<PAGE>   1

                                                                      Exhibit 13

                    POTASH CORPORATION of SASKATCHEWAN INC.

                        BALANCED INGREDIENTS FOR GROWTH

                               1998 ANNUAL REPORT



<PAGE>   2


                                     PROFILE


         Potash  Corporation of  Saskatchewan  Inc.  (PCS),  the world's largest
fertilizer  enterprise  producing the three primary  plant  nutrients,  provides
quality products to farmers and industry  worldwide.  

         The world's largest potash (K) company by capacity, PCS has vast excess
capacity to draw upon as global  demand grows.  The third largest  phosphate (P)
company in the world, it produces the most  diversified  product line. It is the
world's  second  largest  nitrogen  (N)  company  with a wide range of  upgraded
products.  

         PCS Sales,  its  subsidiary,  sells all PCS products  domestically  and
handles some exports, as well as potash exports for a large New Mexico producer.
PCS is a leading  member of  fertilizer  export  agencies  and owns a full-range
retail company,  Florida Favorite Fertilizer.  

         The 54.2 million PCS shares trade on the Toronto, Montreal and New York
stock exchanges under the symbol POT.

                                    STRATEGY


         PCS has followed an operating strategy of pursuing products and markets
with the best  margins  and an  acquisition  strategy  aimed at  building on its
strengths. It has reinforced its solid potash base with acquisitions that expand
its export  prospects into key markets.  It has diversified  into phosphates and
nitrogen  with  acquisitions  that fit its  strategy  of  building  a  balanced,
market-driven company best able to take advantage of distribution  logistics and
economies of scale.

         Recognizing the different  circumstances of each of its nutrients,  PCS
has leveraged  them for maximum  profits.  In potash,  it has grown  earnings by
matching  production to demand. In phosphates and nitrogen,  it has utilized its
diversified  product range to maximize the  production of those  products with a
market premium.  In both, it uses its upgraded product line and multiple product
locations to develop non-fertilizer business in which the key issues are quality
and security of supply.



Cover:  PCS potash,  phosphate and nitrogen help farmers to produce  better food
for 6 billion  people and industry to make better  products  for the world.  Its
three  nutrients  and varied  products  within  each  nutrient  give the Company
balance and diversity.



<PAGE>   3
                                    [CHART]


                               TABLE OF CONTENTS

Highlights...........................   1
Letter to Shareholders...............   2
Production...........................   6
 Potash..............................   6
 Phosphate...........................   9
 Nitrogen............................   13
Sales................................   16
Stewardship..........................   26
Management's Discussion and
 Analysis of Financial Condition
  and Results of Operations..........   32
Selected Ten-Year Data...............   43
Management's Responsibility..........   44
Auditors' Report.....................   44
Consolidated Financial Statements....   45
Board of Directors...................   62
Shareholder Information..............   64
Corporate Information................   back
Glossaries...........................   back



<PAGE>   4
                                    [CHART]

                                PCS AT A GLANCE


                                  PCS PRODUCTS

<TABLE>
<CAPTION>

<S>                    <C>                 <C>                   <C>                 <C> 
NUTRIENT*              PRODUCTION MODE     BASE PRODUCT          PRODUCTS            PRIMARY END USES
POTASH                 Mined               Potassium chloride    Fertilizer          Agriculture
                                                                 Industrial          TV/computer screens, water softeners, soaps,
[CHART]                                                                              perfumes, de-icers
                                                                 Feed supplements    Livestock and poultry

PHOSPHATE              Mined and           Phosphate rock        MGA                 Feedstock for other phosphate products
                       Manufactured        -- Phosphoric acid
                                                                 DAP                 Agriculture
[CHART]                                                          SPA, LoMag, Poly-N  Liquid fertilizers, feed, industrial products
                                                                 Feed supplements    Livestock and poultry
                                                                 Industrial acid     Soft drinks, food products, industrial
                                                                                     detergents, metal treating, water treatment

NITROGEN               Manufactured        Ammonia               Fertilizer,         Agriculture, industrial, other nitrogen
                                                                 Feedstock           products
                                                                 Urea                Agriculture, pharmaceuticals, plastics, resins,
[CHART]                                                                              adhesives, dyes, pool chemicals, humulin
                                                                                     for diabetics
                                                                                     Feed supplements for livestock
                                                                 Nitric acid         Carpets, photography, batteries, lacquers and
                                                                                     paints, tires, ammonium nitrate
                                                                 Ammonium nitrate    Agriculture, explosives for mining,
                                                                                     construction and road work
                                                                 Nitrogen solutions  Agriculture


* Sales Volumes
</TABLE>



<PAGE>   5
                                   HIGHLIGHTS

[CHART] Record cash flow was used to pay down $375 million in debt.

                               FINANCIAL SUMMARY

                     (US$ millions except where specified)
<TABLE>
<CAPTION>
                                                          1998         1997
                                                          -------      -------
<S>                                                       <C>          <C>    
Net Sales                                                 2,307.8      2,325.9
Costs and Expenses                                        1,861.7      1,878.3
Operating Income                                            446.1        447.6
EBITDA                                                      636.9        617.6
Net Income                                                  261.0        297.1
  Per Common Share (Actual Dollars)                          4.82         5.68
Dividends Per Share (Actual Dollars CDN)                     1.44         1.44
Cash Flow from Operations                                   578.0        467.8
Long-Term Debt Obligations                                  933.3      1,130.0
Shareholders' Equity                                      2,453.8      2,227.9
Return on Shareholders' Equity                                11%          13%
</TABLE>


[CHART] Net sales revenue was almost flat with the 1997 record and provided
        record gross margin.

                            POTASH OPERATING SUMMARY

                          (in thousands of KCl tonnes)

<TABLE>
<S>                                                       <C>          <C> 
Total Potash Production                                   6,995        6,483
North American Sales                                      2,702        3,017
Offshore Sales                                            3,581        3,623
                                                          -----        -----
  Sales to Third Parties                                  6,283        6,640
Sales to Florida Favorite Fertilizer                        126          129
                                                          -----        -----
Total Sales Tonnage                                       6,409        6,769
</TABLE>


[CHART] Fertilizer provided 68 percent of gross margin and non-fertilizer
        products 32 percent, showing the value of PCS diversification.

                          PHOSPHATE OPERATING SUMMARY

                            (in thousands of tonnes)

                                                          
<TABLE>
<S>                                                       <C>          <C> 
Total Phosphoric Acid Production (P2O5 tonnes)            2,363        2,282
Sales (product tonnes)
  Rock                                                        9           29
  Solids                                                  1,962        1,924
  Liquids                                                 1,684        1,494
  Animal Feed                                               747          752
  Industrial Products                                       225          235
                                                          -----        -----
Total Sales Tonnage                                       4,627        4,434
</TABLE>

Total P2O5 production and sales reflect the acquisition of the Geismar operation
on March 6, 1997.


[CHART] Even after paying nearly $10 million more in provincial mining taxes,
        PCS operating income was flat with the 1997 record.

                           NITROGEN OPERATING SUMMARY

                            (in thousands of tonnes)

<TABLE>
<S>                                                       <C>          <C> 
Total Nitrogen Production (N tonnes)                      3,121        2,349
Sales (product tonnes)
  Manufactured Product
   Ammonia                                                1,496        1,061
   Urea                                                   1,425        1,226
   Nitrogen Solutions                                     2,164        1,719
   Other                                                  1,040          894
  Purchased Product                                         554        1,138
                                                          -----        -----
Total Sales Tonnage                                       6,679        6,038
</TABLE>

The nitrogen  production  and  manufacturing  data for 1997 cover only a partial
year, since the properties were acquired on March 6, 1997.
<PAGE>   6

 [Photo Caption] C.E. Childers, Chairman and Chief Executive Officer

  DEAR SHAREHOLDERS:


            Your  company  continued to show  strength in 1998 in the  important
financial area of cash flow, with operating  activities  providing $578 million.
Excluding changes in working capital,  the amount was $556 million.  This was an
improvement  over 1997 and our best year ever.  Net sales of $2,308 million were
within 1 percent of our record year in 1997,  but gross  margin of $609  million
was up by 4 percent. Higher provincial mining taxes resulted in operating income
for 1998  approximately  the same as in 1997.  Income before income taxes was up
over 1997 to a new high of $378 million.  However,  an increase of 70 percent in
income  taxes  recorded,  from  $69  million  in 1997 to $117  million  in 1998,
resulted in net income of $261 million, compared to $297 million in the previous
year. In what otherwise was a better year financially, $58 million more in taxes
caused net income to drop by $36  million  from 1997,  our best year ever on the
basis of net income and net income per share.

         Since 84 percent of our taxes  were  deferred,  we were able to provide
record  cash  flows.  We used that cash to pay off a net $240  million  of debt,
purchase  a potash  property  in New  Brunswick,  Canada,  buy  shares in Israel
Chemicals Ltd., and make improvements at our operations. At the end of the year,
our  balance  sheet  was  stronger  and we had a debt to  capital  ratio of 29.5
percent.


<PAGE>   7


     Potash,  our first  business and the  foundation  of the  Corporation,  had
another  outstanding  year.  Although  sales  were  down in the  fourth  quarter
compared to the very strong  fourth  quarter of 1997,  total  tonnes sold in the
year were only 5 percent  below the record  tonnage sold the year  before.  Much
stronger prices, however, resulted in an 8-percent increase in sales revenue and
a 23-percent  increase in gross margin.  Even though we paid an  additional  $10
million in Saskatchewan Provincial Mining Tax, our potash subsidiary earned $238
million in  operating  earnings,  an increase of $46 million or 24 percent  over
1997.

     We purchased Potash Company of Canada Limited (Potacan) from its German and
French  owners and are using the mill,  renamed  PCS  Cassidy  Lake,  to upgrade
standard  grade potash  produced in  Saskatchewan  to granular grade product for
markets in Eastern  Canada and the United  States.

     In  December,  we  purchased  9  percent of the shares of Israel  Chemicals
Ltd.  (ICL)  from  the  Government  of  Israel in an offering that sold off  the
remaining  government  ownership  in  that company. The most important asset  of
ICL is its ownership in Dead Sea Works, the fifth largest potash exporter in the
world.

     PCS Phosphate,  our phosphate subsidiary,  also had another good year, with
fertilizer  products  leading the way. The  subsidiary  had an increase in gross
margin of 14 percent, to $211 million. Fertilizer sales revenue was up 9 percent
and gross margin on fertilizer  sales was up 49 percent.  Phosphate sold as feed
supplements  and as  industrial  acid was down from last year,  but continued to
represent the highest margins.

     On a nutrient  basis,  including  the  phosphate  products  produced in our
nitrogen  subsidiary,  fertilizer  products  represented  58  percent  of  total
phosphate gross margin,  with feed supplements and purified acid representing 27
percent and 15 percent respectively. Liquid phosphate fertilizers are gaining in
popularity as they are tied to the low-till  farming methods being utilized more
each year by American  farmers.  Our North  American sales of liquids were up 18
percent.


[CHART]  Net income was below the 1997 record but, at $637 million, PCS earnings
         before  interest,  taxes,  depreciation and amortization reached a  new
         high.

<PAGE>   8


     PCS  Nitrogen did not fare as well  because  prices for  nitrogen  products
continued  to  fall as the  year  progressed.  Our  nitrogen  subsidiary  had an
operating  income of $61  million in 1998,  a drop of 51  percent  from the $126
million in 1997. We have taken several measures to combat the problem, including
closing down our Wilmington,  North Carolina operations.  In August we dedicated
our new  ammonia  plant in  Trinidad.  It is the  fourth  plant in our  Trinidad
complex and is rated as the most  efficient in the world.  This plant is helping
to lower our cost of production,  increase our volumes of sales and replace some
purchased ammonia.

     In  addition,  we are making  efforts  to move more  nitrogen  products  to
industrial  markets.  W. R. Grace built a new calcium  nitrite  plant at the PCS
complex  in  Augusta,  Georgia.  We are  providing  it with raw  materials  that
otherwise would have gone to fertilizer products. We are completing construction
of a new  396,000  tonnes per annum  (TPA)  nitric  acid  plant at our  Geismar,
Louisiana  complex to feed new  industrial  plants  built at the nearby BASF and
Rubicon  facilities.  The new  nitric  acid plant will  consume  100,000  TPA of
ammonia that is presently going into the fertilizer market.

     We just recently signed an agreement with Melamine  Chemicals  which,  when
concluded,  will see us supply up to 113,000  TPA of urea  liquor to a new plant
that will be connected to our Memphis, Tennessee operations. Melamine will begin
construction of this facility in 1999.

     In total,  excluding  selling and corporate  costs,  the potash  subsidiary
supplied 47 percent of our operating income,  PCS Phosphate  supplied 41 percent
and PCS Nitrogen supplied 12 percent.

     Fertilizer  products  made up 68 percent of sales revenue and 68 percent of
gross margin, while our non-fertilizer products were 32 percent of sales revenue
and gross margin.

     Revenue  by  nutrient  was split between the offshore market and the  North
American  market  as  follows:  potash  58/42 percent; phosphate 29/71  percent;
nitrogen 7/93 percent. In total, 29 percent of our 1998 sales revenue came  from
offshore markets and 71 percent from North American markets, virtually identical
to 1997.

     In July of 1998,  several changes in our management  organization were made
in an effort to provide  continuity and strength in future  leadership.  William
Doyle was promoted to President  and Chief  Operating  Officer  responsible  for
Potash, Phosphate and Nitrogen subsidiaries.  Gary Carlson replaced Mr. Doyle as
President  of PCS Sales.  James Dietz was  promoted  to replace  Mr.  Carlson as
President of PCS Nitrogen. These executives,  along with Tom Wright,  President,
PCS Phosphate, and Garth Moore, President,


[CHART]  Although results for the three nutrients will vary over time, potash
         gross margin was highest in 1998 as a percentage of sales.





<PAGE>   9


PCS Potash,  form the nucleus of our  operations  and sales team.  There were no
changes in the ranks of Senior Vice Presidents in the corporate office.
     
     Although we did make slight  alterations to our operating assets during the
year,  our recent effort to negotiate the purchase of a controlling  interest in
The Israel Corporation, the holding company that controls Israel Chemicals Ltd.,
was  unsuccessful.  However,  your board and your  management  will  continue to
identify potential opportunities that are financially attractive and accretive.

Yours truly,




[signature]
------------------------------------
C. E. CHILDERS
Chairman and Chief Executive Officer 
March 2, 1999


[CHART] Its varied production within each of its nutrients gives PCS strength
and balance.


[Photo Caption] Through balanced fertilization, productive and efficient North
American farmers achieve their high-quality crops.
<PAGE>   10
                               PRODUCTION REPORT



PCS POTASH

WHAT IS POTASH?  The major  source of  potassium.  In plants,  potassium  raises
yields and food value, builds disease resistance and improves shipping, handling
and  storage  qualities;  in  animals,  it helps  growth,  maintenance  and milk
production.  SOURCE? Potash is mined from ore deep underground or extracted from
brine,  and  milled  on  the  surface.  Production  costs  are  affected  by ore
thickness, consistency and continuity;  ore depth, geological conditions and K2O
grade;  mill  recovery  achievable, operational capacity, degree of  automation.
WORLD TRADE?  There are a limited  number of world  suppliers  but more than 150
countries use it. About three-quarters of world production moves across borders.
Developing nations have little or no supply and account for nearly half of world
consumption.

PCS STRENGTHS:  Excess capacity; leading global player; capable of producing
more potash than other world companies at lower cost.


[Photo caption] Lanigan,  the largest of the PCS potash  properties,  set both
productivity and annual production records in 1998.



<PAGE>   11
                                       7


                            PRODUCING FOR THE WORLD


        PCS produces potash from seven mines in Canada, six of which it owns and
operates,  and one  wholly-owned  mine in the United States.  With 24 percent of
world capacity and an estimated 57 percent of excess  capacity,  it can increase
production  as markets grow and further  reduce costs per tonne.  Reserves  that
will last more than a century  ensure its  long-term  leadership  in  potash.  A
primary supplier to developing nations where demand for potash keeps growing, it
makes more than half its annual sales offshore.

        To suit its different  markets,  PCS produces  potash  fertilizer in two
dozen grades. Its agricultural product is guaranteed to have at least 60 percent
K2O (95 percent KCl).

RECORD POTASH PRODUCTION

     With a second consecutive year of strong world demand for potash, PCS set a
second consecutive record in 1998 for total production.  Using 57 percent of its
capacity and with eight fewer shutdown weeks than in 1997, the Company  produced
6.995 million tonnes.  New Brunswick and Moab also produced 0.897 million tonnes
of sodium  chloride  (salt) during the year,  used for de-icing winter roads and
making various products. Moab's salt production broke a four-year-old record.

     Productivity records were set at Lanigan, Rocanville and New Brunswick, and
annual production records at Lanigan, Rocanville, Cory and New Brunswick.

                                    [PHOTO]

<PAGE>   12
                               PRODUCTION REPORT


     On March 3, 1998, PCS purchased the Potacan  property in New  Brunswick,  a
flooded  mine and a mill.  Renamed PCS Cassidy  Lake,  it has an annual  milling
capacity of 1.3 million  tonnes and a compaction  capacity of 1.0 million tonnes
of granular  product.  A rail car  unloading  facility  was  installed  there to
receive  standard  potash from  Rocanville for upgrading into granular  product.
Since  acquisition,  0.283 million  tonnes have been  compacted at Cassidy Lake,
which has 30 employees.

[CHART] World demand remained strong and PCS drew on its excess capacity,
surpassing its 1997 production record by 8 percent.


     In April 1998, a small brine  inflow was  discovered  at the New  Brunswick
division,  but  production  was  maintained  without  interruption  or danger as
attempts  to locate the source of the inflow continued.

     Technological  advancements  in  1998  included  developments  in  computer
applications for on-site analysis of three-dimensional seismic survey data.  PCS
personnel  researched  and developed a fully-automated underground  microseismic
event  location  and analysis system. A flotation column 3.3 meters in  diameter
was  designed,  fabricated  and  commissioned  at Rocanville. Research  projects
included   the   evaluation   of   thickened  tailing  technologies  through   a
combination of process,  pipeline and waste  stream  deposition  and  weathering
studies.  The Company  continues  to participate in research groups that support
studies  relevant to the fertilizer business, such as product quality,  minerals
separations,  fine particle science and environmental technology.

     PCS reserves at Esterhazy division are mined by International  Minerals and
Chemical  (Canada)  Limited  Partnership  (IMC)  under a  long-term  mining  and
processing  agreement  effective through 2026. PCS has the option of terminating
this  agreement  every five years;  the next  opportunity  is December 31, 2001.
Under the agreement, the Company can take between 0.450 and 0.950 million tonnes
of product a year from IMC. For the calendar  year 1999,  it has  increased  its
allocation to 0.726 million tonnes.


                                  POTASH 1998
                  World production: 42.6 million tonnes (est.)
                       PCS production: 7.0 million tonnes
                              PCS percentage: 16%


                                 1998 PRODUCTION
                              (million tonnes KCl)

<TABLE>
<CAPTION>
                    ANNUAL CAPACITY  1998 PRODUCTION  1997 PRODUCTION  MINE SITE EMPLOYEES
                                                                                  (active)
<S>                          <C>               <C>              <C>                  <C>  
Lanigan SK                    3.828            1.656            1.600                  327
Rocanville SK                 2.295            1.882            1.692                  319
Allan SK                      1.885            1.142            1.011                  279
Cory SK                       1.361             .676             .626                  151
Patience Lake SK              1.033             .254             .277                   72
Esterhazy SK(1)                .951             .543             .498                    2
New Brunswick NB               .785             .783             .715                  334
Moab UT                        .062             .059             .064                   49
Total                        12.200            6.995            6.483                1,533
</TABLE>



(1)  Production at Esterhazy is mined from PCS reserves by  International
     Minerals and Chemical (Canada) Limited Partnership under a long-term
     agreement.


<PAGE>   13
                                       9


PCS PHOSPHATE

WHAT IS PHOSPHORUS? The energizer of plant production, crucial to photosynthesis
and reproduction and helps other yield-developing processes. It assists animals'
general  nutrition  and normal body  growth,  maintenance  and  repair.  SOURCE?
Underground  phosphate ore deposits yield  phosphate rock from which  phosphoric
acid,  feedstock  for  other  products, is made. Ore thickness, consistency  and
continuity,  depth,  geological  conditions and  concentration  ratio (tonnes of
material  removed per tonne of phosphate rock) affect  production  costs.  WORLD
TRADE? About 60 countries produce phosphate  products;  about one-third of world
production is traded. More than 150 countries use phosphate  fertilizers;  about
two-thirds of consumption is in developing nations.

PCS STRENGTHS: Diversified and low-cost production; long-term rock reserves.


[Photo caption] The excellent PCS rock reserves in North Carolina and Florida
will last about 50 years operating at full capacity.


<PAGE>   14


                          QUALITY AND DIVERSIFICATION


         PCS produces a wealth of products at its three phosphate  facilities in
the US.  From its  high-quality  phosphoric  acid,  it makes  solid  and  liquid
fertilizers,  industrial  phosphoric acid and feed supplements for livestock and
poultry. The most flexible of the major producers,  it can switch its production
among these products to maximize its margins.

         Outside  experts have  recognized  PCS Aurora in North  Carolina as the
lowest-cost  world producer of phosphoric  acid, and White Springs in Florida is
also a  leading  low-cost  producer.  These  two  facilities  combine  with  the
phosphate  plant that is part of the Company's  nitrogen  operations at Geismar,
Louisiana   to  make  PCS  one  of  the  world's  lowest-cost  P205   producers.
Superphosphoric  acid and  phosphate  solutions  are also  produced  at Geismar,
making PCS the world's leading  supplier of  superphosphoric  acid, a fertilizer
intermediate geared to the increasingly popular conservation tillage systems.

         Aurora blends its byproduct gypsum and clays into a unique  neutralized
soil  for  land  reclamation  so  it  needs  no  clay  pond  impoundment  areas.
Convenience   to   tidewater   at  both  Aurora  and  White   Springs   benefits
transportation logistics.

[CHART] With the most varied line in the industry, PCS can shift its feedstock
to the products most in demand by the markets, optimizing margins.


DIVERSITY IN PHOSPHATE PRODUCTION GIVES STRENGTH

In 1998, PCS produced 2.363 million P2O5 tonnes of phosphoric  acid. This total,
4 percent more than


[Photo caption] PCS is the world's largest manufacturer of phosphate feed
supplements for livestock and poultry, which help proper growth, maintenance and
reproduction, and in cows, good milk production.
<PAGE>   15
                                       11



1997 production,  partially  reflects  inclusion of a full year of production at
Geismar. Aurora produced phosphate rock at 79 percent of capacity and P205 at 99
percent.  White  Springs,  whose  rock  comes  from its Swift Creek mine and  is
processed at its Suwannee River and Swift Creek facilities,  produced rock at 94
percent of capacity and P2O5 at 87 percent.  Geismar,  which uses imported rock,
produced P2O5 at 106 percent of capacity.

                              Phosphoric Acid 1998

                World production: 27.6 million P2O5 tonnes (est.)
                     PCS production: 2.4 million P2O5 tonnes
                               PCS percentage 9%

         White Springs  reduced its costs of producing DAP by 2 percent.  It had
record  production  of green SPA.  A major  change in the LoMag  process,  fully
implemented  in 1998,  enabled  production of this type of SPA to increase by 16
percent over 1997 and cut costs of  production  per P205 tonne.  The Swift Creek
plant continued to operate according to its original design, as a single product
producer of black SPA, and raised its output 2 percent above 1997.  Again it was
one of the most cost-effective plants anywhere.

         Record production volumes at Aurora helped to reduce unit costs at this
already  low-cost plant,  despite  challenging  mining  conditions and lower ore
availability in the area of its deposit being mined.  Annual production  records
were set for sulphuric acid, phosphoric acid, green phosphoric acid, 54 percent

                         1998 ROCK AND ACID PRODUCTION

<TABLE>
<CAPTION>
                                   PHOSPHATE ROCK                           PHOSPHORIC ACID
                         ANNUAL         1998            1997      ANNUAL          1998         1997      MINE SITE
                        CAPACITY     PRODUCTION      PRODUCTION  CAPACITY      PRODUCTION   PRODUCTION   EMPLOYEES
                                  (million tonnes)                                                        (active)
                                                                 (million tonnes P2O5)

<S>                        <C>          <C>            <C>         <C>           <C>          <C>          <C>  
Aurora NC                  6.0          4.738          4.806       1.202         1.193        1.168        1,177
White Springs FL           3.6          3.393          3.585       1.093          .956         .962        1,113
Geismar LA                   -              -              -        .202          .214         .152(1)        45
-------------------------------------------------------------------------------------------------------------------
Total                      9.6          8.131          8.391       2.497         2.363        2.282        2,335
</TABLE>

(1)  After acquisition, March 6, 1997.

                                    [PHOTO]
<PAGE>   16
                               PRODUCTION REPORT



                           1998 PHOSPHATE PRODUCTION
                            (million tonnes product)

<TABLE>
<CAPTION>
                       AURORA                           WHITE SPRINGS                      GEISMAR
             ANNUAL    1998        1997        ANNUAL    1998         1997       ANNUAL    1998        1997(1)
             CAPACITY  PRODUCTION  PRODUCTION  CAPACITY  PRODUCTION  PRODUCTION  CAPACITY  PRODUCTION  PRODUCTION

<S>          <C>       <C>         <C>         <C>       <C>          <C>        <C>       <C>         <C> 
Liquids
  MGA (2)    1.835     1.789       1.753       1.908     1.456        1.474      .337      .357        .252
  SPA         .676      .437        .348       1.138      .822         .788      .196      .180        .121
Solids
  DAP        1.247     1.225       1.215        .710      .700         .724       -         -           -
</TABLE>

(1)  After acquisition, March 6, 1997.

(2)  A  substantial  portion  is  consumed  internally  in  the  production   of
     downstream  products.  The  balance  is  exported  to phosphate  fertilizer
     producers   and  sold  domestically  to  dealers  that  custom-mix   liquid
     fertilizer.

acid,  LoMag,  POLY 11 and DAP.  Productivity  was increased by  improvements in
production of amber acid and of the feed acid for industrial acid. Ammonia usage
was cut through  improvements  in recovery  from the DAP plants.

Geismar set an annual P2O5  production  record of 0.214 million  tonnes,
benefiting from a new reliability  team that  addresses  equipment  problems and
proposes  corrective actions.

     Technological  advances at Aurora  included  development of a new flotation
scheme for two circuits in the mill to improve recovery,  and  implementation of
low  phosphorus  technology  in the cooling  towers to reduce  discharge  to the
outfalls.

     At  White  Springs,   mining  production  capability  and  efficiency  were
improved.  A second rod mill was added to grind rejected  "pebble" to product of
usable  size,  and a telemetry  system was  installed  on one  dragline  pumping
circuit to pump a denser  slurry  and cut time lags in  start-up  and  shutdown.
Global  Positioning  System  equipment  increased  productivity in surveying and
prospecting of mineral reserves.

FEED PHOSPHATE PRODUCTION

     PCS is the world's largest  manufacturer of phosphate feed  supplements for
livestock and poultry.  While production was down by 3 percent in 1998, it still
represented an estimated 47 percent of total US feed phosphate production.

     Weeping  Water,  Kinston,  Marseilles,  Davenport  and  one  White  Springs
facility  produced  Dical and Monocal,  while DFP was produced at Saltville  and
White Springs. High inventories  constrained total production in 1998, but plant
improvements  resulted  in  new  daily  production  records  at  Weeping  Water,
Marseilles and Davenport.  Through  efficiencies  in gas  consumption and use of
more of its own rock, costs of producing DFP at White Springs fell by 4 percent.

     A new program of annual quality audits at each facility was  implemented in
1998 to maintain the reputation of PCS feed products for high quality.  A potash
storage dome being  constructed at Marseilles  will reduce costs of distributing
potash,  and is one of many  synergies  achieved  among the Company's  operating
units.  Acid tanks being built at  Marseilles  and Kinston  will  provide a more
constant flow of acid to the plants and free rail cars for other uses.

INDUSTRIAL ACID

     The purified  acid plant at Aurora  produced  0.130  million P2O5 tonnes of
purified acid for  industrial  use. This was 96 percent of its rated capacity of
0.135 million tonnes.

                         1998 FEED PHOSPHATE PRODUCTION
                                (million tonnes)

<TABLE>
<CAPTION>
                          ANNUAL CAPACITY  1998 PRODUCTION  1997 PRODUCTION  EMPLOYEES
                                                                              (active)

<S>                                  <C>              <C>              <C>          <C>
Davenport IA                         .280             .094             .080         27
Marseilles IL                        .278             .175             .187         37
White Springs FL (D/M)               .218             .096             .108         20
Weeping Water NE                     .209             .154             .161         42
Kinston NC                           .141             .059             .070         27
White Springs FL (DFP)               .100             .086             .079         41
Saltville VA                         .078             .068             .072         50
                                    -----             -----            -----       ----
Total                               1.304             .732             .757        244
</TABLE>



<PAGE>   17
                                       13



PCS NITROGEN

WHAT IS NITROGEN? A requirement for every living cell. It is part of the genetic
blueprints  RNA  and  DNA,  and  needed  by  animals  for  proper nutrition  and
maturation. The fundamental building block of plant proteins, it improves  yield
and quality. SOURCE? Ammonia synthesized from natural gas, steam and air is  the
feedstock  for  all  nitrogen  products  and  the  most  concentrated   nitrogen
fertilizer.   Urea   is   the   major  fertilizer  source  of  nitrogen.   Solid
fertilizer  ammonium nitrate is made from nitric acid. Liquid forms of urea  and
ammonium  nitrate  are combined into nitrogen solutions. WORLD TRADE?  More than
75  countries  produce  ammonia  and  most  use their production internally,  so
cross-border   trade   is   limited.   North  America  is  a  net  importer   of
nitrogen,  unlike  potash  and  phosphate  with  their  excess supply and  large
exports.

