-----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, C/Rp5fItyAN1WYS5RnJgNumy2BVvjj4bY4VIT0ejyWRE0lezlYNhX5T7ogPLf+Tw 2/AtW+Mij3od+KmjumPsAw== 0000821026-98-000001.txt : 19980415 0000821026-98-000001.hdr.sgml : 19980415 ACCESSION NUMBER: 0000821026-98-000001 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANDERSONS INC CENTRAL INDEX KEY: 0000821026 STANDARD INDUSTRIAL CLASSIFICATION: 5150 IRS NUMBER: 341562374 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-20557 FILM NUMBER: 98576921 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-K405 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, 1997 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. [X] The aggregate market value of the registrant's voting stock which may be voted by persons other than affiliates of the registrant was $58,189,660 on February 27, 1998, computed by reference to the last sales price for such stock on that date as reported on the Nasdaq National Market The registrant had 7,986,065 Common shares outstanding, no par value, at February 28, 1998. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1997 Annual Report of The Andersons, Inc. and Proxy Statement for the Annual Meeting of Shareholders to be held on May 14, 1998, 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, 1998. PART I Item 1. Business (a) General Development of Business The Andersons, Inc. is a diversified 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 Processing and Manufacturing Group includes the processing of lawn and corn-cob based products; the purchase, sale, repair and leasing of railcars; and the operation of automotive service centers. The Retail Group operates six retail stores in Ohio. 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. The Corporation survived and changed its name to The Andersons, Inc. See Note 1 to the consolidated financial statements for further discussion about 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 operates grain elevators, wholesale fertilizer terminals, 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, 1997. 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 1997, approximately 71% of the grain sold by the Company was purchased domestically by grain processors and feeders, and approximately 29% 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 Port of Toledo 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 (both crop quality and quantity) in its principal growing area, 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 worldwide 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-the- market. Gains/losses in the value of the Company's owned inventory positions due to changing market 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 increases in market prices, such as occur when weather conditions are unfavorable for extended periods, can have an effect on the Company's liquidity and require it to maintain appropriate short-term lines of credit. The Company may utilize 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, 1998 approximated 22 million, all of which was to be delivered in the 1997 and 1998 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 credit worthiness, 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. The Company competes in the sale of grain with other grain merchants, other 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 announced on March 25, 1998, a signed letter of intent to lease the two grain handling facilities owned by Cargill, Inc. in Maumee and Toledo, Ohio. This letter of intent also includes a marketing agreement giving Cargill marketing rights to grain in the two Cargill-owned facilities as well as the Andersons' facilities also located in Maumee and Toledo, Ohio. The Company expects the agreement to be finalized by June 1, 1998. 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 owned storage capacity for dry fertilizer was 11.5 million cubic feet at December 31, 1997. The Company reserves 5 million cubic feet of this space for various fertilizer manufacturers and customers. The Company's aggregate storage capacity for liquid fertilizer at December 31, 1997 was 27.5 million gallons and 8.5 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. Included in this aggregate storage capacity is the newly constructed Lordstown, Ohio distribution plant expected to open on April 1, 1998. In addition, the Company leases 1.1 million cubic feet and 4.4 million gallons of dry and liquid fertilizer capacity, respectively, under arrangements with various fertilizer dealers and warehouses. The Company operates nine retail farm centers located throughout Michigan, Indiana and Ohio. These centers, located within the same regions as the Company's grain and wholesale fertilizer facilities, offer agricultural fertilizer, custom application of fertilizer to farms and golf courses, and chemicals, seeds and supplies to the farmer, many of which are also customers of the Company's grain division. The Company has signed letters of intent to acquire or lease four additional retail farm centers in Northwest Ohio. 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. 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 produces and markets granular lawn fertilizer and related products to retailers and professional lawn care companies and produces and distributes corn cob based products to the chemical carrier, pet and industrial markets. Retail lawn products are sold to mass merchandisers, small independent retailers and other lawn fertilizer manufacturers. During the off- season, ice melter products are distributed to many of the same retailers. Professional lawn products are sold both direct and through distributors to lawn service applicators and to golf courses. 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 and feed ingredient carrier, animal litter and industrial 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 buys, sells, leases, rebuilds and repairs various types of railcars. The division also provides fleet management services to fleet owners and operates a custom steel fabrication business. 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 joint venture operation of eight Tireman auto service centers and a lawn and garden power equipment sales and service shop. 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, suburban and rural customers. The retail concept is that of a complete store for the 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, bath soft goods 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. Remodeling of several of the stores, as well as a reset of the product offering, was completed in 1997. 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. 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 $350,000, $320,000, and $370,000 on research and development during 1997, 1996 and 1995, respectively. Employees At December 31, 1997, the Company had 1,116 full-time and 1,846 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 $945,000, $720,000 and $740,000 in 1997, 1996 and 1995, 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 Dry Storage Liquid Storage Storage (bushels) (cubic feet) (gallons) Maumee, OH 17,270,000 4,500,000 2,646,000 Toledo, OH River (4) 7,745,000 1,800,000 2,800,000 Metamora, OH 6,860,000 --- --- Lyons, OH (3) 380,000 47,000 160,000 Toledo, OH (1) 1,000,000 --- --- Lordstown, OH --- 173,000 --- Champaign, IL 13,500,000 833,000 --- Delphi, IN 6,700,000 923,000 --- Clymers, IN (2) 4,450,000 --- 2,156,000 Clymers, IN (3) --- 37,000 480,000 Dunkirk, IN 5,900,000 833,000 --- Poneto, IN 620,000 --- 6,298,000 North Manchester, IN (3) --- 23,000 90,000 Logansport, IN --- 33,000 2,231,000 Walton, IN (3) --- 375,000 5,962,000 Albion, MI (3) 2,270,000 23,000 40,000 White Pigeon, MI 2,060,000 --- --- Webberville, MI --- 1,747,000 3,916,000 Litchfield, MI (3) --- 40,000 252,000 North Adams, MI(3) --- 20,000 230,000 Union City, MI (3) --- 20,000 49,500 Munson, MI (3) -- 33,000 150,000 68,756,000 11,470,000 27,460,500 (1) Facility leased. (2) Facility also stores soybean oil with a capacity of 61,000,000 pounds. (3) Facility is or includes a retail farm center. (4) Includes leased storage with a 740,000 bushel capacity The grain facilities are mostly concrete and steel tanks, with some flat storage, which is primarily cover-on-first termporary 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 1997, 1996 or 1995. Other Properties The Company owns lawn fertilizer production facilities and automated pet food production and storage facilities in Maumee, Ohio and a lawn fertilizer production facility in Bowling Green, Ohio. It also owns corncob processing and storage facilities in Maumee, Ohio and Delphi, Indiana. The Company leases a lawn fertilizer warehouse facility in Toledo, Ohio. In its railcar business, the Company owns, leases or controls approximately 2,800 railcars (primarily covered hopper cars) with lease terms ranging from one to ten years and future minimum lease payments aggregating $26 million with future minimum sublease income of approximately $24 million. The Company also owns a railcar repair facility, a steel fabrication facility, and owns or leases a number of switch engines, cranes and other equipment. In its ventures business, the Company owns a service and sales facility for outdoor power equipment. Additionally, the Company participates in a joint venture which owns or leases eight auto service centers and leases a warehouse. The Company's administrative office building is leased under a net lease expiring in 2005. The Company owns approximately 958 acres of land on which various of the above properties and facilities are located; approximately 413 acres of farmland and land held for future use; approximately 5 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 $33 million at December 31, 1997. Additions to property for the years ended December 31, 1997, 1996 and 1995 amounted to $15 million, $10 million, and $16 million, respectively. See Note 10 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 currently has several arbitration cases before the National Grain and Feed Association. The Company also has received several favorable rulings in the arbitration proceedings, including a favorable ruling in the Harter arbitration. 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. Because of the favorable rulings received, this is the last time that the Company will be reporting on the Harter case. 