-----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, WIXyUCSUCktChDgRWLEm3ieL7JACMJJh1dyIXCPFPBQlOmcwXhwG3UWXnYaJnxgI MbJd9NE5mYqBCk5pBxDx1A== 0000821026-99-000002.txt : 19990317 0000821026-99-000002.hdr.sgml : 19990317 ACCESSION NUMBER: 0000821026-99-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANDERSONS INC CENTRAL INDEX KEY: 0000821026 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-FARM PRODUCT RAW MATERIALS [5150] IRS NUMBER: 341562374 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-20557 FILM NUMBER: 99566315 BUSINESS ADDRESS: STREET 1: 480 W DUSSEL DR CITY: MAUMEE STATE: OH ZIP: 43537 BUSINESS PHONE: 4198935050 MAIL ADDRESS: STREET 1: 480 W DUSSEL DR CITY: MAUMEE STATE: OH ZIP: 43537 FORMER COMPANY: FORMER CONFORMED NAME: ANDERSONS MANAGEMENT CORP DATE OF NAME CHANGE: 19931119 10-K405 1 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 For the fiscal year ended December 31, 1998 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 $82,876,033 on February 28, 1999, computed by reference to the last sales price for such stock on that date as reported on the Nasdaq National Market. The registrant had 8,166,797 Common shares outstanding, no par value, at February 28, 1998. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1998 Annual Report of The Andersons, Inc. and Proxy Statement for the Annual Meeting of Shareholders to be held on April 22, 1999, 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 March 16, 1999. PART I Item 1. Business (a) General Development of Business The Andersons, Inc. is a diversified company with three operating groups. The Agriculture Group merchandises grain, operates grain elevator facilities located in Ohio, Michigan, Indiana and Illinois, manufactures agricultural fertilizer, and distributes agricultural inputs (fertilizer, chemicals, seed and supplies) to dealers and farmers. The Processing and Manufacturing Group includes the Processing Segment, which manufactures lawn fertilizer and corncob based products; the Manufacturing Segment that purchases, sells, repairs and leases railcars; and several smaller businesses. The Retail Group operates six retail stores and a distribution center in Ohio. (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 80 million bushels at December 31, 1998. 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. In 1998, the Company signed a five-year lease agreement with Cargill, Inc. for Cargill's Maumee and Toledo, Ohio grain handling and storage facilities. As part of the agreement, Cargill was given the marketing rights to grain in the Cargill- owned facilities as well as the adjacent Company-owned facilities in Maumee and Toledo. These agreements cover 45%, or 35 million bushels, of the Company's total storage space and became effective on June 1, 1998. During 1998, approximately 69% of the grain sold by the Company was purchased domestically by grain processors and feeders, and approximately 31% 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. Grain sales, except for grain sales subject to the marketing agreement with Cargill which are effected on a negotiated basis with Cargill's merchandising staff, 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 sale 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 customers, 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 generally are 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 into, 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 operation 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, 1999 approximated 33 million, 95% of which are to be delivered to the Company in the 1998 and 1999 crop years (through August 2000). 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. The Company competes in the sale of grain with other grain merchants, other elevator operators and farmer cooperatives that operate elevator facilities. Competition is based primarily on price, service and reliability. Some of the Company's competitors are also its customers and many of its competitors have substantially greater financial resources than the Company. The Company's wholesale fertilizer operations involve purchasing, storing, formulating, and selling dry and liquid fertilizers; providing fertilizer warehousing and services to manufacturers and customers; and the 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 12.6 million cubic feet at December 31, 1998. The Company reserves 6 million cubic feet of this space for various fertilizer manufacturers and customers. The Company's aggregate storage capacity for liquid fertilizer at December 31, 1998 was 30.4 million gallons and 8.7 million gallons of this space is reserved for manufacturers and customers. The agreements for reserved space provide the Company storage and handling fees and, generally, are for an initial term of one year and are renewable at the end of each term. The Company also 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 fourteen 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 a letter of intent to acquire two additional retail farm centers in Michigan. The purchase is expected to be finalized in the spring of 1999. In its agricultural fertilizer 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 Segment, the Manufacturing Segment and the ventures division. The Processing Segment produces and markets granular lawn fertilizer and related products to retailers and professional lawn care companies. It also produces and distributes corncob-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 melt 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 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 has signed a letter of intent with International Raw Materials, LTD, to create a joint venture which will operate a fertilizer and ice melt processing facility near Philadelphia, Pennsylvania. This transaction is expected to close in the spring of 1999. The Company's Manufacturing Segment buys, sells, leases, rebuilds and repairs various types of used railcars. The division also provides fleet management services to fleet owners and operates a custom steel fabrication business. A significant portion of the railcar fleet is leased from financial lessors and sub-leased to end-users. Some of these leases are nonrecourse to the Company. Competition for railcar marketing and fleet maintenance services is based primarily on service, access to used railcars 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 ten Tireman auto service centers and The Andersons Mower Center, a lawn and garden power equipment sales and service shop. Retail Group The Company's Retail Group consists of six stores operated as "The Andersons", which are located in the Columbus, Lima and Toledo, Ohio markets and serve urban, suburban and rural customers. The retail concept is "The Complete Home Store" 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 products, 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. The retail merchandising business is highly competitive. The Company competes with a variety of retail merchandisers, including 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 Segment. The Company expended approximately $340,000, $350,000, and $320,000 on research and development during 1998, 1997 and 1996, respectively. Employees At December 31, 1998, the Company had 1,235 full-time and 1,800 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 that 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 is 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 $650,000, $945,000 and $720,000 in 1998, 1997 and 1996, 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, the Company owns all properties. Agriculture Facilities (in thousands) Agricultural Fertilizer Grain Dry Storage Liquid Storage Storage Location (bushels) (cubic feet) (gallons) Maumee, OH (3) 21,610 4,500 2,646 Toledo, OH Port (4) 13,650 1,800 2,812 Metamora, OH 6,860 -- -- Lyons, OH (2) 380 53 194 Toledo, OH (1) 1,000 -- -- Fremont, OH (2) -- 47 284 Fostoria, OH (2) -- 36 279 Gibsonburg, OH (2) -- 35 307 Pulaski, OH (1)(2) -- 33 250 Lordstown, OH -- 197 -- Champaign, IL 13,500 833 -- Delphi, IN 6,700 923 -- Clymers, IN (2) 4,450 37 2,636 Dunkirk, IN 5,980 992 -- Poneto, IN 620 10 6,298 North Manchester, IN (2) -- 23 127 Waterloo, IN (1)(2) -- 992 1,654 Logansport, IN -- 33 2,231 Walton, IN (2) -- 375 5,962 Albion, MI (2) 2,000 20 128 White Pigeon, MI 2,100 -- -- Webberville, MI -- 1,747 3,916 Litchfield, MI (2) -- 40 252 North Adams, MI (2) -- 20 230 Union City, MI (2) -- 20 40 Munson, MI (2) -- 33 140 78,850 12,640 20,286 (1) Facility leased. (2) Facility is or includes a retail farm center. (3) Includes leased facilities with a 4,300-bushel capacity. (4) Includes leased facilities with a 7,100-bushel capacity. The grain facilities are mostly concrete and steel tanks, with some flat storage, which is primarily cover-on-first temporary 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 fourteen retail farm centers located in Michigan, Indiana and Ohio for liquid fertilizer and dry fertilizer is 2.9 million gallons and 472,500 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 leases payments based on achieved sales volume. Neither store achieved a sales level triggering contingent lease payments in 1998, 1997 or 1996. Other Properties The Company owns lawn fertilizer production facilities and automated pet food production and storage facilities in Maumee, Ohio and 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. The Company's Processing Segment venture expects to lease space in Pottstown, Pennsylvania. In its railcar business, the Company owns, leases or controls approximately 3,800 railcars (primarily covered or open hoppers with some boxcars, tank cars and gondolas) with lease terms ranging from one to ten years and future minimum lease payments aggregating $20 million with future minimum sublease income of approximately $15 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. The Company owns a service and sales facility for outdoor power equipment and several auto service centers leased to its venture. That venture also leases other auto service centers and a warehouse directly from third parties. 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 415 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 $28 million at December 31, 1998. Additions to property, including intangible assets, for the years ended December 31, 1998, 1997 and 1996 amounted to $14 million, $15 million and $10 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 is not involved in any legal proceedings that it believes to be material. 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 April 22, 1999. Year Name Position Age Assumed Christopher J. President, Processing and Manufacturing Group 44 1996 Anderson Vice President, Business Development Group 1992 General Manager, Ventures & New Business 1990 Development Daniel T. President, Retail Group 43 1996 Anderson Director of Marketing and Merchandising, 1996 Retail Group 1991 General Merchandise Manager, Retail Group Michael J. President and Chief Executive Officer 47 1999 Anderson President and Chief Operating Officer 1996 Vice President and General Manager, Retail 1994 Group 1990 Vice President and General Manager, Grain Group Richard P. Chairman of the Board 69 1999 Anderson Chairman of the Board and Chief Executive 1996 Officer 1987 President and Chief Executive Officer Thomas H. Chairman Emeritus 75 1996 Anderson Chairman of the Board 1987 Joseph L. President, Agriculture Group 48 1996 Braker Vice President and General Manager, 1994 Agriculture Group 1990 Vice President and General Manager, Agricultural Products Group Joseph C. Vice President, Human Resource Development 50 1996 Christen Director of Human Resource Development 1988 Dale W. Vice President - Corporate Services 54 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 57 1996 Gallagher Director of Personnel 1988 Richard R. Vice President and Controller 49 1996 George Corporate Controller 1988 Beverly J. Vice President, General Counsel and Secretary 57 1996 McBride General Counsel and Corporate Secretary 1988 Gary L. Vice President, Finance and Treasurer 53 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 Selected Quarterly Financial Data and Market for Common Stock on page 7 and Shareholders on the inside back cover of The Andersons, Inc. 1998 Annual Report to Shareholders is incorporated herein by reference. The Company paid quarterly dividends of four cents and three cents per common share, respectively, in 1998 and 1997. The Company declared quarterly dividends of five cents per common share to be paid January 21, 1999 and April 21, 1999 to shareholders of record on January 4, 1999 and April 1, 1999. Item 6. Selected Financial Data The information under the caption Selected Financial Data on page 7 of The Andersons, Inc. 1998 Annual Report to Shareholders is incorporated herein by reference. Item 7. Management's Discussion & 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. 