PCS STRENGTHS: Large percentage of industrial sales; long-term natural gas 
contracts in Trinidad.

[Photo caption] Urea is the world's most popular nitrogen fertilizer and, among
other uses, is a raw input for the insulin product humulin used by eight million
diabetics around the world.


<PAGE>   18
                               PRODUCTION REPORT



                         A WEALTH OF UPGRADED PRODUCTS

                                  AMMONIA 1998
                 World production: 126.9 million tonnes (est.)
                       PCS production: 3.8 million tonnes
                               PCS percentage: 3%

     PCS, the most diversified  nitrogen  producer,  makes upgraded products for
agriculture  and industry at six plants in the United States and a large complex
in  Trinidad.  It  produces  all the  nitrogen  fertilizers  and its  industrial
products  are used in the  manufacture  of essential  and familiar  products for
home,  car,  building and  pharmaceuticals.  PCS micro prilled urea is used as a
nitrogen-based supplement that helps build protein in beef and dairy cattle.

     Adequate  supplies of natural gas are key to the competitive  production of
nitrogen products.  Natural gas can represent up to half of the operating budget
of PCS  Nitrogen.  The  Company  has the  ability  to  produce 43 percent of its
ammonia in Trinidad, where the price of natural gas is indexed to ammonia prices
in the Caribbean. For its US production, it purchases half of its natural gas at
fixed prices and half at market  prices.  This breakdown has been adopted as the
ongoing PCS strategy.

     Much of the ammonia  produced in  Trinidad  goes to Florida DAP  producers.
Nearly half the Company's US production goes to industrial  customers as ammonia
or upgraded  products.  It can use over a third of the remaining ammonia for its
own DAP  production.  The rest of its  nitrogen  business  is  agricultural  and
benefits  from  its  strategic  plant  locations  in the US  Midwest,  close  to
customers and profiting from a positive price differential with the Gulf.

VALUE-ADDED PRODUCTS FOR AGRICULTURE AND INDUSTRY

     PCS produced  3.806 million  tonnes of ammonia in 1998, 63 percent from its
plants in the United States and 37 percent in Trinidad. That ammonia was the raw
material used in its value-added products.

     The ammonia  plant under  construction  in Trinidad  when PCS  acquired the
former Arcadian Corporation, now PCS Nitrogen, began operating in May 1998,


[CHART] With the new PCS ammonia plant in Trinidad now operating, the complex
there has 43 percent of Company capacity.


1998 PRODUCTION
(million tonnes)

<TABLE>
<CAPTION>
                                       AMMONIA(1)                               NITRIC ACID(1)(2)
                          ANNUAL          1998           1997*        ANNUAL           1998           1997*
                        CAPACITY    PRODUCTION      PRODUCTION      CAPACITY     PRODUCTION      PRODUCTION
<S>                        <C>           <C>             <C>           <C>            <C>             <C>  
Trinidad                   1.827         1.399            .923             -              -               -
Augusta GA                  .622          .666            .549          .474           .511            .409
Lima OH                     .525          .481            .388          .097           .103            .075
Geismar LA                  .476          .473            .404          .560           .517            .441
Memphis TN                  .357          .373            .275             -              -               -
Clinton IA                  .238          .226            .182          .126           .122            .105
LaPlatte NE                 .182          .188            .143          .178           .158            .125
Wilmington NC(3)               -             -               -          .161           .025            .087
                           ------        ------          ------        ------         ------          ------
Total                      4.227         3.806           2.864         1.596          1.436           1.242
</TABLE>

* After acquisition, March 6, 1997.

(1)  A  substantial  portion of ammonia and nitric acid is upgraded to
     value-added products.  

(2)  HNO3 tonnes 

(3)  Ceased production June 1998;  remaining staff dealing with safety and plant
     remediation.


<PAGE>   19
                                       15


[CHART] Industry consultants forecast considerable growth in industrial sales of
nitrogen, which will benefit PCS.


the fourth in the Company's  complex there.  One of the world's largest and most
advanced  facilities,  it  features a  gas-efficient  Kellogg  Advanced  Ammonia
Process (KAAP) reactor.

     Because of the difficult  nitrogen  solutions market, PCS ceased production
at its  Wilmington  plant,  the only  nitrogen  facility not  producing  its own
ammonia  feedstock.  The lower-cost Augusta plant took over the supply of nitric
acid for the Company's  contract with W.R. Grace,  which built a calcium nitrite
plant adjacent to Augusta.

     Annual  production  records  were set at Augusta for all  products in 1998.
Record annual  ammonia  production  was also  achieved by Trinidad,  Geismar and
Memphis;  the latter also set a record for the year's urea production.  Lima had
record production of nitric acid and LaPlatte of nitrogen solutions.


INDUSTRIAL PRODUCTION

     Many  PCS  nitrogen  products  have  widespread  industrial  uses.  Of  the
Company's 1998 US production,  more than one-quarter of the ammonia,  62 percent
of urea,  74 percent of ammonium  nitrate and all nitric acid went to  industry,
mainly in the US.

     PCS is responding to the growing demand for industrial nitrogen products by
expanding its production  capabilities.  Nitric acid capacity is being increased
at Geismar to meet rising market demand.  Its new  state-of-the-art  plant,  the
fifth in its complex and the largest in the US, was  designed to have  extremely
low air emissions.  Its production will be used by customers to make both methyl
diphenyl  diisocyanate  (MDI) and toluene  diisocyanate  (TDI), used in flexible
cushioning  foams and rigid  urethane  foams.

     PCS also  produced  0.092 million tonnes of micro prilled urea at Memphis.

[Photo Caption] Several  long-term  industrial  customers  have  built  plants
adjacent to  PCS Nitrogen facilities, and are conveniently connected by
pipeline.


<TABLE>
<CAPTION>
            UREA SOLIDS                         AMMONIUM NITRATE SOLIDS                 NITROGEN SOLUTIONS
   ANNUAL          1998        1997*       ANNUAL         1998         1997*    ANNUAL          1998       1997*  EMPLOYEES
 CAPACITY    PRODUCTION   PRODUCTION     CAPACITY   PRODUCTION    PRODUCTION  CAPACITY    PRODUCTION  PRODUCTION   (active)
<S> <C>           <C>          <C>           <C>          <C>           <C>      <C>           <C>         <C>       <C>   
     .586          .512         .489            -            -             -         -             -           -        388
     .274          .348         .282         .397         .410          .343      .581          .467        .356        142
     .329          .260         .192            -            -             -      .163          .157        .128          2(5)
        -             -            -            -            -             -     1.028          .955        .873        152
     .399          .395         .249            -            -             -         -             -           -        159
        -             -            -         .079         .078          .077      .163          .081        .083        114
        -             -            -            -            -             -      .436          .436        .344        125
        -             -            -            -            -             -      .408          .003        .082          5
    1.588         1.515        1.212         .476         .488          .420     2.779         2.099       1.866      1,087(4)
</TABLE>

(4)   502  contract  employees  work  at  the  nitrogen  plants,  for  a   total
     active workforce  of  1,589.  

(5)   BP   Chemicals   operates   the   Lima   facility  under  an   operational
     agreement with PCS Nitrogen.



<PAGE>   20
                                  SALES REPORT



PCS SALES

WHAT ARE THE MAJOR MARKETS? The United States, China, India, Brazil.



CHARACTERISTICS?  The US, the  world's  largest  consumer of  fertilizers,  is a
mature market with relatively stable annual  consumption.  Important factors are
acreage  planted  and  application  rates per acre.  China,  a major  potash and
phosphate  importer,  is  evolving  from  centralized  purchasing  to a multiple
customer  system.  In  India,  an  important  market  for potash and  phosphate,
purchases  are  affected by subsidy  levels.  Brazil,  the largest  agricultural
producer in Latin  America and a major potash  importer,  applies  fertilizer to
cash crops it grows for  export.  Weather  and  politics  may affect  fertilizer
purchases in any country.


PCS STRENGTHS: Multiple product locations; efficient transportation network; 
one-stop shopping convenience.

                                    [PHOTO]


<PAGE>   21
                                       17



                 BUILDING ON GLOBAL AND DOMESTIC OPPORTUNITIES

     World consumption of fertilizers  continued to grow in 1998; total sales of
nitrogen,  phosphate  and potash  for  agriculture  and  industry  increased  by
approximately  1 percent over 1997.  Nitrogen and  phosphate  sales rose despite
economic  difficulties in Asia, the Former Soviet Union (FSU) and Latin America,
while world sales of potash  fertilizer fell slightly due to large volume buying
the previous year.

     PCS  continued  to serve its  customers  by  providing  the  three  primary
nutrients  through  its  efficient   transportation  network.  That  network  of
railways, trucks, river barges and ocean-going bulk carriers, plus strategically
located  warehouses,  makes the  Company a  reliable  supplier  able to  provide
just-in-time delivery.

     A focus group of dealers in 1998 rated PCS Sales as the supplier  that does
the best job of serving their NPK needs, and the most honest, modern, dependable
and on-time.  Since it has no large retail  network,  they did not consider it a
competitor.

     The major fertilizer  market for PCS is the United States,  its home market
in all  three  nutrients.  In 1998,  PCS  maintained  its  market  share in each
nutrient.  The  world's  largest  consumer  of potash,  the US is the  Company's
biggest single market. It is a big user of phosphate fertilizers, and PCS has 16
percent of its DAP  market and about half of the market for liquid  fertilizers.
The US is also a major producer and consumer of ammonia for both  fertilizer and
industry; PCS has significant sales in both areas.


[Photo caption] Asia is an emerging fertilizer market with a huge potential for
greater consumption.
<PAGE>   22
                                  SALES REPORT



     Offshore,  the majority of PCS potash  sales are handled by  Canpotex,  the
export sales agency for Saskatchewan producers. Offshore phosphate sales are the
responsibility  of  PhosChem,   an  association  for  US  exports  of  phosphate
fertilizers  whose market  position has been  strengthened  by the  inclusion of
Mississippi  Chemical  and  Mulberry.  PCS Sales  handles  all liquid  phosphate
exports for PhosChem,  as well as offshore  sales of the Company's New Brunswick
potash and Mississippi  Chemical's potash from New Mexico,  and all sales of PCS
nitrogen products.

     China, Brazil and India are the major offshore fertilizer markets.

     China,  with 22 percent of world  population  and 7 percent of arable land,
has made increased  fertilizer use a priority.  Its potash consumption has risen
by an  average  of 9  percent  a year in the last 10  years,  and PCS is a major
supplier.  China is the world's largest DAP importer,  with almost two-thirds of
its imports provided by PhosChem.  Usually the world's largest importer of urea,
China stopped importing during 1997, affecting ammonia and urea markets.

     Brazil,  the  largest  country in South  America,  is a major  consumer  of
potash, and an important market for PCS. It is the largest single market for the
Company's New Brunswick potash.

     PCS sells  little  potash to India but its  purchases  support  prices  and
absorb tonnage that could otherwise compete with the Company's products. It is a
major phosphate  importer.  Its primary DAP supplier is the US, and the majority
of its MGA comes from Morocco. It buys MGA to make DAP or it buys DAP, depending
on price.

PCS POTASH IN DEMAND

     World demand for potash continued strong in 1998 and, as no new supply came
on stream,  the market was firm.  World sales are estimated at 41 million tonnes
and PCS sold 16 percent of that, 6.409 million tonnes  (including  inter-company
sales to Florida Favorite  Fertilizer).  Its sales were just 5 percent below its
all-time  record set in 1997.  Offshore  markets  took 56 percent of total sales
volumes,  domestic  markets 44  percent.  First-quarter  sales,  led by offshore
demand, established a new  Company  record,  and  third-quarter  sales came
close to matching  the 1997 record for that  quarter.  Prices  increased  in
both markets.

DOMESTIC

     PCS sold  2.828  million  tonnes of potash  domestically  in 1998,  meeting
almost 30 percent of North American demand. After 1997, an exceptional year with
large volume  purchases in fall and winter in anticipation  of price  increases,
1998 sales by all  suppliers  were down about 11  percent.  Sales by PCS,  which
include  0.126  million  tonnes  sold to Florida  Favorite  Fertilizer,  were 10
percent  below its 1997 record.  The United States market took 90 percent of the
Company's domestic potash;  the major customers were large  agricultural  co-ops
and national firms.

     Although  shipments  for the  spring  season  didn't  differ  much in total
volumes  from  1997,  the  quarterly   distribution   was  quite  different  and
illustrates the difficulty of quarter-over-quarter  comparisons.  After the huge
fall/winter  fill which set Company  sales  records in fourth  quarter  1997 and
first  quarter  1998,  sales in the second  quarter were lower than the previous
year. Sales surpassed the 1997 record in the third quarter, but fell back toward
the end of the year,  when it was clear that farmers were  postponing  purchases
for their spring season needs until 1999.

     Total  domestic  sales in 1998  included  0.109  million  tonnes of product
compacted at the Company's new Cassidy Lake property in New Brunswick.  It began
taking  standard  potash from  Rocanville  in April and upgrading it to granular
product wanted in domestic markets on the East Coast.

     Domestic  prices were the  strongest in more than a decade.  Higher  prices
were  achieved  for March  and held up well for the rest of the  year.  Proposed
price  increases  for  first-quarter  1999 will be tested when the spring season
commences.

OFFSHORE

     Markets  offshore  bought 3.581 million tonnes of PCS potash in 1998,  just
0.042  million  tonnes  below the export  record set in 1997.

     Again,  China and Brazil were the Company's main markets,  but Malaysia
bought record volumes,  as did the emerging markets of


[CHART] Notwithstanding the economic difficulties of many Asian nations,
offshore volumes were only 1 percent below the 1997 record.
<PAGE>   23
                                       19



Thailand and Vietnam. Except for Indonesia, Asian economic problems did not
have much impact on sales,  for countries there  understand how important potash
is to the cash crops they grow for export.

     At 5.1 million tonnes, sales by Canpotex were less than 2 percent below the
1997 record.  PCS provided 2.966 million  tonnes of that.  The largest  Canpotex
markets were China,  Brazil,  Malaysia and Japan, which together took 63 percent
of its volumes.

     China, which purchased  near-record  volumes from all suppliers,  bought 31
percent of the potash  sold by  Canpotex.  Brazil  bought a total of 3.2 million
tonnes from all sources,  though  economic  difficulties in the second half held
its imports below the 1997 record. Canpotex had the second-best year in its long
history in Brazil,  providing  20 percent of all potash sold there;  that was 13
percent of total Canpotex sales. Brazil was the largest single export market for
PCS potash from New Brunswick,  with 55 percent of its offshore sales. Delays in
government  decisions on  subsidies  affected  India's  1998  imports  slightly,
despite demand.

     With strong  offshore  demand,  Canpotex  achieved  higher prices in Japan,
Korea, Australia, China and Brazil.

NON-FERTILIZER

     More  than 7  percent  of  total  potash  sales  were  industrial,  sold to
customers  who refine it further or use it for  manufacture  of other  products.
Sales were up 2 percent over 1997,  and 68 percent went  offshore,  where Japan,
Korea and China are important customers.  Industrial potash prices were up by 10
percent.

     A small amount of PCS potash is sold for animal feed supplements.  In 1998,
sales increased by 13 percent to 0.027 million tonnes.

     All non-fertilizer sales are included in domestic and offshore totals.


[Photo caption] Developing nations, where most world population growth is taking
place, are large importers of fertilizers and use them to produce a wide range
of crops.

<PAGE>   24
                                  SALES REPORT



HIGHER PHOSPHATE SALES


     With higher world demand for phosphates in 1998 and continued tight supply,
the  phosphate  market  remained in balance.  World trade was up an  estimated 2
percent over 1997 levels,  led by record sales of the many phosphate  fertilizer
products.

     World production and consumption of DAP rose by 3 percent, setting new
records.  China,  a  major  DAP  consumer  and  importer,  used  large  volumes.
Uncertainty about subsidy levels limited India's purchases for much of 1998, but
it re-entered the market late in the year and its total purchases exceeded those
of 1997.

     MGA production and consumption  worldwide grew by 2 percent in 1998.  India
is the single  largest  importer of MGA,  which it uses to make DAP, and in 1998
its purchases amounted to almost half of international  trade. Its one-year 1998
contract with its major suppliers matched the 1997 record volumes.

     PCS sold 4.627 million tonnes of phosphate products in 1998, 4 percent more
than in 1997. Almost  two-thirds of sales were domestic,  up from 62 percent the
previous year.  Following its policy of  emphasizing  the products with the best
margins,  the Company  limited its MGA exports and upgraded its phosphoric  acid
for sale in North America  where prices were better.  It had 23 percent of North
American phosphate sales,  including  one-third of all non-fertilizer  phosphate
sales.

PHOSPHATE PRODUCTS

     Solid and liquid  phosphates,  used primarily for  fertilizers,  made up 79
percent of PCS  phosphate  sales in 1998.  Feed  supplements  for  livestock and
poultry  made up 16 percent,  and the  remainder  was  industrial  and  purified
product and phosphate rock.

     SOLID PHOSPHATES: DAP sales in 1998 totalled 1.962 million tonnes, slightly
more than the 1.924  million  tonnes  sold the  previous  year.  Of that,  1.083
million tonnes were sold offshore  through  PhosChem,  whose DAP sales jumped 11
percent to 4.912  million  tonnes;  PCS supplied 22 percent of that.  Two-thirds
went to China, always the largest offshore buyer, and India,  Thailand and Japan
were other major  purchasers.  Pakistan's  purchasing  patterns affect world DAP
trade and it returned  strongly to the market in 1998,  including  some  tonnage
from PhosChem.  Vietnam, another sizable importer, also returned strongly to the
market. Offshore prices were up 3 percent over 1997.

     PCS sold 0.879 million tonnes of DAP domestically,  8 percent more than 
in 1997 and 45 percent of total DAP sales. Domestic prices were similar to 1997.

     LIQUID  PHOSPHATES:  Sales of liquid  phosphate  products  continued  their
annual rise to total 1.684 million tonnes,  13 percent more than 1997, which had
been a  20-percent  increase  over the  previous  year.  All the increase was in
domestic sales, which were up 18 percent.

     Superphosphoric  acid, which is used in conservation  tillage systems,  was
the major domestic  product,  comprising  half of liquid sales.  Domestic prices
climbed  through  spring and summer,  with the  average  price for the year up 3
percent.

[CHART] PCS customers vary by both geography and end use.

[Photo caption] Nitrogen fertilizers are the first fertilizers US farmers buy,
the most in demand and the fastest-growing in use.


<PAGE>   25
                                       21



     Amber MGA was the major  export  product.  PCS  supplied  71 percent of the
0.503 million tonnes of MGA shipped by PhosChem. The association's sales were up
by 19 percent,  with India,  Australia  and Brazil the biggest  markets.  Liquid
prices rose through 1998, reflecting strong sales, for a year-over-year increase
of 7 percent.

     Phosphate  Rock:  In keeping with the PCS policy of retaining its phosphate
rock for its own production, sales were limited to 0.009 million tonnes, just 30
percent of 1997 sales.

     Feed  Supplements:   PCS  sold  0.747  million  tonnes  of  phosphate  feed
supplements,  almost  identical to 1997.  Half of that was  Monocal,  with Dical
amounting  to 27  percent,  DFP 21  percent,  and  feedgrade  MAP  and  DAP  the
remainder.  Eighty-seven percent of sales were domestic, and prices were similar
to 1997.

     In  offshore  markets,  Asian  demand  was down due to the  effect of local
economic problems on demand for meat, but new markets in Chile, Peru and Vietnam
offset this  decline.  Offshore  prices were down 9 percent.  When  offshore and
domestic markets are taken together, feed supplement prices were flat over 1997.

     Liquid  products  sold to the feed  market,  and  included in total  liquid
phosphate sales,  amounted to 0.194 million tonnes.  When all phosphates sold to
the feed  market are  considered  together,  both  volumes  and prices were flat
compared to 1997.

     Industrial  Products:  In a joint venture with Albright & Wilson  Americas,
Aurora  produces  both  food-grade  acid  and  technical  grade  for  industrial
processes and products.  Total sales involved were 0.225 million tonnes in 1998,
which are included in other phosphate sales.  Additional phosphate products sold
for  industrial  use, also included in other  phosphate  sales,  totalled  0.213
million  tonnes.  Most of this came from Geismar,  which sells  phosphoric  acid
under  contract  to  Rhodia,  Inc.  as  a  feedstock  for  its  food-grade  acid
purification plant located beside the Geismar plant.

     Sales volumes of all phosphates sold for industrial use were up 13 percent,
while prices fell 7 percent.

[CHART] The US nitrogen production was consumed in the US. About 85 percent of
ammonia from Trinidad went to the US market, mostly to DAP producers.

NITROGEN SUPPORTED BY INDUSTRIAL PRODUCTS

     PCS benefited from its wide range of nitrogen  industrial products in 1998,
when ammonia supply continued to outpace demand with a damaging effect on prices
for nitrogen fertilizers.

     World  consumption of ammonia for both  agriculture  and industry grew by 2
percent in 1998. Still, the nitrogen market struggled  throughout the year, with
trade and prices down compared to 1997.

     Along with the excess  supply of  ammonia,  China's  absence  from the urea
market -- where  traditionally  it has been a major purchaser -- affected prices
and profits for producers.  China's ammonia  production was up by an estimated 2
million tonnes, which was upgraded into urea for its own use. Ammonia production
was also higher in the United States, India,

                                    [PHOTO]

<PAGE>   26
                                  SALES REPORT



     Trinidad and the Middle East, after new supply came on stream.  Consumption
of ammonia  rose in China by  approximately  2 million  tonnes.  It also rose in
India, in the Middle East where it was converted to urea for export,  and in the
US where it was used to make DAP for export. The FSU cut production in 1998, and
its consumption fell.

     Although  prices were  influenced  by the  oversupply  of ammonia,  PCS was
partially  sheltered  by its  wealth of  industrial  products.  In 1998,  it had
approximately 28 percent of the industrial nitrogen market in North America, and
18 percent of the total nitrogen market.

     NITROGEN PRODUCTS

     PCS sold 6.679 million tonnes of nitrogen  products,  both manufactured and
purchased, in 1998, 11 percent more than in its 10 months as a nitrogen producer
in 1997.  Ninety-four  percent of sales  were  domestic.  Sales of  manufactured
products were up by 25 percent, while resale of purchased product was down by 51
percent. Most of this was ammonia, which the Company purchases from producers in
the Former Soviet Union and other countries.  In 1998 it chose to decrease these
purchases by 49 percent and use its own ammonia.

     Sales of ammonia,  which is used as a fertilizer and as feedstock for other
nitrogen products,  totalled 1.496 million tonnes, 41 percent more than in 1997.
Almost 90 percent was domestic.

     Urea  sales  were  up 16  percent  to  1.425  million  tonnes.  Urea is the
Company's  largest  export  nitrogen  product,  and 18  percent  of  sales  went
offshore, all from Trinidad.

     Nitrogen  solutions again represented the largest sales product,  and 2.164
million tonnes were sold, 26 percent more than in 1997. All sales were domestic;
North American farmers' increasing use of conservation  tillage methods and site
specific fertilizer applications raises demand for nitrogen solutions, which are
well-suited to these methods.

     Other nitrogen sales of 1.040 million tonnes included ammonium nitrate,  up
11 percent to 0.465  million  tonnes,  and nitric  acid,  up 35 percent to 0.417
million  tonnes.  All  ammonium  nitrate  and almost all nitric acid was sold in
North America.

     Included in total 1998 sales of nitrogen products were 2.254 million tonnes
of higher-margin  industrial  nitrogen  products,  30 percent more than in 1997.
Much of the increase was due to higher contract volumes influenced by the strong
US economy, particularly housing starts.

     Also included in total 1998 sales were nitrogen feed sales of 0.074 million
tonnes, 86 percent of it urea prills and the rest urea solutions.  Total volumes
were up 2 percent.  Almost all sales were domestic,  but small volumes were sold
to Mexico for the first time.

     Prices  for all  nitrogen  products  were  down  in  1998,  affected  by an
oversupply of ammonia,  China's absence from the market and lower prices for FSU
product due to a devalued ruble and lower production costs.  Fertilizer products
were hardest hit, falling

[Photo caption] Urea is an important ingredient in high-quality dyes for
textiles.


<PAGE>   27
                                       23



     28 percent from 1997 levels.  Prices for industrial  products were affected
by the general  nitrogen  market and fell 14 percent,  but remained  higher than
fertilizer  prices  throughout the year.  Ammonia  prices  offshore were down 22
percent and urea prices 18 percent.  The fall in domestic  prices  ranged from 4
percent for ammonium nitrate to 25 percent for ammonia.

     In 1998,  PCS signed an agreement with Melamine  Chemicals,  which produces
melamine  for  surface  coating  and  laminating  resins  used  in  countertops,
cabinets, floors, automotive and appliance paints, and other products. When this
agreement is concluded,  PCS will provide up to 113,000  tonnes per year of urea
liquor  to  Melamine  Chemicals,  which  plans to build a plant  beside  the PCS
facility  at  Memphis.  Construction  is  expected  to begin  in 1999.  When the
Melamine plant is completed, a large majority of the PCS Memphis production will
be used for industrial purposes.

     Several  other  large  customers  also  have  plants  adjacent  to  Company
facilities and connected by convenient pipeline. PCS signed major contracts with
six other industrial customers for nitric acid, ammonia and urea.

     OUTLOOK FOR 1999 AND BEYOND

     While some national economies  floundered in 1998, world population grew by
about 80 million with a corresponding  increase in the demand for food.  Meeting
that demand from the world's  declining acreage of arable land requires balanced
fertilization;  without it, there is no hope of feeding  billions of people with
ever-increasing  food  requirements and desire for better and more varied diets,
particularly  meat. At the same time, grain stocks are in delicate balance.  One
bad crop year can put the global food supply at risk.

     PCS is well-equipped to help the world meet these  challenges.  It is first
and  foremost  a  fertilizer  company  and  a  leading  exporter  to  developing
countries,  where  fertilizer  consumption is growing at three to four times the
rate in the developed world.  These countries,  where population is rising and a
growing middle class insists on better food,  increasingly recognize the role of
fertilizer in helping to fulfil the new food demands.  They are  emphasizing the
need to apply  adequate  amounts  of  fertilizer  and to  better  balance  their
application of the three nutrients.

     China, the world's most populous nation,  is the largest user of fertilizer
so its buying patterns are always important and influential.  Potash and DAP are
key  fertilizer  imports  for  China,  and its demand  for them is  expected  to
continue  to be strong in 1999.  China has made  essentially  no urea  purchases
since  mid-1997,  with a  lowering  effect  on  world  nitrogen  pricing.  It is
producing more of its nitrogen needs. Its return to the urea market would affect
both sales and prices  positively,  but there is no  indication  when that might
occur.

     India's  fertilizer  purchases depend on its subsidy levels,  and producers
have been urging the government to set levels early for the new fiscal year.

[Photo caption] The people in developing nations are demanding better diets with
more variety and better quality of food, and fertilizer is crucial to meeting
those needs.

<PAGE>   28
                                  SALES REPORT



Large-volume  purchases  of  potash  and DAP are expected for 1999. Brazil,  the
third of the Big Three  offshore  potash  markets,  is  expected  to continue to
import  large  volumes  of  potash,  which is  critical  for the  cash  crops of
soybeans,  coffee,  citrus  fruits  and sugar  cane that  provide  vital  export
revenues.

     North American  fertilizer  demand is expected to be higher in 1999 than in
1998, with a strong spring season likely. The US government is providing farmers
with $6  billion  in  emergency  spending  for  agriculture  in  support  of low
commodity prices and in disaster relief.  Net cash farm income is expected to be
the second highest on record.  Total acreage  planted is expected to be much the
same as in 1998.

     In concert with supply, world trade affects prices. Estimates of changes in
1998 trade, compared to 1997, vary among the nutrients: Phosphate trade was up 2
percent,  potash trade down 4 percent after a very strong 1997 and nitrogen down
4 percent. In all three nutrients, PCS maintained its market share.

     The FSU is an important  fertilizer  producer and its potash and  phosphate
companies are increasingly  aware of the law of supply and demand and its effect
on  profitability.  Potash  producers  there  are  operating  at close to actual
current capacity but are constrained by  infrastructure  limitations.  They sell
through  International  Potash Company,  whose  successful  joint agreement with
Canpotex in Malaysia is continuing.  Infrastructure  constraints also affect the
FSU phosphate industry, which is much smaller since privatization.  The nitrogen
situation is different. FSU ammonia production is influenced by local conditions
unrelated  to world  demand,  and benefits  from a devalued  ruble and lower gas
prices. Ammonia and urea exports are down.

[CHART] World grain inventories remain below the stocks-to-use ratio which the
FAO considers the minimum needed to safeguard food security.

                                    [PHOTO]
<PAGE>   29
                                       25



Efforts  are  being  made  to  increase  domestic  fertilizer  use,  which  will
affect the world supply/demand  balance.  Russia's 1998 crop was a disaster, and
the government has announced measures to increase  fertilizer  consumption there
in 1999.