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 in the industry as a whole, there can be no assurance that other litigation will not be brought 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 14, 1998. Name Position Age Year Assumed Christopher President, Processing and Manufacturing Group 43 1996 J. Anderson Vice President, Business Development Group 1992 General Manager, Ventures & New Business Development 1990 Daniel T. President, Retail Group 42 1996 Anderson Director of Marketing and Merchandising, Retail Group 1996 General Merchandise Manager, Retail Group 1991 Michael J. President and Chief Operating Officer 46 1996 Anderson Vice President and General Manager, Retail Group 1994 Vice President and General Manager, Grain Group 1990 Richard P. Chairman of the Board and Chief Executive 68 Anderson Officer 1996 President and Chief Executive Officer 1987 Joseph L. President, Agriculture Group 47 1996 Braker Vice President and General Manager, Agriculture Group 1994 Vice President and General Manager, Agricultural Products Group 1990 Joseph C. Vice President, Human Resource Development 49 1996 Christen Director of Human Resource Development 1988 Dale W. Vice President - Corporate Services 53 1992 Fallat Senior Vice President, Corporate Services 1990 Philip C. Vice President, Corporate Planning 56 1996 Fox Director of Company Planning 1988 Charles E. Vice President, Personnel 56 1996 Gallagher Director of Personnel 1988 Richard R. Vice President and Controller 48 1996 George Corporate Controller 1988 Beverly J. Vice President, General Counsel and Secretary 56 1996 McBride General Counsel and Corporate Secretary 1987 Gary L. Vice President, Finance and Treasurer 52 1996 Smith 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 7 and Shareholders on the inside back cover of The Andersons, Inc. 1997 Annual Report to Shareholders is incorporated herein by reference. No dividends were paid in 1996. The Company paid quarterly dividends of three cents per common share in 1997. The Company declared quarterly dividends of four cents per common share to be paid January 21, 1998 and April 21, 1998 to shareholders of record on January 2, 1998 and April 1, 1998. Item 6. Selected Financial Data The information under the caption Selected Financial Data on page 7 of The Andersons, Inc. 1997 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 13 through 15 of The Andersons, Inc. 1997 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 7 of The Andersons, Inc. 1997 Annual Report to Shareholders, as well as the following consolidated financial statements of The Andersons, Inc. set forth on pages 9 through 12 and 16 through 28 of The Andersons, Inc. 1997 Annual Report to Shareholders are incorporated herein by reference: Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Changes in Owners' Equity for the years ended December 31, 1997, 1996 and 1995 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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, 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 26, 1998 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 14, 1998 (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 caption "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 caption "Security Ownership" 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. 1997 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, 1997, 1996 and 1995 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. 1997 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 27th day of March, 1998. 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 27th day of March, 1998. Signature Title Date Chairman of the Board /s/Richard P. Anderson Chief Executive Officer Richard P. Anderson (Principal Executive Officer) March 27, 1998 /s/Richard R. George Vice President and Controller Richard R. George (Principal Accounting Officer) March 27, 1998 /s/Gary L. Smith Vice President, Finance Gary L. Smith and Treasurer (Principal Financial Officer) March 27, 1998 ____________________ Director Donald E. Anderson /s/Michael J. Anderson Director Michael J. Anderson March 27, 1998 /s/Richard M. Anderson Director Richard M. Anderson March 27, 1998 /s/Thomas H. Anderson Director Thomas H. Anderson March 27, 1998 _____________________ Director John F. Barrett /s/Paul M. Kraus Director Paul M. Kraus March 27, 1998 _____________________ Director Donald L. Mennel /s/Donald M. Mennel Director Donald M. Mennel March 27, 1998 _____________________ Director David L. Nichols /s/Sidney A. Ribeau Director Dr. Sidney A. Ribeau March 27, 1998 _____________________ Director Charles A. Sullivan Except for those portions of The Andersons, Inc. 1997 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, 1997 $3,230,000 $1,680,523 $ - $1,953,523(1) $2,957,000 Year ended December 31, 1996 3,514,000 4,321,994 - 4,605,994(1) 3,230,000 Year ended December 31, 1995 2,292,000 2,220,830 - 998,830(1) 3,514,000 Allowance for doubtful notes receivable: Year ended December 31, 1997 $ 735,000 $ 86,409 $ - $ 44,409(1) $ 777,000 Year ended December 31, 1996 1,277,000 - - 542,000(1) 735,000 Year ended December 31, 1995 727,000 550,000 - - 1,277,000 (1) Uncollectible accounts written off, net of recoveries
EX-13 2 1997 Annual Report Diversified, Dynamic, Driven Corporate Profile The Andersons, Inc. (Nasdaq: ANDE) is a diversified Agribusiness and Retailing Company with annual revenues of $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, Processing & Manufacturing and Retail. 1997 Accomplishments and Highlights - - - Record per share fourth quarter results at $0.68 - - - 2nd, 3rd and 4th quarters show successive year-to-year increases - - - Cash dividend started in 1997 and increased 33% in 1st quarter 1998 - - - Repurchased over 400,000 common shares from the open market - - - Railcar business unit had significant growth in revenue and earnings - - - Increased railcar fleet by 25%, now over 2,800 railcars - - - Selling lawn fertilizer to several of the nation's largest lawn and garden retailers - - - Ended 1997 with twice as much grain inventory when compared to 1996 (which should benefit 1998 performance) - - - Purchased the Clymers, Indiana grain elevator (previously leased) - - - Started construction on a fertilizer distribution plant in a new location at Lordstown, Ohio - - - Purchased assets of Blondes Farm Supply (previously leased) - - - 90% complete on Retail Group's renovations and merchandise resets - - - Five of our six Retail stores now offer drive-through customer service - - - Developed a Year 2000 Compliance Plan and targeted completion dates Visit our website at www.andersonsinc.com Table of Contents Highlights 1 Letter to Shareholders 2-3 Agriculture Group 4 Processing & Manufacturing Group 5 Retail Group 6 Selected Financial Data 7 Audited Consolidated Financial Statements 8-12 Management's Discussion & Analysis 13-15 Notes to Consolidated Financial Statements 16-28 Officers & Directors Data Inside Back Welcome to our new and continuing shareholders! We appreciate your vote of confidence! The Andersons, Inc. Financial Highlights (in thousands, except for per share & performance data) 1997 1996 % Change OPERATIONS Grain sales & revenues $566,373 $ 700,326 -19.1% Fertilizer, retail & other sales 427,373 449,978 -5.0% Other income 5,099 4,652 9.6% Total sales & revenues 998,845 1,154,956 -13.5% Gross profit - grain 33,787 41,082 -17.8% Gross profit - fertilizer, retail & other 113,901 118,149 -3.6% Total gross profit 147,688 159,231 -7.2% Income before income taxes & asset impairment 7,376 11,891 -38.0% Asset impairment 1,121 -- Net income 4,074 6,406 -36.4% Effective tax rate 34.9% 46.1% -24.3% PER SHARE DATA Income before asset impairment $ 0.59 $ 0.76 -22.4% Asset impairment charge 0.09 -- Net income 0.50 0.76 -34.2% PERFORMANCE Pre tax return on beginning equity* 10.1% 17.7% Net income return on beginning equity** 5.6% 9.6% Long-term debt to equity ratio*** 0.95-to-1 0.97-to-1 Weighted average shares outstanding 8,160,000 8,425,000 Number of employees 2,962 3,024 *Before asset impairment charge **After asset impairment charge ***Including pension & post-retirement benefits [Pie Graphs] `97 Beginning Allocated Capital `97 Revenues `97 Operating Income Total $150.6 million $1 billion $7.6 million Agriculture $68.4 72.6% 30.3% Processing & Manufacturing $32.7 10.4% 63.2% Retail $44.5 17.0% 6.5% Other $ 5.0 -- -- Letter to Shareholders We are pleased to report another dynamic year for The Andersons. Just a short 50 years ago Harold Anderson started our Company with a vision of providing extraordinary customer service that lives on today. The business started from a small half-million bushel grain elevator in Maumee, Ohio, and grew to a billion-dollar agribusiness, processing and manufacturing business, and retail mass merchandiser. Harold would certainly be proud of the success and growth that The Andersons has attained in the past five decades. History is important, and we celebrate it with humble reverence, but our focus is clearly on the future. As we begin our sixth decade, we believe the Company is poised for continued growth and prosperity. 