e424b4
Filed pursuant to
rule 424(b)(4)
File No: 333-135480
2,250,000 Shares
The Andersons, Inc.
Common Stock
This is a public offering of 2,250,000 shares of common
stock of The Andersons, Inc. We are offering
2,000,000 shares of our common stock in this offering and
the selling shareholders identified in this prospectus are
offering an additional 250,000 shares. We will not receive
any proceeds from the sale of shares of our common stock by the
selling shareholders.
Our common stock is quoted on the Nasdaq Global Select Market
under the symbol ANDE. On August 22, 2006, the
last reported sale price of our common stock on the Nasdaq
Global Select Market was $37.25 per share.
Investing in our common stock involves a high degree of
risk. Please refer to the section entitled Risk
Factors beginning on page 10 for a discussion of
factors that you should carefully consider before buying shares
of our common stock.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary is a criminal
offense.
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Per Share
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Total
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Public offering price
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$
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37.00
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$
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83,250,000
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Underwriting discount
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$
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1.81
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$
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4,072,500
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Proceeds, before expenses, to The
Andersons, Inc.
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$
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35.19
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$
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70,380,000
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Proceeds, before expenses, to the
selling shareholders
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$
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35.19
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$
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8,797,500
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The underwriters have the option to purchase up to
337,500 additional shares of our common stock from the
Company at the public offering price, less the underwriting
discount, within 30 days from the date of this prospectus
to cover over-allotments, if any.
The underwriters expect to deliver the shares of our common
stock on or about August 28, 2006.
Joint Book-Running Managers
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BB&T
Capital Markets |
Piper
Jaffray |
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Stephens
Inc. |
Stifel
Nicolaus |
Prospectus dated August 22, 2006.
Rail
The Andersons
Plant Nutrient
Retail
Turf & Specialty
Grain & Ethanol
Andersons
ISO 9001:2000 Certified |
You should rely only on the information contained or
incorporated by reference in this prospectus. We have not, and
the underwriters have not, authorized any other person to
provide you with different information or make any additional
representations. The selling shareholders are offering to sell,
and seeking offers to buy, shares of our common stock only in
jurisdictions where such offers and sales are permitted. The
information contained in this prospectus is accurate only as of
the date of this prospectus or the date of such incorporated
information, regardless of the time of delivery of this
prospectus or any sale of our common stock. Our business,
financial condition, results of operations and business
prospects may have changed since those dates.
INDUSTRY
AND MARKET DATA
We obtained the industry, market and competitive position data
used throughout this prospectus from our own research, internal
surveys and studies conducted by third parties, independent
industry associations or general publications and other publicly
available information. In particular, we have based much of our
discussion of the ethanol industry, including government
regulation relevant to the industry and forecasted growth in
demand, on information published by the Renewable Fuels
Association, or the RFA, the national trade
association for the U.S. ethanol industry. While we believe
this data to be accurate as of the date of this prospectus,
market data is subject to change and cannot always be verified
with complete certainty, due to limits on the availability and
reliability of raw data, the voluntary nature of the data
gathering process and other limitations and uncertainties
inherent in any survey of market size. As a result, you should
be aware that market share and other similar data set forth in
this prospectus, as well as estimates and beliefs based on such
data, may not be reliable beyond the date of this filing. None
of the publications, reports or other published industry sources
referred to in this prospectus were commissioned by us or
prepared at our request. Furthermore, because the RFA is a trade
organization for the ethanol industry, it may present
information in a manner that is more favorable to that industry
than would be presented by an independent source. Forecasts are
particularly likely to be inaccurate, especially over long
periods of time.
i
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
this prospectus. This summary does not contain all of the
information you should consider before investing in our common
stock. You should read the entire prospectus carefully,
especially the risks of investing in our common stock discussed
under Risk Factors, and the consolidated financial
statements and the related notes relating thereto included
elsewhere in this prospectus. Unless otherwise noted, references
to The Andersons, the Company,
we, us and our refer to The
Andersons, Inc., an Ohio corporation, together with its
consolidated subsidiaries, unless the context requires
otherwise.
Our
Business
We are an entrepreneurial, customer focused company with
diversified interests in the agriculture and transportation
markets. Since our founding in 1947, we have developed specific
core competencies in risk management, bulk handling,
transportation and logistics and an understanding of commodity
markets. We have leveraged these competencies to diversify our
operations into other complementary markets, including ethanol,
railcar leasing, plant nutrients, turf products and general
merchandise retailing. For the year ended December 31,
2005, our sales and merchandising revenues were
$1,296.7 million, our operating income was
$39.3 million and our EBITDA was $74.3 million, which
represented increases over 2004 levels of 2%, 31% and 20%,
respectively. For the three months ended March 31, 2006,
our sales and merchandising revenues were $280.7 million,
our operating income was $6.0 million and our EBITDA was
$16.2 million, which represented increases over 2005 levels
of 9%, 267% and 61%, respectively.