1998 Annual Report to Shareholders is incorporated herein by reference. Item 7a. Quantitative and Qualitative Disclosures about Market Risk The information under the captions Market Risk Sensitive Instruments and Positions, Commodities and Interest appearing on page 15 of The Andersons, Inc. 1998 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 and Market for Common Stock on page 7 of The Andersons, Inc. 1998 Annual Report to Shareholders, as well as the following consolidated financial statements of The Andersons, Inc. set forth on pages 9 through 12 and 17 through 28 of The Andersons, Inc. 1998 Annual Report to Shareholders are incorporated herein by reference: * Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 * Consolidated Balance Sheets as of December 31, 1998 and 1997 * Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 * Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996 * 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, 1998 and 1997, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, 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 25, 1999 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 April 22, 1999 (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. 1998 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, 1998, 1997 and 1996 17 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 Seventeenth Supplemental Indenture dated as of August 14, 1997, between The Andersons, Inc. and The Fifth Third Bank, successor Trustee to an Indenture between The Andersons and Ohio Citizens Bank, dated as of October 1, 1985. 10.1 Management Performance Program. * (Incorporated by reference to Exhibit 10(a) to the Predecessor Partnership's Form 10-K dated December 31, 1990, File No. 2-55070). 10.2 The Andersons, Inc. Amended Long-Term Performance Compensation Plan * (Incorporated by reference to Appendix A to the Proxy Statement for the May 22, 1997 Annual Meeting). 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. 1998 Annual Report to Shareholders 21 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: A report on Form 8-K was filed with the Securities and Exchange Commission on December 31, 1998. It contained a December 18, 1998 press release announcing the naming of Michael J. Anderson as President and Chief Executive Officer and Richard P. Anderson as Chairman of the Board. (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 16th day of March, 1999. THE ANDERSONS, INC. (Registrant) By /s/Michael J. Anderson Michael J. Anderson President 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 16th day of March, 1999. Signature Title Date /s/Michael J. Anderson President March 16, 1999 Michael J. Anderson Chief Executive Officer (Principal Executive Officer) /s/Richard R. George Vice President and Controller March 16, 1999 Richard R. George (Principal Accounting Officer) /s/Gary L. Smith Vice President, Finance March 16, 1999 Gary L. Smith and Treasurer (Principal Financial Officer) /s/Richard P. Anderson Chairman of the Board March 16, 1999 Richard P. Anderson Director Donald E. Anderson /s/Richard M. Anderson Director March 16, 1999 Richard M. Anderson /s/Thomas H. Anderson Director March 16, 1999 Thomas H. Anderson /s/John F. Barrett Director March 16, 1999 John F. Barrett /s/Paul M. Kraus Director March 16, 1999 Paul M. Kraus Director Donald L. Mennel Director David L. Nichols /s/Sidney A. Ribeau Director March 16, 1999 Dr. Sidney A. Ribeau /s/Charles A. Sullivan Director March 16, 1999 Charles A. Sullivan Director Jacqueline F. Woods Except for those portions of The Andersons, Inc. 1998 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, 1998 $2,957,000 $2,913,962 $ 235,500(2) $ 1,651,462(1) $ 4,455,000 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 Allowance for doubtful notes receivable: Year ended December 31, 1998 $ 777,000 $ 530,923 $ - $ 792,923(1) $ 515,000 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 (1) Uncollectible accounts written off, net of recoveries (2) Allowance for doubtful accounts acquired in acquisition of business
EXHIBIT INDEX THE ANDERSONS, INC. Exhibit Number 4.4 The Seventeenth Supplemental Indenture dated August 14, 1997, between The Andersons, Inc. and The Fifth Third Bank 13 The Andersons, Inc. 1998 Annual Report to Shareholders 21 Subsidiaries of The Andersons, Inc. 23.1 Consent of Independent Auditors EX-13 2 The Andersons 1998 Annual Report Corporate Profile The Andersons, Inc. (Nasdaq: ANDE) is a diversified Agribusiness and Retailing Company with annual revenues of $1.1 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. For more in-depth information about the Company visit our website at www.andersonsinc.com [Bar Graph] Diluted Earnings Per Share 1996 $.76 1997 $.50 1998 $1.20 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 13-16 Notes to Consolidated Financial Statements 17-28 Officers & Directors Data Inside Back 1998 Accomplishments * Shareholders enjoyed total return of over 32% * Second best total year performance on record * 1st, 2nd and 3rd quarters show successive year-to-year increases * Railcar business unit continues to enjoy significant growth in revenue and earnings * Increased Railcar lease fleet 36% to over 3,800 railcars * Lawn fertilizer unit selling to several of the nation's largest lawn and garden retailers * Leased two grain elevators from & created marketing alliance with Cargill * Ended 1998 with higher levels of grain inventory 59 MM bushels vs 1997's 52 MM * Creating joint venture with Pottstown, PA's IRM to produce lawn fertilizer & ice melter * Leased or purchased 5 Retail Farm Centers in Fostoria, Fremont, Gibsonburg & Pulaski, OH & Waterloo, IN * Opened a new wholesale fertilizer distribution plant in Lordstown, OH * Retail Group substantially improved in-stock positions (96%) * Retail's focus is the "Complete Home Store" - everything you need for your home including a complete line of domestics * Cash dividend increased 25% in 1st quarter 1999 * Made significant progress on our your 2000 compliance plans * Effected strategies to lower the Company's effective tax rate * Mike Anderson named CEO January 1, 1999 * Jacqueline Woods elected to board of directors February 1999 Financial Highlights (in thousands, except for per share & performance data) 1998 1997 % Change Operations Grain sales & revenues $ 630,507 $566,373 11.3% Fertilizer, retail & other sales 468,215 427,373 9.6% Other income 5,412 5,099 6.1% Total sales & revenues $1,104,134 $998,845 10.5% Gross profit - grain 40,748 33,787 20.6% Gross profit - fertilizer, retail & other 125,893 113,901 10.5% Total gross profit $166,641 $147,688 12.8% Income before income taxes & asset impairment 13,006 7,376 76.3% Asset impairment -- 1,121 -100.0% Net income 9,752 4,074 139.4% Effective tax rate 25.0% 34.9% -28.4% Per Share Data Net income - basic $1.21 $0.50 142.0% Net income - diluted 1.20 0.50 140.0% Dividends per share 0.16 0.12 33.3% Year end market value 11.56 8.88 30.3% Performance Pretax return on beginning equity* 18.0% 10.1% Net income return on beginning equity** 13.5% 5.6% Long-term debt to equity ratio*** 0.9-to-1 0.95-to-1 Weighted average shares outstanding - basic 8,059,000 8,160,000 Number of employees 3,035 2,962 *Before asset impairment charge in 1997 **After asset impairment charge in 1997 ***Including pension & postretirement benefits [Pie Charts] '98 Beginning Allocated Capital '98 Revenues Total $146.8 million Total $1.1 billion Agriculture $70.5 71.6% Retail $43.1 15.4% Processing 6.7% Manufacturing 4.8% Other 1.4% Processing & Manufacturing $32.9 12.9% Other $0.3 0.1% [Bar Graph] '98 Operating Income Total $13 million Processing & Manufacturing $7,420 Agriculture $6,676 Retail $1,655 Corporate Expense ($2,745) Letter To Our Shareholders 1998 was a very exciting and busy year for The Andersons. Our 1998 operating income was the second best in the 51-year history of the company. Both net income and earnings per share more than doubled and we acquired or expanded capacity to help us grow and secure the future. Our shareholders enjoyed a 32% total return on their beginning market value. We recently announced an increase in our cash dividend for the third consecutive year. Our business is well diversified, allowing us to work through the ups and downs of the natural business cycles and conditions in our three strategic business units. We are dedicated to these businesses and our determination to add value for our customers will allow us to better serve all our stakeholders. Net income and revenue were both up in 1998. Business conditions in the Agriculture (AG) and Processing & Manufacturing Groups (PMG) were very good, while conditions in our Retail Group continued to be challenging. PMG, for the third year running, turned in the highest operating income of our three strategic business units. PMG's Lawn and Railcar profit centers exceeded their targets for the third consecutive year. Total revenues for 1998 increased 11% from 1997 to $1.1 billion. All three operating groups reported increases, with PMG showing the most significant revenue percentage increase of 38%. Pretax income was up $6.8 million, or 108% over 1997 (including the effects of a one-time non-cash asset impairment charge recorded in 1997), resulting in a pretax return on beginning equity of 18% compared with our goal of 25%. 1998's net income was up 139% to $9.8 million vs. 1997's net income of $4.1 million. Diluted earnings per share was $1.20 vs. 1997's 59 cents before the effects of a one-time non-cash asset impairment charge. Starting in the second quarter of 1997 and continuing through the third quarter of 1998, we recorded six consecutive year-over-year increases in quarterly earnings per share. Last year's fourth quarter was very good at 63 cents per share but shy of 1997's exceptional fourth quarter results of 68 cents per share. Part of this improvement was the continued strength in our Railcar and Lawn fertilizer businesses and the much-improved crop conditions throughout our market area. However, a great deal of the credit is due to our 3,000 industries and devoted employees, who pulled together to make 1998 a financial success. Our balance sheet has never been stronger. We ended 1998 with $66 million in working capital and book equity of more than $82 million. Long-term debt and employee benefit liabilities increased slightly to $75 million. As a result, we ended the year with a .9 to 1 long-term debt-to-equity ratio (just short of our .8 to 1 goal). We used $16 million (cash or stock) to fund capital projects, acquisitions and to purchase software. In addition, we continued our share repurchase efforts. One objective for listing our shares on Nasdaq in 1996 was to use our shares as a currency for acquisitions and mergers. In 1998 we acquired the Crop & Soil Service's three Retail Farm Centers through an exchange of shares. In the future, we intend to use our shares to acquire other business entities if the right opportunity is offered and the owner's interests are compatible. We like to have former owners hold an equity stake in the newly merged entity, as it indicates their confidence in the long-term future of The Andersons. Shareholders were paid a dividend of 4 cents per quarter during the year. We increased the dividend 25% to 5 cents a share during the first quarter of 1999. Approximately 20% of our full-time workforce participated in our Employee Share Purchase Plan in 1998. And, last year we began offering shares of The Andersons as an investment alternative in our employees' 401(k) plan. The Processing & Manufacturing Group (PMG) showed the third consecutive year of record profits, as well as a healthy 38% improvement in total sales. The Manufacturing 