MISSISSIPPI CHEMICAL CORP /MS/ - MSPIQ Quarterly Report (10-Q) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF ...

The following is an excerpt from a 10-Q SEC Filing, filed by MISSISSIPPI CHEMICAL CORP ... on 5/19/2004.

Jump to :

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

GENERAL. The following is management's discussion and analysis of results of operations and financial condition, which should be read in conjunction with our audited financial statements and related notes for the fiscal year ended June 30, 2003, in our most recent Annual Report on Form 10-K which is on file with the Securities and Exchange Commission.

PETITION FOR RELIEF UNDER CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE. On May 15, 2003 (the "Petition Date"), Mississippi Chemical Corporation and nine of its direct and indirect subsidiaries (collectively, the "Debtors"), filed voluntary petitions to reorganize under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of Mississippi, Jackson, Mississippi (the "Court"). The cases are being administered jointly in Joint Case Number 03-02984 WEE, collectively ("Case"). As debtors-in-possession, the Debtors are authorized to operate their business but may not engage in transactions outside the ordinary course of business without the approval of the Court. On May 16, 2003, the Court rendered an Interim Order approving the Debtors' request for interim financing, and on October 2, 2003, the Court entered a Final Order approving debtor-in-possession revolving credit financing of $32.5 million, which was automatically reduced to $22.5 million on March 2, 2004, immediately following the sale of our Potash Assets. On December 19, 2003, the Court entered a Final Order approving supplemental debtor-in-possession term loan financing of $96.7 million (the "Supplemental DIP Order").

The Debtors sought relief under Chapter 11 of the Bankruptcy Code because of a lack of liquidity. The combination of the depression in the agricultural sector, several waves of low priced imports, and the extreme increase in price level and price volatility of domestic natural gas, the Company's primary raw material, had resulted in substantial financial losses for the Company for the last five years.

On June 6, 2003, the Court appointed the Official Committee of Unsecured Creditors to represent the interests of the unsecured creditors. This committee will monitor our financial condition and restructuring activities. We are required to reimburse certain fees and expenses of the committee, including fees for attorneys and other professionals to the extent allowed by the Court.

As debtors-in-possession, the Debtors, subject to any required Court approval, may elect to assume or reject real estate leases, employment contracts, personal property leases, service contracts, and other unexpired executory pre-petition contracts. We cannot currently determine with certainty the aggregate liability that will result from the filing and settlement of claims related to any rejected contracts.

On October 8, 2003, we signed an agreement with Koch Nitrogen Company ("Koch") to sell our interests in Point Lisas Nitrogen Limited, our ammonia joint venture with Koch in the Republic of Trinidad and Tobago ("Point Lisas Nitrogen") for an estimated cash amount of $92.0 million, plus assumed liabilities (the "Koch Stalking Horse Agreement"). Subsequently, and in conjunction with the Supplemental DIP Order, in December we withdrew our motion to sell pursuant to the Koch Stalking Horse Agreement, resulting in the payment of a break-up fee to Koch in the amount of $3.8 million (the "Koch Break-Up Fee"). As a result of these events, in December 2003, we recorded our share, approximately $6.4 million, of Point Lisas Nitrogen's earnings for the six-month period ended December 31, 2003. Due to the pending sale, we did not record our equity earnings, approximately $2.4 million, for the September 30, 2003 quarter.

On November 26, 2003, our subsidiaries, Mississippi Potash, Inc. and Eddy Potash, Inc., entered into a stalking horse agreement to sell the Potash Assets to subsidiaries of Intrepid Mining LLC (the "Intrepid Stalking Horse Agreement"). On March 2, 2004, these assets were sold. As of March 31, 2004, we had received approximately $26.6 million related to the sale and had a receivable of approximately $1.8 million recorded on our books for the remainder of the purchase price.

On April 16, 2004, the Debtors filed a joint plan of reorganization and disclosure statement. The principal objective of this plan will be to restructure the Debtors' obligations to creditors in a manner which will permit us to continue as a viable business organization. If approved by the Bankruptcy Court, the plan provides that our unsecured creditors will own substantially all of our stock and our current shareholders will have the opportunity to share in our long-term growth. Under the proposed plan, our debt will be substantially reduced. Upon emergence from bankruptcy, our debt will be provided by a combination of existing secured lenders and new lenders. Although we filed a plan of reorganization, there can be no assurance at this time as to whether the plan will be approved by the various classes of creditors and equity holders, or whether it will be confirmed by the Court. Our plan of reorganization could substantially change the amounts and characterization of assets and liabilities disclosed in the accompanying consolidated financial statements.

Our ability to continue as a going concern is dependent upon, but not limited to, the development and confirmation of a plan of reorganization, continued access to adequate sources of capital, continued compliance with debt covenants under the debtor-in-possession revolving credit facility and supplemental debtor-in-possession term loan, the ability to sustain positive cash flows sufficient to fund operations and repay debt, and retention of key suppliers, customers and employees. No assurance can be given that we will be successful in reorganizing our affairs through the Chapter 11 bankruptcy proceedings. Because of the ongoing nature of the reorganization process, the outcome of which is not determinable until a plan of reorganization is confirmed and implemented, the accompanying consolidated financial statements do not include any adjustments that might result from the resolution of these uncertainties.

SEGMENTS. Our operations are currently organized into two strategic business units: nitrogen and phosphate. Our nitrogen business unit produces nitrogen products that are sold to fertilizer dealers, distributors, and industrial users located primarily in the southern region of the United States. Our phosphate business unit produces diammonium phosphate fertilizer (commonly referred to as "DAP") and exports approximately 30% of this production through a separate export association, Phosphate Chemicals Export Association, Inc., a Webb-Pomerene corporation known as "PhosChem." Prior to December 2003, we had a potash business unit that mined and produced agricultural and industrial potash products that were sold to farmers, fertilizer dealers, distributors, and industrial accounts for use primarily in the southern and western regions of the United States and into export markets. On December 1, 2003, we announced our wholly owned subsidiaries in our potash segment had signed a definitive agreement to sell substantially all of their potash assets. As a result of this agreement, our potash operations have been sold and are reflected as discontinued operations. Prior to March 2004, we had a melamine segment that produced melamine crystal, which is a raw material for manufacturers in the construction/remodeling and automotive industries. Our production of melamine began in June 2003. On March 25, 2004, we announced the permanent closing of our melamine operation and our intent to sell this facility. As a result, our melamine operation has been reflected as discontinued operations.

BUSINESS FACTORS. Our products and primary raw materials (particularly natural gas) are commodities, the prices for which may vary significantly from quarter to quarter. These prices and the global supply/demand balance for our products do not necessarily change in relation to one another and may impact our performance in different ways. In addition, quarterly results can vary significantly from year to year due to a number of other factors as detailed under "Outlook" and "Forward Looking Statements" in this quarterly report and under the heading "Certain Business Factors" and elsewhere in our most recent Annual Report on Form 10-K which is on file with the Securities and Exchange Commission.

CRITICAL ACCOUNTING POLICIES. The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.