We operate our business in five segments: the Grain &
Ethanol Group, the Rail Group, the Plant Nutrient Group, the
Turf & Specialty Group and the Retail Group. The
principal activities of each of these groups are as follows:
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The Grain & Ethanol Group, which achieved 2005 sales
and merchandising revenues of approximately $628.0 million,
operates grain elevators in Ohio, Michigan, Indiana and
Illinois. The Grain & Ethanol Group collectively
shipped approximately 167 million bushels of grain in 2005.
We are the developer, manager and largest investor in two
ethanol facilities currently under construction in Indiana and
Michigan. We will provide plant management, including
transportation, logistics and marketing services to these
facilities. We also have an investment in a third ethanol
facility located in Indiana. We will be providing grain
origination services for each of these three facilities, which
collectively have nameplate capacity of
205 million gallons per year, or MMGY. We have
expanded our trading operations through a 36% ownership interest
in Lansing Trade Group, LLC, or Lansing, which is an
established commodity trader and service provider to the grain
and ethanol industries.
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The Rail Group, which achieved 2005 sales of approximately
$92.0 million, leases and manages a fleet of over 19,000
railcars of various types and 89 locomotives. The Rail Group
also operates a repair, refurbishment and custom steel
fabrication business.
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The Plant Nutrient Group, which achieved 2005 sales and
merchandising revenues of approximately $271.4 million,
operates fertilizer distribution terminals and farm centers in
Ohio, Michigan, Indiana and Illinois, which collectively handle
approximately 1.5 million tons of dry and liquid fertilizer
products annually.
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The Turf & Specialty Group, which achieved 2005 sales
of approximately $122.6 million, produces and markets turf
and ornamental plant fertilizer and pest control products with a
particular focus on the professional lawn care and golf course
markets.
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The Retail Group, which achieved 2005 sales of approximately
$182.8 million, operates six large stores in Ohio offering
a combination traditional home center with hardware, plumbing,
electrical and building supplies, as well as unique specialty
food offerings, indoor and outdoor garden centers, extensive
lines of housewares and other domestic products, automotive
supplies and pet supplies.
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1
Industry
Overview
Our businesses are largely impacted by the overall market for
grain and related commodities. The principal grains sold by us
are corn, soybeans and wheat, the three principal crops produced
in the U.S.
Grains. The U.S. is the largest producer
and exporter of corn, the largest producer and exporter of
soybeans and the largest exporter of wheat in the world. The
U.S. Department of Agriculture, or USDA, has
forecast a 2005 corn and soybean harvest of approximately
11.1 billion bushels and 3.1 billion bushels,
respectively, each of which were the second-largest harvests on
record, and a wheat harvest of approximately 2.1 billion
bushels. U.S. corn and soybean production has grown in
recent years due to increased yields, usage of new and modified
seeds, improved fertilizer and pesticide applications and better
management practices. U.S. wheat production has decreased
as acreage has been used for higher value crops.
Ethanol. Ethanol is a type of alcohol produced
in the U.S. principally from corn. It is primarily used as
a blend component in the 140 billion gallon
U.S. gasoline fuel market. Gasoline refiners and marketers
generally use ethanol as an up to 10% blend component per gallon
of gasoline to increase octane and as an oxygenate to reduce
tailpipe emissions. According to the RFA, 4.0 billion
gallons of ethanol were produced in the U.S. in 2005,
accounting for approximately 3% of the domestic gasoline fuel
supply. The ethanol industry has grown significantly over the
last few years. Production capacity has doubled since 2001 and
has expanded at a compounded annual growth rate of approximately
20% from 2000 to 2005.
The key drivers of growth in the grain industry include, among
others: continued world population and GDP growth; the use of
more effective fertilizers and chemicals; levels of planted
acreage; the increased production of renewable fuels from corn,
soybeans and other crops; and the increasing demand for fuel and
other products. In addition, we believe that increased
production of grain and ethanol will result in an increased
demand for rail transportation services and plant nutrient
products.
Our
Competitive Strengths
We have developed specific core competencies in customer
service, risk management, bulk handling, transportation and
logistics and an understanding of commodity markets, each of
which are used across our business groups. We believe that these
core competencies and the following strengths differentiate us
from our competitors and position us for continued growth:
Strategically Diversified Agribusiness
Model. Throughout our history we have leveraged
our core competencies to selectively and strategically extend
our base grain business. We have transferred our core
competencies across our business groups and captured synergies
as these businesses interact. Our service culture
underlies each of our business groups, placing an emphasis on
entrepreneurship and meeting the needs of our customers.
