-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TcxQG0Wazhf/zvP7Iqnbd8fbigwtw2hke9BtCtRDIxklDmBfFcJqjjwUdg7sofHv ShhYou1JbJA+wzG5q7wiWg== 0000821026-97-000002.txt : 19970329 0000821026-97-000002.hdr.sgml : 19970329 ACCESSION NUMBER: 0000821026-97-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANDERSONS INC CENTRAL INDEX KEY: 0000821026 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-FARM PRODUCT RAW MATERIALS [5150] IRS NUMBER: 341562374 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20557 FILM NUMBER: 97567307 BUSINESS ADDRESS: STREET 1: 1200 DUSSEL DRIVE CITY: MAUMEE STATE: OH ZIP: 43537 BUSINESS PHONE: 4198935050 FORMER COMPANY: FORMER CONFORMED NAME: ANDERSONS MANAGEMENT CORP DATE OF NAME CHANGE: 19931119 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1996 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ______________ to _________________ Commission file number 000-20557 THE ANDERSONS, INC. (Exact name of registrant as specified in its charter) OHIO 34-1562374 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 480 W. Dussel Drive, Maumee, Ohio 43537 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (419) 893-5050 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Shares Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.___ The aggregate market value of the registrant's voting stock which may be voted by persons other than affiliates of the registrant was $64,059,586 on February 28, 1997, computed by reference to the last sales price for such stock on that date as reported on the Nasdaq National Market The registrant had 8,316,992 Common shares outstanding, no par value, at February 28, 1997. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1996 Annual Report of The Andersons, Inc. and Proxy Statement for the Annual Meeting of Shareholders to be held on May 22, 1997, are incorporated by reference into Parts II (Items 5, 6, 7 and 8), III (Items 10, 11 and 12) and IV of this Annual Report on Form 10-K. The Proxy Statement will be filed with the Commission on or about April 15, 1997. PART I Item 1. Business (a) General Development of Business The Andersons, Inc. is a diversified agribusiness and retailing company operating in three segments. The Agriculture Group engages in grain merchandising, operates grain elevator facilities located in Ohio, Michigan, Indiana and Illinois, distributes wholesale agricultural fertilizer and operates retail farm centers. The Retail Group operates six retail stores in Ohio. The Processing and Manufacturing Group (formerly called the Business Development Group) includes, primarily, the processing of lawn and industrial products and the repair and leasing of railcars. Prior to January 2, 1996 the Company was structured as two entities; The Andersons Management Corp. (the "Corporation") and The Andersons (the "Partnership"). The Corporation was the sole general partner of the Partnership and provided all management services to the Partnership. The Partnership was the successor to other Ohio limited partnerships which operated as "The Andersons" continuously since 1947. On January 2, 1996, the Partnership merged with and into the Corporation and the Corporation survived, changing its name to The Andersons, Inc. See Note 1 to the consolidated financial statements for further discussion about the merger. All information herein gives effect to the merger. (b) Financial Information About Industry Segments See Note 13 to the consolidated financial statements for information regarding business segments. (c) Narrative Description of Business Agriculture Group The Agriculture Group consists of grain operations, wholesale fertilizer operations, and retail farm centers. The Company's grain operations involve merchandising grain and operating terminal grain elevator facilities. This includes purchasing, handling, processing and conditioning grain, storing grain purchased by the Company as well as grain owned by others, and selling grain. The principal grains sold by the Company are yellow corn, yellow soybeans and soft red and white wheat. The Company's total grain storage capacity was approximately 69 million bushels at December 31, 1996. Virtually all grain merchandised by the Company is grown in the Midwestern portion of the United States (the Eastern Corn Belt) and is acquired from country elevators, dealers and producers. The Company makes grain purchases at prices referenced to Chicago Board of Trade quotations. The Company competes for the purchase of grain with grain processors and feeders, as well as with other grain merchandisers. During 1996, approximately 72% of the grain sold by the Company was purchased domestically by grain processors and feeders, and approximately 28% was exported. Most of the exported grain was purchased by exporters for shipment to foreign markets. Some grain is shipped directly to foreign countries, mainly Canada. Almost all grain shipments are by rail or boat. Rail shipments are made primarily to grain processors and feeders, with some rail shipments made to exporters on the Gulf or east coast. All boat shipments are from the Toledo, Ohio port elevator. Grain sales are effected on a negotiated basis by the Company's merchandising staff. The Company's grain business may be adversely affected by the grain supply in its principal growing area including crop quality and quantity, government regulations and policies, conditions in the shipping and rail industries and commodity price levels. See "Government Regulation". The grain business is seasonal coinciding with the harvest of the principal grains purchased and sold by the Company. Fixed price purchases and sales of cash grain and grain held in inventory expose the Company to risks related to adverse changes in price. The Company attempts to manage these risks by hedging fixed price purchase and sales transactions and inventory through the use of futures and option contracts with the Chicago Board of Trade ("CBOT"). The CBOT is a regulated commodity futures exchange that maintains futures markets for the grains merchandised by the Company. Futures prices are determined by supply and demand. The Company's hedging program is designed to reduce the risk of changing commodity prices. In that regard, hedging transactions also limit potential gains from further changes in market prices. The grain division's profitability is primarily derived from margins on grain sold, and revenues generated from other merchandising activities with its customer, not from hedging transactions. The Company has a policy which specifies the key controls over its hedging program. This policy includes a description of the hedging programs, mandatory review of positions by key management outside of the trading function on a biweekly basis, daily position limits, modeling of positions for changes in market conditions, and other internal controls. Purchases of grain can be made the day the grain is delivered to a terminal or via a forward contract made prior to actual delivery. Sales of grain are generally made by contract for delivery in a future period. When the Company purchases grain at a fixed price, the purchase is hedged with the sale of a futures contract on the CBOT. Similarly, when the Company sells grain at a fixed price, the sale is hedged with the purchase of a futures contract on the CBOT. At the close of business each day, the open inventory ownership positions as well as open futures and option positions, are marked-to-market. Gains/losses in the value of the Company's owned inventory positions due to changing prices are netted with and generally offset by losses/gains in the value of the Company's futures positions. When a futures contract is entered, an initial margin deposit must be sent to the CBOT. The amount of the margin deposit is set by the CBOT and varies by commodity. If the market price of a futures contract moves in a direction which is adverse to the Company's position, an additional margin deposit, called a maintenance margin, is required by the CBOT. Subsequent price changes could require additional maintenance margins or could result in the return of maintenance margins by the CBOT. Significant changes in market prices, such as occur when weather conditions are unfavorable for extended periods, can have an effect on liquidity and require the Company to maintain appropriate short-term lines of credit. The Company has, at times, utilized CBOT option contracts to limit its exposure to potential required margin deposits in the event of a rapidly rising market. The Grain division relies on forward purchase contracts with producers, dealers and country elevators to ensure an adequate supply of grain to its facilities throughout the year. Bushels contracted for future delivery at February 28, 1997 approximated 23 million, 96% of which was to be delivered in the 1996 and 1997 crop years. The Company relies heavily on its hedging program as the method for minimizing price risk in its grain inventories and contracts. The Company monitors current market conditions and may expand or reduce the purchasing program in response to changes in those conditions. In addition, the Company reviews its purchase contracts and the parties to those contracts on a regular basis for defaults and non-delivery. Provision is made under the Grain Trade Rules of the National Grain and Feed Association ("NGFA") for resolution of contract defaults (non-delivery of grain) and for arbitration of contract disputes. The Company's standard purchase and sales contracts include arbitration clauses, and the Company is currently arbitrating several cases before the NGFA. In addition, the Company is involved in litigation with several producers. See "Legal Proceedings". The Company competes in the sale of grain with other grain merchants, other private elevator operators and farmer cooperatives which operate elevator facilities. Competition is based primarily on price, service and reliability. Some of the Company's competitors are also its customers and many of its competitors have substantially greater financial resources than the Company. The Company's wholesale fertilizer operations involve purchasing, storing, formulating, and selling dry and liquid fertilizers; providing fertilizer warehousing and services to manufacturers and customers; and wholesale distribution of seeds and various farm supplies. The major fertilizer ingredients sold by the Company are nitrogen, phosphate and potassium, all of which are readily available from various sources. The Company's wholesale fertilizer market area primarily includes Illinois, Indiana, Michigan and Ohio and customers for the Company's fertilizer products are principally retail dealers. Sales of agricultural fertilizer products are heaviest in the spring and fall. The Company's aggregate storage capacity for dry fertilizer was 14 million cubic feet at December 31, 1996. The Company reserves 6 million cubic feet of this space for various fertilizer manufacturers and customers. The Company's aggregate storage capacity for liquid fertilizer at December 31, 1996 was 29 million gallons and 5 million gallons of this space is reserved for manufacturers and customers. The agreements for reserved space provide the Company storage and handling fees and, generally, are for an initial term of one year and are renewable at the end of each term. The Company operates nine retail farm centers located throughout Michigan, Indiana and Ohio. These centers, often strategically located at or near the Company's grain or wholesale fertilizer facilities, offer agricultural fertilizer, custom application of fertilizer, and chemicals, seeds and supplies to the farmer. In its wholesale fertilizer and retail farm center businesses, the Company competes with regional cooperatives; fertilizer manufacturers; multi-state retail/wholesale chain store organizations; and other independent wholesalers of agricultural products. Many of these competitors have considerably larger resources than the Company. Competition in the agricultural products business of the Company is based principally on price, location and service. Retail Group The Company's Retail Group consists of six stores operated under the trade name "The Andersons", which are located in the Columbus, Lima and Toledo, Ohio markets and serve urban, rural and suburban customers. The retail concept is that of a destination store for the do-it-yourself homeowner and includes a full line of home center products plus a wide array of other items not available at the more traditional home center stores. In addition to hardware, home remodeling and lawn & garden products, The Andersons stores offer housewares, automotive, sporting goods, pet products, workwear and food (bakery, deli, produce, wine and specialty groceries). Each store carries more than 70,000 different items, has 100,000 square feet or more of in-store display space plus 40,000 square feet of outdoor garden center space, and has a center aisle that features do-it-yourself clinics, special promotions and varying merchandise displays. The retail merchandising business is highly competitive. The Company competes with a variety of retail merchandisers, including numerous mass merchandisers, home centers, department and hardware stores. The principal competitive factors are quality of product, price, service and breadth of selection. The Company's retail business is affected by seasonal factors