We have identified and described the accounting policies that involve those estimates and assumptions that we believe are critical to an understanding of our financial statements. Our management has discussed the development and selection of each critical accounting estimate with the Audit Committee of our Board of Directors and the Audit Committee has reviewed these related disclosures. Since application of these accounting policies involves the exercise of judgment and use of estimates, actual results could differ from those estimates. Details regarding these policies are described in our most recent Annual Report on Form 10-K, which is on file with the Securities and Exchange Commission. There have been no material changes to our critical accounting policies that impacted our financial condition or results of operations during the nine-month period ended March 31, 2004.

RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2003

OVERVIEW. For the quarter ended March 31, 2004, we incurred a net loss of $27.8 million (or $1.15 per diluted share) compared to a net loss of $48.0 million (or $1.83 per diluted share) for the same quarter during the prior year. Included in our net loss for the quarter ended March 31, 2004, was a pre-tax impairment charge totaling $21.3 million included in reorganization expense and an after-tax loss from discontinued operations related to our potash and melamine/urea segments of $6.1 million. Net sales increased to $123.8 million for the quarter ended March 31, 2004, from $88.5 million for the quarter ended March 31, 2003. We had operating income of $14.5 million for the quarter ended March 31, 2004, compared to an operating loss of $63.1 million for the quarter ended March 31, 2003. Operating loss for the quarter ended March 31, 2003, included a $58.6 million charge for the impairment of long-lived assets. The significant improvement we have experienced compared to the prior-year period is the result of a substantial increase in nitrogen prices over the last 12 months.

NET SALES

OVERVIEW. Our net sales increased 40% to $123.8 million for the quarter ended March 31, 2004, from $88.5 million for the quarter ended March 31, 2003. This increase was primarily the result of higher average sales prices for our nitrogen and DAP products and higher sales volumes for DAP.

The following tables summarize our sales results by product categories for the three months ended March 31:

% 2004 2003 Inc. Net Sales (in thousands):
Nitrogen $ 87,010 $ 64,385 35% DAP 36,514 23,919 53% Other 259 194 34%

Net Sales $123,783 $ 88,498 40%

% 2004 2003 Inc. (Dec.) Tons Sold (in thousands):
Nitrogen:
Anhydrous ammonia 172 185 (7)% Ammonium nitrate 185 170 9% Nitrogen solutions 90 107 (16)% Nitric acid 13 5 160% Total Nitrogen 460 467 (2)%

DAP 189 168 13%

% 2004 2003 Inc. Average Sales Price Per Ton:
Nitrogen $ 189 $ 138 37% DAP $ 193 $ 143 35%

NITROGEN. Our nitrogen net sales increased 35% as a result of a 37% increase in average sales prices offset by a 2% decrease in sales volumes.

Our average ammonia sales prices increased 36%, while our ammonia sales volumes decreased 7%. We sell substantially all of our ammonia into industrial markets. Sales prices continued to increase from levels experienced during the second fiscal quarter ending December 31, 2003, because of reduced supply in the world market. Over the past year, there has been downtime at plants in various countries due to political unrest and natural gas supply issues. The ammonia supply situation intensified during January and February of 2004, when logistical problems impeded product moving out of the Black Sea. Ammonia prices peaked during January and February of 2004, but began a strong decline in late February 2004 as supply restrictions eased. The decline in prices occurred as the logistical problems were resolved in the Black Sea and mechanical issues were corrected resulting in increased production. Prices have continued to decline since the end of the quarter, but recently showed a modest increase.

Our ammonium nitrate sales prices increased 41%, and our ammonium nitrate sales volumes increased 9%. Sales were strong throughout the previous two quarters and this continued through the quarter ended March 31, 2004. Strong grain prices have improved the economic outlook of the farming community, which in turn has supported the strong sales through the quarter ended March 31, 2004. Dry weather in our trade area caused demand to slow down toward the end of the quarter, and this has continued into the first part of our fourth fiscal quarter. Prices peaked in February and early March of 2004, but began to decline late in the quarter as demand slowed. The price trend leveled off as we entered our fourth fiscal quarter, but weather will play a role in both volume and price levels as we move forward. We ended the quarter with ammonium nitrate inventory 43% lower than the prior-year period.

Our nitrogen solutions sales prices increased 44%, while our nitrogen solutions sales volumes decreased 16%. During the quarter ended March 31, 2004, sales prices benefited from lower industry inventory levels and high grain prices. Sales prices peaked during the quarter and declined some by the end of the quarter. Our sales volumes decreased due to lower demand because of weather conditions during the quarter. We ended the quarter with nitrogen solutions inventory 50% below the prior-year level.

PHOSPHATES. Our DAP sales prices increased 35%, and our sales volumes increased 13%. Prices were higher as world supply/demand was more in balance, spurred by increased demand in China. Volumes increased due to higher demand.

OTHER REVENUES

Our other revenues consist primarily of facility fees earned by our Yazoo City facility that supplies nitrogen tetroxide to the United States Department of Defense. This facility was placed into service during the third quarter of fiscal 2003.

COST OF PRODUCTS SOLD

OVERVIEW. Our cost of products sold increased to $104.1 million for the quarter ended March 31, 2004, from $80.6 million for the quarter ended March 31, 2003. As a percentage of net sales, cost of products sold decreased to 84% for the quarter ended March 31, 2004, from 91% for the quarter ended March 31, 2003. This decrease was primarily the result of higher sales prices for our nitrogen and DAP products partially offset by higher costs per ton for these same products. During the quarter ended March 31, 2004, the average natural gas price for our domestic operations, net of futures gains and losses, increased 40% to $6.32 from $4.52 per MMBtu over the quarter ended March 31, 2003.

NITROGEN. Our nitrogen costs per ton increased 35% primarily as a result of higher natural gas costs at our domestic production facilities. The average price of natural gas, net of futures gains and losses, at our domestic nitrogen production facilities increased approximately 44% to $6.33 from $4.40 per MMBtu. In addition, our purchased ammonia costs in the current year were higher than in the prior year due to the improved global supply/demand balance. These higher costs were partially offset by higher equity earnings from Point Lisas Nitrogen. Equity earnings from Point Lisas Nitrogen are reflected in our consolidated statements of operations as a reduction in cost of products sold. During the quarter ended March 31, 2004, we recorded equity earnings of $8.1 million as compared to $2.7 million during the quarter ended March 31, 2003.

PHOSPHATES. Our DAP costs per ton increased 10% for the quarter ended March 31, 2004. This increase was primarily the result of higher raw material costs for this segment's purchased ammonia.

SELLING, GENERAL AND ADMINISTRATIVE

Our selling, general and administrative expenses decreased to $5.9 million for the quarter ended March 31, 2004, from $8.2 million for the quarter ended March 31, 2003. This decrease resulted primarily from reduced labor costs and other cost savings initiatives. In addition, during the prior year, we incurred additional expenses associated with reductions in workforce. These lower costs were partially offset by a non-cash increase of approximately $1.5 million in retirement expense due to the freezing of our retirement benefits. As a result, we were required to recognize in the current year all unamortized prior service cost. As a percentage of net sales, selling, general and administrative expenses decreased to 5% at March 31, 2004, from 9% at March 31, 2003.

