SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 [ ] 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 of incorporation (I.R.S. Employer or organization) Identification No.) 480 W. Dussel Drive, Maumee, Ohio (Address of principal executive offices) 43537 (419) 893-5050 (Zip Code) (Telephone Number) (Former name, former address and former fiscal year, if changed since last report.) 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 __ The registrant had 8,162,513 Common shares outstanding, no par value, at August 1, 1998. THE ANDERSONS, INC. INDEX Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets - June 30, 1998 and December 31, 1997 3 Condensed Consolidated Statements of Operations - Three months and six months ended June 30, 1998 and 1997 5 Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 1998 and 1997 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION Item 1. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 PART I. FINANCIAL INFORMATION Item 1. Financial Statements THE ANDERSONS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)(IN THOUSANDS) December 31 June 30 1997 1998 (Audited) Current assets Cash and cash equivalents $ 5,885 $ 8,278 Accounts and notes receivable: Trade accounts - net 64,035 68,643 Margin deposits 278 771 64,313 69,414 Inventories: Grain 38,848 113,838 Agricultural fertilizer and supplies 20,941 18,908 Merchandise 32,319 27,674 Lawn and corn cob products 12,352 20,142 Other 16,761 10,905 121,221 191,467 Deferred income taxes 3,957 1,408 Prepaid expenses 2,525 4,521 Total current assets 197,901 275,088 Other assets: Notes receivable (net) and other assets 6,067 6,333 Investments in and advances to affiliates 1,027 1,026 7,094 7,359 Property, plant and equipment: Land 11,995 11,763 Land improvements and leasehold improvements 25,299 24,594 Buildings and storage facilities 87,227 85,377 Machinery and equipment 107,549 104,590 Construction in progress 1,892 2,109 233,962 228,433 Less allowances for depreciation and amortization 146,969 142,636 86,993 85,797 $291,988 $368,244 Note: The balance sheet at December 31, 1997 has been derived from the audited financial statements at that date. See notes to condensed consolidated financial statements. THE ANDERSONS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS - (continued) (UNAUDITED)(IN THOUSANDS) December 31 June 30 1997 1998 (Audited) Current liabilities Notes payable $ 9,500 $ 15,572 Accounts payable for grain 34,805 121,233 Other accounts payable 70,077 63,309 Accrued expenses 17,242 12,973 Current maturities of long-term debt 7,136 8,406 Total current liabilities 138,760 221,493 Pension and postretirement benefits 2,825 2,799 Long-term debt Note payable, 7.84%, payable $398 thousand quarterly, due 2004 12,508 13,304 Note payable under revolving credit line, variable rate (6.35% at June 30, 1998) 20,000 20,000 Notes payable, variable rate (6.44% at June 30, 1998), payable $336 quarterly, due 2002 8,409 9,082 Other notes payable 1,116 1,120 Industrial development revenue bonds: 6.5%, sinking fund $1 million payable annually, due 1999 2,000 2,000 Variable rate (5.70% at June 30, 1998), payable $882 thousand annually through 2004 5,470 5,470 Variable rate (4.1% at June 30, 1998), due 2025 3,100 3,100 Debenture bonds, 6.5% to 8.7%, due 1998 through 2008 20,743 19,556 Other bonds, 4% to 10% 437 483 73,783 74,115 Less current maturities of long-term debt 7,136 8,406 66,647 65,709 Deferred income taxes 5,931 5,393 Minority interest 647 649 Shareholders' equity: Common stock (25,000 shares authorized, 8,430 issued, stated value $.01 per share, 7,950 and 7,939 outstanding at 6/30/98 and 12/31/97, respectively) 84 84 Additional paid-in capital 66,663 66,660 Retained earnings 14,784 9,875 Treasury stock (480 and 491 shares at 6/30/98 and 12/31/97, respectively; at cost) (4,353) (4,418) 77,178 72,201 $291,988 $368,244 Note: The balance sheet at December 31, 1997 has been derived from the audited financial statements at that date. See notes to condensed consolidated financial statements. THE ANDERSONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)(IN THOUSANDS, EXCEPT PER SHARE DATA) Three Months Six Months Ended June 30 Ended June 30 1998 1997 1998 1997 Grain sales and revenues $ 123,043 $ 98,721 $ 250,872 $ 192,529 Fertilizer, retail and other sales 159,756 150,719 253,148 242,729 Other income 1,040 750 2,008 1,697 283,839 250,190 506,028 436,955 Cost of grain sales 115,078 92,664 235,311 183,864 Cost of fertilizer, retail and other sales 119,999 114,642 188,095 182,891 235,077 207,306 423,406 366,755 Gross Profit 48,762 42,884 82,622 70,200 