditionally submits to the exclusive jurisdiction of such courts and to the appellate courts therefrom. The parties irrevocably consent to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified airmail, postage prepaid, to such parties at the addresses specified in Section 12.1. Any such service of process shall be effective five (5) business days after mailing, or, if hand delivered, upon delivery. Nothing herein shall affect the right to serve process in any other manner permitted by applicable law. The parties hereby waive any right to stay or dismiss any action or proceeding under or in connection with this Agreement brought before the foregoing courts on the basis of (a) any claim that it is not personally subject to the jurisdiction of the above-named courts for any reason, or that it or any of its property is immune from the above-described legal process, (b) that such action or proceeding is brought in an inconvenient forum, that venue for the action or proceeding is improper or that this Agreement may not be enforced in or by such courts, or (c) any other defense that would hinder or delay the levy, execution or
collection of any amount to which any party is entitled pursuant to any final judgment of any court having jurisdiction.
[Signature Page Follows]
* * * * *
IN WITNESS WHEREOF, the parties hereto have executed this Registration Rights Agreement as of the date first written above.
CF INDUSTRIES HOLDINGS, INC. | ||
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By: |
Name: | ||
Title: | ||
[Name of Stockholders (including addresses)] |
Skadden, Arps, Slate, Meagher & Flom LLP
333 West Wacker Drive
Chicago, Illinois 60606
July 25, 2005
CF
Industries Holdings, Inc.
One Salem Lake Drive
Long Grove, Illinois 60047
Re: Registration
Statement on Form S-1
(File No. 333-124949)
Ladies and Gentlemen:
We have acted as special counsel to CF Industries Holdings, Inc., a Delaware corporation (the "Company"), in connection with the initial public offering by the Company of up to 47,437,500 shares (including 6,187,500 shares subject to an over-allotment option) (the "Shares") of the Company's common stock, par value $0.01 per share (the "Common Stock").
This opinion is being furnished in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended (the "Act").
In connection with this opinion, we have examined originals or copies, certified or otherwise identified to our satisfaction, of (i) the registration statement on Form S-1 (File No. 333-124949) of the Company as filed with the Securities and Exchange Commission (the "Commission") on May 16, 2005 under the Act and Amendments No. 1 through No. 3 thereto (such Registration Statement, as so amended, being hereinafter referred to as the "Registration Statement"); (ii) the form of Underwriting Agreement proposed to be entered into by and among the Company, as issuer, and Morgan Stanley & Co. Incorporated, J.P. Morgan Securities Inc., Credit Suisse First Boston LLC, Harris Nesbitt Corp., Banc of America Securities LLC and CIBC World Markets Corp. as representatives of the several underwriters named therein (the "Underwriters"), filed as an exhibit to the Registration Statement (the "Underwriting Agreement"); (iii) a specimen certificate evidencing the Common Stock; (iv) the Certificate of Incorporation of the Company, as currently in effect; (v) the By-Laws of the Company, as currently in effect; (vi) the form of the Amended and Restated Certificate of Incorporation of the Company to be filed with the Secretary of State of the State of Delaware, filed as an exhibit to the Registration Statement (the "Restated Charter"); (vii) the form of the Amended and Restated By-Laws of the Company, filed as an exhibit to the Registration Statement (the "Restated By-Laws") and (viii) certain resolutions of the Board of Directors of the Company relating to the issuance and sale of the Shares, the Restated Charter, the Restated By-Laws and related matters. We also have examined originals or copies, certified or otherwise identified to our satisfaction, of such records of the Company and such agreements, certificates of public officials, certificates of officers or other representatives of the Company and others, and such other documents as we have deemed necessary or appropriate as a basis for the opinion set forth below.
In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as facsimile, electronic, certified, or photostatic copies and the authenticity of the originals of such copies. In making our examination of executed documents, we have assumed that the parties thereto, other than the Company, had the power, corporate or other, to enter into and perform all obligations thereunder and have also assumed the due authorization by all requisite action, corporate or other, and execution and delivery by such parties of such documents and the validity and binding effect thereof on such parties. In rendering the opinion set forth below, we have assumed that the Restated Charter in the form examined by us has been duly filed with the Secretary of State of the State of Delaware prior to the issuance of the Shares. As to any facts material to the opinion expressed herein which we have not independently established or verified, we have relied upon statements and representations of officers and other representatives of the Company and others and of public officials.
Members of our firm are admitted to the bar in the State of Illinois and we do not express any opinion as to the laws of any jurisdiction other than the corporate laws of the State of Delaware, and we do not express any opinion as to the effect of any other laws on the opinion stated herein.
Based upon and subject to the foregoing, we are of the opinion that when (i) the Registration Statement becomes effective under the Act, (ii) the Underwriting Agreement has been duly executed and delivered and (iii) certificates representing the Shares in the form of the specimen certificate examined by us have been manually signed by an authorized officer of the transfer agent and registrar for the Common Stock and registered by such transfer agent and registrar, and have been delivered to and paid for by the Underwriters at a price per share not less than the per share par value of the Common Stock as contemplated by the Underwriting Agreement, the issuance and sale of the Shares will have been duly authorized, and the Shares will be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion with the Commission as an exhibit to the Registration Statement. We also consent to the reference to our firm under the caption "Legal Matters" in the prospectus forming a part of the Registration Statement. In giving this consent, we do not thereby admit that we are included in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission.
Very truly yours, | ||
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/s/ SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP |
2
Exhibit 10.11
CF INDUSTRIES HOLDINGS, INC.
2005 EQUITY AND INCENTIVE PLAN
CF INDUSTRIES HOLDINGS, INC.
2005 EQUITY AND INCENTIVE PLAN
Section
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1. | Purpose; Types of Awards; Construction. | 1 | ||
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Definitions. |
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3. |
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Administration. |
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4. |
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Eligibility. |
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Stock Subject to the Plan. |
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Specific Terms of Awards. |
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Change in Control Provisions. |
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General Provisions. |
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CF INDUSTRIES HOLDINGS, INC.
2005 EQUITY AND INCENTIVE PLAN
1. Purpose; Types of Awards; Construction.
The purpose of the CF INDUSTRIES HOLDINGS, INC. 2005 Equity and Incentive Plan (the "Plan") is to promote the interests of the Company and its Subsidiaries and the stockholders of the Company by providing officers, employees, consultants and independent contractors (including non-employee directors) of the Company and its Subsidiaries with appropriate incentives and rewards to encourage them to enter into and continue in the employ or service of the Company or its Subsidiaries, to acquire a proprietary interest in the long-term success of the Company and to reward the performance of individuals in fulfilling their personal responsibilities for long-range and annual achievements. The Plan provides for the grant of options (including "incentive stock options" and "nonqualified stock options"), stock appreciation rights, restricted stock, restricted stock units and other stock- or cash-based awards. The Plan is designed so that Awards granted hereunder intended to comply with the requirements for "performance-based compensation" under Section 162(m) of the Code may comply with such requirements, and the Plan and Awards shall be interpreted in a manner consistent with such requirements. Notwithstanding any provision of the Plan, to the extent that any Award would be subject to Section 409A of the Code, no such Award may be granted if it would fail to comply with the requirements set forth in Section 409A of the Code and any regulations or guidance promulgated thereunder.
2. Definitions.
For purposes of the Plan, the following terms shall be defined as set forth below:
(a) "Annual Incentive Program" means the program described in Section 6(c) hereof.
(b) "Award" means any Option, SAR, Restricted Stock, Restricted Stock Unit or Other Stock-Based Award or Other Cash-Based Award granted under the Plan.
(c) "Award Agreement" means any written agreement, contract, or other instrument or document evidencing an Award.
(d) "Board" means the Board of Directors of the Company.
(e) A "Change in Control" shall be deemed to have occurred if an event set forth in any one of the following paragraphs shall have occurred:
(i) any Person is or becomes the Beneficial Owner (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or any of its affiliates) representing 25% or more of the combined voting power of the Company's then outstanding securities; or
(ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving on the Board: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds ( 2 / 3 ) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or;
(iii) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than a merger or consolidation immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the Board of the entity surviving such merger or consolidation or, if the Company or the entity surviving such merger is then a subsidiary, the ultimate parent thereof; or
(iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than (a) a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 60% of the combined voting
power of the voting securities of which are owned by stockholders of the Company following the completion of such transaction in substantially the same proportions as their ownership of the Company immediately prior to such sale or (b) other than a sale or disposition by the Company of all or substantially all of the Company's assets immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of the entity to which such assets are sold or disposed or, if such entity is a subsidiary, the ultimate parent thereof.
(a) Notwithstanding the foregoing, (1) a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions, and (2) a "Change in Control" shall not occur for purposes of the Plan as result of the initial public offering of the common stock of CF Industries Holdings, Inc. or any transactions or events contemplated by such offering.
(f) "Code" means the Internal Revenue Code of 1986, as amended from time to time.
(g) "Committee" shall mean, at the discretion of the Board, a Committee of the Board, which shall consist of two or more persons, each of whom, unless otherwise determined by the Board, is an "outside director" within the meaning of Section 162(m) of the Code and a "nonemployee director" within the meaning of Rule 16b-3.
(h) "Company" means CF INDUSTRIES HOLDINGS, INC., a corporation organized under the laws of the State of Delaware, or any successor corporation.
(i) "Covered Employee" shall have the meaning set forth in Section 162(m)(3) of the Code.
(j) "Effective Date" means the effective date of the Initial Public Offering.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and as now or hereafter construed, interpreted and applied by regulations, rulings and cases.
(l) "Fair Market Value" means, with respect to Stock or other property, the fair market value of such Stock or other property determined by such methods or procedures as shall be established from time to time by the Committee. Unless otherwise determined by the Committee in good faith, the per share Fair Market Value of Stock as of a particular date shall mean (i) the mean between the highest and lowest reported sales price per share of Stock on the national securities exchange on which the Stock is principally traded, for the last preceding date on which there was a sale of such Stock on such exchange, or (ii) if the shares of Stock are then traded in an over-the-counter market, the average of the closing bid and asked prices for the shares of Stock in such over-the-counter market for the last preceding date on which there was a sale of such Stock in such market, or (iii) if the shares of Stock are not then listed on a national securities exchange or traded in an over-the-counter market, such value as the Committee, in its sole discretion, shall determine.
(m) "Grantee" means an employee, consultants or independent contractor (including non-employee director) of the Company or any Subsidiary of the Company that has been granted an Award under the Plan.
(n) "Initial Public Offering" means the initial public offering of the shares of Stock of the Company.
(o) "ISO" means any Option intended to be and designated as an incentive stock option within the meaning of Section 422 of the Code.
(p) "Long Term Incentive Program" means the program described in Section 6(b) hereof.
(q) "NQSO" means any Option that is not designated as an ISO.
(r) "Option" means a right, granted to a Grantee under Section 6(b)(i), to purchase shares of Stock. An Option may be either an ISO or an NQSO.
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(s) "Other Cash-Based Award" means cash awarded under the Annual Incentive Program or the Long Term Incentive Program, including cash awarded as a bonus or upon the attainment of Performance Goals or otherwise as permitted under the Plan.
(t) "Other Stock-Based Award" means a right or other interest granted to a Grantee under the Annual Incentive Program or the Long Term Incentive Program that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, Stock, including but not limited to (i) unrestricted Stock awarded as a bonus or upon the attainment of Performance Goals or otherwise as permitted under the Plan, and (ii) a right granted to a Grantee to acquire Stock from the Company containing terms and conditions prescribed by the Committee.
(u) "Performance Goals" means performance goals based on the attainment by the Company or any Subsidiary of the Company (or any division or business unit of such entity) of performance goals pre-established by the Committee, based on one or more of the following criteria (as determined in accordance with generally accepted accounting principles): (1) return on total stockholder equity; (2) earnings per share of Company Stock; (3) net income (before or after taxes); (4) earnings before any or all of interest, taxes, minority interest, depreciation and amortization; (5) sales or revenues; (6) return on assets, capital or investment; (7) market share; (8) cost reduction goals; (9) budget comparisons; (10) implementation or completion of critical projects or processes; (11) the formation of joint ventures, research or development collaborations, or the completion of other corporate transactions; and (12) any combination of, or a specified increase in, any of the foregoing. The performance goals may be based upon the attainment of specified levels of performance under one or more of the measures described above relative to the performance of other entities. To the extent permitted under Section 162(m) of the Code (including, without limitation, compliance with any requirements for stockholder approval), the Committee may designate additional business criteria on which the performance goals may be based or adjust, modify or amend the aforementioned business criteria. Performance Goals may include a threshold level of performance below which no Award will be earned, a level of performance at which the target amount of an Award will be earned and a level of performance at which the maximum amount of the Award will be earned. The Committee shall have the authority to make equitable adjustments to the Performance Goals in recognition of unusual or non-recurring events affecting the Company or any Subsidiary of the Company or the financial statements of the Company or any Subsidiary of the Company, in response to changes in applicable laws or regulations, or to account for items of gain, loss or expense determined to be extraordinary or unusual in nature or infrequent in occurrence or related to the disposal of a segment of a business or related to a change in accounting principles.
(v) "Person" shall have the meaning set forth in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (1) the Company or any Subsidiary Corporation, (2) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Subsidiary Corporation, (3) an underwriter temporarily holding securities pursuant to an offering of such securities, or (4) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company.
(w) "Plan" means this CF INDUSTRIES HOLDINGS, INC. 2005 Equity and Incentive Plan, as amended from time to time.
(x) "Restricted Stock" means an Award of shares of Stock to a Grantee under Section 6(b)(iii) that may be subject to certain restrictions and to a risk of forfeiture.
(y) "Restricted Stock Unit" means a right granted to a Grantee under Section 6(b)(iv) to receive Stock or cash at the end of a specified deferral period, which right may be conditioned on the satisfaction of specified performance or other criteria.
(z) "Rule 16b-3" means Rule 16b-3, as from time to time in effect promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act, including any successor to such Rule.
(aa) "Stock" means shares of the common stock, par value $0.01 per share, of the Company.
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(bb) "Stock Appreciation Right" or "SAR" means the right, granted to a Grantee under Section 6(b)(ii), to be paid an amount measured by the appreciation in the Fair Market Value of Stock from the date of grant to the date of exercise of the right.
(cc) "Subsidiary" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code.
(dd) "Total Authorized Shares" shall have the meaning set forth in Section 5 of the Plan.
3. Administration.
The Plan shall be administered by the Committee. The Committee shall have the authority in its discretion, subject to and not inconsistent with the express provisions of the Plan, to administer the Plan and to exercise all the powers and authorities either specifically granted to it under the Plan or necessary or advisable in the administration of the Plan, including, without limitation, the authority to grant Awards; to determine the persons to whom and the time or times at which Awards shall be granted; to determine the type and number of Awards to be granted, the number of shares of Stock to which an Award may relate and the terms, conditions, restrictions and performance criteria relating to any Award; to determine Performance Goals no later than such time as required to ensure that an underlying Award which is intended to comply with the requirements of Section 162(m) of the Code so complies; and to determine whether, to what extent, and under what circumstances an Award may be settled, cancelled, forfeited, exchanged, or surrendered; to make adjustments in the terms and conditions of, and the Performance Goals (if any) included in, Awards; to construe and interpret the Plan and any Award; to prescribe, amend and rescind rules and regulations relating to the Plan; to determine the terms and provisions of the Award Agreements (which need not be identical for each Grantee); and to make all other determinations deemed necessary or advisable for the administration of the Plan. Notwithstanding the foregoing, neither the Board, the Committee nor their respective delegates shall have the authority to reprice (or cancel and regrant) any Option or, if applicable, other Award at a lower exercise, base or purchase price without first obtaining the approval of the Company's stockholders.
All determinations of the Committee shall be made by a majority of its members either present in person or participating by conference telephone at a meeting or by written consent. The Committee may delegate to one or more of its members or to one or more agents such administrative duties as it may deem advisable, and the Committee or any person to whom it has delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the Plan. All decisions, determinations and interpretations of the Committee shall be final and binding on all persons, including but not limited to the Company, any Subsidiary of the Company, or Grantee (or any person claiming any rights under the Plan from or through any Grantee) and any stockholder.
No member of the Board or Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any Award granted hereunder. Notwithstanding anything to the contrary continued herein, prior to the consummation of the Initial Public Offering, all Committee action may be taken by the Board.