IMPAIRMENT OF LONG-LIVED ASSETS

We evaluate the recoverability of our long-lived assets whenever events or changes in circumstances indicate that an asset's carrying amount may not be recoverable, as required by SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." These evaluations utilize various estimates and judgments. The recoverability of these assets is highly dependent upon the accuracy of certain underlying assumptions, such as future product prices and natural gas costs. During our third quarter of fiscal 2003, events occurred that necessitated such an evaluation of recoverability of certain assets at our Donaldsonville facility.

Ammonia Assets. In February 2003, we announced closure plans for one of our ammonia plants located in Donaldsonville, Louisiana. This closure was the result of unfavorable natural gas prices and market conditions. We decided to idle this ammonia plant indefinitely because we did not expect it to contribute to future operations. The long-lived assets associated with this ammonia plant had a book value of approximately $70.3 million. We tested this asset for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," and recorded a pre-tax impairment charge totaling $58.6 million at March 31, 2003. This amount has been reflected in the consolidated statement of operations as impairment of long-lived assets.

Due to customer demand and improved market conditions in December 2003, we restarted an ammonia plant previously idled and produced through the first week in April 2004. On March 25, 2004, we announced the permanent closure for one ammonia plant and our intent to indefinitely idle our second ammonia plant. Both ammonia plants are located at our facility in Donaldsonville, Louisiana. Negative operating performance caused by persistently high natural gas prices was the major contributing factor for our decision. We tested these assets for impairment at March 31, 2004, as required by SFAS No. 144 and recorded a pre-tax impairment charge of approximately $21.3 million. This impairment charge is reflected as a component of reorganization expense in the consolidated statement of operations.

Melamine/Urea Assets. In December 2002, we announced plans to close our urea facility located in Donaldsonville, Louisiana. This closure was also the result of unfavorable natural gas prices and market conditions. We evaluated the utility of these long-lived assets and initially concluded that the prilling section of the urea plant was not expected to contribute to ongoing operations and production would cease. We tested the assets associated with the urea prilling section for impairment in accordance with SFAS No. 144 and recorded a pre-tax impairment charge totaling $12.2 million at December 31, 2002. This amount has been included as loss from discontinued operations in the consolidated statement of operations.

In November 2003, we restarted the urea prilling section, previously shut down, at reduced rates to satisfy customer demand. On March 25, 2004, we announced the permanent closure of our melamine and urea operations, including the prilling section at our Donaldsonville, Louisiana, facility because we decided to exit this business operation completely. We have formally initiated efforts to locate a buyer for these assets. In accordance with SFAS No. 144, these assets have been reflected as discontinued operations as March 31, 2004, and prior reporting periods have also been reclassified. We have recorded a pre-tax impairment charge for the melamine/urea assets totaling $9.4 million for the three-month and nine-month periods ended March 31, 2004. We ceased production at this facility during the first week in April 2004.

OTHER OPERATING EXPENSES

Our other operating expenses decreased to $334,000 for the quarter ended March 31, 2004, from $4.9 million for the quarter ended March 31, 2003. This decrease resulted from a reduction in idle plant costs. During the quarter ended March 31, 2004, only portions of our ammonia plants at our Donaldsonville facility were idled. During the quarter ended March 31, 2003, portions of our ammonia, nitric acid, ammonium nitrate and nitrogen solutions production facilities at our Donaldsonville and Yazoo City facilities were temporarily idled primarily as a result of the unfavorable relationship between product prices and the cost of natural gas.

INTEREST, NET

Our net interest expense for the quarter ended March 31, 2004, increased to $8.2 million from $6.8 million for the quarter ended March 31, 2003. During the quarter ended March 31, 2004, we recorded interest expense on our Pre-Petition Harris Facility because it was adequately secured and our Supplemental DIP Loan which is a post-petition loan. We did not record any interest expense on our Senior Notes and 1998 IRBs as they are a part of our pre-petition liabilities subject to compromise. In addition, as a result of reclassifying our potash segment as discontinued operations, we transferred approximately $1.4 million of intercompany interest expense for the prior year period for our potash companies from interest, net, to discontinued operations; therefore, lowering our consolidated interest expense for the prior-year period.

OTHER (EXPENSE) INCOME

Other (expense) income did not change significantly for the quarter ended March 31, 2004, as compared to the quarter ended March 31, 2003.

REORGANIZATION EXPENSE

Costs directly related to our reorganization under Chapter 11 of the Bankruptcy Code are reflected as reorganization expense in the consolidated statement of operations. Reorganization expense for the three months ended March 31, 2004, was approximately $25.7 million and consisted primarily of an impairment loss of approximately $21.3 million related to our ammonia plants located in Donaldsonville, Louisiana, professional fees, as well as severance and employee retention expenses.

INCOME TAX EXPENSE (BENEFIT)

For the quarter ended March 31, 2004, our income tax expense from continuing operations was $2.9 million, as compared to an income tax benefit of $24.4 million for the quarter ended March 31, 2003. The income tax expense for the quarter ended March 31, 2004, is primarily the result of the establishment of a valuation allowance for the deferred tax asset related to federal net operating loss carryforwards that may expire unutilized. The income tax benefit for the prior year was primarily a result of our net losses from continuing operations.

Our income tax benefit from discontinued operations for the three-month period ended March 31, 2004, was $4.3 million as compared to an income tax benefit of $1.8 million for the three-month period ended March 31, 2003. The income tax benefit was primarily the result of our net losses from discontinued operations.

DISCONTINUED OPERATIONS

Melamine and Urea Assets. On March 25, 2004, we announced the permanent closure of our melamine and urea operation at our Donaldsonville, Louisiana facility. We have initiated efforts to locate a buyer for these assets. As a result of this announcement and meeting the requirements for classification as discontinued operations in accordance with SFAS No. 144, at March 31, 2004, our melamine and urea operation has been reflected as discontinued operations. Melamine and urea operations in previous periods presented have also been reclassified in accordance with SFAS No. 144. We have recorded an after-tax loss from discontinued operations of $6.9 million for the quarter ended March 31, 2004.

Potash Assets. During our first quarter of fiscal 2004, our board of directors authorized our management to actively market for sale the long-lived assets of Mississippi Potash, Inc. and its subsidiary (the "Potash Assets"). Accordingly, at September 30, 2003, the Potash Assets were classified as assets held for sale and all related depreciation expense ceased. As required by SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," we tested the Potash Assets for impairment at September 30, 2003. This test resulted in an impairment charge of approximately $34.0 million. Significant judgments and estimates were used in performing the impairment test in accordance with SFAS No. 144.

On December 1, 2003, we announced a definitive agreement by our subsidiaries to sell the Potash Assets to two wholly owned subsidiaries of Intrepid Mining LLC, a privately held Denver-based natural resources company. On March 2, 2004, these assets were sold for approximately $28.4 million. As a result of this agreement, and meeting the requirements for classification as discontinued operations in accordance with SFAS No. 144, our potash operation has been reflected as discontinued operations. Potash operations in previous periods presented have also been reclassified in accordance with SFAS No. 144. We have recorded an after-tax loss on the disposal of our potash assets of $624,000 for the quarter ended March 31, 2004, and estimated after-tax income from discontinued operations of $837,000 for the quarter ended March 31, 2004. Corporate allocations have been excluded from discontinued operations.