Large Established Grain Infrastructure. We
have an established infrastructure and nearly 60 years of
experience in purchasing, storing, processing, marketing and
transporting corn, soybeans, wheat and other commodities. We
operate a network of 14 grain elevators in four states that are
strategically located near production and transportation hubs,
making us a leading grain handler in the eastern corn belt with
81 million bushels of storage capacity.
Risk Management Capabilities. We believe we
are a leading developer and user of proprietary and other risk
management tools and instruments in certain of our business
groups. We have developed a specific risk management strategy
for certain of our business groups and were among the first to
use several products and techniques which allow us and our grain
suppliers to minimize risk.
Transportation and Logistics Expertise. We
believe that the maturation and evolution of any commodities
industry favors those market participants who possess
competitive advantages in logistics and transportation
expertise. Our large fleet of railcars and nearly 60 years
of experience with the U.S. rail system gives us the
ability to quickly and cost effectively satisfy the
transportation needs of commodity contracts and will provide us
with a competitive advantage as the ethanol industry matures.
Growing Commodity Trading Platform. Our
Grain & Ethanol Groups trading capabilities
combined with the over 80-year operating history of our Lansing
affiliate positions us as a significant provider of commodity
2
trading and delivery services. Our relationship with Lansing
allows us to enter into storage and commodity trading contracts
outside of our traditional geographic markets in the eastern
corn belt, and expand our trading platform into non-storage
facility-based transactions and additional commodities,
including ethanol.
Rail Car Expertise. In 2005, we grew our fleet
by 32% as a result of targeted acquisitions and now manage and
lease the nations eighth largest private fleet of railcars
(exclusive of railroads). We believe we have developed industry
leading positions in railcar refurbishing, leasing and component
manufacturing. With over 19,000 railcars and 89 locomotives that
we manage and lease at March 31, 2006, we have the ability
to meet our customers needs as demand for rail
transportation equipment continues to rise.
Experienced and Proven Management Team. Our
management team has significant experience both with our company
and within the markets in which we operate. Our 12 top managers
have an average of 27 years of experience with our company.
Our current management team has fostered a service culture that
encourages and rewards continuous improvement in all areas of
our business.
Our
Business Strategy
Our business strategy includes:
Increasing Services to and Investments in the Grain and
Ethanol Industries. We plan to leverage our core
competencies by investing in and providing plant management,
grain origination and other services to ethanol producers. We
expect our future ethanol investments will be in a form similar
to our current joint venture investments. We believe that
investments through joint ventures in high volume, cost
efficient ethanol plants will allow us to deploy capital more
efficiently across more plants (enabling us to share in more
industry capacity), achieve geographic diversity, reduce
earnings volatility, and increase annual management and service
contract revenues.
Increasing Our Grain Trading Operations. We
intend to increase our trading operations and broaden our
trading expertise through continued development of our internal
trading group and continued investments in Lansing. Expanding
our trading operations is a significant growth opportunity that
leverages our grain and commodity, risk management and
transportation and logistics expertise. We have options to
increase our ownership in Lansing in 2007 and 2008 and, if both
options are exercised, we would be the majority owner in 2008.
Growing Our Fleet of Railcars and
Locomotives. We plan to continue to grow our
diversified fleet of railcars through targeted portfolio
acquisitions and open market purchases, which could include both
owned and managed railcars and locomotives. We intend to
continue our practice of match funding where practical or
otherwise financing the acquisitions in ways that mitigate risk.
We also expect to increase our investment in railcar
refurbishment, conversion and repair facilities.
Improving Our Plant Nutrient Groups Product
Offerings. We intend to expand into product and
service offerings that are more premium in nature. For example,
we are currently exploring the sale of reagents for air
pollution control technologies used in coal-fired power plants
and marketing the resulting byproducts that can be used as plant
nutrients.
Focusing on Our Turf & Specialty and Retail
Operations. We intend to continue to focus on
improving profitability in our Turf & Specialty and
Retail Groups. Within our Turf & Specialty Group, we
are focusing on higher value, proprietary products with greater
profitability as compared to commodity products. With respect to
our retail operations, we plan to continue increasing our
specialty offerings such as premium food items, wine and
produce, to further grow sales and improve margins.
Recent
Developments
Recent
Operating Results
On July 28, 2006, we announced second quarter net income of
$10.3 million, or $0.66 per diluted share, and total
revenues of $378 million. In the same three-month period of
2005, we reported net income of $10.4 million, or $0.67 per
diluted share, on $365 million of revenues. For the first
six months of 2006, our net income was
3
$14.2 million, or $0.90 per diluted share, on revenues of
$659 million. In the first half of 2005, we earned
$11.4 million, or $0.74 per diluted share, on revenues of
$624 million.