     Demand is expected to grow in both domestic and offshore  potash markets in
1999,  and prices should remain firm with continued  strong trade.  Increases in
world  phosphoric acid capacity should be matched by increased  utilization,  as
phosphate trade is expected to remain strong,  keeping  supply/demand  tight and
prices  firm.  Nitrogen  exports  are  forecast  to  increase in 1999 but excess
capacity  worldwide will continue to keep prices down, unless there are cutbacks
in production. The nitrogen business has much upside potential and can easily be
stimulated by unexpected events such as plant outages and closures.

     PCS anticipates  continued strong demand for its industrial  products,  and
expects to benefit from contracts  with new customers  scheduled to be completed
in 1999. It will continue to shift its phosphate and nitrogen from fertilizer to
industrial  products  and feed  supplements.  Its  expansion  at Geismar  with a
contract  customer  will  enable the  Company to  continue  to grow its sales of
nitric  acid,  the  highest-margin   nitrogen  product.   Industrial  prices  in
phosphates  should be similar to 1998,  and in nitrogen they should  continue to
demand a premium over fertilizer.  Demand for the PCS livestock and poultry feed
supplements  is expected  to be stable in 1999,  but the  difficulties  in Asian
markets -- where meat consumption had been growing -- will likely affect prices.

     Economic  and  political  events  within  and  between  nations  may  cause
temporary  problems for  fertilizer  companies  in the short run, but  long-term
fertilizer prospects continue to be promising because of rising world population
and demand for food.  Rather than a smooth upward sweep,  demand for  fertilizer
has always snaked around a rising trend line.

INDICATORS TO WATCH

*  US acreage planted
*  Subsidies in India
*  Reappearance of China in the urea market
*  Potash imports in Brazil
*  Fertilizer exports from the FSU
*  Nitrogen plant outages and closures

[Photo caption] In the US, nitrogen and phosphates make up more than 90 percent
of the fertilizer used by wheat, and most is applied before or at planting.

<PAGE>   30


PCS STEWARDSHIP

 WHAT DOES STEWARDSHIP MEAN?

   Long-term  service  awards for  employees  and  scholarships  for  employees'
children;  contributions  of time and money to  community  events;  attention to
corporate  governance;  a responsible  corporate  environmental  policy and high
standards of environmental care; treating safety as a priority.

[Photo caption] Restored or created wetlands at Aurora add beauty to the area,
attracting wildlife and wading birds such as this egret.
<PAGE>   31
                                       27



FULFILLING ITS RESPONSIBILITIES

     Almost two-thirds of the PCS workforce of 5,744 at December 31, 1998 worked
in the United States,  with 29 percent in Canada and 7 percent in Trinidad.  The
annual payroll is approximately $248 million.

     The  Company  recognized  and  rewarded  the  long-term  commitment  of its
employees by presenting  955 service  awards in 1998.  Forty  scholarships  were
awarded  to sons and  daughters  of  employees  for  post-secondary  study -- 12
Chairman's Awards and 28 Divisional Awards.

     SHARING IN ITS COMMUNITY

     PCS  responds  to  requests  to  support  a wide  range  of  causes  in the
communities in which it operates,  and individual operations support their local
communities with donations and employee  participation  in many activities.  The
Company  matches  employees'  personal  donations  to their  favorite  charities
through its longstanding Matching Gift Program.

     In  the  last  three  years,  PCS  has  contributed  CDN$5  million  to the
University of Saskatchewan First and Best Campaign. In response,  the University
in 1998  established  the  Chuck  and  Norma  Childers  Chair  for  Saskatchewan
Enterprise in the College of Commerce.  The Company is also in the third year of
its five-year  commitment to the North  Carolina  Museum of Natural  Sciences in
Raleigh.

     As usual,  PCS  corporate  office  employees  and those at Cory,  Allan and
Patience Lake raised their  contribution to the Saskatoon  United Way and it was
matched  by  the  Company.   Employees   again   received  the  Gold  Award  for
participation  and the Company  its  seventh  Gold  Corporate  Award.  PCS Allan
received  the Quantum  Leap Award for its  significant  increase  in  donations.
Employees at White Springs  increased their  contributions  to the United Way of
Suwannee  Valley by 6  percent,  which,  matched by the  Company,  made up about
one-third of the funds raised.  Employees at PCS Nitrogen contributed 19 percent
more to the Memphis United Way than in 1997.

     A donation  from White  Springs  gave a major boost to Heritage  Village in
Jasper,  Florida  by  making  possible  the  acquisition  of land on which  this
collection of buildings and exhibits  depicting  early North Florida  history is
located.  White Springs  contributed to several  environmental  and  educational
organizations  in Florida and received the Florida  Commissioner  of Education's
Business  Recognition Award for the third straight year for its contributions to
schools.  It also received a Governor's  Business Leadership Award for 1998, one
of only nine Florida companies to do so.

     The  75  employees  at  Aurora  who  participated  in the  American  Cancer
Society's 24-hour Relay for Life raised more money than all other  participating
companies or groups and received the Excalibur  Award,  the Society's top award.
Aurora  successfully  completed its 23rd annual  Salvation Army  campaign,  with
increased  donations,  and  many  employees  volunteered  to teach  Safelife  in
elementary schools.

     A $10,000  contribution by PCS Nitrogen to the Memphis Zoo was commemorated
by two  permanent  in-ground  plaques in the zoo's Once Upon a Farm area,  which
includes growing plots, farm animals and an interactive historical  agricultural
display.

     Employees  at  Weeping  Water  donated  their  time to give  more  than 450
visitors to the  community's  annual  Limestone  Days tours of the PCS limestone
mine as  well  as  safety  training.  Limestone  Days  recognizes  the  economic
importance  of limestone to the local area. Weeping Water uses its limestone  to
make the feed supplements Dical and Monocal.

     Employees at Clinton  made a Christmas  Caring  Tree,  complete  with Santa
Claus,  for  children  at the  day-care  centre at its partner  school,  Lincoln
Alternative High School, which is operated within the public school system.

CORPORATE GOVERNANCE

     The  responsibility  for  corporate  governance  rests  with  the  Board of
Directors of PCS,  which has the duty to direct the  management  of the business
and affairs of the Company.

     Having regard to the guidelines published by the Toronto and Montreal stock
exchanges,  PCS  reports  annually  with  respect  to its  corporate  governance
practices.  For a complete review of those  practices,  see the section entitled
"Corporate Governance" in the Company's current proxy circular.

     The Board of  Directors  is made up of 15  members,  13 of whom are outside
directors. No significant shareholders are represented on the Board.



<PAGE>   32
                                  STEWARDSHIP



     Each of the four  committees of the Board plays a  significant  role in the
discharge of Board duties and obligations.  Each committee (audit, compensation,
environmental  affairs and executive) is composed entirely of outside directors,
except the executive  committee which is chaired by the Chief Executive Officer.
Each committee is empowered to retain outside advisors. Individual directors may
engage  outside  advisors at the  Company's  expense upon  authorization  of the
executive committee.


     The Company has adopted a corporate  disclosure  policy which calls for the
timely public  dissemination  of material  information.  Shareholder  questions,
comments  and  concerns  may be made to the  Senior  Vice  President,  Corporate
Relations,  who is responsible for  implementing the disclosure  policy,  to the
Corporate Secretary or to the Company's transfer agent.

PRESERVING THE ENVIRONMENT

     Farmers' desire to maintain their land and water is shared by the companies
that  provide  the  nutrients  which help keep that land  fertile and enable the
effective use of water.  Conservation tillage systems are now used on 37 percent
of US cropland,  and PCS is a leader in producing fertilizers for those systems.
It shares in efforts by  fertilizer  companies to  encourage  farmers to use the
right amounts at the optimum time for each crop, and to balance nutrient use.

     PCS  takes  seriously  its  responsibility  to  fulfil  the  terms  of  the
environmental  permits and applicable federal, provincial, state and local  laws
that  govern  air  emissions,  waste  water  discharges, land use and solid  and
hazardous  waste  management  at  all  its  operations.  It  must, according  to
corporate   environmental   policy,   manage   its  operations  responsibly   to
safeguard  the  natural  resources  related  to  or affected by its  activities.
Each  production  unit  must  work  diligently  to  minimize potential risks  to
the  environment  and to comply with environmental legislation and  regulations.
The Board's  environmental  affairs committee reviews all audit reports.

     In-depth  information on PCS  environmental  activities is available on its
website at www.potashcorp.com.

POTASH AND ITS ENVIRONMENT

     The Director,  Environmental  Affairs for potash,  audited all divisions in
1998; each  environmental  management system met the objective of minimizing the
risk  of  serious   environmental   degradation.   All   divisions   except  the
newly-acquired  Cassidy Lake were  substantially  compliant  with all applicable
environmental  regulations  and  corporate  environmental  policy.  Cassidy Lake
quickly corrected all significant cases of non-compliance.

     An  impervious  cutoff  wall five  kilometers  long and 20 meters  deep was
completed  at  Rocanville,   to  prevent  sub-surface  seepage  from  the  waste
management area. The largest such installation in Canada, this wall incorporates
design features developed through research sponsored by the Saskatchewan  Potash
Producers Association.

     A buried drain was installed at Cassidy Lake to eliminate  the  possibility
of brine seepage entering the Hammond River.  The division  received a Watershed
Management Partner Award from the Hammond River Angling  Association.  The State
of Utah issued final approval for Moab's operating and reclamation plans.

     PCS is supporting  environmental research at the University of Saskatchewan
investigating the potential for movement of fluids through groundwater barriers.
Early results in this multi-year  project  indicate that these barriers are more
impermeable  than  had been  thought.  An  internal  research  program  is being
organized to develop  better  methods for disposing of the insoluble  portion of
potash refinery wastes.

     The  decommissioning  and  reclamation  plan  for  each  Saskatchewan  mine
submitted  by PCS  Potash to the  Saskatchewan  Department  of  Environment  and
Resource  Management  was accepted in its technical  aspects.  Some  discussions
continue between producers and Department officials.

PHOSPHATE AND ITS ENVIRONMENT

     In 1998, internal audits were conducted at all phosphate facilities,  and a
few issues were  identified and  corrected.  Major capital  projects  included a
conversion in the Aurora  phosphoric acid plant to discharge  gypsum directly to
the gypsum/clay  blend system and improvements to White Springs' pond system and
spill prevention systems.



[CHART] PCS operations steadily improve their facilities for controlling
pollution, managing wastes and maintaining air quality.
<PAGE>   33
                                       29



     Under  agreement,  the Florida Game and Fresh Water Fish  Commission  began
managing a reclaimed  lake at White Springs for public  fishing.  The Governor's
Council for Sustainable Florida is working with White Springs as a test case for
application  of  draft  Sustainable   Florida  Standards  for  businesses  which
integrate environmental protection,  economic development,  public participation
and community quality of life.

     Environmental  projects at the Company's feed plants included  installation
of new fugitive dust collection systems at Weeping Water and Marseilles.

     Land  Reclamation:  PCS leadership in this area was recognized  when the US
Army Corps of Engineers  officially agreed in 1998 that 429 acres of restored or
created  wetlands  at  Aurora  met the  success  criteria  and could be used for
mitigation  against  future  wetland  impacts.  Approximately  6,000  trees were
planted in one project and a multi-year  monitoring  program under way elsewhere
focused on water  table  levels and  successful  planted  vegetation  near three
creeks.

     Part of White  Springs'  reclaimed  lands houses a commercial  recreational
hunting and fishing  business which the Company  considers an endorsement of the
wildlife value of its lands. The Florida Department of Environmental  Protection
gave this business an award for innovative use of reclaimed  lands,  recognizing
White Springs in the presentation.

NITROGEN AND ITS ENVIRONMENT

     In 1998,  three  nitrogen  facilities  and five terminals were audited by a
PCS/consultant  team and received  favorable  reports.  A federal  Environmental
Protection  Agency audit of LaPlatte and three state audits of Augusta  resulted
in no citations,  and no violations were found in a waste water audit of Lima by
the Ohio Environmental  Protection Agency. Augusta and Clinton had no reportable
quantity emissions.

     Lima won the Ohio Chemical Council 1998 pollution prevention award. Geismar
received  a  certificate  for  participation  in  the  Louisiana   Environmental
Leadership Pollution  Prevention Program,  implementing  environmental  projects
that go beyond regulatory compliance.

     Major capital  improvements  included  installation  of an ammonia  process
flare for all ammonia relief valves at Geismar,  and a waste water  concentrator
which allows  recovery of ammonia from its waste water system.  Lima installed a
vent  scrubber  for  the  urea  granulator;   LaPlatte   implemented   secondary
containment for all fertilizer storage.

     Geismar has an environmental  research project to remove uranium and radium
and isolate  hydrofluoric  and  phosphoric  acid from the phosphate  plant waste
stream. A pilot project was scheduled for early 1999. Clinton is planting poplar
trees to remove nitrates from ground water.

[Photo caption] Water lilies, reeds, shrubs and trees combine into peaceful
beauty in this restored wetland at Aurora, which with White Springs leads in US
land reclamation achievements.

<PAGE>   34
                                  STEWARDSHIP



EMPHASIZING SAFETY IN ALL ITS OPERATIONS

     Safety is a top priority and a constant focus at all PCS  enterprises,  and
operations  throughout the Company have achieved  enviable safety  records.  For
example,  in 1998,  employees  at Aurora  stacked  up 2 million,  3 million  and
finally 4 million  hours  without a  lost-time  injury.  Individual  departments
within various facilities have accumulated  exceptional safety records: 30 years
in Aurora's  Technical  Services,  29 years in Lima's Nitrogen  Laboratory.  The
Company has  created  the  President's  Award for 1 million  hours  worked by an
entire  operation  without a lost-time  injury,  and the Chairman's  Award for 2
million,  3 million and 4 million hours. All awards are presented  personally by
Chairman and CEO Charles E. Childers.

     Safety  achievements  are honored  outside the Company,  too. In 1998,  New
Brunswick and Lanigan each received a John T. Ryan "special  award  certificate"
for outstanding  achievement in safe production in 1997. The John T. Ryan awards
are the awards in Canada for mining safety,  and this is Lanigan's  sixth award.
New Brunswick also received the New Brunswick Mining Association's award for the
lowest  frequency  and  severity  of  lost-time  accidents  of all  mines in the
province in 1997.

                        Recent Potash Safety Milestones
                        Time without a lost-time injury

          Lanigan SK            3 years on August 1, 1998,
                                2 million hours on February 28, 1999
          Allan SK              4 years on October 22, 1998
          New Brunswick NB      4 years on June 8, 1998
                                3 million hours on January 12, 1999
          Moab UT               3 years on February 7, 1998    

     In  1998,  Clinton  received  its  fifth  Iowa  Safety  Council  Award  for
Outstanding  Achievement in Accident Prevention.  LaPlatte received the Award of
Honor with distinction with six gold stars from the Safety and Health Council of
Greater Omaha,  Nebraska,  as well as its Seat Belt Honor Award.  Wilmington was
presented with its third North Carolina Department of Safety Award.

     PCS Nitrogen,  Aurora and White Springs  received their second  consecutive
Thoroughbred  Chemical  Safety  Awards from  Norfolk  Southern  Corporation  for
shipping  more than 1,000  carloads of  hazardous  materials  in 1997  without a
shipper-caused   accident.

                       Recent Phosphate Safety Milestones
                        Time without a lost-time injury

          Aurora NC             4 million hours on October 13, 1998
          White Springs FL      1 million hours on January 18, 1999
          Davenport IA          19 years on September 13, 1998
          Kinston NC            5 years on December 1, 1998

     The  entire  PCS  Phosphate  operation  reduced  its recordable injuries by
38 percent in 1998,  achieving an Occupational Safety and Health Administration
(OSHA) incidence rate of 1.61. Safety Training Observation Program  (STOP)
training  was  completed  for  all  employees  at  Aurora  and contractors
working there exceeded 1 million hours without a lost-time  injury. White
Springs  completed an upgrade of its contractor safety program and trained local
volunteer  fire  department  personnel  in hazardous  material  emergency
response.

     PCS Nitrogen improved its overall safety  performance in 1998, with an OSHA
recordable  rate of 1.3 and three less  recordable  injuries  than in 1997.  The
Behavioral Accident Prevention Process was fully implemented.  Augusta completed
the year without one OSHA recordable injury, and Lima retained its OSHA VPP Star
status.  Memphis hosted a Hazardous  Material  training  demonstration  with the
Company  training car for the Texas  Agricultural  Association.  Clinton trained
more than 100 local firemen, emergency responders and fertilizer dealers in safe
handling of anhydrous ammonia. Hurricane procedures were included in new health,
safety and environmental procedures at Trinidad.  Employees who built the fourth
ammonia  plant in Trinidad  worked more than 3 million hours without a lost-time
injury.

                       Recent Nitrogen Safety Milestones
                        Time without a lost-time injury

          Trinidad              2 million hours on January 11, 1999
          Geismar LA            4 million hours on December 18, 1998

     PCS  potash  operations  excel  in  the  mine  rescue  competitions  in the
provinces in which they operate.  For the second  consecutive year,  Lanigan was
overall winner for soft rock mines in the  Saskatchewan  Provincial  Mine Rescue
Competition,  with Rocanville runner-up. New Brunswick was overall winner at the
19th annual New Brunswick Mine Rescue Competition.  Lanigan was runner-up in the
18th  annual  PCS  Fireman's  Rodeo,  which  involves  all PCS  mines  and  fire
departments in two nearby communities  competing in six rodeo events that demand
a range of firefighting  skills. It was won in 1998 by the Town of Lanigan team,
which includes several PCS employees.



<PAGE>   35


                              F I N A N C I A L S


                                    [PHOTO]


                                   [CAPTION]

     Corn is the largest user of fertilizer in the US, accounting for more than
40 percent of all application and about the same percentage of each of the three
major nutrients.
<PAGE>   36
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                                1998 VERSUS 1997

With the exception of purchased product, nitrogen data for 1997 is only for the
period subsequent to the acquisition of Arcadian on March 6, 1997. Phosphate
data for 1997 includes phosphate produced by the acquired Geismar operation.

<TABLE>
<CAPTION>
OVERVIEW

($000'S)                                                   1998           1997  INCREASE (DECREASE)      % CHANGE
Net Sales
<S>                                                <C>              <C>                 <C>                   <C>
  North American                                   $  1,641,376     $1,665,140          $  (23,764)           (1)
  Offshore                                              666,387        660,789               5,598             1
                                                   $  2,307,763     $2,325,929          $  (18,166)           (1)
Gross Margin                                       $    609,347     $  585,171          $   24,176             4
Operating Income                                   $    446,056     $  447,640          $   (1,584)            0
Net Income                                         $    261,003     $  297,138          $  (36,135)          (12)
Earnings per Share (dollars)                       $       4.82     $     5.68          $    (0.86)          (15)
</TABLE>


     Higher net sales revenue in potash and phosphate - $41.3 million and $57.4
million, respectively - was more than offset by lower nitrogen net sales revenue
of $116.9 million, resulting in a decrease of $18.2 million in PCS net sales
revenue.

     North American net sales revenue represented 71 percent (1997 - 72 percent)
of total net sales revenue and offshore sales represented 29 percent (1997 - 28
percent).

     Gross margin for potash products was $316.3 million (an increase of $58.7
million over 1997); for phosphate products $228.2 million (an increase of $33.9
million); and for nitrogen products $64.8 million (a decrease of $68.4 million
from 1997).

     The decrease in net income of $36.1 million compared to 1997 is
attributable to: increases in selling and administrative expenses ($16.3
million), provincial mining and other taxes ($9.8 million) and income taxes
($48.4 million) which were partially offset by a $24.2-million increase in gross
margin and a $13.9-million reduction in interest expense.


[CHART] The strongest phosphate sales in its history and potash prices 14
percent higher than in 1997 helped make 1998 a year with record gross margin.

<TABLE>
<CAPTION>
POTASH REVENUE
                        1998 SALES          1997 SALES               $000'S             TONNES (000'S)
                               TONNES              TONNES    INCREASE                INCREASE
                    $000'S    (000'S)   $000'S    (000'S)   (DECREASE)     % CHANGE (DECREASE)   % CHANGE
<S>               <C>          <C>    <C>          <C>        <C>         <C>          <C>       <C>
North American    $227,586     2,702  $210,240     3,017      $17,346          8       (315)        (10)
Offshore           317,905     3,581   293,927     3,623       23,978          8        (42)         (1)
                 ----------------------------------------------------------------------------------------
                  $545,491     6,283  $504,167     6,640      $41,324          8       (357)         (5)
                 ----------------------------------------------------------------------------------------
</TABLE>

     Gross margin for potash products was $316.3 million (1997 - $257.6 million)
or 52 percent (1997 - 44 percent) of consolidated gross margin.

     Potash prices in the offshore market rose early in the year with increased
contract prices and then stabilized and rose again in the last half, resulting
in a 9 percent increase on a year-over-year basis. The higher prices realized
were primarily due to higher contract prices with Japan, South Korea and
Australia and increased prices in China and Brazil.

     North American potash prices increased in the last half of 1997 and first
half of 1998 due to tighter

[CHART] Firm supply and demand factors resulted in higher potash prices
throughout 1998.


<PAGE>   37
                                       33



supply, then stabilized in the last two quarters, ending the year 21 percent
higher on a year-over-year basis.

     The currency devaluations and financial difficulties in Asian countries did
not significantly affect offshore potash sales volumes. Canpotex sales volumes
to Asia decreased by 6 percent from 1997, which was partially offset by a
21-percent increase in sales to Latin America (primarily Brazil). Overall,
offshore sales volumes ended the year down only marginally from 1997.

     North American sales volumes declined 10 percent from 1997 levels,
primarily due to abnormally high sales volumes in the last half of that year. In
the North American market, the 2.702 million tonnes sales volumes for 1998 were
sourced as follows: 2.529 million tonnes (1997 - 2.813 million tonnes) came from
Saskatchewan, 0.116 million tonnes (1997 - 0.122 million tonnes) from New
Brunswick and 0.057 million tonnes (1997 - 0.082 million tonnes) from Utah.


[CHART] Potash revenue was 8 percent higher than in 1997, with 58 percent
provided by offshore sales.


     North American net sales revenue from potash operations represented 42
percent (1997 - 42 percent) of the Company's potash net sales revenue. Higher
North American potash prices resulted in a $39.4-million increase in North
American potash net sales revenue over 1997. This was partially offset by a
reduction in net sales revenue of $22.1 million due to a 10-percent reduction in
sales volumes, resulting in an overall increase in North American net sales
revenue of $17.3 million.

     Offshore net sales revenue from potash operations represented 58 percent
(1997 - 58 percent) of the Company's potash net sales revenue. Higher offshore
prices resulted in a $28.2-million increase in offshore potash net sales
revenue. This was partially offset by a reduction in net sales revenue of $4.2
million due to reduced sales volumes, resulting in an overall increase in
offshore net sales revenue of $24.0 million. In the offshore market, 2.966
million tonnes were sold through Canpotex and the remaining 0.615 million tonnes
were produced by PCS New Brunswick and sold and delivered by PCS Sales.

PHOSPHATE REVENUE
<TABLE>
<CAPTION>
                          1998 SALES            1997 SALES             $000's               TONNES (000's)
                                   TONNES               TONNES    INCREASE       %        INCREASE       %
                        $000's    (000's)    $000's    (000's)   (DECREASE)    CHANGE     (DECREASE)   CHANGE
<S>                    <C>         <C>      <C>         <C>      <C>             <C>         <C>         <C> 
Liquids              $  365,006    1,684    $309,063    1,493    $55,943         18          191         13
Solids                  374,525    1,962     362,625    1,924     11,900          3           38          2
Feed supplements        187,557      747     191,016      752     (3,459)        (2)          (5)        (1)
Industrial products      83,210      225      89,588      235     (6,378)        (7)         (10)        (4)
Phosphate rock              691        9       1,317       30       (626)       (48)         (21)       (70)
                     ----------------------------------------------------------------------------------------
                     $1,010,989    4,627    $953,609    4,434    $57,380          6          193          4
                     ========================================================================================
North American       $  713,584    3,020    $656,884    2,769    $56,700          9          251          9
Offshore                297,405    1,607     296,725    1,665        680          0          (58)        (3)
                     ----------------------------------------------------------------------------------------
                     $1,010,989    4,627    $953,609    4,434    $57,380          6          193          4
                     ========================================================================================
</TABLE>

     Gross margin for phosphate was $228.2 million (1997 - $194.4 million) or 37
percent (1997 - 33 percent) of consolidated gross margin.

     With the exception of industrial products, phosphate prices in the domestic
 market increased or remained constant compared to 1997. Prices for solid
 phosphates and feed supplements were flat while liquid phosphate prices
 increased by 3 percent when compared to 1997. Industrial prices fell by 3
 percent over the same period.

     Phosphate prices in the offshore markets (except for feed supplements)
improved during 1998. Liquid phosphate prices were up 7 percent on a
year-over-year basis and solid phosphate prices 3 percent. These increases were
partially due to higher prices realized in Brazil. The price of feed
supplements, affected by the currency devaluations and financial difficulties in
Asian countries, decreased by 9 percent on a year-over-year basis.

     Overall, North American phosphate sales volumes increased by 9 percent.
Liquid and solid phosphate sales volumes increased by 18 percent and 8 percent,
respectively. Sales volumes of industrial products decreased by 4 percent due,
in part, to a strike at a significant customer's facility which reduced sales.
Feed supplements sales volumes were down marginally.

     Offshore phosphate sales volumes declined 3 percent on an overall basis as
the Company chose to orient its P2O5 production to the North American market
where margins


[CHART] PCS sold more liquid and solid phosphates in 1998, at higher prices.



<PAGE>   38
                                   FINANCIALS


were better. PhosChem had good sales volumes in 1998; sales volumes to Asia
increased by 13 percent and to Latin America by 12 percent. The Company's liquid
and solid sales volumes decreased by 1 percent and 3 percent, respectively,
compared to 1997. Feed supplement sales volumes were flat compared to 1997.

     For 1998, North American phosphate net sales revenue accounted for 71
percent (1997 - 69 percent) of total phosphate net sales revenue. Offshore sales
accounted for 29 percent (1997 - 31 percent) of total phosphate net sales
revenue and 35 percent (1997 - 38 percent) of volumes. In 1998, 64 percent (1997
- 63 percent) of the Company's total phosphate net sales revenue was earned from
phosphate fertilizer products which represented 70 percent (1997 - 70 percent)
of phosphate sales volumes and 58 percent (1997 - 46 percent) of gross margin.

<TABLE>
<CAPTION>
NITROGEN REVENUE
                             1998 SALES          1997 SALES               $000's             TONNES (000's)
                      ----------------------------------------------------------------------------------------
                                    TONNES              TONNES    INCREASE                INCREASE
                         $000's    (000's)    $000's   (000's)   (DECREASE)     % CHANGE (DECREASE)   % CHANGE
                      ----------------------------------------------------------------------------------------
<S>                    <C>          <C>    <C>          <C>        <C>         <C>          <C>       <C>
Ammonia                $194,369     1,496  $183,840     1,061    $  10,529          6        435          41 
Urea                    199,141     1,425   203,092     1,226       (3,951)        (2)       199          16 
Nitrogen solutions      163,014     2,164   161,149     1,719        1,865          1        445          26 
Other nitrogen
 products               129,775     1,040   118,472       894       11,303         10        146          16 
                      ----------------------------------------------------------------------------------------
                        686,299     6,125   666,553     4,900       19,746          3      1,225          25
Purchased products       64,984       554   201,600     1,138     (136,616)       (68)      (584)        (51)
                      ----------------------------------------------------------------------------------------
                       $751,283     6,679  $868,153     6,038    $(116,870)       (13)       641          11
                      ========================================================================================
North American         $700,206     6,261  $798,016     5,544    $ (97,810)       (12)       717          13   
Offshore                 51,077       418    70,137       494      (19,060)       (27)       (76)        (15) 
                      ----------------------------------------------------------------------------------------
                       $751,283     6,679  $868,153     6,038    $(116,870)       (13)       641          11 
                      ========================================================================================
</TABLE>

[CHART] Non-fertilizer products represented 44 percent of nitrogen net sales
        revenue and 35 percent of volumes.


     Gross margin for nitrogen products was $64.8 million (1997 - $133.2
million) or 11 percent (1997 - 23 percent) of consolidated gross margin.

     The continued absence of China from offshore urea markets and reduced cash
production costs for Former Soviet Union (FSU) producers due to lower gas prices
and currency weakness in the FSU countries led to significant declines in
offshore prices. Urea prices were down 18 percent and ammonia prices down 22
percent compared to 1997.

     Falling offshore nitrogen prices resulted in lower North American prices as
well. Prices were down as follows: urea 17 percent, ammonia 25 percent, nitrogen
solutions 20 percent, ammonium nitrates 4 percent and nitric acid 12 percent.

     The Company's offshore sales volumes of ammonia increased by 54 percent
which is explained by a full year's operation in 1998 as compared to 10 months
in 1997 and the addition of the new plant in Trinidad. Offshore sales volumes of
urea declined 28 percent as the Company chose to focus its sales on the North
American market where prices were stronger.

     In North America, sales of ammonia for fertilizer were slow but the strong
DAP market supported healthy ammonia sales to DAP producers as ammonia is a key
input for DAP. This contributed to a 41 percent increase in manufactured ammonia
sales volumes. When the new PCS facility in Trinidad came on stream, these
tonnes replaced product purchased by the Company, reducing total ammonia sales
volumes (purchased


[CHART] The strong offshore market helped raise DAP prices 3 percent above 1997
        levels.