1997 was a difficult year in terms of income and revenue. Business conditions in both Agriculture and Retail Groups were challenging. However, once again, our diversification has paid off. For the second consecutive year, the Processing & Manufacturing Group (PMG) was the Company's top performer. Manufacturing's railcar marketing unit showed significant growth with record sales and earnings this year. The lawn products unit met its 1997 target and recently added new 1998 business that shows promise for increased performance in the future. Total revenues for 1997 decreased 13.5% from 1996 to $1 billion. The reduction was principally due to grain prices and bushels sold, both of which were lower than the previous year's levels. Excluding a one-time non-cash asset impairment charge, pretax income was down 38% to $7.4 million, resulting in a pretax return on equity of 10% compared with our goal of 25%. Net income was $4.8 million before the $732,000 tax-effected, non-cash asset impairment charge. Earnings per share before the asset impairment charge were 59 cents (50 cents net of the charge) versus 76 cents in 1996. The Company experienced a record first quarter net loss of $4.1 million, attributable primarily to the second successive year of poor crops in parts of the eastern corn belt. Due to plenty of hard work from our 3,000 dedicated employees, the last three quarters of 1997 showed successive year-to-year earnings increases. Conditions are right for this trend to continue into 1998. The Company enjoyed strong cash flow during the year that allowed us to spend over $15 million on capital projects, repurchase over 400,000 of our common shares, and pay dividends of 12 cents per share, while at the same time maintaining a strong balance sheet. Long-term debt declined by more than $3 million in 1997. We ended the year with a funded long-term debt-to-equity ratio of .95 to 1 compared to our long-term goal of .8 to 1; a goal we believe can be accomplished in a reasonable period of time. We ended 1997 with total assets in excess of $368 million compared with assets of $347 million in 1996. The increase is due primarily to added grain inventories that will have a positive impact on 1998's performance. Shareholders enjoyed their first dividend of 3 cents per quarter during the year. In addition, we increased the dividend 33% during the first quarter of 1998 to 4 cents per share. Shareholders' equity declined slightly during the year as a result of share repurchases of $4.2 million. The Processing & Manufacturing Group's manufacturing division was our best performer in 1997, with record sales and profits. The division's railcar business unit buys, repairs, maintains, sells and leases railcars for the grain, chemical, plastic, salt, fertilizer and mining industries. During the year we increased our fleet to 2,800 cars, a 25% increase. We have been able to acquire used railcars, refurbish the cars to customer specifications where necessary and structure long-term leases with quality lessees. Historically, with our roots in the grain industry, the majority of our railcar business has been concentrated in covered grain-hopper cars. However, most of the recent growth is providing us with a diversified railcar portfolio and customer base outside the grain industry. Hats off to our creative employees working in this very successful division. We expect the railcar business unit to continue this rate of growth in 1998. The processing division's lawn products business unit had a good year as well. We recently added a major national account to our list of lawn products' customers which now includes four of the five top lawn and garden retailers in America. In addition, our professional lawn product line, sold under the Tee Time label, is one of the top five golf course fertilizer brands in America, with approximately 10% of total market share. The industrial lawn and garden business has made solid progress as well. The lawn and garden fertilizer industry is going through stages of consolidation. We believe The Andersons is a long-term player in the lawn and garden industry and we are closely evaluating the industry developments to secure our appropriate position. The processing division's industrial products unit continues its development efforts in the pet litter product category. We are in the product development and test marketing stages, trying to find the right strategy and distribution channels for these value added corn-cob based products. The Agriculture Group (Ag) had mixed results in 1997. Our core grain business suffered with low inventories during most of the year. However, the 1997 fall harvest was excellent in our marketing area. Nationwide, the corn harvest was the third best in history and the soybean harvest set an all-time record. The huge fall harvest allowed us to fill the elevators, almost to operating capacity, by year end; 52 million bushels were in-store at the end of 1997 versus 27 million bushels at the end of 1996. This should have a very positive impact in 1998. Ag's two fertilizer divisions, wholesale and retail farm centers, are adding capacity in 1998. A wholesale fertilizer plant is under construction at a new location in Lordstown, Ohio, and we acquired two retail farm centers in Hillsdale and North Adams, Michigan, that were previously leased. In addition, we recently signed letters of intent to acquire or lease retail farm centers in Northwestern Ohio. We expect additional growth in retail farm centers, mainly through acquisition. Worldwide demand for agriculture products continues to grow driven principally by population growth, higher standards of living, a desire for improved diets and a generally improving worldwide economy. There is turbulence in the Asian financial markets, which may delay the growth in these regions, but long- term we remain optimistic. The United States does not have a huge supply of excess grain, which generally means a high percentage of tillable acres will most likely be in production in 1998. We stand ready to provide and serve the industry with farm inputs and assist the farmers and dealers with solid marketing plans to maximize the value of their grain production. The North American grain industry continues to go through historic consolidation, joint venturing and announcements of strategic alignments. Added value food manufacturers, grain processors and grain exporters are aligning themselves with grain elevators that can provide the feedstock for their livelihood. We are watching the consolidation closely to determine our best position in the industry. The Retail Group sharpened its customer focus in 1997. The capital projects announced in 1996 involving expansion, remodeling and merchandise resets are 90% complete. Several stores were in various stages of this process during 1997, which can be disruptive to both customers and employees. We now have expanded product offerings in hardware, home remodeling and flooring. Five of our six stores have drive-through customer loading facilities that include a "we load it" program. Several of our stores now have additional customer entrances and check-out facilities that are far more convenient than the traditional single entrance used by most home improvement centers. We are rolling out a new in-store signage package to improve the customer's ability to find merchandise and customer service assistance. Our in-stock performance has improved to 94%, and our goal is to be at 97% within the next 12 months. We have also implemented an automated replenishment system to improve the accuracy and reduce the cost of ordering product, plus improve inventory turns. Several important Administrative issues are being addressed in 1998. One issue all companies face is year 2000 compliance (Y2K). Our plans are to complete the necessary software modifications by early 1999 which should give us adequate time for system testing. Our Y2K plans also include the installation of enterprise resource planning software for certain divisions and applications. During 1998, we plan to add The Andersons common shares as an investment option for employees participating in our 401(k) plan. We are also reviewing the use of a dividend re-investment program for the benefit of all investors. Harold Anderson was a visionary in business and customer service. He persevered when dealing with the difficult issues every business faces from time to time. He was devoted to his family and loyal to the thousands of employees who helped make The Andersons a success. His vision lives on in the culture he created and nurtured from 1947 to 1968 when he passed away. We strive to live up to his ideals, which are part of the Mission Statement that guides many of our decisions today. We are indebted to our customers, employees and shareholders for their support of our past successes, and we fully expect to earn your continued support in the future. Sincerely, /s/Mike /s/Dick Michael Anderson Richard Anderson President & Chief Operating Officer Chairman & Chief Executive Officer Agriculture Group The Agriculture Group operates grain elevators in Ohio, Michigan, Indiana and Illinois; wholesale fertilizer terminals in the same Eastern Corn Belt region which distribute dry and liquid agricultural fertilizer products; and retail farm centers in Michigan, Ohio and Indiana that sell agricultural fertilizer, crop protection chemicals and seed as well as field application services. The group's total revenue declined by $141 million, or 16.2%, in 1997 due almost entirely to lower average grain prices and fewer bushels shipped. Operating income was down 38%, from $3.7 million in 1996 to $2.3 million in 1997. Important to note, is the fact that a large year-to-year earnings decline was incurred in the first three months of the year. This was a direct result of two successive poor grain harvests in parts of our region. In each of the last three quarters of 1997, operating income improved from the corresponding three-month period of 1996. This positive trend is expected to continue into 1998. As described above, grain revenues were significantly lower in 1997 because of lower prices throughout most of the year. Following the weak period early in the year, conditions improved. Farmers in our region had an excellent wheat harvest last summer and the same was generally true for the corn and soybean crops last fall. As a result, bushel receipts were up 14.7% for the year. These improving conditions also enabled us to realize a good return on our storage space for the second half of the year. By year-end our grain inventories were almost double year-earlier levels, and our elevators were approaching their practical operating capacity. Wholesale fertilizer tonnage sales, total revenues and operating income in 1997 were down from 1996 levels. Unlike previous years when rising prices encouraged early dealer buying, generally declining price levels in the past year prompted delays in dealer orders. This shift hurt our results in 1997 but doesn't necessarily represent a long-term trend. We anticipate growth in 1998 and beyond. Construction of a fertilizer terminal in Lordstown, Ohio, began late in 1997. It will be open this spring to serve customers in eastern Ohio and Pennsylvania. Our retail farm centers achieved growth in application acres, total revenues and income in 1997. During the year we purchased two outlets which had previously been leased and signed letters of intent to acquire Crop & Soil Service, Inc. which operates three retail farm centers in Northwest Ohio, and to lease a retail farm center near Bryan, Ohio. We believe that the long-term outlook for worldwide demand for food products offers a solid future for our Agriculture Group. In addition to growing demand for grain and crop production inputs, ongoing consolidation in the industry clearly represents opportunity for our company. [Bar Graphs] In Millions of Dollars 1993 1994 1995 1996 1997 Sales & Revenues $571 $711 $831 $869 $728 Operating Income 9.2 12.3 6.0 3.7 2.3 Unit Volume 1993 1994 1995 1996 1997 Grain Bushels