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 by 36% to over 3,800 cars. Our year-end railcar inventory is larger than the previous year. However, many of these cars are being refurbished for delivery to new lessees in 1999. We are building a high-quality railcar lease portfolio that should generate sustainable income for many years to come. Key dimensions of our portfolio strategy include a healthy diversity of car types and customers, creditworthy lessees, staggered lease termination dates, and a high proportion of match-funded assets and liabilities. In addition, many of these lease transactions are funded non-recourse to The Andersons. We expect the railcar business unit to maintain its solid rate of profitable growth in 1999. The Processing Division recorded a 21% revenue increase and a 303% increase in operating income in 1998. In order to meet the increased demand, our Lawn Products business unit is adding capacity in the Northeast with the announced formation of a joint venture in Pottstown, PA, with International Raw Materials. We are also looking for additional manufacturing capacity in the Southeast to improve service to our growing customer base. As reported last year, we added a major national account to our list of lawn products customers, which now includes five of the top six lawn and garden retailers in America. Our professional lawn product line, sold under the Tee Time TM label, continues to be one of the top five golf course fertilizer brands in America, with approximately 10% of total market share. The lawn and garden fertilizer industry is consolidating at both the manufacturing and marketing levels. We see ourselves as a long-term player in this industry. Our future efforts will be to build stronger relationships with our marketing and manufacturing partners, to expand our geographical manufacturing and logistical position, to refine our category management and internal product development expertise, and to build new customer relationships that effectively leverage our infrastructure and capabilities. The Processing Division's corncob products unit continues to focus on value- added opportunities in the chemical carrier/formulation area, and pet litter area, and on the development and manufacturing of a proprietary pet litter product. Primary efforts to date have centered on product development. In 1999, we will concentrate on market assessment, and refinement of manufacturing and quality assurance processes to support future sales. We will continue to build in-house developmental capability. The Agriculture Group achieved a substantial improvement over 1997. Revenue was up 9% and operating income totaled $6.7 million, 190% more than the $2.3 million reported in 1997. The U. S. grain harvest in 1998 was excellent. Soybean production was a record, corn production was the second best in history and wheat production, while not a record, was excellent. Wholesale Fertilizer's (WF) operating income increased 31% to $2.4 million while the Retail Farm Centers (RFC) had a disappointing operating loss in 1998. We have made significant management changes in RFC to gain better gross margin insight and return the unit to profitability. Our core grain business carried normal to higher-than-normal inventories during most of the year. We entered 1998 with 52 million bushels of grain vs. 27 million at the beginning of 1997. At the end of 1998, we held 59 million bushels of grain, which will have a positive impact on 1999's income. Our grain capacity increased 16% (to 80 million bushels) when we leased two neighboring elevators from Cargill in June. The lease agreement gives us access to Cargill's global grain-marketing network - a network that is respected worldwide. The WF and RFC divisions added capacity in 1998. A new wholesale fertilizer plant in Lordstown, Ohio, was opened in April. We purchased or leased five retail farm centers in our Northern Ohio and Indiana marketing regions. We believe worldwide demand for agriculture products will continue to grow, driven principally by population, higher standards of living, a desire for improved diets and a long term trend toward an improving worldwide economy. The weak Asian and Brazilian financial markets are a continued concern for U.S. grain exporters. Currently, supplies of grain exceed demand. This is pushing agricultural-commodity prices lower, which unfortunately takes a toll on farm income. However, over the long haul we remain optimistic. The United States has decoupled grain price supports from farm production decisions. Farmers are free to grow the crops that provide them with the highest returns. We expect a high percentage of tillable acres to be in production in 1999. There will be shifts from corn to soybeans as farmers seek the most profitable production mix. We stand ready to provide and serve the industry with farm inputs and custom application, 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 will continue to watch the industry consolidation closely to determine our best position for the future. The Retail Group rolled out "The Complete Home Store" marketing plan in 1998. Over the last two years, we have put together a mix of goods that offers the homeowner "more for your home than any other store." The vast majority of our construction, renovation, resets, and new signage programs were in place during 1998. The new drive-through customer loading facilities, "we load it" programs, additional customer entrances, and added checkout facilities are very popular with our customers. We also focused on our in-stock/on-shelf position to make the stores more customer friendly. We are proud to report an overall 96% in-stock, on-shelf inventory position. Margins held up nicely in 1998. Retail's operating income was up substantially over 1997. However, we still need to improve both the top and bottom lines to achieve our earnings targets before we begin to expand this important group. In 1999, we are concentrating on our sales processes; using system-wide marketing intelligence to respond to customer demands quickly. We plan to redesign and reset the paint/wall-coverings department with new and better private- label products. Indoor lawn and garden will also be redesigned with a better product mix and improved merchandise display. These improvements will clearly improve the shop-ability of the departments. We believe there is opportunity to improve the margin per square foot in the building supplies and sporting goods/toy area as well. In addition, we will be installing state-of- the-art SASI TM point-of-sale systems throughout the Retail Group. On the administrative front, we are making excellent progress on several important issues. We are in the testing phase of our year 2000 compliance (Y2K) initiatives with most of the necessary software modifications completed by January 1999. We believe we have adequate time to make additional Y2K modifications if necessary. Secondly, our effective tax rate improved significantly in 1998. This was a result of several initiatives started a few years ago that have begun to produce results. This year we are recognizing additional tax savings from multiple years, as we were able to favorably re- determine the tax impact of these initiatives. For our shareholders, we plan to introduce a dividend reinvestment plan (DRIP) for The Andersons' common shares in 1999. DRIPs are a convenient way for shareholders to reinvest their dividends as well as invest new monies. The net result should benefit all investors as it has the potential of increasing demand and liquidity. 1998 was an excellent year at The Andersons, especially when compared with the two difficult years we faced in 1997 and 1996. Based on the strong fundamentals in our industries, we expect 1999 to be even better than 1998. Last year at our annual management meeting, where we share our ideas and strategies and gain insight from our front-line management people, we set a $14-$17-$20 million pretax income goal for 1998, 1999, and 2000, respectively. We were just short of meeting the pretax income goal in 1998; however, through lower tax rates, we were able to successfully meet our net income goal. We believe these goals are well within our grasp in 1999 and 2000. We are confident our diversification strategy will lessen the normal seasonal and cyclical earnings trends in our various industries. Over the past few years we have invested more capital in business units that potentially provide consistent and sustainable earnings with the aim of taking some of the seasonal bumps out of our earnings. We are greeting the new millennium with an orderly and set management succession plan. Dick will remain Chairman of the Board and Mike accepted the Chief Executive Officer position effective January 1, 1999. This transition has been in process for several years so it comes as no surprise to our customers and employees. Dick has 51 years of experience at The Andersons; a life-long passion of service to customers, employees, shareholders, and our communities. We appreciate his guidance and counsel and wish him well as he spends more time on his many avocations. More than 3,000 dedicated employees are the primary source of our Company's success and creativity. We applaud their efforts, thank them for their service, and we know we can count on them to meet the challenges of the future. The 21st century will include ups and downs, just as the 20th century has. We are confident that, over the long term, The Andersons will continue to provide its customers, shareholders and employees with real value and growth through excellent products, great service, and fair prices. We thank you for your confidence and look forward to serving you in the future! Sincerely, /s/Mike /s/Dick Michael J. Anderson Richard P. Anderson President & Chief Executive Officer Chairman Agriculture Group The Agriculture Group operates grain elevators and wholesale fertilizer distribution facilities in the four eastern corn belt states of Ohio, Michigan, Indiana and Illinois. Its elevators purchase large quantities of grain and oilseeds (primarily corn, soybeans and wheat) from farms and country elevators in the region, store and condition it, then market it via rail or ship to domestic and export processors. Its wholesale fertilizer facilities store and market large volumes of dry and liquid agricultural fertilizers to dealers in the four-state region. The group also operates retail farm centers in Ohio, Michigan and Indiana, which sell fertilizer, crop protection chemicals, seed and field application services to farmers. The group's total revenue increased by $68 million in 1998, primarily because of improved grain volume, but also due to growth from additional retail farm centers. Total operating income rebounded in 1998, following three years of decline. The $6.7 million earned for the year was almost triple the amount generated in 1997, even after start-up costs incurred in the acquisition of several additional retail farm centers. Following successive poor grain harvests in 1995 and 1996, we have now experienced two good growing seasons and excellent yields in most of our region. This has resulted in improved demand for grain storage and enhanced our ability to earn a return on our elevators. As a result, our 1998 operating income from grain exceeded the past three-year total. During the year, we leased two Toledo-area elevators from Cargill, increasing our total storage capacity to 80 million bushels and providing access to their worldwide grain marketing system. Wholesale fertilizer tonnage and revenues were relatively flat for the year. With grain prices remaining fairly low, the farm community has been cautious about making early commitments for crop production inputs. Operating income in 1998 grew slightly, however. During the year, we opened a new distribution facility in Lordstown, Ohio, acquired another, in Waterloo, Indiana, and invested in innovative environmental technology. This year, we acquired five additional retail farm centers - four in northwest Ohio and one in northeast Indiana. In total, application acreage and revenues in this unit increased by approximately 20%. Operating income was heavily impacted by costs associated with the acquisitions, however. As a result, this unit incurred a loss for the year. [Bar Graphs] ($ Millions) 1994 1995 1996 1997 1998 Sales & Revenue Grain $552 $660 $701 $567 $632 Wholesale Fertilizer 138 143 139 131 128 Retail Farm Centers 21 28 29 30 36 Total $711 $831 $869 $728 $796 Operating Income $12.3 $6.0 $3.7 $2.3 $6.7 Unit Volume 1994 1995 1996 1997 1998 Grain bushels received (millions) 144 162 126 145 157 Grain bushels shipped (millions) 152 168 136 124 192 Wh. Fertilizer tons sold (thousands) 977 879 908 845 850 RFC Application Acres (thousands) 196 241 273 319 383 Processing & Manufacturing Group The Processing Division produces granular lawn car products for retailers, professional lawn care operators and golf courses. It also produces ice melt products, corncob-based chemical and feed ingredient carriers, animal bedding and litter products. Our primary lawn products manufacturing facilities are located in Maumee and Bowling Green, Ohio. During 1998, we announced the addition of capacity in eastern Pennsylvania and we are now evaluating possible production opportunities in the south to better service our growing customer base in this rapidly consolidating industry. The focus in our cob business continues to be the steady shift to higher value-added product applications including a proprietary cat litter. Driven by volume increases in lawn products and average margin growth in cob products, division revenue and operating income both rebounded in 1998 after declining somewhat the previous year. The capacity expansion projects and product development efforts we have outlined reflect our confidence in continued profitable growth in this business. The Manufacturing Division repairs, reconfigures, sells and leases various types of railcars. It also operates a custom steel fabrication business. In the past year, we added 1000 cars to our fleet, a 36% increase, and now control in excess of 3800 railcars. Our intent is to continue to profitably build our fleet, diversifying it in terms of our car types, industries and customer types; to monitor credit quality diligently, and to match fund assets and liabilities as much as possible to effectively manage risk. PMG has grown dramatically in the past few years. In 1998, revenues and operating income increased by 38% and 54% respectively. Clearly, the Company's primary initiatives to achieve profitable growth are focused on these two businesses - Processing and Manufacturing. Also indicated on the graphs are some "Other" businesses. This category includes our ten Tireman Auto Centers, a lawnmower and power equipment sales and service center and the Company's real estate activity. Both Tireman and the Mower Center achieved modest gains in 1998, but sales from our declining portfolio of excess real estate were lower than the previous year. [Bar Graphs] ($ Millions) 1994 1995 1996 1997 1998 Sales Mix Processing $63.3 $66.5 $75.4 $62.5 $75.3 Manufacturing $14.5 $21.6 $22.4 $26.4 $54.3 Ventures & Other $17.3 $17.7 $15.9 $16.5 $15.4 Total $95.1 $105.8 $113.7 $105.4 $145.0 Operating Income Processing $1.6 $0.0 $2.9 $0.7 $2.8 Manufacturing $1.9 $1.7 $2.3 $3.3 $4.4 Ventures & Other ($0.3) $2.0 ($0.3) $0.8 $0.2 Total $3.2 $3.7 $4.8 $4.8 $7.4 Retail Group The Retail Group operates six large stores in Ohio. Three are located in the Toledo area, two in Columbus and one in Lima. Four are stand-alone facilities, each of which has in-store selling space of 130,000 square feet or more. Two mall-based units are slightly smaller. Our retail concept is "The Complete Home Store" with "more for your home than any other store." The product offering includes a broad array of traditional home center merchandise - building supplies, plumbing, electrical, flooring, paint and lighting products - - but, in addition, features lawn and garden products, extensive lines of housewares and domestics, pet supplies, automotive supplies, sporting goods and a very unique offering of specialty foods and wine. Total sales for the group rose very modestly in 1998, up 0.3% from 1997. Average gross margins were higher than year-earlier levels, led by volume increases in higher-margin product lines. Thus, total gross profit was up. In addition, expenses were held relatively flat for the year. As a result, the group's operating income rebounded somewhat from the disappointing results of the prior year. It goes without saying that retailing is an extremely competitive industry. Nevertheless, we're encouraged by the progress we made in 1998. Throughout the year, we devoted a lot of time and attention to many of the basics of retailing such as in-stock percentages, fill-rate measurement, in-store signage and appearance. All of these efforts were designed to make our stores easier for the consumer to shop. Our drive-through merchandise pickup facilities and "We Load It" programs are additional examples of this emphasis. These programs are being well received by our customers. Sales increases late in the year were encouraging. The Christmas season was very good, and total fourth quarter sales were up 2.7%. Performance in the early weeks of 1999 has been even stronger. In 1999, we will be installing new point-of-sale equipment which, in addition to being Y2K compliant, will improve customer service and operating efficiency. While our retail business is a concept our customers like, generates a profit and is a positive cash contributor, it is not yet where it needs to be. Future growth in retail will depend on continued operating improvement and a higher return on invested capital. In the meantime, because of the emphasis on funding growth in our more profitable businesses, retail is becoming proportionally a smaller segment of our overall business portfolio. [Bar Graphs] ($ Millions) 1994 1995 1996 1997 1998 Sales Volume $169 $168 $176 $170 $171 Operating Income $2.3 $1.8 $3.8 $0.5 $1.7 1997 results before asset impairment charge. Selected Financial Data 1998 1997 1996 1995 1994 (in thousands, except for per share data) Operating Results Total sales & revenues $1,104,134 $998,845 $1,154,956 $1,097,730 $971,638 Income from continuing operations (a) 9,752 4,074(d) 6,406(e) 6,273 9,285 Per share data: Income from continuing operations(b) 1.21 0.50 0.76 0.74 1.10 Dividends paid (c) 0.16 0.12 -- -- -- Balance Sheet Data Total assets $360,823 $368,244 $346,591 $455,518 $344,809 Working capital 65,898 53,595 61,649 58,897 57,623 Long-term debt 71,565 65,709 68,568 74,139 71,217 Shareholders' equity (c) 82,734 72,201 73,249 67,260 64,870 (a) Includes pro forma income taxes of $3,915 thousand and $5,886 thousand for 1995 and 1994, respectively. (b) Amounts are net of pro forma income taxes of $0.47 and $0.70 for 1995 and 1994, respectively. Amounts for 1995 and 1994 were calculated using the actual number of shares outstanding on the date of the merger. See note 1 to the Consolidated Financial Statements. (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 ($0.7 million after tax). (e) Income taxes for 1996 include a charge of $0.8 million to establish deferred income taxes on assets and liabilities of the partnership at the time of the merger. Selected Quarterly Financial Data and Market for Common Stock (in thousands, except for per share data) Net Income (Loss) Common Net Gross Per Share Stock Quote Dividends Quarter Ended Sales Profit Amount - Basic High Low Declared 1998 March 31 $222,189 $33,860 $ (824) $(0.10) $9.25 $8.25 $0.04 June 30 283,839 48,762 6,370 0.80 11.00 8.94 0.04 September 30 230,792 36,917 (972) (0.12) 11.25 10.19 0.04 December 31 367,314 47,102 5,178 0.64 11.56 9.75 0.05 Year 1,104,134 166,641 9,752 1.21 0.17 1997 March 31 186,765 27,317 (4,082) (0.49) 9.63 8.63 0.03 June 30 250,109 42,884 4,259 0.52 9.50 8.63 0.03 September 161,929 30,797 (1,529) (0.19) 9.50 8.13 0.03 December 399,961 46,690 5,426 0.68 9.50 8.75 0.04 Year 998,845 147,688 4,074 0.50 0.13 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, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform 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, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/Ernst & Young LLP Toledo, Ohio January 25, 1999 The Andersons, Inc. Consolidated Statements of Income Year ended December 31 (in thousands, except per 1998 1997 1996 share data) Sales and merchandising revenues $ 1,098,722 $ 993,746 $ 1,150,304 Other income 5,412 5,099 4,652 1,104,134 998,845 1,154,956 Cost of sales and merchandising revenues 937,493 851,157 995,725 Gross profit 166,641 147,688 159,231 Operating, administrative and general expenses 144,681 131,818 133,637 Asset impairment charge -- 1,121 -- Interest expense 8,954 8,494 13,703 153,635 141,433 147,340 Income before income taxes 13,006 6,255 11,891 Income taxes 3,254 2,181 5,485 Net income $ 9,752 $ 4,074 $ 6,406 Per common share Basic earnings $ 1.21 $ .50 $ .76 Diluted earnings $ 1.20 $ .50 $ .76 Dividends paid $ .16 $ .12 $ -- The Notes to Consolidated Financial Statements on pages 17-28 are an integral part of this statement. The Andersons, Inc. Consolidated Balance Sheets December 31 (in thousands) 1998 1997 Assets Current assets: Cash and cash equivalents $ 3,253 $ 8,278 Accounts and notes receivable: Trade receivables, less allowance for doubtful accounts of $4,455 in 1998; $2,957 in 1997 62,647 68,643 Margin deposits 248 771 62,895 69,414 Inventories 184,990 191,467 Deferred income taxes 4,634 1,408 Prepaid expenses 5,502 4,521 Total current assets 261,274 275,088 Other assets: Notes receivable and other assets, less allowance for doubtful notes receivable of $515 in 1998; $777 in 1997 8,435 6,333 Investments in and advances to affiliates 1,057 1,026 9,492 7,359 Property, plant and equipment, net 90,057 85,797 $360,823 $368,244 Liabilities and shareholders' equity Current liabilities: Notes payable $ 7,700 $ 15,572 Accounts payable for grain 88,978 121,233 Other accounts payable 75,301 63,309 Accrued expenses 17,079 12,973 Current maturities of long-term debt 6,318 8,406 Total current liabilities 195,376 221,493 Pension and postretirement benefits 3,113 2,799 Long-term debt, less current maturities 71,565 65,709 Deferred income taxes 7,330 5,393 Minority interest 705 649 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 67,180 66,660 Treasury shares (290 and 491 in 1998 and (2,665) (4,418) 1997, respectively) Accumulated other comprehensive income (29) -- Unearned compensation (83) -- Retained earnings 18,247 9,875 82,734 72,201 $360,823 $368,244 The Notes to Consolidated Financial Statements on pages 17- 28 are an integral part of this statement. The Andersons, Inc. Consolidated Statements of Cash Flows Year ended December 31 (in thousands) 1998 1997 1996 Operating activities Net income $ 9,752 $ 4,074 $ 6,406 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 10,575 10,065 9,730 Provision for losses on accounts and notes receivable 3,757 1,767 4,322 Asset impairment charge -- 1,121 -- Gain on sale of property, plant and equipment (116) (529) (182) Deferred income taxes (1,696) 478 2,766 Other 98 36 (491) Changes in operating assets and liabilities: Trade accounts receivable 4,953 2,839 10,772 Inventories 6,810 (41,170) 119,633 Prepaid expenses and other assets (849) (1,242) (1,875) Accounts payable for grain (32,254) 24,301 2,848 Other accounts payable and accrued expenses 14,381 (16,737) 5,335 Net cash provided by (used in) operating activities 15,411 (14,997) 159,264 Investing activities Purchases of property, plant and equipment (11,218) (15,427) (9,955) Proceeds from sale of property, plant and equipment 347 1,221 720 Sales and maturities of investments -- -- 366 Advances to affiliates -- -- (29) Net cash used in investing activities (10,871) (14,206) (8,898) Financing activities Net increase (decrease) in short-term borrowings (11,940) 15,572 (120,267) Proceeds from issuance of long-term debt 110,157 150,982 140,780 Payments of long-term debt (106,389) (151,795) (147,743) Proceeds from sale of treasury shares to employees 440 423 -- Dividends paid (1,291) (985) -- Purchase of common shares for the treasury (542) (4,240) (600) Payments to partners and shareholders -- -- (64) Net cash provided by (used in) financing activities (9,565) 9,957 (127,894) Increase (decrease) in cash and cash equivalents (5,025) (19,246) 22,472 Cash and cash equivalents at beginning of year 8,278 27,524 5,052 Cash and cash equivalents at end of year $ 3,253 $ 8,278 $ 27,524 The Notes to Consolidated Financial Statements on pages 17- 28 are an integral part of this statement.