[CHART] The effect of the world oversupply of ammonia on prices was tempered
        somewhat for PCS by its large industrial sales.

<PAGE>   39
                                       35



and manufactured) by 5 percent. Urea sales volumes increased 35 percent and
nitrogen solutions sales volumes increased 28 percent.

     The Company continued to sell a large portion of its North American
nitrogen production to the more stable industrial market. On a year-over-year
basis, nitrogen industrial prices fell by 14 percent compared to a 28-percent
decline for fertilizer. Non-fertilizer products represented 35 percent (1997 -
30 percent) of nitrogen sales volumes, 44 percent (1997 - 34 percent) of net
sales revenue and 100 percent (1997 -51 percent) of gross margin.

     North American net sales revenue accounted for 93 percent (1997 - 92
 percent) of total nitrogen net sales revenue.

<TABLE>
<CAPTION>
COST OF GOODS SOLD

                                                              1998        1997  INCREASE (DECREASE)          % CHANGE
<S>                                                          <C>         <C>                    <C>                <C>
Potash production (KCl) tonnage (000's)                      6,995       6,483                  512                 8
Phosphate production (P2O5) tonnage (000's)                  2,363       2,282                   81                 4
Nitrogen production (N) tonnage (000's)                      3,121       2,349                  772                33
</TABLE>



     Potash unit cost of sales decreased 2 percent in 1998 compared to 1997, due
primarily to higher production volumes and eight fewer shutdown weeks, which
were partially offset by water management costs at the New Brunswick division
and costs to transport Saskatchewan product to Cassidy Lake for processing.

     Overall, phosphate unit cost of sales decreased by 1 percent. This
consisted of increases of 5 percent and 1 percent in the unit cost of sales of
feed supplements and liquid phosphates respectively, offset by decreases of 2
percent for industrial products and 6 percent for solid phosphates (due
primarily to lower input costs for ammonia). The unit cost of sulphur decreased
by 2 percent compared to 1997.

     PCS Nitrogen reduced its per unit natural gas cost by 12 percent compared
to 1997 primarily due to its gas contracts in Trinidad. Overall, the per unit
cost of sales of manufactured product declined by 8 percent, primarily due to
reduced gas costs and the opening of an efficient new plant in Trinidad. The
total per unit cost of sales decreased by 16 percent due to reduced gas costs,
the new plant in Trinidad and the reduction in the amount of product purchased
for resale.

     Depreciation and amortization expense for 1998 was $190.9 million compared
to $170.0 million in 1997, an increase of $20.9 million or 12 percent. The
increase was largely attributable to $17.7 million additional depreciation and
amortization due to a full year of nitrogen operations in 1998.

SELLING AND ADMINISTRATIVE

     Selling and administrative expenses for 1998 were $116.0 million compared
to $99.7 million in 1997. The increase of $16.3 million was attributable to
general increases in compensation and benefits, a full year of amortization of
the goodwill relating to the nitrogen acquisition, an increase in bad debt
expense, an increase in franchise taxes and a Revenue Canada employee benefits
assessment.

PROVINCIAL MINING AND OTHER TAXES

     Saskatchewan's Potash Production Tax is comprised of a base tax per tonne
of product sold and an additional tax based on mine-by-mine profits. The New
Brunswick division and the Saskatchewan divisions pay a provincial Crown
royalty, which is accounted for in cost of goods sold.


     For 1998, Saskatchewan provincial mining and other taxes were $80.1 million
compared to $70.3 million in 1997, an increase of $9.8 million. Potash
Production Tax was $61.6 million compared to $53.5 million in 1997, an increase
of $8.1 million. The higher potash prices and the resulting increased profit
per tonne (which was partially due to the strengthening of the US dollar as
compared to the Canadian dollar), combined with the full utilization of certain
provincial resource tax deductions carried forward from previous years,
resulted in most Saskatchewan mines reaching the top marginal profits tax rate
of 35 percent in 1998.

     Saskatchewan corporate capital tax was $18.5 million in 1998 compared to
 $16.8 million in 1997, an increase of $1.7 million. Various other payments to
 the Province in the form of royalties and taxes totalled $13.2 million in 1998
 and $12.4 million in 1997, and are included in cost of goods sold.

 INTEREST EXPENSE

     For 1998, interest expense was $67.6 million compared to $81.4 million in
 1997, a decrease of $13.8 million or 17 percent, due to a reduction of the
 weighted average long-term debt outstanding from $1.1 billion in 1997 to $968.9
 million in 1998. The weighted average interest rate on the long-term debt
 outstanding was 6.4 percent (1997 - 6.1 percent).



<PAGE>   40
                                   FINANCIALS



INCOME TAXES

     Income taxes for the year were $117.5 million, compared to $69.1 million in
1997, an increase of $48.4 million. The increase reflects the impact of
utilization of non-capital loss carryforwards. Provincial taxes and royalties
are non-deductible for federal income tax purposes.

     PCS and certain subsidiaries are subject to federal and provincial income
taxes in Canada. By virtue of deductions with respect to non-capital losses
carried forward, capital cost allowance, Canadian development expense and earned
depletion allowance, such taxes have not yet become payable. However, PCS is
subject to the Large Corporations Tax. In addition, PCS records a deferred tax
provision at the effective rate of 35 percent. The Company expects to begin
paying Canadian income taxes in 1999.

     The Company's subsidiaries which operate in the United States are subject
to US federal and state income taxes. By virtue of certain income tax deductions
available, these subsidiaries are not currently subject to regular federal cash
income tax. However, they are subject to the Alternative Minimum Tax, which may
be carried forward indefinitely as a credit to be applied against future regular
income tax liabilities.

     The Company's nitrogen subsidiaries which operate in Trinidad are subject
to Trinidad taxes.

     The effective consolidated tax rate for 1998 was 31 percent (1997 - 19
percent) of income before income taxes, of which 5 percentage points (1997 - 13
percentage points) represented cash income taxes and 26 percentage points (1997
- 6 percentage points) represented deferred income taxes. The reduction in the
cash component of the provision was largely due to a reduction in the amount of
US withholding taxes on certain payments received from the Company's US
subsidiaries.


                                1997 VERSUS 1996

     With the exception of purchased product, nitrogen data for 1997 is only for
the period subsequent to the acquisition of Arcadian on March 6, 1997. Phosphate
data for 1997 includes phosphate produced by the acquired Geismar operation.


<TABLE>
<CAPTION>
OVERVIEW

($000'S)                                                   1997           1996  INCREASE (DECREASE)          % CHANGE
Net Sales
<S>                                               <C>               <C>                    <C>                     <C>
North American                                    $   1,665,140     $  847,756             $817,384                96
Offshore                                                660,789        556,112              104,677                19
                                                  $   2,325,929     $1,403,868             $922,061                66
Gross Margin                                      $     585,171     $  383,974             $201,197                52
Operating Income                                  $     447,640     $  299,492             $148,148                49
Net Income                                        $     297,138     $  209,036             $ 88,102                42
Earnings per Share (dollars)                      $        5.68     $     4.59               $ 1.09                24
</TABLE>



     The $922.0 million increase in net sales revenue was comprised of: potash
$101.0 million, phosphate $61.6 million and nitrogen $759.4 million (the
additional nitrogen net sales revenue was primarily due to the acquisition of
Arcadian).

     For 1997, North American net sales revenue represented 72 percent (1996 -
60 percent) of total net sales revenue, whereas offshore sales represented 28
percent of total net sales revenue (1996 - 40 percent). The change in the
relative weighting of net sales revenue was principally due to the fact that 92
percent of nitrogen net sales revenue was earned in North America.

     Gross margin for potash products was $257.6 million (an increase of $67.0
million); gross margin for phosphate products was $194.4 million (an increase of
$3.1 million); and gross margin for nitrogen products was $133.2 million (an
increase of $131.1 million which was primarily due to the acquisition of
Arcadian).

     The increase in net income of $88.1 million when comparing 1997 with 1996
was attributable to: a $67.0 million increase in potash gross margin and a
$131.1 million gross margin contributed by nitrogen. This increase in gross
margin was offset by: $31.6 million of nitrogen selling and administrative
expense (including amortization of goodwill), a $30.1 million increase in
provincial mining and other taxes, a $34.7 million increase in interest expense
relating to the acquisition of the nitrogen operations, and a $25.4 million
increase in the provision for income taxes.



<PAGE>   41
                                       37


POTASH REVENUE
<TABLE>
<CAPTION>
                          1997 SALES            1996 SALES             $000's               TONNES (000's)
                                   TONNES               TONNES    INCREASE       %        INCREASE       %
                        $000's    (000's)    $000's    (000's)   (DECREASE)    CHANGE     (DECREASE)   CHANGE
<S>                    <C>         <C>      <C>         <C>      <C>             <C>         <C>         <C> 
North American         $210,240    3,017    $157,645    2,589    $ 52,595        33          428         16
Offshore                293,927    3,623     245,551    3,023      48,376        20          600         20
                       --------------------------------------------------------------------------------------
                       $504,167    6,640    $403,196    5,612    $100,971        25        1,028         18
                       ======================================================================================
</TABLE>

     Gross margin for potash products was $257.6 million (1996 - $190.6 million)
or 44 percent of consolidated gross margin.

     Potash prices in the offshore market decreased early in the year but had
recovered to 1996 levels by the end of the third quarter, resulting in flat
prices on a year-over-year basis. Price increases of 14 percent were realized in
the domestic market. Comparisons are affected by sales to another producer
during 1996.

     North American net sales revenue from potash operations represented 42
percent (1996 - 39 percent) of the potash net sales revenue of the Company. The
closure of Potacan's mine due to flooding and the announced closure of another
competitor's mine in New Mexico tightened supply, which influenced successive
domestic price increases in September and November. The increase in North
American potash prices and an increase in North American sales volumes resulted
in a $52.6 million increase in North American potash net sales revenue over
1996. In the North American market, the 3.017 million tonnes sales volumes for
1997 were sourced as follows: 2.813 million tonnes (1996 - 2.438 million tonnes)
came from Saskatchewan, 0.122 million tonnes (1996 - 0.079 million tonnes) from
New Brunswick and 0.082 million tonnes (1996 - 0.072 million tonnes) from Utah.

     Offshore net sales revenue from potash operations represented 58 percent
(1996 - 61 percent) of potash net sales revenue of the Company. Strong offshore
volumes contributed to higher prices during the year. In December, Canpotex
signed a new contract with China at higher prices. The increase in offshore
sales volumes resulted in a $48.4 million increase in offshore potash net sales
revenue. In the offshore market, 2.960 million tonnes were sold through Canpotex
and the remaining 0.663 million tonnes were produced by PCS New Brunswick and
sold and delivered to offshore markets by PCS Sales.

PHOSPHATE REVENUE
<TABLE>
<CAPTION>
                          1997 SALES            1996 SALES             $000's               TONNES (000's)
                                   TONNES               TONNES    INCREASE       %        INCREASE       %
                        $000's    (000's)    $000's    (000's)   (DECREASE)    CHANGE     (DECREASE)   CHANGE
<S>                    <C>         <C>      <C>         <C>      <C>             <C>          <C>        <C> 
Liquids                $309,063    1,493    $239,716    1,240    $ 69,347        29           253        20
Solids                  362,625    1,924     379,326    1,880     (16,701)       (4)           44         2
Feed supplements        191,016      752     186,145      778       4,871         3           (26)       (3)
Industrial products      89,588      235      80,662      216       8,926        11            19         9
Phosphate rock            1,317       30       6,115      191      (4,798)      (78)         (161)      (84)
                       --------------------------------------------------------------------------------------
                       $953,609    4,434    $891,964    4,305     $61,645         7           129         3
                       ======================================================================================
North American         $656,884    2,769    $581,403    2,483     $75,481        13           286        12
Offshore                296,725    1,665     310,561    1,822     (13,836)       (4)         (157)       (9)
                       --------------------------------------------------------------------------------------
                       $953,609    4,434    $891,964    4,305     $61,645         7           129         3
                       ======================================================================================
</TABLE>

     The acquired Geismar operation increased P2O5 production, liquid sales and
industrial sales.

     Gross margin for phosphate was $194.4 million (1996 - $191.3 million) or 33
 percent of consolidated gross margin.

     For 1997, North American phosphate net sales revenue accounted for 69
percent (1996 - 65 percent) of total phosphate net sales revenue. In 1997, 61
percent (1996 - 57 percent) of the Company's North American phosphate net sales
revenue was earned from liquid and solid phosphate products, which represented
68 percent (1996 - 63 percent) of its North American phosphate sales volumes.
Offshore sales accounted for 31 percent (1996 - 35 percent) of total phosphate
net sales revenue for 1997 and 38 percent (1996 - 42 percent) of volumes. In
1997, 92 percent (1996 - 92 percent) of the Company's offshore phosphate net
sales revenue was earned from liquid and solid phosphate products, which
represented 93 percent (1996 - 85 percent) of its offshore phosphate sales
volumes.

     Solid phosphates (substantially all DAP) accounted for 38 percent (1996 -
43 percent) of the total phosphate net sales revenue. Compared to 1996, the
Company received higher prices for most of its phosphate products (with the
exception of DAP). Liquid phosphate prices increased by 5 percent and sales
volumes increased by 20 percent, resulting in additional net sales revenue of
$69.3 million. Solid phosphate prices declined 7 percent as compared to 1996.
However, this was partially offset by an increase in volumes of 2 percent,
resulting in a reduction in net sales revenue of $16.7 million.



<PAGE>   42
                                   FINANCIALS



     North American net sales revenue was 92 percent of total feed supplements
and industrial products in 1997 (1996 - 93 percent). Feed supplement prices
increased 6 percent and volumes decreased 3 percent as compared to 1996. This
resulted in additional net sales revenue of $4.9 million. Industrial product
prices increased by 2 percent while sales volumes increased by 9 percent. The
result was additional net sales revenue of $8.9 million. Gross margin provided
by feed and industrial products increased by 19 percent over the previous year.

<TABLE>
<CAPTION>
NITROGEN REVENUE

                                                                        1997 SALES                          1996 SALES
                                                         $000'S     TONNES (000'S)         $000'S       TONNES (000'S)
<S>                                                    <C>                   <C>        <C>             <C>              
Ammonia                                                $183,840              1,061      $       -                    -
Urea                                                    203,092              1,226              -                    -
Nitrogen solutions                                      161,149              1,719              -                    -
Other nitrogen products                                 118,472                894              -                    -
                                                       ---------------------------------------------------------------
                                                        666,553              4,900              -                    -
Purchased products                                      201,600              1,138        108,708                  535
                                                       ---------------------------------------------------------------
                                                       $868,153              6,038       $108,708                  535
                                                       ---------------------------------------------------------------
North American                                         $798,016              5,544       $108,708                  535
Offshore                                                 70,137                494              -                    -
                                                       ---------------------------------------------------------------
                                                       $868,153              6,038       $108,708                  535
                                                       ---------------------------------------------------------------
</TABLE>

     Arcadian was acquired in March 1997. North American net sales revenue
accounted for 92 percent of the total nitrogen net sales revenue. Gross margin
for nitrogen products was $133.2 million or 23 percent of consolidated gross
margin.

     Limited imports of urea into China resulted in pricing pressures throughout
the world. Ammonia prices have declined since the acquisition, but results were
supported by the Company's strategic plant locations in North America and its
favorable gas contracts in Trinidad.

<TABLE>
<CAPTION>
COST OF GOODS SOLD

                                                              1997        1996  INCREASE (DECREASE)          % CHANGE
<S>                             <C>                          <C>         <C>                    <C>                <C>
Potash production (KCl) tonnage (000's)                      6,483       5,782                  701                12
Phosphate production (P2O5) tonnage (000's)                  2,282       2,096                  186                 9
Nitrogen production (N) tonnage (000's)                      2,349           -                2,349
</TABLE>


     Potash unit cost of sales decreased marginally in 1997 compared to 1996,
due primarily to higher production volumes and fewer shutdown weeks.

     Overall, phosphate unit cost of sales increased by 5 percent. This
consisted of increases of 8 percent and 5 percent in the unit cost of sales of
liquid phosphates and industrial products, respectively, partially offset by a
decrease of 2 percent for feed supplements. These increased costs were primarily
caused by increased rock costs as a result of excessive moisture in the
overburden at Aurora. The unit cost of sales of solid phosphates remained
unchanged during 1997. The input cost of sulphur increased and ammonia decreased
as compared to 1996.

     PCS Nitrogen, through its natural gas hedging program and favorable gas
contracts in Trinidad, kept its per unit natural gas cost relatively flat on a
year-over-year basis.

     Depreciation and amortization expense for 1997 was $170.0 million compared
to $90.1 million in 1996, an increase of $79.9 million or 89 percent. The
increase was largely attributable to $69.0 million additional depreciation and
amortization from the acquired nitrogen operations.

SELLING AND ADMINISTRATIVE

         Selling and administrative expenses for 1997 were $99.7 million as
compared to $60.1 million in 1996, an increase of $39.6 million. The increase
was primarily attributable to the acquisition of Arcadian ($31.6 million
including amortization of goodwill of $12.2 million) and to general increases in
supplies, compensation and benefits.

PROVINCIAL MINING AND OTHER TAXES

     Saskatchewan's Potash Production Tax is comprised of a base tax per tonne
of product sold and an additional tax based on mine-by-mine profits. The New
Brunswick division and the Saskatchewan divisions pay a provincial Crown
royalty, which is accounted for in cost of goods sold.



<PAGE>   43
                                       39



     For 1997, provincial mining and other taxes were $70.3 million as compared
to $40.2 million in 1996, an increase of $30.1 million. Potash production tax
was $53.5 million compared to $27.5 million in 1996, an increase of $26.0
million. The increased sales volumes in 1997 over 1996 have served, in part, to
increase these taxes. In addition, increased prices for potash and the
resulting increased profit per tonne, combined with the full utilization of
certain provincial resource tax deductions carried forward from prior years,
resulted in most Saskatchewan mines reaching the top marginal profits tax rate
of 50 percent in 1997.

    Saskatchewan corporate capital tax was $16.8 million in 1997 compared to
$12.7 million in 1996, an increase of $4.1 million. Various other payments to
the Province in the form of royalties and taxes totalled $12.4 million in 1997
and $10.2 million in 1996, and are reflected in cost of goods sold.

INTEREST EXPENSE

    For 1997, interest expense was $81.4 million as compared to $46.8 million
in 1996. The weighted average long-term debt outstanding in 1997 was $1.1
billion (1996 - $0.7 billion). The increase was due to the financing of the
Arcadian acquisition. The weighted average interest rate on the long-term debt
outstanding increased to 6.1 percent in 1997 from 5.8 percent in 1996. The
increase was primarily due to the higher interest rate on the ten-year notes
issued in June 1997.

INCOME TAXES

    Income taxes for the year were $69.1 million, compared to $43.7 million in
1996, an increase of $25.4 million. The increase reflects higher taxable
earnings relating to the Company's phosphate operations and taxes relating to
the acquired nitrogen operations.

     PCS and certain subsidiaries are subject to federal and provincial income
taxes in Canada. By virtue of deductions with respect to non-capital losses
carried forward, capital cost allowance, Canadian development expense, and
earned depletion allowance, such taxes have not yet become payable. However, PCS
is subject to the Large Corporations Tax. In 1997, PCS began to book a deferred
tax provision at the effective rate of 35 percent since the tax pools plus the
non-capital losses carried forward are less than the book value of the assets.

     The Company's subsidiaries which operate in the United States are subject
to US federal and state income taxes. By virtue of certain income tax deductions
available, these subsidiaries are not currently subject to regular cash income
tax. However, they are subject to the Alternative Minimum Tax, which may be
carried forward indefinitely as a credit to be applied against future regular
income tax liabilities. In addition, the Company is subject to United States
withholding taxes on certain payments received from its US subsidiaries.

     The Company's nitrogen subsidiaries which operate in Trinidad are subject
to Trinidad taxes.

     The effective consolidated tax rate for 1997 was 19 percent (1996 - 17
percent) of income before income taxes of which 13 percentage points (1996 - 8
percentage points) represented cash income taxes and 6 percentage points (1996 -
9 percentage points) represented deferred income taxes.

                  ANALYSIS OF FINANCIAL CONDITION AND CASH FLOW

     The following table summarizes certain of the Company's financial ratios as
calculated from the consolidated financial statements:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
                                                             1998         1997  INCREASE (DECREASE)           % CHANGE
<S>                                                           <C>          <C>                  <C>                <C>
Quick Ratio                                                   .83          .79                  .04                  5
Current Ratio                                                1.74         1.62                  .12                  7
Shareholders' Equity to Total Assets                          .54          .50                  .04                  8
Return on Shareholders' Equity                                11%          13%                 (2%)               (15)
Book Value per Share                                       $45.24       $41.34                $3.90                  9
Asset Turnover                                                51%          53%                 (2%)                (4)
Return on Investment                                           9%          14%                 (5%)               (36)
Long-term Debt to Equity                                    .38:1        .51:1                (.13)               (25)
</TABLE>


     Cash provided by operating activities for 1998 was $578.0 million (1997 -
$467.8 million). The increase of $110.2 million was primarily due to increases
in non-cash expenses charged against operating income (primarily depreciation
and amortization and deferred income taxes) and positive cash flow from
operating working capital.

     Cash used in investing activities was $243.3 million (1997 - $1,215.4
million). Included in the 1997 amount is $1,048.3 million that relates to the
acquisition of shares of Arcadian. The 1998 amount includes the purchase of 9
percent of Israel Chemicals Ltd. in the amount of $92.2 million and the purchase
of rail



<PAGE>   44
                                   FINANCIALS



cars under a sale/leaseback transaction in the amount of $19.4 million.
Proceeds from disposal of property, plant and equipment include sale proceeds
of $27.9 million related to the sale/leaseback transaction.

     Cash used in financing activities was $275.5 million, primarily to repay
long-term debt and to pay dividends. In 1997, financing activities were a source
of $762.7 million of cash, primarily due to borrowings to finance the purchase
of Arcadian. The Company paid dividends of $51.7 million in 1998 (1997 - $55.3
million). The reduction in dividends paid was due solely to the change in the
exchange rate of the Canadian dollar as compared to the US dollar rather than a
change in dividend policy.

     The Company's capital expenditures were $190.2 million in 1998 and are
expected to be approximately $135.0 million in 1999.

     The Company has a syndicated credit facility which provides for unsecured
advances of up to $925.0 million of which $488.0 million was outstanding at
December 31, 1998. In addition, the Company has short-term lines of credit for
up to $290.0 million in borrowings, of which $72.1 million was outstanding at
December 31, 1998 and $40.4 million was utilized for letters of credit. The
Company may also issue up to an additional $600.0 million in unsecured debt
securities under its existing shelf registration statement.

    The Company believes that internally generated cash flow, as supplemented
by borrowing from existing financing sources, will be sufficient to meet the
Company's anticipated capital expenditure and other cash requirements,
exclusive of any possible acquisitions, in 1999.

                  RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS

    The Company's nitrogen operations are significantly affected by the price
of natural gas. The Company employs derivative commodity instruments related to
a portion of its natural gas requirements (primarily futures, swaps and
options) for the purpose of managing its exposure to commodity price risk in
the purchase of natural gas. Changes in the market value of these derivative
instruments have a high correlation to changes in the spot price of natural
gas. Gains or losses arising from settled hedging transactions are deferred as
a component of inventory until the product containing the hedged item is sold.
Changes in the market value of open hedging transactions are not recognized as
they generally relate to changes in the spot price of anticipated natural gas
purchases.

    A sensitivity analysis has been prepared to estimate the Company's market
risk exposure arising from derivative commodity instruments. The fair value of
such instruments is calculated by valuing each position using quoted market
prices. Market risk is estimated as the potential loss in fair value resulting
from a hypothetical 10 percent adverse change in such prices. The results of
this analysis indicate that as of December 31, 1998, the Company's estimated
derivative commodity instruments market risk exposure was $34.7 million (1997 -
$22.5 million). Actual results may differ from the estimate. Changes in the
fair value of such derivative instruments, with maturities in 1999 through
2003, will generally relate to changes in the spot price of anticipated natural
gas purchases.

    The Company also enters into forward foreign exchange contracts for the
sole purpose of limiting its exposure to exchange rate fluctuations relating to
certain trade accounts. Gains or losses resulting from foreign exchange
contracts are recognized at the time that the contracts are entered into and
are included in Other Income.


                                  ENVIRONMENTAL

    The Company is subject to various environmental laws and regulations
throughout the United States, Canada and Trinidad. Expenditures relating to
compliance with these environmental laws are considered to be part of the
normal course of business. Future laws and regulations or changes to existing
laws and their impact cannot be predicted. Capital expenditures in the
environmental area in 1998 totalled $14.0 million (1997 - $15.4 million; 1996 -
$8.9 million) while $83.4 million (1997 - $66.9 million; 1996 - $63.0 million)
was incurred as environmental operating expense. Expenditures in 1999 are
expected to be of a similar magnitude for existing operations.

                                    YEAR 2000

    The year 2000 poses a risk that computer systems, or devices containing
microchips, will generate erroneous results if the year 2000 is stored as 00.
The Year 2000 problem, if not remedied, could result in a system failure or
miscalculations causing what are expected to be temporary disruptions of
operations, including, among other things, an inability to process
transactions, send invoices or engage



<PAGE>   45
                                       41



in similar normal business activities. The Company defines Year 2000 compliance
as computer systems or devices which will function accurately before, on, and
after January 1, 2000 without business or operational interruptions, or
repercussions, due to any date-related functions.

     The Company has a Year 2000 committee composed of executive and senior
management to oversee and direct efforts to identify and resolve Year 2000
issues. The Company anticipated Year 2000 requirements for its corporate, potash
and sales administrative systems in the early 1990s by implementing four-digit
century standards. Testing to confirm compliance is complete in these areas.
Based on testing and investigations to date, the Company believes that these
systems will not give rise to material Year 2000 problems. Phosphate and
nitrogen subsidiaries are conducting routine compliant upgrades of their
packaged administrative systems. The last such upgrade is expected to be
completed by mid-1999.

     The majority of the Company's production locations' operational systems are
scheduled for compliance in the first quarter of 1999. Compliance for the
remaining plants is scheduled for completion during routine maintenance
shutdowns during 1999.

     The Company has formally communicated with critical customers, suppliers
and other external parties to determine the extent to which the Company may be
vulnerable to such parties' failure to resolve their Year 2000 issues. Written
assurances received to date have not identified any matters which are expected
to materially affect the Company. However, the effect, if any, on the Company's
results of operations or financial condition from the failure of these entities
to be Year 2000 ready is uncertain.

     The Company is primarily utilizing internal resources to identify, upgrade
and test its systems for Year 2000 compliance. This has not deferred any other
material projects. The Company anticipates that these efforts will be completed
by mid-1999 and that the total estimated costs will approximate $2.0 million. To
date, $0.8 million has been expended. These costs have been and are expected to
continue to be financed from internally generated cash flows.

     At this time, the Company believes its most reasonably likely worst case
scenario is that there may be temporary disruptions of power to certain of its
plants and/or that there may be temporary disruptions of certain transportation
services. In either case, the Company does not believe that these disruptions
would have a material adverse effect on its results of operations or financial
condition. This is principally due to the fact that inventory levels would be
building in anticipation of the spring fertilizer season; fertilizer sales are
seasonally low at the beginning of the year and the disruptions, if any, would
be expected to be temporary.

     The Company has not identified the need for formal contingency plans at
this time but continues to monitor third parties and evaluate the circumstances
in which such plans may be appropriate.

                                     OUTLOOK

     The rising world population and the demand for more food and better diets,
with meat as a protein source, will continue to drive consumption of fertilizers
over the long term. Over the short term, increased fertilizer usage will be
required to replenish world grain stocks which remain low. Governments around
the world are placing priority on fertilizer purchases to increase food
production. While the consumption trend line is expected to continue to climb
over the long term, there will be, at times, fluctuations in demand.

     North American fertilizer demand is generally considered mature but is
expected to fluctuate from year to year, as a function of acres planted and
application rates per acre which are influenced by crop prices and weather. US
farmers are projected to continue to commit more than 150 million acres to corn
and soybeans in 1999. These crops are among the largest users of fertilizers. In
addition, US net cash farm income for 1998 is expected to be the second highest
on record as the result of cash received under a US government program. With
large projected acreages for corn and soybeans, it is expected that demand for
fertilizer will remain strong.

     The Company sells a significant amount of potash and phosphate in the
offshore markets. To date, the currency devaluations and financial difficulties
in Asian countries have not significantly affected these sales. These countries
purchase fertilizer to grow cash crops for export and to grow food for internal
use. However, the persistence of the currency devaluations and financial
difficulties could affect the growth trend.

     The Company also sells product in the non-fertilizer markets which are
affected by domestic economic growth. The outlook for domestic economic growth
should translate into increased demand for these upgraded products.



[CHART] In the US market, which is considered mature, nitrogen consumption has
        been increasing more than potash and phosphate. All are affected by the
        acreage planted.
<PAGE>   46
                                   FINANCIALS



     The effect of such anticipated increase in demand for fertilizer and
non-fertilizer products will be offset to the degree that additional capacity
comes on stream.