with significant sales occurring during the Christmas season and in the spring. Processing and Manufacturing Group The Processing and Manufacturing Group consists of three business units: the processing division, the manufacturing division and the ventures division. The processing division consists of lawn products, which manufactures and markets fertilizer and related products to retailers and professional lawn care companies and industrial products, which processes corn cobs into various products for the chemical carrier, pet and industrial markets. The retail granular lawn products are sold to mass merchandisers, small independent retailers and other lawn fertilizer manufacturers. During the off-season, ice melt products are distributed to many of the same retailers. The professional granular lawn products are sold both direct and through distributors to lawn service applicators and to golf courses. The principal raw materials for the lawn care products are nitrogen, potash and phosphate, which are purchased primarily from the Company's wholesale fertilizer division. The lawn products industry is highly seasonal, with the majority of the sales occurring from early spring to early summer. Competition is based principally on merchandising ability, service and quality. The Company is one of the largest producers of processed corncob products in the United States. These products serve the chemical carrier, animal litter, industrial and sorbent markets and are distributed throughout the United States and Canada and into Europe and Asia. The principal sources for the corncobs are the Company's grain operations and seed corn producers. The Company's manufacturing division includes a full service railcar repair shop, which specializes in repair, renovation and painting of railcars. The division also is involved in the purchase and sale of railcars, leasing and subleasing of railcars, and also provides fleet management services. It also does custom fabrication work. Competition for railcar marketing and fleet maintenance services are based primarily on service and access to third party financing. Repair and fabrication shop competition is based primarily on price, quality and location. The Company's ventures division includes the production of pet foods, which are marketed through a joint venture, the operation of eight auto service centers, also a joint venture, and a lawn and garden power equipment sales and service shop. Research and Development The Company's research and development program is mainly concerned with the development of improved products and processes, primarily for the processing division of the Processing and Manufacturing Group. The Company expended approximately $320,000, $370,000, and $490,000 on research and development during 1996, 1995 and 1994, respectively. Employees At December 31, 1996, the Company had 1,160 full-time and 1,864 part-time or seasonal employees. The Company believes its relations with its employees are good. Government Regulation Grain sold by the Company must conform to official grade standards imposed under a federal system of grain grading and inspection administered by the United States Department of Agriculture ("USDA"). The production levels, markets and prices of the grains which the Company merchandises are materially affected by United States government programs, including acreage control and price support programs of the USDA. Also, under federal law, the President may prohibit the export of any product, the scarcity of which is deemed detrimental to the domestic economy, or under circumstances relating to national security. Because a portion of the Company's grain sales are to exporters, the imposition of such restrictions could have an adverse effect upon the Company's operations. The Company, like other companies engaged in similar businesses, is subject to a multitude of federal, state and local environmental protection laws and regulations including, but not limited to, laws and regulations relating to air quality, water quality, pesticides and hazardous materials. The provisions of these various regulations could require modifications of certain of the Company's existing plant and processing facilities and could restrict future facilities expansion or significantly increase their cost of operation. Of the Company's capital expenditures, approximately $720,000, $740,000 and $617,000 in 1996, 1995 and 1994, respectively, were made in order to comply with these regulations. Item 2. Properties The Company's principal agriculture, retail and other properties are described below. Except as otherwise indicated, all properties are owned by the Company. Agriculture Facilities Location Wholesale Fertilizer Grain Liquid Storage Dry Storage Storage (bushels) (cubic feet) (gallons) Maumee, OH 17,270,000 6,333,000 2,620,000 Toledo, OH River 7,010,000 2,000,000 3,000,000 Metamora, OH 6,860,000 --- --- Lyons, OH (3) 380,000 47,000 160,000 Toledo, OH 1,210,000 --- --- Champaign, IL 13,500,000 833,000 --- Delphi, IN 6,700,000 1,000,000 --- Clymers, IN (1)(4) 4,450,000 --- 2,694,000 Clymers, IN (3) --- 37,000 480,000 Dunkirk, IN 5,980,000 900,000 Poneto, IN 620,000 --- 5,540,000 North Manchester, IN (3) --- 23,000 90,000 Logansport, IN --- 33,000 3,011,000 Walton, IN (3) --- 433,000 7,000,000 Albion, MI (3) 2,590,000 23,000 40,000 White Pigeon, MI 2,070,000 --- --- Webberville, MI --- 2,017,000 3,200,000 Litchfield, MI (2)(3) --- 40,000 252,000 North Adams, MI(2)(3) --- 20,000 230,000 Union City, MI (3) --- 20,000 49,500 Munson, MI (3) --- 33,000 150,000 68,640,000 13,792,000 28,516,500 (1) Facility leased - lease expires in 1998, provides an option to purchase. (2) Facility leased. (3) Facility is or includes a retail farm center. (4) Facility also stores soybean oil with a capacity of 61,000,000 pounds. The grain facilities are mostly concrete and steel tanks, with some flat storage. The Company also owns grain inspection buildings and dryers, a corn sheller plant, maintenance buildings and truck scales and dumps. Wholesale fertilizer and retail farm center properties consist mainly of fertilizer warehouse and distribution facilities for dry and liquid fertilizers. The Maumee, Ohio and Walton, Indiana locations have fertilizer mixing, bagging and bag storage facilities. The Company also owns a seed processing facility in Delta, Ohio. Aggregate storage capacity in the nine retail farm centers located in Michigan, Indiana and Ohio for liquid fertilizer and dry fertilizer is 1.5 million gallons and 243,000 cubic feet, respectively. Retail Store Properties Name Location Square Feet Maumee Store Maumee, OH 131,000 Toledo Store Toledo, OH 130,000 Woodville Store (1) Northwood, OH 100,000 Lima Store (1) Lima, OH 117,000 Brice Store Columbus, OH 128,000 Sawmill Store Columbus, OH 134,000 Warehouse (1) Maumee, OH 245,000 (1) Leased The leases for the two stores and the warehouse facility are long-term leases with several renewal options and provide for minimum aggregate annual lease payments approximating $1 million. The two store leases provide for contingent lease payments based on achieved sales volume. Neither store achieved a sales level triggering contingent lease payments in 1996, 1995 or 1994. Other Properties The Company owns lawn fertilizer production facilities and automated pet food production and storage facilities in Maumee, Ohio. It also owns corncob processing and storage facilities in Maumee, Ohio and Delphi, Indiana. The Company leases a lawn fertilizer production facility and a warehouse facility. In its railcar leasing business, the Company owns or leases approximately 2,000 railcars (primarily covered hopper cars) with lease terms ranging from one to ten years and future minimum lease payments aggregating $18 million with future minimum sublease income of an equal amount. The Company also owns a railcar repair facility, a steel fabrication facility, a service and sales facility for outdoor power equipment. Additionally, the Company is part of a joint venture which owns or leases eight auto service centers. The Company also owns or leases a number of switch engines, cranes and other equipment. The Company's administrative office building is leased under a net lease expiring in 2005. The Company owns approximately 704 acres of land on which various of the above properties and facilities are located; approximately 439 acres of farmland and land held for future use; approximately 11 acres of improved land in an office/industrial park held for sale; and certain other real estate. Real properties, machinery and equipment of the Company were subject to aggregate encumbrances of approximately $36 million at December 31,1996. Additions to property for the years ended December 31, 1996, 1995 and 1994 amounted to $10 million, $16 million, and $26 million, respectively. See Note 9 to the Company's consolidated financial statements for information as to the Company's leases. The Company believes that its properties, including its machinery, equipment and vehicles, are adequate for its business, well maintained and utilized, suitable for their intended uses and adequately insured. Item 3. Legal Proceedings The Company, like others in the agriculture industry, utilizes different types of contracts with producers (including contracts commonly referred to as "Hedged To-Arrive" or "HTA" contracts) to purchase grain. Some grain producers have defaulted or threatened default on certain of these contracts, arguing that their contracts are unenforceable. The Company believes that this is due, in large part, to unprecedented high grain prices experienced in 1996. The Company currently is engaged in litigation and/or arbitration with several defaulting producers, including one purported class action filed on May 16, 1996 in the United States District Court for the Northern District of Illinois, Eastern Division, Case no. 96C2936, Harter, et. al., v. Iowa Grain Company and The Andersons Investment Services Corp., d.b.a. The Andersons, Inc., wherein enforceability of the delivery obligation under certain grain contracts has been raised as an issue. The Harter lawsuit seeks declaratory and injunctive relief and compensatory, exemplary and punitive damages of an unspecified amount. The Court, in Harter, ordered arbitration by the National Grain and Feed Association and dismissed Iowa Grain Company as a defendant. The Company believes its grain contracts are enforceable obligations and intends to enforce them. Although no assurance can be given that the current litigation and arbitration will not result in liability or loss, the Company continues to believe that it has valid claims and defenses in the lawsuits and proceedings in which it is involved. Pursuant to subpoenas duces tecum served by the Commodities Futures Trading Commission (the "CFTC"), the Company has produced certain records, including names and phone numbers of certain customers and the depositions of certain employees and former employees have been taken in the matter of "Certain Transactions and Practices Among Grain Elevators, et. al., Involving Futures Contracts." In light of the Company's current and prior use of Hedged To-Arrive contracts, related industry-wide litigation, and current conditions of the industry as a whole, there can be no assurance that other litigation will not be brought, that a class will not be certified or that other CFTC proceedings will not be instituted. There currently is no reasonable basis to predict the amount of future liability or loss, if any, that may arise from such litigation or CFTC proceedings. Item 4. Submission of Matters to a Vote of Security Holders None Item 4A. Executive Officers of the Registrant Pursuant to General Instruction G(3) of Form 10-K, the following information with respect to the executive officers of the registrant is included herein in lieu of being included in the Registrant's Proxy Statement for its Annual Meeting of Shareholders to be held May 22, 1997. Name Position Age Year Assumed Christopher President, Processing and 42 1996 J. Anderson Manufacturing Group Vice President, Business 1992 Development Group General Manager, Ventures & New 1990 Business Development Daniel T. President, Retail Group 41 1996 Anderson Director of Marketing and 1996 Merchandising, Retail Group General Merchandise Manager, 1991 Retail Group Michael J. President and Chief Operating 45 1996 Anderson Officer Vice President and General 1994 Manager, Retail Group Vice President and General 1990 Manager, Grain Group Richard M. Vice President and General 40 1996 Anderson Manager, Processing Division Vice President and General 1990 Manager, Industrial Products Group General Manager, Industrial 1990 Products & Technical Development Richard P. Chairman of the Board and Chief 67 1996 Anderson Executive Officer President and Chief Executive 1987 Officer Joseph L. President, Agriculture Group 46 1996 Braker Vice President and General 1994 Manager, Agriculture Group Vice President and General 1990 Manager, Agricultural Products Group Joseph C. Vice President, Human Resource 48 1996 Christen Development Director of Human Resource 1988 Development Dale W. Vice President - Corporate 52 1992 Fallat Services Senior Vice President, Corporate 1990 Services Phillip C. Vice President, Corporate 55 1996 Fox Planning Director of Company Planning 1988 Charles E. Vice President, Personnel 55 1996 Gallagher Director of Personnel 