The Andersons, Inc. Consolidated Statements of Shareholders' Equity Accumulated Converted Additional Other Equity Common Paid-in Treasury Comprehensive Unearned Retained (in thousands) (See Note 1) Shares Capital Shares Income Compensation Earnings Total Balances at January 1, 1996 $ 66,532 $ -- $ -- $ -- $ -- $ -- $ 728 $67,260 Merger transaction: Issuance of 8,399 shares to convert equity (66,468) 84 66,384 -- Payments to dissenting partners and for fractional shares (64) (64) Issuance of 31 shares to convert employee bonds 275 275 Balances at January 2, 1996 -- 84 66,659 -- -- -- 728 67,471 Net and comprehensive income 6,406 6,406 Purchase of 70 shares for treasury (600) (600) Other (28) (28) Balances at December 31, 1996 -- 84 66,659 (600) -- -- 7,106 73,249 Net and comprehensive income 4,074 4,074 Sale of 49 shares to Employee Share Purchase Plan participants 1 422 423 Purchase of 470 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 Net income 9,752 9,752 Other comprehensive income Minimum pension liability, net of $19 income taxes (29) (29) Comprehensive income 9,723 Sale of 47 shares to Employee Share Purchase Plan participants 3 410 413 Exercise of share options (1) 27 26 Restricted stock issued net of forfeitures 13 90 (103) -- Amortization of unearned compensation 20 20 Issuance of 193 shares in an acquisition 502 1,748 2,250 Issuance of common shares to directors in lieu of retainer 3 20 23 Purchase of 54 shares for treasury (542) (542) Dividends declared (1,380) (1,380) Balances at December 31, 1998 $ -- $ 84 $67,180 $(2,665) $ (29) $ (83) $ 18.247 $82,734 The Notes to Consolidated Financial Statements on pages 17-28 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 to external customers, intersegment sales, other income, interest expense, operating income, identifiable assets, capital expenditures and depreciation and amortization for each of the Company's business segments. The following discussion focuses on the operating results as shown in the consolidated statements of income. Comparison of 1998 with 1997 Sales and merchandising revenues for 1998 totaled $1.1 billion, an increase of $105 million, or 11%, from 1997. Sales in the Agriculture Segment were up $58.5 million, or 8%, due to a 55% volume increase in grain. This significant volume increase was offset by a decrease in the average price per bushel sold caused by lower market prices and a change in the mix of grain sold by the Company. Fertilizer sales were relatively constant from year to year as a decrease in average price per wholesale ton sold offset sales from additional locations. In addition, merchandising revenues were up $6.3 million, or 25%, due to increases in income from storing grain and fertilizer for others and fees for custom application. During 1998, the Company leased two grain elevators (increasing total grain storage capacity from 69 million to 80 million bushels), added a fertilizer distribution facility and leased or purchased four retail farm centers. Near the end of 1998, it completed the purchase of a combined fertilizer distribution / retail farm center facility. The Company had 59 million bushels of grain owned or stored for others at December 31, 1998 as compared to 52 million at December 31, 1997. These added bushels may provide for increased storage revenues in 1999. In addition, the lease agreement with Cargill provides added storage capacity and marketing opportunities in 1999 that were available for only a portion of 1998. The additional fertilizer sales and warehousing facilities should also provide opportunities for increased revenue in 1999. The Processing Segment had a $13 million, or 21%, increase in sales. The majority of this increase, or $10.8 million, was due to a 74% increase in lawn fertilizer volume sold into the consumer market. This volume increase more than offset a 13% reduction in the average price per consumer market ton sold. Sales were up $2.5 million in the other fertilizer market segments while the cob-based businesses had decreased sales and revenues of $.3 million. The Manufacturing Segment had a significant sales increase of $27.6 million, or 111%. Of this increase, $22.8 million was due to a 59% increase in railcars sold in 1998. The Segment's leasing and service business generated additional revenues of $4.3 million due to its steadily increasing railcar fleet. The remaining increase was due to additional revenue in the Manufacturing Segment's railcar repair shop. The Retail Segment experienced a slight increase in sales, with both the Toledo and Columbus, Ohio markets up. The Segment ended 1998 with a strong Christmas season including a 6% increase in December same-store sales. This sales increase carried into January due primarily to weather-related sales. Gross profit for 1998 totaled $166.6 million, an increase of $19 million, or 13%, from 1997. The Agriculture Segment had a gross profit increase of $9.9 million or 17% due to the $6.3 million increase in merchandising revenues described above and improved margins on sales of grain and fertilizer. Gross profit for the Processing Segment increased $3.9 million, or 17%, from the prior year. All operations of the Processing Segment experienced increased gross profit. In the lawn fertilizer businesses, the increase was due to increased volume, even though gross profit per ton decreased. The cob-based businesses are transitioning to higher margin, value-added products and had a gross profit increase of $.3 million in spite of decreased volumes. Gross profit in the Manufacturing Segment increased $3.8 million, or 50%, from the prior year. This was due primarily to higher railcar sales, greater volume of railcars repaired and higher gross profit per railcar repaired. Gross profit in the Retail Segment improved by $1 million, or 2%, from 1997. This was due primarily to a 2% increase in margins resulting from changes in the product mix, including the addition of home soft goods and similar products in the 1998 reset of the stores. Operating, administrative and general expenses for 1998 totaled $144.7 million, a $12.9 million, or 10%, increase from 1997. Full time employees increased over 10% from the prior year with the majority of the increase due to acquisitions or added capacity in the Agriculture Segment and growth in the Manufacturing Segment. Included in the total increase are additional labor and benefits charges of $5.5 million, maintenance charges of $2.5 million, an increase in the provision for bad debts of $2 million and an increase in depreciation and amortization of $.5 million. All of these increases reflect growth in the underlying businesses. Additional operating expenses relating specifically to the facilities added in 1998 were $3.5 million. In 1997, the Retail Segment 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 1998. Interest expense for 1998 was $9 million, a $.5 million, or 5%, increase from 1997. Average daily short-term borrowings increased 12% from 1997 while the average interest rate decreased slightly. Income before income taxes of $13 million increased $6.8 million, or 108%, from the 1997 pretax income of $6.3 million. Income tax expense was $3.3 million, a $1.1 million, or 49%, increase from 1997. The effective tax rate of 25% represents a significant decrease from the 1997 effective tax rate of 35%. This was due to refinements in the method used to calculate the benefit from the captive foreign sales corporation. Net income more than doubled to $9.8 million from $4.1 million. Basic and diluted earnings per share also more than doubled from the 1997 amounts. Comparison of 1997 with 1996 Sales and merchandising revenues for 1997 totaled $994 million, a decrease of $157 million, or 14%, from 1996. Sales in the Agriculture Segment were down $143.4 million, or 17%, due to a 9% volume decrease in grain coupled with an 11% decrease in the average price of a bushel sold. Most significant was the impact of 25 million fewer bushels of corn sold along with a drop in the average price of a corn bushel sold from over $4 in 1996 to less than $3 in 1997. This was offset by more sales of higher priced soybeans. Fertilizer sales for the same period also decreased $8.7 million on 5% fewer tons sold and a slight decrease in the average price of a ton sold. Offsetting the decrease in sales, merchandising revenues were up $1.4 million, or 6%, primarily due to improved income from storing and conditioning grain. Poor harvests in both 1995 and 1996 not only reduced the farmers' revenues and profitability, but also limited the Company's opportunities to sell and merchandise grain due to volume shortages and reduced the sales volume of fertilizer as farmers were forced to limit their applications. The Processing Segment had a $12.2 million, or 17%, decrease in sales. Of this decrease $9.4 million represented the 1996 sales of the Sorbents TM business which 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 Segment had increased sales of $3.9 million, or 19%. The majority of this increase resulted from additional railcar sales and increases in the leasing and service business. . The Retail Segment experienced a $6.1 million, or 3%, decrease in sales, with all markets down. This was due to increased competition and a slow Christmas selling season. Gross profit for 1997 totaled $147.7 million, a decrease of $11.5 million, or 7%, from 1996. The Agriculture Segment had a gross profit decrease of $7.8 million, or 12%, resulting primarily from the reduced sales of grain and lower margins on those sales due to decreasing market prices in 1997. Margins on fertilizer also decreased in 1997 when compared to 1996. As noted previously, merchandising revenues increased over the prior two years, which had low bushel volumes due to the weak harvests. Gross profit for the Processing Segment decreased $3.9 million, or 15%, from the prior year. When excluding the 1996 gross profit related to the businesses no longer operated (as described previously), the Processing Segment had a gross profit decrease of $1 million, or 4%. Gross profit for the Manufacturing Segment increased $1.8 million, or 31%, from the prior year due to the increases in railcar sales and the leasing and service business. Gross profit for the Retail Segment decreased 6%. This was due to both sales decreases and a 2% decrease in the average margin. Operating, administrative and general expenses for 1997 totaled $131.8 million, a $1.8 million, or 1%, 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 prior two years. In 1997, the Retail Segment 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. Interest expense for 1997 was $8.5 million, a $5.2 million, or 38%, decrease from 1996. Average daily short-term borrowings decreased 57% 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%, from the 1996 pretax income of $11.9 million. Income tax expenses was $2.2 million, a $3.3 million, or 60%, 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% to 34%. 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 Partnership. In addition, state and local taxes decreased in 1997. Net income decreased 36% to $4.1 million from $6.4 million. Earnings per share decreased 34% from $0.76 per share in 1996 to $0.50 per share in 1997. Liquidity and Capital Resources The Company's operations provided cash of $15.4 million in 1998, a change from 1997's operating use of cash of $15 million. Working capital at December 31, 1998 was $65.9 million, a significant improvement of $12.3 million or 23% from December 31, 1997 primarily due to a reduction in accounts payable for grain. 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, 1998 were $225 million. The Company had drawn $7.7 million on its short-term lines of credit at December 31, 1998, with $15.6 million drawn on its short-term lines at December 31, 1997. Typically, the Company's highest borrowing occurs in the spring due to seasonal inventory requirements in several of the Company's businesses, credit sales of fertilizer and a customary reduction in grain payables due to customer cash needs and market strategies. The Company utilizes interest rate contracts to manage a portion of its interest rate risk on both its long and short term debt and lease commitments. As of December 31, 1998, the Company had swaps with a total notional amount of $27.7 million that convert variable rates to fixed rates on long and short-term borrowings. The Company also held treasury locks with a total notional amount of $8.4 million to hedge the interest component of firm commitment railcar lease transactions that it will close in 1999. Cash dividends of $1.3 million were paid in 1998 ($.16 per share). The Company made income tax payments of $4 million in 1998. The Company also purchased 54,000 of its common shares on the open market at an average price of $10 per share. The Company issued approximately 62,000 shares to employees, directors and former employees under stock compensation plans. It also issued 193,000 shares to complete an acquisition. During 1998, the Company acquired property, plant, equipment and intangible assets (customer lists, goodwill, software) with a value of $15.7 million. To accomplish this, it paid cash, gave up working capital and common shares and assumed existing debt. Included in these assets are $1.9 million in retail store improvements, $.5 million in computer and communication equipment, $3.1 million in railcars and railcar improvements, $.7 million in additions and improvements to its processing facilities, $5.2 million in additional facilities, equipment and businesses in the Agriculture Segment and $.5 million in safety and environmental improvements. Approximately $20 million is budgeted for capital spending in 1999 including $4.3 million for additional facilities, $3.6 million to increase the railcar fleet and $1.6 million to replace the point-of-sale systems in the Company's retail stores. These expenditures are expected to be funded by cash generated from operations or additional debt. 