The following table sets forth our operating results and certain
segment data for the six months ended June 30, 2005
and 2006.
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Six Months Ended June 30,
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2005
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2006
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(Dollars in thousands, except per share data)
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Statement of Operations
Data:
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Sales and merchandising revenues
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$
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623,773
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$
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658,767
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Cost of sales and merchandising
revenues
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530,796
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563,729
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Gross profit
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92,977
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95,038
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Operating, administrative and
general expenses
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72,756
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75,273
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Interest expense
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6,141
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8,695
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Other income/gains:
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Other income
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2,509
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5,411
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Equity in earnings of affiliates
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460
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5,762
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Income before income taxes
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17,049
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22,243
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Income tax provision
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5,662
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8,061
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Net income
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$
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11,387
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$
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14,182
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Per common share:
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Basic earnings
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$
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0.77
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$
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0.94
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Diluted earnings
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$
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0.74
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$
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0.90
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Dividends paid
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$
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0.080
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$
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0.0875
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Weighted average shares
outstanding Basic
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14,772
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15,155
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Weighted average shares
outstanding Diluted
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15,340
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15,728
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Segment Data:
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Sales and merchandising
revenues:
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Grain & Ethanol Group
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$
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253,585
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$
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277,388
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Rail Group
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35,378
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62,219
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Plant Nutrient Group
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163,985
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159,341
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Turf & Specialty Group
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81,355
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72,933
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Retail Group
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89,470
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86,886
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Total
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$
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623,773
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$
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658,767
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Gross profit:
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Grain & Ethanol Group
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$
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17,538
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$
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17,249
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Rail Group
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17,104
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24,761
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Plant Nutrient Group
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21,180
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14,243
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Turf & Specialty Group
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10,681
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12,263
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Retail Group
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26,474
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26,522
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Total
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$
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92,977
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$
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95,038
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4
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Six Months Ended June 30,
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2005
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2006
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(Dollars in thousands)
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Operating income
(loss):
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Grain & Ethanol Group
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$
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357
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$
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3,703
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Rail Group
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7,439
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11,217
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Plant Nutrient Group
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9,508
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3,806
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Turf & Specialty Group
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1,489
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3,493
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Retail Group
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1,745
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1,714
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Other
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(3,489
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(1,690
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Total
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$
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17,049
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$
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22,243
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Marathon
Letter of Intent
On July 10, 2006, we announced the signing of a letter of
intent with a subsidiary of Marathon Oil Corporation, or
Marathon, for the creation of a 50/50 joint venture
to construct and operate new ethanol plants. We would provide
day-to-day
management of the ethanol plants, as well as corn origination,
risk management, and DDGS and ethanol marketing services. Upon
execution of final documentation, we plan to finalize site
selection for the joint ventures first two plants. Closing
of the joint venture is subject to, among other things, approval
of our and Marathons boards of directors, negotiation and
execution of final documentation and agreement as to desirable
ethanol plant locations. In addition, the timing of construction
of any facilities is contingent upon applicable regulatory and
permitting requirements and economic incentives. There can be no
assurance as to the timing of ethanol plant construction or that
any joint venture will be consummated at all.
Our
Company
Our principal executive offices are located at 480 West
Dussel Drive, Maumee, Ohio 43537. The telephone number for our
principal executive offices is
(419) 893-5050.
Our Internet address is http://www.andersonsinc.com. This
Internet address is provided for informational purposes only.
The information at this Internet address is not a part of this
prospectus.
5
The
Offering
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Common stock offered by us |
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2,000,000 shares |
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Common stock offered by the selling shareholders |
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250,000 shares |
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Total common stock offered hereby |
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2,250,000 shares |
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Total common stock outstanding after this offering |
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17,281,255 shares |
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Use of proceeds |
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We expect to receive net proceeds from this offering of
approximately $69.9 million, after deducting underwriting
discounts, commissions and other offering-related expenses. We
intend to use the net proceeds for investments in the ethanol
industry, including in additional ethanol plants, investments in
additional railcar assets and for general corporate purposes. We
will not receive any proceeds from the sale of common stock by
the selling shareholders. See Use of Proceeds for
additional information. |
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Dividends |
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Our dividend practice reflects our intention to pay quarterly
dividends on all shares of our common stock, but only if and to
the extent such dividends are declared by our board of
directors, in its absolute discretion, and permitted by our
credit facilities and applicable law. Dividends on our common
stock are not cumulative. See Price Range of our Common
Stock and Dividends. |
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Voting rights |
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The holders of our common stock are entitled to one vote per
share on all matters submitted to a vote of our stockholders.