1988 Richard R. Vice President and Controller 47 1996 George Corporate Controller 1988 Beverly J. Vice President, General Counsel 55 1996 McBride and Secretary General Counsel and Corporate 1987 Secretary Gary L. Vice President, Finance and 51 1996 Smith Treasurer Corporate Treasurer 1988 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The information under the caption Market for Common Stock on page 10 and Shareholders on the inside back cover of The Andersons, Inc. 1996 Annual Report to Shareholders is incorporated herein by reference. The Company's first quarterly dividend of three cents per common share was declared on December 20, 1996 for shareholders of record on January 2, 1997. Item 6. Selected Financial Data The information under the caption Selected Financial Data on page 9 of The Andersons, Inc. 1996 Annual Report to Shareholders is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information under the caption Management's Discussion and Analysis appearing on pages 8 and 9 of The Andersons, Inc. 1996 Annual Report to Shareholders is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The information under the caption Selected Quarterly Financial Data on page 10 of The Andersons, Inc. 1996 Annual Report to Shareholders, as well as the following consolidated financial statements of The Andersons, Inc. set forth on pages 11 through 28 of The Andersons, Inc. 1996 Annual Report to Shareholders are incorporated herein by reference: Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994 Consolidated Balance Sheets as of December 31, 1996 and 1995 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Changes in Owners' Equity for the years ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements Following is the Report of Independent Auditors on the Consolidated Financial Statements and schedule: Report of Independent Auditors Board of Directors The Andersons, Inc. We have audited the accompanying consolidated balance sheets of The Andersons, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, cash flows and changes in owners' equity for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Andersons, Inc. and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ERNST & YOUNG LLP Toledo, Ohio January 31, 1997 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant For information with respect to the executive officers of the registrant, see "Executive Officers of the Registrant" in Item 4A included in Part I of this report. For information with respect to the Directors of the registrant, see "Election of Directors" in the Proxy Statement for the Annual Meeting of the Shareholders to be held on May 22, 1997 (the "Proxy Statement"), which is incorporated herein by reference; for information concerning 1934 Securities and Exchange Act Section 16(a) Compliance, see such section in the Proxy Statement, incorporated herein by reference. Item 11. Executive Compensation The information set forth under the captions "Executive Compensation" in the Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information set forth under the captions "Executive Compensation" in the Proxy Statement is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions None PART IV Item 14. Financial Statement Schedules and Reports on Form 8-K (a) (1) The consolidated financial statements of the Company, as set forth under Item 8 of this report on Form 10-K, are incorporated herein by reference from The Andersons, Inc. 1996 Annual Report to Shareholders. (2) The following consolidated financial statement schedule is included in Item 14(d): Page II. Consolidated Valuation and Qualifying Accounts - years ended December 31, 1996, 1995 and 1994 14 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (3) Exhibits: 2.1 Agreement and Plan of Merger, dated April 28, 1995 and amended as of September 26, 1995, by and between The Andersons Management Corp. and The Andersons. (Incorporated by reference to Exhibit 2.1 to Registration Statement No. 33-58963). 3.1 Articles of Incorporation. (Incorporated by reference to Exhibit 3(d) to Registration Statement No. 33-16936). 3.4 Code of Regulations of The Andersons, Inc. (Incorporated by reference to Exhibit 3.4 to Registration Statement No. 33-58963). 4.3 Specimen Common Share Certificate. (Incorporated by reference to Exhibit 4.1 to Registration Statement No. 33-58963). 4.4 The Fifteenth Supplemental Indenture dated as of January 2, 1995, between The Andersons, Inc. and Fifth Third Bank of Northwestern Ohio, N.A., successor Trustee to an Indenture between The Andersons and Ohio Citizens Bank, dated as of October 1, 1985. (Incorporated by reference to Exhibit 4.4 to registrant's 1995 Annual Report on Form 10-K). 10.1 Management Performance Program. * (Incorporated by reference to Exhibit 10(a) to the Partnership's Form 10-K dated December 31, 1990, File No. 2-55070). 10.2 The Andersons, Inc. Long-Term Performance Compensation Plan * (Incorporated by reference to Appendix B to Registration Statement No. 33-58963). 10.3 The Andersons, Inc. Employee Share Purchase Plan * (Incorporated by reference to Appendix C to Registration Statement No. 33-58963). 13 The Andersons, Inc. 1996 Annual Report to Shareholders 22 Subsidiaries of The Andersons, Inc. 23.1 Consent of Independent Auditors * Management contract or compensatory plan. The Company agrees to furnish to the Securities and Exchange Commission a copy of any long-term debt instrument or loan agreement that it may request. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the last quarter of the year. (c) Exhibits: The exhibits listed in Item 14(a)(3) of this report, and not incorporated by reference, follow "Financial Statement Schedule" referred to in (d) below. (d) Financial Statement Schedule: The financial statement schedule listed in 14(a)(2) follows "Signatures". SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Maumee, Ohio, on the 28th day of March, 1997. THE ANDERSONS, INC. (Registrant) By /s/Richard P. Anderson Richard P. Anderson Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant on the 28th day of March, 1997. Signature Title Date /s/Richard P. Anderson Chairman and Chief Executive 3/28/97 Richard P. Anderson Officer (Principal Executive Officer) /s/Richard R. George Vice President and Controller 3/28/97 Richard R. George (Principal Accounting Officer) /s/Gary L. Smith Vice President, Finance 3/28/97 Gary L. Smith and Treasurer (Principal Financial Officer) ________________________ Director Donald E. Anderson /s/Michael J. Anderson Director 3/28/97 Michael J. Anderson /s/Richard M. Anderson Director 3/28/97 Richard M. Anderson /s/Thomas H. Anderson Director 3/28/97 Thomas H. Anderson /s/John F. Barrett Director 3/28/97 John F. Barrett /s/Paul M. Kraus Director 3/28/97 Paul M. Kraus _______________________ Director Donald M. Mennel _______________________ Director David L. Nichols _______________________ Director Dr. Sidney A. Ribeau _______________________ Director Charles A. Sullivan Except for those portions of The Andersons, Inc. 1996 Annual Report to Shareholders specifically incorporated by reference in this report on Form 10-K, such annual report is furnished solely for the information of the Securities and Exchange Commission and is not to be deemed "filed" as a part of this filing. SCHEDULE II - CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS THE ANDERSONS, INC.
Additions Balance at Charged to Charged to Balance Beginning Costs and Other Accounts Deductions at End Description of Period Expenses -Describe -Describe of Period Allowance for doubtful accounts receivable: Year ended December 31, 1996 $3,514,000 $4,321,994 $ - $4,605,994 $3,230,000 Year ended December 31, 1995 2,292,000 2,220,830 - 998,830 3,514,000 Year ended December 31, 1994 1,178,000 2,682,904 - 1,568,904 2,292,000 Allowance for doubtful notes receivable: Year ended December 31, 1996 $1,277,000 $ - $ - $ 542,000 $ 735,000 Year ended December 31, 1995 727,000 550,000 - - 1,277,000 Year ended December 31, 1994 - 727,000 - - 727,000 Uncollectible accounts written off, net of recoveries
EXHIBIT INDEX THE ANDERSONS, INC. Exhibit Number 13 The Andersons, Inc. 1996 Annual Report to Shareholders 22 Subsidiaries of The Andersons, Inc. 23.1 Consent of Independent Auditors EX-13 2 1996 Annual Report Corporate Profile The Andersons, Inc. (Nasdaq: ANDE) is a diversified agribusiness and retailing Company with annual revenues of more than $1 billion. The Company, which began operations in Maumee, Ohio, in 1947 with one grain elevator and 500,000 bushels of storage capacity, today has three operating groups: Agriculture, Retail, and Processing & Manufacturing. 1996 Accomplishments * Merged The Andersons Management Corp. and The Andersons (partnership) and changed the name to The Andersons, Inc. * Listed and initiated trading of the company's shares on Nasdaq: ANDE * Exceeded 1995 pretax income by 15% * Increased total sales by 5.2% and net income by 2.1% * Declared our first cash dividend -- paid in 1997 * Achieved record sales and income in the Retail Group and significant sales and income gains in our Lawn and railcar businesses. * Redesigned and renovated the Toledo retail store * Reorganized the Business Development Group to improve efficiency and renamed it the Processing & Manufacturing Group to better reflect the nature of the business * Reduced balance sheet leverage -- improving the long-term debt to equity ratio Table of Contents Highlights 1 Letter to Shareholders 2-3 Agriculture Group 4 Retail Group 5 Processing & Manufacturing Group 6 Management's Discussion & Analysis 7-9 Selected Financial Data 9-10 Audited Consolidated Financial Statements 11-28 Officers & Directors Data Inside Back Welcome to our new shareholders! Thanks for your vote of confidence. The Andersons, Inc. Financial Highlights (in thousands, except for per share and performance data) 1996 1995* % Change Operations Grain sales & revenue $ 700,326 $ 660,121 6.1% Fertilizer, retail and other sales 449,978 432,289 4.1% Other income 4,652 5,320 (12.5)% Total sales & revenue 1,154,956 1,097,730 5.2% Gross profit 159,231 153,554 3.7% Income before income taxes 11,891 10,325 15.2% Net income 6,406 6,273 2.1% Per share Net income $ 0.76 $ 0.74 2.7% Book value 8.76 7.98 9.8% Performance Pre tax return on beginning equity 17.7% 15.9% Net income return on beginning equity 9.6% 10.3% Long-term debt to equity ratio 0.97 to 1 1.13 to 1 Weighted average shares outstanding (000) 8,425 8,430 Number of employees 3,024 3,126 * 1995 net income and per share data on a pro forma basis [Pie Graph] 1996 Operating Income 1996 Revenues Total: $12.3 million Total: $1.2 billion Agriculture 30.1% Agriculture 75.0% Retail 30.9% Retail 15.2% Processing & Manufacturing 39.0% Processing & Manufacturing 9.8% Letter to Shareholders The past year was an exciting and eventful one. 1996 confirmed the soundness of our business diversification strategy. We exceeded 1995 pretax income by 15%, modified our business structure from a partnership to a corporation, changed our name to The Andersons, Inc., listed our shares on Nasdaq (trading symbol ANDE), and directly addressed several strategic issues in a number of our businesses. Looking forward, we see many opportunities to improve and grow our Company. While 1996 was a challenging year for a number of our grain operating units, the Company's business diversification strategy served us well. Strong performances by our retail, wholesale fertilizer, lawn products and railcar businesses more than offset the reduction in grain income caused by a second consecutive year of poor harvests in the Eastern Corn Belt. Both retail and lawn products enjoyed healthy growth in sales and income. Total revenues for 1996 increased 5% from 1995 to $1.2 billion primarily due to grain price escalation in the Agriculture Group and volume growth in other businesses. Pretax income for the year was up 15% to $11.9 million, resulting in pretax return on beginning equity of 17.7%, against our goal of 25%. As a result of a one-time charge to establish the Company's deferred tax liability resulting from the merger, total net income increased by only 2% to $6.4 million versus pro forma net income of $6.3 million in 1995. Earnings per share increased modestly to $0.76 in 1996 from $0.74 pro forma in 1995. Strong cash flow in 1996 allowed us to increase working capital modestly and reduce balance sheet leverage closer to our long-term debt to equity ratio objective of 0.8 to 1. Total equity grew by 8.9% for the year. Our objective is to achieve average annual internally-generated equity growth of 14%. The January 2, 1996 restructuring from a partnership to a corporation and subsequent Nasdaq listing has improved investment liquidity for you, our shareholders, and enhanced the Company's access to the capital markets. It also provides a currency for acquisitions and performance-based compensation programs and permits increased employee ownership through the Employee Share Purchase Plan. With our strengthened balance sheet and the improved liquidity of our shares, we believe the Company has more flexibility and is in a better position to support our present businesses and to make acquisitions. At year end, the Company declared its first dividend since going public. The Andersons invested heavily for the future in 1996. We added grain and fertilizer storage capacity and increased liquid fertilizer manufacturing capacity. We