Operating, administrative and general expenses 37,210 33,603 69,938 65,505 Interest expense 1,886 2,273 4,344 4,412 39,096 35,876 74,282 69,917 Income before income taxes 9,666 7,008 8,340 283 Provision for income taxes (Note B) 3,296 2,749 2,794 106 Net Income $ 6,370 $ 4,259 $ 5,546 $ 177 Per common share: Basic and diluted $ 0.80 $ 0.52 $ 0.70 $ 0.02 Dividends paid $ 0.04 $ 0.03 $ 0.08 $ 0.06 Weighted average common shares outstanding 7,960 8,230 7,973 8,287 See notes to condensed consolidated financial statements. THE ANDERSONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(IN THOUSANDS) Six Months Ended June 30 1998 1997 Operating activities Net income $ 5,546 $ 177 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 5,184 4,927 Provision for losses on accounts and notes receivable 1,082 723 Deferred income tax (2,011) (1,221) Changes in operating assets and liabilities: Trade receivables 4,019 14,056 Inventories 70,246 42,843 Prepaid expenses and other assets 1,975 2,219 Accounts payable for grain (86,428) (64,433) Other accounts payable and accrued expenses 11,064 (21,623) Net cash provided by (used in) operating activities 10,677 (22,332) Investing activities Purchases of property, plant and equipment (6,116) (7,602) Proceeds from sale of property, plant and equipment 19 102 Net cash used in investing activities (6,097) (7,500) Financing activities Net increase (decrease) in short-term borrowings (6,072) 20,000 Proceeds from issuance of long-term debt 61,985 113,788 Payments of long-term debt (62,316) (113,086) Purchase of common stock for the treasury (344) (2,086) Proceeds from sale of treasury stock to employees participating in Employee Share Purchase Plan 413 423 Dividends paid (639) (501) Net cash provided by (used in) financing activities (6,973) 18,538 Decrease in cash and cash equivalents (2,393) (11,294) Cash and cash equivalents at beginning of period 8,278 27,524 Cash and cash equivalents at end of period $ 5,885 $ 16,230 See notes to condensed consolidated financial statements. THE ANDERSONS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note A - In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of operations for the periods indicated have been made. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in The Andersons, Inc. Annual Report on Form 10-K for the year ended December 31, 1997. Note B - In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, which is required for years beginning after December 15, 1997. The new rules change the manner in which operating segments are defined and reported externally to be consistent with the basis on which they are reported and evaluated internally. This statement will not have a significant impact on the Company. In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", which defines derivatives, requires that derivatives be carried at fair value, and provides for hedge accounting when certain conditions are met. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Although the Company has not fully assessed the implications of this new statement, the Company does not believe adoption of this statement will have a material impact on its financial statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Comparison of the three months ended June 30, 1998 with the three months ended June 30, 1997: Sales and revenues for the three months ended June 30, 1998 totaled $283.8 million, an increase of $33.6 million or 13% from the 1997 second quarter sales and revenues of $250.2 million. The Agriculture Group had a total increase of $27.7 million. This includes a $24.3 million increase in grain sales and revenues due to a 70% increase in bushels shipped and a slight increase in merchandising revenues (primarily storage income), partially offset by a 27% decrease in the average price of a bushel sold. On June 30, 1998, the Company's grain elevators held more than triple the bushels they held at June 30, 1997 - almost double the owned inventory and eight times as much grain stored for others. Sales of agricultural fertilizer, supplies and services were also up from the prior year with a total increase in sales of $3.4 million or 5%. Wholesale tons sold were up 11% with a 6% decrease in the average selling price per ton. A wholesale terminal in Eastern Ohio opened at the beginning of the second quarter. An additional Retail Farm Center ("RFC") and the customer list and assets of a second RFC were added at the beginning of the second quarter of 1998. Same location RFC sales were down 3%. Overall, the Processing & Manufacturing Group contributed increased sales and revenues of $4.6 million or 15%. The