RESULTS OF OPERATIONS - NINE MONTHS ENDED MARCH 31, 2004 COMPARED TO THE NINE MONTHS ENDED MARCH 31, 2003

OVERVIEW. For the nine-month period ended March 31, 2004, we incurred a net loss of $92.3 million (or $3.73 per diluted share) compared to a net loss of $85.7 million (or $3.27 per diluted share) for the same nine-month period during the prior year. Included in these losses were after-tax losses from discontinued operations related to our potash and melamine/urea segments of $38.7 million and $13.8 million for the nine-month periods ended March 31, 2004 and 2003, respectively. In addition, we recorded impairment charges related to our ammonia plants located in Donaldsonville, Louisiana, in the amount of $21.3 million (included in reorganization expense) and $58.6 million (included in operating expenses) for the nine-month periods ended March 31, 2004 and 2003, respectively. We recorded an asset write-down in September 2003 related to the potash business segment that is now classified as discontinued operations. Net sales increased to $317.1 million for the nine-month period ended March 31, 2004, from $249.8 million for the nine-month period ended March 31, 2003. We had operating income of $21.2 million for the nine-month period ended March 31, 2004, compared to an operating loss of $77.0 million for the nine-month period ended March 31, 2003. During the first three months of the fiscal year, we incurred a substantial amount of downtime at our nitrogen and potash facilities that negatively impacted performance.

NET SALES

OVERVIEW. Our net sales increased 27% to $317.1 million for the nine-month period ended March 31, 2004, from $249.8 million for the nine-month period ended March 31, 2003. This increase was primarily the result of higher average sales prices from our nitrogen and DAP products partially offset by lower sales volumes for these same products.

The following tables summarize our sales results by product categories for the nine months ended March 31:

% 2004 2003 Inc. (Dec.) Net Sales (in thousands):
Nitrogen $226,728 $171,619 32% DAP 89,028 77,582 15% Other 1,347 576 134%

Net Sales $317,103 $249,777 27%

% 2004 2003 Inc. (Dec.) Tons Sold (in thousands):
Nitrogen:
Ammonia 531 533 - % Ammonium nitrate 500 534 (6)% Nitrogen solutions 190 379 (50)% Nitric acid 30 17 76% Total Nitrogen 1,251 1,463 (14)%

DAP 515 556 (7)%

% 2004 2003 Inc. Average Sales Price Per Ton:
Nitrogen $ 181 $ 117 55% DAP $ 173 $ 140 24%

NITROGEN. Our nitrogen net sales increased 32% as a result of a 55% increase in sales prices that were offset by a 14% decrease in sales volumes. The average selling price for ammonia, ammonium nitrate, and nitrogen solutions increased 50%, 45%, and 49%, respectively. A decrease in U.S. nitrogen production, along with a tightening of world supply/demand balances, led to these nitrogen price increases. In late June 2003, we shut down significant portions of our Yazoo City facility in an effort to manage inventory levels that were higher than normal as a result of poor spring 2003 demand. While reduced production allowed us to conserve cash and avoid building inventories in a soft market during a seasonally slow point of the year, sales volumes for ammonium nitrate and nitrogen solutions were negatively affected. The Yazoo City facility returned to production in late September 2003.

Our average ammonia sales prices increased 50%, while our ammonia sales volumes did not change significantly. Substantially all of our ammonia sales are made to industrial customers. Our sales volumes were negatively impacted by the cancellation of an industrial contract that was offset by shifting such tonnage to other contracts. Sales prices increased due to increased world demand and decreased global production. This decreased production was caused by natural gas supply problems, high U.S. natural gas costs and mechanical problems at several plants around the world. U.S. Gulf prices peaked during January and February of 2004, but began a strong decline in late February.

Our ammonium nitrate sales prices increased 45%, while our ammonium nitrate sales volumes decreased 6%. Sales volumes decreased because of lower production during our first fiscal quarter. Sales prices increased due to improved grain prices and the anticipation of increased fertilizer consumption.

Our nitrogen solutions sales prices increased 49%, while our nitrogen solutions sales volumes decreased 50%. Sales volumes decreased because of production cutbacks at our Yazoo City production facility during our first fiscal quarter. Sales prices increased due to higher demand created by increased grain prices and the anticipation of additional planted acreage.

PHOSPHATES. Our DAP sales prices increased 24%, while our sales volumes decreased 7%. Sales prices were higher because the world supply/demand balance continued to improve. Sales volumes decreased as a result of having less tons available for sale because of lower production rates during the first half of fiscal 2004, brought on by mechanical problems and a scheduled maintenance turnaround.

OTHER REVENUES

Our other revenues of $3.4 million consist primarily of facility fees earned by our Yazoo City facility that supplies nitrogen tetroxide to the United States Department of Defense. This facility was placed in service during the third quarter of fiscal 2003.

COST OF PRODUCTS SOLD

OVERVIEW. Our cost of products sold increased to $276.9 million for the nine-month period ended March 31, 2004, from $236.8 million for the nine-month period ended March 31, 2003. As a percentage of net sales, cost of products sold decreased to 87% for the nine-month period ended March 31, 2004, from 95% for the nine-month period ended March 31, 2003. This decrease was primarily the result of higher sales prices for our nitrogen and DAP products, partially offset by higher costs per ton for our nitrogen and DAP products. During the nine-month period ended March 31, 2004, the average natural gas price for our domestic operations, net of futures gains and losses, increased 51% to $5.60 from $3.70 per MMBtu over the nine-month period ended March 31, 2003.

NITROGEN. Our nitrogen costs per ton increased 40% primarily as a result of higher natural gas costs at our domestic production facilities. The average price of natural gas, net of futures gains and losses, at our domestic nitrogen production facilities increased approximately 54% to $5.62, from $3.66 per MMBtu. In addition, we purchased more ammonia at higher prices in the current year due to lower production at our nitrogen plants as described above. These higher costs were partially offset by higher equity earnings at Point Lisas Nitrogen. These equity earnings are reflected in our consolidated statements of operations as a reduction in cost of products sold.

Our portion of the equity earnings from Point Lisas Nitrogen was $14.5 million for the nine-month period ended March 31, 2004, compared to $5.7 million for the nine-month period ended March 31, 2003. Point Lisas Nitrogen's earnings were higher in the current year primarily as a result of increased ammonia sales prices and increased production partially offset by higher natural gas costs.

PHOSPHATE. Our DAP costs per ton increased 18% for the nine-month period ended March 31, 2004. This increase was primarily the result of higher raw material costs, primarily for ammonia and sulfur. In addition, we experienced lower production rates caused by mechanical problems and a scheduled maintenance turnaround that occurred during the quarter ended December 31, 2003. We produced approximately 34,000 fewer tons of product during the nine-month period ending March 31, 2004, compared to the same prior-year period.

SELLING, GENERAL AND ADMINISTRATIVE

Our selling, general and administrative expenses decreased to $16.6 million for the nine-month period ended March 31, 2004, from $21.6 million for the nine-month period ended March 31, 2003. This decrease resulted primarily from reduced labor costs and other cost savings initiatives. These lower costs were partially offset by higher retirement expense due to the freezing of our retirement benefits in April 2003. As a result, we were required to recognize in the current year, all unamortized prior-service cost. In addition, during the prior year, we incurred additional expenses associated with reductions in workforce. As a percentage of net sales, selling, general and administrative expenses decreased to 5% at March 31, 2004, from 9% at March 31, 2003.