also completed renovation of the Toledo retail store, improving product presentation and customer service. Based on the excellent customer response to this renovation, we have initiated similar improvements at the Maumee store and have begun to incorporate many of the new concepts in our two Columbus stores. In 1997, we will complete these renovations and add a much expanded state-of-the-art garden center at the Maumee store just in time for the spring season. In addition, we are adding pet products manufacturing capacity to support our corn cob-based consumer product offerings and will be acquiring additional railcars by exercising purchase options on cars currently under lease. The Company's outlook for 1997 and beyond is good. Improving fundamentals offer promise for our Agriculture Group businesses. Worldwide demand is growing, both from population growth and a desire for improved diets supported by rising average per capita incomes. In addition, the USDA has removed acreage set-aside programs, allowing more acres to be planted in the U.S. These conditions and a return to more "normal" growing seasons should benefit our grain, wholesale fertilizer and retail farm center businesses. Two competitors (five stores) left Toledo in 1996, helping the Retail Group's three stores in that market. Our Columbus and Lima stores, however, were confronted with new competitors. Additional new competition is expected to open in Toledo in 1997. To date, we have met the challenge of the "big box" competitors, but realize that we must maintain a sharper focus on our customers' needs and desires to earn and retain their business. This year our advertising campaign will reinforce the concept of our renovated stores with the theme that The Andersons is a home center plus a whole lot more. The Processing & Manufacturing Group, reorganized and renamed during the year, also has a promising future. Income improvement in 1996 was driven by solid growth in our lawn products markets. In addition, the sorbents business was sold to enable us to sharpen our focus on higher value-added products. The manufacturing division anticipates strong demand for railcar leasing and repair services as well as opportunities in rail fleet management. In addition, we will continue to explore ways to focus our engineering and steel fabrication capabilities on broader railcar opportunities. As noted in last year's annual report, our friend and fellow board member, Ren McPherson, passed away early in 1996. Later in the year, Dan Anderson, Dale Fallat and Janet Schoen retired from our board. We want to thank them again for their years of service and numerous contributions to our Company's success. We also want to acknowledge and thank two other board members: Tom Anderson, who retired as Chairman of the Board and now serves as Chairman Emeritus, and Don Anderson, who remains on the board but who retired as Director of Science this year. We also welcomed two new board members: Chuck Sullivan, Chairman and CEO of Interstate Bakeries Corp. and Dr. Sidney Ribeau, President of Bowling Green State University. We look forward to their contributions in the coming years. While the Company has experienced a great deal of change recently, our commitment to the goals outlined in our Mission Statement has not changed. As a result of the efforts of over 3,000 dedicated employees, The Andersons has achieved a half century of success. We see improving fundamentals in agriculture and are pursuing growth opportunities in all three operating groups. We believe that The Andersons, Inc. is well positioned to benefit from this growth. The following pages review in greater detail the performance of our three operating groups. /s/ Richard P. Anderson Richard P. Anderson, Chairman & Chief Executive Officer /s/ Michael J. Anderson Michael J. Anderson, President & Chief Operating Officer Agriculture Group The Agriculture Group consists of 12 grain elevators in Ohio, Michigan, Indiana and Illinois with a combined storage capacity of 69 million bushels; wholesale fertilizer operations in the same area of the Eastern Corn Belt with dry and liquid fertilizer storage capacity of more than 550,000 tons; and nine retail farm centers in Michigan, Indiana and Ohio that offer agricultural fertilizer, chemicals and seeds for sale and custom application. Operating income of the group dropped $2.3 million in 1996. Income gains in the wholesale fertilizer division and retail farm centers were more than offset by the decline in grain division income. This occurred for two reasons: a second straight year of poor harvests in parts of our market area and charges against earnings resulting from the industry's hedged-to-arrive contract issues aggravated by last year's extraordinary rally in grain prices. The sales growth depicted by the top graph was a direct result of these unusually high prices. Because of poor weather in northwest Ohio, southern Michigan and parts of Indiana, total bushels delivered to our grain facilities fell 23% and grain division gross profit declined. At the same time, costs increased. The extraordinary grain prices resulted in high levels of short-term bank debt and related interest expense to support the Company's margin deposits on hedged grain and grain contracts. Expenses were also up due to the additional provisions for hedged-to-arrive contract issues, i.e. potential losses relating to some customers' nonperformance on grain contracts and related nonpayment of accounts receivable. Although total revenues were down slightly because of a drop in average prices, the wholesale fertilizer division achieved increases in volume and gross profit in 1996. This was primarily due to growth in our liquid fertilizer business. Overall operating expenses were slightly lower. Profitability continued to improve in our retail farm center division in 1996. Most centers experienced a decrease in tonnage due to poor planting conditions, but this was more than offset by margin growth. Custom application revenue continued to grow with increased acreage, improved service charges, changing agronomic practices and our expanded participation in that change. With strong demand for grain, low stocks and no USDA acreage set-aside programs, we expect more acres to be planted this spring. This should be good for our wholesale fertilizer and retail farm center divisions. Although early months will be challenging for the grain division, a more normal growing season this year would lead to higher volumes this fall. Longer term, we believe that the Company is well positioned to take advantage of improving fundamentals in the worldwide agricultural industry and growth opportunities within our region. [Bar Graphs] In Millions of Dollars 1992 1993 1994 1995 1996 Sales & Revenues $555 $571 $ 711 $831 $869 Operating Income 4.5 9.2 12.3 6.0 3.7 Unit Volume 1992 1993 1994 1995 1996 Grain Bushels (Millions) 129 124 137 164 137 Wholesale Fertilizer Tons (000) 726 879 963 879 908 Retail Group The Retail Group operates six large stores in three markets in Ohio; three in the Toledo area, two in Columbus and one in Lima. Each store has about 100,000 square feet of in-store display space plus about 40,000 square feet of outdoor garden center space. The group achieved a 4.6% growth in sales in 1996, with the Toledo-area stores producing the biggest gains. Because of this increase in volume and a strong focus on improving efficiency, the group's operating income of $3.8 million in 1996 was a record, more than double 1995. During 1996, we completed the Toledo store renovation which began the previous year. The reconfigured layout emphasizes our position as a destination store for the do-it-yourself homeowner - having a full line of home center products plus a wide array of other items not available at the more traditional home center stores. In addition to hardware, home remodeling, and lawn & garden products, our stores offer housewares, automotive supplies, sporting goods, pet, workwear, and food (bakery, deli, produce, wine and specialty groceries). The excellent customer response and sales growth achieved at the Toledo store once the renovation was completed, has encouraged us to begin similar improvements in our Maumee store and to redesign the interior of both Columbus stores. The Maumee renovation also includes a prototype greenhouse and expanded garden center. All three projects are underway and should be ready for the traditionally strong spring season. The competition in Columbus has been especially tough in recent years. While we have benefited from the recent exit of two major competitors in the Toledo area, new competition is scheduled to open very soon. In spite of this, the strong performance of our refurbished Toledo store indicates that we are developing a prototype which can be used to successfully grow this business. [Bar Graphs] In Millions of Dollars 1992 1993 1994 1995 1996 Sales Volume $149 $153 $169 $168 $176 Operating Income 2.8 0.4 2.3 1.8 3.8 Processing & Manufacturing Group The Processing & Manufacturing Group is made up of three divisions. The processing division includes a lawn products business that serves consumer and professional markets, and an industrial products business which processes corn cobs for use as chemical carriers, animal bedding, cat litter and a wide variety of other products. The manufacturing division repairs, sells and leases various types of railcars, offers fleet management services for private railcar fleets, manufactures railcar components and performs custom steel fabrication. The ventures division is comprised of three smaller businesses involved in automotive service and repair, pet food manufacturing and outdoor power equipment sales and service. The group continued to achieve sales growth in 1996, reaching a total of $113 million, up 7.6% from 1995. Total operating income also grew, from $3.7 million in 1995 to $4.8 million in 1996. In the processing division, an increase in lawn products tonnage fueled sales and income growth. This business manufactures and markets fertilizer and related products to retailers and professional lawn care companies. In the off-season, it markets various ice melt products. Revenue increases in industrial products also led to bottom line improvement. The lawn and industrial products businesses were combined during the year to form the processing division. Late in 1996, the division's sorbents business, which had evolved from a cob-based product line to one with synthetic materials as well, was sold. This will allow us to focus on other processing and higher value-added opportunities. The Company will remain a major raw material supplier to the new owners of the sorbents business. The manufacturing division also had a strong year. Because of gross profit growth from car sales and increased fleet income, the biggest year-to-year gains were realized in the division's railcar marketing business. We believe that there is additional growth potential in our manufacturing division. The group's ventures division had mixed results this year. The Tireman auto centers continued to expand and achieved income growth. Our pet food venture, however, was adversely impacted by high ingredient costs, and the unusually wet spring hurt our lawn and garden power equipment business. [Bar Graphs] In Millions of Dollars 1992 1993 1994 1995 1996 Sales Mix Processing $50.6 $53.3 $63.3 $ 66.5 $ 75.5 Manufacturing 8.4 7.8 14.0 20.4 21.2 Ventures & Other 10.4 18.0 17.3 17.7 15.9 Total $69.4 $79.1 $94.6 $104.6 $112.6 Operating Income $1.8 $4.4 $3.2 $3.7 $4.8 Management's Discussion and Analysis Introduction The following discussion should be read in conjunction with the consolidated financial statements and the notes thereto. The consolidated financial statements included in this annual report present the historical results of operations for The Andersons, Inc., resulting from the merger of a limited partnership (the "Partnership") into its corporate general partner on January 2, 1996. As operations had been combined historically, the only adjustments made to the historical statements have been to show on a pro forma basis, the effect of income taxes on income tax expense, net income and earnings per share had the merged companies always operated as a consolidated corporation. Operating Results Operating results for The Andersons, Inc. business segments are discussed in the Business Review on pages 4, 5 and 6 of this annual report. In addition, Note 13 to the consolidated financial statements displays sales and revenues, operating profit, identifiable assets, capital expenditures and depreciation and amortization for each of the Company's three business segments. The following discussion focuses on the consolidated operating results as shown in the consolidated Statements of Income. Comparison of 1996 with 1995 Sales and revenue for 1996 totaled $1.2 billion, an increase of $57.2 million or 5.2% from 1995. The Agriculture Group accounted for $41.3 million of the increase. Grain shipment volume was down approximately 19% from 1995. This was more than offset by a 31% increase in average price per bushel. The majority of the volume decrease resulted from a poor 1996 wheat harvest and a poor 1996 corn harvest in some of the primary growing areas served by the Company. The increase in the average selling price is reflective of significant increases in market prices of commodities in