processing business (lawn fertilizer, cob and pet products) had a sales increase of $3.8 million or 19%. The sale of lawn fertilizer to a large retailer was the primary source of this increase. Lawn fertilizer volume sold increased 48% with a 17% decrease in the average price per ton. The manufacturing business had increased sales of $1.2 million or 22%. This increase resulted primarily from the strength of the railcar leasing business. The Retail Group experienced a 2% overall increase in sales from the second quarter of 1997 with both the Toledo and Columbus markets posting increases. Gross profit for the three months ended June 30, 1998 totaled $48.8 million, an increase of $5.9 million or 14% from the 1997 second quarter gross profit of $42.9 million. The Agriculture Group had a $3.5 million or 21% increase with $1.9 million related to margins on grain sales and merchandising activities. Wholesale fertilizer margin per ton increased 10% while the RFC's same location gross profit was flat. The new RFC location and customers added $.5 million in gross profit. Overall, the Processing and Manufacturing Group experienced an increase in gross profit of $1.4 million or 13%, with $.9 million from the processing division. This increase is attributable to the volume increases in the lawn fertilizer business and railcar leasing business in the second quarter. Gross profit on sales in the Retail Group increased 5% or $0.7 million on higher margins and increased sales. The margin improvement was due to a shift in the product mix sold during the quarter. The addition of home soft goods and similar products in the recent reset of the stores has resulted in improvements to the overall store margins. Operating, administrative and general expenses for the second quarter of 1998 totaled $37.2 million, an increase of $3.6 million or 11% from the second quarter of 1997. Full time employees increased 3% in the same period and the resulting labor and benefits expense for the three month period increased 8%. The staffing increases occurred primarily in the Agriculture and Processing and Manufacturing groups. Interest expense for the second quarter of 1998 was $1.9 million, a $0.4 million decrease from the second quarter of 1997. Short-term borrowings at June 30, 1998 were $9.5 million as compared to $20.0 million at June 30, 1997. The pretax income of $9.7 million represents an improvement of $2.7 million or 38% from the second quarter of 1997. The net income of $6.4 million represents an improvement of $2.1 million from the 1997 second quarter net income. The quarterly effective tax rate decreased from 39% in 1997 to 34% in 1998. The actual tax rate for the year ended December 31, 1997 was 35%. Basic and dilutive earnings per share of $0.80 are a $0.28 improvement from the second quarter of 1997 earnings per share of $0.52. Comparison of the six months ended June 30, 1998 with the six months ended June 30, 1997: Sales and revenues for the six months ended June 30, 1998 totaled $506.0 million, an increase of $69.1 million or 16% from the 1997 sales and revenues of $437.0 million. The Agriculture Group had a total increase of $64.5 million. This includes a $58.3 million increase in grain sales and revenues due to a 62% increase in bushels shipped and a significant increase in merchandising revenues (primarily storage income), partially offset by a 21% decrease in the average price of a bushel sold. On June 30, 1998, the Company's grain elevators held more than triple the bushels they held at June 30, 1997 - almost double the owned inventory and eight times as much grain stored for others. Sales of agricultural fertilizer, supplies and services were also up from the prior year with a total increase in sales of $6.2 million or 7%. Wholesale tons sold were up 13% with a 7% decrease in the average selling price per ton. A wholesale terminal in Eastern Ohio was opened at the beginning of the second quarter. An additional Retail Farm Center and the customer list and assets of a second RFC were added at the beginning of the second quarter of 1998. Same location RFC sales were up 3%. Overall, the Processing & Manufacturing Group contributed increased sales and revenues of $5.1 million or 8%. All of this increase came from the processing business. The sale of lawn fertilizer to a large retailer was the primary source of this increase. Lawn fertilizer volume sold increased 39% with a 16% decrease in the average price per ton. The manufacturing business had flat sales and revenues for the six month period. Sales of railcars were down but revenues from the railcar leasing business were up