See Description of Capital Stock. |
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Nasdaq Global Select Market symbol |
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ANDE |
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Risk factors |
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You should carefully read and consider the information set forth
under Risk Factors and all other information
included in this prospectus for a discussion of factors that you
should consider before deciding to invest in shares of our
common stock. |
The number of shares of our common stock to be outstanding after
this offering is based on 15,281,255 shares of our common
stock outstanding as of August 22, 2006, excluding:
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an aggregate of 465,852 shares of common stock issuable
upon the exercise of options, performance share units and
restricted shares outstanding under our 2005 Long-Term
Performance Compensation Plan;
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an aggregate of 517,218 shares of common stock reserved for
future issuance under our equity compensation plans, including
the Employee Share Purchase Plan; and
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an aggregate of 337,500 shares of common stock issuable
upon the exercise of the underwriters over-allotment
option.
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6
Summary
Financial Data
The following table sets forth our summary consolidated
financial data for the periods indicated. The summary financial
data as of December 31, 2005 and for the years ended
December 31, 2004 and 2005 have been derived from our
audited consolidated financial statements and related notes
included elsewhere in this prospectus. The summary financial
data as of March 31, 2006 and for the three months ended
March 31, 2005 and 2006 have been derived from our
unaudited consolidated financial statements and related notes
included elsewhere in this prospectus. The as adjusted balance
sheet data as of March 31, 2006, has been adjusted to
reflect the impact of this offering and an application of the
net proceeds therefrom of approximately $69.9 million.
You should read this information together with our consolidated
financial statements and related notes thereto included
elsewhere or incorporated by reference in this prospectus, and
the information under the section Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
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Year Ended December 31,
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Three Months Ended March 31,
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2004
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2005
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2005
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|
2006
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Statement of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and merchandising revenues
|
|
$
|
1,266,932
|
|
|
$
|
1,296,652
|
|
|
$
|
258,656
|
|
|
$
|
280,658
|
|
Cost of sales and merchandising
revenues
|
|
|
1,077,833
|
|
|
|
1,098,506
|
|
|
|
218,697
|
|
|
|
239,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
189,099
|
|
|
|
198,146
|
|
|
|
39,959
|
|
|
|
41,485
|
|
Operating, administrative and
general expenses
|
|
|
154,895
|
|
|
|
153,759
|
|
|
|
36,901
|
|
|
|
37,906
|
|
Interest expense
|
|
|
10,545
|
|
|
|
12,079
|
|
|
|
2,950
|
|
|
|
4,194
|
|
Other income/gains:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
4,973
|
|
|
|
4,683
|
|
|
|
1,079
|
|
|
|
3,059
|
|
Equity in earnings of affiliates
|
|
|
1,471
|
|
|
|
2,321
|
|
|
|
446
|
|
|
|
3,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
30,103
|
|
|
|
39,312
|
|
|
|
1,633
|
|
|
|
5,997
|
|
Income tax provision
|
|
|
10,959
|
|
|
|
13,225
|
|
|
|
599
|
|
|
|
2,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
19,144
|
|
|
$
|
26,087
|
|
|
$
|
1,034
|
|
|
$
|
3,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
|
|
$
|
1.32
|
|
|
$
|
1.76
|
|
|
$
|
0.07
|
|
|
$
|
0.26
|
|
Diluted earnings
|
|
$
|
1.28
|
|
|
$
|
1.70
|
|
|
$
|
0.07
|
|
|
$
|
0.25
|
|
Dividends paid
|
|
$
|
0.1525
|
|
|
$
|
0.165
|
|
|
$
|
0.04
|
|
|
$
|
0.045
|
|
Weighted average shares
outstanding Basic
|
|
|
14,492
|
|
|
|
14,842
|
|
|
|
14,746
|
|
|
|
15,090
|
|
Weighted average shares
outstanding Diluted
|
|
|
14,996
|
|
|
|
15,410
|
|
|
|
15,286
|
|
|
|
15,638
|
|
Segment Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and merchandising
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain & Ethanol Group
|
|
$
|
664,565
|
|
|
$
|
627,958
|
|
|
$
|