4. Eligibility.
Awards may be granted to executive officers and other key employees, consultants and independent contractors (including non-employee directors) of the Company or its Subsidiaries, including officers and directors who are employees, and to key consultants to the Company or its Subsidiaries. In determining the persons to whom Awards shall be granted and the number of shares to be covered by each Award, the Committee shall take into account the duties of the respective persons, their present and potential contributions to the success of the Company or its Subsidiaries and such other factors as the Committee shall deem relevant in connection with accomplishing the purposes of the Plan.
5. Stock Subject to the Plan.
The maximum number of shares of Stock reserved for the grant of Awards under the Plan shall be 8,250,000, subject to adjustment as provided herein ("Total Authorized Shares"). Subject to adjustment as provided herein, no more than (1) thirty-five percent (35%) of the Total Authorized Shares may be awarded under the Plan in the aggregate in respect of Awards other than Options and SARs, (2) fifteen percent (15%) of the Total Authorized Shares may be made subject to Options or SARs awarded to an individual in a single calendar year, and (3) seven and one-half percent (7.5%) of the Total Authorized Shares may be
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made subject to stock-based awards other than Options (including SARs, Restricted Stock and Restricted Stock Units or Other Stock-Based Awards denominated in shares of Stock) to an individual in a single calendar year. Determinations made in respect of the limitations set forth in the immediately preceding sentence shall be made in a manner consistent with Section 162(m) of the Code. Such shares may, in whole or in part, be authorized but unissued shares or shares that shall have been or may be reacquired by the Company in the open market, in private transactions or otherwise. If any shares subject to an Award are forfeited, cancelled, exchanged or surrendered or if an Award terminates or expires without a distribution of shares to the Grantee, or if shares of stock are surrendered or withheld as payment of either the exercise price of an Award and/or withholding taxes in respect of an Award, the shares of stock with respect to such Award shall, to the extent of any such forfeiture, cancellation, exchange, surrender, withholding, termination or expiration, again be available for Awards under the Plan. Upon the exercise of any Award granted in tandem with any Awards such related Awards shall be cancelled to the extent of the number of shares of Stock as to which the Award is exercised and, notwithstanding the foregoing, such number of shares shall no longer be available for Awards under the Plan.
In the event that the Committee shall determine that any dividend or other distribution (whether in the form of cash, Stock, or other property), recapitalization, Stock split, reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other similar corporate transaction or event, affects the Stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of Grantees under the Plan, then the Committee shall make such equitable changes or adjustments as it deems necessary or appropriate to any or all of (i) the number and kind of shares of Stock or other property (including cash) that may thereafter be issued in connection with Awards, (ii) the number and kind of shares of Stock or other property (including cash) issued or issuable in respect of outstanding Awards, (iii) the exercise price, grant price, or purchase price relating to any Award; provided, that, with respect to ISOs, such adjustment shall be made in accordance with Section 424(h) of the Code; and (iv) the Performance Goals applicable to outstanding Awards.
6. Specific Terms of Awards.
(a) General. The term of each Award shall be for such period as may be determined by the Committee. Subject to the terms of the Plan and any applicable Award Agreement, payments to be made by the Company or any Subsidiary of the Company upon the grant, maturation, or exercise of an Award may be made in such forms as the Committee shall determine at the date of grant or thereafter, including, without limitation, cash, Stock, or other property, and may be made in a single payment or transfer, in installments, or on a deferred basis. The Committee may make rules relating to installment or deferred payments with respect to Awards, including the rate of interest to be credited with respect to such payments. In addition to the foregoing, the Committee may impose on any Award or the exercise thereof, at the date of grant or thereafter, such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall determine.
(b) Long Term Incentive Program. Under the Long Term Incentive Program, the Committee is authorized to grant the Awards described in this Section 6(b), under such terms and conditions as deemed by the Committee to be consistent with the purposes of the Plan. Such Awards may be granted with value and payment contingent upon Performance Goals. Each Award granted under the Long Term Incentive Program shall be evidenced by an Award Agreement containing such terms and conditions applicable to such Award as the Committee shall determine at the date of grant or thereafter.
(i) Options. The Committee is authorized to grant Options to Grantees on the following terms and conditions:
(A) Type of Award. The Award Agreement evidencing the grant of an Option under the Plan shall designate the Option as an ISO or an NQSO.
(B) Exercise Price. The exercise price per share of Stock purchasable under an Option shall be determined by the Committee, but in no event shall the exercise price of any Option be less than the Fair Market Value of a share of Stock on the date of grant of such Option. The exercise price for Stock subject to an Option may be paid in cash or by an exchange of Stock previously owned by the Grantee, through a "broker cashless
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exercise" procedure approved by the Committee, a combination of the above, or any other method approved the Committee, in any case in an amount having a combined value equal to such exercise price.
(C) Term and Exercisability of Options. Unless the Committee determines otherwise, the date on which the Committee adopts a resolution expressly granting an Option shall be considered the day on which such Option is granted. Options shall be exercisable over the exercise period (which shall not exceed ten years from the date of grant), at such times and upon such conditions as the Committee may determine, as reflected in the Award Agreement; provided, that the Committee shall have the authority to accelerate the exercisability of any outstanding Option at such time and under such circumstances as it, in its sole discretion, deems appropriate. An Option may be exercised to the extent of any or all full shares of Stock as to which the Option has become exercisable, by giving written notice of such exercise to the Committee or its designated agent.
(D) Termination of Employment, etc. An Option may not be exercised unless the Grantee is then a director of, in the employ of, or then maintains an independent contractor relationship with, the Company or a Subsidiary of the Company, and unless the Grantee has remained continuously so employed, or continuously maintained such a relationship, since the date of grant of the Option; provided, that the Award Agreement may contain provisions extending the exercisability of Options, in the event of specified terminations, to a date not later than the expiration date of such Option.
(E) Other Provisions. Options may be subject to such other conditions including, but not limited to, restrictions on transferability of the shares acquired upon exercise of such Options, as the Committee may prescribe in its discretion or as may be required by applicable law.
(ii) SARs. The Committee is authorized to grant SARs to Grantees on the following terms and conditions:
(A) In General . SARs may be granted independently or in tandem with an Option. Unless the Committee determines otherwise, a SAR (1) granted in tandem with an NQSO may be granted at the time of grant of the related NQSO or at any time thereafter or (2) granted in tandem with an ISO may only be granted at the time of grant of the related ISO. A SAR granted in tandem with an Option shall be exercisable only to the extent the underlying Option is exercisable. Payment of an SAR may be made in cash, Stock, or property as specified in the Award Agreement or determined by the Committee.
(B) SARs . A SAR shall confer on the Grantee a right to receive an amount with respect to each share subject thereto, upon exercise thereof, equal to the excess of (1) the Fair Market Value of one share of Stock on the date of exercise over (2) the grant price of the SAR (which in the case of an SAR granted in tandem with an Option shall be equal to the exercise price of the underlying Option, and which in the case of any other SAR shall be such price as the Committee may determine).
(iii) Restricted Stock. The Committee is authorized to grant Restricted Stock to Grantees on the following terms and conditions:
(A) Issuance and Restrictions . Restricted Stock shall be subject to such restrictions on transferability and other restrictions, if any, as the Committee may impose at the date of grant or thereafter, which restrictions may lapse separately or in combination at such times, under such circumstances, in such installments, or otherwise, as the Committee may determine; provided that, except as provided in Section 7, any such restrictions that are based only on continued employment for a specified period of time shall not lapse less than one year after the date of grant of the Award. The Committee may place restrictions on Restricted Stock that shall lapse, in whole or in part, only upon the attainment of Performance Goals. Except to the extent restricted under the Award Agreement relating to the Restricted Stock, a Grantee granted Restricted Stock shall have all of the rights of a stockholder including, without limitation, the right to vote Restricted Stock and the right to receive dividends thereon.
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(B) Forfeiture . Upon termination of employment with or service to the Company or any Subsidiary of the Company, during the applicable restriction period, Restricted Stock shall be forfeited; provided, that the Committee may provide, by rule or regulation or in any Award Agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Restricted Stock will be waived in whole or in part in the event of terminations resulting from specified causes, and the Committee may in other cases waive in whole or in part the forfeiture of Restricted Stock.
(C) Certificates for Stock . Restricted Stock granted under the Plan may be evidenced in such manner as the Committee shall determine. If certificates representing Restricted Stock are registered in the name of the Grantee, such certificates shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock, and the Company shall retain physical possession of the certificate.
(D) Dividends . Dividends paid on Restricted Stock shall be either paid at the dividend payment date in cash or in shares of unrestricted Stock having a Fair Market Value equal to the amount of such dividends. Stock distributed in connection with a stock split or stock dividend, and other property distributed as a dividend, shall be subject to restrictions and a risk of forfeiture to the same extent as the Restricted Stock with respect to which such Stock or other property has been distributed.
(iv) Restricted Stock Units. The Committee is authorized to grant Restricted Stock Units to Grantees, subject to the following terms and conditions:
(A) Award and Restrictions . Delivery of Stock or cash, as determined by the Committee, will occur upon expiration of the deferral period specified for Restricted Stock Units by the Committee. The Committee may place restrictions on Restricted Stock that shall lapse, in whole or in part, only upon the attainment of Performance Goals; provided that, except as provided in Section 7, any such restrictions that are based only on continued employment for a specified period of time shall not lapse less than one year after the date of grant of the Award.
(B) Forfeiture . Upon termination of employment with or service to the Company or any Subsidiary of the Company, during the applicable deferral period or portion thereof to which forfeiture conditions apply, or upon failure to satisfy any other conditions precedent to the delivery of Stock or cash to which such Restricted Stock Units relate, all Restricted Stock Units and any accrued but unpaid dividend equivalents that are then subject to deferral or restriction shall be forfeited; provided, that the Committee may provide, by rule or regulation or in any Award Agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Restricted Stock Units will be waived in whole or in part in the event of termination resulting from specified causes, and the Committee may in other cases waive in whole or in part the forfeiture of Restricted Stock Units.
(v) Other Stock- or Cash-Based Awards. The Committee is authorized to grant Awards to Grantees in the form of Other Stock-Based Awards or Other Cash-Based Awards, as deemed by the Committee to be consistent with the purposes of the Plan. Awards granted pursuant to this paragraph may be granted with value and payment contingent upon Performance Goals, so long as such goals relate to periods of performance in excess of one calendar year. The Committee shall determine the terms and conditions of such Awards at the date of grant or thereafter. The maximum value of the aggregate payment that any Grantee may receive with respect to Other Cash-Based Awards pursuant to this Section 6(b)(v) in respect of any annual performance period is $3,000,000 and for any other performance period in excess of one year, such amount multiplied by a fraction, the numerator of which is the number of months in the performance period and the denominator of which is twelve. Payments earned hereunder may be decreased or, with respect to any Grantee who is not a Covered Employee, increased in the sole discretion of the Committee based on such factors as it deems appropriate. No payment shall be made to a Covered Employee prior to the certification by the Committee that the Performance Goals have been attained. The Committee
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may establish such other rules applicable to the Other Stock- or Cash-Based Awards to the extent not inconsistent with Section 162(m) of the Code.
(c) Annual Incentive Program. The Committee is authorized to grant Awards to Grantees pursuant to the Annual Incentive Program, under such terms and conditions as deemed by the Committee to be consistent with the purposes of the Plan. The maximum value of the aggregate payment that any Grantee may receive under the Annual Incentive Program in respect of any calendar year is $3,000,000. Payments earned hereunder may be decreased or, with respect to any Grantee who is not a Covered Employee, increased in the sole discretion of the Committee based on such factors as it deems appropriate. No payment shall be made to a Covered Employee prior to the certification by the Committee that the Performance Goals have been attained. The Committee may establish such other rules applicable to the Annual Incentive Program to the extent not inconsistent with Section 162(m) of the Code.
7. Change in Control Provisions.
Unless otherwise determined by the Committee and evidenced in an Award Agreement, in the event of a Change of Control:
(a) any Award carrying a right to exercise that was not previously vested and exercisable shall become fully vested and exercisable; and
(b) the restrictions, deferral limitations, payment conditions, and forfeiture conditions applicable to any other Award granted under the Plan shall lapse and such Awards shall be deemed fully vested, and any performance conditions imposed with respect to Awards shall be deemed to be fully achieved.
8. General Provisions.
(a) Nontransferability. Unless otherwise determined by the Committee, Awards shall not be transferable by a Grantee except by will or the laws of descent and distribution and shall be exercisable during the lifetime of a Grantee only by such Grantee or his guardian or legal representative.
(b) No Right to Continued Employment, etc. Nothing in the Plan or in any Award, any Award Agreement or other agreement entered into pursuant hereto shall confer upon any Grantee the right to continue in the employ or service of the Company or Subsidiary of the Company or to be entitled to any remuneration or benefits not set forth in the Plan or such Award Agreement or other agreement or to interfere with or limit in any way the right of the Company or any such Subsidiary to terminate such Grantee's employment or independent contractor relationship.
(c) Taxes. The Company or any Subsidiary of the Company is authorized to withhold from any Award granted, any payment relating to an Award under the Plan, including from a distribution of Stock, or any other payment to a Grantee, amounts of withholding and other taxes due in connection with any transaction involving an Award, and to take such other action as the Committee may deem advisable to enable the Company and Grantees to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Award. This authority shall include authority to withhold or receive Stock or other property and to make cash payments in respect thereof in satisfaction of a Grantee's tax obligations. The Committee may provide in the Award Agreement that in the event that a Grantee is required to pay any amount to be withheld in connection with the issuance of shares of Stock in settlement or exercise of an Award, the Grantee shall or may satisfy such obligation (in whole or in part) by electing to have a portion of the shares of Stock to be received upon settlement or exercise of such Award equal to the minimum amount required to be withheld.
(d) Stockholder Approval; Amendment and Termination.
(i) The Plan shall take effect upon its adoption by the Board.
(ii) The Board may at any time and from time to time alter, amend, suspend, or terminate the Plan in whole or in part; provided, however, that unless otherwise determined by the Board, an amendment that requires stockholder approval in order for the Plan to continue to comply with Section 162(m) or any other law, regulation or stock exchange requirement shall not be effective unless approved by the requisite vote of stockholders. Notwithstanding
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the foregoing, no amendment to or termination of the Plan shall affect adversely any of the rights of any Grantee, without such Grantee's consent, under any Award theretofore granted under the Plan. Moreover, the Company reserves the right to cancel, amend, terminate, suspend, or otherwise change outstanding Awards under the Annual Incentive Program for any reason at any time before, during or after the calendar year to which an Award relates, upon authorization of the Board. The Committee may expand, reduce or otherwise change any and all opportunities, Awards, and any and all financial factors, or financial measures used in outstanding Awards under the Annual Incentive Program for any reason at any time before, during or after the calendar year to which an Award relates. All changes described in this paragraph are at the sole discretion of the Board and/or the Committee, may be made at any time, and may have a retroactive effective date.
(e) Expiration of Plan. Unless earlier terminated by the Board pursuant to the provisions of the Plan, the Plan shall expire on the tenth anniversary of the date of the Plan's adoption by the Board. No Awards shall be granted under the Plan after such expiration date. The expiration of the Plan shall not affect adversely any of the rights of any Grantee, without such Grantee's consent, under any Award theretofore granted.
(f) Deferrals. The Committee shall have the authority to establish such procedures and programs that it deems appropriate to provide Grantees with the ability to defer receipt of cash, Stock or other property payable with respect to Awards granted under the Plan.
(g) No Rights to Awards; No Stockholder Rights. No Grantee shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Grantees. Except as provided specifically herein, a Grantee or a transferee of an Award shall have no rights as a stockholder with respect to any shares covered by the Award until the date of the issuance of a stock certificate to him for such shares or the issuance of shares to him in book-entry form.
(h) Unfunded Status of Awards. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Grantee pursuant to an Award, nothing contained in the Plan or any Award shall give any such Grantee any rights that are greater than those of a general creditor of the Company.
(i) No Fractional Shares. No fractional shares of Stock shall be required to be issued or delivered pursuant to the Plan or any Award. The Committee shall determine whether cash, other Awards, or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated.
(j) Regulations and Other Approvals.
(i) The obligation of the Company to sell or deliver Stock with respect to any Award granted under the Plan shall be subject to all applicable laws, rules and regulations, including all applicable federal and state securities laws, and the obtaining of all such approvals by governmental agencies as may be deemed necessary or appropriate by the Committee.