     Domestic potash sales volumes are expected to grow in 1999 while offshore
sales volumes are expected to increase marginally. Canpotex recently sold a
shipment to India -- its first there in six years. In India, subsidies remain an
important factor and buyers have been purchasing product based on expectations
that subsidies will continue. In China, the fertilizer quotas have been
established for 1999. In January 1999, Canpotex reached agreement with China for
new shipments at a higher price. Proposed increases in the Company's prices in
the domestic market will be fully tested during the spring season.

     PCS continues to operate its potash mines by matching production to sales
demand. Shutdowns for inventory correction will influence potash production
costs on a quarter-over-quarter comparative basis. It is expected that the
number of such shutdowns will exceed the 33 weeks of shutdowns incurred in 1998.
Natural gas costs are increasing in Western Canada. The combination of higher
gas costs and increased shutdown weeks is expected to increase production costs
somewhat.

     The severe decrease of ammonia prices is expected to favorably affect
phosphate processing input costs on a year-over-year basis. PCS can use up to
one-quarter of the ammonia it produces and sells as ammonia at its own phosphate
plants. However, it is expected that there will be increases in the cost of
sulphur and higher rock costs at Aurora due to difficult conditions in the ore
body currently being mined. These conditions are expected to intensify in early
1999 and continue for approximately two years until mining reaches an area
anticipated to have more advantageous ore conditions.

     In the near term, prices for liquid and solid phosphates are expected to
remain steady as supply and demand are in reasonably good balance. However, 1999
sales volumes may be down somewhat from 1998 due to the difficult rock
conditions affecting 1999 P2O5 production volumes. Increased competition in
industrial products and feed supplements will likely affect prices for these
products.

     Market prices for nitrogen products are expected to continue under
pressure. 1999 gross margin is expected to be lower than in 1998. The urea
market is influenced by China which, early in 1997, stopped importing urea,
thereby having a negative effect on prices. Chinese buyers remain inactive and
there are no indications as to when they will return to the market.

     The Company manages its natural gas costs through a combination of fixed
price contracts, hedges and the Trinidad gas contracts. As the most flexible
producer, PCS will continue to allocate its nitrogen and phosphate feed stock to
production of the products with the best margins.

     Capital expenditures in 1999 are expected to be approximately $135.0
million.

     The effective consolidated income tax rate on income before taxes is
expected to increase slightly.

     The narrative included under this Management's Discussion and Analysis of
Financial Condition and Results of Operations has been prepared on a nutrient
basis (the phosphate products produced at Geismar are included with phosphate
data rather than nitrogen) rather than a subsidiary or business segment basis
and with reference to the consolidated financial statements reported under
accounting principles generally accepted in Canada.

                           FORWARD-LOOKING STATEMENTS

     Certain statements in this annual report and this Management's Discussion
and Analysis of Financial Condition and Results of Operations, including those
in the "Outlook" section, relating to the period after December 31, 1998, are
forward-looking statements subject to significant uncertainties. A number of
factors could cause actual results to differ materially from those expressed in
the forward-looking statements, including, but not limited to, fluctuation in
supply and demand in fertilizer, sulphur and petrochemical markets; changes in
competitive pressures including pricing pressures; changes in capital markets;
changes in currency and exchange rates; unexpected geological or environmental
conditions; imprecision in reserve estimates; the outcome of legal proceedings;
and changes in government policy. The Company sells to a diverse group of
customers both by geography and by end product. Market conditions will vary on a
year-over-year basis and sales can be expected to shift from one period to
another.



[CHART] Peaks and dips are to be expected, but the trend line for fertilizer use
        is rising.
<PAGE>   47



                             SELECTED TEN-YEAR DATA
                       (FOR THE YEARS ENDED DECEMBER 31)


<TABLE>
<CAPTION>
FINANCIAL DATA (US$ Millions)              1998  1997(5)    1996    1995(4)  1994(1) 1993(3)    1992     1991     1990 1989(2)


<S>                                     <C>      <C>     <C>          <C>      <C>     <C>     <C>      <C>      <C>     <C>  
Net Sales                               2,307.8  2,325.9 1,403.9      856.1    363.1   212.2   214.1    206.8    189.9   221.6
Operating Income                          446.1    447.6   299.5      224.2     98.5    56.9    50.6     39.1     34.6    68.4
Net Income                                261.0    297.1   209.0      159.5     91.2    44.7    39.8     31.3     17.3    57.7
Net Income per Share (Actual Dollars)      4.82     5.68    4.59       3.68     2.12    1.13    1.03     0.81     0.47    1.65
Dividends per Share (Actual Dollars)       0.96     1.03    1.06       1.06     0.77    0.53    0.51     0.51     0.51    0.13
Cash Provided by Operating Activities     578.0    467.8   296.2      233.5    150.7    49.8    57.4     53.8     66.1    72.4
Working Capital                           329.2    281.7   278.8      136.1    103.3    37.0    70.9     47.4     25.7    16.4
Total Assets                            4,534.3  4,427.6 2,494.4    2,581.8  1,027.8 1,036.4   915.0    898.8    914.8   915.5
Total Long-Term Debt                      933.3  1,130.0   620.0      714.5      2.0    20.1    48.9     54.4     62.6    67.8
Shareholders' Equity                    2,453.8  2,227.9 1,405.5    1,241.9    964.3   903.7   809.5    788.9    777.3   745.2
------------------------------------------------------------------------------------------------------------------------------

OPERATING DATA (Thousands)
EMPLOYEES AT YEAR-END (Actual Numbers)    5,744    5,751   4,490      4,579    1,781   1,818   1,415    1,227    1,242   1,256
------------------------------------------------------------------------------------------------------------------------------
POTASH PRODUCTION (KCl) Tonnage           6,995    6,483   5,782      6,071    5,298   3,902   3,850    4,030    3,464   4,257
------------------------------------------------------------------------------------------------------------------------------
PHOSPHATE PRODUCTION (P2O5) Tonnage       2,363    2,282   2,096      1,008        -       -       -        -        -       -
------------------------------------------------------------------------------------------------------------------------------
NITROGEN PRODUCTION (N) Tonnage           3,121    2,349       -          -        -       -       -        -        -       -
------------------------------------------------------------------------------------------------------------------------------
POTASH SALES - KCl Tonnes                 6,283    6,640   5,612      5,848    5,569   3,795   3,737    3,909    3,725   4,018
------------------------------------------------------------------------------------------------------------------------------
PHOSPHATE SALES - Product Tonnes          4,627    4,434   4,305      2,206        -       -       -        -        -       -
------------------------------------------------------------------------------------------------------------------------------
NITROGEN SALES - Product Tonnes           6,679    6,038     535        115        -       -       -        -        -       -
------------------------------------------------------------------------------------------------------------------------------


NET SALES (US$ Millions)
POTASH                                    545.5    504.2   403.2      421.0    363.1   212.2   214.1    206.8    189.9   221.6
PHOSPHATE                               1,011.0    953.6   892.0      412.1        -       -       -        -        -       -
NITROGEN                                  751.3    868.1   108.7       23.0        -       -       -        -        -       -
------------------------------------------------------------------------------------------------------------------------------
TOTAL NET SALES                         2,307.8  2,325.9 1,403.9      856.1    363.1   212.2   214.1    206.8    189.9   221.6
------------------------------------------------------------------------------------------------------------------------------
</TABLE>


(1) The financial statements of the Company for 1994 and prior years have been
    restated to US dollars in accordance with accounting principles generally
    accepted in Canada using the Translation of Convenience Method. The Canadian
    dollar amounts for these periods have been converted to US dollars at the
    exchange rate of US$1.00 = CDN$1.4028.

(2) In November 1989, the Company was privatized. Subsequent results reflect the
    privatization and associated reorganization. 

(3) Data for 1993 and thereafter reflect the acquisition of Potash Company of
    America assets on October 7, 1993.

(4) Data for 1995 and thereafter reflect the acquisition of Texasgulf Inc. on
    April 10, 1995 and the acquisition of White Springs Agricultural Chemicals,
    Inc. on October 31, 1995.

(5) Data for 1997 and thereafter reflect the acquisition of Arcadian Corporation
    on March 6, 1997.



<TABLE>
<CAPTION>
QUARTERLY RESULTS (Thousands)                 98 Q1     98 Q2    98 Q3    98 Q4    97 Q1   97 Q2     97 Q3    97 Q4
<S>                                           <C>       <C>      <C>      <C>      <C>     <C>       <C>      <C>  
Potash Production - KCl Tonnes                1,996     2,046    1,259    1,694    1,653   1,687     1,297    1,846
Phosphate Production - P2O5 Tonnes              561       604      585      613      521     600       599      562
Nitrogen Production - N Tonnes                  759       777      781      804      240     724       722      663
Net Sales ($)                               583,812   660,442  521,368  542,141  464,834 676,648   573,773  610,674
Operating Income ($)                        109,790   146,909   95,575   93,782   90,513 154,714   108,851   93,562
Net Income ($)                               63,009    89,117   54,704   54,173   56,365  96,980    71,418   72,375
Net Income per Share (Actual Dollars) ($)      1.17      1.64     1.01     1.00     1.18    1.81      1.33     1.35
-------------------------------------------------------------------------------------------------------------------
</TABLE>


The consolidated financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in Canada. These
principles differ in some respects from those applicable in the United States
(see Note 27 to the Company's consolidated financial statements).

NOTES TO SELECTED TEN-YEAR DATA AND QUARTERLY RESULTS:

1. There were no extraordinary items nor were there any discontinued operations
   in any of the accounting periods. 

2. Fully diluted net income per share did not differ materially from net income
   per share in any of the accounting periods. 

3. Net income per share for each quarter has been computed based on the weighted
   average number of shares issued and outstanding during the respective
   quarter; therefore, quarterly amounts may not add to the annual total.

                                       43
<PAGE>   48
               MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING

     The accompanying consolidated financial statements and related financial
information are the responsibility of PCS management and have been prepared in
accordance with generally accepted accounting principles and include amounts
based on estimates and judgments. Financial information included elsewhere in
this report is consistent with the consolidated financial statements.

     To meet management's responsibility for financial reporting and to obtain
reasonable assurance for the integrity and reliability of the financial reports,
the Company's accounting and internal control systems are designed to safeguard
assets and to properly record transactions and events. Policies and procedures
are maintained to support the accounting and internal control systems.

     Our independent auditors, Deloitte & Touche LLP, provide an objective,
independent audit of the consolidated financial statements. Their report for
1998 is included.

     The Board of Directors, through the audit committee composed exclusively of
outside directors, meets regularly with the independent auditors -- both jointly
and separately -- to review significant accounting, reporting and internal
control matters. The audit committee also recommends to the Board the
independent auditors to be proposed to the shareholders for appointment at the
annual meeting. Interim consolidated financial statements are reviewed by the
audit committee prior to release to shareholders.

     The consolidated financial statements are approved by the Board of
Directors on the recommendation of the audit committee.


       [signature]                       [signature]
       C. E. CHILDERS                    B. E. HUMPHREYS
       Chairman and                      Senior Vice President
       Chief Executive Officer           Finance and Treasurer 
       February 10, 1999 

 

                                AUDITORS' REPORT

TO THE SHAREHOLDERS OF POTASH CORPORATION OF SASKATCHEWAN INC.

     We have audited the consolidated statements of financial position of Potash
Corporation of Saskatchewan Inc. as at December 31, 1998 and 1997 and the
consolidated statements of income and retained earnings and of cash flow for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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.

     In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
1998 and 1997, and the results of its operations and the changes in its
financial position for each of the three years in the period ended December 31,
1998 in accordance with accounting principles generally accepted in Canada.

     Saskatoon, Saskatchewan               [signature]
     February 10, 1999                     DELOITTE & TOUCHE LLP
                                           Chartered Accountants


                                       44




<PAGE>   49


                  CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
                                AS AT DECEMBER 31

<TABLE>
<CAPTION>

                                                                                  (in thousands of US dollars)

                                                                                     1998                 1997
ASSETS
Current Assets
<S>                                                                            <C>                  <C>       
  Cash and cash equivalents                                                    $   67,971           $    8,756
  Accounts receivable (Note 5)                                                    302,974              351,154
  Inventories (Note 6)                                                            364,397              353,425
  Prepaid expenses                                                                 38,839               21,131
                                                                               -------------------------------  
                                                                                  774,181              734,466
Property, plant and equipment (Note 7)                                          3,003,443            2,995,625
Goodwill (Note 8)                                                                 559,621              574,296
Other assets (Note 9)                                                             197,012              123,205
                                                                               -------------------------------  
                                                                               $4,534,257           $4,427,592
                                                                               -------------------------------  
</TABLE>


<TABLE>
<CAPTION>
LIABILITIES
Current Liabilities
<S>                   <C>                                                      <C>                  <C>       
  Short-term debt (Note 10)                                                    $   94,940           $  101,928
  Accounts payable and accrued charges (Note 11)                                  349,684              348,103
  Current portion of long-term debt (Note 12)                                         386                2,740
                                                                               -------------------------------  
                                                                                  445,010              452,771
Long-term debt (Note 12)                                                          933,294            1,129,964
Deferred income tax liability (Note 20)                                           417,853              338,431
Accrued post-retirement/post-employment benefits (Note 14)                        131,179              123,418
Accrued reclamation costs (Note 15)                                               129,399              139,105
Other non-current liabilities and deferred credits                                 23,761               16,012
                                                                               -------------------------------  
                                                                                2,080,496            2,199,701
                                                                               -------------------------------  
</TABLE>


<TABLE>
<CAPTION>
CONTINGENCIES (NOTE 23)

SHAREHOLDERS' EQUITY
<S>                 <C>                                                         <C>                  <C>      
Share Capital (Note 16)                                                         1,227,599            1,211,049
Unlimited authorization of common shares without par value;
issued and outstanding 54,243,795 and 53,896,186 shares
in 1998 and 1997, respectively
Unlimited authorization of first preferred shares;
none outstanding
Contributed Surplus                                                               336,486              336,486
Retained Earnings                                                                 889,676              680,356
                                                                               -------------------------------  
                                                                                2,453,761            2,227,891
                                                                               -------------------------------  
                                                                               $4,534,257           $4,427,592
                                                                               -------------------------------  
</TABLE>

              (See Notes to the Consolidated Financial Statements)


                             Approved by the Board,


                  [signature]                      [signature]  
                   Director                         Director



                                       45
<PAGE>   50


             CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
                         FOR THE YEARS ENDED DECEMBER 31

<TABLE>
<CAPTION>
                                                                       (in thousands of US dollars)

                                                                 1998                1997                 1996
<S>                                                        <C>                 <C>                  <C>       
Net sales (Note 17)                                        $2,307,763          $2,325,929           $1,403,868
Cost of goods sold                                          1,698,416           1,740,758            1,019,894
                                                           ---------------------------------------------------
GROSS MARGIN                                                  609,347             585,171              383,974
                                                           ---------------------------------------------------

Selling and administrative                                    116,012              99,663               60,142
Provincial mining and other taxes (Note 18)                    80,088              70,312               40,197
Other income                                                  (32,809)            (32,444)             (15,857)
                                                           ---------------------------------------------------
                                                              163,291             137,531               84,482
                                                           ---------------------------------------------------

OPERATING INCOME                                              446,056             447,640              299,492


INTEREST EXPENSE (NOTE 19)                                     67,574              81,439               46,761
                                                           ---------------------------------------------------

INCOME BEFORE INCOME TAXES                                    378,482             366,201              252,731


INCOME TAXES (NOTE 20)                                        117,479              69,063               43,695
                                                           ---------------------------------------------------

NET INCOME                                                    261,003             297,138              209,036


RETAINED EARNINGS, BEGINNING OF YEAR                          680,356             438,526              277,689


DIVIDENDS                                                     (51,683)            (55,308)             (48,199)
                                                           ---------------------------------------------------

RETAINED EARNINGS, END OF YEAR                             $  889,676          $  680,356           $  438,526
                                                           ---------------------------------------------------

NET INCOME PER SHARE (NOTE 21)                                  $4.82               $5.68                $4.59
                                                           ---------------------------------------------------

DIVIDENDS PER SHARE                                             $0.96               $1.03                $1.06
                                                           ---------------------------------------------------
</TABLE>


              (See Notes to the Consolidated Financial Statements)


                                       46



<PAGE>   51


                      CONSOLIDATED STATEMENTS OF CASH FLOW
                        FOR THE YEARS ENDED DECEMBER 31

<TABLE>
<CAPTION>
                                                                  (in thousands of US dollars)

                                                                 1998             1997          1996
OPERATING ACTIVITIES
<S>                                                       <C>              <C>               <C>              
 Net income                                               $  261,003       $   297,138   $   209,036
 Items not affecting cash
 Depreciation and amortization                               190,880           170,002        90,125
 (Gain) loss on disposal of property,
  plant and equipment                                            (99)          (4,739)         2,152
 Provision for deferred income tax                            97,203            34,491        23,737
 Provision for post-retirement/
 post-employment benefits                                      6,848             6,166         5,890
                                                          ------------------------------------------
                                                             555,835           503,058       330,940
CHANGES IN NON-CASH OPERATING WORKING CAPITAL
 Accounts receivable                                          48,751            23,470       (7,400)
 Inventories                                                 (7,859)            19,873         2,493
 Prepaid expenses                                           (16,603)             3,736       (1,393)
 Accounts payable and accrued charges                        (2,477)          (68,623)      (19,214)
Accrued reclamation costs                                    (7,436)           (7,407)       (5,021)
Other non-current liabilities and deferred credits             7,749           (6,286)       (4,219)
                                                          ------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES                        577,960           467,821       296,186
                                                          ------------------------------------------
INVESTING ACTIVITIES
Additions to property, plant and equipment                 (190,155)         (160,337)      (58,939)
Acquisition of Arcadian Corporation                                -       (1,048,263)             -
Proceeds from disposal of property,
plant and equipment                                           31,926            15,276        22,716
Additions to other assets                                   (85,066)          (22,091)       (2,819)
                                                          ------------------------------------------
CASH USED IN INVESTING ACTIVITIES                          (243,295)       (1,215,415)      (39,042)
                                                          ------------------------------------------
CASH (DEFICIENCY) BEFORE FINANCING ACTIVITIES                334,665         (747,594)       257,144
                                                          ------------------------------------------
FINANCING ACTIVITIES
Proceeds from (repayment of) long-term obligations         (233,329)           510,021     (258,556)
Proceeds from (repayment of) short-term debt                 (6,988)           101,928             -
Repayment of Senior Notes                                          -         (374,526)             -
Dividends                                                   (51,683)          (55,308)      (48,199)
Issuance of shares                                            16,550           580,565         2,784
                                                          ------------------------------------------
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES            (275,450)           762,680     (303,971)
                                                          ------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS              59,215            15,086      (46,827)
CASH AND CASH EQUIVALENTS (BANK
INDEBTEDNESS), BEGINNING OF YEAR                               8,756           (6,330)        40,497
                                                          ------------------------------------------
CASH AND CASH EQUIVALENTS (BANK
INDEBTEDNESS), END OF YEAR                                $   67,971      $     8,756    $  (6,330)
                                                          ------------------------------------------
Supplemental cash flow disclosure
 Interest paid                                            $   68,419      $    84,365    $   42,901
 Income taxes paid                                        $   19,228      $    41,252    $   32,914
                                                          -----------------------------------------
</TABLE>


              (See Notes to the Consolidated Financial Statements)



                                      -47-
<PAGE>   52
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                          (in thousands of US dollars)



 1.  DESCRIPTION OF BUSINESS

     Potash Corporation of Saskatchewan Inc. ("PCS") and its operating
subsidiaries (the "Company" except to the extent the context otherwise requires)
form an integrated fertilizer and related industrial and feed products company.
The Company's potash producing assets include five mines and mills and mining
rights to potash reserves at a sixth location all in the Province of
Saskatchewan, one mine and two mills located in the Province of New Brunswick
and one mine and mill in the State of Utah. The Company's phosphate producing
assets include a vertically-integrated phosphate mine and processing plant
located in the State of North Carolina, phosphate feed plants in six states, two
industrial phosphoric acid plants owned in a joint venture carrying on business
as Albright & Wilson Company, a mine and processing plant complexes in the State
of Florida and a processing plant complex in the State of Louisiana. The
Company's nitrogen producing assets include six domestic plants located in the
states of Georgia, Iowa, Louisiana, Nebraska, Ohio and Tennessee and large-scale
operations in Trinidad. The Company owns or leases in excess of 130 terminal and
warehouse facilities strategically located in Canada and the United States, and
services customers with a fleet of approximately 5,000 rail cars.

     The Company sells potash from its Saskatchewan mines for use outside North
America exclusively to Canpotex Limited ("Canpotex"). Canpotex, a potash export,
sales and marketing company owned in equal shares by the three potash producers
in the Province of Saskatchewan (including the Company), resells potash to
offshore customers. PCS Sales (Canada) Inc. and PCS Sales (USA), Inc.,
wholly-owned subsidiaries of PCS, execute marketing and sales for the Company's
potash, phosphate and nitrogen products in North America. PCS Sales (Canada)
Inc. executes offshore marketing and sales for the Company's New Brunswick
potash. PCS Sales (USA), Inc. executes offshore marketing and sales for the
Company's nitrogen products. Phosphate Chemicals Export Association, Inc.
("PhosChem"), an unrelated phosphate export association established under United
States law, is the principal vehicle through which the Company executes offshore
marketing and sales for its phosphate fertilizers.

 2.  SIGNIFICANT ACCOUNTING POLICIES

 BASIS OF PRESENTATION

         The Company's accounting policies are in accordance with accounting
 principles generally accepted in Canada ("Canadian GAAP"). These policies are
 consistent with accounting principles generally accepted in the United States
 ("US GAAP") in all material respects except as outlined in Note 27. The
 preparation of financial statements in accordance with generally accepted
 accounting principles requires management to make estimates and assumptions
 that affect the reported amounts of assets and liabilities and disclosure of
 contingent assets and liabilities at the date of the financial statements and
 the reported amounts of revenues and expenses during the reporting period.
 Actual results could differ from those estimates. The following policies are
 considered to be significant:

 PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of PCS and its 
     operating subsidiaries:
     o PCS Sales (Canada) Inc.
       - PCS Sales (Iowa), Inc.
       - PCS Sales (Indiana), Inc.
       - Potash Corporation of Saskatchewan (Florida) Inc.
     o PCS Sales (USA), Inc.
     o Potash Corporation of Saskatchewan Transport Limited
     o PCS Phosphate Company, Inc.
       - Albright & Wilson Company (proportionately consolidated)
     o White Springs Agricultural Chemicals, Inc. ("White Springs")
     o PCS Nitrogen, Inc.
       - PCS Nitrogen Fertilizer, L.P.
       - PCS Nitrogen Ohio, L.P.
       - PCS Nitrogen Limited
       - PCS Nitrogen Fertilizer Limited
       - PCS Nitrogen Trinidad Limited
     o PCS Cassidy Lake Company ("PCS Cassidy Lake")

     All significant intercompany balances and transactions have been
eliminated.

CASH EQUIVALENTS

     Highly liquid investments with an original maturity of three months or less
are considered to be cash equivalents.

INVENTORIES

     Inventories of finished product, raw materials and work in process are
valued at the lower of cost and net realizable value. Cost for substantially all
finished product, raw materials and work in process inventories is determined
using the first in, first out (FIFO) method. Certain inventories of materials
and supplies are valued at the lower of average cost and replacement cost and
certain inventories of materials and supplies are valued at the lower of cost
and market.

PREPAID EXPENSES

     Prepaid expenses include prepaid freight which relates to product inventory
stored at warehouse and terminal facilities which is invoiced to customers at
the time of sale of the inventory.

PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment (which includes mine development costs) are
carried at cost, except for mineral properties, which are carried at the lower
of cost or fair value. Costs of additions, betterments, renewals and interest
during construction are capitalized. The Company periodically reviews property,
plant and equipment for indicators of potential impairment. Impairment would be
measured by comparing book value against the estimated undiscounted future cash
flows and any such impairment loss would be included in the statement of income.

     Maintenance and repair expenditures which do not improve or extend
productive life are expensed as incurred.

DEPRECIATION AND AMORTIZATION

     Depreciation and amortization are provided for on a basis and at rates
calculated to amortize the cost of the property, plant and equipment over their
estimated useful lives. Depreciation and amortization rates for all mine assets
(including mine development costs) and potash mills are determined using the
units of production method based on estimates of proven and probable reserves.
Other asset classes are depreciated or amortized on a straight-line basis as
follows: land improvements 5 to 30 years, buildings and improvements 6 to 30
years and machinery and equipment 5 to 25 years.

GOODWILL

     Goodwill represents the excess of the purchase price and related costs over
the value assigned to the net tangible assets of businesses acquired. Goodwill
is being amortized on a straight-line basis over a period of forty years. The
Company assesses the recoverability of this intangible asset based on estimated
undiscounted future cash flows.


                                       48

<PAGE>   53
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                          (in thousands of US dollars)



 2.  SIGNIFICANT ACCOUNTING POLICIES (continued)

 OTHER ASSETS

     Issue costs of long-term obligations are capitalized to deferred charges
 and are amortized to interest expense over the term of the related liability.

     Preproduction costs are capitalized to deferred charges and represent costs
incurred prior to obtaining commercial production at new milling facilities, net
of revenue earned, and are amortized on a straight-line basis over ten years.

     The costs of constructing bases for gypsum stacks and settling ponds are
capitalized to deferred charges and are amortized on a straight-line basis over
their estimated useful lives of three to five years.

     Land held for sale is stated at the lower of cost or net realizable value.

     Investments in which the Company exercises significant influence (but does
not control) are accounted for using the equity method. Other investments are
stated at cost.

     Rotational plant maintenance costs, which consist primarily of planned
major maintenance projects (also known as "turnarounds"), are capitalized when
incurred and are amortized over the anticipated periods until the next scheduled
rotational plant maintenance which ranges from two to four years.

LEASES

     Leases entered into are classified as either capital or operating leases.
Leases that transfer substantially all of the benefits and risks of ownership of
property to the Company are accounted for as capital leases. At the time a
capital lease is entered into, an asset is recorded together with the related
long-term obligation. Equipment acquired under capital leases is being
depreciated on the same basis as other property, plant and equipment. Gains or
losses resulting from sale-leaseback transactions are deferred and amortized in
proportion to the amortization of the leased asset. Rental payments under
operating leases are charged to expense as incurred.

POST-EMPLOYMENT AND POST-RETIREMENT BENEFITS

     Accrual of the costs of the Company's defined benefit pension plans are
recorded monthly and adjusted annually based on actuaries' reports. Pension
expense includes the net of management's best estimate of the cost of benefits
provided, interest cost of projected benefits, return on pension plan assets and
amortization of experience gains or losses and plan amendments. Adjustments
arising from plan amendments, experience gains or losses and changes in
assumptions are amortized on a straight-line basis over the expected average
remaining service life of the employee group covered by the plan. Pension fund
assets are valued at market values.

     Accrual of the costs of providing certain post-retirement benefits,
including medical and life insurance coverage, during the active service period
of the employee is recorded monthly and adjusted annually as actuaries' reports
become available.


     Accrual during periods of active employment, for the expected cost of
certain benefits payable to former or inactive employees, is also recorded
monthly and adjusted annually. These benefits include long-term disability
income payments and related medical and insurance costs.

ENVIRONMENTAL COSTS

     Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures that relate to existing conditions
caused by past operations and that do not contribute to current or future
revenue generation are expensed. Provisions for estimated costs are recorded
when environmental remedial efforts are likely and the costs can be reasonably
estimated.

     In determining the provisions, the Company uses the most current
information available, including similar past experiences, available technology,
regulations in effect, the timing of remediation and cost-sharing arrangements.

FOREIGN EXCHANGE TRANSACTIONS

     PCS and its operating subsidiaries have the US dollar as their functional
currency.

     Canadian dollar operating transactions are translated to US dollars at the
average exchange rate of the previous month. Trinidadian dollar operating
transactions are translated to US dollars at the average exchange rate for the
period. Monetary assets and liabilities are translated at period-end exchange
rates. Non-monetary assets owned at December 31, 1994 have been translated under
the Translation of Convenience Method at the December 31, 1994 year-end exchange
rate of US$1.00 = CDN$1.4028. Additions subsequent to December 31, 1994 are
translated at the exchange rate prevailing at the time of the transaction.


     Foreign exchange gains or losses are included in other income.

FINANCIAL INSTRUMENTS

     The Company enters into forward exchange contracts and natural gas futures,
swaps and option agreements to manage its exposure to exchange rate and
commodity price fluctuations. These activities have been designated as hedging
activities by the Company.

     Gains or losses on foreign currency exchange contracts are recognized at
the time that the contracts are entered into and are included in other income.

     Gains or losses resulting from changes in the fair value of natural gas
hedging transactions which have not yet been settled are not recognized as they
generally relate to changes in the spot price of anticipated natural gas
purchases. Gains or losses arising from settled hedging transactions are
deferred as a component of inventory until the product containing the hedged
item is sold, at which time both the natural gas purchase cost and the related
hedging deferral are recorded as cost of sales.

     The Company regularly evaluates its unrecognized or deferred gains and
losses on these derivatives from a net realizable value of inventory perspective
and establishes appropriate provisions, if necessary.

REVENUE RECOGNITION

     Sales revenue is recognized when the product is shipped or a service is
performed. Revenue is recorded based on the F.O.B. mine, plant, warehouse or
terminal price. Transportation costs are recovered from the customer through
sales pricing.