120,937
|
|
|
$
|
128,625
|
|
Rail Group
|
|
|
59,283
|
|
|
|
92,009
|
|
|
|
17,705
|
|
|
|
34,383
|
|
Plant Nutrient Group
|
|
|
236,574
|
|
|
|
271,371
|
|
|
|
44,071
|
|
|
|
46,033
|
|
Turf & Specialty Group
|
|
|
127,814
|
|
|
|
122,561
|
|
|
|
40,891
|
|
|
|
39,505
|
|
Retail Group
|
|
|
178,696
|
|
|
|
182,753
|
|
|
|
35,052
|
|
|
|
32,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,266,932
|
|
|
$
|
1,296,652
|
|
|
$
|
258,656
|
|
|
$
|
280,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Three Months Ended March 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain & Ethanol Group
|
|
$
|
52,680
|
|
|
$
|
50,159
|
|
|
$
|
10,199
|
|
|
$
|
6,945
|
|
Rail Group
|
|
|
28,793
|
|
|
|
43,281
|
|
|
|
8,515
|
|
|
|
14,092
|
|
Plant Nutrient Group
|
|
|
34,692
|
|
|
|
32,774
|
|
|
|
5,582
|
|
|
|
4,133
|
|
Turf & Specialty Group
|
|
|
21,503
|
|
|
|
18,888
|
|
|
|
5,858
|
|
|
|
6,635
|
|
Retail Group
|
|
|
51,431
|
|
|
|
53,044
|
|
|
|
9,805
|
|
|
|
9,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
189,099
|
|
|
$
|
198,146
|
|
|
$
|
39,959
|
|
|
$
|
41,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain & Ethanol Group
|
|
$
|
14,174
|
|
|
$
|
12,623
|
|
|
$
|
1,738
|
|
|
$
|
1,780
|
|
Rail Group
|
|
|
10,986
|
|
|
|
22,822
|
|
|
|
3,640
|
|
|
|
6,218
|
|
Plant Nutrient Group
|
|
|
7,128
|
|
|
|
10,351
|
|
|
|
(787
|
)
|
|
|
(1,235
|
)
|
Turf & Specialty Group
|
|
|
(144
|
)
|
|
|
(3,044
|
)
|
|
|
1,077
|
|
|
|
2,149
|
|
Retail Group
|
|
|
2,108
|
|
|
|
2,921
|
|
|
|
(2,098
|
)
|
|
|
(2,441
|
)
|
Other
|
|
|
(4,149
|
)
|
|
|
(6,361
|
)
|
|
|
(1,937
|
)
|
|
|
(474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
30,103
|
|
|
$
|
39,312
|
|
|
$
|
1,633
|
|
|
$
|
5,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
21,435
|
|
|
$
|
22,888
|
|
|
$
|
5,490
|
|
|
$
|
6,047
|
|
Cash invested in
acquisitions/investments in affiliates
|
|
|
85,753
|
|
|
|
16,005
|
|
|
|
1,895
|
|
|
|
22,852
|
|
Investments in property, plant and
equipment
|
|
|
13,201
|
|
|
|
11,927
|
|
|
|
1,896
|
|
|
|
2,495
|
|
Net investments in (sale of)
railcars(1)
|
|
|
(90
|
)
|
|
|
29,810
|
|
|
|
12,008
|
|
|
|
(1,051
|
)
|
Interest expense
|
|
|
10,545
|
|
|
|
12,079
|
|
|
|
2,950
|
|
|
|
4,194
|
|
EBITDA(2)
|
|
|
62,083
|
|
|
|
74,279
|
|
|
|
10,073
|
|
|
|
16,238
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31, 2006
|
|
|
|
Actual
|
|
|
As Adjusted
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,821
|
|
|
$
|
85,746
|
|
Total assets
|
|
|
700,667
|
|
|
|
770,592
|
|
Long-term debt(3)
|
|
|
77,217
|
|
|
|
77,217
|
|
Long-term debt, non-recourse(3)
|
|
|
86,269
|
|
|
|
86,269
|
|
Total shareholders equity
|
|
|
163,573
|
|
|
|
233,498
|
|
Working capital(4)
|
|
|
72,312
|
|
|
|
142,237
|
|
|
|
|
(1) |
|
Represents the net purchases of railcars offset by proceeds on
sales of railcars. In 2004, proceeds exceeded purchases. In
2004, cars acquired as described in Note 3 of the audited
consolidated financial statements included elsewhere in this
prospectus have been excluded from this number. |
|
(2) |
|
Earnings before interest, taxes, depreciation and amortization,
or EBITDA, is a non-GAAP measure. We believe that EBITDA
provides additional information for investors and others in
determining our ability to meet debt service obligations. EBITDA
does not represent and should be not be considered as an
alternative to net income or cash flow from operations as
determined by generally accepted accounting principles, and
EBITDA does not necessarily indicate whether cash flow will be
sufficient to meet cash requirements. Because EBITDA, |
8
|
|
|
|
|
as determined by us, excludes some, but not all, items that
affect net income, it may not be comparable to EBITDA or
similarly titled measures used by other companies. |
|
|
|
The following table sets forth our calculation of EBITDA and
provides a reconciliation to net cash provided by/(used in)
operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Three Months Ended March 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
Net Income
|
|
$
|
19,144
|
|
|
$
|
26,087
|
|
|
$
|
1,034
|
|
|
$
|
3,835
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
10,959
|
|
|
|
13,225
|
|
|
|
599
|
|
|
|
2,162
|
|
Interest expense
|
|
|
10,545
|
|
|
|
12,079
|
|
|
|
2,950
|
|
|
|
4,194
|
|
Depreciation and amortization
|
|
|
21,435
|
|
|
|
22,888
|
|
|
|
5,490
|
|
|
|
6,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
62,083
|
|
|
$
|
74,279
|
|
|
$
|
10,073
|
|
|
$
|
16,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add/(subtract):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
(10,959
|
)
|
|
|
(13,225
|
)
|
|
|
(599