IMPAIRMENT OF LONG-LIVED ASSETS

Potash Assets. During our first quarter of fiscal 2004, our board of directors authorized our management to actively market for sale the long-lived assets of Mississippi Potash, Inc. and its subsidiary (the "Potash Assets"). Accordingly, at September 30, 2003, the Potash Assets were classified as assets held for sale, and all related depreciation expense ceased. As required by SFAS No. 144, we tested the Potash Assets for impairment at September 30, 2003. This test resulted in a pre-tax impairment charge of approximately $34.0 million, which is reflected as a component of discontinued operations in the consolidated statement of operations.

OTHER OPERATING EXPENSES

Our other operating expenses decreased to $5.8 million for the nine-month period ended March 31, 2004, from $10.5 million for the nine-month period ended March 31, 2003. This decrease resulted from a reduction in idle plant costs. During the nine-month period ended March 31, 2004, portions of all of our nitrogen facilities, except ammonium nitrate, which was run at reduced rates, were temporarily idled. During the nine-month period ended March 31, 2003, portions of all of our nitrogen facilities were temporarily idled. The unfavorable relationship between product prices and the cost of natural gas was the primary reason we idled our nitrogen plants during these periods.

INTEREST, NET

Our net interest expense for the nine-month period ended March 31, 2004, decreased to $18.6 million from $18.4 million for the nine-month period ended March 31, 2003. During the nine-month period ended March 31, 2004, we did not record any interest expense on our Senior Notes and 1998 IRBs as they are a part of our pre-petition liabilities subject to compromise. We did record interest expense during the nine-month period ended March 31, 2004, on our Pre-Petition Harris Facility because it was adequately secured and our Supplemental DIP Loan, which is a post-petition loan. In addition, as a result of reclassifying our potash segment as discontinued operations for the nine-month period ended March 31, 2003, we transferred approximately $4.1 million of intercompany interest expense for our potash companies from interest, net, to discontinued operations; therefore, lowering our consolidated interest expense for the period ended March 31, 2003.

OTHER INCOME

Other income decreased to $1.7 million from $4.9 million. This decrease was primarily the result of receiving, during the nine-months ended March 31, 2003, $3.6 million in net proceeds from the conclusion of litigation related to a breach of contract claim involving performance guarantees for one of our ammonia plants at our nitrogen facility in Donaldsonville, Louisiana.

REORGANIZATION EXPENSE

Costs directly related to our reorganization under Chapter 11 of the Bankruptcy Code are reflected as reorganization expense in our consolidated statement of operations. Reorganization expense for the nine-month period ended March 31, 2004, was approximately $36.3 million and consisted primarily of an impairment loss of approximately $21.3 million related to our ammonia plants located in Donaldsonville, Louisiana, professional fees, severance and employee retention expenses and a $3.8 million break-up fee paid to Koch for terminating the sale of our interest in Point Lisas Nitrogen.

INCOME TAX EXPENSE (BENEFIT)

For the nine-month period ended March 31, 2004, our income tax expense from continuing operations was $21.6 million, as compared to an $18.7 million benefit for the nine-month period ended March 31, 2003. The income tax expense for the nine-month period ended March 31, 2004, was primarily the result of the establishment of a valuation allowance for the deferred tax asset related to federal net operating loss carryforwards that may expire unutilized. The income tax benefit was primarily the result of our net losses from continuing operations, partially offset by U.S. tax expense on cumulative foreign earnings triggered by the guarantee by one of our foreign subsidiaries of our debt.

Our income tax benefit from discontinued operations for the nine-month period ended March 31, 2004, was $26.9 million, as compared to $9.3 million for the nine-month period ended March 31, 2003. The income tax benefit was primarily the result of our net loss from discontinued operations.

DISCONTINUED OPERATIONS

Potash Assets. During our first quarter of fiscal 2004, our board of directors authorized our management to actively market for sale the Potash Assets. Accordingly, at September 30, 2003, the Potash Assets were classified as assets held for sale and all related depreciation expense ceased. As required by SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," we tested the Potash Assets for impairment at September 30, 2003. This test resulted in a pre-tax impairment charge of approximately $34.0 million, which is reflected as a component of discontinued operations in our consolidated statement of operations for the nine-months ended March 31, 2004. Significant judgments and estimates were used in performing the impairment test in accordance with SFAS No. 144.

On December 1, 2003, we announced a definitive agreement by our subsidiaries to sell the Potash Assets to two wholly owned subsidiaries of Intrepid Mining LLC, a privately held Denver-based natural resources company. On March 2, 2004, these assets were sold for approximately $28.4 million. As a result of this agreement, and meeting the requirements for classification as discontinued operations in accordance with SFAS No. 144, at March 31, 2004, our potash operation has been reflected as discontinued operations. Potash operations in previous periods presented have also been reclassified in accordance with SFAS No. 144. For the nine-month period ended March 31, 2004, we have recorded an after-tax loss on the disposal of our potash assets of $11.1 million. In addition, we recorded an after-tax loss from discontinued operations of $30.1 million, which includes the pre-tax impairment charge of $34.0 million. Corporate allocations have been excluded from discontinued operations.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2004, we had cash and cash equivalents of $5.1 million, compared to $6.1 million at June 30, 2003, a decrease of approximately $1.0 million.

Debtor-in-Possession Credit Facility.

On May 16, 2003, the Court entered an Interim Order approving our request, on an interim basis, for a debtor-in-possession financing facility with Harris Trust and Savings Bank and a syndicate of six other lenders (the "Original DIP Lenders") to provide up to $37.5 million in financing (the "Interim Credit Facility"). On August 13, 2003, the Court denied our request for a Final Order with regard to the Interim Credit Facility, but granted us authority to use our cash collateral (i.e., cash and proceeds of inventory and receivables) for ordinary course operations through October 3, 2003. On October 2, 2003, the Court entered a Final Order that approved certain amendments to the Interim Credit Facility to permit borrowings of up to $32.5 million (the "DIP Credit Facility"). This Facility has since been reduced to $22.5 million as a result of the sale of our Potash Assets in March 2004. The DIP Credit Facility is a revolving credit facility that terminates upon the earlier to occur of (a) June 30, 2004, (b) the date that a plan of reorganization confirmed by the Court becomes effective, or (c) the date on which the lenders terminate the DIP Credit Facility in connection with an event of default thereunder. Mississippi Chemical Corporation is the borrower under the DIP Credit Facility and its subsidiaries who are Debtors and MCHI are guarantors. Pursuant to a Final Order entered on December 19, 2003, the Investors (as defined below under the heading "Supplemental Debtor-in-Possession Term Loan") concluded a tender offer to the Original DIP Lenders on January 23, 2004 (the "DIP Credit Lenders"). At March 31, 2004, we had borrowings outstanding under the DIP Credit Facility in the amount of $8.2 million. We had no outstanding balance as of the date of this filing.