the fall of 1995 through late spring of 1996. Wholesale fertilizer experienced a 1% increase in sales with a slight volume increase of 3% and a decrease of 2% in average prices, while the Retail Farm Center sales were unchanged from 1995. The Retail Group experienced a 4.7% increase in sales, led by increases in each of the three Toledo, Ohio area stores. Store closings by some competitors, as well as significant refurbishing of one of the Toledo stores, contributed to this increase. Increased competition is expected in this region in 1997. The Processing and Manufacturing Group experienced sales increases of 8.6% with all major divisions contributing to the Group's improvement. The processing division recorded an increase in sales of $7.8 million or 12%, the manufacturing division had increased sales of $0.5 million or 2.6% and the ventures division increased sales of $0.4 million or 2.9%. Included in other income in 1996 are proceeds of approximately $1 million from the sale of the sorbents business, a small component of the processing division. Overall, other income decreased from 1995 when sales of excess real estate added approximately $2.5 million to operating income. Gross profit for 1996 totaled $159 million, an increase of $5.7 million or 3.7% from 1995. Significant increases in gross profit were experienced in the Retail Group, with a $2.4 million or 5% increase, and the Processing and Manufacturing Group, with a $3.7 million or 10.7% increase. Gross profit in the Agriculture Group was unchanged. Gross profit, as a percent of total sales and revenue, declined slightly from 14% in 1995 to 13.8% in 1996. Operating, administrative and general expenses for 1996 totaled $133.6 million, a $4.4 million or 3.4% increase over 1995. Two million dollars of this increase was due to additional provision for losses on accounts and notes receivable relating primarily to nonperformance on grain contracts and related nonpayment of accounts receivable. As a percent of total sales and revenue, operating administrative and general expenses again decreased from 11.8% in 1995 to 11.6% in 1996. Interest expense for 1996 was $13.7 million, a $0.3 million or 2.3% decrease from 1995. The average daily borrowing amount was unchanged from 1995 but the average rate decreased 0.45%. Borrowings for both 1995 and 1996 were unusually high due to the significant rise in commodity prices in the third quarter of 1995 until their fall in mid-1996. The Company's cost to carry higher value grain inventory and resulting margin requirements for its commodity hedge portfolio, required additional funding in the first half of the year. These short-term borrowings were reduced to zero by year end. Income before income taxes of $11.9 million represented an improvement of $1.6 million or 15% from the 1995 pretax income of $10.3 million. Net income (after considering the 1995 pro forma tax adjustment) also improved 2.1% to $6.4 million from $6.3 million. The 1996 net income includes a non-recurring charge of $0.8 million to establish deferred income taxes on the assets and liabilities of the Partnership. Earnings per share (also after considering the 1995 pro forma tax adjustment) increased 2.7% from $0.74 per share in 1995 to $0.76 per share in 1996. Comparison of 1995 with 1994: Sales and revenue for 1995 totaled $1.1 billion, an increase of $126 million or 13% from 1994. Grain shipment volume increased 11% and the average price per bushel increased 9%, representing 85% of the total increase. A portion of the volume increase resulted from two grain facilities which the Company leased or acquired in mid 1994 and, therefore, did not report full year results of operations. The Company's Retail Group experienced a 1% decrease in same-store sales but all other operating units experienced some level of increase. Notable increases include the manufacturing division of the Processing and Manufacturing Group, which experienced a $6.4 million or 46% increase in sales and the Retail Farm Center division of the Agriculture Group which experienced a $7 million or 35% increase. Half of the Retail Farm Center increase resulted from new facilities. In addition, the Company liquidated a portion of its excess real estate, realizing gains of approximately $2.5 million which are included in other income. Gross profit for 1995 was $154 million, a $4 million or 2.8% increase from 1994. The increase in other income of $2.6 million accounts for the majority of the gross profit increase. Gross profit, as a percent of total sales and revenue decreased from 15.4% in 1994 to 14% in 1995. Operating, administrative and general expenses for 1995 were $129 million, a $3.7 million or 3% increase over 1994. Of this increase, one percent was due to the two facilities which began operations in 1994. As a percent of total sales and revenue, operating, administrative and general expenses decreased from 12.9% in 1994 to 11.8% in 1995. Interest expense for 1995 was $14 million, a $5.6 million or 67% increase over 1994. This was due to a 64% higher average daily borrowing and a 1.5% increase in the average short-term interest rate. See Note 6 to the consolidated financial statements. Income before income taxes of $10.3 million represented a decrease from the 1994 level of $15.5 million. Net income (after considering pro forma tax adjustments for both 1995 and 1994) represented a decrease of $3 million or 32% from the 1994 level. After the pro forma tax adjustment, earnings per share for 1995 were $0.74 as compared to $1.10 in 1994. Liquidity and Capital Resources The Company's operations provided cash of $159 million in 1996 as compared to using $60 million in cash in 1995. This change was due primarily to the sale of a portion of the Company's grain inventories in response to market conditions and a reduction in the market price (on which the Company values its commodity inventories) decreasing the value of the bushels remaining in inventory. In addition, margin deposits with the Chicago Board of Trade were refunded to the Company as the commodity prices dropped. The Company has significant short-term lines of credit available to finance working capital, primarily inventories and accounts receivable. Lines of credit available on December 31, 1996 were $250 million, a reduction from a high of $385 million that the Company had available earlier in the year. Although there were no outstanding balances on the Company's short-term lines of credit on December 31, 1996, several lines were again drawn in January 1997. Typically, the Company's highest borrowing occurs in the spring due to seasonal inventory requirements in several of the Company's businesses, credit sales in the lawn products and agricultural fertilizer businesses and a customary reduction in grain payables due to customer cash needs and market strategies. The Company utilizes interest rate contracts to manage interest rate risk by converting variable rates on its short-term borrowings to intermediate-term fixed rates, consistent with projected borrowing needs. As of December 31, 1996, the Company had four $10 million interest rate swaps maturing in 1997 which converted variable rates to fixed rates ranging from 4.94% to 5.965%. The Company incurred $30,000 of additional interest expense from participating in swaps. The final payments to former partners electing not to participate in the merger were made in the first quarter of 1996. No cash dividends were paid in 1996, but a cash dividend of $0.03 per common share was declared for shareholders of record on January 2, 1997. The Company will be required to make quarterly income tax deposits in 1997 as well as pay its 1996 income tax liability in the first quarter of 1997. The Company also purchased 70,000 of its common shares on the open market for use in its Employee Share Purchase program at an average price of $8.57 per share. During 1996, the Company invested approximately $10 million in capital additions and improvements, including $2.0 million for renovations to the Maumee and Toledo retail stores, $1.6 million for new information systems, $0.7 million for additional storage capacity and $3.6 million for plant upgrades and improvements. Approximately $17 million is budgeted for capital spending in 1997 including $6 million for retail store improvements, $5 million for acquisition of businesses and transportation systems, $1 million for additional storage capacity and $1 million for improvements to production facilities. These expenditures are expected to be funded by cash generated from operations. Certain of the Company's long-term debt is secured by first mortgages on various facilities. In addition, some of the long-term borrowings include provisions that impose minimum levels of working capital and equity, limitations on additional debt and requires that the Company be substantially hedged in its grain transactions. Additionally, the Company has entered into a long-term interest rate contract to convert $9.4 million of its variable rate debt to a fixed rate of 6.85%. As of December 31, 1996 the Company held $22 million in short-term investments. The Company's liquidity is enhanced by the fact that grain inventories are readily marketable and the Maumee and Toledo, Ohio elevators serve as delivery points for Chicago Board of Trade contracts. In the opinion of management, the Company's liquidity is adequate to meet short-term and long-term needs. Forward Looking Statements The preceding Letter to Shareholders, Business Review and Management's Discussion and Analysis contain various "forward-looking statements" which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including but not limited to those identified below, which could cause actual results to differ materially from historical results or those anticipated. The words "believe," "expect," "anticipate" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The following factors could cause actual results to differ materially from historical results or those anticipated; weather, supply and demand of commodities including grains, fertilizer and other basic raw materials, market prices for grains and the potential for increased margin requirements, regulatory agency review of grain contracts and related contract default litigation, competition, interest rates and income taxes. SELECTED FINANCIAL DATA (in thousands, except for per share data) 1996 1995 1994 1993 1992 Operating Results Total sales and revenues $1,154,956 $1,097,730 $971,638 $800,345 $771,380 Income from continuing operations (a) 6,406 6,273 9,285 6,986 6,284 Per share data: Income from continuing operations (b) .76 .74 1.10 .83 .75 Dividends paid (c) - - - - - Balance Sheet Data Total assets $346,591 $455,518 $344,809 $360,586 $259,294 Working capital 61,649 58,897 57,623 47,795 40,940 Long-term debt 68,568 74,139 71,217 52,259 46,077 Owners' equity 73,249 67,260 64,870 56,256 51,970 (a) Includes pro forma income taxes of $3,915 thousand, $5,886 thousand, $4,094 thousand and $3,761 thousand for 1995, 1994, 1993, and 1992, respectively. Income taxes for 1996 includes a charge of $812 thousand to establish deferred income taxes on the assets and liabilities of the Partnership. See Note 1 to the consolidated financial statements of the Company. (b) Amounts are net of pro forma income taxes of $.47, $.70, $.48 and $.44 for 1995, 1994, 1993 and 1992, respectively. Amounts for 1992 through 1995 were calculated using the actual number of shares that were outstanding on the date of the merger. (c) There were no dividends paid in 1996. Distributions made to partners are not included in this table. SELECTED QUARTERLY FINANCIAL DATA The following tables present selected unaudited quarterly financial data for the years ended December 31, 1996 and 1995: (in thousands, except per share data) 1996 First Second Third Fourth Quarter Quarter Quarter Quarter Net sales $256,714 $345,229 $227,651 $325,362 Cost of sales 216,981 303,250 196,542 278,952 Gross profit 39,733 41,979 31,109 46,410 Net income (loss) 1,269 1,380 (1,806) 5,563 Net income (loss) per share $.15 $.16 $(.21) $.66 1995 Net sales $207,327 $262,637 $283,778 $343,988 Cost of sales 170,983 224,501 252,682 296,010 Gross profit 36,344 38,136 31,096 47,978 Pro forma net income (loss) 1,198 1,615 (2,026) 5,486 Pro forma net income (loss) per share $.14 $.19 $(.24) $.65 Market for Common Stock The following table sets forth the high and low bid prices for the Company's Common Stock as quoted on the Nasdaq National Market System for the period from February 20, 1996 (the Company's first day of trading) to December 31, 1996. Such quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. 1996 High Low First quarter $17.68 $9.75 Second quarter 11.00 8.75 Third quarter 9.50 8.00 Fourth quarter 9.50 7.25 Report of Independent Auditors Board of Directors The Andersons, Inc. We have audited the accompanying consolidated balance sheets of The Andersons, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, cash flows and changes in owners' equity for each of the three years in the period ended December 31, 1996. 