significantly. The Retail Group experienced a 1% overall decrease in sales from 1997 with only the Columbus market posting a small increase. Gross profit for the six months ended June 30, 1998 totaled $82.6 million, an increase of $12.4 million or 18% from the 1997 gross profit of $70.2 million. The Agriculture Group had a $9.2 million or 41% increase with $6.9 million related to margins on grain sales and merchandising activities. Wholesale fertilizer margin per ton increased 9% while the RFC's same location gross profit was flat. The new RFC location and customers added $.5 million in gross profit. Overall, the Processing and Manufacturing Group experienced an increase in gross profit of $2.8 million or 12%, with $1.9 million from the processing division. This increase is attributable to the volume increases in the lawn fertilizer business and railcar leasing business. Gross profit on sales in the Retail Group increased 1% or $0.2 million on higher margins. The margin improvement was due to a shift in the product mix sold during the quarter. The addition of home soft goods and similar products in the recent reset of the stores has resulted in improvements to the overall store margins. Operating, administrative and general expenses for the six months ended June 30, 1998 totaled $69.9 million, an increase of $4.4 million or 7% from 1997. Full time employees increased 3% in the same period and the resulting labor and benefits expense for the period increased 4%. The staffing increases occurred primarily in the Agriculture and Processing and Manufacturing groups. Interest expense for the six months ended June 30, 1998 was $4.3 million, a $0.1 million decrease from 1997. Short-term borrowings at June 30, 1998 were $9.5 million as compared to $20 million at June 30, 1997. The pretax income of $8.3 million represents an improvement of $8.1 million from 1997. The net income of $5.5 million represents an improvement of $5.4 million. The effective tax rate for the six month period decreased from 37% in 1997 to 34% in 1998. The actual tax rate for the year ended December 31, 1997 was 35%. Basic and dilutive earnings per share of $0.70 is a $0.68 improvement from the 1997 earnings per share of $0.02 Liquidity and Capital Resources Cash flow generated from operations provided $10.7 million for the first six months of 1998 as compared to the first six months of 1997 when operations used $22.3 million. The Company has significant short-term lines of credit available to finance working capital, primarily inventories and accounts receivable. Lines of credit available at August 1, 1998 were $250 million, of which $9.5 million was borrowed at June 30, 1998. Typically the Company's highest borrowings occur in the spring due to seasonal inventory requirements in the wholesale fertilizer and retail businesses, credit sales in the wholesale and lawn fertilizer businesses and a customary reduction in the liability for grain due to the cash needs of grain producers and market strategies. A quarterly cash dividend of $0.04 per common share was paid in each of the first two quarters of 1998. A cash dividend of $0.04 per common share was declared on July 1, 1998 and was paid on July 21, 1998. Cash dividends of $0.03 per common share were paid quarterly in 1997. The Company made income tax payments of $1.1 million in the first half of 1998 and expects to make additional payments totaling approximately $1.3 million in 1998. Also in the first six months of 1998, the Company issued 46,600 shares to its employees as part of the Employee Share Purchase Plan and repurchased 36,000 shares for the treasury. Capital expenditures for the first half of 1998 total $6 million. Total cash capital expenditures for 1998 are expected to approximate $15 million and include additional production capacity in the processing division, plant upgrades and improvements in the agriculture group and the acquisition of additional railcars. Funding for these expenditures is expected to come from cash generated from operations. Capital expenditures can be curtailed if cash generated from operations is less than expected. The Company also closed a stock for stock acquisition of a corporation operating three retail farm centers in Northwest Ohio with an effective date of July 1, 1998. Certain of the Company's long-term debt is secured by first mortgages on various facilities. Some of the long-term borrowings include provisions that impose minimum levels of working capital and equity, limitations on additional debt and require the Company to be substantially hedged in its grain transactions. The Company's liquidity