Received (Millions) 130 144 163 126 145 Grain Bushels Shipped (Millions) 127 152 168 136 124 Wholesale Fertilizer Tons Handled (000) 894 960 977 841 1004 Processing & Manufacturing Group The Processing & Manufacturing group consists of three operating divisions. The processing division producers and markets granular lawn care products for consumer, golf and professional lawn care markets, and numerous corn cob based products including chemical and feed ingredient carriers, animal bedding and pet litter products. The manufacturing division buys, sells leases, rebuilds and repairs various types of railcars, offers fleet management services to private fleet owners and operates a custom steel fabrication business. The ventures division operates seven Tireman Automotive Service Centers in the Toledo area as well as a lawn and garden equipment dealer. Total group revenue declined from $113 million in 1996 to $104 million in 1997, due primarily to the sale of its SorbentsTM business in late 1996. Revenue from ongoing operations was relatively flat with healthy gains in rail leasing and Tireman, offsetting a downturn in the professional lawn fertilizer segment. Despite the revenue decline, operating income for the Processing & Manufacturing Group in 1997 matched the $4.8 million earned in 1996. While processing division income declined, both the railcar leasing segment and the ventures division realized solid earnings growth. The processing division's operating income declined for two primary reasons: 1) increased raw material costs due to a tight cob supply situation and 2) the loss of a large professional lawn fertilizer customer who switched from granular to liquid products when it merged with a competitor. On a positive note, this division continued the development of new products which hold promise for future growth and commenced production and nationwide distribution of a line of exclusive brand lawn care products for another of the major big- box retailers. The manufacturing division continued its exciting growth trend with a 25% increase in fleet size, the addition of several new customers and a planned diversification into new industries and car types to balance its past reliance on cars that primarily serve agriculture. In addition to this diversification strategy, prudent risk management in this business includes meticulous attention to credit quality. Continued growth is foreseen in this business. The ventures division achieved solid revenue and income growth in its Tireman Auto Centers and improved profitability in its lawn and garden power equipment outlet. Group operating income was also strengthened from the sale of some excess real estate in 1997. [Bar Graphs] In Millions of Dollars 1993 1994 1995 1996 1997 Sales Mix Processing $53.3 $63.3 $66.5 $75.5 $62.5 Manufacturing 7.8 14.0 20.4 21.2 25.2 Ventures & Other 18.0 17.3 17.7 15.9 16.4 Total $79.1 $94.6 $104.6 $112.6 $104.1 Operating Income $4.4 $3.2 $3.7 $4.8 $4.8 Retail Group The Retail Group operates six large stores in Ohio: three in the Toledo area, two in Columbus and one in Lima. Each store has 100,000+ square feet of instore display space as well as an extensive outdoor lawn and garden center. Our unique concept is a complete home store. In addition to the traditional home center offerings of hardware, plumbing, electrical, paint, building supplies, kitchen and bath remodeling, flooring and garden products, we carry housewares, bed and bath soft goods, pet supplies, sporting goods and automotive supplies as well as our "Uncommon Market" which consists of a bakery, deli, produce section, specialty foods and wine. Five of the stores also have drive-through customer loading facilities. The group's same store sales declined by $6 million or 3.4% for the year, from $176 million in 1996 to $170 million in 1997. As a result, gross profit and operating income were also down. Operating income for the Retail Group was $0.5 million in 1997 before a one-time non-cash charge of $1.1 million ($732,0000 after-tax) to write down certain assets. This charge recognizes impairment losses on long-term assets when carrying values exceed expected future cash flows. Some of the reduction in sales resulted from unseasonable weather patterns. Last spring's lawn and garden business was affected by a succession of cool and wet weekends, and sales of cold weather goods like snowblowers suffered from the absence of winter weather in the fourth quarter. Competition also was a factor as we saw new players enter the marketplace in Toledo and Lima. Sales were also impacted by the disruption caused by major store renovation projects and merchandising resets in several of our stores during 1997. These changes, including expanded product offerings in categories such as home remodeling, hardware, flooring and bed and bath domestics, are designed to make our stores much easier to shop. These changes are expected to improve our business volume in 1998 and beyond. Systems improvements implemented during the past year have already improved merchandise in-stock performance levels by 5 percentage points, automated replenishment on certain products and reduced overall inventory levels. With our sharpened customer focus, enhanced product offering and improved merchandising and systems, the Retail Group expects to achieve sales and operating margin growth in 1998. [Bar Graphs] In Millions of Dollars 1993 1994 1995 1996 1997 Sales Volume $153 $169 $168 $176 $170 Operating Income 0.4 2.3 1.8 3.8 0.5 Selected Financial Data 1997 1996 1995 1994 1993 (in thousands, except for per share data) Operating Results Total sales and revenues $998,845 $1,154,956 $1,097,730 $971,638 $800,345 Income from continuing operations (a) 4,074(d) 6,406(e) 6,273 9,285 6,986 Per share data: Income from continuing operations(b) .50 .76 .74 1.10 .83 Dividends paid (c) .12 - - - - Balance Sheet Data Total assets $368,244 $346,591 $455,518 $344,809 $360,586 Working capital 53,595 61,649 58,897 57,623 47,795 Long-term debt 65,709 68,568 74,139 71,217 52,259 Shareholders' equity 72,201 73,249 67,260 64,870 56,256 (a) Includes pro forma income taxes of $3,915 thousand, $5,886 thousand, and $4,094 thousand for 1995, 1994 and 1993, respectively. See Note 1 to the consolidated financial statements of the Company. (b) Amounts are net of pro forma income taxes of $.47, $.70, and $.48 for 1995, 1994 and 1993, respectively. Amounts for 1993 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 prior to 1996 are not included in this table. (d) Non-recurring charge of $1.1 million for asset impairment is included ($.7 million after tax). (e) Income taxes for 1996 include a charge of $.8 million to establish deferred income taxes on the assets and liabilities of the Partnership. SELECTED QUARTERLY FINANCIAL DATA AND MARKET FOR COMMON STOCK The following table presents selected unaudited quarterly financial data for the years ended December 31, 1997 and 1996. The high and low bid prices for the Company's Common Stock are as quoted on the Nasdaq National Market System from February 20, 1996 (the Company's first day of trading) to December 31, 1997. Such quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. (in thousands, except per share data) Quarter Net Gross Net Income (loss) Common Stock Quote Dividends Ended Sales Profit Amount Per Share High Low Declared 1997 March 31 $186,765 $27,317 $(4,082) $(.49) $9.625 $8.625 $.03 June 30 250,190 42,884 4,259 .52 9.500 8.625 .03 September 30 161,929 30,797 (1,529) (.19) 9.500 8.125 .03 December 31 399,961 46,690 5,426 .68 9.500 8.750 .04 Year 998,845 147,688 4,074 .50 .13 1996 March 31 256,714 39,733 1,269 .15 17.680 9.750 - June 30 345,229 41,979 1,380 .16 11.000 8.750 - September 30 227,651 31,109 (1,806) (.21) 9.500 8.000 - December 31 325,362 46,410 5,563 .66 9.500 7.250 .03 Year 1,154,956 159,231 6,406 .76 .03 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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/Ernst & Young LLP Toledo, Ohio January 26, 1998 The Andersons, Inc. Consolidated Statements of Income Year ended December 31 (in thousands, except per share data) 1997 1996 1995 Grain sales and revenues $ 566,373 $ 700,326 $ 660,121 Fertilizer, retail and other sales 427,373 449,978 432,289 Other income 5,099 4,652 5,320 998,845 1,154,956 1,097,730 Cost of grain sales 532,586 659,244 617,934 Cost of fertilizer, retail and other sales 318,571 336,481 326,242 851,157 995,725 944,176 Gross profit 147,688 159,231 153,554 Operating, administrative and general expenses 131,818 133,637 129,210 Asset impairment charge 1,121 -- -- Interest expense 8,494 13,703 14,019 141,433 147,340 143,229 Income before income taxes 6,255 11,891 10,325 Income taxes 2,181 5,485 137 Net income $ 4,074 $ 6,406 10,188 Pro forma income taxes (See Note 1) 3,915 Pro forma net income $ 6,273 Per common share (Pro forma for 1995 - See Note 1): Basic and diluted earnings $ .50 $ .76 $ .74 Dividends paid $ .12 $ -- $ -- Weighted average shares outstanding 8,160 8,425 8,430 The Notes to the Consolidated Financial Statements on pages 16-28 are an integral part of this statement. The Andersons, Inc. Consolidated Balance Sheets December 31 (in thousands) 1997 1996 Assets Current assets: Cash and cash equivalents $ 8,278 $27,524 Accounts and notes receivable: Trade receivables, less allowance for doubtful accounts of $2,957 in 1997; $3,230 in 1996 68,643 73,694 Margin deposits 771 327 69,414 74,021 Inventories 191,467 150,297 Deferred income taxes 1,408 1,864 Prepaid expenses 4,521 3,929 Total current assets 275,088 257,635 Other assets: Notes receivable and other assets, less allowance for doubtful notes receivable of $777 in 1997; $735 in 1996 6,333 5,951 Investments in and advances to affiliates 1,026 1,340 7,359 7,291 Property, plant and equipment (net) 85,797 81,665 $368,244 $346,591 Liabilities and owners' equity Current liabilities: Notes payable $ 15,572 $ -- Accounts payable for grain 121,233 96,932 Other accounts payable 63,309 75,713 Accrued expenses 12,973 16,981 Current maturities of long-term debt 8,406 6,360 Total current liabilities 221,493 195,986 Pension and postretirement benefits 2,799 2,804 Long-term debt, less current maturities 65,709 68,568 Deferred income taxes 5,393 5,371 Minority interest 649 613 Shareholders' equity Common shares, without par value Authorized -- 25,000 shares Issued -- 8,430 shares at stated value of $.01 per share 84 84 Additional paid-in capital 66,660 66,659 Treasury shares (491 and 70 in 1997 and 1996, respectively) (4,418) (600) Retained earnings 