(ii) Each Award is subject to the requirement that, if at any time the Committee determines, in its absolute discretion, that the listing, registration or qualification of Stock issuable pursuant to the Plan is required by any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the grant of an Award or the issuance of Stock, no such Award shall be granted or payment made or Stock issued, in whole or in part, unless listing, registration, qualification, consent or approval has been effected or obtained free of any conditions not acceptable to the Committee.
(iii) In the event that the disposition of Stock acquired pursuant to the Plan is not covered by a then current registration statement under the Securities Act and is not otherwise exempt from such registration, such Stock shall be restricted against transfer to the extent required by the Securities Act or regulations thereunder, and the Committee may require a Grantee receiving Stock pursuant to the Plan, as a condition precedent to receipt of such Stock, to
9
represent to the Company in writing that the Stock acquired by such Grantee is acquired for investment only and not with a view to distribution.
(iv) The Committee may require a Grantee receiving Stock pursuant to the Plan, as a condition precedent to receipt of such Stock, to enter into a stockholder agreement or "lock-up" agreement in such form as the Committee shall determine is necessary or desirable to further the Company's interests.
(k) Governing Law. The Plan and all determinations made and actions taken pursuant hereto shall be governed by the laws of the State of Delaware without giving effect to the conflict of laws principles thereof.
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Exhibit 10.12
CF INDUSTRIES HOLDINGS, INC.
2005 EQUITY AND INCENTIVE PLAN
NON-QUALIFIED STOCK OPTION AWARD AGREEMENT
Capitalized terms used but not otherwise defined herein shall have the meaning ascribed to such terms as defined in the CF Industries Holdings, Inc. 2005 Equity and Incentive Plan (the "Plan"). Please review this Non-Qualified Stock Option Award Agreement and promptly return a signed copy to William G. Eppel in order to render the grant effective.
1. NOTICE OF STOCK OPTION GRANT
[Name of Optionee] :
You (the "Optionee") have been granted an option to purchase shares of the Company's Stock, subject to the terms and conditions of the Plan and this Award Agreement, as follows:
Date of Grant | [ ] | |
Exercise Price per Share | $[ ] | |
Number of Shares Subject to the Option | [ ] | |
Type of Option | Non-Qualified Option (NQSO) | |
Term/Expiration Date | Tenth anniversary of the Date of Grant, unless earlier terminated as provided in the Plan and/or this Award Agreement |
Vesting Schedule :
Subject to accelerated vesting upon a Change in Control or otherwise as set forth herein or in the Plan, this Option may be exercised, in whole or in part, in accordance with the following schedule (the "Vesting Schedule"):
Date
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Portion of Total Shares
Exercisable |
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On or after the first anniversary of the Date of Grant | 33 1 / 3 % (the "First Installment") (the "First Installment") | |
On or after the second anniversary of the Date of Grant | 66 2 / 3 % (the "Second Installment") | |
On or after the third anniversary of the Date of Grant | 100% (the "Third Installment") |
2. AGREEMENT
a. Grant of Option.
The Company hereby grants to the Optionee an Option to purchase the number of shares of Stock at the exercise price per share set forth in Section 1 (the "Exercise Price"), subject to the terms and conditions of the Plan, which is incorporated herein by reference. This Option shall not be treated as an incentive stock option within the meaning of Section 422(b) of the Code.
b. Exercise of Option.
(a) Right to Exercise. This Option is exercisable during its term in accordance with the Vesting Schedule and the applicable provisions of the Plan and this Award Agreement. Unless otherwise determined by the Committee, this Option shall only become exercisable on the dates set forth in the Vesting Schedule.
(b) Method of Exercise. This Option is exercisable by delivery of an option exercise notice, in the form attached as Exhibit A (the "Exercise Notice"), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the "Exercised Shares"), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be completed by the Optionee and
delivered to William Eppel or his designee or successor . The Exercise Notice shall be accompanied by payment of the aggregate exercise price for all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate exercise price.
(c) Method of Payment.
Payment of the aggregate Exercise Price of the Exercised Shares shall be by any of the following, or a combination thereof, at the election of the Optionee:
(i) cash; or
(ii) delivery of shares of Stock previously owned by the Optionee having a Fair Market Value equal to or less than the aggregate exercise price for such Exercised Shares; or
(iii) if permitted by the Committee as of the date of exercise of the Option, consideration received by the Company or the broker designated by the Company, as applicable, under a "broker cashless exercise" program implemented by the Company in connection with the Plan; or
(iv) if permitted by the Committee, the Optionee's written authorization for the Company to withhold shares of Exercised Shares having a Fair Market Value equal to or less than the aggregate exercise price for such Exercised Shares.
c. Withholding.
The Company or a Subsidiary shall withhold all applicable taxes or other amounts required by law from all amounts paid or delivered in respect of the Option. The Optionee may satisfy the withholding obligation by paying the amount of any taxes in cash or, with the approval of the Committee, shares may be withheld from the Exercised Shares to satisfy the obligation in full or in part. The amount of the tax withholding and the number of shares to be withheld shall be determined by the Committee with reference to the Fair Market Value of the Stock when the withholding is required to be made.
d. Non-Transferability of Option.
Unless otherwise determined by the Committee, this Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of the Optionee only by the Optionee. The terms of the Plan and this Award Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.
e. Term of Option/Termination of Employment or Service.
(a) Unexercisable Options. If the Optionee's employment with the Company is terminated for any reason, and if the Committee does not determine otherwise, any portion of the Option that has not become exercisable in accordance with the Vesting Schedule shall immediately be forfeited and shall terminate.
(b) Termination for Cause. If the Optionee's employment with the Company terminates for Cause (as defined below), then the Option shall immediately terminate, regardless of whether or not it has become exercisable.
(c) Termination for Death. If the Optionee dies while in the employment of the Company, then this Option shall become fully exercisable and Employee's estate or the person who acquires the Option by will or the laws of descent and distribution or otherwise, may exercise the Option for one year following the date of Optionee's death. At the end of such period the Option shall immediately terminate.
(d) Termination for Disability. If the Optionee's employment with the Company terminates as a result of Disability (as defined below), then this Option shall become fully exercisable and the Optionee, his guardian or estate, as the case may be, may exercise the Option for one year following the date of Optionee's termination of employment. At the end of such period the Option shall immediately terminate.
(e) Termination for Retirement. If the Optionee's employment with the Company terminates as a result of Retirement (as defined below), then the Optionee (or anyone acting
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on Optionee's behalf) may exercise the Option, to the extent it was exercisable on the date of Optionee's Retirement, for four years following such date. At the end of such period the exercisable portion of the Option shall immediately terminate. If the Optionee has attained at least age 60 upon the date of his or her Retirement, then an additional portion or portions of this Option shall become fully exercisable on the date of the Optionee's Retirement as follows:
Age Attained
|
Acceleration of Exercisability
|
|
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Age 60, but not yet age 62.5 | Next Installment Otherwise Scheduled to Become Exercisable | |
Age 62.5, but not yet age 65 |
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Next Two Installments Otherwise Scheduled to Become Exercisable |
Age 65 and beyond |
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Option Becomes Fully Exercisable |
(f) Other Terminations. If the Optionee's employment with the Company terminates for any reason other than those set forth in (b) through (e) above, then the Optionee (or anyone acting on Optionee's behalf) may exercise the Option, to the extent it was exercisable as of the date of Optionee's termination of employment, for 90 days following the date of Optionee's termination of the employment. At the end of such period the exercisable portion of the Option shall immediately terminate.
(g) Employment Relationship. For purposes of this Award Agreement, Optionee shall be considered to be in the employment of the Company so long as Optionee remains as an employee or consultant for either the Company or an affiliate of the Company or for a corporation (or an affiliate thereof) that assumes or substitutes a new option for this Option. An Optionee shall not be considered to be in the employment of the Company if the affiliate which employs the Optionee ceases to be an affiliate of the Company. Any question as to whether and when there has been a termination of such employment, and the cause of such termination, shall be determined by the Committee or its delegate, as appropriate, and such determination shall be final.
(h) Maximum Term. Notwithstanding anything to the contrary, the Option shall in no case be exercisable on or following the expiration date set forth in Section 1.
(i) Change in Control. In addition to becoming fully vested upon a Change in Control, this Option, to the extent outstanding, shall remain exercisable until the tenth anniversary of the Date of Grant.
For purposes of this Award Agreement:
"Cause" shall have the meaning ascribed to such term in the Optionee's individual employment, severance or other agreement with the Company or, if the Optionee is not party to such an agreement, "Cause" shall mean (i) dishonesty in the performance of the Optionee's duties and (ii) the Optionee's malfeasance or misconduct in connection with the Optionee's duties or any act or omission which is injurious to the Company or its Subsidiaries or affiliates, monetarily or otherwise.
"Disability" shall have the meaning ascribed to such term in the Optionee's individual employment, severance or other agreement with the Company or, if the Optionee is not party to such an agreement, "Disability" shall mean Optionee's inability because of ill health, physical or mental disability, to perform Optionee's duties for a period of 180 days in any twelve month period.
"Retirement" shall mean the Optionee's termination of employment, other than for Cause, death or Disability, following the attainment of the Optionee of at least age fifty-five.
f. Entire Agreement; Governing Law.
The Plan is incorporated herein by reference. The Plan and this Award Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Optionee with respect to the subject matter hereof, and may not be modified except by means of a writing signed by the Company and the Optionee. If there is a conflict between the terms and conditions of the Plan and the terms and conditions of this Award Agreement, the terms and conditions of the Plan shall govern. This Award
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Agreement is governed by the internal substantive laws, but not the choice of law rules, of the State of Delaware.
g. No Guarantee of Continued Service.
The Optionee acknowledges and agrees that this Award Agreement, the transactions contemplated hereunder and the Vesting Schedule do not constitute an express or implied promise of continued engagement as an employee or as a service provider for any period and shall not interfere with the Optionee's right or the Company's right to terminate the Optionee's relationship as an employee or as a service provider at any time, with or without Cause.
* * * * *
By your signature and the signature of the Company's representative below, the Optionee and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and this Award Agreement. The Optionee has reviewed the Plan and this Award Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Award Agreement and fully understands all provisions of the Plan and Award Agreement. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions relating to the Plan and Award Agreement.
OPTIONEE | CF INDUSTRIES HOLDINGS, INC. | |
Signature |
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By: |
Print Name |
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Title: |
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EXHIBIT A
EXERCISE NOTICE
PURSUANT TO 2005 EQUITY AND INCENTIVE PLAN
DATE |
CF INDUSTRIES HOLDINGS, INC.
One Salem Lake Drive
Long Grove, IL 60047
Attn: William Eppel
Reference is made to the stock option that CF INDUSTRIES HOLDINGS, INC. (the "Company") granted to me by Agreement dated [ ]. Let this letter serve as my Exercise Notice with respect to shares of the Company's Common Stock at the exercise price of $ per share.
o Cash; my check in the amount of $ is enclosed herewith.
o Previously acquired shares of Company Stock; such shares with a total Fair Market Value of $ are enclosed herewith.
o By having the Company withhold from the shares of stock otherwise issuable shares with a total Fair Market Value of $ .; Note: This method of exercise may not be permitted by the Committee.
o "Broker cashless exercise"; Note: This method of exercise may not be permitted by the Committee.
In exercising this stock option, if the shares otherwise issuable are not registered under the Securities Act of 1933, as amended, I hereby agree, warrant and represent to the Company that:
"The shares represented by this certificate have not been registered under the Securities Act of 1933 and may not be sold, transferred, pledged, hypothecated or offered for sale in the absence of an effective registration statement relating to such shares under such Act or a written opinion of counsel to CF INDUSTRIES HOLDINGS, INC. that such registration is not required."
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In respect of local, state and federal withholding taxes due:
o I am enclosing a check payable to Company
o I hereby authorize the Company to withhold a sufficient number of shares otherwise issuable.
Sincerely, | ||
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[NAME OF OPTIONEE] |
REQUIRED INFORMATION |
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Name and Address |
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Telephone Number |
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Social Security Number |
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CF INDUSTRIES HOLDINGS, INC.
2005 EQUITY AND INCENTIVE PLAN
NON-EMPLOYEE DIRECTOR RESTRICTED STOCK AWARD
AGREEMENT
Name of Grantee:
Restricted Stock: [FMV of $65,000 on Grant Date] shares of Restricted Stock
Grant Date: [MD, 2005]
Vesting Date: The earlier to occur of the first annual meeting of Company shareholders occurring after the Grant Date or one-year following the Grant Date, subject to earlier acceleration as described herein.
Capitalized terms used but not otherwise defined herein shall have the meaning ascribed to such terms as defined in the CF Industries Holdings, Inc. 2005 Equity and Incentive Plan (the "Plan"). Please review this Award Agreement and promptly return a signed copy to William Eppel in order to render the grant effective.
* * * * *
1. You have been granted the shares of Restricted Stock shown above, subject to the terms and conditions of the Plan and this Award Agreement.
2 From the Grant Date until the Vesting Date, you may not sell, assign, transfer, donate, pledge or otherwise dispose of the Restricted Stock unless such restrictions shall lapse prior to the Vesting Date as described herein.
3. Each certificate representing Restricted Stock shall bear the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER AS SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE COMPANY.
You shall be entitled to have such legend removed from such certificate when the restrictions referred to in Section 2 with respect to the Restricted Stock have lapsed.
4. Restrictions on the Restricted Stock shall lapse on the Vesting Date, subject to earlier lapse upon a Change in Control as provided for in the Plan or as otherwise provided herein.
5. If you shall resign from the Board for any reason prior to the date the restrictions on your Restricted Stock shall have lapsed, the Restricted Stock shall be forfeited. Notwithstanding the above, in the event of your death or disability (as determined by the Board) or in the event that you are not reappointed or reelected to the Board, the restrictions and forfeiture conditions applicable to the Restricted Stock shall lapse, and the Restricted Stock shall be deemed fully vested in accordance with the terms of the Plan.
6. During the restricted period, you shall have the right to vote Restricted Stock and to receive any dividends or distributions paid on such stock.
7. The Plan is incorporated herein by reference. The Plan and this Award Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of you and the Company with respect to the subject matter hereof, and may not be modified except by means of a writing signed by you and the Company. If there is a conflict between the terms and conditions of the Plan and the terms and conditions of this Award Agreement, the terms and conditions of the Plan shall govern. This Award Agreement is governed by the internal substantive laws, but not the choice of law rules, of the State of Delaware.
By your signature and the signature of the Company's representative below, you and the Company agree that this Award is granted under and governed by the terms and conditions of the Plan, the terms of which are incorporated herein, and this Award Agreement. You have reviewed the Plan and this Award Agreement in their entirety, have had an opportunity to obtain the advice of counsel prior to executing this Award Agreement and fully understands all provisions of the Plan and Award Agreement. You hereby agree to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions relating to the Plan and Award Agreement. You further agree to notify the Company upon any change in the residence address indicated below.
GRANTEE | CF INDUSTRIES HOLDINGS, INC. | |
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2
CHANGE IN CONTROL SEVERANCE AGREEMENT
THIS AGREEMENT, dated , 2005, is made by and between CF Industries Holdings, Inc., a Delaware corporation (the "Company"), and (the "Executive") * .
WHEREAS, the Company considers it essential to the best interests of its stockholders to foster the continued employment of key management personnel; and
WHEREAS, the Board recognizes that the possibility of a Change in Control exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; and
WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control;
NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows:
1. Defined Terms. The definitions of capitalized terms used in this Agreement are provided in the last Section hereof.
2. Term of Agreement. This Agreement shall not become effective, and the Term of this Agreement shall not commence, unless and until the Company's initial public offering of its common stock has closed and public trading in its common stock has commenced on the New York Stock Exchange or NASDAQ. Once in effect, the Term shall continue through December 31, 2007; provided , however , that commencing on January 1, 2007 and each January 1 thereafter, the Term shall automatically be extended for one additional year unless, not later than September 30 of the preceding year, the Company or the Executive shall have given notice not to extend the Term; and further provided , however , that if a Change in Control shall have occurred during the Term, the Term shall expire no earlier than twenty-four (24) months beyond the month in which such Change in Control occurred.
3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 hereof, no Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company.
4. The Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six (6) months from the date of such Potential Change in Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason.