|
)
|
|
|
(2,162
|
)
|
Interest expense
|
|
|
(10,545
|
)
|
|
|
(12,079
|
)
|
|
|
(2,950
|
)
|
|
|
(4,194
|
)
|
(Gain) loss on disposal of
property, plant and equipment
|
|
|
(431
|
)
|
|
|
540
|
|
|
|
(11
|
)
|
|
|
(45
|
)
|
Realized and unrealized gains
(losses) on railcars and related leases
|
|
|
(3,127
|
)
|
|
|
(7,682
|
)
|
|
|
(473
|
)
|
|
|
(2,759
|
)
|
Deferred income taxes
|
|
|
3,184
|
|
|
|
1,964
|
|
|
|
(447
|
)
|
|
|
(370
|
)
|
Excess tax benefit from
share-based payment arrangement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,199
|
)
|
Changes in working capital,
unremitted earnings of affiliates and other
|
|
|
22,287
|
|
|
|
(5,917
|
)
|
|
|
(86,919
|
)
|
|
|
(88,919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in)
operations
|
|
$
|
62,492
|
|
|
$
|
37,880
|
|
|
$
|
(81,326
|
)
|
|
$
|
(84,410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
Excludes current portion of long-term debt. |
|
(4) |
|
Working capital is defined as current assets less current
liabilities. |
9
RISK
FACTORS
An investment in our stock involves a high degree of risk.
You should carefully read and consider the risks described below
and all of the information set forth or incorporated by
reference in this prospectus, including our consolidated
financial statements and related notes included elsewhere in
this prospectus, before deciding to invest in our common stock.
If any of the following risks actually occur, our business,
financial condition, results of operations, cash flows and
business prospects could be materially and adversely affected.
In any such case, the trading price of our common stock could
decline and you could lose all or part of your investment. The
risks and uncertainties described below are those that we
currently believe may materially affect us. Additional risks not
presently known to us, or that we currently deem immaterial, may
also impair our financial condition and business operations.
Risks
Relating to Our Business
We
face increasing competition and pricing pressure from other
companies in our industries. If we are unable to compete
effectively with these companies, our sales and profit margins
would decrease, and our earnings and cash flows would be
adversely affected.
The markets for our products in each of our business segments
are highly competitive. Competitive pressures in all of our
businesses could affect the price of, and customer demand for,
our products, thereby negatively impacting our profit margins
and resulting in a loss of market share.
Our grain business competes with other grain merchandisers,
grain processors and end-users for the purchase of grain, as
well as with other grain merchandisers, private elevator
operators and cooperatives for the sale of grain. While we have
substantial operations in the eastern corn belt, many of our
competitors are significantly larger than we are and compete in
wider markets.
Our ethanol business will compete with other corn processors,
ethanol producers and refiners, a number of whom will be
divisions of substantially larger enterprises and have
substantially greater financial resources than we do. As of
June 23, 2006, the top ten producers accounted for 42.0% of
the ethanol production capacity in the U.S. according to
the RFA. Smaller competitors, including farmer-owned
cooperatives and independent firms consisting of groups of
individual farmers and investors, will also pose a threat.
Currently, international suppliers produce ethanol primarily
from sugar cane and have cost structures that may be
substantially lower than ours will be. The blenders credit
allows blenders having excise tax liability to apply the excise
tax credit against the tax imposed on the gasoline-ethanol
mixture. Any increase in domestic or foreign competition could
cause us to reduce our prices and take other steps to compete
effectively, which could adversely affect our future results of
operations and financial position.
Our Rail Group is subject to competition in the rail leasing
business, where we compete with larger entities that have
greater financial resources, higher credit ratings and access to
capital at a lower cost. These factors may enable competitors to
offer leases and loans to customers at lower rates than we are
able to provide.
Our Plant Nutrient Group competes with regional cooperatives,
manufacturers, wholesalers and multi-state retail/wholesalers.
Many of these competitors have considerably larger resources
than we.
Our Turf & Specialty Group competes with other
manufacturers of lawn fertilizer and corncob processors that are
substantially bigger and have considerably larger resources than
we.