9,875 7,106 72,201 73,249 $368,244 $346,591 The Notes to the Consolidated Financial Statements on pages 16-28 are an integral part of this statement. The Andersons, Inc. Consolidated Statements of Cash Flows Year ended December 31 (in thousands) 1997 1996 1995 Operating activities Net income, as reported $4,074 $ 6,406 $10,188 Adjustments to reconcile net income, as reported, to net cash provided by (used in) operating activities: Depreciation and amortization 10,065 9,730 9,318 Provision for losses on accounts and notes receivable 1,767 4,322 2,229 Asset impairment charge 1,121 -- -- Gain on sale of property, plant and equipment (529) (182) (2,568) Deferred income taxes 478 2,766 -- Other 36 (491) (70) Changes in operating assets and liabilities: Trade accounts receivable 2,839 10,772 (38,775) Inventories (41,170) 119,633 (71,295) Prepaid expenses and other assets (1,242) (1,875) 815 Accounts payable for grain 24,301 2,848 10,240 Other accounts payable and accrued expenses (16,737) 5,335 19,818 Net cash provided by (used in) operating activities (14,997) 159,264 (60,100) Investing activities Purchases of property, plant and equipment (15,427) (9,955) (11,894) Proceeds from sale of property, plant and equipment 1,221 720 1,242 Sales and maturities of investments, net of $101 purchased in 1995 -- 366 464 (Advances to) payments received from affiliates -- (29) 518 Acquisition of business, net of cash acquired -- -- (1,427) Net cash used in investing activities (14,206) (8,898) (11,097) Financing activities Net increase (decrease) in short-term borrowings 15,572 (120,267) 68,578 Proceeds from issuance of long-term debt 150,982 140,780 56,570 Payments of long-term debt (151,795) (147,743) (49,616) Proceeds from sale of treasury shares to employees participating in Employee Share Purchase Plan 423 -- -- Dividends paid (985) -- -- Purchase of common shares for the treasury (4,240) (600) -- Payments to partners and shareholders and other deductions from owners' equity accounts, net of $1,350 invested in 1995 -- (64) (6,206) Net cash provided by (used in) financing activities 9,957 (127,894) 69,326 Increase (decrease) in cash and cash equivalents (19,246) 22,472 (1,871) Cash and cash equivalents at beginning of year 27,524 5,052 6,923 Cash and cash equivalents at end of year $ 8,278 $ 27,524 $ 5,052 Noncash operating, investing and financing activities: Exchange of fixed assets for investment $ 513 Exchange of convertible 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 The Notes to the Consolidated Financial Statements on pages 16-28 are an integral part of this statement. The Andersons, Inc. Consolidated Statements of Changes in Owners' Equity Converted Equity The Andersons The Management Andersons Corp. Additional Partners' Common Common Paid-in Treasury Retained (in thousands) Capital Shares Shares Capital Shares Earnings Total Balances at $63,008 $1,391 $ -- $ -- $ -- $ 471 $64,870 January 1, 1995 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 275 275 employee bonds Balances at January 2, 1996 -- -- 84 66,659 -- 728 67,471 Net income 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 66,659 (600) 7,106 73,249 Net income 4,074 4,074 Sale of 49 thousand shares to Employee Share Purchase Plan participants 1 422 423 Purchase of 470 thousand shares for treasury (4,240) (4,240) Dividends declared (1,305) (1,305) Balances at December 31, 1997 $ -- $ -- $ 84 $66,660 $(4,418) $ 9,875 $72,201 The Notes to the Consolidated Financial Statements on pages 16-28 are an integral part of this statement. Management's Discussion and Analysis Operating Results Operating results for The Andersons, Inc. business segments are discussed in the Business Review on pages 4-6 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 1997 with 1996 Sales and revenue for 1997 totaled $1 billion, a decrease of $156 million or 13.5% from 1996. Sales in the Agriculture Group were down $138.4 million, with the grain division down 19.1% and the fertilizer divisions down 4.9%. Grain shipment volume decreased approximately 9.0% from 1996 and the average price per bushel shipped dropped 11.1%. The majority of the volume decrease resulted from low carryover of grain stocks from poor harvests in 1995 and 1996. The decrease in average selling price reflects very high market prices in the fall of 1995 through late spring of 1996. Wholesale fertilizer experienced a 5.4% volume decrease and a decrease of 2.1% in average prices, while the retail farm center sales and revenues were up 5% from 1996. The Processing and Manufacturing Group ("PMG") had an $8.5 million or 7.8% decrease in sales. The processing division had the largest decrease of $12.2 million or 16.7%. Of this decrease $9.4 million represented 1996 combined sales of the SorbentsTM business that was sold in the fourth quarter of 1996 and lawn fertilizer retail businesses that are no longer being operated by the Company. The remainder of the decrease resulted from lower volumes. The manufacturing division had increased sales of $3.9 million or 18.7%. The Retail Group experienced a 3.4% decrease in sales, with all markets down. This was due to increased competition and a slow Christmas selling season. Gross profit for 1997 totaled $148 million, a decrease of $11.5 million or 7.2% from 1996. The grain division had a gross profit decrease of $7.3 million, due primarily to the volume decrease noted previously. Merchandising revenues from blending and storing grain for others are rising from the past two years of weak results due to poor harvests and fewer bushels to handle. The fertilizer divisions had a decrease of $.5 million in gross profit, with wholesale fertilizer down and retail farm centers up. Gross profit for PMG decreased $1.4 million from the prior year. The processing division had the largest decrease of $3.9 million or 14.7%, the manufacturing division had a $1.8 million or 30.9% increase and the ventures division also had increased gross profit of $.7 million or 10.8%. When excluding the 1996 gross profit related to the businesses no longer operated (as described previously), PMG showed an increase of $1.5 million or 4%. Gross profit for the Retail Group decreased 5.6%. Operating, administrative and general expenses for 1997 totaled $131.8 million, a $1.8 million or 1.4% decrease from 1996. This reduction includes approximately $2.6 million for businesses no longer operated and a return to a more normal level of expense for bad debts and grain contract nonperformance than in the past two years. The Retail Group took a pretax, non-cash charge of $1.1 million to write down store assets to their fair value. There was no comparable charge in 1996. See also Note 5 to the Audited Financial Statements. Interest expense for 1997 was $8.5 million, a $5.2 million or 38% decrease from 1996. The average daily borrowing amount decreased 57.0% from 1996 and the average interest rate decreased slightly. Borrowings were unusually high in 1996 due to the extraordinarily high commodity prices from the third quarter of 1995 until their decrease in mid-1996. Income before income taxes of $6.3 million represented a decrease of $5.6 million or 47.4% from the 1996 pretax income of $11.9 million. Income tax expenses was $2.2 million, a $3.3 million or 60.2% decrease from 1996. The decrease is attributable to the significant decrease in pretax income in 1997 and a decrease in the effective tax rate from 46.1% to 34.9%. The 1996 tax expense includes a non-recurring charge of $0.8 million (6.8%) to establish deferred income taxes on the assets and liabilities of the former partnership. See Note 1 to the Consolidated Financial Statements. In addition, state and local taxes decreased in 1997. Net income decreased 36.4% to $4.1 million from $6.4 million. Earnings per share decreased 34.2% from $0.76 per share in 1996 to $0.50 per share in 1997. 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 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 $0.4 million or 2.9%. 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. 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 Processing and Manufacturing Group, with a $3.7 million or 10.7% increase, and the Retail Group, with a $2.4 million or 5% 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. 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 interest 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 decrease 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. Liquidity and Capital Resources The Company's operations used cash of $15 million in 1997 as compared to providing $159 million in cash in 1996. The significant amount of cash provided in 1996 related to the liquidation of grain inventories in response to market conditions. Cash used in 1997 is reflected in the ending inventory positions. 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, 1997 were $250 million. The Company had drawn $15.6 million on its short-term lines of credit in 1997, with no short- term lines drawn in 1996. 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 on both its long and short term debt and lease commitments. As of December 31, 1997, the Company had swaps with a total notional amount of $29.4 million which convert variable rates to fixed rates on long and short-term borrowings. The Company also held treasury locks with a total notional amount of $24.9 million to hedge the interest component of firm commitment railcar lease transactions that are projected to close in 1998. Cash dividends of $1 million were paid in 1997 ($.12 per share). The Company made income tax payments of $4.1 million in 1997 The Company also purchased 470,000 of its common shares on the open market. Shares in the Company's treasury were purchased at an average of $9 per share. During 1997, the Company invested approximately $15.4 million in capital additions and improvements, including $4.2 million to upgrade retail stores and $3.4 million to purchase previously leased agricultural facilities. Approximately $17 million is budgeted for capital spending in 1998 including $6 million for business expansion and growth, $2.5 million for additional rail cars, $.8 million for additional storage capacity and $1.4 million for upgrades and improvements to production and handling facilities. These expenditures are expected to be funded by cash generated from operations or available lines of credit. 