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 require 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 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. Market Risk Sensitive Instruments and Positions The market risk inherent in the Company' market risk sensitive instruments and positions is the potential loss arising from adverse changes in commodity prices and interest rates as discussed below. Commodities The availability and price of agricultural commodities are subject to wide fluctuations due to unpredictable factors such as weather, plantings, government (domestic and foreign) farm programs and policies, changes in global demand created by population growth and higher standards of living, and global production of similar and competitive crops. To reduce price risk caused by market fluctuations, the Company follows a policy of hedging its inventories and related purchase and sale contracts. The instruments used are readily marketable exchange traded futures contracts that are designated as hedges. To a lesser degree, the Company uses exchange traded option contracts, also designated as hedges. The changes in market value of such contracts have a high correlation to the price changes of the hedged commodity. The Company's accounting policy for these hedges, as well as the underlying inventory positions, and purchase and sale contracts is to mark them to the market price daily and include gains and losses in the statement of income in sales and merchandising revenues. A sensitivity analysis has been prepared to estimate the Company's exposure to market risk of its commodity position. The Company's daily net commodity position consists of inventories, related purchase and sale contracts and exchange traded contracts. The fair value of such position is a summation of the fair values calculated for each commodity by valuing each net position at quoted futures market prices. Market risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in such prices. The result of this analysis, which may differ from actual results, is as follows: (in thousands) December 31, 1998 Net short position $1,961 Market risk 196 Interest The fair value of the Company's long-term debt is estimated using quoted market prices or discounted future cash flows based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Such fair value exceeded the long-term debt carrying value. In addition, the Company has off-balance sheet interest rate contracts established as hedges. The fair value of these contracts is estimated based on quoted market termination values. Market risk, which is estimated as the potential increase in fair value resulting from a hypothetical one- half percent decrease in interest rates, is summarized below: (in thousands) December 31, 1998 Fair value of long-term debt and interest rate contracts $78,521 Excess of fair value over carrying value 638 Market risk 403 Impact of Year 2000 The Company plan to resolve the Year 2000 Issue involves four phases: assessment, remediation, testing and implementation. The Company has completed its assessment of all systems that could be significantly affected by the year 2000 and has developed remediation plans that include both modifications and replacements. These remediation plans have been prioritized based on the perceived risk of failure or error. The Company interfaces with third parties in some of its businesses and functional areas. These third party interfaces have been considered in the assessment and remediation plans and have been assigned a high priority for completion. The Company queried its significant suppliers and subcontractors that do not share information systems with the Company (its "external agents") and received responses from 76% of them. The Company plans to update this survey for new external agents added after the initial mailing and throughout 1999. To date, the Company is not aware of any external agent with a Year 2000 Issue that would materially impact the Company's results of operations, liquidity or capital resources. However, the Company has no means of ensuring that external agents will be Year 2000 ready. The inability of external agents to complete their Year 2000 resolution processes in a timely fashion could materially impact the Company. The effect of non-compliance by external agents is not determinable. Costs incurred to date have totaled approximately $1.4 million for the purchase of new software and $.8 million representing existing internal resources that were expensed as incurred. The remaining cost of remediation for the Company is estimated at $1.5 million, which includes $1.3 million for the purchase of software and hardware and $.2 million representing existing internal resources that will be expensed as incurred. Year 2000 modification plans and software installations are under way and are expected to be substantially complete by the end of the first quarter of 1999 for all significant high risk systems except for the following: System Modification Completion Date Wholesale fertilizer system replacement 2nd Quarter 1999 Retail farm center system replacement 2nd Quarter 1999 Retail point-of-sale system replacement 3rd Quarter 1999 Railcar marketing system 2nd Quarter 1999 Processing EDI systems 2nd Quarter 1999 Testing of remediated systems has begun as well and will be completed for the remaining systems upon completion of modifications. There have been no substantial changes to the plans as previously reported. The Company believes that with the planned modifications and conversions, the Year 2000 Issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not completed before the year 2000, there could be an impact on the operations of the Company. The Company is now in the process of developing contingency plans for its major systems applications and other high-risk systems. This process will both determine the need for a contingency plan based on the current status of remediation and testing as well as determine manual workarounds or other actions for these critical applications. 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" which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including but not limited to those identified below, which could cause actual results to differ materially from historical results or those anticipated. The words "believe," "expect," "anticipate" and similar expressions identify forward- looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The following factors could cause actual results to differ materially from historical results or those anticipated; weather, supply and demand of commodities including grains, fertilizer and other basic raw materials, market prices for grains and the potential for increased margin requirements, competition, economic conditions, risks associated with acquisitions, interest rates and income taxes. The Andersons, Inc. Notes to Consolidated Financial Statements December 31, 1998 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. 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. These consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. Certain previously reported amounts have been reclassified to conform to the 1998 presentation. On July 1, 1998, the Company issued 193 thousand of its common shares to effect an acquisition of a retail farm center operation. The acquisition was accounted for as a purchase, and the results of operations have been included in the statement of income from July 1, 1998. 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. 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 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. At December 31, 1998, the balance of deferred losses on settled treasury locks totaled $1.7 million. There was no corresponding amount at December 31, 1997. 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 economic useful lives of the individual assets principally by the straight-line method. Internal Use Software In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed for or Obtained for Internal Use" (SOP 98-1). The Company adopted SOP 98-1 as of the beginning of 1998. Certain costs incurred in the development of internal use software that were previously expensed are now being capitalized. The effect of this accounting change was not material to net income or earnings per share for 1998. 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-the-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 $2.9 million, $3.2 million and $3.1 million is included in operating, administrative and general expense in 1998, 1997 and 1996, respectively. Goodwill Goodwill, representing the excess of purchase cost over the fair value of net assets of acquired companies, is amortized over the estimated period of benefit (currently 12 years) by the straight-line method. At December 31, 1998, goodwill of $.7 million was included in notes receivable and other assets in the balance sheet. 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. (in thousands) 1998 1997 1996 Net income available for common shareholders $ 9,752 $ 4,074 $6,406 Weighted average shares outstanding - basic 8,059 8,160 8,425 Additional shares contingently issuable upon exercise of options 59 7 14 Weighted average shares outstanding - diluted 8,118 8,167 8,439 Comprehensive Income As of January 1, 1998, the Company adopted Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income." Statement No. 130 establishes new rules for the reporting and display of comprehensive income and its components. The adoption of this Statement had no impact on the Company's net income or shareholders' equity. Statement No. 130 requires the effect of changes in the minimum pension liability to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of Statement No. 130. New Accounting Standards In June 1997, the Financial Accounting Standards Board issued Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities", which is effective for fiscal years beginning after June 15, 1999. The impact that this statement will have on the Company has not been determined. 3. Inventories Major classes of inventories are as follows: December 31 (in thousands) 1998 1997 Grain $ 91,218 $113,838 Agricultural fertilizer and supplies 27,127 18,908 Agriculture 118,345 132,746 Processing 22,428 20,142 Manufacturing 16,039 8,754 Retail 25,863 27,674 Other 2,315 2,151 $ 184,990 $191,467 4. Property, Plant and Equipment The components of property, plant and equipment are as follows: December 31 (in thousands) 1998 1997 Land $ 12,095 $ 11,763 Land improvements and leasehold improvements 26,056 24,594 Buildings and storage facilities 88,818 85,377 Machinery and equipment 112,561 104,590 Construction in progress 3,059 2,109 242,589 228,433 Less allowances for depreciation and amortization 152,532 142,636 $ 90,057 $ 85,797 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 $225 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 1998 1997 1996 interest rate) Maximum borrowed $94,100 $110,500 $207,800 Average daily amount borrowed (total of daily borrowings divided by number of days in period) 57,134 51,237 119,187 Average interest rate (computed by dividing interest expense by average daily amount outstanding) 5.92% 5.98% 6.10% 7. Long-Term Debt Long-term debt consists of the following: December 31 (in thousands) 1998 1997 Note payable under revolving line of credit $25,500 $20,000 Note payable, 7.8%, payable $398 thousand quarterly, due 2004 11,712 13,304 Notes payable, variable rate (6.3% at December 31, 1998), payable $336 thousand quarterly, due 2002 7,737 9,082 Other notes payable 762 1,120 Industrial development revenue bonds: 6.5%, payable $1 million annually, due 1999 1,000 2,000 Variable rate (5.4% at December 31, 1998), payable $882 thousand annually through 2004 4,588 5,470 Variable rate (4.7% at December 31, 1998), due 2025 3,100 3,100 Debenture bonds, 6.5% to 8.7%, due 1999 through 2008 23,049 19,556 Other bonds, 4% to 10% 435 483 77,883 74,115 Less current maturities 6,318 8,406 $71,565 $65,709 The Company has a $40 million revolving line of credit with a bank which bears interest based on the LIBOR rate (effective rate of 6% at December 31, 1998). The revolving line of credit expires on July 1, 2001. The variable rate notes payable due 2002, the note payable due 2004, and the industrial development revenue bonds re 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, 1998. The aggregate annual maturities of long-term debt, including sinking fund requirements, are as follows: 1999--$6 million; 2000--$4 million; 2001--$32 million; 2002--$11 million and 2003--$9 million. Interest paid (including short-term lines of credit) amounted to $9 million in 1998 and 1997 and $15 million in 1996. 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, 1998, 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 May and July, 1999 and convert variable interest rates to a fixed rate of 6.22%. The Company entered into a long-term interest rate swap in December 1996 to convert its variable rate note payable to a fixed rate of 6.84%. 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 a long-term treasury lock with a total notional amount of $8.4 million. This instrument hedges the interest component on firm commitment lease transactions that are projected to close in 1999. The effect of long-term and short-term interest rate contracts on interest expense was not significant in 1998, 1997 and 1996. 