Maximum Borrowings. The DIP Credit Facility provides for maximum borrowings (the "DIP Commitment"), at any time, up to the lesser of (a) $22.5 million, or (b) a borrowing base equal to the sum of (i) 85% of eligible accounts receivable plus (ii) 65% of eligible inventories, minus (iii) a scheduled excess collateral availability requirement, minus (iv) an amount equal to twice the amount of all the then accrued and unpaid charges owed to warehousemen and other third parties having inventories in their possession that have not executed and delivered to the lenders a warehouseman's waiver, minus
(v) an amount equal to six months' rent for all leased facilities where inventory is kept for which the landlord has not executed and delivered to the lenders a landlord's waiver. The DIP Commitment is subject to certain mandatory reductions described below under the heading "Covenants".

Rates and Fees. The loans under the DIP Credit Facility bears interest at rates equal to the prime commercial rate from time to time in effect plus 4%. Upon entry of the Interim Order, we paid a facility fee of $375,000 to the Original DIP Lenders and an administrative fee of $75,000 (of this amount, $60,000 was refunded to us during the quarter ended September 30, 2003) to Harris Trust and Savings Bank, as "DIP Agent." Upon entry of the Final Order, we paid an additional fee of $375,000 to the Original DIP Lenders and an additional administrative fee of $75,000 to the DIP Agent. The DIP Credit Facility also has a commitment fee equal to 0.5% per annum of the average daily unused amount of the DIP Commitment.

Collateral Security and Guarantees. Pursuant to the Final Order for the DIP Credit Facility, the DIP Credit Lenders have been granted superpriority claim status in the Case with a first lien on substantially all of the Debtors' assets (including all cash collateral and proceeds of inventories and accounts receivable). Our use of cash collateral and proceeds of inventories and accounts receivable generated in the ordinary course of business is limited to the payment of certain expenses and application to the DIP Credit Facility prior to its termination and, following such termination, to the Pre-Petition Harris Facility (as defined below under the heading "Pre-Petition Harris Facility"). All of our subsidiaries which are Debtors have guaranteed the DIP Credit Facility (the "DIP Guarantors"). As adequate protection for the use of pre-petition cash collateral, the lenders under the Pre-Petition Harris Facility (the "Pre-Petition Lenders") have been granted a replacement lien on substantially all of our assets and the assets of the DIP Guarantors, subject only to the lien of the DIP Credit Lenders and certain liens permitted under the DIP Credit Facility.

Covenants. The DIP Credit Facility (a) restricts our ability to incur debt, (b) required us to generate certain minimum levels of EBITDA, as defined in the agreement, for so long as the amount of obligations under the Pre-Petition Harris Facility exceeded $67.5 million, (c) limits our expenditures to the types set forth in a budget, subject to permitted deviations, (d) limits the amount of capital expenditures as detailed below in this paragraph, (e) provides for mandatory prepayments and commitment reductions from all or part of the net proceeds of certain liquidity events (such as asset dispositions outside the ordinary course of business) as detailed below in this paragraph, (f) permits the voluntary prepayment of the DIP Credit Facility without penalty, (g) prior to the sale of our Potash Assets required that the obligations under the Pre-Petition Harris Facility be reduced according to a schedule, and (h) contains representations, warranties, other affirmative and negative covenants, and events of default that are customary for debtor-in-possession revolving credit facilities. As of March 31, 2004, and the date of this filing, we were in compliance with all covenants under the DIP Credit Facility.

Our cumulative capital expenditures are limited as follows:

Cumulative For January 1, thru the period ending Maximum Permitted

January 31, 2004 $7,100,000 February 29, 2004 $7,700,000 March 31, 2004 $9,000,000 April 30, 2004 $9,600,000 May 31, 2004 $10,300,000 June 30, 2004 $10,800,000

We must maintain an excess collateral availability amount under our borrowing base according to the following schedule:

Required Excess
Period Ending Collateral Availability

January 31, 2004 $31,990,000
February 29, 2004 $31,270,000
March 31, 2004 $30,900,000
April 30, 2004 $32,900,000
May 31, 2004 $35,510,000
June 30, 2004 $36,930,000

Asset Dispositions. The DIP Credit Facility required us to market and dispose of specified assets. The financing order entered by the Court on December 19, 2003, found that the transactions contemplated by the Supplemental Debtor-In-Possession Term Loan satisfied our disposition requirement with respect to our interests in Point Lisas Nitrogen. The financing order entered by the Court on February 12, 2004, found that Intrepid Stalking Horse Agreement satisfied our disposition requirement with respect to our potash assets. Other than any disposition of our interest in Point Lisas Nitrogen, all net cash proceeds of asset dispositions outside the ordinary course in excess of $1.0 million shall be applied to the Pre-Petition Harris Facility and the DIP Credit Facility on an equal basis, provided that if the obligations under the DIP Credit Facility are otherwise satisfied as described in the DIP Credit Facility, the balance of any such proceeds shall be applied to the Pre-Petition Harris Facility. As a result of any such sale, the DIP Commitment shall be automatically and permanently reduced by the amount of each such payment with a corresponding reduction in the DIP Commitment of each DIP Lender. In the event of a disposition of our interest in Point Lisas Nitrogen, all net cash proceeds must be applied first to the Pre-Petition Harris Facility and then to the DIP Credit Facility.

Supplemental Debtor-In-Possession Term Loan

On December 19, 2003, the Court entered a Final Order approving our entering into the Supplemental Post-Petition Credit Agreement, dated as of December 15, 2003, with certain funds or affiliates managed or advised by Delaware Street Capital, L.P. and DDJ Capital Management LLC (together with their participants and assigns, the "Investors"), pursuant to which the Investors made a $96.7 million term loan to us on December 30, 2003 (the "Supplemental DIP Loan"). The proceeds of the Supplemental DIP Loan were used to reduce the principal amount of the Pre-Petition Harris Facility by $90.0 million and to pay certain transaction-related fees and expenses of $6.7 million. The Supplemental DIP Loan matures on the earlier of (a) October 31, 2004, (b) the effective date of a plan of reorganization in our Case, (c) the conversion of our Case to a Chapter 7 case, or (d) the dismissal or appointment of a trustee in any of our Chapter 11 cases. At March 31, 2004, we had borrowings outstanding under the Supplemental DIP Loan in the amount of $98.7 million, which included $2.0 million of accrued payment-in-kind interest.

In addition, the Investors agreed to tender for the approximately $68.4 million remaining secured debt under the Pre-Petition Harris Facility and the obligations under the DIP Credit Facility, at par plus accrued interest (excluding default interest). The tender was conditioned upon acceptance by at least 51 percent in number of the lenders representing not less than 66-2/3 percent of the outstanding principal amount under these facilities. More than 51 percent in number of the Pre-Petition Lenders and the Original DIP Lenders tendered, respectively, 93 percent and 85 percent of the Pre-Petition Harris Facility and the DIP Credit Facility. The tender closed on January 23, 2004. As a result, the Investors hold substantially all of our secured debt.

As a result of the Supplemental DIP Loan, we withdrew our motion to sell our investment in Point Lisas Nitrogen under the Koch Stalking Horse Agreement, and the Court entered a Final Order terminating such sale process. Accordingly, we paid the Koch Break-Up Fee from the proceeds of the Supplemental DIP Loan.