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 the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Andersons, Inc. and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Toledo, Ohio January 31, 1997 The Andersons, Inc. Consolidated Statements of Income Year ended December 31 (in thousands, except per share data) 1996 1995 1994 Grain sales and revenues $ 700,326 $ 660,121 $ 551,836 Fertilizer, retail and other sales 449,978 432,289 417,044 Other income 4,652 5,320 2,758 1,154,956 1,097,730 971,638 Cost of grain sales 659,244 617,934 513,893 Cost of fertilizer, retail and other sales 336,481 326,242 308,381 995,725 944,176 822,274 Gross profit 159,231 153,554 149,364 Operating, administrative and general expenses 133,637 129,210 125,472 Interest expense 13,703 14,019 8,395 147,340 143,229 133,867 Income before income taxes 11,891 10,325 15,497 Income taxes 5,485 137 326 Net income $ 6,406 10,188 15,171 Pro forma income taxes (See Note 1) 3,915 5,886 Pro forma net income $ 6,273 $ 9,285 Earnings per share (Pro forma for 1995 and 1994 - See Note 1) $ .76 $ .74 $ 1.10 Weighted average shares outstanding 8,425 8,430 8,430 See accompanying notes. The Andersons, Inc. Consolidated Balance Sheets December 31 (in thousands) 1996 1995 Assets Current assets: Cash and cash equivalents $ 27,524 $ 5,052 Accounts receivable: Trade accounts, less allowance for doubtful accounts of $3,230 in 1996; $3,514 in 1995 73,694 68,362 Margin deposits 327 20,753 74,021 89,115 Inventories 150,297 269,930 Deferred income taxes 1,864 - Prepaid expenses 3,929 4,314 Total current assets 257,635 368,411 Other assets: Notes receivable and other assets, less allowance for doubtful notes receivable of $735 in 1996; $1,277 in 1995 5,951 4,575 Investments in and advances to affiliates 1,340 670 7,291 5,245 Property, plant and equipment 81,665 81,862 $346,591 $455,518 Liabilities and owners' equity Current liabilities: Notes payable $ -- $120,267 Accounts payable for grain 96,932 94,084 Other accounts payable 75,713 72,777 Accrued expenses 16,981 14,357 Current maturities of long-term debt 6,360 8,029 Total current liabilities 195,986 309,514 Pension and postretirement benefits 2,804 2,929 Long-term debt 68,568 74,139 Deferred income taxes 5,371 675 Minority interest 613 1,001 Owners' equity 73,249 67,260 $346,591 $455,518 See accompanying notes. The Andersons, Inc. Consolidated Statements of Cash Flows Year ended December 31 (in thousands) 1996 1995 1994 Operating activities Net income, as reported $ 6,406 $ 10,188 $ 15,171 Adjustments to reconcile net income, as reported, to net cash provided by (used in) operating activities: Depreciation and amortization 9,730 9,318 8,105 Provision for losses on accounts and notes receivable 4,322 2,229 2,683 Deferred income taxes 2,766 -- -- Gain on sale of property, plant and equipment (182) (2,568) (161) Other (491) (70) (77) Changes in operating assets and liabilities: Accounts receivable 10,772 (38,775) 10,486 Inventories 119,633 (71,295) 12,388 Prepaid expenses and other assets (1,875) 815 (992) Accounts payable for grain 2,848 10,240 132 Other accounts payable and accrued expenses 5,335 19,818 4,574 Net cash provided by (used in) operating activities 159,264 (60,100) 52,309 Investing activities Purchases of property, plant and equipment (9,955) (11,894) (22,663) Proceeds from sale of property, plant and equipment 720 1,242 848 Sales and maturities of investments 366 565 2,179 (Advances to) payments received from affiliates (29) 518 (640) Acquisition of business, net of cash acquired -- (1,427) -- Purchases of investments -- (101) (739) Net cash used in investing activities (8,898) (11,097) (21,015) Financing activities Net increase (decrease) in short-term borrowings (120,267) 68,578 (37,900) Proceeds from issuance of long-term debt 140,780 56,570 35,509 Payments of long-term debt (147,743) (49,616) (20,144) Purchase of common stock for the treasury (600) -- -- Payments to partners and shareholders and other deductions from owners equity accounts (64) (7,556) (7,323) Capital invested by partners and shareholders -- 1,350 755 Net cash provided by (used in) financing activities (127,894) 69,326 (29,103) Increase (decrease) in cash and cash equivalents 22,472 (1,871) 2,191 Cash and cash equivalents at beginning of year 5,052 6,923 4,732 Cash and cash equivalents at end of year $ 27,524 $ 5,052 $ 6,923 Noncash operating, investing and financing activities: Exchange of fixed assets for investment $ 513 Exchange of employee bonds for common shares $ 275 Acquisition of business: Working capital, other than cash $ 90 Property, plant and equipment 4,096 Short and long-term debt assumed (2,070) Deferred tax liabilities assumed (689) Net cash expended $ 1,427 Donation of land to charity $ 1,648 Notes received on sale of land $ 2,431 Assumption of long-term debt in purchase of property, plant and equipment $ 5,217 See accompanying notes. The Andersons, Inc. Consolidated Statements of Changes in Owners' Equity Converted Equity The Andersons The Management Andersons Corp. Additional Partners' Common Common Treasury Paid-in Retained (in thousands) Capital Shares Shares Shares Capital Earnings Total Balances at January 1, 1994 $ 54,649 $ 1,388 $ -- $ -- $ -- $ 219 $56,256 Net income as reported 14,919 252 15,171 Distributions and other changes (6,560) 3 (6,557) Balances at December 31, 1994 63,008 1,391 -- -- -- 471 64,870 Net income as reported 9,960 228 10,188 Distributions and other changes (7,812) (15) 29 (7,798) Balances at December 31, 1995 65,156 1,376 -- -- -- 728 67,260 Merger transaction Issuance of 8,399 thousand shares to convert equity (65,092) (1,376) 84 66,384 -- Payments to dissenting partners and for fractional shares (64) (64) Issuance of 31 thousand shares to convert employee bonds 275 275 Balances at January 2, 1996 -- -- 84 -- 66,659 728 67,471 Net income for the year 6,406 6,406 Purchase of 70 thousand shares for treasury (600) (600) Sale of available- for-sale securities (28) (28) Balances at December 31, 1996 $ -- $ -- $84 $(600) $66,659 $7,106 $73,249 See accompanying notes. The Andersons, Inc. Notes to Consolidated Financial Statements December 31, 1996 1. Basis of Financial Presentation On January 2, 1996, The Andersons, an Ohio limited partnership (the "Partnership") merged with and into The Andersons Management Corp. (the "Company") and the partnership was dissolved. Concurrent with the merger, the Company changed its name to The Andersons, Inc. Prior to the merger, the Company was the sole general partner of the Partnership, and the Company and the Partnership shared common ownership in that ownership of Class A Common shares of the Company was restricted to limited partners of the Partnership and ownership of Class B Common shares (voting shares) was restricted to holders of Class A Common shares. The merger has been accounted for as a reorganization of entities under common control similar to a pooling of interests. The Company's financial statements have been restated to include the accounts and operations of the Partnership for all periods prior to the merger. The Company, in previous years, had presented financial statements that combined the accounts and results of operations of the Company and the Partnership. All material intercompany accounts and transactions had been eliminated in the combined presentation and, consequently, the restatement to reflect the merger was not material to the historical presentation. The Partnership's net income was includable in the federal income tax returns of its partners, and therefore, the Partnership did not pay federal income taxes. The Partnership's operations will be included in the Company's U. S. federal income tax return effective January 2, 1996, and therefore, a net deferred tax liability and corresponding expense of $0.8 million was recorded in the first quarter of 1996. The income statements for 1995 and 1994 were restated to present pro forma income taxes and pro forma earnings per share as if the change in the corporate structure had been effective on January 1, 1994. Pro forma net income per share is calculated on the actual shares that were outstanding at the date of the merger. In the merger transaction, 8.1 million shares were issued to the partners of the Partnership and the remainder to shareholders of the Company and employees who held convertible bonds of the Partnership. In connection with the merger, approximately $0.6 of merger costs and expenses were incurred and were charged to expense in 1995. The merger costs consisted of legal, accounting and benefits consulting fees. 2. Significant Accounting Policies Estimates and Assumptions The preparation of the financial statements in conformity 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. Cash and Cash Equivalents Cash and cash equivalents include cash and all highly liquid debt instruments purchased with an initial maturity of three months or less. The carrying value of these assets approximate their fair values. Securities Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when there is positive intent and ability to hold the securities to maturity. Held-to- maturity securities are stated at amortized cost. Marketable equity securities and debt securities not classified as held-to- maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in a separate component of owners' equity. The fair market value of held-to-maturity securities, consisting primarily of time deposits and U.S. Treasury securities, approximated their amortized cost of $22.9 million and $6.0 million at December 31, 1996 and 1995, respectively. The held-to-maturity securities are included in cash and cash equivalents and margin deposits in the consolidated balance sheets and mature within one year. Inventories Inventories of grain are hedged to the extent practicable and are valued on the basis of replacement market prices prevailing at the end of the year. Such inventories are adjusted for the amount of gain or loss (based on year-end market price quotations) on open grain contracts at the end of the year. Contracts in the commodities futures market, maintained for hedging purposes, are valued at market at the end of the year and income or loss to that date is recognized. Grain contracts maintained for other merchandising purposes are valued in a similar manner, and net margins from these transactions are included in grain sales and revenues. All other inventories are stated at the lower of cost or market. Cost is determined by the average cost method. Property, Plant and Equipment Land, buildings and equipment are carried at cost. Depreciation is provided over the estimated useful lives of the individual assets principally by the straight-line method. Accounts Payable for Grain The liability for grain purchases on which price has not been established (delayed price) has been computed on the basis of replacement market at the end of the year, adjusted for the applicable premium or discount. Revenue Recognition Sales of grain and other products are recognized at the time of shipment. Revenues from merchandising activities are recognized as open contracts are marked to market or as services are provided. Income Taxes Deferred income taxes are determined based on temporary differences between financial reporting and tax bases of assets and liabilities and are measured using the tax rates and laws that will be in effect when the differences are expected to reverse. Preopening Expenses Preopening expenses are charged to income as incurred. Advertising Advertising costs are expensed as incurred. Advertising expense of $3.1 million, $3.6 million and $4.2 million is included in operating, administrative and general expense in 1996, 1995 and 1994, respectively. Reclassifications Certain amounts in the 1995 and 1994 financial statements have been reclassified to conform with the 1996 presentation. These reclassifications had no effect on net income. 