8. Income Taxes Income tax expense (credit) consists of the following: Year ended December 31 (in thousands) 1998 1997 1996 Current: Federal $4,919 $1,728 $2,268 State and local 31 (25) 451 4,950 1,703 2,719 Deferred: Federal (1,415) 393 2,134 State and local (281) 85 632 (1,696) 478 2,766 Total: Federal 3,504 2,121 4,402 State and local (250) 60 1,083 $3,254 $2,181 $5,485 A reconciliation from the statutory U.S. federal tax rate of 35% to the effective tax rate is as follows: 1998 1997 1996 Statutory U.S. Federal tax rate 35.0% 35.0% 35.0% Increase (decrease) in rate resulting from: Effect of commissions paid to foreign sales corporation (10.3) (1.4) (0.4) State and local income taxes net of related federal taxes 0.4 0.6 4.4 Net basis differences of partnership -- -- 6.8 Other (net) (0.1) 0.7 0.3 Effective tax rate 25.0% 34.9% 46.1% In 1998, the Company refined its method for calculating commissions payable to its foreign sales corporation as provided under current regulations of the Internal Revenue Service. As a result of this refinement in calculation, the Company reduced its federal income tax liability for 1997 and 1996 by approximately $.5 million and $.3 million, respectively. These reductions are reflected in 1998 income taxes as an increased effect of commissions paid to its foreign sales corporation. Income taxes paid in 1998, 1997 and 1996 were $4 million, $4.1 million, and $.1 million. Significant components of the Company's deferred tax liabilities and assets are as follows: December 31 (in thousands) 1998 1997 Deferred tax liabilities: Tax depreciation in excess of book depreciation $(8,968) $(7,555) Prepaid employee benefits (2,122) (1,682) Deferred income (570) (692) Other (408) (463) (12,068) (10,392) Deferred tax assets: Employee benefits accrual 3,366 2,919 Deferred income 1,776 217 Allowance for doubtful accounts and notes receivable 1,636 1,138 Inventory reserve 1,337 1,086 Investments 495 857 Other 762 190 9,372 6,407 Net deferred tax liability $(2,696) $(3,985) 9. Stock Compensation Plans The Company has elected to account for its two stock compensation plans using the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related Interpretations because 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 stock options equaled the market price of the underlying stock on the date of grant, no compensation expense is recognized for either of its plans. The Long-Term Performance Compensation Plan (the "LT Plan") authorizes the Board of Directors to grant options and share awards 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 have a fixed term of five years and vest after one year. Options granted to management personnel under the LT Plan 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 and outside directors have elected to receive a portion of their cash compensation in stock options issued under the LT Plan. These options vest immediately and have a ten-year term. There were 57,958 and 50,756 options issued in lieu of cash compensation in 1998 and 1997, respectively. The Company issued 17,445 restricted shares during 1998 of which 9,923 remain outstanding at December 31, 1998. These shares carry voting and dividend rights; however, sale of the shares is restricted prior to vesting. Shares issued under the plan were recorded at their fair market value on the grant date with a corresponding charge to shareholders' equity representing the unearned portion of the award. The unearned portion is being amortized as compensation expense on a straight-line basis over the related vesting period. Compensation expense related to this plan amounted to $20 thousand during 1998. The Company's Employee Share Purchase Plan (the "ES Plan") allows employees to purchase common shares through payroll withholdings. It 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. 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 each option grant is estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions by year. 1998 1997 1996 Long Term Performance Compensation Plan Risk free interest rate 5.61% 6.22% 5.55% Dividend yield 1.79% 1.33% 1.30% Volatility factor of the expected market price of the Company's common shares .266 .272 .389 Expected life for the options (in years) 6.43 6.49 5.00 Employee Share Purchase Plan Risk free interest rate 5.46% 6.08% 5.07% Dividend yield 1.80% 1.35% 1.30% Volatility factor of the expected market price of the Company's common shares .266 .272 .389 Expected life for the options (in years) 1.00 1.00 1.00 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 per share information): 1998 1997 1996 Pro forma net income $9,348 $3,700 $6,154 Pro forma earnings per share: Basic $1.16 $.45 $.73 Diluted $1.15 $.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 1998 1997 1996 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at beginning of year 305 $8.85 137 $8.60 -- -- Granted / subscribed 202 8.93 170 9.05 137 $8.60 Exercised (3) 8.76 -- -- -- -- Expired/forfeited (5) 8.63 (2) 8.60 -- -- Outstanding at end of year 499 $8.89 305 $8.85 137 $8.60 1998 Options available for grant at end of year 386 Options price range at end of year $8.60 to $10.375 Weighted average remaining contractual life (in years) 4.30 Weighted average fair value of options granted during the year $2.80 Options exercisable at end of year 375 Weighted average exercise price of options exercisable at end of year $8.86 Employee Share Purchase Plan 1998 1997 1996 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at beginning of year 47 $8.875 49 $8.60 -- -- Granted / subscribed 38 8.875 52 8.875 59 $8.60 Exercised (47) 8.875 (49) 8.60 -- -- Expired (2) 8.875 (5) 8.875 (10) 8.60 Outstanding at end of year 36 $8.875 47 $8.875 49 $8.60 1998 Options available for grant at end of year 168 Options price range at end of year $8.875 Weighted average fair value of options granted during the year 1.06 Options exercisable at end of year 36 10. Leases and Related Commitments The Company leases certain equipment and real property under operating leases, including railcars. Many of the Company's leasing arrangements provide for renewals and purchase options, including a majority of the railcar leases. Rental expense and rental income under operating leases was as follows: (in thousands) 1998 1997 1996 Rental expense - railcars $8,883 $7,160 $6,683 Rental expense - other 4,522 4,819 5,251 Total rental expense $13,405 $11,979 $11,934 Rental income - railcars $11,198 $8,545 $7,844 Rental income - other 69 69 80 Total rental income $11,267 $8,614 $7,924 At December 31, 1998, the Company had commitments for railcar lease and sublease transactions that are scheduled to close in 1999. Future minimum rentals and sublease income that will result from these transactions have not been reflected in the following table, 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 Rental Minimum Income Rentals 1999 $ 8,193 $ 3,702 2000 5,951 2,191 2001 4,926 1,915 2002 4,149 1,661 2003 3,404 1,187 Future years 7,384 4,899 $34,007 $15,555 11. Pension and Other Postretirement Benefits In February, 1998, Statement of Financial Accounting Standard No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," was issued. Statement No. 132 revises employers' disclosures about pension and other postretirement benefit plans and is effective for 1998. The 1997 and 1996 pension and postretirement benefits disclosures have been restated to conform to the 1998 presentation. The Company provides retirement benefits for substantially all of its employees under several defined benefit and defined contribution pension plans. The Company's expense for its defined contribution plans amounted to $1.1 million, $1.1 million, and $1 million in 1998, 1997 and 1996, respectively. The Company also provides certain health insurance benefits to employees including retirees. The Company 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. Following are the details of the defined benefit pension (Pension Benefits) plans and postretirement benefit plan liability and funding status. Postretirement (in thousands) Pension Benefits Benefits 1998 1997 1998 1997 Change in benefit obligation Benefit obligation at beginning of year $16,440 $14,082 $10,294 $9,595 Service cost 1,679 1,536 298 302 Interest cost 1,169 1,000 613 711 Actuarial losses 2,832 827 2,555 219 Plan amendment -- -- (4,585) -- Participant contributions -- -- 15 14 Benefits paid (1,090) (1,006) (605) (547) Benefit obligation at end of year 21,030 16,439 8,585 10,294 Change in plan assets Fair value of plan assets at beginning of year 16,800 13,017 -- -- Actual return on plan assets 3,925 2,446 -- -- Company contributions 2,147 2,343 590 533 Participant contributions -- -- 15 14 Benefits paid (1,090) (1,006) (605) (547) Fair value of plan assets at end of year 21,782 16,800 -- -- Funded status of plans (underfunded) 752 361 (8,585) (10,294) Unrecognized net actuarial loss (gain) 240 (54) 2,344 (180) Unrecognized prior service cost 195 222 -- -- Unrecognized net transition obligation -- (42) 1,550 6,309 Additional minimum liability (244) (191) -- -- Prepaid (accrued) benefit cost $ 943 $ 296 $(4,691) $(4,165) Amounts recognized in the consolidated balance sheets consist of: Postretirement (in thousands) Pension Benefits Benefits 1998 1997 1998 1997 Accrued expenses $ (897) $(1,070) $ -- $ -- Pension and postretirement asset (liability) 1,840 1,366 (4,691) (4,165) Net amount recognized $ 943 $ 296 $(4,691) $(4.165) Included in pension and postretirement benefits at December 31, 1998 is $262 thousand of deferred compensation for certain employees who, due to Internal Revenue Service guidelines, may not take full advantage of the Company's defined contribution plan. Assets funding this plan are recorded at fair value in prepaid expenses. There are no comparable amounts for December 31, 1997. In March 1998, the Company amended its postretirement benefit plan to provide eligible retirees the option of enrolling in a Medicare HMO. Subsequent to the initial enrollment period, the Company re-measured its accumulated benefit obligation incorporating the Medicare HMO enrollment and cost assumptions. The $4.6 million reduction in the accumulated benefit obligation resulting from the re-measurement has been netted with the unrecognized net transition obligation. The plan amendment will result in a reduction in future annual benefit cost by approximately $.6 million and reduced the 1998 benefit cost by approximately $.2 million. Amounts applicable to a Company pension plan with accumulated benefit obligations in excess of plan assets are as follows: (in thousands) 1998 1997 Projected benefit obligation $1,160 $ 1,039 Accumulated benefit obligation and additional liability 760 498 Fair value of plan assets -- -- Minimum liability adjustment $ (244) $ (191) Intangible asset 195 191 49 -- Tax benefit 20 -- Other comprehensive income $ 29 $ -- Postretirement Pension Benefits Benefits 1998 1997 1998 1997 Weighted average assumptions as of December 31 Discount rate 6.8% 7.5% 6.8% 7.5% Expected return on plan assets 8.0% 8.0% -- -- Rate of compensation increases 4.0% 4.0% -- -- Health care cost trend rate -- -- 5.0% 5.0% The health care cost trend rate of 5% is assumed to remain at that level. Pension Benefits Postretirement Benefits (in thousands) 1998 1997 1996 1998 1997 1996 Components of net periodic benefit cost Service cost $1,679 $1,536 $1,503 $298 $302 $272 Interest cost 1,169 1,000 796 613 711 666 Expected return on plan assets (1,422) (1,085) (835) -- -- -- Amortization of prior service cost 27 32 38 -- -- -- Recognized net actuarial loss 35 20 -- 31 -- -- Amortization of net transition obligation (42) (50) (50) 175 421 421 Benefit cost $1,446 $1,453 $1,452 $1,117 $1,434 $1,359 The assumed health care cost trend rate has a significant effect on the amounts reported for postretirement benefits. A one-percentage-point change in the assumed health care cost trend rate would have the following effects: One-Percentage-Point (in thousands) Increase Decrease Effect on total of service and interest cost components in 1998 $ 177 $ (149) Effect on postretirement benefit obligation as of December 31, 1998 $1,545 $(1,227) To partially fund self-insured health care and other employee benefits, the Company makes payments to a trust. Assets of the trust amounted to $2.8 million and $2.6 million at December 31, 1998 and 1997, respectively, and are included in prepaid expenses. 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 liabilities of $.7 million and $.6 million at December 31, 1998 and 1997, respectively. The fair value of these interest rate contracts are substantially offset by unrealized appreciation and depreciation in the hedged items. 13. Business Segments In June 1997, Statement of Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information," was issued. Statement No. 131 establishes new standards for reporting information about operating segments and is effective for 1998. The 1997 and 1996 business segment presentations have been restated to conform with the 1998 presentation. The Company has evaluated its operations in accordance with Statement No. 131 and has determined that its operations include four reportable business segments. This determination was made primarily on the basis of services offered and does include aggregation of operating segments. The Agriculture segment includes grain merchandising and the operation of terminal grain elevator facilities and the manufacture and distribution of agricultural inputs, primarily fertilizer, to dealers and farmers. The Processing segment includes the production and distribution of lawn care and corncob based products. The Manufacturing segment includes the leasing, marketing and fleet management of railcars, railcar repair and metal fabrication. The Retail segment includes the operation of six large retail stores and a distribution center. Included in the Other classification are the operations of several smaller businesses and corporate level amounts not attributable to an operating segment. These smaller businesses include the operations of ten auto service centers (a joint venture), a lawn and garden equipment sales and service shop and the marketing of the Company's excess real estate. The segment information that follows (in thousands) 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. Intersegment sales are made at prices comparable to normal, unaffiliated customer sales. Operating income (loss) for each segment is based on net sales and merchandising revenues plus identifiable other income less all identifiable operating expenses, including interest expense for carrying working capital and long-term assets.