5. Compensation Other Than Severance Payments.
5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period (other than any disability plan), until the Executive's employment is terminated by the Company for Disability.
5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the rate in effect immediately prior to the Date of Termination or, if higher, the rate in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason.
5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason.
6. Severance Payments.
6.1 Subject to Section 6.2 hereof, if the Executive's employment is terminated following a Change in Control and during the Term, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Payments"), in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, (ii) the Executive terminates his employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person, or (iii) the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason and such termination or the circumstance or event which constitutes Good Reason is otherwise in connection with or in anticipation of a Change in Control (whether or not a Change in Control ever occurs). For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the Executive shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that such position is not correct.
(A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefit otherwise payable to the Executive, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to one times the sum of (i) the Executive's base salary as in effect immediately prior to the Date of Termination or, if higher, in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, and (ii) the Executive's target annual bonus pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which the Date of Termination occurs or, if higher, the fiscal year in which the first event or circumstance constituting Good Reason occurs.
(B) For the twelve month period immediately following the Date of Termination, the Company shall arrange to provide the Executive and his dependents life, disability, accident and health insurance benefits substantially similar to those provided to the Executive and his dependents immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive and his dependents immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater after tax cost to the Executive than the after tax cost to the Executive immediately prior to such date or occurrence; provided , however , that, unless the Executive consents to a different method, such health insurance benefits shall be provided through a third-party insurer. Benefits otherwise receivable by the Executive pursuant to this Section 6.1(B) shall be reduced to the extent benefits of the same type are received by or made available to the Executive during the twelve month period following the Executive's termination of employment (and any such benefits received by or made
2
available to the Executive shall be reported to the Company by the Executive); provided , however , that the Company shall reimburse the Executive for the excess, if any, of the after tax cost of such benefits to the Executive over such cost immediately prior to the Date of Termination or, if more favorable to the Executive, the first occurrence of an event or circumstance constituting Good Reason. If the Severance Payments shall be decreased pursuant to Section 6.2 hereof, and the Section 6.1(B) benefits which remain payable after the application of Section 6.2 hereof are thereafter reduced pursuant to the immediately preceding sentence, the Company shall, no later than five (5) business days following such reduction, pay to the Executive the least of (a) the amount of the decrease made in the Severance Payments pursuant to Section 6.2 hereof, (b) the amount of the subsequent reduction in these Section 6.1(B) benefits, or (c) the maximum amount which can be paid to the Executive without being, or causing any other payment to be, nondeductible by reason of section 280G of the Code.
(C) The Executive's aggregate accrued benefits under the Company's non-qualified DB Plans will be calculated, and he will be treated for all purposes, as if he was credited with one additional year of age and service as of the Date of Termination under such plans with compensation equal to the Executive's compensation (as defined in the DB Pension Plans) during the twelve (12) months immediately preceding Date of Termination or, if higher, during the twelve months immediately prior to the first occurrence of an event or circumstance constituting Good Reason (without regard to any amendment to any DB Pension Plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of retirement benefits thereunder).(1) The Executive shall also be paid a lump sum amount, in cash, equal to the excess of (i) the actuarial equivalent of the aggregate retirement pension (taking into account any early retirement subsidies associated therewith and determined as a straight life annuity commencing at the date (but in no event earlier than the first anniversary of the Date of Termination) as of which the actuarial equivalent of such annuity is greatest) which the Executive would have accrued under the terms of all tax-qualified DB Pension Plans in which he was a participant (without regard to any amendment to any DB Pension Plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of retirement benefits thereunder), determined as if the Executive were fully vested thereunder and had accumulated (after the Date of Termination) twelve additional months of service credit thereunder and had been credited under each such DB Pension Plan during such period with compensation equal to the Executive's compensation (as defined in such DB Pension Plan) during the twelve (12) months immediately preceding Date of Termination or, if higher, during the twelve months immediately prior to the first occurrence of an event or circumstance constituting Good Reason, over (ii) the actuarial equivalent of the aggregate retirement pension (taking into account any early retirement subsidies associated therewith and determined as a straight life annuity commencing at the date (but in no event earlier than the Date of Termination) as of which the actuarial equivalent of such annuity is greatest) which the Executive had accrued pursuant to the provisions of the DB Pension Plans as of the Date of Termination. For purposes of this Section 6.1(D), "actuarial equivalent" shall be determined using the same assumptions utilized under the applicable DB Pension Plan immediately prior to the Date of Termination or, if more favorable to the Executive, immediately prior to the first occurrence of an event or circumstance constituting Good Reason. In addition to the benefits to which the Executive is entitled under each DC Pension Plan, the Company shall pay the Executive a lump sum amount, in cash, equal to the sum of (1) the amount that would have been contributed or allocated to each DC Pension Plan by the Company on the Executive's behalf (without regard to whether such amount would be vested) during the year immediately following the Date of Termination, determined (x) as if the Executive made the maximum permissible contributions thereto during such period, (y) as if the Executive earned compensation during such period at a rate equal to the Executive's compensation (as defined in the DC Pension Plans) during the twelve (12) months immediately preceding the Date of Termination or, if higher, during the twelve months immediately prior to the first occurrence of an event or circumstance constituting Good Reason, and (z) without regard to any amendment to the DC Pension Plans made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of benefits thereunder and (2) all other amounts credited to the Executive's account under each DC Pension Plan to the extent such amounts were unvested on the Date of Termination.
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(D) If the Executive would have become entitled to benefits under the Company's post-retirement health care or life insurance plans, as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, had the Executive's employment terminated at any time during the period of twelve months after the Date of Termination, the Company shall provide such post-retirement health care or life insurance benefits to the Executive and the Executive's dependents commencing on the later of (i) the date on which such coverage would have first become available and (ii) the date on which benefits described in subsection (B) of this Section 6.1 terminate.
(E) The Company shall provide the Executive with outplacement services suitable to the Executive's position for a period of one year or, if earlier, until the first acceptance by the Executive of an offer of employment.
(F) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation which has been allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the Date of Termination under any such plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date, and (ii) a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for all then uncompleted periods under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the target level (or, if greater, based on actual results to Date of Termination), of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period.
6.2
(A) Notwithstanding any other provisions of this Agreement, in the event that any payment or benefit received or to be received by the Executive (including any payment or benefit received in connection with a Change in Control or the termination of the Executive's employment, whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement) (all such payments and benefits, including the Severance Payments, being hereinafter referred to as the "Total Payments") would not be deductible (in whole or part), by the Company, an affiliate or Person making such payment or providing such benefit as a result of section 280G of the Code, then, to the extent necessary to make such portion of the Total Payments deductible (and after taking into account any reduction in the Total Payments provided by reason of section 280G of the Code in such other plan, arrangement or agreement), the cash Severance Payments shall first be reduced (if necessary, to zero), and all other Severance Payments shall thereafter be reduced (if necessary, to zero); provided , however , that the Executive may elect to have the noncash Severance Payments reduced (or eliminated) prior to any reduction of the cash Severance Payments.
(B) For purposes of this limitation, (i) no portion of the Total Payments the receipt or enjoyment of which the Executive shall have waived at such time and in such manner as not to constitute a "payment" within the meaning of section 280G(b) of the Code shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, including by reason of section 280G(b)(4)(A) of the Code, (iii) the Severance Payments shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (i) or (ii)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of section 280G(b)(4)(B) of the Code or are otherwise not subject to disallowance as deductions by reason of section 280G of the Code, in the opinion of Tax Counsel, and (iv) the value of any noncash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code.
(C) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of
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this Section 6.2, the Total Payments paid to or for the Executive's benefit are in an amount that would result in any portion of such Total Payments being subject to the Excise Tax, then, if such repayment would result in (i) no portion of the remaining Total Payments being subject to the Excise Tax and (ii) a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, the Executive shall have an obligation to pay the Company upon demand an amount equal to the sum of (i) the excess of the Total Payments paid to or for the Executive's benefit over the Total Payments that could have been paid to or for the Executive's benefit without any portion of such Total Payments being subject to the Excise Tax; and (ii) interest on the amount set forth in clause (i) of this sentence at the rate provided in section 1274(b)(2)(B) of the Code from the date of the Executive's receipt of such excess until the date of such payment.
6.3 The payments provided in subsections (A),(C) and (F) of Section 6.1 hereof shall be made not later than the fifth day following the Date of Termination; provided , however , that if the amounts of such payments, and the limitation on such payments set forth in Section 6.2 hereof, cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth (5th) business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement).
6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require.
6.5 The Executive agrees that prior to and following the Date of Termination, he shall retain in confidence any confidential information known to him concerning the Company and its Affiliates and their respective businesses for as long as such information is not publicly disclosed.
6.6 Notwithstanding anything to the contrary, all compensation and benefits payable to Executive pursuant to this Section 6 (other than Sections 6.2 and 6.4) are conditioned on receipt by the Company of an executed release of claims by Executive in the form attached hereto as Exhibit A and the expiration of any revocation period in such release.
7. Termination Procedures and Compensation During Dispute.
7.1 Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive
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was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail.
7.2 Date of Termination. "Date of Termination," with respect to any purported termination of the Executive's employment after a Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty (30) day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given).
7.3 Dispute Concerning Termination. If within fifteen (15) days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided , however , that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence.
7.4 Compensation During Dispute. If a purported termination occurs following a Change in Control and during the Term and the Date of Termination is extended in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, as determined in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement.
8. No Mitigation. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 hereof or Section 7.4 hereof. Further, except as specifically provided in Section 6.1(B) hereof, no payment or benefit provided for in this Agreement shall be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise.
9. Successors; Binding Agreement.
9.1 In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination.
9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all
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such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate.
10. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address inserted below the Executive's signature on the final page hereof and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt:
To the Company:
CF
Industries, Inc.
One Salem Lake Drive
Long Grove, Illinois 60046
Attention: William G. Eppel
11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by either party; provided , however , that this Agreement shall supersede any agreement setting forth the terms and conditions of the Executive's employment with the Company only in the event that the Executive's employment with the Company is terminated on or following a Change in Control, by the Company other than for Cause or by the Executive for Good Reason. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Illinois. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration.
12. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.
13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.
14. Settlement of Disputes; Arbitration. 14.1 All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within sixty (60) days after notification by the Board that the Executive's claim has been denied. Notwithstanding the above, in the event of any dispute, any decision by the Board hereunder shall be subject to a de novo review by the arbitrator.
14.2 Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Chicago, Illinois in accordance with the rules of the American Arbitration Association then in effect; provided , however , that the evidentiary standards set forth in this Agreement shall apply. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Notwithstanding any provision of this Agreement to the contrary, the Executive shall be entitled to seek specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement.
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15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below:
(A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act.
(B) "Auditor" shall have the meaning set forth in Section 6.2 hereof.
(C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code.
(D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act.
(E) "Board" shall mean the Board of Directors of the Company.
(F) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) that has not been cured within 30 days after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in or not opposed to the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Board by clear and convincing evidence that Cause exists.
"Change in Control" shall mean the first to occur of any of the following:
(I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of CF Industries Holdings, Inc. (not including in the securities beneficially owned by such Person any securities acquired directly from CF Industries Holdings, Inc. or any of its subsidiaries) representing 25% or more of the combined voting power of CF Industries Holdings, Inc.'s then outstanding securities; or
(II) the following individuals cease for any reason to constitute a majority of the number of directors then serving on the Board: individuals who, on the date of the initial public offering, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of CF Industries Holdings, Inc.) whose appointment or election by the Board or nomination for election by CF Industries Holdings, Inc.'s stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or
(III) there is consummated a merger or consolidation of CF Industries Holdings, Inc. or any direct or indirect subsidiary of CF Industries Holdings, Inc. with any other corporation, other than a merger or consolidation immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the Board of the entity surviving such merger or consolidation or, if CF Industries Holdings, Inc. or the entity surviving such merger is then a subsidiary, the ultimate parent thereof; or
(IV) the stockholders of CF Industries Holdings, Inc. approve a plan of complete liquidation or dissolution of CF Industries Holdings, Inc. or there is consummated an agreement for the sale or disposition by CF Industries Holdings, Inc. of all or substantially all of CF Industries Holdings, Inc.'s assets, other than (a) a sale or disposition by CF Industries Holdings, Inc. of all or substantially all of CF Industries Holdings, Inc.'s assets to an entity, at least 60% of the combined voting power of the voting securities of which are owned by stockholders of CF Industries Holdings, Inc. following the completion of such transaction in substantially the same proportions as their ownership of CF Industries Holdings, Inc. immediately prior to such sale or (b) other than a sale or disposition by CF Industries Holdings, Inc. of all or substantially all of CF Industries Holdings, Inc.'s assets immediately following
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which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of the entity to which such assets are sold or disposed or, if such entity is a subsidiary, the ultimate parent thereof.
Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred (1) by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of CF Industries Holdings, Inc. immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of CF Industries Holdings, Inc. immediately following such transaction or series of transactions or (2) as a result of the initial public offering of the Company's common stock or any transactions or any events contemplated by such offering.
(G) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time.
(H) "Company" shall mean CF Industries Holdings, Inc., and except in determining under Section 15(G) hereof whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise.
(I) "DB Pension Plan" shall mean any tax-qualified, supplemental or excess defined benefit pension plan maintained by the Company and any other defined benefit plan or agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits.
(J) "DC Pension Plan" shall mean any tax-qualified, supplemental or excess defined contribution plan maintained by the Company and any other defined contribution plan or agreement entered into between the Executive and the Company which is designed to provide the executive with supplemental retirement benefits.
(K) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof.
(L) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six (6) consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties.
(M) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time.
(N) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code.
(O) "Executive" shall mean the individual named in the first paragraph of this Agreement.
(P) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent which specifically references this Agreement) after any Change in Control, or prior to a Change in Control under the circumstances described in clauses (ii) and (iii) of the second sentence of Section 6.1 hereof (treating all references in paragraphs (I) through (VII) below to a "Change in Control" as references to a "Potential Change in Control"), of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (V), (VI) or (VII) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof:
(I) the assignment to the Executive of any duties inconsistent with the Executive's status as an officer of the Company or a substantial adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control including, without limitation, if the Executive was, immediately prior to the Change in Control, an executive officer of a public company, the Executive ceasing to be an executive officer of a public company;
(II) a reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all executives of the Company and all executives of any Person in control of the Company;
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(III) the relocation of the Executive's principal place of employment to a location more than 35 miles from the Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations;
(IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days after the date demand for payment is made provided such compensation is due;
(V) the failure by the Company to continue in effect any compensation plan in which the Executive participates immediately prior to the Change in Control which is material to the Executive's total compensation unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Executive's participation relative to other participants, as existed immediately prior to the Change in Control;
(VI) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control (except for across the board changes similarly affecting all executives of the Company and all executives of any Person in control of the Company), the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled with the Company in accordance with the vacation policy applicable to the Executive in effect at the time of the Change in Control; or
(VII) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness.
The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder.
For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that Good Reason does not exist. "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof.
(Q) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) CF Industries Holdings, Inc. or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of CF Industries, Inc. or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company.
(R) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred:
(I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control;
(II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control;
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(III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 15% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); or
(IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred.
(S) "Retirement" shall be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees.
(T) "Severance Payments" shall have the meaning set forth in Section 6.1 hereof.
(U) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof.
(V) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein).