 3.  CHANGE IN ACCOUNTING POLICY

     The Company has adopted the provisions of section 3465 of the Canadian
Institute of Chartered Accountants Handbook "Income Taxes". Under this
accounting policy, deferred income taxes are determined based on the difference
between the financial reporting and tax bases of assets and liabilities using
the enacted rates expected to apply to taxable income in the years in which
those temporary differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense for the period is the tax payable for the
period and the change during the period in deferred tax assets and liabilities.
The effect of this change on prior period financial statements and current
period results is not significant.


                                       49
<PAGE>   54
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                          (in thousands of US dollars)



4.  ACQUISITION OF POTASH COMPANY OF CANADA LIMITED

     On March 3, 1998, the Company acquired all of the outstanding shares of
Potash Company of Canada Limited for $11,439. Concurrent with the closing, the
name Potash Company of Canada Limited was changed to PCS Cassidy Lake Limited
and this company was subsequently wound up. The acquisition has been accounted
for by the purchase method of accounting and, accordingly, the results of
operations of PCS Cassidy Lake have been included in the consolidated financial
statements from March 4, 1998.

     Due to the cessation of mining activities at PCS Cassidy Lake prior to
acquisition, no pro forma information is being presented.

<TABLE>
<CAPTION>
5.   ACCOUNTS RECEIVABLE
                                                     1998            1997
<S>                                            <C>             <C>       
Trade accounts - Canpotex                      $   30,738      $   43,097
               - Other                            247,956         283,485
Non-trade accounts                                 30,055          31,429
                                               --------------------------
                                                  308,749         358,011
Less allowance for doubtful accounts                5,775           6,857
                                               --------------------------
                                               $  302,974      $  351,154
                                               --------------------------

6.   INVENTORIES
                                                     1998            1997
Finished product                               $  176,908      $  162,181
Materials and supplies                            106,797         107,518
Raw materials                                      58,471          59,689
Work in process                                    22,221          24,037
                                               --------------------------
                                               $  364,397      $  353,425
                                               --------------------------
</TABLE>


<TABLE>
<CAPTION>
7.   PROPERTY, PLANT AND EQUIPMENT
                                                  1998
                                  ------------------------------------------
                                               ACCUMULATED
                                               DEPRECIATION AND     NET BOOK
                                      COST     AMORTIZATION         VALUE
                                 -----------   ----------------     --------
<S>                               <C>          <C>              <C>         
Land and improvements             $  206,230   $  23,318        $    182,912
Buildings and improvements           449,096     117,037             332,059
Machinery and equipment            3,034,648     631,476           2,403,172
Mine development costs               125,908      40,608              85,300
                                  ------------------------------------------
                                  $3,815,882   $ 812,439        $  3,003,443
                                  ------------------------------------------
</TABLE>

<TABLE>
<CAPTION>


                                                     1997
                                 ------------------------------------------
                                              ACCUMULATED
                                              DEPRECIATION AND      NET BOOK
                                      COST    AMORTIZATION          VALUE
                                 -----------   ----------------     --------
<S>                              <C>           <C>                  <C>

Land and improvements             $  196,004   $   20,697       $    175,307
Buildings and improvements           421,617      102,494            319,123
Machinery and equipment            2,914,119      501,228          2,412,891
Mine development costs               125,908       37,604             88,304
                                  ------------------------------------------
                                  $3,657,648   $  662,023       $  2,995,625
                                  ------------------------------------------
</TABLE>


     Depreciation and amortization of property, plant and equipment included in
Cost of Goods Sold and in Selling and Administrative was $154,215 (1997 -
$141,241; 1996 - $87,894).

8.   GOODWILL

<TABLE>
<CAPTION>

                                                     1998              1997
<S>                                                <C>               <C>   
Cost                                           $  586,987        $  586,987
Accumulated amortization                           27,366            12,691
                                               ----------------------------
                                               $  559,621        $  574,296
                                               ----------------------------

</TABLE>

     Amortization of goodwill included in Selling and Administrative
was $14,675 (1997 - $12,238; 1996 - $54).

<TABLE>
<CAPTION>
9. OTHER ASSETS
                                                     1998              1997
<S>                                              <C>               <C>     
Deferred charges - net of
accumulated amortization                         $ 41,268          $ 32,080
Prepaid pension costs                              11,169            13,143
Land held for sale                                  3,490             9,435
Investments, at equity                             23,961            28,041
Investment, at cost                                92,151                 -
Rotational plant maintenance costs
- net of accumulated amortization                  21,103            36,137
Other                                               3,870             4,369
                                                 --------------------------
                                                 $197,012          $123,205
                                                 --------------------------
</TABLE>


Amortization of deferred charges and rotational plant maintenance costs included
in Cost of Goods Sold and in Selling and Administrative was $21,990 (1997 -
$16,523; 1996 - $2,177).

10. SHORT-TERM DEBT

Short-term debt was $94,940 at December 31, 1998 (1997 - $101,928). The weighted
average interest rate on this debt was 6.00% (1997 - 6.17%). The Company had
available lines of credit for short-term financing (net of letters of credit of
$40,431) in the amount of $177,451 at December 31, 1998 (1997 - $205,000).
The lines of credit are unsecured.

<TABLE>
<CAPTION>
11. ACCOUNTS PAYABLE AND ACCRUED CHARGES

                                                     1998              1997
<S>                                              <C>               <C>     
Trade accounts                                   $273,031          $264,679
Accrued interest                                    6,758             3,927
Accrued payroll                                    14,429            17,561
Accrued integration                                42,702            44,534
Income taxes                                            -             3,778
Dividends                                          12,764            13,624
                                                 --------------------------
                                                 $349,684          $348,103
                                                 --------------------------
</TABLE>


     During the year the Company paid severance, relocation and other related
costs in the amount of $1,832 (1997 - $6,394) which were charged against accrued
integration.


                                       50
<PAGE>   55
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                          (in thousands of US dollars)

12.  LONG-TERM DEBT
<TABLE>
<CAPTION>

                                                                                              1998              1997
<S>                                                                                       <C>             <C>
SYNDICATED FACILITIES LED BY THE BANK OF NOVA SCOTIA                                      $488,000        $  685,000
     The Credit Facility provides for aggregate unsecured advances of $925
     million at an interest rate of LIBOR plus a maximum of 0.75% (actual at December
     31, 1998 was 0.40%) or Base Rate Canada Loans, payable throughout the term of
     the Credit Facility. The actual weighted average interest rate at December 31,
     1998 was 5.66%. The Credit Facility is renewable every 364 days with the consent
     of the lenders. No principal payments are required during the revolving period.
     If the Credit Facility is not renewed, it converts to a five-year term facility
     repayable in twenty quarterly instalments each equal to 1% of the principal
     outstanding on the conversion date and a final payment of the remaining
     principal amount due on the fifth anniversary of the conversion date. The
     weighted average interest rate on this obligation was 5.97% in 1998 (1997 -
     5.96%). 

INDUSTRIAL REVENUE AND POLLUTION CONTROL OBLIGATIONS                                        44,266            45,641
     Adjustable Rate Industrial Revenue and Pollution Control Obligations with
     varying interest rates and with maturity dates ranging from 1999 to 2012. No
     sinking fund requirements prior to maturity. The Adjustable Rate Industrial
     Revenue and Pollution Control Obligations bear interest at rates ranging from
     3.41% to 4.30%. The average interest rate on these obligations was 3.67% in 1998
     (1997 - 3.92%). These loans are secured by bank letters of credit, most of which
     are guaranteed by the Company.

NOTES PAYABLE                                                                              400,000           400,000
     7.125% notes payable June 15, 2007. No sinking fund requirements prior
     to maturity. These notes were issued under a shelf registration
     statement covering up to $1,000,000 of debt securities. The notes are
     unsecured.

OBLIGATIONS UNDER CAPITAL LEASES                                                               823             1,163
OTHER                                                                                          591               900
                                                                                          --------------------------
                                                                                           933,680         1,132,704
Less current maturities                                                                        386             2,740
                                                                                          --------------------------
                                                                                          $933,294        $1,129,964
                                                                                          --------------------------
</TABLE>

     The fair values of all long-term obligations (except the Notes Payable
whose approximate fair value at December 31, 1998 was $419,000) are approximated
by their face values.

     Assuming that the Credit Facility will continue to be renewed, long-term
debt at December 31, 1998 will mature as follows:

<TABLE>
<CAPTION>

<C>                                                      <C>           
1999                                                     $    386
2000                                                        8,637
2001                                                            -
2002                                                          221
2003                                                        2,637
Subsequent years                                          921,799
                                                         --------
                                                         $933,680
                                                         --------
</TABLE>

13. COMMITMENTS

LEASE COMMITMENTS

     The Company has long-term lease agreements for buildings, port facilities,
certain ammonia plants in Trinidad, equipment, ocean-going transportation
vessels and rail cars (excluding mineral leases), the latest of which expires in
2017.

     The Company has lease agreements with unaffiliated entities with respect to
two ammonia plants constructed in Trinidad. The minimum annual lease payments
under these agreements are approximately $27,000. The initial terms of the
leases (five years and seven years) are renewable for additional five-year terms
subject to certain conditions. If the leases are not renewed or are otherwise
terminated, the Company may be required to make residual termination payments of
approximately 85% of the estimated $384,000 costs of construction. The Company
has an option to purchase the plants during the terms of the leases for prices
approximating their fair market values at the date of exercise.

     Future minimum lease payments under these operating leases will be
approximately as follows:

<TABLE>
<CAPTION>

<C>                                                      <C>     
1999                                                     $ 87,599
2000                                                       80,502
2001                                                       75,306
2002                                                       72,160
2003                                                       43,183
Subsequent years                                          108,452
</TABLE>

     Rental expense for operating leases for the years ended December 31, 1998,
1997 and 1996 was $86,633, $65,252 and $29,350, respectively.

OTHER COMMITMENTS

     The Company has entered into raw material purchase commitments based upon
market rates at the time of delivery through 2007 in the amount of approximately
$152,816, of which approximately $77,420 relates to 1999.

     The Company has entered into an agreement for the construction of a ship to
be delivered in 1999 for ocean-going transportation of raw materials and
finished products in the amount of $37,000. The balance of the progress payments
of $14,800 is required in 1999.

     BP Chemicals Inc. ("BPC") operates the Lima plant on behalf of the Company
pursuant to a contract providing for the reimbursement of expenses incurred by
BPC in providing such operating services.

     The Company's Trinidad operations have entered into long-term natural gas
contracts with a gas company in Trinidad. The contracts provide for prices which
vary with ammonia market prices, escalating floor prices and minimum purchase
quantities.


                                       51

<PAGE>   56
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                          (in thousands of US dollars)



14. POST-RETIREMENT/POST-EMPLOYMENT BENEFITS AND PENSION PLANS

CANADA

     Substantially all employees of the Company are participants in either a
defined contribution or a defined benefit pension plan. The Company's
obligations under the defined contribution plans are limited to making regular
payments to the plan to match contributions made by the employees for current
services (to a maximum of 5.5% of salary).

     The Company has established a supplemental retirement income plan for
senior management which is unfunded and non-contributory and provides a
supplementary pension benefit. The plan is provided for by charges to earnings
sufficient to meet the projected benefit obligation.

UNITED STATES

     The Company has contributory and defined benefit pension plans that cover a
substantial majority of its employees. Benefits are based on a combination of
years of service and compensation levels, depending on the plan. Generally,
contributions to the US plans are made to meet minimum funding requirements of
the Employee Retirement Income Security Act of 1974 ("ERISA"). Assets of both US
funded plans consist mainly of corporate equity, US government and corporate
debt securities and units of participation in a collective short-term investment
fund.

TRINIDAD

     The Company has contributory defined benefit pension plans that cover a
substantial majority of its employees. Benefits are based primarily on future
service, with past service counting for purposes of vesting and eligibility for
benefits. The plans' assets consist mainly of local government and other bonds,
local mortgage and mortgage-backed securities, fixed income deposits and cash.

ALL PENSION PLANS

     The components of net pension expense for the Company's pension plans,
computed actuarially, were as follows:

<TABLE>
<CAPTION>
                                          1998        1997             1996
<S>                                    <C>         <C>              <C>    
Service cost for benefits
earned during the year                 $11,669     $ 9,827          $ 7,337
Interest cost on projected
benefit obligations                     22,019      19,566           15,351
Expected return on plan assets         (29,900)    (25,234)         (35,551)
Net amortization and deferral            1,730          31           16,875
                                       ------------------------------------
Net pension expense                    $ 5,518     $ 4,190          $ 4,012
                                       ------------------------------------
</TABLE>


Significant actuarial assumptions used in calculating the net pension expense
for the Company's funded plans were as follows:


<TABLE>
<CAPTION>
                                          1998        1997             1996
<S>                                      <C>         <C>              <C>  
Discount rate                            6.75%       7.50%            7.50%
Long-term rate of return
on assets                                9.00%       9.00%            9.00%
Rate of increase in
compensation levels                      5.00%       5.00%            5.00%
</TABLE>


OTHER POST-RETIREMENT PLANS

     The Company provides certain health care and life insurance benefits for
retired employees. These plans are either contributory or non-contributory and
contain certain cost-sharing features such as deductibles and coinsurance. These
plans are unfunded and benefits are subject to change.

     Although the Company prepares its financial statements under Canadian GAAP,
it has continued to apply the treatment prescribed by SFAS No. 106 under US GAAP
"Employers' Accounting for Postretirement Benefits Other Than Pensions" and SFAS
No. 132 "Employers' Disclosures about Pensions and Other Postretirement
Benefits". These statements require the accrual of the cost of providing other
post-retirement benefits, including medical and life insurance coverage, during
the active service period of the employee, and prescribe certain disclosure
requirements.

     The components of this expense, computed actuarially, were as follows:

<TABLE>
<CAPTION>
                                          1998         1997            1996
<S>                                    <C>          <C>              <C>   
Service cost for benefits
earned during the year                 $ 2,903      $ 2,701          $2,233
Interest cost on projected
benefit obligations                      8,025        7,816           6,710
Net amortization and deferral                2            -             (11)
                                       ------------------------------------
Net post-retirement expense            $10,930      $10,517          $8,932
                                       ------------------------------------
</TABLE>


     The significant actuarial assumptions used in determining post-retirement
benefit expense were as follows:

<TABLE>
<CAPTION>
                                           1998       1997            1996
<S>                                       <C>        <C>             <C>  
Discount rate                             6.80%      7.50%           7.50%
Health care cost trend rate              10.00%*    10.80%          11.60%
</TABLE>

*Decreasing gradually to 6.00% in 2003 and thereafter.

     If the health care cost trend rate was increased by 1.0 percent, the
accumulated post-retirement benefit obligation and the aggregate of service and
interest expense would have increased as follows:

<TABLE>
<CAPTION>
                                          1998         1997           1996
<S>                                  <C>            <C>       <C>         
Accumulated post-retirement
benefit obligation                   $   6,325      $ 4,722   $        843
Aggregate of service and
interest cost                              573          490             77
</TABLE>


     The Company has applied Canadian GAAP to prepare its financial statements
but continues to apply SFAS No. 112 under US GAAP "Employers' Accounting for
Postemployment Benefits". This statement requires the Company to accrue, during
periods of active employment, the expected cost of certain benefits payable to
former or inactive employees. These benefits include long-term disability income
payments and related medical and insurance costs.

     The effect of these costs on income before income taxes was $0, $887 and
$486 for 1998, 1997 and 1996, respectively. As at December 31, 1998, the Company
has a recorded liability for these costs of $1,060 (1997 - $1,873).

     All of the Company's US employees may participate in defined contribution
savings plans. These plans are subject to US federal tax limitations and provide
for voluntary employee salary deduction contributions of up to 15 percent of
salary and Company matching contributions of up to 5 percent of salary. The
Company's matching contributions were $3,844 and $3,647 for 1998 and 1997,
respectively.


                                       52

<PAGE>   57
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                          (in thousands of US dollars)

14. POST-RETIREMENT/POST-EMPLOYMENT BENEFITS AND PENSION PLANS (continued)
                         
<TABLE>
<CAPTION>

The change in benefit obligations and change in plan assets for the above
pension and post-retirement/post-employment plans were as follows:
                                                                                                            POST-RETIREMENT/
                                                                                       PENSION              POST-EMPLOYMENT
                                                                                 1998         1997         1998           1997
Change in Benefit Obligations
<S>                                                                          <C>          <C>         <C>           <C>       
Balance, beginning of year                                                   $306,948     $221,134    $ 119,701     $   96,511
Acquisitions                                                                      849       50,582            -         13,455
Canadian benefit obligations                                                   11,156            -            -              -
Service cost                                                                   11,669        9,827        2,903          2,701
Interest cost                                                                  22,019       19,566        8,025          7,816
Participants' contributions                                                       384          282           88             73
Actuarial gain                                                                 20,936       15,744       10,421          3,269
Amendments                                                                          -        2,842            -              -
Benefits paid                                                                 (13,859)     (13,029)      (4,812)        (4,124)
                                                                             -------------------------------------------------
Balance, end of year                                                          360,102      306,948      136,326        119,701
                                                                             -------------------------------------------------
Change in Plan Assets
Fair value, beginning of year                                                 333,020      238,531            -              -
Acquisitions                                                                        -       51,984            -              -
Canadian plan assets                                                           11,156            -            -              -
Actual return on plan assets                                                   34,130       55,685            -              -
Employer contributions                                                          4,080        2,806        4,092          4,051
Participants' contributions                                                     1,110          987          720             73
Valuation allowance                                                              (910)      (3,944)           -           (886)
Benefits paid                                                                 (13,859)     (13,029)      (4,812)        (3,238)
                                                                             -------------------------------------------------
Fair value, end of year                                                       368,727      333,020            -              -
                                                                             -------------------------------------------------
Funded Status                                                                   8,625       26,072     (136,326)      (119,701)
Unrecognized Net Gain (Loss)                                                  (11,244)     (26,526)      11,908          2,131
Unrecognized Prior Service Cost                                                 2,270        3,245            -              -
                                                                             -------------------------------------------------
Accrued Benefit Cost                                                             (349)        2,791    (124,418)      (117,570)
Less current portion                                                            2,187            -        3,630          6,378
                                                                             -------------------------------------------------
                                                                                1,838        2,791     (120,788)      (111,192)
Add SFAS 112 liability                                                              -            -       (1,060)        (1,874)
                                                                             -------------------------------------------------
Accrued Post-retirement/Post-employment Benefits Asset (Liability)           $  1,838   $    2,791    $(121,848)     $(113,066)
                                                                             -------------------------------------------------
Amounts recognized in the statements of financial position consist of:
Long-term liability                                                          $ (9,331)   $ (10,352)   $(121,848)     $(113,066)
Prepaid pension asset                                                          11,169       13,143            -              -
                                                                             -------------------------------------------------
                                                                             $  1,838   $    2,791    $(121,848)     $(113,066)
                                                                             -------------------------------------------------
</TABLE>


The aggregate pension accumulated benefit obligations and aggregate fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets are as follows:

<TABLE>
<CAPTION>
                                                                                                           POST-RETIREMENT/
                                                                                       PENSION             POST-EMPLOYMENT
                                                                                 1998         1997        1998         1997
<S>                                                                        <C>            <C>        <C>          <C>      
Accumulated benefit obligations                                            $  100,213     $ 76,274   $ 121,848    $ 113,066
Fair value of plan assets                                                  $   76,698     $ 61,695           -            -
</TABLE>

15. ENVIRONMENTAL COSTS

RECLAMATION AND RESTORATION COSTS

     Site restoration and reclamation costs have been accrued for various sites.
At December 31, 1998, the Company has accrued $29,078 (1997 - $31,953) for the
Aurora, North Carolina facility, $66,412 (1997 - $66,810) for the White Springs,
Florida facility, $27,377 (1997 - $27,377) for the Moab, Utah facility, $9,225
(1997 - $12,965) for various sulphur facilities and $5,038 for the Cassidy Lake
facility. The idle sulphur facilities were part of the acquisition of Texasgulf
Inc. and are undergoing dismantlement and environmental restoration efforts. The
current portion of restoration and reclamation accrued in 1998 totalled $7,731
(1997 - $3,675). These amounts represent the Company's current estimate of
potential site restoration and reclamation costs which were last assessed in
December 1998. These expenditures are generally incurred over an extended period
of time.

     Annual environmental expenditures for reclamation and restoration during
the years ended December 31, 1998, 1997 and 1996 were $71,887, $66,972 and
$69,905, respectively. Of the 1998 amount, $62,958 (1997 - $51,421; 1996 -
$53,507) was charged to operations, $4,059 (1997 - $4,948; 1996 - $6,787) was
capitalized and $4,870 (1997 - $10,603; 1996 - $9,611) was charged against
accrued reclamation costs.

     Certain reclamation obligations are currently secured by a surety bond of
approximately $13,000.

CAPPING OF BYPRODUCT GYPSUM STACKS

     In 1993, the State of Florida passed certain legislation requiring
companies to reduce the potential environmental hazards associated with
accumulations of byproduct gypsum (gypsum stacks). The regulations implementing
this legislation require companies to "cap" the gypsum stacks in order to reduce

                                       53
<PAGE>   58
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                          (in thousands of US dollars)


15. ENVIRONMENTAL COSTS (continued)

seepage into the groundwater, when such stacks reach their design capacity (for
the Company, in approximately 35 years), or after March 25, 2001 if groundwater
standards are not being met. At December 31, 1998, a balance of $35,350 (1997 -
$35,350) was included in accrued reclamation costs for this gypsum stack capping
requirement. The obligation of White Springs regarding the gypsum stacks is
guaranteed by PCS.


     In North Carolina, on expiry of the mine's phosphate reserves, capping of
the remaining gypsum stacks must comply with the laws in place at that time.

OTHER ENVIRONMENTAL COSTS

     Other than reclamation, restoration and gypsum stack capping costs
discussed above, no significant costs relating to existing conditions caused by
past operations were incurred by the Company during 1998. At December 31, 1998,
environmental provisions recorded by the Company, other than those related to
reclamation, restoration and gypsum stack capping, as discussed above, were
approximately $3,800.

     The Company's estimated operating expenses, other than reclamation,
restoration and gypsum stack capping, relating to compliance with environmental
laws and regulations governing ongoing operations were approximately $20,473 for
the year ended December 31, 1998 (1997 - $15,520; 1996 - $9,533). In addition,
capital expenditures for other environmental compliance were approximately
$9,926 for the year ended December 31, 1998 (1997 - $10,464; 1996 - $2,123).

16. SHARE CAPITAL

AUTHORIZED:

     The Company is authorized to issue an unlimited number of common shares
without par value and an unlimited number of first preferred shares. The first
preferred shares may be issued in one or more series with rights and conditions
to be determined by the Board of Directors.

<TABLE>
<CAPTION>

ISSUED:                                       1998              1997              1996
                                     CONSIDERATION     CONSIDERATION     CONSIDERATION
                                           
<S>                                     <C>               <C>                 <C>     
Issued, beginning of year               $1,211,049        $  630,484          $627,700
Shares issued under option                  15,414             5,826             2,634
Shares issued to purchase
Arcadian Corporation                             -           573,278                 -
Shares issued for dividend
reinvestment plan                            1,136             1,461               150
                                        ----------------------------------------------
Issued, end of year                     $1,227,599        $1,211,049          $630,484
                                        ----------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
ISSUED:                                  1998          1997              1996
                                    NUMBER OF     NUMBER OF         NUMBER OF
                                       COMMON        COMMON            COMMON
                                       SHARES        SHARES            SHARES
<S>                                <C>           <C>               <C>       
Issued, beginning of year          53,896,186    45,581,864        45,439,667
Shares issued under option            332,800       267,350           140,050
Shares issued to purchase
Arcadian Corporation                        -     8,029,092                 -
Shares issued for dividend
reinvestment plan                      14,809        17,880             2,147
                                   ------------------------------------------
Issued, end of year                54,243,795    53,896,186        45,581,864
                                   ------------------------------------------
</TABLE>


STOCK OPTIONS

     At December 31, 1998, there were stock options outstanding in respect of
2,947,075 common shares granted to certain employees of the Company and the
directors of PCS with an exercise price from CDN$14.00 to CDN$121.50 for options
held by optionees resident in Canada, and US$12.00 to US$86.75 for optionees
resident in the United States. As at December 31, 1998, 1,682,325 shares were
subject to exercisable options.

     The foregoing options have expiry dates ranging from November 30, 1999 to
November 5, 2008.

STOCK-BASED COMPENSATION DISCLOSURE

     The Company continues with its policy of not recording any compensation
expense for the stock options as the exercise price is the quoted market closing
price of the Company's common shares on the last trading day immediately
preceding the date of the grant.

SHAREHOLDER RIGHTS PLAN

     The Board of Directors of the Company adopted a shareholder rights plan
("the Plan") on November 10, 1994. The Plan was amended by the Board of
Directors on March 28, 1995 and May 4, 1995 and approved by the shareholders on
May 11, 1995. Under the Plan, the Board of Directors declared a dividend
distribution of one right for each common share to holders of record. The rights
are not currently exercisable and only become exercisable upon the occurrence of
certain events as specified in the Plan. The Plan was renewed in 1998 and now
expires following the Company's annual meeting in 2001, unless otherwise renewed
or extended.

17. SEGMENTED INFORMATION

     The Company has three reportable business segments: potash, phosphate and
nitrogen. All three segments produce fertilizers for sale to agricultural
customers. In addition, approximately 44 percent of nitrogen and 36 percent of
phosphate net sales revenue is from non-fertilizer products. These business
segments are differentiated by the chemical nutrient contained in the product
that each produces with the exception of phosphate products produced at Geismar,
which are included in the nitrogen business segment. Inter-segment net sales are
made under terms which approximate market value. Each of the phosphate and
nitrogen business segments was acquired as a unit.

<TABLE>
<CAPTION>
                                                                                             1998
                                                               POTASH     PHOSPHATE       NITROGEN    ALL OTHERS       CONSOLIDATED
<S>                                                       <C>           <C>           <C>                    <C>         <C>       
Net sales - third party                                   $   545,491   $   914,197   $    848,075           $ -         $2,307,763
Inter-segment net sales                                        10,342         1,318         66,704             -                  -
Gross margin                                                  322,613       210,626         83,027       (6,919)            609,347
Other income                                                    2,101         6,463         10,610        13,635             32,809
Depreciation and amortization                                  36,242        59,084         86,708         8,846            190,880
Operating income                                              237,615       207,756         61,077      (60,392)            446,056
Assets                                                      1,037,328     1,359,288      1,931,326       206,315          4,534,257
Expenditures for segment capital assets                        43,158        66,958         80,039             -            190,155
</TABLE>

                                       54





<PAGE>   59
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                          (in thousands of US dollars)


17. SEGMENTED INFORMATION (continued)
<TABLE>
<CAPTION>
                                                                                          1997
                                                   POTASH           PHOSPHATE         NITROGEN    ALL OTHERS     CONSOLIDATED
<S>                                          <C>                  <C>           <C>               <C>              <C>       
Net sales - third party                      $     504,167        $   926,490   $      895,272    $        -       $2,325,929
Inter-segment net sales                              9,017              1,460           18,132             -                -
Gross margin                                       262,237            184,386          143,420       (4,872)          585,171
Other income                                         6,010              4,863            9,959        11,612           32,444
Depreciation and amortization                       39,605             55,102           68,996         6,299          170,002
Operating income                                   191,857            181,249          125,705      (51,171)          447,640
Assets                                           1,005,910          1,406,717        1,957,292        57,673        4,427,592
Expenditures for segment capital assets             42,836             47,979           69,522             -          160,337

                                                                                          1996
                                                   POTASH           PHOSPHATE         NITROGEN    ALL OTHERS     CONSOLIDATED
Net sales - third party                      $     403,196        $   891,964   $      108,708    $        -       $1,403,868
Gross margin                                       190,655            191,257            2,062             -          383,974
Other income                                        10,461              5,396                -             -           15,857
Depreciation and amortization                       38,472             51,653                -             -           90,125
Operating income                                   137,762            182,142            2,062      (22,474)          299,492
Assets                                           1,005,220          1,447,173                -        41,994        2,494,387
Expenditures for segment capital assets             28,306             30,633                -             -           58,939
</TABLE>


FINANCIAL INFORMATION BY GEOGRAPHIC AREA IS SUMMARIZED IN THE FOLLOWING TABLE:

<TABLE>
<CAPTION>
                                                            CANADA    UNITED STATES      TRINIDAD        CONSOLIDATED
1998
Net sales to customers outside the Company
<S>                                                    <C>           <C>               <C>           <C>             
 Canada                                                $    21,885       $   29,808      $      -          $   51,693
 United States                                             199,956        1,279,615       110,112           1,589,683
 PhosChem                                                        -          262,168             -             262,168
 Canpotex                                                  252,464                -             -             252,464
 Other                                                      65,441           35,237        51,077             151,755
                                                       --------------------------------------------------------------
                                                       $   539,746       $1,606,828      $161,189          $2,307,763
                                                       --------------------------------------------------------------
Operating income                                       $   209,783       $  220,221      $ 16,052          $  446,056
                                                       --------------------------------------------------------------
Capital assets and goodwill                            $   823,827       $2,448,587      $316,025          $3,588,439
                                                       --------------------------------------------------------------
1997
Net sales to customers outside the Company
 Canada                                                $    14,460       $   27,147      $      -          $   41,607
 United States                                             188,416        1,334,672       100,466           1,623,554
 PhosChem                                                        -          261,502             -             261,502
 Canpotex                                                  229,666                -             -             229,666
 Other                                                      64,261           35,097        70,242             169,600
                                                       --------------------------------------------------------------
                                                       $   496,803       $1,658,418      $170,708          $2,325,929
                                                       --------------------------------------------------------------
Operating income                                       $   163,620       $  257,528      $ 26,492          $  447,640
                                                       --------------------------------------------------------------
Capital assets and goodwill                            $   811,135       $2,463,546      $335,745          $3,610,426
                                                       --------------------------------------------------------------
1996
Net sales to customers outside the Company
 Canada                                                $    14,507       $   28,225      $      -          $   42,732
 United States                                             136,981          668,385             -             805,366
 PhosChem                                                        -          275,644             -             275,644
 Canpotex                                                  184,025                -             -             184,025
 Other                                                      61,526           34,575             -              96,101
                                                       --------------------------------------------------------------
                                                       $   397,039       $1,006,829      $      -          $1,403,868
                                                       --------------------------------------------------------------
Operating income                                       $   113,317       $  186,175      $      -          $  299,492
                                                       --------------------------------------------------------------
Capital assets and goodwill                            $   829,791       $1,150,587      $      -          $1,980,378
                                                       --------------------------------------------------------------
</TABLE>


18. PROVINCIAL MINING AND OTHER TAXES
<TABLE>
<CAPTION>

Provincial mining taxes and other taxes consist of:

                                          1998         1997           1996
<S>                                    <C>          <C>            <C>    
Potash Production Tax                  $61,639      $53,453        $27,462
Saskatchewan corporate
capital taxes                           18,449       16,859         12,735
                                       -----------------------------------
                                       $80,088      $70,312        $40,197
                                       -----------------------------------
</TABLE>


19. INTEREST EXPENSE
<TABLE>

                                          1998         1997           1996
<S>                                    <C>          <C>            <C>
Interest on
 Short-term debt                       $ 2,942      $ 2,351        $    56
 Long-term debt                         64,632       79,088         46,705
                                       -----------------------------------
                                       $67,574      $81,439        $46,761
                                       -----------------------------------
</TABLE>

                                       55
<PAGE>   60
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                          (in thousands of US dollars)



20. INCOME TAXES

     As the Company operates in a specialized industry and in several tax
jurisdictions, its income is subject to various rates of taxation.