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. The Company's liquidity is enhanced by the fact that grain inventories are readily marketable and the adequate lines of credit that it has available. In the opinion of management, the Company's liquidity is adequate to meet short-term and long-term needs. Impact of Year 2000 Some of the Company's older computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs may have time-sensitive software that recognize a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations causing disruption of operations. The Company has substantially completed an assessment and identified software that will have to be modified or replaced so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The total Year 2000 project cost, excluding modification or potential replacement of cash register systems in the Retail Group, is estimated at approximately $1.7 million, which includes $.9 million for the purchase of new software that will be capitalized and $.8 million that will be expensed as incurred. The Company is still developing its plans for the cash register systems in the Retail Group. The total cost to make these systems Year 2000 compliant is currently being determined. Initial installation of new software and programming modifications are anticipated to be substantially complete in early 1999, which will allow for testing and revisions prior to any anticipated impact on operating systems. The Company believes that with modifications to existing software and conversions to new software, the Year 2000 Issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 Issue could have an impact on the operations of the Company. The costs of the project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and similar uncertainties. Forward Looking Statements The preceding Letter to Shareholders, Business Review and Management's Discussion and Analysis contain various "forward-looking statements" that 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, competition, economic conditions, risks associated with acquisitions, interest rates and income taxes. The Andersons, Inc. Notes to Consolidated Financial Statements December 31, 1997 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. The merger was 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 were 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 $0.8 million ($.10 per share) was recorded in the first quarter of 1996. The income statement for 1995 was 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, 1995. 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 (.3 million shares) to shareholders of the Company and employees who held convertible bonds of the Partnership. 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. The fair market value of held-to-maturity securities, consisting primarily of time deposits and U.S. Treasury securities, approximated their amortized cost of $4.7 million and $22.9 million at December 31, 1997 and 1996, 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 and Inventory Commitments Grain inventories in the Company's balance sheet 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 (also based on year-end market price quotations) on open commodity contracts at the end of the year. These contracts require performance in future periods. Contracts to purchase grain from producers generally relate to the current or future crop years for delivery periods quoted by regulated commodity exchanges. Contracts for the sale of grain to processors or other consumers generally do not extend beyond one year. The terms of contracts for the purchase and sale of grain are consistent with industry standards. All other inventories are stated at the lower of cost or market. Cost is determined by the average cost method. Commodity and Interest Rate Contracts For the purpose of hedging its market price risk exposure on grain owned and related forward grain purchase and sale contracts, the Company holds regulated commodity contracts in the form of futures and options contracts for corn, soybeans and wheat. The Company accounts for all commodity contracts using a daily mark-to-the-market method; the same method it uses to value grain inventory and forward purchase and sale contracts. Company policy limits the Company's unhedged grain position. Gains and losses in the value of commodity contracts (whether due to changes in commodity prices or due to sale, maturity, or extinguishment of the commodity contract) and grain inventories and related forward grain contracts are included in Grain Sales and Merchandising Revenues in the statement of income. The Company also periodically enters into interest rate contracts to manage interest rate risk on borrowing or financing activities. Income or expense associated with interest rate swap contracts is recognized on the accrual basis over the life of the agreement as a component of interest expense. The Company expenses the cost of interest rate caps at the date of purchase. Gains or losses upon settlement of treasury rate locks hedging the interest component of firm commitment lease transactions are recognized over the life of the ensuing lease transaction. All interest rate contracts are entered into for hedging purposes. The fair market value of interest rate contracts is not recognized in the balance sheet. 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. Advertising Advertising costs are expensed as incurred. Advertising expense of $3.2 million, $3.1 million and $3.6 million is included in operating, administrative and general expense in 1997, 1996 and 1995, respectively. Earnings per Share The Company adopted Financial Accounting Standards Board Statement No. 128, "Earnings per Share" in 1997. Under Statement No. 128, the Company is required to calculate basic and diluted earnings per share. Basic earnings per share is equal to net income divided by weighted average shares outstanding. Diluted earnings per share is equal to basic earnings per share plus the incremental share effect of dilutive options issued to officers, directors and employees. New Accounting Standard In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 131 "Disclosures about Segments of an Enterprise and Related Information", which is effective for years beginning after December 15, 1997. The new rules change the manner in which operating segments are defined and reported externally to be consistent with the basis on which they are reported and evaluated internally. The impact that this statement will have on the Company has not been fully determined. 3. Inventories Major classes of inventories are as follows: December 31 (in thousands) 1997 1996 Grain $ 113,838 $ 70,762 Agricultural fertilizer and supplies 18,908 21,897 Merchandise 27,674 29,527 Lawn and corn cob products 20,142 17,633 Other 10,905 10,478 $ 191,467 $150,297 4. Property, Plant and Equipment The components of property, plant and equipment are as follows: December 31 (in thousands) 1997 1996 Land $ 11,763 $ 11,261 Land improvements and leasehold improvements 24,594 24,431 Buildings and storage facilities 85,377 80,669 Machinery and equipment 104,590 99,871 Construction in progress 2,109 1,795 228,433 218,027 Less allowances for depreciation and amortization 142,636 136,362 $ 85,797 $ 81,665 5. Asset Impairment Charge Based upon an assessment of historical and projected operating results, the Company determined in 1997 that the carrying value of certain retail store assets were impaired under the criteria defined in FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". As a result, the Company recorded a pretax impairment charge of $1.1 million ($.7 million after tax or $.09 per share) to write down the carrying value of these assets to their estimated fair value. Fair value was estimated through market price comparisons for similar assets. 6. 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 1997 1996 1995 interest rate) Maximum borrowed $110,500 $207,800 $195,500 Average daily amount borrowed (total of daily borrowings divided by number of days in period) 51,237 119,187 118,382 Average interest rate (computed by dividing interest expense by average daily amount outstanding) 5.98% 6.10% 6.55% 7. Long-Term Debt Long-term debt consists of the following: December 31 (in thousands) 1997 1996 Note payable, 7.84%, payable $398 thousand quarterly, due 2004 $13,304 $14,250 Note payable under revolving credit line 20,000 16,300 Notes payable, variable rate (6.8% at December 31, 1997), payable $336 thousand quarterly, due 2004 9,082 9,418 Other notes payable 1,120 1,036 Industrial development revenue bonds: 6.5%, sinking fund $1 million payable 2,000 2,900 annually, due 1999 Variable rate (5.7% at December 31, 1997), payable $882 thousand annually 5,470 6,351 through 2004 Variable rate (4.2% at December 31, 1997), due 2025 3,100 3,100 Debenture bonds, 6.5% to 8.7%, due 1998 through 2007 19,556 21,030 Other bonds, 4% to 9.6% 483 543 74,115 74,928 Less current maturities 8,406 6,360 $65,709 $68,568 The Company has a $40 million revolving line of credit with a bank which bears interest based on the LIBOR rate (6.21% at December 31, 1997). Borrowings under this agreement totaled $20 million at December 31, 1997. The revolving credit line expires on July 1, 1999. 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 $30 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, 1997. The aggregate annual maturities of long-term debt, including sinking fund requirements, are as follows: 1998--$8 million; 1999--$26 million; 2000--$4 million; 2001--$7 million and 2002--$11 million. Interest paid (including short-term lines of credit) amounted to $9 million, $15 million and $13 million in 1997, 1996 and 1995, respectively. The Company periodically utilizes interest rate contracts to manage interest rate risk on short-term borrowings by converting variable interest rates to short-term fixed rates consistent with projected borrowing needs. At December 31, 1997, the Company was participating in two short-term interest rate swap agreements, with a total notional amount of $20 million. The interest rate swaps expire in January 1998 and convert variable interest rates to fixed rates of 5.92% to 6.04%. The Company also has purchased two interest rate caps, each with notional amounts of $10 million. The caps expire on April 1, 1998 and cap interest at 6.25%. 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 6.65%. 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. The Company also has entered into long-term treasury locks with a total notional amount of $24.9 million. These instruments hedge the interest component on firm commitment lease transactions that are projected to close in 1998. The effect of long-term and short-term interest rate contracts on interest expense was not significant in 1997, 1996 and 1995. 