3. Inventories Major classes of inventories are as follows: December 31 (in thousands) 1996 1995 Grain $ 70,762 $186,989 Agricultural fertilizer and supplies 21,897 19,602 Merchandise 29,527 29,909 Lawn and corn cob products 17,633 21,729 Other 10,478 11,701 $150,297 $269,930 4. Property, Plant and Equipment The components of property, plant and equipment are as follows: December 31 (in thousands) 1996 1995 Land $ 11,261 $ 11,179 Land improvements and leasehold improvements 24,431 23,926 Buildings and storage facilities 80,669 78,210 Machinery and equipment 99,871 97,970 Construction in progress 1,795 972 218,027 212,257 Less allowances for depreciation and amortization 136,362 130,395 $ 81,665 $ 81,862 5. Banking and Credit Arrangements The Company has available lines of credit for unsecured short-term debt with banks aggregating $250 million. The credit arrangements, the amounts of which are adjusted from time to time to meet the Company's needs, do not have termination dates but are reviewed at least annually for renewal. The terms of certain of the lines of credit provide for annual commitment fees. The following information relates to borrowings under short-term lines of credit during the year indicated. (in thousands, except for interest rate) 1996 1995 1994 Maximum borrowed $207,800 $195,500 $127,600 Average daily amount borrowed (total of daily borrowings divided by number of days in period) 119,187 118,382 72,183 Average interest rate (computed by dividing interest expense by average daily amount outstanding) 6.10% 6.55% 5.03% 6. Long-Term Debt Long-term debt consists of the following: December 31 (in thousands) 1996 1995 Note payable, 7.84%, payable $75 thousand quarterly through July 1997, and $398 thousand quarterly thereafter, due 2004 $14,250 $14,550 Note payable under revolving credit line 16,300 20,000 Notes payable, variable rate (6.5625% at December 31, 1996), payable $336 thousand quarterly beginning October 1997, due 2004 9,418 9,418 Other notes payable 1,036 1,101 Industrial development revenue bonds: 6.5%, sinking fund $900 thousand to $1 million payable annually, due 1999 2,900 3,700 Variable rate (5.5% at December 31, 1996), payable $882 thousand annually through 2004 6,351 7,233 Variable rate (4.6% at December 31, 1996), due 2025 3,100 3,100 Debenture bonds, 6.5% to 10%, due 1997 through 2006 21,030 22,193 Employee bonds -- 304 Other bonds, 4% to 9.6% 543 569 74,928 82,168 Less current maturities 6,360 8,029 $68,568 $74,139 The Company has a $40 million revolving line of credit with a bank which bears interest based on the LIBOR rate (7.225% at December 31, 1996). Borrowings under this agreement totalled $16.3 million at December 31, 1996. The revolving credit line expires on July 1, 1998. The variable rate notes payable, the notes payable in quarterly installments, and the industrial development revenue bonds are collateralized by first mortgages on certain facilities and related property with a book value of approximately $29 million . The various underlying loan agreements, including the Company's revolving credit line, contain certain provisions which require the Company to, among other things, maintain minimum working capital of $32 million and net equity (as defined) of $43 million, limit the addition of new long-term debt, limit its unhedged grain position to 2 million bushels, and restrict the amount of dividends. The Company was in compliance with these covenants at December 31, 1996. The aggregate annual maturities of long-term debt, including sinking fund requirements, are as follows: 1997--$6 million; 1998--$24 million; 1999--$6 million; 2000--$7 million and 2001--$7 million. Interest paid (including short-term lines of credit) amounted to $15 million, $13 million and $8 million in 1996, 1995 and 1994, respectively. The Company periodically utilizes interest rate contracts to manage interest rate risk by converting variable interest rates on short-term borrowings to intermediate-term fixed rates consistent with projected borrowing needs. Income or expense associated with interest rate swap agreements is recognized on the accrual basis over the life of the swap agreement as a component of interest expense. The Company entered into a long-term interest rate swap in December 1996 to convert its variable rate $9.4 million note payable to a fixed rate of 6.85%. This swap expires in October 2002. The notional amount of this swap equals the outstanding balance of the long-term note and amortizes in the same manner as the note principal. At December 31, 1996, the Company was participating in four short-term interest rate swap agreements, each with a notional amount of $10 million. The interest rate swaps expire in March and June of 1997 and convert variable interest rates to fixed rates of 4.94% to 5.965%. The effect of interest rate swaps on interest expense was not significant in 1996, 1995 and 1994. 7. Income Taxes Income taxes consist of the following: Year ended December 31 Pro Forma (Unaudited) (in thousands) 1996 1995 1994 Current: Federal $2,268 $3,088 $5,652 State and local 451 791 1,404 2,719 3,879 7,056 Deferred: Federal 2,134 138 (676) State and local 632 35 (168) 2,766 173 (844) Total: Federal 4,402 3,226 4,976 State and local 1,083 826 1,236 $5,485 $4,052 $6,212 A reconciliation from the statutory U.S. federal tax rate of 35% to the effective tax rate is as follows: Pro Forma (Unaudited) 1996 1995 1994 Statutory U.S. Federal tax rate 35.0% 35.0% 35.0% Increase in rate due to: State and local income taxes net of related federal taxes 4.4% 4.4% 4.4% Net basis differences of partnership 6.8% -- -- Other (0.1)% (0.2)% 0.7% Effective tax rate 46.1% 39.2% 40.1% Income taxes paid in 1996, 1995 and 1994 were $131,000, $340,000, and $321,000. Significant components of the Company's historical deferred tax liabilities and assets are as follows: December 31 (in thousands) 1996 1995 Deferred tax liabilities: Tax depreciation in excess of book depreciation $(7,602) $(675) Prepaid employee benefits (1,170) -- Deferred income (695) -- Other (216) -- (9,683) (675) Deferred tax assets: Employee benefits 2,534 -- Accounts receivable allowance for doubtful accounts 1,249 -- Inventory reserve 1,042 -- Investments 866 -- Deferred income 309 -- Other 176 -- 6,176 -- Net deferred tax liability $(3,507) $(675) 8. Owners' Equity Owners' equity is comprised of the following: (in thousands) December 31 1996 1995 Common Shares, without par value Authorized -- 25,000 shares Issued -- 8,430 shares at stated value of $.01 per share $ 84 $ -- Additional paid in capital 66,060 -- Converted Equity The Andersons Partners' Capital -- 65,156 The Andersons Management Corp. Common Shares -- 1,376 Retained earnings 7,105 699 Unrealized gain on available-for-sale securities -- 29 $73,249 $67,260 The Company has two stock-based compensation plans: Long-Term Performance Compensation Plan (the "LT Plan") and its Employee Share Purchase Plan (the "ES Plan"). The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related Interpretations in accounting for its employee stock options under these plans because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense was recognized for either of its plans. The Company's shareholders approved the LT Plan which authorizes the board of directors to grant options to employees and outside directors for up to 500,000 common shares of the Company. Options granted to employees have a term of 10 years or less. Formula-based options granted to outside directors have a fixed term of five years and vest after one year. Options granted to management personnel under the LT Plan in 1996 have a five year term and vest 40% immediately, 30% after one year and the remaining 30% after two years. The Company's ES Plan, whereby employees may use payroll withholdings to purchase common shares of the Company, also contains an option component. The share purchase price is the lower of the market value at the beginning of the year or the market value at the end of the year. A liability has been recorded for withholdings not yet applied towards the purchase of common stock. Pro forma information regarding net income and earnings per share is required by Statement 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value of the options under the Company's two plans is estimated at the date of grant using a Black-Scholes option pricing model. Assumptions for the LT Plan were as follows: risk free interest rate of 5.39% for options granted to non- employee directors and 5.55% for options granted to employees; dividend yield of 1.30%; volatility factor of the expected market price of the Company's common shares of .389; and an expected life for the options of five years. Assumptions for the ES Plan were as follows: risk free interest rate of 5.07%; dividend yield of 1.30%, volatility factor of the expected market price of the Company's common shares of .389; and an expected life for the option of one year. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected share price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Had compensation cost for the Company's two stock option plans been determined based on fair value at the grant date for awards, consistent with the provisions of Statement 123, the Company's net income and earnings per share would have been reduced to $6,154 and $0.73, respectively, in 1996, on a pro forma basis. A summary of the Company's stock option activity, and related information for the year ended December 31, 1996 follows: (in thousands, except for weighted-averages) LT PLAN ES PLAN Outstanding at January 1, 1996 -- -- Granted / Subscribed 137 59 Exercised -- -- Forfeited / Cancelled -- (10) Outstanding at December 31, 1996 137 49 Exercisable at December 31, 1996 52 49 Weighted-average remaining contractual life (in years) 4.14 0 The weighted-average exercise price for all options outstanding at December 31, 1996 is $8.60. The weighted-average fair value of options granted at December 31, 1996 is $2.76. 9. Leases The Company leases certain equipment and real property under operating leases, including rail cars which are subleased to third parties. Net rental expense under operating leases was as follows: (in thousands) 1996 1995 1994 Total rental expense $11,934 $11,242 $8,562 Less rental income from subleases 7,924 6,313 2,884 Net rental expense $ 4,010 $ 4,929 $5,678 Future minimum rentals for all noncancelable operating leases and future rental income from subleases are as follows: (in thousands) Future Minimum Future Sublease Rentals Income 1997 $ 9,679 $ 6,648 1998 8,034 5,796 1999 5,144 3,313 2000 3,107 1,426 2001 2,503 829 Future years 5,773 608 $34,240 $18,620 10. Employee Benefit Plans The Company sponsors several employee benefit programs which include the following: Defined Benefit Pension Plan and Supplemental Defined Benefit Pension Plan, Retirement Savings Investment Plan, Cash Profit Sharing Plan, Management Performance Program and health insurance benefits. Substantially all full-time employees are covered by the Company's Defined Benefit Pension Plan. The benefits are based on the employee's highest five consecutive years of compensation during their last ten years of service. The Company's policy is to pay into trusteed funds each year an amount equal to the annual pension expense calculated under the Entry Age Normal method. In addition, the Company has a Supplemental Retirement Plan which is a non- qualified deferred compensation plan designed to cover all Defined Benefit Plan participants whose compensation exceeds the Internal Revenue Code limitation. Supplemental Plan benefits are calculated similarly to the Defined Benefit Plan and are based on compensation in excess of the Internal Revenue Code limitation. The following table sets forth the plans' funded status and amounts recognized in the Company's balance sheets as of December 31, 1996 and 1995. December 31 (in thousands) 1996 1995 Actuarial present value of benefit obligation: Vested benefits $ 8,456 $ 6,666 Non-vested benefits 442 329 Accumulated benefits obligation 8,898 6,995 Impact of future salary increases 5,184 4,196 Projected benefit obligation for service rendered to date 14,082 11,191 Plan assets at fair value 13,017 9,606 Projected benefit obligation in excess of plan assets 1,065 1,585 Unrecognized net asset at adoption of FAS 87, net of amortization 92 143 Unrecognized net gain (loss) (497) 526 Prior service cost (254) (292) Net pension liability recognized in balance sheet (includes current portion of $865 thousand in 1996 and $1,498 thousand in 1995) $ 406 $ 1,962 Net periodic pension cost includes the following components: Year ended December 31 (in thousands) 1996 1995 1994 Service cost - benefits earned during the period $ 1,503 $ 1,234 $ 1,082 Interest cost on projected benefit obligation 796 681 563 Return on plan assets (1,394) (2,018) 71 Net amortization and deferral 547 1,425 (655) Net periodic pension cost $ 1,452 $ 1,322 $ 1,061 The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation was 7.5% and 4%, respectively. The weighted average long- term rate of return on plan assets used in determining the expected return on plan assets included in net periodic pension cost was 8% for all years presented. Substantially all of the plan assets are invested in a family of mutual funds. Under the Retirement Savings Investment Plan (RSIP) (401K) eligible participating employees may elect to contribute specified amounts up to 15% of their gross pay on a tax-deferred basis, subject to certain limitations, to a trust for investment in a family of mutual funds. The Company contributes an amount equal to 50% of the participant's contributions, but not in excess of 3% of the participant's annual gross pay. Participants are fully vested in their contributions to the RSIP. Participants hired before January 1, 1993 vest immediately in the Company's matching contributions and participants hired after December 31, 1992 vest ratably over five years. The matching contributions to the RSIP amounted to $1 million, $0.9 million, and $0.9 million in 1996, 1995 and 1994, respectively. Substantially all full-time employees are included in the Cash Profit Sharing Plan. The Plan provides for participants to receive certain percentages of their pay as various threshold levels of return on capital of the Company are achieved. The Company also has a Management Performance Program for certain levels of management. Participants in the Management Performance Program are not eligible to participate in the Cash Profit Sharing Plan. The expense for profit sharing/management performance programs was $2.2 million, $1.6 million and $3.9 million for 1996, 1995 and 1994, respectively. The Company currently provides certain health insurance benefits to its employees, including retired employees. The Company has reserved the right in most circumstances to modify the benefits provided and in recent years has in fact made changes. The Company has elected to recognize the accrued benefits earned by employees as of January 1, 1993 (transition obligation) prospectively, which means this cost will be recognized as a component of the net periodic postretirement benefit cost over a period of approximately 20 years. The Company's postretirement benefits are not funded. The status of the plan as of December 31 is as follows: (in thousands) 1996 1995 Accumulated postretirement benefit obligation: Retirees $ 5,035 $ 5,502 Fully eligible active plan participants 823 656 Other active participants 3,737 3,593 9,595 9,751 Unrecognized net transition obligation (6,730) (7,150) Unrecognized net gain (loss) 398 (136) Accrued postretirement benefit cost $ 3,263 $ 2,465 Net periodic postretirement benefit cost includes the following components: Year ended December 31 (in thousands) 1996 1995 1994 Service cost $ 272 $ 247 $ 245 Interest cost 666 679 750 Net amortization 421 421 452 Net periodic postretirement benefit costs $1,359 $1,347 $1,447 The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.5%. The weighted average discount rate used in determining the postretirement benefit cost was 7.5% for all years presented. The assumed health care cost trend rate used to measure the expected cost of benefits covered by the plan was 6% in 1996, declining to 5% in 1997 and remaining at that level thereafter. A 1% increase in the assumed health care cost trend rate would increase the annual postretirement benefit cost by approximately $190 thousand and the accumulated postretirement benefit obligation as of December 31, 1996 by approximately $1.6 million. To partially fund self-insured health care and other employee benefits, the Company makes payments to a trust. Assets of the trust amounted to $2.3 million and $2.7 million at December 31, 1996 and 1995, respectively, and such amounts are included in prepaid expenses. 