     The provision for income taxes differs from the amount that would have
resulted from applying the Canadian statutory income tax rates to income before
income taxes as follows:

<TABLE>
<CAPTION>
                                          1998        1997             1996
Income before income taxes
<S>                                   <C>         <C>              <C>        
Canada                                $122,490    $ 67,606         $ 81,067
United States                          243,275     272,520          171,664
Trinidad                                12,717      26,075                -
                                      -------------------------------------
Income before income taxes            $378,482    $366,201         $252,731
                                      -------------------------------------
Federal and Provincial
Statutory tax rates                     46.12%      46.12%           46.12%
                                      -------------------------------------
Tax at statutory rates                $174,556    $168,892         $116,560

Adjusted for the effect of:
 Net non-deductible provincial
  taxes and royalties and
  resource allowances                   19,327      (7,025)         (22,879)
 Additional tax deductions             (63,330)    (73,631)         (44,255)
 Difference between Canadian
  rate and rates applicable to
  subsidiaries in other countries      (14,071)    (24,662)         (10,359)
Other                                      997       5,489            4,628
                                      -------------------------------------
Income tax expense                    $117,479    $ 69,063         $ 43,695
                                      -------------------------------------
</TABLE>


<TABLE>
<CAPTION>
Details of income tax expense are as follows:
Canada
<S>                                   <C>         <C>              <C>       
- Current                             $  2,351    $  1,024          $ 3,097
- Deferred                              75,405       2,146                -
United States - Federal
- Current                                6,177      31,888           16,861
- Deferred                              10,683      25,063           20,651
United States - State
- Current                                4,963           -                -
- Deferred                              14,561        (716)           3,086
Trinidad
- Current                                5,808      13,564                -
- Deferred                              (2,469)     (3,906)               -
                                      -------------------------------------
Income tax expense                    $117,479    $ 69,063          $43,695
                                      -------------------------------------
</TABLE>


The tax effects of temporary differences that give rise to significant portions
of the net deferred income tax liability are:

<TABLE>
<CAPTION>
                                                      1998             1997
Deferred income tax assets:
<S>                                              <C>              <C>      
 Loss and credit carryforwards                   $ 127,653        $  91,884
 Post-retirement/post-employment benefits           50,161           49,551
 Accrued reclamation costs                          44,555           49,577
 Other                                              11,312           63,858
                                                 --------------------------
Total deferred income tax assets                   233,681          254,870
                                                 --------------------------
Deferred income tax liabilities:
 Basis difference in fixed assets                  628,551          574,673
 Other                                              22,983           18,628
                                                 --------------------------
Total deferred income tax liabilities              651,534          593,301
                                                 --------------------------
Net deferred income tax liability                $ 417,853        $ 338,431
                                                 --------------------------
</TABLE>


     At December 31, 1998, the Company has income tax losses carried forward of
approximately $300,210 which will begin to expire in 2010. The benefit relating
to these loss carryforwards has been recognized by reducing deferred income tax
liabilities. In addition, the Company has alternative minimum tax credits of
approximately $20,359 which carry forward indefinitely.

21.  NET INCOME PER SHARE (EARNINGS PER SHARE)

     Net income per share was calculated on the weighted average number of
shares issued and outstanding during the twelve months ended December 31, 1998
of 54,177,000 (1997 -52,275,000; 1996 - 45,537,000). Fully diluted net income
per share for the year ended December 31, 1998 was $4.77 (1997 -$5.61; 1996 -
$4.53).

22.  FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

     The Company uses financial instruments, including forward exchange
contracts, futures, swaps and option agreements to hedge foreign exchange and
commodity price risk. The Company does not hold or issue financial instruments
for trading purposes.

     At December 31, 1998, the Company had no commitments in the form of foreign
exchange contracts to sell US dollars (1997 - US$46,000).

     The Company's exposure to interest rate risk is limited to its long-term
debt. The effective interest rate on the long-term debt approximates the stated
rate because there are no significant premiums or discounts.

     In addition to physical spot and term purchases, the Company at times
employs futures, swaps and option agreements to establish the cost on a portion
of its natural gas requirements. These instruments are intended to hedge the
future cost of the committed and anticipated natural gas purchases for its US
nitrogen plants. Under these arrangements, the Company receives or makes
payments based on the differential between a specified price and the actual spot
price of natural gas. The Company has certain available lines of credit which
are utilized to reduce cash margin requirements to maintain the derivatives.
Cash margin requirements which have been advanced as at December 31, 1998
totalled $16,199 (1997 - $11,158) and are included in inventory.

     As at December 31, 1998, the Company had derivatives qualifying for
deferral in the form of futures and swaps. The futures represented a notional
amount of 33.1 million MMBtus with maturities in 1999 through 2001. The swaps
represented a notional amount of 107.3 million MMBtus with maturities in 1999
through 2003. As at December 31, 1998, net losses arising from settled hedging
transactions which are included as a component of finished goods inventory were
not material.

     The Company is exposed to credit related losses in the event of
non-performance by counterparties to derivative financial instruments. The
Company anticipates, however, that counterparties will be able to fully satisfy
their obligations under the contracts.

     The major concentration of credit risk arises from the Company's
receivables. A majority of the Company's sales are in North America and are
primarily for use in the agricultural industry. The Company seeks to manage the
credit risk relating to these sales through a credit management program.
Internationally, the Company's products are sold primarily through two export
associations whose accounts receivable are either insured or secured by letters
of credit.

     The carrying amount of the Company's cash and cash equivalents, accounts
receivable, short-term debt and accounts payable and accrued charges
approximate fair values because of short-term maturities. The carrying amount
of the Company's long-term debt (except the Notes Payable whose approximate
fair value at December 31, 1998 was $419,000) approximates estimated fair value
because the stated interest rates approximate the market rate.


                                       56
<PAGE>   61
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                          (in thousands of US dollars)



23. CONTINGENCIES

GENERAL

     PCS is a shareholder in Canpotex which markets potash offshore. Should any
operating losses or other liabilities be incurred by Canpotex, the shareholders
have contractually agreed to reimburse Canpotex for such losses or liabilities
in proportion to their productive capacity. There were no such operating losses
or other liabilities in 1998.

     In common with other companies in the industry, the Company is unable to
acquire insurance for underground assets.

     In June 1993, the Company was served with a complaint relating to a suit
filed in the United States District Court for Minnesota against most North
American potash producers, including the Company. The complaint alleged a
conspiracy among the defendants to fix the price of potash purchased by the
plaintiffs as well as potash purchased by the members of a class of certain
purchasers proposed by the plaintiffs. The complaint sought treble damages in an
unspecified amount and other relief. The Company filed a motion for summary
judgment on December 22, 1995. On January 2, 1997, Judge Richard H. Kyle issued
an order granting the defendants' motions for summary judgment and dismissing
the lawsuit. The plaintiffs appealed that order to the United States Court of
Appeals for the Eighth Circuit on January 31, 1997. Oral arguments were heard on
November 17, 1997.

     Additional complaints were filed in the California and Illinois State
Courts on behalf of purported classes of indirect purchasers of potash in those
states. The parties in the California lawsuit have agreed to stay proceedings
pending the outcome of the appeal to the United States Court of Appeals for the
Eighth Circuit. The Illinois State Court complaint has been dismissed for
failure to state a cause of action.

     On May 7, 1997, J. Douglas Campbell, Alfred L. Williams, Peter H. Kesser
and David L. Alyea, former officers of Arcadian Corporation, filed lawsuits
against PCS in the United States District Court for the Western District of
Tennessee. The complaints allege that PCS breached employment agreements between
Arcadian and the officers and breached the related assumption agreement among
PCS, PCS Nitrogen and Arcadian. The complaints of Mr. Campbell, Mr. Williams,
Mr. Kesser and Mr. Alyea seek damages in excess of $22.2 million, $6.2 million,
$3.7 million and $4.2 million, respectively. In addition, on October 14, 1997,
Charles Lance, a former officer of Arcadian Corporation, filed a lawsuit in the
same court against PCS also alleging breaches of his employment agreement and
the related assumption agreement. Mr. Lance seeks damages in an amount exceeding
$3.0 million. Each complaint also seeks certain additional unspecified damages.
Trial with respect to the claims of Mr. Campbell, Mr. Williams and Mr. Kesser
commenced on August 17, 1998 and concluded on August 25, 1998. On December 1,
1998, the court entered judgments in the amounts of $12.7 million, $3.2 million
and $2.6 million in the favor of Mr. Campbell, Mr. Williams and Mr. Kesser,
respectively, subject to pending applications for attorneys' fees or additional
amounts to compensate the Arcadian executives for the impact of certain excise
taxes, if applicable. The Company has filed Notices of Appeal with respect to
these judgments. The Company has settled the claim of Mr. Alyea for $0.7 million
and attorneys' fees (subject to the application for fees) and the claim of Mr.
Lance for the total amount of $0.6 million. Management of the Company, having
consulted with legal counsel, believes that the lawsuits will not have a
material adverse effect on the Company's financial condition or results of
operations.

     On March 13, 1996, PCS Nitrogen, two other nitrogen producers and up to
thirty unidentified parties were named as defendants in a lawsuit filed in the
name of the Port Authority of New York and New Jersey (the "Port Authority") in
New Jersey State Court. The lawsuit was actually filed by the attorneys hired by
the Port Authority's subrogated insurance carriers. The Port Authority's
insurers are seeking to recover damages allegedly incurred as a result of the
explosion at the World Trade Center in New York City on February 26, 1993.


     On February 7, 1997, the defendants filed a motion to dismiss the suit for
failure to state a claim upon which relief could be granted. On December 19,
1997, that motion was granted and the complaint was dismissed with prejudice. On
January 15, 1998, the Port Authority appealed the dismissal to the United States
Court of Appeals for the Third Circuit. The case was briefed and oral argument
was heard on September 17, 1998. Although neither the Port Authority nor its
subrogated insurers have alleged or otherwise revealed the amount of damages
sought from PCS Nitrogen in the lawsuit, the Port Authority stated in an
affidavit submitted to the court in support of its motion to disqualify its
insurers' counsel that as of April 9, 1996, the Port Authority had submitted to
its insurers claims relating to the explosion totalling approximately $340
million of which the insurers had paid approximately $160 million. PCS Nitrogen
is unaware of any basis for any liability and intends to continue to vigorously
defend the lawsuit.

     Various other claims and lawsuits are pending against the Company. While it
is not possible to determine the ultimate outcome of such actions at this time,
it is management's opinion that the ultimate resolution of such items, including
those pertaining to environmental matters, will not have a material effect on
the Company's financial condition or results of operations.

UNCERTAINTY DUE TO THE YEAR 2000 ISSUE

     The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect the Company's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting the
Company, including those related to the efforts of customers, suppliers, or
other third parties, will be fully resolved.

24. RELATED PARTY TRANSACTIONS

     The Company has a one-third interest in Canpotex which markets potash
offshore. Sales to Canpotex are at prevailing market prices. Sales for the year
ended December 31, 1998 were $252,464 (1997 - $229,666; 1996 - $184,025).

     Account balances resulting from the Canpotex transactions are included in
the Consolidated Statements of Financial Position and settled on normal trade
terms.

25. QUARTERLY RESULTS (UNAUDITED)

     The following quarterly information in management's opinion includes all
adjustments (consisting solely of normal recurring adjustments) necessary for
fair presentation.

<TABLE>
<CAPTION>
                                  FIRST      SECOND       THIRD      FOURTH
                                QUARTER     QUARTER     QUARTER     QUARTER
1998
<S>                          <C>         <C>         <C>         <C>       
Net sales                    $  583,812  $  660,442  $  521,368  $  542,141
                             ----------------------------------------------
Gross Margin                 $  150,673  $  186,631  $  140,188  $  131,855
                             ----------------------------------------------
Operating Income             $  109,790  $  146,909  $   95,575  $   93,782
                             ----------------------------------------------
Net Income                   $   63,009  $   89,117  $   54,704  $   54,173
                             ----------------------------------------------
Net Income per Share         $     1.17  $     1.64  $     1.01  $     1.00
                             ----------------------------------------------

1997
Net sales                    $  464,834  $  676,648  $  573,773  $  610,674
                             ----------------------------------------------
Gross Margin                 $  115,027  $  184,152  $  149,466  $  136,526
                             ----------------------------------------------
Operating Income             $   90,513  $  154,714  $  108,851  $   93,562
                             ----------------------------------------------
Net Income                   $   56,365  $   96,980  $   71,418  $   72,375
                             ----------------------------------------------
Net Income per Share         $     1.18  $     1.81  $     1.33  $     1.35
                             ----------------------------------------------
</TABLE>


                                       57

<PAGE>   62
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                          (in thousands of US dollars)



25. QUARTERLY RESULTS (UNAUDITED) (continued)

     Net Income per Share for each quarter has been computed based on the
weighted average number of shares issued and outstanding during the respective
quarter; therefore, quarterly amounts may not add to the annual total.

26. COMPARATIVE FIGURES

     Certain of the prior years' figures have been reclassified to conform with
the current year's presentation.

27. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

     A description of certain significant differences between Canadian GAAP and
US GAAP follows:

     Marketable securities: The Company's investment in Israel Chemicals Ltd.
("ICL") is stated at cost. US GAAP would require that this investment be
classified as available-for-sale and be stated at market value.

     Foreign currency translation adjustment: The foreign currency translation
adjustment results from the restatement of prior periods so that all periods
presented are in the same reporting currency. US GAAP requires that the
comparative Consolidated Statements of Income and the Consolidated Statements of
Cash Flow be translated using weighted average exchange rates for the applicable
periods. In contrast, the Consolidated Statements of Financial Position are
translated using the exchange rates at the end of the applicable periods in
accordance with Canadian GAAP. The difference in these exchange rates is what
gives rise to the foreign currency translation adjustment.

     Net sales: Sales are recorded net of freight costs (less related revenues)
and transportation and distribution expenses. US GAAP would require that net
freight costs be included in cost of sales and transportation and distribution
expenses be reported as an operating expense.

     Non-cash financing and investing activities: Non-cash financing and
investing activities are included in the statement of cash flow. US GAAP
requires that non-cash financing and investing activities be disclosed
supplementally rather than being included in the statement of cash flow.

     Comprehensive income: Comprehensive income is not recognized under Canadian
GAAP. US GAAP would require the recognition of comprehensive income.

     In 1995, the Financial Accounting Standards Board issued SFAS No. 123
"Accounting for Stock-Based Compensation". The Company has decided to continue
to apply APB Opinion 25 ("APB 25") for measurement of compensation of employees.

     THE APPLICATION OF US GAAP, AS DESCRIBED ABOVE, WOULD HAVE HAD THE
FOLLOWING APPROXIMATE EFFECTS ON NET INCOME, NET INCOME PER SHARE, TOTAL ASSETS
AND SHAREHOLDERS' EQUITY:

<TABLE>
<CAPTION>
                                                                  1998              1997            1996
<S>                                                       <C>              <C>              <C>         
Net income as reported                                    $    261,003     $     297,138    $    209,036
Item decreasing reported net income
Deferred income taxes                                                -          (11,382)          (7,216)
                                                          ----------------------------------------------
Approximate net income - US GAAP                          $    261,003     $     285,756    $    201,820
                                                          ----------------------------------------------
Approximate net income per share - US GAAP                $       4.82     $        5.47    $       4.43
                                                          ----------------------------------------------
Total assets as reported                                  $  4,534,257     $   4,427,592    $  2,494,387
Items increasing reported total assets
 Deferred income tax asset                                           -                 -          15,727
 Available-for-sale security (unrealized holding gain)          14,906                 -               -
                                                          ----------------------------------------------
Approximate total assets - US GAAP                        $  4,549,163     $   4,427,592    $  2,510,114
                                                          ----------------------------------------------
Shareholders' equity as reported                          $  2,453,761     $   2,227,891    $  1,405,496
Items increasing reported shareholders' equity
 Deferred income taxes                                               -                 -          11,382
 Other Comprehensive Income                                      8,944                 -               -
                                                          ----------------------------------------------
Approximate shareholders' equity - US GAAP                $  2,462,705     $   2,227,891    $  1,416,878
                                                          ----------------------------------------------
</TABLE>


SUPPLEMENTAL US GAAP DISCLOSURE
     Available-for-Sale Security

     The Company's investment in ICL is classified as available-for-sale. The
fair market value of this investment at December 31, 1998 was $107,057 and the
unrealized holding gain was $14,906.

     New Accounting Pronouncements

     In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits",
which was effective for the Company's 1998 fiscal year. Adoption of this
standard did not have a material impact on the Company's consolidated financial
statements. In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
will be effective for the Company's 2000 fiscal year. The impact on the
Company's consolidated financial statements of the adoption of this standard is
not presently determinable.

     Stock Compensation Plans

     The Company has two stock-based compensation plans which are described
below. The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. No compensation cost has been recognized under APB 25
as the exercise price of the options at the grant date is equal to the market
value of the shares at the grant date. Had compensation cost for the Company's
plans been determined based on the fair value at the grant dates for awards
under the plans consistent with the method of SFAS No. 123, the Company's net
income and net income per share for the years ending December 31, 1998, 1997 and
1996 would have been reduced to the pro forma amounts indicated as follows:



                                       58
<PAGE>   63
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                          (in thousands of US dollars)


27. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)

<TABLE>
<CAPTION>
                                      1998                        1997                         1996
                                      ----                        ----                         ----
                            AS REPORTED   PRO FORMA      AS REPORTED  PRO FORMA      AS REPORTED   PRO FORMA
                            -----------   ---------      -----------  ---------      -----------   ----------
<S>                         <C>           <C>            <C>          <C>            <C>           <C>     
Net income                  $ 261,003     $ 239,667      $ 285,756    $ 271,497      $ 201,820     $ 191,936
Net income per share        $    4.82     $    4.42      $    5.47    $    5.19      $    4.43     $    4.21
</TABLE>


     In calculating the foregoing pro forma amounts, the fair value of each
option grant was estimated as of the date of grant using the Modified
Black-Scholes option-pricing model with the following weighted average
assumptions:



<TABLE>
<CAPTION>
                                            1998         1997              1996
<S>                                        <C>          <C>               <C>  
Expected dividend                          $0.92        $1.03             $1.06
Expected volatility                          30%          26%               32%
Risk-free interest rate                    4.83%        5.80%             6.90%
Expected life of option                 10 YEARS     10 years          10 years
Expected forfeitures                         26%          26%               25%
</TABLE>


     The Company has two option plans. Under the Officers and Key Employee
Plans, the Company may, after February 3, 1998, issue up to 6,926,125 common
shares pursuant to the exercise of options. Under the Directors Plan, the
Company may, after January 24, 1995, issue up to 456,000 common shares pursuant
to the exercise of options. Under both plans, the exercise price of each option
equals the closing market price of the Company's shares on the trading day prior
to the grant and an option's maximum term is ten years. All options granted to
date have provided that one-half of the options granted in a year will vest one
year from the date of the grant, with the other half of the options vesting the
following year.

     A summary of the status of the plans as of December 31, 1998, 1997 and 1996
and changes during the years ending on those dates is presented below:

<TABLE>
<CAPTION>
NUMBER OF SHARES SUBJECT TO OPTION
                                             1998          1997              1996
<S>                                     <C>           <C>               <C>      
Outstanding, beginning of year          2,461,125     1,845,475         1,395,525
Granted                                   824,000       889,750           592,000
Exercised                                (332,800)     (267,350)         (140,050)
Cancelled                                  (5,250)       (6,750)           (2,000)
                                        -----------------------------------------
Outstanding, end of year                2,947,075     2,461,125         1,845,475
                                        -----------------------------------------
</TABLE>


<TABLE>
<CAPTION>
WEIGHTED AVERAGE EXERCISE PRICE
                                             1998          1997              1996
<S>                                        <C>           <C>               <C>   
Outstanding, beginning of year             $68.11        $52.90            $34.74
Granted                                     67.88         86.11             71.00
Exercised                                   47.45         23.12             20.95
Cancelled                                   82.61         78.44             74.75
Outstanding, end of year                    70.35         68.11             52.90
</TABLE>


The weighted-average grant-date fair value of options granted during the year
was $18,665 (1997 - $23,712; 1996 - $14,206). The following table summarizes
information about stock options outstanding at December 31, 1998:

<TABLE>
<CAPTION>

                                    OPTIONS OUTSTANDING                                      OPTIONS EXERCISABLE
                                    -------------------                                      -------------------
RANGE OF EXERCISE          NUMBER      WEIGHTED AVERAGE        WEIGHTED AVERAGE                     WEIGHTED AVERAGE
PRICES                OUTSTANDING        REMAINING LIFE          EXERCISE PRICE           NUMBER      EXERCISE PRICE
-----------------     -----------      ----------------        ----------------         --------    ----------------
<C>       <C>              <C>                  <C>                      <C>              <C>                 <C>   
$12.00 to $18.38           18,000               2 years                  $15.84           18,000              $15.84
$20.00 to $25.38          129,350               5 years                   21.96          129,350               21.96
$32.25                    176,650               6 years                   32.25          176,650               32.25
$67.88                    824,000              10 years                   67.88                -                   -
$70.38 to $74.75          917,575               8 years                   72.43          917,575               72.43
$81.75 to $86.75          881,500               9 years                   86.34          440,750               86.34
</TABLE>

                                       59

<PAGE>   64
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                          (in thousands of US dollars)


27. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)

     The following supplemental schedules present the Consolidated Financial
Position, Income and Retained Earnings, Cash Flow and Comprehensive Income in
accordance with US GAAP as adjusted for the GAAP differences described in this
note.

<TABLE>
<CAPTION>
SUPPLEMENTAL SCHEDULE OF CONSOLIDATED FINANCIAL POSITION
As at December 31
(in thousands of US dollars)
                                                                1998                1997
<S>                                                       <C>                 <C>       
ASSETS
Current Assets
  Cash and cash equivalents                               $   67,971          $    8,756
  Accounts receivable                                        302,974             351,154
  Inventories                                                364,397             353,425
  Prepaid expenses                                            38,839              21,131
                                                          ------------------------------
                                                             774,181             734,466
Property, plant and equipment                              3,003,443           2,995,625
Goodwill                                                     559,621             574,296
Other assets                                                 211,918             123,205
                                                          ------------------------------
                                                          $4,549,163          $4,427,592
                                                          ------------------------------
LIABILITIES
Current Liabilities
 Short-term debt                                          $   94,940          $  101,928
 Accounts payable and accrued charges                        349,684             348,103
 Current portion of long-term debt                               386               2,740
                                                          ------------------------------
                                                             445,010             452,771
Long-term debt                                               933,294           1,129,964
Deferred income tax liability                                423,815             338,431
Accrued post-retirement/post-employment benefits             131,179             123,418
Accrued reclamation costs                                    129,399             139,105
Other non-current liabilities and deferred credits            23,761              16,012
                                                          ------------------------------
                                                           2,086,458           2,199,701
                                                          ------------------------------
SHAREHOLDERS' EQUITY
Share Capital                                              1,227,599           1,211,049
Contributed Surplus                                          336,486             336,486
Retained Earnings                                            910,605             701,285
Foreign Currency Translation Adjustment                     (20,929)            (20,929)
Other Comprehensive Income                                     8,944                   -
                                                          ------------------------------
                                                           2,462,705           2,227,891
                                                          ------------------------------
                                                          $4,549,163          $4,427,592
                                                          ------------------------------
</TABLE>


<TABLE>
<CAPTION>
SUPPLEMENTAL SCHEDULE OF CONSOLIDATED INCOME AND RETAINED EARNINGS
For the Years Ended December 31
(in thousands of US dollars)
                                                                1998              1997                1996
<S>                                                       <C>               <C>                 <C>       
Net sales                                                 $2,601,697        $2,610,346          $1,552,885
Cost of goods sold                                         1,914,757         1,963,565           1,119,758
                                                          ------------------------------------------------
GROSS MARGIN                                                 686,940           646,781             433,127
                                                          ------------------------------------------------
Selling, distribution and administrative                     193,605           161,273             109,295
Provincial mining and other taxes                             80,088            70,312              40,197
Other income                                                (32,809)          (32,444)            (15,857)
                                                          ------------------------------------------------
                                                             240,884           199,141             133,635
                                                          ------------------------------------------------
OPERATING INCOME                                             446,056           447,640             299,492
INTEREST EXPENSE                                              67,574            81,439              46,761
                                                          ------------------------------------------------
INCOME BEFORE INCOME TAXES                                   378,482           366,201             252,731
INCOME TAXES                                                 117,479            80,445              50,911
                                                          ------------------------------------------------
NET INCOME                                                   261,003           285,756             201,820
RETAINED EARNINGS, BEGINNING OF YEAR                         701,285           470,837             317,216
DIVIDENDS                                                    (51,683)          (55,308)            (48,199)
                                                          ------------------------------------------------
RETAINED EARNINGS, END OF YEAR                            $  910,605         $ 701,285           $ 470,837
                                                          ------------------------------------------------
NET INCOME PER SHARE - BASIC                              $     4.82         $    5.47           $    4.43
                                                          ------------------------------------------------
NET INCOME PER SHARE - FULLY DILUTED                      $     4.80         $    5.42           $    4.39
                                                          ------------------------------------------------
DIVIDENDS PER SHARE                                       $     0.96         $    1.03           $    1.06
                                                          ------------------------------------------------
</TABLE>
                                      
                                       60

<PAGE>   65
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                          (in thousands of US dollars)


27. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)

<TABLE>
<CAPTION>
SUPPLEMENTAL SCHEDULE OF CONSOLIDATED CASH FLOW
For the Years Ended December 31
(in thousands of US dollars)
                                                                          1998               1997               1996
<S>                                                                   <C>                <C>                <C>     
OPERATING ACTIVITIES
Net income                                                            $261,003           $285,756           $201,820
Items not affecting cash
 Depreciation and amortization                                         190,880            170,002             90,125
 (Gain) loss on disposal of property, plant and equipment                  (99)            (4,739)             2,152
 Provision for deferred income tax                                      97,203             45,873             30,953
 Provision for post-retirement/post-employment benefits                  6,848              6,166              5,890
CHANGES IN NON-CASH OPERATING WORKING CAPITAL
 Accounts receivable                                                    48,751             23,470             (7,400)
 Inventories                                                            (7,859)            19,873              2,493
 Prepaid expenses                                                      (16,603)             3,736             (1,393)
 Accounts payable and accrued charges                                   (2,477)           (68,623)           (19,214)
Accrued reclamation costs                                               (7,436)            (7,407)            (5,021)
Other non-current liabilities and deferred credits                       7,749             (6,286)            (4,219)
                                                                      ---------------------------------------------- 
CASH PROVIDED BY OPERATING ACTIVITIES                                  577,960            467,821            296,186
                                                                      ---------------------------------------------- 
INVESTING ACTIVITIES
Additions to property, plant and equipment                            (190,155)          (160,337)           (58,939)
Acquisition of Arcadian Corporation                                          -           (474,985)                 -
Proceeds from disposal of property, plant and equipment                 31,926             15,276             22,716
Additions to other assets                                              (85,066)           (22,091)            (2,819)
                                                                      ---------------------------------------------- 
CASH USED IN INVESTING ACTIVITIES                                     (243,295)          (642,137)           (39,042)
                                                                      ---------------------------------------------- 
FINANCING ACTIVITIES
Proceeds from long-term obligations                                    143,000          1,210,000                  -
Repayment of long-term obligations                                    (375,429)          (699,979)          (258,556)
Proceeds from short-term debt                                          215,000            210,000                  -
Repayment of short-term debt                                          (221,988)          (108,072)                 -
Repayment of Senior Notes                                                 (900)          (374,526)                 -
Dividends                                                              (51,683)           (55,308)           (48,199)
Issuance of shares                                                      16,550              7,287              2,784
                                                                      ---------------------------------------------- 
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES                       (275,450)           189,402           (303,971)
                                                                      ---------------------------------------------- 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                        59,215             15,086            (46,827)
CASH AND CASH EQUIVALENTS (BANK INDEBTEDNESS), BEGINNING OF YEAR         8,756             (6,330)            40,497
                                                                      ---------------------------------------------- 
CASH AND CASH EQUIVALENTS (BANK INDEBTEDNESS), END OF YEAR            $ 67,971           $  8,756          $  (6,330)
                                                                      ---------------------------------------------- 
</TABLE>


SUPPLEMENTAL CASH FLOW INFORMATION - 1997
     On March 6, 1997, the Company acquired all of the outstanding shares of
Arcadian Corporation. The consideration paid included 8,029,092 common shares of
the Company valued at $573,278.