8. Income Taxes Income tax consists of the following: Year ended December 31 Pro Forma (Unaudited) (in thousands) 1997 1996 1995 Current: Federal $1,728 $2,268 $3,088 State and local (25) 451 791 1,703 2,719 3,879 Deferred: Federal 393 2,134 138 State and local 85 632 35 478 2,766 173 Total: Federal 2,121 4,402 3,226 State and local 60 1,083 826 $2,181 $5,485 $4,052 A reconciliation from the statutory U.S. federal tax rate of 35% to the effective tax rate is as follows: Pro Forma (Unaudited) 1997 1996 1995 Statutory U.S. Federal tax rate 35.0% 35.0% 35.0% Increase (decrease) in rate resulting from: State and local income taxes net of related federal taxes 0.6% 4.4% 4.4% Net basis differences of partnership -- 6.8% -- Other (net) (0.7)% (0.1)% (0.2)% Effective tax rate 34.9% 46.1% 39.2% Income taxes paid in 1997, 1996 and 1995 were $4.1 million, $131 thousand, and $340 thousand. Significant components of the Company's deferred tax liabilities and assets are as follows: December 31 (in thousands) 1997 1996 Deferred tax liabilities: Tax depreciation in excess of book depreciation $ (7,555) (7,602) Prepaid employee benefits (1,682) (1,170) Deferred income (692) (695) Other (463) (216) (10,392) (9,683) Deferred tax assets: Employee benefits accrual 2,919 2,534 Allowance for doubtful accounts and notes receivable 1,138 1,249 Inventory reserve 1,086 1,042 Investments 857 866 Deferred income 217 309 Other 190 176 6,407 6,176 Net deferred tax liability $ (3,985) $(3,507) 9. Stock Compensation Plans The Company has two stock-based compensation plans that are described below. 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," ("Statement 123") 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 equaled the market price of the underlying stock on the date of grant, no compensation expense was recognized for either of its plans. The Long-Term Performance Compensation Plan (the "LT Plan") authorizes the Board of Directors to grant options to employees and outside directors for up to 900,000 common shares of the Company. Options granted under the LT Plan have a maximum term of 10 years. Options granted to outside directors in 1997 and 1996 have a fixed term of five years and vest after one year. Options granted to management personnel under the LT Plan in 1997 and 1996 have a five year term and vest 40% immediately, 30% after one year and the remaining 30% after two years. In addition, certain Company executives have elected to receive a portion of their salary in stock options issued under the LT Plan. These options vest immediately and have a ten year term. There were 50,756 options issued in lieu of salary in 1997. Pro forma information regarding net income and earnings per share is required by Statement 123, and also requires that the information be determined as if the Company has accounted for its employee stock options granted under the fair value method of that Statement. The fair value of the each option grant is estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions used for the 1997 and 1996 grants, respectively: risk free interest rate of 6.22% and 5.55%; dividend yield of 1.33% and 1.30%; volatility factor of the expected market price of the Company's common shares of .272 and .389; and an expected life for the options of six and one half years and five years. The Company's Employee Share Purchase Plan (the "ES Plan"), that allows employees to purchase common shares through payroll withholdings, also contains an option component. The share purchase price is the lower of the market price at the beginning or end of the year. The Company records a liability for withholdings not yet applied towards the purchase of common stock. Assumptions for the ES Plan used for grants in 1997 and 1996, respectively, were as follows: risk free interest rate of 6.08% and 5.07%; dividend yield of 1.35% and 1.30%, volatility factor of the expected market price of the Company's common shares of .272 and .389; and an expected life for the option of one year. The Black-Scholes option valuation model was developed for 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. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands except for earnings per share information): 1997 1996 Pro forma net income $3,700 $6,154 Pro forma earnings per share: Basic $.45 $.73 Diluted $.45 $.73 A summary of the Company's stock option activity, and related information for the years ended December 31 follows (in thousands, except for prices): Long Term Performance Compensation Plan 1997 1996 Weighted Weighted Average Average Shares Exercise Price Shares Exercise Price Outstanding at beginning of year 137 $8.60 -- -- Granted / Subscribed 170 9.05 137 $8.60 Exercised -- -- -- -- Expired (2) 8.60 -- -- Outstanding at end of year 305 $8.85 137 $8.60 Options available for grant at end of year 595 363 Options price range at end of year $8.60 to $9.125 $8.60 Weighted average remaining contractual life 4.51 4.15 Weighted average fair value of options granted during the year $3.15 $3.27 Options exercisable at end of 193 52 year Employee Share Purchase Plan 1997 1996 Weighted Weighted Average Average Shares Exercise Price Shares Exercise Price Outstanding at beginning of year 49 $8.60 -- -- Granted / Subscribed 52 8.875 59 $8.60 Exercised (49) 8.60 -- -- Forfeited (5) 8.875 (10) 8.60 Outstanding at end of year 47 $8.875 49 $8.60 Options available for grant at end of year 204 251 Options price range at $8.875 $8.60 end of year Weighted average fair value of options granted during $1.13 $1.37 the year Options exercisable at end 47 49 of year 10. Leases and Related Commitments The Company leases certain equipment and real property under operating leases, including railcar leases and subleases. Net rental expense under operating leases, relating primarily to buildings and equipment used by the Company's operations, was as follows: (in thousands) 1997 1996 1995 Total rental expense $13,202 $11,934 $11,242 Less rental income from subleases 10,470 7,924 6,313 Net rental expense $ 2,732 $ 4,010 $ 4,929 At December 31, 1997, the company had commitments for railcar lease and sublease transactions that are scheduled to close in 1998. Future minimum rentals and sublease income that will result from these transactions have not been reflected in the table following, however, the Company anticipates that these leases will result in sublease income in excess of future minimum rentals over the ensuing lease terms. Future minimum rentals for all noncancelable operating leases and future rental income from subleases are as follows: (in thousands) Future Future Sublease Minimum Income Rentals 1998 $10,820 $ 7,013 1999 6,899 4,690 2000 4,849 2,606 2001 4,172 2,035 2002 3,575 1,635 Future years 9,894 5,585 $40,209 $23,564 11. Employee Benefit Plans The Company sponsors several employee benefit programs including the following: Defined Benefit Pension Plan and Supplemental Retirement 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 "DBPP"). 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 (the "SERP") which is a non-qualified deferred compensation plan designed to cover all DBPP participants whose compensation exceeds the Internal Revenue Code limitation. SERP benefits are calculated similarly to the DBPP 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. December 31 (in thousands) 1997 1996 DBPP SERP All Plans Actuarial present value of benefit obligation: Vested benefits $(9,313) $ (498) $(8,456) Non-vested benefits (553) -- (442) Accumulated benefits obligation (9,866) (498) (8,898) Impact of future salary increases (5,534) (541) (5,184) Projected benefit obligation for service rendered to date (15,400) (1,039) (14,082) Plan assets at fair value, primarily mutual funds 16,800 -- 13,017 Plan assets in excess of or (less than) projected benefit obligation 1,400 (1,039) (1,065) Unrecognized net asset at adoption, net of amortization (42) -- (92) Unrecognized net (gain) loss (564) 510 497 Prior service cost -- 222 254 Adjustment required to recognize minimum liability -- (191) -- Prepaid (liability) recognized in the balance sheet $ 794 $ (498) $ (406) Net periodic pension cost includes the following components: Year ended December 31 (in thousands) 1997 1996 1995 Service cost - benefits earned during the period $1,536 $1,503 $1,234 Interest cost on projected benefit obligation 1,000 796 681 Return on plan assets (2,446) (1,394) (2,018) Net amortization and deferral 1,363 547 1,425 Net periodic pension cost $1,453 $1,452 $1,322 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 (the "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 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 vest ratably in the Company's matching contributions over five years. The matching contributions to the RSIP amounted to $1.1 million, $1 million, and $0.9 million in 1997, 1996 and 1995, 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 $1.1 million, $2.2 million and $1.6 million for 1997, 1996 and 1995, 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) 1997 1996 Accumulated postretirement benefit obligation: Retirees $ 5,531 $ 5,035 Fully eligible active plan participants 693 823 Other active plan participants 4,070 3,737 10,294 9,595 Unrecognized net transition obligation (6,309) (6,730) Unrecognized net gain 180 398 Accrued postretirement benefit cost $ 4,165 $ 3,263 Net periodic postretirement benefit cost includes the following components: Year ended December 31 (in thousands) 1997 1996 1995 Service cost $ 302 $ 272 $ 247 Interest cost 711 666 679 Net amortization 421 421 421 Net periodic postretirement benefit costs $ 1,434 $ 1,359 $ 1,347 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 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 $200 thousand and the accumulated postretirement benefit obligation as of December 31, 1997 by approximately $1.7 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 $2.6 million and $2.3 million at December 31, 1997 and 1996, respectively, and such amounts are included in prepaid expenses. The following table reconciles the pension and postretirement assets and liabilities to their appropriate line items in the consolidated balance sheet: December 31 1997 1996 DBPP asset (liability) $ 794 $ (241) SERP (liability) (498) (165) Pension asset (liability) 296 (406) Postretirement liability (4,165) (3,263) Net pension and postretirement liability $(3,869) $ (3,669) As displayed in the Consolidated Balance Sheets: Accrued expenses $(1,070) $ (865) Pension and postretirement liability (2,799) (2,804) $(3,869) $ (3,669) 12. Fair Values of Financial Instruments The fair values of the Company's cash equivalents, margin deposits and long and short-term debt, approximate their carrying values since the instruments provide for short terms to maturity and/or variable interest rates based on market indexes. The Company's investments in affiliates are accounted for on the equity method which approximates fair value. The Company believes the fair value of its notes receivable, long-term notes payable and debentures, some of which bear fixed rates and terms of five or ten years, approximate their carrying values, based upon interest rates offered by the Company on similar notes receivable and bonds and rates currently available to the Company. The fair value of off-balance sheet interest rate contracts, as described in Note 7, which are not recognized in the balance sheet, is estimated based on quoted market termination values. Fair values of these contracts amount to a liability of $618 thousand and an asset of $98 thousand at December 31, 1997 and 1996, respectively. The fair value of these interest rate contracts are substantially offset by unrealized appreciation and depreciation in the hedged items. 