(W) "Total Payments" shall mean those payments so described in Section 6.2 hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
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EXHIBIT A
RELEASE
(a) (" Executive ") for and in consideration of benefits provided pursuant to the Change in Control Severance Agreement with CF Industries, Inc.(" Company ") entered into [MD,Y] (the " Severance Agreement "), on behalf of Executive and Executive's heirs, executors, administrators, successors and assigns, voluntarily, knowingly and willingly releases and discharges the Company and its parents, subsidiaries and affiliates (collectively, the " Company Group "), together with their respective present and former partners, officers, directors, employees and agents, and each of their predecessors, heirs, executors, administrators, successors and assigns, and any and all employee pension or welfare benefit plans of the Company, including current and former trustees and administrators of these plans (collectively, the " Company Releasees ") from any and all charges, complaints, claims, promises, agreements, controversies, causes of action, demands, damages and liabilities (" Claims ") of any nature whatsoever, known or unknown, suspected or unsuspected, which against the Company Releasees, jointly or severally, Executive or Executive's heirs, executors, administrators, successors or assigns ever had or now have by reason of any matter, cause or thing whatsoever arising from the beginning of time to the time Executive executes this release (the " Release "). This Release includes, without limitation, any Claims arising out of or relating in any way to Executive's employment or director relationship with the Company, or the termination thereof, any Claims arising under any statute or regulation, including but not limited to the Age Discrimination in Employment Act of 1967, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Americans with Disabilities Act of 1990, the Family and Medical Leave Act of 1993, or the Employee Retirement Income Security Act of 1974, each as amended, or any other federal, state or local law, regulation, ordinance or common law, or under any policy, agreement, understanding or promise, written or oral, formal or informal, between any Company Releasee and Executive. Executive shall not be entitled to any recovery, in any action or proceeding that may be commenced on Executive's behalf in any way arising out of or relating to the matters released under this Release. Notwithstanding the foregoing, nothing herein shall release any Company Releasee from any Claim based on (i) Executive's rights under the Severance Agreement or any other agreement with the Company (including, but not limited to, any stock option agreements), (ii) any right or claim that arises after the date Executive executes this Release, (iii) Executive's eligibility for indemnification in accordance with applicable laws or the certificate of incorporation or by-laws of the Company (or any affiliate or subsidiary) or any applicable insurance policy, with respect to any liability Executive incurs or incurred as a director, officer or employee of the Company or any affiliate or subsidiary (including as a trustee, director or officer of any employee benefit plan) or (iv) any rights Executive may have to vested benefits under any employee benefit plan or program.
(b) Executive has been advised to consult with an attorney of Executive's choice prior to signing this Release, has done so and enters into this Release freely and voluntarily.
[(c) Executive acknowledges that the Company has enclosed with this Release information concerning (i) the ages and job titles of all employees who are eligible to receive severance pay and (ii) the ages of all employees in the same job classification or organizational unit who are not eligible to receive severance pay.](2)
(d) Executive has had at least [twenty-one (21)] [forty-five ](3) calendar days to consider the terms of this Release. Once Executive has signed this Release, Executive has seven (7) additional days to revoke Executive's consent and may do so by writing to the Company as provided in Section 10 of the Severance Agreement. Executive's Release shall not be effective, and no payments or benefits shall be due under Section 6 of the Severance Agreement, until the eighth day after Executive has executed this Release and returned it to the Company, assuming that Executive has not revoked Executive's consent to this Release during such time (the "Revocation Date").
(e) In the event that any one or more of the provisions of this Release shall be held to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remainder thereof shall not in any way be affected or impaired thereby.
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(f) This Release shall be governed by the law of the State of Illinois without reference to its choice of law rules.
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CF INDUSTRIES HOLDINGS, INC.
NON-EMPLOYEE DIRECTOR COMPENSATION POLICY
The following sets forth the compensation policy for non-employee members of the board of directors (the "Board") of CF Industries Holdings, Inc.:
Annual Cash Retainer
$30,000, payable in arrears quarterly. The Chairperson of the Company's Audit Committee shall also be paid an additional annual retainer of $5,000 which shall be paid in the same manner.
Annual Restricted Stock Grant
Each non-employee director will receive, upon joining the Board, a restricted stock grant with a fair market value of $65,000. The restricted stock grant will vest on the first annual meeting of the Company's shareholders that follows the date of the grant or one year after the date of the grant, whichever occurs first. Thereafter, each continuing non-employee director will receive a restricted stock grant with a fair market value of $65,000 on the date of each annual meeting of the Company's shareholders. These shares of restricted stock will vest as described above.
Meeting Fees
$1,500 for each Board meeting attended ($500 for telephonic attendance).
$1,250 for each Board committee meeting attended, other than Committee meetings held in conjunction with Board meetings ($425 for telephonic attendance).
Non-employee directors will be reimbursed for reasonably incurred out-of-pocket meeting expenses.
CHANGE IN CONTROL SEVERANCE AGREEMENT
THIS AGREEMENT, effective as of , 2005, is made by and between CF Industries Holdings, Inc., a Delaware corporation (the "Company"), and David J. Pruett (the "Executive").
WHEREAS, the Company considers it essential to the best interests of its stockholders to foster the continued employment of key management personnel; and
WHEREAS, the Board recognizes that the possibility of a Change in Control exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; and
WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control;
NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows:
1. Defined Terms . The definitions of capitalized terms used in this Agreement are provided in the last Section hereof.
2. Term of Agreement . This Agreement shall not become effective, and the Term of this Agreement shall not commence, unless and until the Company's initial public offering of its common stock has closed and public trading in its common stock has commenced on the New York Stock Exchange or NASDAQ. Once in effect, the Term shall continue in effect through December 31, 2007; provided , however , that commencing on January 1, 2007 and each January 1 thereafter, the Term shall automatically be extended for one additional year unless, not later than September 30 of the preceding year, the Company or the Executive shall have given notice not to extend the Term; and further provided , however , that if a Change in Control shall have occurred during the Term, the Term shall expire no earlier than twenty-four (24) months beyond the month in which such Change in Control occurred.
3. Company's Covenants Summarized . In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 hereof, no Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company.
4. The Executive's Covenants . The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six (6) months from the date of such Potential Change in Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason.
5. Compensation Other Than Severance Payments .
5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period (other than any disability plan), until the Executive's employment is terminated by the Company for Disability.
5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the rate in effect immediately prior to the Date of Termination or, if higher, the rate in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason.
5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason.
6. Severance Payments .
6.1 If the Executive's employment is terminated following a Change in Control and during the Term, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Payments") and Section 6.2, in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, (ii) the Executive terminates his employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person, or (iii) the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason and such termination or the circumstance or event which constitutes Good Reason is otherwise in connection with or in anticipation of a Change in Control (whether or not a Change in Control ever occurs). For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the Executive shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that such position is not correct.
(A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefit otherwise payable to the Executive, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to two times the sum of (i) the Executive's base salary as in effect immediately prior to the Date of Termination or, if higher, in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, and (ii) the Executive's target annual bonus pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which the Date of Termination occurs or, if higher, the fiscal year in which the first event or circumstance constituting Good Reason occurs.
(B) For the twenty-four (24) month period immediately following the Date of Termination, the Company shall arrange to provide the Executive and his dependents life, disability, accident and health insurance benefits substantially similar to those provided to the Executive and his dependents immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive and his dependents immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater after tax cost to the Executive than the after tax cost to the Executive immediately prior to such date or occurrence; provided , however , that, unless the Executive consents to a different method, such health insurance benefits shall be provided through a third-party insurer. Benefits otherwise receivable by the Executive pursuant to this Section 6.1(B) shall be reduced to the extent benefits of the same type are received by or made available to the Executive during the twenty-four (24) month period following the Executive's termination of employment (and any such
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benefits received by or made available to the Executive shall be reported to the Company by the Executive); provided , however , that the Company shall reimburse the Executive for the excess, if any, of the after tax cost of such benefits to the Executive over such cost immediately prior to the Date of Termination or, if more favorable to the Executive, the first occurrence of an event or circumstance constituting Good Reason.
(C) In addition to the benefits to which the Executive is entitled under each DC Pension Plan, the Company shall pay the Executive a lump sum amount, in cash, equal to the sum of (1) the amount that would have been contributed or allocated to each DC Pension Plan by the Company on the Executive's behalf (without regard to whether such amount would be vested) during the two years immediately following the Date of Termination, determined (x) as if the Executive made the maximum permissible contributions thereto during such period, (y) as if the Executive earned compensation during such period at a rate equal to the Executive's compensation (as defined in the DC Pension Plans) during the twelve (12) months immediately preceding the Date of Termination or, if higher, during the twelve months immediately prior to the first occurrence of an event or circumstance constituting Good Reason, and (z) without regard to any amendment to the DC Pension Plans made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of benefits thereunder and (2) all other amounts credited to the Executive's account under each DC Pension Plan to the extent such amounts were unvested on the Date of Termination.
(D) If the Executive would have become entitled to benefits under the Company's post-retirement health care or life insurance plans, as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, had the Executive's employment terminated at any time during the period of twenty-four (24) months after the Date of Termination, the Company shall provide such post-retirement health care or life insurance benefits to the Executive and the Executive's dependents commencing on the later of (i) the date on which such coverage would have first become available and (ii) the date on which benefits described in subsection (B) of this Section 6.1 terminate.
(E) The Company shall provide the Executive with outplacement services suitable to the Executive's position for a period of two years or, if earlier, until the first acceptance by the Executive of an offer of employment.
(F) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation which has been allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the Date of Termination under any such plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date, and (ii) a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for all then uncompleted periods under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the target level (or, if greater, based on actual results to Date of Termination), of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period.
6.2 (A) Whether or not the Executive becomes entitled to the Severance Payments, if any of the payments or benefits received or to be received by the Executive (including any payment or benefits received in connection with a Change in Control or the Executive's termination of employment, whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement) (all such payments and benefits, excluding the Gross-Up Payment, being hereinafter referred to as the "Total Payments") will be subject to the Excise Tax, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, and after taking into account the phase out of itemized deductions and personal exemptions attributable to the Gross-Up Payment, shall be equal to the Total Payments.
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(B) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" (within the meaning of section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of section 280G(b)(4)(B) of the Code) in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes.
(C) In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, the Executive shall repay to the Company, within five (5) business days following the time that the amount of such reduction in the Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive), to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) within five (5) business days following the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments.
6.3 The payments provided in subsections (A),(C) and (F) of Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-Up Payment is calculated for purposes of Section 6.2 hereof); provided , however , that if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive or, in the case of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth (5th) business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other
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advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement).
6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require.
6.5 The Executive agrees that prior to and following the Date of Termination, he shall retain in confidence any confidential information known to him concerning the Company and its Affiliates and their respective businesses for as long as such information is not publicly disclosed.
6.6 Notwithstanding anything to the contrary, all compensation and benefits payable to Executive pursuant to this Section 6 (other than Sections 6.2 and 6.4) are conditioned on receipt by the Company of an executed release of claims by Executive in the form attached hereto as Exhibit A and the expiration of any revocation period in such release.
7. Termination Procedures and Compensation During Dispute .
7.1 Notice of Termination . After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail.
7.2 Date of Termination . "Date of Termination," with respect to any purported termination of the Executive's employment after a Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty (30) day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given).
7.3 Dispute Concerning Termination . If within fifteen (15) days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided , however , that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence.
7.4 Compensation During Dispute . If a purported termination occurs following a Change in Control and during the Term and the Date of Termination is extended in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all
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compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, as determined in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement.
8. No Mitigation . The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 hereof or Section 7.4 hereof. Further, except as specifically provided in Section 6.1(B) hereof, no payment or benefit provided for in this Agreement shall be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise.
9. Successors; Binding Agreement .
9.1 In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination.
9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate.
10. Notices . For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address inserted below the Executive's signature on the final page hereof and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt:
To the Company: | ||
CF Industries, Inc. One Salem Lake Drive Long Grove, Illinois 60046 |
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Attention: William G. Eppel |
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11. Miscellaneous . No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by either party; provided , however , that this Agreement shall supersede any agreement setting forth the terms and conditions of the Executive's employment with the Company only in the event that the Executive's employment with the Company is terminated on or following a Change in Control, by the Company other than for Cause or by the Executive for Good Reason. The validity, interpretation,
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construction and performance of this Agreement shall be governed by the laws of the State of Illinois. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration.
12. Validity . The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.
13. Counterparts . This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.
14. Settlement of Disputes; Arbitration .
14.1 All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within sixty (60) days after notification by the Board that the Executive's claim has been denied. Notwithstanding the above, in the event of any dispute, any decision by the Board hereunder shall be subject to a de novo review by the arbitrator.
14.2 Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Chicago, Illinois in accordance with the rules of the American Arbitration Association then in effect; provided , however , that the evidentiary standards set forth in this Agreement shall apply. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Notwithstanding any provision of this Agreement to the contrary, the Executive shall be entitled to seek specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement.
15. Definitions . For purposes of this Agreement, the following terms shall have the meanings indicated below:
(A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act.
(B) "Auditor" shall have the meaning set forth in Section 6.2 hereof.
(C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code.
(D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act.
(E) "Board" shall mean the Board of Directors of the Company.
(F) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) that has not been cured within 30 days after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in or not opposed to the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Board by clear and convincing evidence that Cause exists.
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(G) "Change in Control" shall mean the first to occur of:
(I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of CF Industries Holdings, Inc. (not including in the securities beneficially owned by such Person any securities acquired directly from CF Industries Holdings, Inc. or any of its subsidiaries) representing 25% or more of the combined voting power of CF Industries Holdings, Inc.'s then outstanding securities; or
(II) the following individuals cease for any reason to constitute a majority of the number of directors then serving on the Board: individuals who, on the date of the initial public offering, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of CF Industries Holdings, Inc.) whose appointment or election by the Board or nomination for election by CF Industries Holdings, Inc.'s stockholders was approved or recommended by a vote of at least two-thirds ( 2 / 3 ) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or
(III) there is consummated a merger or consolidation of CF Industries Holdings, Inc. or any direct or indirect subsidiary of CF Industries Holdings, Inc. with any other corporation, other than a merger or consolidation immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the Board of the entity surviving such merger or consolidation or, if CF Industries Holdings, Inc. or the entity surviving such merger is then a subsidiary, the ultimate parent thereof; or
(IV) the stockholders of CF Industries Holdings, Inc. approve a plan of complete liquidation or dissolution of CF Industries Holdings, Inc. or there is consummated an agreement for the sale or disposition by CF Industries Holdings, Inc. of all or substantially all of CF Industries Holdings, Inc.'s assets, other than (a) a sale or disposition by CF Industries Holdings, Inc. of all or substantially all of CF Industries Holdings, Inc.'s assets to an entity, at least 60% of the combined voting power of the voting securities of which are owned by stockholders of CF Industries Holdings, Inc. following the completion of such transaction in substantially the same proportions as their ownership of CF Industries Holdings, Inc. immediately prior to such sale or (b) other than a sale or disposition by CF Industries Holdings, Inc. of all or substantially all of CF Industries Holdings, Inc.'s assets immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of the entity to which such assets are sold or disposed or, if such entity is a subsidiary, the ultimate parent thereof.
Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred (1) by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of CF Industries Holdings, Inc. immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of CF Industries Holdings, Inc. immediately following such transaction or series of transactions or (2) as a result of the initial public offering of the Company's common stock or any transactions or any events contemplated by such offering.
(H) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time.
(I) "Company" shall mean CF Industries Holdings, Inc., as applicable, and except in determining under Section 15(G) hereof whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise.
(J) "DC Pension Plan" shall mean any tax-qualified, supplemental or excess defined contribution plan maintained by the Company and any other defined contribution plan or agreement entered into between the Executive and the Company which is designed to provide the executive with supplemental retirement benefits.
(K) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof.
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(L) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six (6) consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties.
(M) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time.
(N) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code.
(O) "Executive" shall mean the individual named in the first paragraph of this Agreement.
(P) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent which specifically references this Agreement) after any Change in Control, or prior to a Change in Control under the circumstances described in clauses (ii) and (iii) of the second sentence of Section 6.1 hereof (treating all references in paragraphs (I) through (VII) below to a "Change in Control" as references to a "Potential Change in Control"), of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (V), (VI) or (VII) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof:
(I) the assignment to the Executive of any duties inconsistent with the Executive's status as an executive officer of the Company or a substantial adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control including, without limitation, if the Executive was, immediately prior to the Change in Control, an executive officer of a public company, the Executive ceasing to be an executive officer of a public company;
(II) a reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all executives of the Company and all executives of any Person in control of the Company;
(III) the relocation of the Executive's principal place of employment to a location more than 35 miles from the Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations;
(IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days after the date demand for payment is made provided such compensation is due;
(V) the failure by the Company to continue in effect any compensation plan in which the Executive participates immediately prior to the Change in Control which is material to the Executive's total compensation unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Executive's participation relative to other participants, as existed immediately prior to the Change in Control;
(VI) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control (except for across the board changes similarly affecting all executives of the Company and all executives of any Person in control of the Company), the taking of any other action by the Company which would directly or indirectly materially reduce any
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of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled with the Company in accordance with the vacation policy applicable to the Executive in effect at the time of the Change in Control; or
(VII) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness.