1998 Agriculture Processing Manufacturing Retail Other Total Revenues from external customers $788,133 $73,942 $52,324 $170,363 $13,960 $1,098,722 Inter-segment sales 5,753 1,001 1,073 -- -- 7,827 Other income 1,907 407 871 219 2,008 5,412 Interest expense (credit)(a) 6,212 1,231 907 1,974 (1,370) 8,954 Operating income (loss) 6,676 2,810 4,365 1,655 (2,500) 13,006 Identifiable assets 211,777 42,499 25,780 57,331 23,436 360,823 Capital expenditures 6,727 1,351 3,466 1,930 968 14,442 Depreciation and amortization 5,224 1,170 454 2,714 1,013 10,575
1997 Agriculture Processing Manufacturing Retail Other Total Revenues from external customers $723,335 $60,920 $24,760 $169,907 $14,824 $993,746 Inter-segment sales 3,071 940 1,202 -- -- 5,213 Other income 1,577 606 421 239 2,256 5,099 Interest expense (credit)(a) 6,002 1,201 589 2,163 (1,461) 8,494 Asset impairment -- -- -- 1,121 -- 1,121 Operating income (loss)(b) 2,302 698 3,310 (624) 569 6,255 Identifiable assets 232,769 37,690 13,599 59,508 24,678 368,244 Capital expenditures 8,381 1,170 243 4,316 1,317 15,427 Depreciation and amortization 4,728 1,131 427 2,823 956 10,065
Revenues from external customers $865,333 $73,155 $20,856 $175,957 $15,003 $1,150,304 Inter-segment sales 2,314 950 1,166 -- -- 4,430 Other income 1,402 1,340 389 177 1,344 4,652 Interest expense (credit) (a) 10,628 1,381 635 2,262 (1,203) 13,703 Operating income (loss) 3,689 2,858 2,266 3,800 (722) 11,891 Identifiable assets 190,932 33,913 16,290 61,799 43,657 346,591 Capital expenditures 4,359 1,040 649 3,042 1,030 10,120 Depreciation and amortization 4,336 1,250 455 2,870 819 9,730
(a) The other category of interest expense includes net interest income at the company-level representing rate differential between the interest rate on which interest is allocated to the operating segments and the actual rate at which borrowings were made. (b) Operating loss for the retail segment includes the impairment writedown of $1.1 million in 1997. Grain sales for export to foreign markets amounted to approximately $171 million, $177 million and $193 million in 1998, 1997 and 1996, respectively. In 1998, grain sales of $162 million were made to an unaffiliated customer. No unaffiliated customer accounted for more than 10% of sales and merchandising revenues in 1997 or 1996. Board of Directors Richard P. Anderson (3) Chairman The Andersons, Inc. Thomas H. Anderson (3) Chairman Emeritus The Andersons, Inc. Donald E. Anderson (3) Director of Science, retired The Andersons, Inc. Michael J. Anderson (3) President & Chief Executive Officer The Andersons, Inc. Richard M. Anderson (3) Vice President & General Manager Processing Division The Andersons, Inc. John F. Barrett (2), (3) President & Chief Executive Officer The Western & Southern Life Insurance Co. Paul M. Kraus (3) Attorney Marshall & Melhorn Donald L. Mennel (1), (3) President & Treasurer The Mennel Milling Company David L. Nichols (1), (2), (3) Retired Chairman & Chief Executive Officer Mercantile Stores Company, Inc. Dr. Sidney A. Ribeau (1), (3) President Bowling Green State University Charles A. Sullivan (1), (2), (3) Chairman & Chief Executive Officer Interstate Bakeries Corp. Jacqueline F. Woods (3) President & Chief Executive Officer Ameritech Ohio (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 1, 1999 there were 8,166,797 shares of common stock outstanding. At that date, there were 751 shareholders of record and approximately 2,500 shareholders for whom securities firms acted as nominees. Corporate Officers Thomas H. Anderson Chairman Emeritus Richard P. Anderson Chairman Michael J. Anderson President & Chief Executive Officer Christopher J. Anderson President, Processing & Manufacturing Group Daniel T. Anderson President, Retail Group Joseph L. Braker President, Agriculture Group Joseph C. Christen Vice President, Human Resource Development Dale W. Fallat Vice President, Corporate Services Philip C. Fox Vice President, Corporate Planning Charles E. Gallagher Vice President, Personnel Richard R. George Vice President & Controller Beverly J. McBride Vice President, General Counsel & Secretary Gary L. Smith Vice President, Finance & Treasurer Investor Information Corporate Offices The Andersons, Inc. 480 West Dussel Drive Maumee, Ohio 43537 419-893-5050 Internet: www.andersonsinc.com Transfer Agent & Registrar Harris Trust & Savings Bank Shareholder Services Division 311 West Monroe PO Box A-3504 Chicago, Illinois 60690-3504 312-360-5260 Form 10K The Andersons' 1998 Form 10-K filed in late March 1999 with the SEC, is available to stockholders and interested individuals without charge by writing or calling Investor Relations. Investor Relations Gary Smith Vice President, Finance & Treasurer 419-891-6417 email: gary_smith@andersonsinc.com 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 April 22, 1999. Our Mission 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 [Logo] The Andersons, Inc. 480 West Dussel Drive Maumee, Ohio 43537 EX-21 3 Exhibit 21 SUBSIDIARIES OF THE ANDERSONS Subsidiary State of Organization 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.) The Andersons Investment Services Corp. Ohio (a corporation owned 100% by The Andersons, Inc.) The Andersons Mower Center, Inc. Ohio (a corporation owned 100% by The Andersons, Inc.) The Andersons White Pigeon Terminal (a limited Ohio partnership of which The Andersons, Inc. is the sole general partner) The Andersons World Tire, d.b.a. The Andersons - Tireman Ohio Auto Centers (a joint venture owned 52.5% by The Andersons, Inc.) Crop & Soil Service, Inc. Ohio (a corporation owned 100% by The Andersons, Inc.) Kass Products, Inc. Ohio (a joint venture owned 50% by The Andersons, Inc.) Metamora Commodity Company Incorporated Ohio (a corporation owned 100% by The Andersons, Inc.) Poneto Tank Company, LLC Indiana (a limited liability company owned 67% 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, (Form S-8 No. 333-53137) pertaining to The Andersons, Inc. Retirement Savings and Investment Plan and (Form S-2 No. 333-35269) pertaining to the registration of debenture bonds of The Andersons, Inc. of our report dated January 25, 1999, with respect to the consolidated financial statements and schedule of The Andersons, Inc. and Subsidiaries included in the Annual Report (Form 10-K) for the year ended December 31, 1998. /s/Ernst & Young LLP Toledo, Ohio March 16, 1999 EX-27 5
5 1,000 YEAR DEC-31-1998 DEC-31-1998 3253 0 67350 4455 184990 261274 242589 152532 360823 195376 71565 0 0 84 82650 360823 1098722 1104134 937493 937493 144681 0 8954 13006 3254 9752 0 0 0 9752 1.21 1.20
EX-4 6 Exhibit 4.4 THE ANDERSONS, INC. AND THE FIFTH THIRD BANK, Trustee. __________________ SEVENTEENTH SUPPLEMENTAL INDENTURE dated effective as of August 14, 1997 Supplementing Indenture Dated as of October 1, 1985 __________________ Debentures Due Five Years or Ten Years from Original Issue Date THIS SEVENTEENTH SUPPLEMENTAL INDENTURE, dated effective as of August 14, 1997, between The Andersons, Inc., an Ohio corporation having its principal office at 480 W. Dussel Drive, City of Maumee, Lucas County, Ohio (hereinafter called the "Corporation"), and The Fifth Third Bank, a state banking association organized and existing under the laws of the state of Ohio (hereinafter called the "Trustee"); W I T N E S S E T H WHEREAS, the Corporation and Trustee are parties to a certain indenture dated as of October 1, 1985 (hereinafter called the "Indenture"), providing for the issuance of debentures (hereinafter called the "Debentures") as therein provided; and WHEREAS, the Corporation heretofore executed and delivered to the Trustee a Seventeenth Supplemental Indenture dated as of January 16, 1997; and WHEREAS, the Corporation and the Trustee may enter into supplemental indentures to the Indenture without the consent of the holders of Debentures, pursuant to Section 901(1) of the Indenture, to provide for the creation of a new series of Debentures; and WHEREAS, no Event of Default, as defined in Section 501 of the Indenture, and no event which after notice or lapse of time, or both, would become an Event of Default, has happened or is continuing; and WHEREAS, the Corporation has delivered to the Trustee a Resolution requesting the Trustee to authenticate and deliver, effective August 14, 1997, a new series of Debentures, designated as "7.7% Ten-Year Debentures" and "7.0% Five-Year Debentures" in the aggregate principal amounts of $5,000,000 for the Ten-Year Debentures and $5,000,000 for the Five-Year Debentures; and all other terms of the new series shall remain the same as for the original series of Debentures issued under the Indenture; and WHEREAS, the Corporation has delivered to the Trustee a Corporate Certificate and an Opinion of Counsel, stating that the issuance of a new series of Debentures and this Seventeenth Supplemental Indenture comply with the Indenture and that all conditions precedent therein provided for relating to such issuance of a new series of Debentures have been complied with; and WHEREAS, the Corporation has been authorized by its Board of Directors to enter into this Seventeenth Supplemental Indenture in accordance with Section 901 of the Indenture; NOW, THEREFORE, The Corporation, hereby expressly assumes the due and punctual payment of the principal of, including each installment thereof (and premium, if any), and interest on all the Debentures and the performance of every covenant of the Indenture on the part of the Corporation to be performed or observed. IN WITNESS WHEREOF, the parties hereto have caused this Seventeenth Supplemental Indenture to be duly executed as of the day and year first above written. THE FIFTH THIRD BANK THE ANDERSONS, INC., an Ohio corporation By: /s/Christine M. Schaub By: /s/Michael J. Anderson Christine M. Schaub Michael J. Anderson Trust Officer President and Chief Operating Officer [Corporate Seal] By: /s/Gary Smith Gary Smith Vice President and Treasurer Attest: /s/Greg Hahn STATE OF OHIO ) COUNTY OF LUCAS ) SS: Before me, a Notary Public, in and for said county and state, personally appeared Michael J. Anderson and Gary Smith, President and Chief Operating Officer and Vice President and Treasurer, respectively, of The Andersons, Inc., an Ohio corporation, who acknowledged that, they being thereunto duly authorized, did sign the foregoing instrument in behalf of said corporation and by authority of its board of directors and that the same is the free act and deed of said officers and of said corporation. In Testimony Whereof, I have hereunto set my hand and official seal at Maumee, Ohio this 16th day of March, 1998. /s/Cathy L. Redford Notary Public My Commission Expires: 4-10-99 [Notarial Seal] STATE OF OHIO ) COUNTY OF LUCAS ) SS: On the 18th day of March, 1998, before me personally came Christine M. Schaub, Trust Officer, and Greg Hahn, Trust Officer, to me known, who, being by me duly sworn, did depose and say that they are Trust Officers of THE FIFTH THIRD BANK, a bank organized under the laws of the state of Ohio, described in and which executed the foregoing instrument; that they know the seal of said corporation; that the seal affixed to said instrument is such corporation seal; that it was so affixed by authority of the Board of Directors of said corporation, and that they signed their names hereto by like authority. /s/Amy L. Hartung Notary Public My Commission Expires: 4-7-03 [Notarial Seal] CORPORATE CERTIFICATE This is to certify that The Andersons, Inc., an Ohio corporation, has examined the above-mentioned Indenture, Seventeenth Supplemental Indenture, the foregoing Opinion of Counsel and all other documents and matters as it deemed necessary to express an informed opinion on compliance by the corporation with the conditions precedent provided in said Indenture and that it concurs with the aforesaid Opinion of Counsel. THE ANDERSONS, INC., an Ohio corporation By: /s/Michael J. Anderson Michael J. Anderson President and Chief Operating Officer By: /s/Gary Smith Gary Smith, Vice President and Treasurer March 17, 1998 The Fifth Third Bank, Trustee Mail Drop 1090D2 Fifth Third Center Cincinnati, Ohio 45263 Re: Indenture Dated As Of October 1, 1985 ("Indenture") and Seventeenth Supplemental Indenture Thereto Dated Effective As Of August 14, 1997; Opinion of Counsel and Corporate Certificate According to the terms of the Indenture dated October 1, 1985, please be advised that I have examined the aforementioned Indenture and Supplemental Indenture thereto and all other documents and matters as I deemed necessary under the circumstances to render the within opinion, and it is my opinion that the instruments which have been or are herewith delivered to the Trustee conform to the requirements of this Indenture, and it is my opinion that the instruments which have been or are herewith delivered to the Trustee conform to the requirements of this Indenture and constitute sufficient authority under this Indenture for the authentication and delivery by the Trustee of the Debentures applied for, and the issuance of a new series of Debentures, effective August 14, 1997, complies with and is authorized by the Indenture and that The Andersons, Inc. has complied with all conditions precedent therein provided for relating to said transfer and Seventeenth Supplemental Indenture. Further, it is my opinion that there are no tax laws applicable to the issuance of the new series of Debentures with which The Andersons, Inc. need comply and no state or federal commission or other governmental body need give authorization approval or consent to the issuance of these Debentures. /s/Beverly J. McBride Beverly J. McBride, General Counsel -----END PRIVACY-ENHANCED MESSAGE-----