is enhanced by the fact that grain inventories are readily marketable. In the opinion of management, the Company's liquidity is adequate to meet short-term and long-term needs. Impact of Year 2000 Some of the Company's older computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs may have time-sensitive software that recognize a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations causing disruptions of operations. The Company completed an assessment and developed modification plans in early 1998 for all software except the Retail Group cash register systems. Subsequently, the Company determined that its cash register systems could not be easily modified and it has estimated a cost of approximately $1.5 million to replace the systems. The existing cash register systems have minimal book value and were expected to be replaced in the years 1999-2002. Costs incurred to date have totaled approximately $.7 million for the purchase of new software and $.5 million representing existing internal resources that were expensed as incurred. The remaining cost of compliance for the Company is estimated at $2.1 million, which includes $1.7 million for the purchase of software and hardware and $.4 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 in early 1999, allowing for testing and revisions prior to the end of 1999. The retail cash register systems will be installed in the first and third quarters of 1999. There have been no substantial changes to the plans as previously reported, except for the retail cash register systems. 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 next step in the Company's Year 2000 compliance efforts will be to develop contingency plans for its major systems 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 Management's Discussion and Analysis contain various "forward-looking statements" which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including but not limited to those identified below, which could cause actual results to differ materially from historical results or those anticipated. The words "believe," "expect," "anticipate" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The following factors could cause actual results to differ materially from historical results or those anticipated; weather, supply and demand of commodities including grains, fertilizer and other basic raw materials, market prices for grains and the potential for increased margin requirements, regulatory agency review of grain contracts, competition, economic conditions, risks associated with acquisitions, interest rates and income taxes. PART II. OTHER INFORMATION Item 1. Legal Proceedings Pursuant to subpoenas duces tecum served by the Commodities Futures Trading Commission (the "CFTC"), the Company has produced certain records, including names and phone numbers of certain customers, and the depositions of certain employees and former employees have been taken in the matter of "Certain Transactions and Practices Among Grain Elevators, et. al., Involving Futures Contracts." There can be no assurance that other CFTC proceedings will not be instituted. There currently is no reasonable basis to predict the amount of future liability or loss, if any, that may arise from such CFTC proceedings. Item 4. Submission of Matters to a Vote of Security Holders The annual meeting of the shareholders of The Andersons, Inc. was held on May 14, 1998 to elect eleven directors and to ratify the appointment of the Company's independent auditors. Results of the voting follow: Director For Against Withheld Not Voted Donald E. Anderson 7,659,381 0 9,575 317,109 Michael J. Anderson 7,665,081 0 3,875 317,109 Richard M. Anderson 7,665,081 0 3,875 317,109 Richard P. Anderson 7,659,981 0 8,975 317,109 Thomas H. Anderson 7,664,081 0 4,875 317,109 John F. Barrett 7,661,131 0 7,825 317,109 Paul M. Kraus 7,664,181 0 4,775 317,109 Donald L. Mennel 7,661,231 0 7,725 317,109 David L. Nichols 7,665,481 0 3,475 317,109 Dr. Sidney A. Ribeau 7,664,281 0 4,675 317,109 Charles A. Sullivan 7,665,481 0 3,475 317,109 Independent Auditors 7,555,428 5,380 108,148 317,109 Item 6. Exhibits and Reports on Form 8-K (b) Reports on Form 8-K. There were no reports on Form 8-K for the three months ended June 30, 1998. SIGNATURES Pursuant to the requirements 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. THE ANDERSONS, INC. (Registrant) Date: August 13, 1998 By /s/Richard P. Anderson Richard P. Anderson Chairman of the Board and Chief Executive Officer Date: August 13, 1998 By /s/Richard R. George Richard R. George Vice President and Controller (Principal Accounting Officer)