The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder.
For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that Good Reason does not exist.
(Q) "Gross-Up Payment" shall have the meaning set forth in Section 6.2 hereof.
(R) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof.
(S) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) CF Industries Holdings, Inc. or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of CF Industries, Inc. or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company.
(T) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred:
(I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control;
(II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control;
(III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 15% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); or
(IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred.
(U) "Retirement" shall be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees.
(V) "Severance Payments" shall have the meaning set forth in Section 6.1 hereof.
(W) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof.
(X) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein).
(Y) "Total Payments" shall mean those payments so described in Section 6.2 hereof.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
CF INDUSTRIES HOLDINGS, INC. | |||
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(a) David J. Pruett (" Executive ") for and in consideration of benefits provided pursuant to the Change in Control Severance Agreement with CF Industries Holdings, Inc. (collectively, referred to herein as the " Company ") entered into August , 2005 (the " Severance Agreement "), on behalf of Executive and Executive's heirs, executors, administrators, successors and assigns, voluntarily, knowingly and willingly releases and discharges the Company and its parents, subsidiaries and affiliates (collectively, the " Company Group "), together with their respective present and former partners, officers, directors, employees and agents, and each of their predecessors, heirs, executors, administrators, successors and assigns, and any and all employee pension or welfare benefit plans of the Company, including current and former trustees and administrators of these plans (collectively, the " Company Releasees ") from any and all charges, complaints, claims, promises, agreements, controversies, causes of action, demands, damages and liabilities (" Claims ") of any nature whatsoever, known or unknown, suspected or unsuspected, which against the Company Releasees, jointly or severally, Executive or Executive's heirs, executors, administrators, successors or assigns ever had or now have by reason of any matter, cause or thing whatsoever arising from the beginning of time to the time Executive executes this release (the " Release "). This Release includes, without limitation, any Claims arising out of or relating in any way to Executive's employment or director relationship with the Company, or the termination thereof, any Claims arising under any statute or regulation, including but not limited to the Age Discrimination in Employment Act of 1967, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Americans with Disabilities Act of 1990, the Family and Medical Leave Act of 1993, or the Employee Retirement Income Security Act of 1974, each as amended, or any other federal, state or local law, regulation, ordinance or common law, or under any policy, agreement, understanding or promise, written or oral, formal or informal, between any Company Releasee and Executive. Executive shall not be entitled to any recovery, in any action or proceeding that may be commenced on Executive's behalf in any way arising out of or relating to the matters released under this Release. Notwithstanding the foregoing, nothing herein shall release any Company Releasee from any Claim based on (i) Executive's rights under the Severance Agreement or any other agreement with the Company (including, but not limited to, any stock option agreements), (ii) any right or claim that arises after the date Executive executes this Release, (iii) Executive's eligibility for indemnification in accordance with applicable laws or the certificate of incorporation or by-laws of the Company (or any affiliate or subsidiary) or any applicable insurance policy, with respect to any liability Executive incurs or incurred as a director, officer or employee of the Company or any affiliate or subsidiary (including as a trustee, director or officer of any employee benefit plan) or (iv) any rights Executive may have to vested benefits under any employee benefit plan or program.
(b) Executive has been advised to consult with an attorney of Executive's choice prior to signing this Release, has done so and enters into this Release freely and voluntarily.
[ (c) Executive acknowledges that the Company has enclosed with this Release information concerning (i) the ages and job titles of all employees who are eligible to receive severance pay and (ii) the ages of all employees in the same job classification or organizational unit who are not eligible to receive severance pay. ] (1)
(d) Executive has had at least [ twenty-one (21) ] [ forty-five (45) ] (2) calendar days to consider the terms of this Release. Once Executive has signed this Release, Executive has seven (7) additional days to revoke Executive's consent and may do so by writing to the Company as provided in Section 10 of the Severance Agreement. Executive's Release shall not be effective, and no payments or benefits shall be due under Section 6 of the Severance Agreement, until the eighth day after Executive has executed this Release and returned it to the Company, assuming that Executive has not revoked Executive's consent to this Release during such time (the "Revocation Date").
(e) In the event that any one or more of the provisions of this Release shall be held to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remainder thereof shall not in any way be affected or impaired thereby.
(f) This Release shall be governed by the law of the State of Illinois without reference to its choice of law rules.
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CF INDUSTRIES HOLDINGS, INC. |
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Name: | ||||
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Signed as of this day of |
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David J. Pruett |
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Signed as of this day of |
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NET OPERATING LOSS AGREEMENT
dated as of
July [ ], 2005
by and among
CF INDUSTRIES HOLDINGS, INC.
CF INDUSTRIES, INC.
and
EXISTING STOCKHOLDERS OF CF INDUSTRIES, INC.
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ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION | 1 | ||||
Section 1.1 |
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Definitions |
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1 |
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Section 1.2 | Notices | 3 | |||
Section 1.3 | Effect of Headings | 4 | |||
Section 1.4 | Successors and Assigns | 4 | |||
Section 1.5 | Benefits of Agreement | 4 | |||
Section 1.6 | Governing Law | 4 | |||
Section 1.7 | Legal Holidays | 4 | |||
Section 1.8 | Severability Clause | 4 | |||
Section 1.9 | Counterparts | 4 | |||
Section 1.10 | Effectiveness | 5 | |||
Section 1.11 | Entire Agreement | 5 | |||
ARTICLE II NOL RIGHTS |
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5 |
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Section 2.1 |
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Payment Procedures |
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5 |
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Section 2.2 | Payments to Members | 6 | |||
Section 2.3 | Member-Sourced NOL | 6 | |||
Section 2.4 | Repayment of Amounts | 7 | |||
ARTICLE III MEMBERS |
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Section 3.1 |
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Certain Duties and Responsibilities |
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7 |
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Section 3.2 | Certain Rights of the Responsible Member; Actions of the Responsible Member | 8 | |||
Section 3.3 | Reimbursement and Indemnification of the Responsible Member | 9 | |||
Section 3.4 | Resignation and Removal; Appointment of Successor | 9 | |||
Section 3.5 | Acceptance of Appointment by Successor | 9 | |||
Section 3.6 | Final Resolution | 9 | |||
Section 3.7 | Opt Out | 9 | |||
ARTICLE IV COVENANTS |
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10 |
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Section 4.1 |
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Prosecution of Litigation by the Company; Settlement; Periodic Reports; Expenses |
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10 |
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Section 4.2 | Payment of NOL Payment Amount and Operations of the Company | 11 | |||
Section 4.3 | Federal Income Tax Treatment | 11 | |||
ARTICLE V AMENDMENTS |
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11 |
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Section 5.1 |
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Amendments |
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Section 5.2 | Execution of Amendments | 11 | |||
Section 5.3 | Effect of Amendments | 11 |
This NET OPERATING LOSS AGREEMENT, dated as of [ ], 2005 (this " Agreement "), is entered into by and among CF Industries Holdings, Inc., a Delaware corporation (the " Parent "), CF Industries, Inc., a Delaware corporation (the " Company ") and the existing stockholders of the Company before the IPO (as defined below) (each a "Member", collectively " Members ").
RECITALS:
WHEREAS, the Company and the Parent have entered into an agreement and plan of merger dated as of July 21, 2005, pursuant to which a wholly-owned subsidiary of Parent will be merged with and into the Company, with the Company surviving as a wholly-owned subsidiary of Parent (the " Merger ");
WHEREAS, in connection with the Merger, Parent will undertake an initial public offering (the " IPO ") of Parent's common stock, pursuant to which Parent will become a public company; and
WHEREAS, the parties hereto intend that, following the Merger, the Members may be entitled to receive certain contingent payments from Parent in the amount and manner hereinafter described.
NOW, THEREFORE, for and in consideration of the premises and the consummation of the transactions referred to above, it is mutually covenanted and agreed as follows:
ARTICLE I
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 1.1 Definitions.
(a) For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires:
(i) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular;
(ii) all accounting terms used herein and not expressly defined shall have the meanings assigned to such terms in accordance with generally accepted accounting principles, and the term "generally accepted accounting principles" means such accounting principles as are generally accepted in the United States at the time of any computation;
(iii) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision; and
(iv) unless the context otherwise requires, words describing the singular number shall include the plural and vice versa, words denoting any gender shall include all genders and words denoting natural Persons shall include corporations, partnerships and other Persons and vice versa.
(b) Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Merger Agreement. The following additional terms shall have the meanings ascribed to them as follows:
" Affiliate " of a Person means a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the first mentioned Person.
" Board of Directors " means the board of directors of the Parent or the Company, as applicable.
" Business Day " means any day other than a Saturday, Sunday or a day on which banking institutions in Chicago, Illinois are authorized or obligated by law or executive order to remain closed.
" Code " means the Internal Revenue Code of 1986, as amended.
" Consolidated Group " means any group of corporations that includes the Company (or any successor to the Company) and files any United States federal, state or local income tax return on a combined, consolidated, unitary or affiliated basis.
" Determination " means (i) with respect to the utilization of a Member-Sourced NOL for United States federal income tax purposes, " Determination " shall mean (A) a decision by the tax court or a judgment, decree, or other order by any court of competent jurisdiction, which has become final; (B) a closing agreement made under Section 7121 of the Code; (C) a final disposition by the Secretary of a claim for refund or (D) other decisions as described under Section 1313 of the Code and the regulations thereunder,
and (ii) with respect to the utilization of a Member-Sourced NOL for purposes of any state or local income tax, the receipt of an Opinion of Counsel that such Member-Sourced NOL can be utilized to offset taxable income in such state or local jurisdiction.
" Excess Payment " has the meaning specified in Section 2.4
" Expenses " means the sum of all direct expenses incurred after the Merger by any of the Members, the Parent, the Company, the Company Subsidiaries or any of their respective Affiliates in order to carry the Member-Sourced NOLs forward to tax years (or portions thereof) beginning after the Merger, including any fees, expenses or costs incurred after the Merger (including, without limitation, the cost of the time of employees of the Parent, the Company, any Company Subsidiary or any of their Affiliates) in connection with (i) pursuing the Ruling or any other Litigation or any Determination, (ii) any tax audit or refund claim to the extent related to the utilization of Member-Sourced NOLs or (iii) defending any audit, litigation or other proceeding with respect to the amount and/or existence of the Member-Sourced NOLs.
" Firm Expenses " has the meaning specified in Section 2.1(d) of this Agreement.
" IPO " has the meaning set forth in the recitals to this Agreement.
" Last NOL Payment Date " shall mean the date determined by the Parent as the date on which the last NOL Payment Amount is to be made under this Agreement (or the date on which it is determined by a Majority that no payment of NOL Payment Amount shall be made pursuant to this Agreement).
" Litigation " means pursuing the Ruling or any litigation that the Parent, the Company or the Company Subsidiaries or any of their Affiliates may file or assert and any similar future lawsuits, claims or appeals brought by the Parent, the Company, the Company Subsidiaries or their Affiliates related to the ability of the Company to utilize Member-Sourced NOL carryforwards to offset any taxable income of the Company or any Consolidated Group in any tax year (or portion thereof) beginning after the Merger.
" Majority " means the Members who held a majority of the shares of preferred stock of the Company outstanding immediately prior to the Merger; provided, however, that in the event that one or more Members has Opted Out of this Agreement in accordance with Section 3.7 as of the time of the determination of a Majority, only the shares of preferred stock owned immediately before the Merger by Members that have not Opted Out of this Agreement shall be considered to have been outstanding at such time.
" Member-Sourced NOLs " means the net operating losses (within the meaning of section 172 of the Code or any similar provision of applicable state or local income tax law) generated by the Company from business with its members prior to the Merger during the taxable years when the Company was taxed as a cooperative under subchapter T of the Code and the regulations thereunder.
" NOL Payment Amount " means, for any NOL Payment Date, the sum of the excess, if any, of (i) the aggregate amount of United States federal, state and local net income tax liability of the Company or any Consolidated Group for any tax year (or portion thereof) beginning after the Merger, calculated without taking into account the utilization of any Member-Sourced NOLs carried forward from tax years ending on or before the date of the Merger (the " Without Calculation "), over (ii) the aggregate amount of United States federal, state and local net income tax liability of the Company or any Consolidated Group for such tax year (or portion thereof) beginning after the Merger, calculated on the basis of utilizing any Member-Sourced NOLs that are available under applicable law (including, without limitation, the limitations imposed by Sections 382 and 384 of the Code) (the " With Calculation "); provided however, that any tax attributes of the Company or any Consolidated Group other than Member-Sourced NOLs (" Other Attributes ") that are treated as utilized to reduce actual current tax liability under the Without Calculation in any tax year shall be deemed to be unavailable to the Company or Consolidated Group in making the Without Calculation in any future year, regardless of whether such Other Attributes were actually utilized by the Company or Consolidated Group to reduce tax liability in the prior year. " NOL Payment Amount " shall also include any interest actually received by the Company or a Consolidated Group with respect to taxes offset by Member-Sourced NOLs.
" NOL Payment Date " means any date that any NOL Payment Amount is paid by the Parent to the Members.
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" Officer's Certificate " means a certificate signed by the President, Chief Financial Officer or General Counsel, in each case of the Parent or the Company, in his or her capacity as such an officer, and delivered to the Members.
" Opinion of Counsel " means a written opinion of nationally recognized counsel, which shall be selected by a Majority, and which opinion and counsel shall be reasonably acceptable to the Company.
" Opt-Out " has the meaning specified in Section 3.7(a).
" Opt-Out Notice " has the meaning specified in Section 3.7(a).
" Person " means any individual, corporation, partnership, joint venture, limited liability company, business trust, association, joint-stock company, trust, estate, unincorporated organization or government or any agency or political subdivision thereof.
" Resolution " has the meaning specified in Section 2.1(d) of this Agreement.
" Ruling " means a private letter ruling issued by the United States Internal Revenue Service (the " IRS ") to the effect that the Member-Sourced NOLs of the Company can be used to offset the income of the Company (or any Consolidated Group) for federal income tax purposes after the Merger during tax years when the Company is not taxed as a cooperative under subchapter T of the Code.
" Settlement Decision " means any decision to grant consent to the settlement of any aspect or portion of the Litigation or otherwise to dismiss with prejudice any claim of the Parent, the Company or a Company Subsidiary in a Litigation (and any other determination specified in Section 3.1(d) relating to such a decision).
" Strategic Decision " means, with respect to the Litigation, any decision that involves the appeal of any aspect of the case (whether after a verdict or on a interlocutory basis), the addition of any claim or party, changing legal counsel or the basis for payment of attorney's fees, any admission of liability with respect to any claim against the Company in the Litigation, or any other proposed decision or determination that in the opinion of outside counsel representing the Parent, the Company and the Company Subsidiaries in the Litigation would represent a material change or development in strategy with respect to the Litigation and result in a substantial likelihood that the recovery or receipt by the Company and Company Subsidiaries of any amount of Litigation Proceeds (whether pursuant to a court order at trial or upon appeal or pursuant to the terms of any settlement agreement) will be delayed; provided, however , a Strategic Decision shall not include any action that constitutes (in whole or in part) a Settlement Decision.
" Subsidiary " when used with respect to any Person means any corporation or other organization, whether incorporated or unincorporated, of which such Person directly or indirectly owns or controls at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the board of directors or others performing similar functions with respect to such corporation or other organization, or any organization of which such Person is a general partner.
Section 1.2 Notices. Any request, demand, authorization, direction, notice, consent, or other document provided or permitted by this Agreement to be made upon, given or furnished to, or filed with:
(a) The Company shall be sufficient for every purpose hereunder if in writing and delivered personally, telecopied or mailed first-class postage prepaid or sent by a nationally recognized overnight courier to the Company addressed to the attention of the General Counsel or Chief Financial Officer at One Salem Lake Drive, Long Grove, IL 60047, fax: (847) 438-0211, phone: (847) 438-9500 or at any other address previously furnished in writing to the other parties hereto, with a copy to Brian Duwe, Esq., Skadden, Arps, Slate, Meagher & Flom LLP, 333 W. Wacker Drive, Suite 2100, Chicago, IL 60606.
(b) CHS Inc. shall be sufficient for every purpose hereunder if in writing and delivered personally, telecopied or mailed first-class postage prepaid or sent by a nationally recognized overnight courier to it addressed to 5500 Cenex Drive, Inver Grove Heights, Minnesota 55077-1733 or any other address previously furnished in writing to the parties hereto.