Rates and Fees. The Supplemental DIP Loan bears cash interest, payable monthly, at rates equal to the prime commercial rate from time to time in effect plus 4% and accrues additional payment in-kind interest monthly at the rate of 8% per annum for the first six months and 9% per annum thereafter. In connection with the signing and closing of the Supplemental DIP Loan, we paid aggregate commitment fees of approximately $2.4 million to the Investors. The Investors are also entitled to a Cash Out Commitment Fee of approximately $1.4 million upon the termination of the Supplemental DIP Loan. In addition, the Investors will be entitled to a Lost Opportunity Commitment Fee of approximately $2.9 million payable on termination of the Supplemental DIP Loan if our plan of reorganization is not approved by the Investors.

Guarantees and Collateral Security. The Supplemental DIP Loan is guaranteed by (a) all of our direct and indirect wholly owned domestic subsidiaries (the "Domestic Subsidiaries," and together with us, the "Supplemental Loan Parties") and (b) MCHI. MCHI is the indirect holder of our fifty percent equity interest in Point Lisas Nitrogen.

The Supplemental DIP Loan is secured by (a) liens and security interests in substantially all of the assets of the Supplemental Loan Parties and (b) a pledge of all stock and other equity interests owned by each of the Supplemental Loan Parties (provided that such pledge does not include the stock of MCHI, the membership interests in FMCL Limited Liability Company, a 50%-owned Delaware limited liability company which ships product from Point Lisas Nitrogen, or the partnership interests in Houston Ammonia Terminal, L.P., a 50%-owned Delaware limited partnership). The Investors' security interests in the assets of the Supplemental Loan Parties are subordinate to the DIP Credit Facility and the Pre-Petition Harris Facility.

Covenants. The Supplemental DIP Loan has covenants substantially the same as the DIP Credit Facility including (a) restrictions on our ability to incur debt, (b) prior to the sale of our Potash Assets, requirements to generate the same minimum levels of EBITDA required by the DIP Credit Facility, (c) limits on our expenditures to the types set forth in a budget, subject to permitted deviations, (d) limits on the amount of capital expenditures to the same amounts permitted by the DIP Credit Facility, (e) mandatory prepayments from all or part of the net proceeds of certain liquidity events (such as asset dispositions outside the ordinary course of business), and (f) other affirmative and negative covenants typical for this type of loan. As of March 31, 2004, and the date of this filing, we were in compliance with all covenants under the Supplemental DIP Loan.

Pre-Petition Harris Facility.

As of the Petition Date, we had a secured revolving credit facility with Harris Trust and Savings Bank and a syndicate of twelve other lenders totaling $158.4 million. The Pre-Petition Harris Facility bears interest at rates related to the Prime Rate. In December 2003, we paid down $90.0 million on the Pre-Petition Harris Facility with proceeds from the Supplemental DIP Loan. In March 2004, we paid down $16.1 million on the Pre-Petition Harris Facility with proceeds from the sale of our Potash Assets. As of March 31, 2004, our weighted average interest rate was 9.5% (which includes the default rate) and we had borrowings outstanding in the amount of $52.3 million. The bankruptcy filing was an event of default under the Pre-Petition Harris Facility and, as a result, we can no longer borrow under this Facility. As adequate protection for the use of the Pre-Petition Lenders' cash collateral, we are required to pay interest on the Pre-Petition Harris Facility. Interest is paid monthly in arrears at the non-default rate (Prime Rate + 5% on the first $105 million until this debt is reduced to $52.5 million at which point such rate is Prime Rate + 3%. An additional 2% of default rate interest accrues until payoff of the Pre-Petition Harris Facility. Since the Pre-Petition Harris Facility is a secured facility, it has not been classified as a liability subject to compromise on our consolidated balance sheets.

The Industrial Revenue Bonds

In August 1997, we issued $14.5 million in industrial revenue bonds, a portion of which were tax-exempt, to finance the development of our east phosphogypsum disposal facility at our Pascagoula, Mississippi, DAP manufacturing plant. On April 1, 1998, we issued $14.5 million in tax-exempt industrial revenue bonds (the "1998 IRBs"), the proceeds of which were used to redeem the initial industrial revenue bonds issued in August 1997. The 1998 IRBs mature on March 1, 2022, and carry a 5.8% fixed rate of interest. The 1998 IRBs may be redeemed at our option at a premium from March 1, 2008 to February 28, 2010, and may be redeemed at face value at any time after February 28, 2010, through the maturity date. The bonds are the obligation of our subsidiary, Mississippi Phosphates Corporation, but are guaranteed by Mississippi Chemical Corporation. The bankruptcy filing was an event of default under the industrial revenue bonds. At March 31, 2004 and June 30, 2003, the industrial revenue bonds are reflected as a component of liabilities subject to compromise on our consolidated balance sheets.

The Senior Notes

On November 25, 1997, we issued $200.0 million of 7.25% Senior Notes (the "Senior Notes") due November 15, 2017, pursuant to a shelf registration statement filed with the Securities and Exchange Commission. The holders may elect to have the Senior Notes repaid on November 15, 2007. The Senior Notes do not contain any financial covenants, but do contain certain cross-default provisions with the Pre-Petition Harris Facility. As a result of our bankruptcy filing, we did not make the semi-annual interest payments due on May 15, 2003 and November 15, 2003, and were in default under the Senior Notes. At March 31, 2004 and June 30, 2003, the Senior Notes, net of unamortized discounts of $239,000, are reflected as a component of liabilities subject to compromise on our consolidated balance sheets.

Investment in Point Lisas Nitrogen

Our 50-50 joint venture, Point Lisas Nitrogen, formerly known as Farmland MissChem Limited, owns and operates a 2,040 short-ton-per-day anhydrous ammonia plant near Point Lisas, The Republic of Trinidad and Tobago. Point Lisas Nitrogen's loan with Export Import Bank of the United States ("Ex-Im Bank") is a non-recourse loan and is not guaranteed by the joint venture partners. In the event of default, Ex-Im Bank could demand immediate payment of all or any portion of the principal amount of its loan with Point Lisas Nitrogen.

As a result of our filing bankruptcy, we had a payment default of approximately $2.6 million under our ammonia offtake agreement with Point Lisas Nitrogen. The bankruptcy filing also resulted in a default on Point Lisas Nitrogen's loan with Ex-Im Bank. Because of this default, the total loan obligation to Ex-Im Bank continues to be classified as a current liability on Point Lisas Nitrogen's balance sheet. The payment default amount under the ammonia offtake agreement caused us to pay market prices for ammonia from the Petition Date through September 30, 2003, and prevented us from recovering accumulated amounts paid in previous years that were in excess of prevailing market prices. As a result of payment of the cure amount under the offtake agreement, and upon satisfaction of other conditions, Koch and Ex-Im Bank agreed to permit us to recover amounts paid in previous years, approximately $6.4 million, that were in excess of prevailing market prices on purchases after October 1, 2003, which amounts have been recovered. As of the date of this filing, Ex-Im Bank has not demanded that Point Lisas Nitrogen make payment of the outstanding debt. Point Lisas Nitrogen is continuing to repay the loan obligation with Ex-Im Bank based on the original repayment terms.