<TABLE>
<CAPTION>
SUPPLEMENTAL SCHEDULE OF CONSOLIDATED COMPREHENSIVE INCOME
For the Years Ended December 31
(in thousands of US dollars)
                                                                          1998             1997                1996
<S>                                                                   <C>              <C>                 <C>     
Net income                                                            $261,003         $285,756            $201,820
                                                                      --------------------------------------------- 
Other comprehensive income
Unrealized holding gain on security                                     14,906                -                   -
Deferred income tax expense related to other comprehensive income       (5,962)               -                   -
                                                                      --------------------------------------------- 
Other comprehensive income, net of tax                                   8,944                -                   -
                                                                      --------------------------------------------- 
Comprehensive income                                                  $269,947         $285,756            $201,820
                                                                      --------------------------------------------- 
</TABLE>

                                       61




<PAGE>   66
                               BOARD OF DIRECTORS

ISABEL B. ANDERSON  [PHOTO]
     Ms. Anderson, President and Chief Executive Officer of A&L Information
Brokers, a Calgary-based company, joined the PCS Board in 1989 and is on the
executive committee. A longtime Professor of Economics at the University of
Saskatchewan and specialist in international economics and Canadian public
policy, she was a Commissioner in 1986 for Saskatchewan's public hearings on the
Canada-United States trade negotiations. She has served on the Canadian
delegation to the United Nations Conference on Science and Technology and the
Canadian NGO delegation to the United Nations Conference on Trade and
Development. She focuses on the implications of public policy for the growth and
development of the Western Canadian economy.

DOUGLAS J. BOURNE  [PHOTO]
     Mr. Bourne, of Houston, Texas, is a director, former Chairman and retired
CEO of Battle Mountain Gold Company and, before that, Group Vice President and
director of Pennzoil Company, and Chairman and CEO of Duval Corporation, its
mining subsidiary. A past Chairman of the Potash & Phosphate Institute and the
Sulphur Institute, and a director of The Fertilizer Institute and the American
Mining Congress, he was elected to the PCS Board in 1990 and heads the
environmental affairs committee.

CHARLES E. CHILDERS  [PHOTO]
     Mr. Childers, Chairman and CEO of Potash Corporation of Saskatchewan Inc.
and its predecessor company since 1987, joined the Board in 1989 and became
Chairman in 1990. He is Chairman of the executive committee. He is past
President of the International Fertilizer Industry Association and past Chairman
of the Potash & Phosphate Institute, Canpotex Limited, the Saskatchewan Potash
Producers Association and The Fertilizer Institute. He has served on the
Fertilizer Industry Advisory Committee to the United Nations Food and
Agriculture Organization. He sits on the boards of directors of Battle Mountain
Gold Company and the Conference Board of Canada, and formerly served on the
boards of QUNO and KAP Resources.

THE HONOURABLE WILLARD Z. ESTEY, Q.C.  [PHOTO]
     Mr. Estey, of Toronto, Ontario, is a former Chief Justice of Ontario and
Justice of the Supreme Court of Canada. He was appointed Queen's Counsel in 1960
and Companion, Order of Canada, in 1991. A PCS director since 1990, he sits on
the audit committee. He is a director of Canwest Global Communications
Corporation, CamVec Corporation and Fundy Cable Ltd. He is Chairman of the
Ballard Foundation and recently conducted the Grain Handling and Transportation
Review for the Government of Canada.

DALLAS J. HOWE  [PHOTO]
     Mr. Howe, President and CEO of Advanced DataSystems Ltd. and BDM
Information Systems Group of Companies, served on the PCS Board from 1982 to
1989 and was reappointed in 1991. He sits on the audit committee. He has been
President, CEO and founder of an extensive group of high technology information
and data systems companies over twenty years, and is a director of the Saskatoon
Regional Economic Development Authority and Saskatoon City Hospital Foundation.
He has been appointed to the board of governors of the University of
Saskatchewan, and named by Canada's Minister of International Trade to the
Minister's Medical and Health Sectoral Advisory Group.

JAMES F. LARDNER  [PHOTO]
     Mr. Lardner, of Davenport, Iowa, is a retired Vice President of Deere &
Company who was responsible for agricultural tractor design and North American
tractor operations. He joined the PCS Board in 1989 and serves on the executive
committee. He is a director of the Sears Manufacturing Company and a former
director of the Trane Company and American Standard Inc. Elected to the National
Academy of Engineering in 1985, he often serves on bodies which advise United
States government agencies and departments on science, technology and
engineering policy. He is a consultant on manufacturing strategy and management,
and manufacturing and information technology.

DARYL K. SEAMAN  [PHOTO]
     Mr. Seaman, Chairman and President of Dox Investments Inc. in Calgary,
Alberta, joined the PCS Board of Directors in 1989 and is a member of the
compensation committee. Former Chairman and CEO of Bow Valley Industries Ltd.,
he is a director of Tetonka Drilling Inc., Encal Energy Ltd., Renaissance Energy
Ltd., Far West Mining Ltd., Alberta Basic Industries Corporation, Canadian
Chemical Reclaiming Ltd. and Bow Valley Energy Ltd. He is co-owner and director
of the Calgary Flames Hockey Club.

E. ROBERT STROMBERG, Q.C.  [PHOTO]
     Mr. Stromberg, a Partner in the Saskatchewan law firm Robertson Stromberg,
was elected to the PCS Board in 1991 and serves on the executive committee.
Admitted to the Saskatchewan Bar in 1969 and appointed Queen's Counsel in 1984,
he is a member of the Law Society of Saskatchewan and the Saskatoon Bar
Association. He serves on the advisory board for the Centre for International
Business Studies, is Chairman of the Saskatoon Airport Authority, a director of
NorSask Forest Products Inc. and Hitachi Canadian Industries Ltd., and a
director and past President of Saskatchewan Place.

JACK G. VICQ  [PHOTO]
     Mr. Vicq is a Professor of Accounting at the College of Commerce,
University of Saskatchewan. Until June 30, 1998, he was Associate Dean of the
College and responsible for the Centre for International Business Studies. A
member of the PCS Board since 1989, he heads the audit committee. He sits on
committees of the Saskatchewan and Canadian Institutes of Chartered Accountants
and has worked for the Saskatchewan and Canadian governments in areas of policy,
finance and taxation.

                                       62

<PAGE>   67


DENIS J. COTE  [PHOTO]
     Mr. Cote retired as Chairman and CEO of the UMA Group Ltd. in 1991. In
1993, he was President, Chief Executive Officer and member of the board of
Reclamation Management Ltd. in Vancouver, British Columbia. He has served on the
PCS Board since 1989, sits on the executive committee and heads the compensation
committee. Former Chairman and director of Joss Energy Ltd., he is a director of
the successor company, Startech Energy Inc., and chairs its compensation
committee. He is a founder and Chairman of Inter West Energy Corporation, which
merged with New Cache Resources in 1997, and a member of the board of the
Vancouver Port Corporation. From 1975 to 1981, he served on the board of
governors of the University of Calgary.

WILLIAM J. DOYLE  [PHOTO]
     Mr. Doyle, President and Chief Operating Officer of Potash Corporation of
Saskatchewan Inc., has served on the PCS Board since 1989. He became President
of PCS Sales in 1987 and prior to that was International Vice President of
International Minerals and Chemical Corporation. He is past Chairman of Canpotex
Limited and continues to serve on its board. He is vice-chairman of the Potash &
Phosphate Institute, and serves on the boards of Fersan S.A. in the Dominican
Republic and the Foundation for Agronomic Research. He chairs the International
Fertilizer Industry Association's Potash Committee.

DONALD E. PHILLIPS  [PHOTO]
     Mr. Phillips, of Brandon, Mississippi, former President and CEO of
Pitman-Moore Inc., joined the PCS Board in 1991 and serves on the compensation
committee. A director of Great Lakes REIT Inc., Oak Brook, Illinois, he is
Chairman of the board of directors of Synbiotics Inc., San Diego, California. He
is President of Holmes Community College Development Foundation, Goodman,
Mississippi, a regent of Bethel College and Seminary in St. Paul, Minnesota, a
trustee of Mississippi College, Clinton, Mississippi, and former Chairman of the
board of Lake Forest Graduate School of Business, Lake Forest, Illinois.

PAUL J. SCHOENHALS  [PHOTO]
     Mr. Schoenhals, President of Petroleum Industry Training Service in
Calgary, Alberta, was Chairman of Potash Corporation of Saskatchewan from 1987
to 1989. He rejoined the Board in 1992, and sits on the environmental affairs
committee. A former Member of the Legislative Assembly and Cabinet Minister in
Saskatchewan, he is on the boards of Upton Resources Inc. and Petroleum Industry
Training Service. He has been a director of Precambrian Shield Resources and
Sabre West Oil & Gas and on the national advisory board for Marsh & McLennan. He
sits on the national advisory committee for Bayer Care Canada.

BARRIE A. WIGMORE  [PHOTO]
     Mr. Wigmore, a Limited Partner with New York investment banking firm
Goldman, Sachs Group, L.P., headed its corporate finance activities in the
electric, gas, pipelines and telecommunications industries. He joined the PCS
Board in 1989 and sits on the compensation committee. He writes on financial
history and current financial markets and is Chairman of the American Friends of
Worcester College (Oxford University) and a director of National Service
Industries Inc.

PAUL S. WISE  [PHOTO]
     Mr. Wise, of Carefree, Arizona, a past President and CEO of the Alliance of
American Insurers and a member of the PCS Board since 1989, currently sits on
the environmental affairs committee. He is a director emeritus of the boards of
United Funds, Waddell & Reed Funds and TMK/United Funds. He has been on the
boards of the College of Insurance, the Institute of Civil Justice at the Rand
Corporation, the Insurance Hall of Fame, the National Safety Council and Senior
Net. He was President of the Property Loss Research Bureau and a director of the
Insurance Institute for Highway Safety.

COMMITTEES

EXECUTIVE COMMITTEE:
The executive committee is composed of five directors. Between meetings of the
Board it has, with certain exceptions, all the powers vested in the Board. In
addition, the executive committee nominates candidates for directorship of the
Corporation. It also has responsibility for corporate governance issues.

AUDIT COMMITTEE:
The audit committee is composed of three directors, none of whom may be an
officer or employee of the Corporation or any of its affiliates. The committee
meets with the Corporation's financial management personnel, internal auditor
and external auditor at least once each quarter to review the Corporation's
financial reporting practices and procedures and authorize the release of
unaudited quarterly financial statements, and reviews the Corporation's annual
financial statements prior to their submission to the Board for approval. The
committee also recommends to the Board the external auditors to be proposed to
the shareholders for appointment at the annual meeting.

COMPENSATION COMMITTEE:
The compensation committee is composed of four non-employee directors. This
committee formulates and makes recommendations to the Board in respect of
compensation issues relating to directors and senior management of the
Corporation and in respect of corporate salary and benefits policy. It reviews
and approves, on an annual basis, the Corporation's salary administration
program. It is responsible for the annual report on executive compensation. The
committee, in consultation with the Chief Executive Officer, considers and
reports to the Board regarding corporate succession matters.

ENVIRONMENTAL AFFAIRS COMMITTEE:
The environmental affairs committee is composed of three directors. The
committee works to ensure that the Corporation's commitment to the protection of
the environment is fulfilled. It routinely receives environmental audit reports
for review and discussion with senior management and monitors environmental
issues in other areas of corporate activity such as off-site transportation,
distribution and storage of product. The committee reviews and discusses with
management potential changes to regulatory requirements and to corporate
environmental policy.


                                       63

<PAGE>   68
                            SHAREHOLDER INFORMATION



ANNUAL MEETING
The Annual Shareholders Meeting will be held at 10.30 a.m. Central Standard Time
May 6, 1999 in the Commonwealth Ballroom, Ramada Hotel, First Avenue and 22nd
Street East, Saskatoon, Saskatchewan.

Holders of common shares as of March 18, 1999 are entitled to vote at the
meeting and are encouraged to participate. Shareholders who cannot attend are
urged to return their proxies promptly to ensure their shares will be voted.

DIVIDENDS
Dividend amounts paid to shareholders resident in the United States were
adjusted by the exchange rate applicable on the dividend record date. Dividends
are normally paid in February, May, August and November, with record dates
normally set approximately three weeks earlier.

Future cash dividends will be paid out of, and conditioned upon, the Company's
available earnings. Shareholders who wish to have their dividends deposited
directly in their bank accounts should contact the transfer agent and registrar,
CIBC Mellon Trust.

DIVIDEND REINVESTMENT POLICY
Registered shareholders can have dividends reinvested in newly-issued common
shares of PCS at prevailing market rates.

INFORMATION FOR SHAREHOLDERS OUTSIDE CANADA
Dividends paid to residents in countries with which Canada has bilateral tax
treaties are generally subject to the 15-percent Canadian non-resident
withholding tax. There is no Canadian tax on gains from the sale of shares or
debt instruments owned by nonresidents not carrying on business in Canada. No
government in Canada levies estate taxes or succession duties.

INVESTOR INQUIRIES
Shareholders with inquiries can contact Betty-Ann Heggie, Senior Vice President,
Corporate Relations by toll-free lines.
Within Canada: (800) 667-0403
Within the US: (800) 667-3930
WEBSITE: www.potashcorp.com

INTERIM REPORTS, NEWS RELEASES AND FORM 10-K
Non-registered shareholders who would like to receive quarterly reports should
contact the Company's Corporate Relations department. News releases are
available via fax.

Copies of the Company's most recent Form 10-K are available upon request.

DUPLICATE MAILINGS
Multiple copies of the annual and quarterly reports may be received by
shareholders who own shares in more than one account or several shareholders
living at the same address. To eliminate multiple mailings, contact CIBC Mellon
Trust.

SHARES LISTED (POT)
Toronto Stock Exchange
Montreal Exchange
New York Stock Exchange

OWNERSHIP
On March 2, 1999, there were 2,880 holders of record of the Company's common
shares.

COMMON SHARE TRANSFER AGENT
In Canada:
CIBC Mellon Trust Company
1080 - 2002 Victoria Avenue
Regina, Saskatchewan  S4P 0R7
Phone: (306) 751-7550
       (800) 387-0825
Website: www.cibcmellon.ca

Inquiries about shareholdings, share transfer requirements, address changes or
lost certificates should be directed to CIBC Mellon Trust or to the Corporate
Secretary, PCS, Suite 500, 122 First Avenue South, Saskatoon, Saskatchewan S7K
7G3.

In the United States: ChaseMellon Shareholder Services, L.L.C. 85 Challenger 
Road Overpeck Center Ridgefield Park, New Jersey 07660 Phone: (800) 526-0801 
Website: www.chasemellon.com

EXCHANGE RATE OF THE CANADIAN DOLLAR
 In this report, unless otherwise specified, all dollar amounts are expressed in
US dollars (US$). The Government of Canada permits a floating exchange rate to
determine the value of the Canadian dollar (CDN$) against the US dollar. The
exchange rate at the end of each of the five most recent years ended December
31, and the average, the high and the low exchange rates for each of such five
years, were as follows (such rates, which are expressed in US dollars, being
the noon buying rates in Canada for cable transfers in Canadian dollars by the
Bank of Canada):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
                             1998     1997     1996     1995        1994
<S>                         <C>      <C>      <C>      <C>         <C>  
At end of period            .6534    .6997    .7301    .7325       .7129
Average for period (1)      .6743    .7198    .7330    .7307       .7301
High for period             .7105    .7495    .7527    .7534       .7644
Low for period              .6343    .6945    .7212    .7009       .7098
</TABLE>


(1) Based on the average of the exchange rates on the last business day of each
month during the period. The noon buying rate in New York City for cable
transfers in Canadian dollars as certified by the Bank of Canada on March 2,
1999 was US$1.00 = CDN$1.5200 (equivalent to CDN$1.00 = US$0.6579).

1998 PCS SHARE PRICE
Average Weekly Price ($ Actual)

[CHART] 1998 PCS Share Price -- NYSE Average Weekly Price ($ Actual)

COMMON SHARE PRICES AND VOLUMES
The following table sets forth the high and low prices, as well as the volumes,
of the Company's common shares as traded on the Toronto Stock Exchange, Montreal
Exchange and New York Stock Exchange (composite transactions) on a quarterly
basis. Potash Corporation of Saskatchewan Inc. is on the S&P/TSE 60 index and
the TSE 100.

<TABLE>
<CAPTION>
                              TORONTO STOCK EXCHANGE (1)               MONTREAL EXCHANGE (1)           NEW YORK STOCK EXCHANGE
                              High       Low       Volume       High        Low        Volume       High        Low          Volume
1998
<S>                        <C>       <C>        <C>          <C>        <C>           <C>         <C>        <C>         <C>       
First Quarter              138.200   112.000    5,456,109    137.900    112.000       965,685     97.188     78.500      13,056,600
Second Quarter             132.000   108.500    3,618,117    131.950    108.800       551,271     92.938     73.250       7,033,200
Third Quarter              114.700    75.000    5,090,801    115.000     75.000     1,195,571     77.375     48.375      11,262,400
Fourth Quarter             109.000    75.000    4,021,223    108.500     77.750       505,572     70.875     50.563      12,011,600
                           -------   -------   ----------    -------    -------     ---------     ------     ------      ----------
YEAR 1998                  138.200    75.000   18,186,250    137.900     75.000     3,218,099     97.188     48.375      43,363,800
                           -------   -------   ----------    -------    -------     ---------     ------     ------      ----------

1997
First Quarter              122.700    98.650    3,212,708    122.100     99.000       210,444     89.875     71.500      17,412,400
Second Quarter             117.000    99.850    2,986,406    116.800    100.300       230,607     85.000     71.000      15,201,200
Third Quarter              111.500    98.500    3,854,717    111.100     99.000       624,684     81.125     71.688      17,970,600
Fourth Quarter             122.200   108.750    8,222,508    121.900    108.950       371,250     87.500     78.000      14,982,100
                           -------   -------   ----------    -------    -------     ---------     ------     ------      ----------
YEAR 1997                  122.700    98.500   18,276,339    122.100     99.000     1,436,985     89.875     71.000      65,566,300
                           -------   -------   ----------    -------    -------     ---------     ------     ------      ----------

1996
First Quarter              110.875    82.000    1,747,948    110.875     82.250       185,062     80.500     60.000      29,504,000
Second Quarter              97.000    83.000    1,893,727     97.700     83.000       115,952     71.875     60.250      19,552,800
Third Quarter              108.500    88.000    1,018,661    108.250     88.700       138,003     79.500     64.125      15,875,700
Fourth Quarter             117.950    91.750    3,983,487    117.850     92.950       616,267     86.875     68.250      19,888,000
                           -------   -------   ----------    -------    -------     ---------     ------     ------      ----------
YEAR 1996                  117.950    82.000    8,643,823    117.850     82.250     1,055,284     86.875     60.000      84,820,500
                           -------   -------   ----------    -------    -------     ---------     ------     ------      ----------
</TABLE>


(1) Trading prices are in CDN$


                                       64

<PAGE>   69


CORPORATE INFORMATION

CORPORATE OFFICERS AND KEY MANAGEMENT

POTASH CORPORATION OF SASKATCHEWAN INC.

CHARLES E. CHILDERS
Chairman and Chief Executive Officer

WILLIAM J. DOYLE
President and Chief Operating Officer

WAYNE R. BROWNLEE
Senior Vice President Expansion and Development

JOHN GUGULYN
Senior Vice President, Administration

JOHN L. M. HAMPTON
Senior Vice President, General Counsel and Secretary

BETTY-ANN L. HEGGIE
Senior Vice President, Corporate Relations

BARRY E. HUMPHREYS
Senior Vice President, Finance and Treasurer

PETER BRAUN
Vice President, Audit

DENIS A. SIROIS
Vice President and Corporate Controller

PCS SALES

GARY E. CARLSON
President

RICHARD J. LACROIX
Executive Vice President

P. RODNEY WILSON
Executive Vice President

PCS POTASH

GARTH W. MOORE
President

PCS PHOSPHATE

THOMAS J. WRIGHT
President

THOMAS J. REGAN, JR.
Executive Vice President

PCS NITROGEN 

JAMES F. DIETZ
President

CORPORATE OFFICES

POTASH CORPORATION OF SASKATCHEWAN INC.
Suite 500, 122 - 1st Avenue South Saskatoon, SK  S7K 7G3 
Phone: (306) 933-8500

PCS SALES
Suite 440, 5750 Old Orchard Road Skokie, IL  60077 
Phone: (800) 241-6908 (847) 583-4400

PCS POTASH
Suite 500, 122 - 1st Avenue South Saskatoon, SK  S7K 7G3 
Phone: (306) 933-8500

PCS PHOSPHATE
P.O. Box 30321
3101 Glenwood Avenue Raleigh, NC  27622-0321 
Phone: (919) 881-2700

PCS NITROGEN
3175 Lenox Park Boulevard, Suite 400 Memphis, TN  38115-4256 
Phone: (901) 758-5200

GLOSSARIES

OPERATIONAL TERMS

GENERAL

DOMESTIC AND EXPORT MARKETS
Canada and the United States make up the domestic or North American market; the
rest of the world is the export or offshore market.

MIXED FERTILIZERS contain more than one nutrient. A 6-23-30 fertilizer contains
6 percent nitrogen (N), 23 percent phosphoric acid (P2O5) and 30 percent potash
(K2O) by weight. The nutrient breakdown, always in the same order, is referred
to as NPK in the industry.

LIQUID FERTILIZERS come in two types: solutions, in which the plant nutrients
are dissolved in solution; and suspensions, saturated solutions in which some
plant nutrients are suspended.

METRIC TONNE equals 2,204.6 pounds or 1,000 kilograms, and is 10 percent larger
than a 2,000-pound short ton. Most offshore sales are made in metric tonnes and
US dollars, F.O.B. Vancouver BC for potash, Morehead City NC for phosphate and
Trinidad for nitrogen.

PRODUCT TONNE is a standard measure of the weights of all types of potash,
phosphate and nitrogen products.

NUTRIENT TONNE is a measure of the nutrient weight of potassium, phosphate and
nitrogen fertilizers, and consists of K2O tonnes, P2O5 tonnes and N tonnes.

POTASH

POTASSIUM (K) is the seventh most common element in the earth's crust. It is
usually found combined with chlorine in the chemical compound potassium
chloride.

POTASH typically denotes materials containing potassium, particularly potassium
fertilizer. Most fertilizer is muriate of potash (KCl), potassium chloride.
Potassium combines with other minerals in specialty fertilizers.

POTASH ORE consists typically of KCl, NaCl and other minerals. The KCl becomes
the product stream and is separated from the tailings stream of NaCl and other
minerals. Processing 100 tonnes of ore typically produces 28 to 38 tonnes of
product.

K2O is potassium oxide, a term used in the fertilizer industry to define
potassium content.

K2O TONNE is a term which measures the potassium content of fertilizers having
different chemical analyses.

PHOSPHATE

PHOSPHORUS (P) is widely distributed in nature in combination with other
elements. It is most commonly found in phosphate ore, the only economic source
of phosphorus for producing phosphate fertilizers and phosphate chemicals.

P2O5 is phosphorus pentoxide, a term used to express phosphorus content of ore
or products.

P2O5 TONNE is a term which measures the phosphorus content of fertilizers with
different chemical analyses.

PHOSPHATE ROCK is the main source of phosphoric acid for phosphate fertilizers
and industrial products. A form of calcium phosphate, it also contains other
materials.

MGA, merchant grade acid (54 percent P2O5) available in amber or green form, is
primarily used to make DAP.

DAP, diammonium phosphate (46 percent P2O5), is the major solid phosphate
fertilizer. An important domestic and export product, it is applied directly or
in fertilizer blends.

MAP, monoammonium phosphate (52 percent P2O5), is a solid fertilizer.

SPA, superphosphoric acid (70 percent P2O5), is used in manufacturing liquid
fertilizers and animal feed supplements. PCS LoMag is superphosphoric acid
produced by evaporating MGA to remove water and filtering to remove impurities.

ANIMAL AND POULTRY FEED SUPPLEMENTS blend phosphorus and calcium. Dical
(dicalcium phosphate, 18.5 percent phosphorus) and Monocal (monocalcium
phosphate, 21 percent phosphorus) are used primarily for swine and cattle; DFP
or defluorinated phosphate (tricalcium phosphate, 18 percent phosphorus)
primarily for poultry.

NITROGEN

NITROGEN (N) is a gas which makes up four-fifths of the atmosphere. Essential
for plant growth, it is present in chlorophyll and protein. Some plants can
obtain nitrogen from the atmosphere, but most get it from soil solutions. Its
nutritional value is consumed during each growing season so it must be applied
to soil annually.

N TONNE is a term which measures the nitrogen content of fertilizers having
differing chemical analyses.

AMMONIA is produced primarily from natural gas and atmospheric nitrogen as the
first step in nitrogen fertilizer production. It can also be applied directly to
soils. Anhydrous ammonia (NH3) is a gas with 82 percent N. Ammonia is condensed
by pressure and cooling, and stored and transported in this liquid form.

NITRIC ACID is produced in solutions of varying strengths by reacting ammonia
with atmospheric oxygen. It is used to produce ammonium nitrate and as an
intermediate for industrial purposes.

AMMONIUM NITRATE (34 percent nitrogen) is water soluble and used as a solid
fertilizer, as a liquid in nitrogen solutions and in industrial applications. It
is produced by reacting ammonia with nitric acid.

NITROGEN SOLUTIONS (UAN solutions) are produced by blending ammonium nitrate
solutions with urea solution. Varying in nitrogen content (28-32 percent), these
non-pressure solutions are used principally for direct application on soils and
for manufacturing starter fertilizers.

UREA (46 percent nitrogen), the most commonly produced and widely traded
nitrogen product, is manufactured by reacting ammonia with carbon dioxide under
high pressure. It is used as fertilizer and as a feedstock for industrial and
feed purposes.

FINANCIAL TERMS

ASSET TURNOVER = SALES / TOTAL ASSETS measures the efficiency of using assets to
produce sales.

CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITIES measures the ability to pay
short-term debt obligations.

LONG-TERM DEBT TO EQUITY = LONG-TERM DEBT / SHAREHOLDERS' EQUITY measures
the proportion of creditor to shareholder financing.

NET INCOME PER SHARE = EARNINGS AVAILABLE TO COMMON SHARES / WEIGHTED
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING measures the normalized earnings
generated for each common share.

QUICK RATIO = CASH + CASH EQUIVALENTS + NET RECEIVABLES / CURRENT
LIABILITIES measures the ability to meet immediate demands of creditors.

RETURN ON INVESTMENT = NET INCOME PLUS INTEREST EXPENSE / AVERAGE INVESTED
CAPITAL measures the adequacy of return on the total creditor and shareholder
capital.

RETURN ON SHAREHOLDERS' EQUITY = NET INCOME / SHAREHOLDERS' EQUITY measures
the adequacy of return on the owners' investment.

SHAREHOLDERS' EQUITY TO TOTAL ASSETS = SHAREHOLDERS' EQUITY / TOTAL ASSETS
measures the proportion of assets to shareholder financing.

EBITDA represents Earnings (net income) Before Interest, Taxes,
Depreciation and Amortization.

FREE CASH FLOW is the cash, exclusive of the change in working capital,
which is provided by operations less disbursements for sustaining capital,
capitalized turnarounds and dividends.


[LOGO] It is the policy of PCS to manage its operations responsibly in order to
safeguard those natural resources related to or affected by its activities. In
keeping with this policy, the Annual Report uses paper containing at least 10%
post consumer recycled fiber and is recyclable.
<PAGE>   70



                        PCS SALES VOLUMES BY REGION 1998

<TABLE>
<CAPTION>
<S>                                       <C>                               <C>
     POTASH                                  PHOSPHATE                         NITROGEN   
     ------                                  ---------                         --------

North America      43%                  North America      65%            North America     94%
Asia               34%                  Asia               26%            Latin America      4%
Latin America      15%                  Latin America       6%            Europe             2%
Europe              4%                  Oceania             2%
Oceania             4%                  Europe              1%
</TABLE>

  PCS is firmly established as a reliable international supplier of the three
          primary nutrients, selling to a diversified customer group.


                 POTASH CORPORATION OF SASKATCHEWAN INC. [LOGO]
  Suite 500, 122 - 1st Avenue South  Saskatoon  Saskatchewan  Canada  S7K 7G3
                               www.potashcorp.com


                                                               Printed in Canada