(c) La Coop fédérée shall be sufficient for every purpose hereunder if in writing and delivered personally, telecopied or mailed first-class postage prepaid or sent by a nationally recognized overnight courier to it addressed to 9001 Boulevard de l'Acadie, Bureau 200, Montreal, Quebec, H4N 3H7 CANADA or any other address previously furnished in writing to the parties hereto.
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(d) GROWMARK, Inc. shall be sufficient for every purpose hereunder if in writing and delivered personally, telecopied or mailed first-class postage prepaid or sent by a nationally recognized overnight courier to it addressed to 1701 Towanda Avenue, Bloomington, Illinois 61701-9972 or any other address previously furnished in writing to the parties hereto.
(e) Intermountain Farmers Association shall be sufficient for every purpose hereunder if in writing and delivered personally, telecopied or mailed first-class postage prepaid or sent by a nationally recognized overnight courier to it addressed to 1147 West 2100 South, Salt Lake City, Utah 84119-0168 or any other address previously furnished in writing to the parties hereto.
(f) Land O'Lakes, Inc. shall be sufficient for every purpose hereunder if in writing and delivered personally, telecopied or mailed first-class postage prepaid or sent by a nationally recognized overnight courier to it addressed to 4001 Lexington Avenue North, Arden Hills, Minnesota 55126-2998 or any other address previously furnished in writing to the parties hereto.
(g) MFA Incorporated shall be sufficient for every purpose hereunder if in writing and delivered personally, telecopied or mailed first-class postage prepaid or sent by a nationally recognized overnight courier to it addressed to 201 Ray Young Drive, Columbia, Missouri 65201-3599 or any other address previously furnished in writing to the parties hereto.
(h) Southern States Cooperative, Incorporated shall be sufficient for every purpose hereunder if in writing and delivered personally, telecopied or mailed first-class postage prepaid or sent by a nationally recognized overnight courier to it addressed to 6606 West Broad Street, Richmond, Virginia 23230-1717 or any other address previously furnished in writing to the parties hereto.
(i) Tennessee Farmers Cooperative shall be sufficient for every purpose hereunder if in writing and delivered personally, telecopied or mailed first-class postage prepaid or sent by a nationally recognized overnight courier to it addressed to 200 Waldron Road, LaVergne, Tennessee 37086-1983 or any other address previously furnished in writing to the parties hereto.
Section 1.3 Effect of Headings. The Article and Section headings herein are for convenience only and shall not affect the construction hereof.
Section 1.4 Successors and Assigns. All covenants and agreements in this Agreement by the Company shall bind its successors and assigns, whether so expressed or not.
Section 1.5 Benefits of Agreement. Subject to Section 5.6, nothing in this Agreement, express or implied, shall give to any Person (other than the parties hereto) any benefit or any legal or equitable right, remedy or claim under this Agreement or under any covenant or provision herein contained, all such covenants and provisions being for the sole benefit of the parties hereto.
Section 1.6 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the state of Delaware applicable to contracts executed and performed wholly within such state without giving effect to the choice of law principles of such state.
Section 1.7 Legal Holidays. In the event that an NOL Payment Date shall not be a Business Day, then (notwithstanding any provision of this Agreement to the contrary) any payment required to be made in respect of the use of Member-Sourced NOLs pursuant to this Agreement on such date need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the applicable NOL Payment Date.
Section 1.8 Severability Clause. In case any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement, but this Agreement shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein. Upon such determination that any term or other provision is invalid, illegal or unenforceable, the court or other tribunal making such determination is authorized and instructed to modify this Agreement so as to effect the original intent of the parties as closely as possible so that the transactions and agreements contemplated herein are consummated as originally contemplated to the fullest extent possible.
Section 1.9 Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be deemed to constitute but one and the same instrument.
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Section 1.10 Effectiveness. This Agreement shall be effective from and after the consummation of the Merger. This Agreement shall be deemed terminated and of no force or effect, and the parties hereto shall have no liability hereunder, if the IPO is terminated prior to the Effective Time.
Section 1.11 Entire Agreement. This Agreement, the Merger Agreement and the agreements referenced herein and therein represent the entire understanding of the parties hereto with reference to the matters contemplated hereby and such documents supersede any and all prior oral or written agreements regarding such matters.
ARTICLE II
NOL RIGHTS
Section 2.1 Payment Procedures.
(a) As promptly as practicable but in no event later than 45 days after the Company or any Consolidated Group or any of their Affiliates realize any actual cash tax saving as a result of the utilization of any Member-Sourced NOL carryforward in any tax year (or portion thereof) beginning after the Merger, the Parent shall deliver to the Members a certificate (the " NOL Certificate ") setting forth, in each case, in reasonable detail (i) the amount of any Member-Sourced NOL carried forward by the Company and used by the Company or any Consolidated Group, if any, (ii) a detailed description of tax savings enjoyed by the Company or a Consolidated Group, if any, as a result of utilization of Member-Sourced NOL, (iii) an itemized list of the Expenses incurred to date, (iv) an itemized list of the Expenses as of the NOL Payment Date (and not previously included in the computation of the NOL Payment Amount) that the Company has incurred (whether directly or reimbursed), (v) the calculation of the NOL Payment Amount, if any, through the date of the NOL Certificate, (vi) any assumptions (as appropriate or requested) underlying the determination of any item used in making the necessary calculations for such calculations, and (vii) any financial or other documentation (if requested) reasonably necessary to sufficiently support such calculations. For purposes of this Agreement, neither the Company nor any Consolidated Group shall be considered to have realized any actual cash tax savings from the utilization of a Member-Sourced NOL prior to (A) the earlier of (i) the receipt of the Ruling or (ii) a Determination that such Member-Sourced NOLs can be utilized to offset taxable income of the Company or a Consolidated Group in any tax year (or portion thereof) beginning after the Merger, and (B) with respect to any tax year for which a federal or state income tax return of the Company or Consolidated Group is due after the receipt of such Ruling or Determination, the earlier of (i) the due date (taking into account applicable extensions) for such return or (ii) the date such return is actually filed.
(b) Within 30 days of delivery of the NOL Certificate, each Member shall give written notice to the Company specifying whether such member agrees or objects (a " Notice of Agreement " and a " Notice of Objection ", respectively) to the NOL Certificate and the computation of the NOL Payment Amount.
(c) If each Member delivers a Notice of Agreement and any NOL Payment Amount is payable, the Company shall pay such amounts to the Members in accordance with Section 2.2(a).
(d) As promptly as practicable following delivery of a Notice of Objection, the applicable Member shall deliver to the Parent and each other Member a certificate (an " Objection Certificate ") setting forth in reasonable detail each of the objections to the calculations, valuations, methodologies, lists, computations, assumptions and other information (collectively, the " Valuations ") that the Member has to the applicable NOL Certificate. If a Majority does not agree with the Objection Certificate (or any objections within such Objection Certificate), then the NOL Payment Amount shall be as set forth in the NOL Certificate and the Parent shall pay such amounts in accordance with Section 2.2(a). If within ten days of the delivery of the Objection Certificate, a Majority agrees, in whole or in part, with the Objection Certificate, the Parent and the Members shall attempt in good faith to resolve all disagreements regarding the Valuations. If, after 20 days, Parent and the Members are unable to resolve any such disagreement, Parent and the Members shall subject the remaining areas of disagreement regarding the NOL Certificate that are in dispute to Ernst & Young or any other mutually agreed upon independent public accounting firm of national standing that shall have expertise in the valuation of assets and properties (the " Firm "). The Firm shall be instructed to determine whether the Valuations set forth in the NOL Certificate that are in dispute are correct in all material respects. If the Firm
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determines that such Valuations are correct, the NOL Payment Amount shall be as set forth in the NOL Certificate, and each Member shall be deemed to have delivered a Notice of Agreement with respect to such NOL Certificate and the Company shall pay such amounts in accordance with Section 2.2(a). If the Firm determines that any of the Valuations set forth in the NOL Certificate are incorrect in any respect (whether or not material), the Firm's resulting calculation of the NOL Payment Amount shall be binding on all parties hereto (the " Resolution ") and the Parent, upon notice of such Resolution, shall pay such amounts in accordance with Section 2.2(a). All costs and expenses billed by the Firm in connection with the performance of its duties described herein (" Firm Expenses ") shall be paid by the Members that agreed with the Objection Certificate giving rise to such costs, in proportion to such Members' respective ownership of shares of preferred stock of the Company immediately prior to the Merger:
(e) If a Member does not deliver a Notice of Agreement or a Notice of Objection to an NOL Certificate within the 30-day period described above, the Member shall be deemed to have delivered a Notice of Agreement with respect to such NOL Certificate.
(f) Notwithstanding the foregoing, the provisions of this Section 2.1 (other than Section 2.1(f) and the definition of NOL Certificate) shall not apply to any NOL Certificate received as a result of a Settlement Decision.
Section 2.2 Payments to Members.
(a) If any NOL Payment Amount is determined to be payable in accordance with Section 2.1 or Section 3.1(e), the Parent shall pay such amount to the Members in proportion to the number of shares of preferred stock of the Company owned by such Members immediately prior to the Merger (as set forth on Schedule A hereto, as may be amended pursuant to Section 3.7 from time to time) within five (5) Business Days after such determination is final, accompanied by an Officer's Certificate stating that the amount paid is the NOL Payment Amount as determined in accordance with Section 2.1 or Section 3.1(e), as the case may be.
(b) In the event that the Company or any Consolidated Group has utilized the Member-Sourced NOLs in more than one taxable year, then the NOL Payment Amount with respect to any such resulting tax savings shall be paid with respect to each such actual use and the procedures described in Section 2.1 and Section 3.1(e) shall apply to each such actual use of Member-Sourced NOLs.
(c) The determination by the Company of any NOL Payment Amount pursuant to the procedures set forth in Section 2.1, absent a mathematical error, shall be final and binding on the Company and the Members.
(d) Except in the specific cases specified in this Agreement, no interest shall accrue on any amounts payable to the Members.
Section 2.3 Member-Sourced NOL. Within 45 days after filing the federal and state income tax return of the Company for the tax year ending on the Merger date (and any amended federal income tax return for such year), the Company shall deliver to each Member a notice of the amount of Member-Sourced NOL carryforwards reported on such return. The Company's determination of such amount shall be final and binding upon the Parent, the Company and the Members in the absence of manifest error and except to the extent that the amount of Member-Sourced NOL is adjusted through any amended return, tax audit, tax litigation or similar proceeding.
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Section 2.4 Repayment of Amounts. Notwithstanding any other provision of this Agreement, in the event that, after any amount is paid to the Members in respect of tax savings as a result of the utilization of Member-Sourced NOL pursuant to this Agreement, the Company reasonably determines that any such payment was erroneous or exceeded the amount of tax savings actually realized from the utilization of Member-Sourced NOL (such as, for example, as a result of an audit or other tax proceeding pursuant to which it is determined that the Member-Sourced NOLs were smaller than believed or were subject to limitations on use that were not taken into account when such payments were made) (" Excess Payments "), each Member that received an Excess Payment shall repay to the Company the amount of such Excess Payment, together with interest on such Excess Payment at the underpayment rate applicable to the Company under Section 6601 of the Code for the period during which the Member held such Excess Payment. Any such repayment shall be made within 30 days after the Company delivers to the affected Members a notice setting forth in reasonable detail the calculation of the amount of the Excess Payment (and interest thereon). Alternatively, in the Company's sole and absolute discretion, the Company shall have the right to offset any Excess Payments owed by a Member to the Company against any amounts owed by the Company, the Parent or any of their Subsidiaries to such Member. The purpose of this Section 2.4 is to ensure that payments to the Members by the Company pursuant to this Agreement shall be made only in respect of tax savings that are actually realized by the Company through utilizing Member-Sourced NOL after the Merger, and this Section 2.4 shall be interpreted consistent with such purpose.
ARTICLE III
MEMBERS
Section 3.1 Certain Duties and Responsibilities.
(a) The Members undertake to perform such duties and only such duties as are specifically set forth in this Agreement.
(b) The Members shall bear, in proportion to the number of shares of preferred stock of the Company owned by such Members immediately prior to the Merger as set forth on Schedule A (as may be amended from time to time pursuant to Section 3.7), all of the costs incurred after the Merger in connection with or associated with the Litigation, including, but not limited to, the Expenses. To the extent possible, all Expenses shall be incurred and paid directly by the Members (or the Responsible Member on behalf of the Members). To the extent that Expenses are incurred by the Parent, the Company or any of their respective Subsidiaries, (including, without limitation, Expenses constituting reimbursement for the time of any employee of the Parent, the Company or any of their respective Subsidiaries) the Parent or the Company shall be reimbursed promptly for such Expenses by the Members. The Parent or the Company shall bill each Member for its share of Expenses to be reimbursed by such Member pursuant to the previous sentence whenever the Parent or the Company determines that the aggregate amount of unbilled unreimbursed Expenses due from all Members exceeds $50,000, but in no event less than annually (it being understood that a failure to timely bill a Member for any unreimbursed Expense shall not in any way prejudice the Parent's or the Company's right to be reimbursed for such Expense).
(c) The Members shall have the sole power and duty to direct and supervise all matters involving the Litigation (including trial strategy and planning and settlement strategy) on behalf of the Company and any Consolidated Group; provided that all decisions and determinations with respect to the Litigation (including, without limitation, any Settlement Decision or Strategic Decision) shall be made in accordance with this Section 3.1(c). The Members shall elect by Majority vote a Member (the " Responsible Member "), who shall have primary responsibility for the day-to-day direction and supervision of the Litigation and may, without the approval of any of the Parent, the Company, the Company Subsidiaries, any of their respective Affiliates, or any of the other Members, make decisions and determinations in accordance with Section 3.1(d) hereof with respect to the day-to-day conduct of the Litigation and such decisions shall be deemed to made on behalf of all of the Members. Notwithstanding the foregoing, the approval of a Majority shall be required for any Strategic Decision or any Settlement Decision.
(d) In making any decision or determination with respect to the Litigation (including, without limitation, any Settlement Decision or Strategic Decision) the Responsible Member shall act in good faith with a view to maximizing the present value of the Litigation to the Members. Without limiting the
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generality of the foregoing, in connection with any Settlement Decision, the Responsible Member shall consider:
(i) the aggregate amount of Member-Sourced NOLs to be carried forward;
(ii) the benefit to the Company and any Consolidated Group of any actual tax savings as a result of such Member-Sourced NOLs carryforward;
(iii) the discounted present value of any prospective tax-savings.
The discount rate applicable to the value of such prospective tax saving shall be determined by the applicable Majority and shall give due regard to the financial and other costs to the Company and the Company Subsidiaries of other resolution of the Litigation.
(e) In connection with the approval of any Settlement Decision, the Parent and a Majority shall jointly determine the amount, or a methodology for determining the amount, of any Member-Sourced NOLs resulting from the settlement and the resulting tax saving. As promptly as practicable (but in no event later than 30 days after the settlement), the Parent shall deliver to the Members an NOL Certificate setting forth the matters described in Section 2.1(a) to date. Upon receipt of any actual tax savings resulting from the Member-Sourced NOL carryover, the Parent shall compute the NOL Payment Amount in a manner consistent with the NOL Certificate and shall pay the NOL Payment Amount to the Members in accordance with Section 2.2(a) (accompanied by the Officer Certificate's setting forth the NOL Payment Amount). The Parent's management will make a good faith effort to comply with the Responsible Member's request to allow employees of the Parent to participate in the Litigation activities.
(f) The Responsible Member shall confer in person or by telephone as frequently as necessary to keep all Members informed about material developments in the Litigation, on at least three days' prior notice. Such briefings by the Responsible Member shall include a description of the progress of the Litigation and summarize any material decisions or determinations that were made without seeking the approval of the other Members.
(g) The Responsible Member shall establish procedures for making decisions in an expedited manner in the case of exigent or emergency circumstances arising in connection with the Litigation.
(h) The Responsible Member shall be deemed to be the agent of the Parent and the Company for all purposes relating to evidentiary privileges, including attorney-client privileges.