11. Commitments and Risk Management The Company has, in the normal course of its business, entered into contracts to purchase and sell grain and has interest in other commodity contracts requiring performance in future periods. Contracts for purchase of grain from producers generally relate to the current or future crop years for delivery periods quoted by regulated commodity exchanges. Contracts for sale of grain to processors and other consumers generally do not extend beyond one year. The terms of these contracts are consistent with industry practice. The Company utilizes futures and option contracts that are traded on a regulated exchange to hedge its net price exposure from grain inventories held and firm commitments to purchase or sell grain and to limit its cash requirements for margin calls in the event of rising market prices. The Company's policy is to hedge its net price exposure and at December 31, 1996, nearly 100% of its grain inventories held and firm commitments under forward contracts were hedged with futures contracts. All grain inventories held, firm commitments under forward contracts and futures and option contracts are marked to market on a daily basis. 12. Fair Values of Financial Instruments The fair values of the Company's financial instruments, consisting of cash equivalents, margin deposits, investments in and advances to affiliates and long and short-term debt, approximate their carrying values since the instruments either provide for short terms to maturity or interest at variable rates based on market indexes or, in the case of investments in affiliates, the investments are being carried on the equity method which approximate fair value. The Company believes the fair value of its long-term notes payable and debentures, some of which bear fixed rates and terms of five or ten years, outstanding at December 31, 1996 and 1995 approximate their carrying values, based upon current interest rates offered by the Company on similar bonds and rates currently available to the Company. 13. Business Segments The Company operates three business segments: Agriculture Group, Retail Group and the Processing and Manufacturing Group (formerly the Business Development Group). The Agriculture Group includes grain merchandising, operation of terminal grain elevator facilities, and distribution of agricultural products, primarily fertilizer. The Retail Group includes operation of retail stores and a distribution center. The Processing and Manufacturing Group includes production and distribution of lawn and corn cob products, railcar leasing and repair and the marketing of the Company's excess real estate as well as other, smaller businesses. In 1995, the Company realigned its segments, moving some smaller divisions to the Processing and Manufacturing Group to reflect the management structure and development cycle of these businesses. The segment information includes the allocation of expenses shared by one or more segments. Although management believes such allocations are reasonable, the operating information does not necessarily reflect how such data might appear if the segments were operated as separate businesses. Year ended December 31 (in thousands) 1996 1995 1994 Sales and revenues: Agriculture Group: Sales to unaffiliated customers $ 841,262 $ 796,754 $ 678,316 Intersegment sales 2,314 6,630 3,106 Merchandising revenue and other income 25,472 28,090 29,623 869,048 831,474 711,045 Retail Group: Sales to unaffiliated customers 175,987 168,051 169,009 Other income 146 282 113 176,133 168,333 169,122 Processing and Manufacturing Group: Sales to unaffiliated customers 108,997 100,402 92,965 Intersegment sales 950 929 870 Other income 2,615 3,296 765 112,562 104,627 94,600 Other income 477 855 847 Eliminations--intersegment sales (3,264) (7,559) (3,976) Total sales and revenues $1,154,956 $1,097,730 $971,638 Operating profit: Agriculture Group $ 15,046 $ 16,920 $ 18,901 Retail Group 6,680 4,392 4,596 Processing and Manufacturing Group 7,733 6,719 5,594 Total operating profit 29,459 28,031 29,091 Other income 371 664 641 Interest expense (13,703) (14,019) (8,395) General expenses (4,236) (4,351) (5,840) Income before income taxes $ 11,891 $ 10,325 $ 15,497 Identifiable assets: Agriculture Group $ 190,932 $ 321,045 $207,833 Retail Group 61,799 61,296 64,135 Processing and Manufacturing Group 56,196 62,313 59,881 General 37,664 10,864 12,960 Total assets $ 346,591 $ 455,518 $344,809 Depreciation and amortization expense: Agriculture Group $ 4,336 $ 4,186 $ 3,391 Retail Group 2,870 2,771 2,567 Processing and Manufacturing Group 2,061 1,960 1,789 General 463 401 358 Total depreciation and amortization expense $ 9,730 $ 9,318 $ 8,105 Capital expenditures: Agriculture Group $ 4,417 $ 10,072 $ 6,689 Retail Group 3,042 2,749 12,981 Processing and Manufacturing Group 2,029 2,536 5,995 General 690 633 635 Total expenditures $ 10,178 $ 15,990 $ 26,300 Intersegment sales are made at prices comparable to normal, unaffiliated customer sales. Operating profit is sales and merchandising revenues plus interest and other income attributable to the operating area less operating expenses, excluding interest and general expenses. Identifiable assets by segment include accounts receivable, inventories, advances to suppliers, property, plant and equipment and other assets that are directly identified with those operations. General assets consist of cash, investments, land and buildings and equipment associated with administration and services, and other assets not directly identified with segment operations. Grain sales for export to foreign markets amounted to approximately $193 million, $194 million and $130 million in 1996, 1995 and 1994, respectively. Board of Directors Richard P. Anderson (3) Chairman & Chief Executive Officer The Andersons, Inc. Thomas H. Anderson (3) Chairman Emeritus The Andersons, Inc. Donald E. Anderson (3) Director of Science, retired The Andersons, Inc. Michael J. Anderson (3) President & Chief Operating Officer The Andersons, Inc. Richard M. Anderson (1) (3) Vice President & General Manager, Processing Division The Andersons, Inc. John F. Barrett (2)/(3) President & Chief Executive Officer, The Western & Southern Life Insurance Co. Paul M. Kraus (3) Attorney Marshall & Melhorn Donald M. Mennel (1)/(3) Attorney, Retired Chairman of the Board & Chief Executive Officer, The Mennel Milling Company David L. Nichols (1)/(2)/(3) Chairman & Chief Executive Officer, Mercantile Stores Company, Inc. Dr. Sidney A. Ribeau (3) President Bowling Green State University Charles A. Sullivan (1)/(2)/(3) Chairman & Chief Executive Officer, Interstate Bakeries Corp. (1) Audit Committee (2) Compensation Committee (3) Nominating Committee Corporate Officers Thomas H. Anderson Chairman Emeritus Richard P. Anderson Chairman & Chief Executive Officer Michael J. Anderson President & Chief Operating Officer Christopher J. Anderson President, Processing & Mfg. Group Daniel T. Anderson President, Retail Group Joseph L. Braker President, Agriculture Group Joseph C. Christen Vice President, Human Resource Development Dale W. Fallat Vice President, Corporate Services Phillip C. Fox Vice President, Corporate Planning Charles E. Gallagher Vice President, Personnel Richard R. George Vice President & Controller Beverly J. McBride Vice President, General Counsel & Secretary Gary L. Smith Vice President, Finance & Treasurer Investor Information Corporate Offices The Andersons, Inc. 480 West Dussel Drive Maumee, Ohio 43537 (419) 893-5050 Internet: www.andersonsinc.com Transfer Agent and Registrar Harris Trust & Savings Bank Shareholder Services Division 311 W. Monroe P.O. Box A-3504 Chicago, Illinois 60690-3504 Shareholder Services (312) 461-5042 Form 10K The Company will provide without charge to any person who is a beneficial owner of its shares, a copy of the Company's 1996 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission. Requests should be addressed to the Investor Relations department of the Company. Annual Meeting The annual shareholders' meeting of The Andersons, Inc. will be held at the Lucas Auditorium of the Eleanor Dana Center, on the campus of the Medical College of Ohio, Glendale Avenue, Toledo, Ohio at 7:30 p.m. on May 22, 1997. Investor Relations Gary Smith, Vice President, Finance & Treasurer, (419) 891-6417 Independent Auditors Ernst & Young LLP, Toledo, Ohio Nasdaq Symbol The Andersons, Inc. common shares are traded on the Nasdaq National Market under the symbol "ANDE". Shareholders On March 1, 1997, there were 701 registered common shareholders. With Thanks Tom Anderson Chairman Emeritus It is no overstatement to say that The Andersons would not be the company it is today if Tom Anderson had not been a key part of it. One of five sons of founder Harold Anderson, Tom has spent his entire adult working life with the company, starting as a crew boss during construction of the first elevator 50 years ago. He has continued to be a builder, innovator, and leader of The Andersons and the Anderson Foundation. Over the years he also has worked tirelessly to improve the quality of life in the communities in which we do business. Tom stepped down as Chairman of the Board in 1996, but will continue to share his wit and wisdom for the benefit of The Andersons and all who know him. Ren McPherson Director, 1988-1996 The Andersons lost one of its guiding lights when Ren McPherson died on February 26, 1996. A man of great warmth and intellect, he was one of the first people from outside the company to join our Board of Directors. He was former chairman and CEO at the Dana Corporation and former dean of the graduate school of business at Stanford University who maintained that "People are important, management is not." Because he recognized that the "expert in any job is the person performing it," he stressed that the four most important words in running an organization are "What do you think?" We who admired him and learned so much from him know that he will be dearly missed. Mission Statement We firmly believe that our company is a powerful vehicle through which we channel our time, talent, and energy in pursuit of the fundamental goal of serving God by serving others. Through our collective action we greatly magnify the impact of our individual efforts to: * Provide extraordinary service to our customers * Help each other improve * Support our communities * Increase the value of our company The Andersons, Inc. 480 W. Dussel Drive Maumee, Ohio 43537 EX-21 3 Exhibit 22 SUBSIDIARIES OF THE ANDERSONS Subsidiary State of Organization The Andersons White Pigeon Terminal (a limited Ohio Company of which The Andersons, Inc. is the sole general partner) The Andersons Investment Services Corp. Ohio (a corporation owned 100% by The Andersons, Inc.) The Andersons Agriservices, Inc. Illinois (a corporation owned 100% by The Andersons, Inc.) The Andersons Export Sales Corp. Barbados (a corporation owned 100% by The Andersons, Inc.) EX-23 4 Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-01249) pertaining to The Andersons, Inc. Long-Term Performance Compensation Plan, (Form S-8 No. 33-00233) pertaining to The Andersons, Inc. Employee Share Purchase Plan and (Form S-3 No. 333-4213) pertaining to the registration of debenture bonds, of The Andersons, Inc. of our report dated January 31, 1997, with respect to the consolidated financial statements of The Andersons, Inc. incorporated by reference in the Annual Report (Form 10-K) for the year ended December 31, 1996. /s/Ernst & Young LLP Toledo, Ohio March 26, 1997 EX-27 5
5 1,000 12-MOS DEC-31-1996 DEC-31-1996 27524 0 77251 3230 150297 257635 218027 136362 346591 195986 21030 0 0 84 73165 346591 1150304 1154956 995725 995725 133637 0 13703 11891 5485 6406 0 0 0 6406 .76 .76
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