13. Business Segments The Company operates three business segments: Agriculture Group, Processing and Manufacturing Group and Retail Group. The Agriculture Group includes grain merchandising, operation of terminal grain elevator facilities, manufacture of liquid fertilizer products and distribution of agricultural products, primarily fertilizer. The Processing and Manufacturing Group includes production and distribution of lawn and corn cob products, rail car leasing and repair and the marketing of the Company's excess real estate as well as other, smaller businesses. The Retail Group includes operation of retail stores and a distribution center. 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) 1997 1996 1995 Sales and revenues: Agriculture Group: Sales to unaffiliated customers $697,845 $841,262 $796,754 Intersegment sales 3,071 2,314 6,630 Merchandising revenues and 27,067 25,472 28,090 other income 727,983 869,048 831,474 Processing and Manufacturing Group: Sales to unaffiliated customers 100,486 108,997 100,402 Intersegment sales 940 950 929 Merchandising revenues and other income 2,713 2,615 3,296 104,139 112,562 104,627 Retail Group: Sales to unaffiliated customers 169,939 175,987 168,051 Merchandising revenues and other income 207 146 282 170,146 176,133 168,333 Other income 588 477 855 Eliminations--intersegment sales (4,011) (3,264) (7,559) Total sales and revenues $998,845 $1,154,956 $1,097,730 Operating profit: Agriculture Group $ 8,615 $ 15,046 $ 16,920 Processing and Manufacturing Group 7,519 7,733 6,719 Retail Group (including asset impairment) 1,605 6,680 4,392 Total operating profit 17,739 29,459 28,031 Other income 275 371 664 Interest expense (8,494) (13,703) (14,019) General expenses (3,265) (4,236) (4,351) Income before income taxes $ 6,255 $ 11,891 $ 10,325 Identifiable assets: Agriculture Group $232,769 $ 190,932 $ 321,045 Processing and Manufacturing Group 59,500 56,196 62,313 Retail Group 59,508 61,799 61,296 General 16,467 37,664 10,864 Total assets $368,244 $ 346,591 $ 455,518 Depreciation and amortization expense: Agriculture Group $ 4,728 $ 4,336 $ 4,186 Processing and Manufacturing Group 1,944 2,061 1,960 Retail Group 2,823 2,870 2,771 General 570 463 401 Total depreciation and amortization expense $ 10,065 $ 9,730 $ 9,318 Capital expenditures: Agriculture Group $ 8,382 $ 4,359 $ 10,072 Processing and Manufacturing Group 2,344 2,029 2,536 Retail Group 4,316 3,042 2,749 General 385 690 633 Total expenditures $ 15,427 $ 10,120 $ 15,990 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 $177 million, $193 million and $194 million in 1997, 1996 and 1995, respectively. Board of Directors Richard P. Anderson (3) Thomas H. Anderson (3) Chairman & Chief Executive Officer Chairman Emeritus The Andersons, Inc. The Andersons, Inc. Donald E. Anderson (3) Michael J. Anderson (3) Director of Science, retired President & Chief Operating Officer The Andersons, Inc. The Andersons, Inc. Richard M. Anderson (3) John F. Barrett(2)/(3) Vice President & General Manager President & Chief Executive Officer Processing Division The Western & Southern Life The Andersons, Inc. Insurance Co. Paul M. Kraus (3) Donald L. Mennel (3) Attorney President & Treasurer Marshall & Melhorn The Mennel Milling Company Donald M. Mennel (1)/(3) David L. Nichols (1)/(2)/(3) Attorney, Retired Chairman of the Chairman & Chief Executive Officer Board & Chief Executive Officer Mercantile Stores Company, Inc. The Mennel Milling Company Dr. Sidney A. Ribeau (1)/(3) Charles A. Sullivan(1)/(2)/(3) President Chairman & Chief Executive Officer Bowling Green State University Interstate Bakeries Corp. (1) Audit Committee (2) Compensation Committee (3) Nominating Committee Independent Auditors Ernst & Young LLP, Toledo, Ohio Nasdaq Symbol The Andersons, Inc. common shares are traded on the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol: ANDE Shareholders As of March 3, 1998 there were 7,986,063 shares of common stock outstanding. At that date, there were 340 shareholders of record and approximately 2,500 shareholders for whom securities firms acted as nominees. Corporate Officers Thomas H. Anderson Richard P. Anderson Chairman Emeritus Chairman & Chief Executive Officer Michael J. Anderson Christopher J. Anderson President & Chief Operating Officer President, Processing & Manufacturing Group Daniel T. Anderson Joseph L. Braker President, Retail Group President, Agriculture Group Joseph C. Christen Dale W. Fallat Vice President, Human Resource Vice President, Corporate Services Development Philip C. Fox Charles E. Gallagher Vice President, Corporate Planning Vice President, Personnel Richard R. George Beverly J. McBride Vice President & Controller 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 (419)893-5050 Internet: www.andersonsinc.com Transfer Agent & Registrar Harris Trust & Savings Bank Shareholders Services Division 311 West Monroe P.O. Box A-3504 Chicago, Illinois 60690-3504 (312)360-5260 Form 10K The Andersons' 1997 Form 10-K, filed in late March 1998 with the Securities & Exchange Commission, is available to stockholders and interested individuals without charge by writing or calling Investor Relations. Annual Meeting The annual shareholders' meeting of The Andersons, Inc. will be held at The Andersons' Activities Building, 1833 S. Holland-Sylvania Rd, Toledo, Ohio at 7:00 p.m. on May 14, 1998. Investor Relations Gary Smith, Vice President, Finance & Treasurer (419)891-6417 With Thanks Donald M. Mennel Director Emeritus The Andersons, Inc., expresses deepest gratitude to Donald M. Mennel for his service on the Board of Directors. A member since December, 1990, Don has chosen not to stand for re-election when directors' terms expire in May. Fortunately, he has agreed to continue his involvement as Director Emeritus. Don's knowledge of the grain industry and grain futures market have been invaluable, both to the company and to the board. In particular, Don has played an important role in developing contract alternatives for our grain customers and in evaluating growth opportunities in our market areas. He also has served as chairman of the board's audit committee. Many words come to mind when thinking of Don: humble, humorous, vigorous, enthusiastic, honest, generous. To those of us who have had the honor of working with him, one word stands out: friend. Fifty Years of Growth In October, 1947, a 500,000-bushel elevator opened for business in Maumee, Ohio. It was called The Anderson Truck Terminal, and it was an instant hit with the farmers in the area. Its unique design eliminated the long waits they were used to at elevators during harvest. And an innovative transportation agreement negotiated with the Wabash Railroad allowed the new business to pay farmers a premium over the going price for their crops. Founder Harold Anderson wasn't afraid to do things differently. His good ideas and strong convictions fueled the company's growth and diversification and continue to impact the way we do business today. The Andersons celebrated its 50th anniversary last year. Although our focus is on the future, we took a look back in 1997 and marveled at how far we have come. From our origins in grain handling, The Andersons moved into mass merchandising, agricultural and lawn fertilizer production and marketing, railcar repair and leasing for customers throughout the country, steel fabrication, and corncob milling. We reached out from Maumee to establish locations in other parts of the Eastern Corn Belt and earn customers all over the world. Two years ago, public trading of company shares began on the Nasdaq National Market. Each step has been built on the previous one. The expertise we develop in one area has been used to move smoothly, logically, and successfully into new ventures. This will continue to be our approach to growth. We plan to celebrate many more anniversaries, and to give our shareholders good reason to celebrate with us. 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 EX-21 3 Exhibit 22 SUBSIDIARIES OF THE ANDERSONS Subsidiary State of Organization The Andersons White Pigeon Terminal (a limited Ohio partnership 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. 333-01249) pertaining to The Andersons, Inc. Long-Term Performance Compensation Plan, (Form S-8 No. 333-00233) pertaining to The Andersons, Inc. Employee Share Purchase Plan and (Form S-2 No. 333-35269) pertaining to the registration of debenture bonds, of The Andersons, Inc. of our report dated January 26, 1998, with respect to the consolidated financial statements and schedule of The Andersons, Inc. and Subsidiaries incorporated by reference in the Annual Report (Form 10-K) for the year ended December 31, 1997. /s/Ernst & Young LLP Toledo, Ohio March 27, 1998 EX-27 5
5 1,000 YEAR DEC-31-1997 DEC-31-1997 8278 0 72371 2957 191467 275088 228433 142636 368244 221493 65709 0 0 84 72117 368244 993746 998845 851157 851157 132939 0 8494 6255 2181 4074 0 0 0 4074 .50 .50
EX-27 6
5 1,000 9-MOS DEC-31-1997 SEP-30-1997 3946 0 62467 3563 144365 211203 225309 140948 303262 160284 66723 0 0 84 67436 303262 595169 598884 497887 497887 96842 0 6318 (2163) (811) (1352) 0 0 0 (1352) (.16) (.16)
-----END PRIVACY-ENHANCED MESSAGE-----