Section 3.2 Certain Rights of the Responsible Member; Actions of the Responsible Member. The Responsible Member undertakes to perform such duties and only such duties as are specifically set forth in this Agreement, and no implied covenants or obligations shall be read into this Agreement against the Responsible Member. In addition:
(a) the Responsible Member may rely upon and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties;
(b) whenever the Responsible Member shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Responsible Member may, in the absence of bad faith or willful misconduct on its part, rely upon an Officer's Certificate;
(c) the Responsible Member may engage and consult with counsel of its selection and the written advice of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by them hereunder in good faith and in reliance thereon;
(d) the Responsible Member may engage and consult with accounting firms, tax experts, valuation firms and other experts and third parties that it, in its sole and absolute discretion, deem appropriate or necessary to enable them to discharge their duties hereunder; and
(e) the Responsible Member may request employees of the Parent, the Company, the Company Subsidiaries, and their Affiliates to respond to discovery requests, attend and prepare for depositions, prepare for and testify at trial, or take any other action that the Responsible Members believes is necessary or prudent in prosecuting the Litigation.
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Except as otherwise expressly provided in this Agreement, all decisions of the Members shall be taken by Majority vote of the Members; provided, however , that the right to engage parties (including employees of the Parent, the Company, the Company Subsidiaries, or their Affiliates) to perform services with respect to the day-to-day conduct of the Litigation shall be made by the Responsible Member.
Section 3.3 Reimbursement and Indemnification of the Responsible Member.
(a) The Members agree:
(i) except as otherwise expressly provided herein, to pay to or on behalf of the Responsible Member, upon the request of the Responsible Member, all reasonable expenses and disbursements incurred or to be incurred by the Responsible Member in connection with the discharge of their duties under this Agreement (including, without limitation, the reasonable compensation and the expenses and disbursements of their counsel, tax experts, valuation firms and other experts and third parties as contemplated in Section 3.2); and
(ii) to indemnify the Responsible Member and hold him or her harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, reasonable expenses and reasonable disbursements of any kind or nature whatsoever (including, without limitation, the reasonable compensation and the expenses and disbursements of their counsel, tax experts, valuation firms and other experts and third parties as contemplated in Section 3.2) that may be imposed on, asserted against or incurred by them under this Agreement, and the Responsible Member shall be so indemnified under this Agreement for his own ordinary or gross negligence, but the Responsible Member does not have the right to be indemnified under this Agreement for their own willful misconduct or bad faith.
(b) All reimbursements and indemnification payments made by the Members to the Responsible Member pursuant to this Section 3.3 shall be made by the Members in proportion to the number of shares of preferred stock of the Company owned by such Members immediately prior to the Merger, as set forth on Schedule A (as may be amended from time to time pursuant to Section 3.7).
Section 3.4 Resignation and Removal; Appointment of Successor.
(a) The Responsible Member may resign at any time by giving written notice thereof to the Parent and other Members.
(b) A Majority may remove the Responsible Member at any time by giving written notice thereof to the Parent and the Responsible Member.
(c) If the Responsible Member shall resign, be removed or become incapable of acting, his or her successor shall be appointed by a Majority of the remaining Members.
(d) The Parent shall give notice of each resignation and each removal of the Responsible Member and each appointment of a successor Responsible Member to the other Members. Each notice shall include the name and address of the successor Responsible Member. If the Parent fails to send such notice within ten days after acceptance of appointment by a successor Responsible Member, the successor Responsible Member shall cause the notice to be mailed at the expense of the Parent.
Section 3.5 Acceptance of Appointment by Successor. Every successor Responsible Member appointed hereunder shall execute, acknowledge and deliver to the Parent and to the retiring Responsible Member an instrument accepting such appointment and a counterpart of this Agreement, and thereupon such successor Responsible Member, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Responsible Member.
Section 3.6 Final Resolution. On the Last NOL Payment Date, this Agreement shall terminate; provided , however, that the provisions of Section 3.3 shall survive the termination of the Agreement.
Section 3.7 Opt Out
(a) A Member may opt out of the provisions of this Agreement (an "Opt Out") upon written notice to the Company and each of other Members (an "Opt Out Notice"). A Member's Opt Out shall be effective on the date specified by the Member in the Opt Out Notice, which shall not be earlier than fifteen days after the delivery of the Opt Out Notice. Once given, an Opt Out Notice may be revoked
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only with the consent of the Company and all of the Members that have not Opted Out of this Agreement.
(b) If a Member Opts Out of this Agreement, from and after the effective date of such Member's Opt Out: (i) such Member shall not be responsible for any Expenses or Firm Expenses incurred on or after the effective date of the Opt Out (but shall remain liable for its portion of any Expenses or Firm Expenses incurred prior to such effective date); (ii) such Member shall not be entitled to receive any payments pursuant to this Agreement in respect of any tax savings realized by the Company or any Consolidated Group as a result of the utilization of any Member-Sourced NOL in any taxable year that ends on or after the effective date of such Member's Opt Out Notice (and shall be entitled to receive any payments pursuant to this Agreement in respect of any actual cash tax savings realized by the Company or any Consolidated Group as a result of the utilization of any Member-Sourced NOL in any taxable year that ends prior to the effective date of such Member's Opt Out Notice); and (iii) Schedule A shall be amended, as of the effective date of each Opt Out Notice, to remove the Member that has Opted Out, such that (A) any Expenses and Firm Expenses incurred on or after the effective date of such Opt Out Notice shall be borne by the Members that did not Opt Out in proportion to the number of shares of preferred stock of the Company owned by such Members immediately prior to the Merger, treating any shares of preferred stock owned immediately before the Merger by a Member that has Opted Out as not being outstanding immediately prior to the Merger for this purpose and (B) any payments pursuant to this Agreement in respect of any cash tax savings actually realized by the Company or any Consolidated Group as a result of the utilization of any Member-Sourced NOL in any taxable year that ends on or after the effective date of each Opt Out Notice shall be paid to the Members that did not Opt Out in proportion to the number of shares of preferred stock of the Company owned by such Members immediately prior to the Merger. Nothing in this Section 3.7 shall relieve any Member that Opts Out of this Agreement of any of its obligations under Section 2.4 to repay to the Company any Excess Payments it may have received, without regard to whether the determination that an Excess Payment was made to such Member occurs before or after such Member has Opted Out of this Agreement.
(c) For the avoidance of doubt, in the event that all of the Members Opt Out of this Agreement, from and after the effective date of the Opt Out Notice of the last Member to Opt Out, (i) the Company shall control and make all decisions regarding the prosecution of the Litigation (including, without limitation, whether to abandon the Litigation) in its sole and absolute discretion, (ii) the Company shall bear all Expenses incurred after the effective date of such last Opt Out if the Company chooses to pursue the Litigation, and (iii) the Company shall be entitled to retain any tax savings realized by the Company or any Consolidated Group as a result of the utilization of any Member-Sourced NOL in any taxable period ending after the effective date of the Opt Out Notice of the last Member to Opt Out.
ARTICLE IV
COVENANTS
Section 4.1 Prosecution of Litigation by the Company; Settlement; Periodic Reports; Expenses.
(a) In each case as directed by the Members pursuant to Section 3.1(c) hereof, the Company shall cause to prosecute in good faith the Litigation and/or seek a settlement of the Litigation.
(b) None of the Parent, the Company, any Company Subsidiary, or their Affiliates shall make any Settlement Decision without obtaining prior approval from the applicable Majority as determined in accordance with the last sentence of Section 3.1(c).
(c) Until the Litigation has been settled or is final and not subject to further judicial review (by appeal or otherwise), each of the Parent, the Company, the Company Subsidiaries, their Affiliates and the Members shall cooperate in order to ensure that (i) all of the Members receive, by the last Business Day of each fiscal quarter of the Company, a report describing the status of the Litigation, which report shall describe, in summary fashion, the total Expenses incurred through the date of such report, the status of all pending IRS or court proceedings related to the Litigation, and the status of any settlement negotiations among the Parent, the Company, the Company Subsidiaries and their Affiliates and the defendants with respect to the Litigation and (ii) except as otherwise required by applicable law or court
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order, all of the Members are granted access to any and all records, documents, personnel and any other sources of information that are in the possession, custody or control of the Parent, the Company and their Affiliates as the Members shall determine are reasonably necessary or desirable in order to review Settlement Decisions and Strategic Decisions, if any. The Parent, the Company, the Company Subsidiaries, and their Affiliates shall cooperate with the Members in providing the assistance of any of their officers and employees and, to the extent that the Parent or the Company, as the case may be, believes in its reasonable determination that it is required to have its employees expend efforts in prosecuting the Litigation, the Parent or the Company shall be entitled to be reimbursed for any reasonable amount of hours expended in such effort.
(d) None of the Parent, the Company, or the Company Subsidiaries shall initiate settlement negotiations or expand settlement negotiations with respect to any aspect or portion of the Litigation without the prior permission of a Majority as set forth in the last sentence of Section 3.1(c) and the Parent and the Company agree that such powers shall vest with the Members as provided in Section 3.1(c). No Member shall initiate settlement negotiations without first informing each other Member of such settlement negotiations and obtaining consent to pursue such negotiations from a Majority of Members as determined in the last sentence of Section 3.1(c). If one or more Members are allowed to entertain or initiate settlement negotiations, such Members shall keep each other Member reasonably informed regarding the status of such negotiations (including any expansion of such negotiations) and any Members shall, if such Members request, be allowed to participate in the settlement negotiations.
Section 4.2 Payment of NOL Payment Amount and Operations of the Company. The Parent or the Company shall duly and promptly pay all amounts due in accordance with the terms of this Agreement; provided, however, that none of the Parent, the Company or any Company Subsidiary shall be obligated to arrange its affairs in such a manner as to increase the likelihood that the Member-Sourced NOLs will be utilized by the Company or any Consolidated Group after the Merger (other than in pursuing the Ruling and any other Litigation in good faith, as contemplated herein).
Section 4.3 Federal Income Tax Treatment. The Parent or the Company shall not (and shall cause each of their Affiliates not to) treat any NOL Payment Amount as payments of interest or compensation (except as required under Code section 483) and the Parent and the Company shall not (and shall not allow any of their Affiliates to) take any position inconsistent with such treatment (unless required by a determination that is final after the Parent, the Company or their Affiliates have defended such matter in good faith).
ARTICLE V
AMENDMENTS
Section 5.1 Amendments.
(a) This Agreement may not be amended except by an instrument in writing signed by the Parent, the Company and the Majority.
Section 5.2 Execution of Amendments. In executing any amendment permitted by this Article, the Members shall be entitled to receive, and shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such amendment is authorized or permitted by this Agreement. The Members may, but are not obligated to, enter into any such amendment that affects the Members' own rights, privileges, covenants or duties under this Agreement or otherwise.
Section 5.3 Effect of Amendments. Upon the execution of any amendment under this Article, this Agreement shall be modified in accordance therewith, such amendment shall form a part of this Agreement for all purposes and every Person hereto shall be bound thereby.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers to be effective as of the day and year first above written.
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SOUTHERN STATES COOPERATIVE, INCORPORATED |
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CF INDUSTRIES, INC.
ANNUAL INCENTIVE PLAN
Effective January 1, 2004
Purpose | 3 | |
Participation Eligibility |
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Award Opportunities |
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Company Performance |
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Individual Performance |
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Payment of Awards |
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AIP Awards and Employee Benefits |
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Administrative Provisions |
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Plan Administration |
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Exhibit I |
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2
Purpose
The purpose of the Annual Incentive Plan ("AIP") is to support the accomplishment of the Company's financial objectives. In doing so the AIP is designed to:
Participation Eligibility
Participation in the AIP is limited to corporate officers and other management positions having the ability to contribute meaningfully to the Company's business results.
Participation in the AIP must be approved by the President and Chief Executive Officer of the Company.
Award Opportunities
Each approved participant is assigned to one of seven Target Award Groups. A participant's assigned Group reflects a combination of his/her position's relative responsibility level and competitive compensation level. Each Group has two target award components, one based on overall Company performance and the other based upon the performance of the individual participant. The total target award for each Group ranges from 16% to 70% of base salary. Within the basic structure of the Plan, the minimum award in each Group is zero and the maximum award is 200% of target.
The award opportunities for participants in each Group are as follows:
Company Performance
The performance measure used to determine this portion of the aggregate award is Pretax Return on Equity (PTROE). This measure aligns a portion of participants' compensation directly with the absolute level of return realized by the Company's owners. When the return to the owners is greater than the established standard, the award under this component of the Plan will be greater than target. When the return to our owners is less than the established standard, the award will be less than target (and possibly zero). The target performance standard under this component of the AIP is a PTROE of 5% for 2004 and 10% for 2005 going forward. Exhibit I presents the definition of PTROE. The Company's actual PTROE each year will be confirmed by the CEO after the close of the year.
For any award to be granted under the Company Performance component, PTROE must equal or exceed a threshold standard. At threshold, the award is equal to 10 percent of target. Awards for performance between the threshold and target standards or between the target and maximum standards are
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determined proportionately. The required performance standards for the entire range of awards for the first Plan Year (2004) and going forward beginning in 2005 are as follows:
PTROE Required for Company Performance Award to be Granted at:
Plan Year
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(Award = 100% of Target) |
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2004 | 0.5% | 5.0% | 15.0% | |||
2005 and forward | 1.0% | 10.0% | 20.0% |
Individual Performance
A portion of a Plan participant's award is based on performance against pre-established annual individual goals. The determination of actual awards for the Individual Performance component of the Plan is subject to the following overall provisions:
Payment of Awards
Payment of approved awards to participants is made in cash during the first quarter of the calendar year following the completion of the Plan Year.
Participants may elect to defer all or a portion of their AIP awards under the provisions of the Company's Executive Compensation Equalization and Deferral Plan ("ECED") or Management Deferred Compensation Plan ("MDC").
Payment of awards to a participant whose employment with the Company terminates is as follows:
Awards are pro-rated based on the participant's base earnings through the date of termination and paid out after the close of the Plan Year.
Awards for the current Plan Year (the year of termination) and awards not yet paid out for the previous Plan Year are forfeited.
Awards for the current Plan Year (the year of termination) are forfeited. Awards for a completed Plan Year not yet paid out are paid out after the close of the Plan Year.
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AIP Awards and Employee Benefits
Participants' AIP awards, whether paid in cash or deferred, are included in the definition of earnings for the purpose of calculating pension benefits under the CF Industries, Inc. Retirement Income Plan. AIP awards are not used for calculating any other employee benefits.
Administrative Provisions
Plan Administration
The President and Chief Executive Officer of the Company serves as the Plan Administrator, with authority to control and manage the operation and administration of the Plan.
Exhibit I
Definition of Pretax Return on Equity
The performance measure for the Company Performance portion of the Annual Incentive Plan is Pretax Return on Equity (PTROE) defined as follows:
PTROE | = | Income Before Taxes/Equity | ||
Income Before Taxes |
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Earnings Before Patronage, Income Taxes & Cumulative Effect of Change in Accounting Principle (EB4P&T) per CF's income statement |
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Accrued expenses for CF's incentive compensation plans for current year |
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Special Adjustments necessary to remove items/events included in EB4P&T but not representative of earnings attributable to the Plan year (e.g., a one-time charge or credit to current year earnings attributable to events outside Plan year) * |
Equity |
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= |
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Beginning Equity (equity at the end of the month preceding the start of the Plan year) |
|
|
- |
|
Cash Distributions to Owners prorated by the portion of year that follows the distribution |
Beginning Equity |
|
= |
|
Total Stockholders' Equity |
|
|
+ |
|
Accumulated Other Comprehensive Loss/(Income) |
|
|
+ |
|
Distributions Payable to Owners |
|
|
+ |
|
Deferred Tax Liabilities |
|
|
- |
|
Deferred Tax Assets |
Income Before Taxes and Equity will be further adjusted as necessary to reflect all Investments of more than $10 million as if accounting had been handled using the equity method (e.g., if CF has a 30% interest in a venture, Income Before Taxes should include 30% of the pretax income or loss of the venture rather than just distributions received from the venture).
5
Consent of Independent Registered Public Accounting Firm
The
Board of Directors
CF Industries, Inc.:
We consent to the use of our reports dated May 13, 2005, with respect to the consolidated balance sheets of CF Industries, Inc. as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders' equity, cash flows and comprehensive income (loss) for each of the years in the three-year period ended December 31, 2004, and the related consolidated financial statement schedule, included herein and to the reference to our firm under the heading "Experts" in the prospectus.
/s/KPMG
LLP
Chicago, Illinois
July 25, 2005