On October 8, 2003, we signed the Koch Stalking Horse Agreement with Koch to sell our interests in Point Lisas Nitrogen. Subsequently, and in conjunction with the Supplemental DIP Order, we withdrew our motion to sell pursuant to the Koch Stalking Horse Agreement, resulting in the payment of the Koch Break-Up Fee.

Sale of Potash Assets

On March 2, 2004, our potash subsidiaries, Mississippi Potash, Inc. and Eddy Potash, Inc., sold substantially all of their assets to wholly owned subsidiaries of Intrepid Mining LLC, a privately held Denver-based natural gas resource company. As of March 31, 2004, we had received approximately $26.6 million related to the sale and had a receivable of approximately $1.8 million recorded on our books for the remainder of the purchase price.

Liquidity

Based on natural gas and product market prices for nitrogen and DAP, as of the date of this filing, and our current gas hedge positions, we believe that our existing cash, cash generated from operations, and cash available under the DIP Credit Facility should be sufficient to satisfy our financing requirements for operations and capital projects through fiscal 2004. The DIP Credit Facility expires June 30, 2004, and will need to be extended or replaced to ensure adequate liquidity in fiscal 2005. Natural gas prices remain volatile, and if they increase without corresponding increases in the market prices for our products, our natural gas costs will have a material adverse impact on our liquidity and results of operations. We estimate our remaining capital expenditure requirements for fiscal 2004 to be approximately $1-2 million, which includes normal improvements and modifications to our facilities necessary for safe and efficient operations. Our ability to continue as a going concern is dependent upon, but not limited to, the development and confirmation of a plan of reorganization, continued access to adequate sources of capital, compliance with the covenants under the DIP Credit Facility and the Supplemental DIP Loan, the ability to sustain cash flows sufficient to fund operations and repay debt, and retention of key suppliers, customers and employees. No assurance can be given that we will be successful in reorganizing our businesses and successfully emerging from the bankruptcy proceedings.

OUTLOOK

For the remainder of fiscal 2004, there are positive factors in the agricultural outlook. Agricultural commodity prices are high and the world grain stocks-to-use ratio is expected to be at one of the lowest levels in the last 20 years, according to numerous published sources. Improving grain prices as a result of low stocks, combined with a better economic outlook for the domestic farming community, in part because of the Farm Security and Rural Investment Act of 2002, should result in stronger agricultural fundamentals than have existed for several years.

Notwithstanding this positive outlook, volatility in natural gas prices is still prevalent. For the remainder of fiscal 2004, and the summer months of fiscal 2005, weather, oil prices, and the U.S. economic recovery are among the important influences on natural gas prices. Despite the fact that natural gas inventories are normal by historical standards, natural gas prices remain at high levels. To maximize results in the current environment, we continue to determine operating levels for our nitrogen plants based on our commitments to customers and the relationship between nitrogen product prices and natural gas prices. We believe that world nitrogen demand growth will exceed supply growth over the next several years as a result of projected increases in world demand and fewer new production facilities announced to come online.

We are encouraged by the strength of ammonium nitrate and nitrogen solutions sales prices. Despite a fall-off in ammonia pricing, prices for our upgraded products have remained strong. Ammonia sales prices peaked during our third fiscal quarter and then declined rapidly toward the end of the same quarter. The ammonia sales price trend has now flattened and may start to increase during our fourth fiscal quarter. As always, weather will play a role in demand for our nitrogen solutions and ammonium nitrate, but we entered the spring season with very low product inventories and this will affect the tons available for sale.

Approximately 30% of our DAP is sold into the export markets by PhosChem. The strength of international markets will continue to depend on the buying patterns of China and India. We anticipate domestic DAP prices to remain firm relative to current levels due to the tightening of the supply/demand balance caused in part by export sales by domestic producers during the second fiscal quarter.

Other variables can affect our results of operations as stated elsewhere in the discussion under the headings titled "Results of Operations" and "Forward-Looking Statements," as well as under the heading "Certain Business Factors" and elsewhere in our most recent Annual Report on Form 10-K, which is on file with the Securities and Exchange Commission.

ACCOUNTING PRONOUNCEMENTS

There have been no new accounting pronouncements issued during the quarter ended March 31, 2004, that we anticipate having a material effect on our consolidated financial statements. Refer to our accounting policies in our most recent Annual Report on Form 10-K, which is on file with the Securities and Exchange Commission.

In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51, (the "Interpretation"). This Interpretation addresses consolidation by business enterprises of variable interest entities in which the equity investors do not have a majority voting interest and/or do not have sufficient equity at risk for the entity to finance its operations without additional subordinated financial support from other parties. The Company adopted and applied the provisions of this Interpretation during its first quarter of fiscal 2004, without a material effect on its consolidated financial statements. The FASB revised the Interpretation to address certain technical corrections and to clarify many of the implementation issues. We have evaluated the provisions of the revised Interpretation and concluded that its adoption does not have a material effect on the consolidated financial statements.

FORWARD-LOOKING STATEMENTS

Except for the historical statements and discussion contained herein, statements set forth in this report constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. In some cases, forward-looking statements can be identified by the use of terminology such as "may," "will," "expects," "believes," "plans," "anticipates," "estimates," "potential," or "continue," the negatives of such words, or other comparable language. Since these forward-looking statements rely on a number of assumptions concerning future events, risks and other uncertainties that are beyond our ability to control, readers are cautioned that actual results may differ materially from such forward-looking statements. Future events, risks and uncertainties that could cause a material difference in such results include, but are not limited to, (i) our ability to operate pursuant to the terms of the DIP Credit Facility and the Supplemental DIP Loan, and to extend or replace the DIP Credit Facility at June 30, 2004, and the Supplemental DIP Loan at October 31, 2004, (ii) operating constraints, costs and uncertainties associated with the Case, (iii) our ability to confirm and consummate a plan of reorganization, (iv) our ability to receive trade credit,
(v) our ability to maintain contracts that are critical to our operation,
(vi) changes in matters which affect the global supply and demand of fertilizer products, (vii) high natural gas prices and the volatility of the natural gas market, (viii) a variety of conditions in the agricultural industry such as grain prices, planted acreage, projected grain stock, U. S. government policies, weather, and changes in agricultural production methods, (ix) possible unscheduled plant outages and other operating difficulties, (x) price competition and capacity expansions and reductions from both domestic and international competitors, (xi) foreign government agricultural policies (in particular, the policies of the governments of India and China regarding fertilizer imports), (xii) the relative unpredictability of international and local economic conditions, (xiii) the relative value of the U.S. dollar,
(xiv) regulations regarding the environment and the sale and transportation of fertilizer products, (xv) oil costs and the impact of war in the Middle East,
(xvi) the occurrence of any national calamity or crisis, including an act of terrorism, (xvii) the continuing efficacy of unfair trade remedies, and the outcome of pending unfair trade remedy (antidumping) cases, (xviii) our ability to retain key employees, and (xviv) other important factors affecting the fertilizer industry and us as detailed in Item 1 under the heading "Certain Business Factors" and elsewhere in our most recent Annual Report on Form 10-K, which is on file with the Securities and Exchange Commission.