Our Retail Group competes with a variety of retailers, primarily
mass merchandisers and do-it-yourself home centers in its three
markets. The principle competitive factors in our Retail Group
are location, product quality, price, service, reputation and
breadth of selection. Some of these competitors are larger than
us, have greater purchasing power and operate more stores in a
wider geographical area.
New
plants under construction or decreases in the demand for ethanol
may result in excess production capacity.
According to the RFA, domestic ethanol production capacity has
increased from 1.9 billion gallons per year, or
BGY, as of January 2001 to an estimated 4.8 BGY at
June 23, 2006. The RFA estimates that, as of June 23,
2006,
10
approximately 2.2 BGY of additional production capacity is under
construction. The ethanol industry in the U.S. now consists
of more than 90 production facilities. Excess capacity in the
ethanol industry would have an adverse effect on our future
results of operations, cash flows and financial position. In a
manufacturing industry with excess capacity, producers have an
incentive to manufacture additional products for so long as the
price exceeds the marginal cost of production (i.e., the
cost of producing only the next unit, without regard for
interest, overhead or fixed costs). This incentive can result in
the reduction of the market price of ethanol to a level that is
inadequate to generate sufficient cash flow to cover costs.
Excess capacity may also result from decreases in the demand for
ethanol, which could result from a number of factors, including
regulatory developments and reduced U.S. gasoline
consumption. Reduced gasoline consumption could occur as a
result of increased prices for gasoline or crude oil, which
could cause businesses and consumers to reduce driving or
acquire vehicles with more favorable gasoline mileage.
Certain
of our business segments are affected by the supply and demand
of commodities, and are sensitive to factors outside of our
control. Adverse price movements could adversely affect our
profitability and results of operations.
Our Grain & Ethanol and Plant Nutrient Groups buy, sell
and hold inventories of various commodities, some of which are
readily traded on commodity futures exchanges. In addition, our
Turf & Specialty Group uses some of these same
commodities as base raw materials in manufacturing golf course
and landscape fertilizer. Unfavorable weather conditions, both
local and worldwide, as well as other factors beyond our
control, can affect the supply and demand of these commodities
and expose us to liquidity pressures due to rapidly rising
futures market prices. Changes in the supply and demand of these
commodities can also affect the value of inventories that we
hold, as well as the price of raw materials for our Plant
Nutrient and Turf & Specialty Groups. Increased costs
of inventory and prices of raw material would decrease our
profit margins and adversely affect our results of operations.
While we hedge the majority of our grain inventory positions
with derivative instruments to manage risk associated with
commodity price changes, including purchase and sale contracts,
we are unable to hedge 100% of the price risk of each
transaction due to timing, availability of hedge contracts and
third party credit risk. Furthermore, there is a risk that the
derivatives we employ will not be effective in offsetting the
changes associated with the risks we are trying to manage. This
can happen when the derivative and the hedged item are not
perfectly matched. Our grain derivatives, for example, do not
hedge the basis pricing component of our grain inventory and
contracts. (Basis is defined as the difference between the cash
price of a commodity in our facility and the nearest
exchange-traded futures price.) Differences can reflect time
periods, locations or product forms. Although the basis
component is smaller and generally less volatile than the
futures component of our grain market price, significant
unfavorable basis moves on a grain position as large as ours can
significantly impact the profitability of the Grain &
Ethanol Group and our business as a whole. In addition, we do
not hedge non-grain commodities.
Since we buy and sell commodity derivatives on registered and
non-registered exchanges, our derivatives are subject to margin
calls. If there is a significant movement in the derivatives
market, we could incur a significant amount of liabilities,
which would impact our liquidity. We cannot assure you that the
efforts we have taken to mitigate the impact of the volatility
of the prices of commodities upon which we rely will be
successful and any sudden change in the price of these
commodities could have an adverse affect on our business and
results of operations.
Many
of our business segments operate in highly regulated industries.
Changes in government regulations or trade association policies
could adversely affect our results of operations.
Many of our business segments are subject to government
regulation and regulation by certain private sector
associations, compliance with which can impose significant costs
on our business. Failure to comply with such regulations can
result in additional costs, fines or criminal action.
In our Grain & Ethanol Group and Plant Nutrient Group,
agricultural production and trade flows are affected by
government actions. Production levels, markets and prices of the
grains we merchandise are affected by U.S. government
programs, which include acreage control and price support
programs of the USDA. In addition, grain sold by us must conform
to official grade standards imposed by the USDA. Other examples
of government
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policies that can have an impact on our business include
tariffs, duties, subsidies, import and export restrictions and
outright embargos. In addition, the development of the ethanol
industry in which we have invested has been driven by
U.S. governmental programs that provide incentives to
ethanol producers. Changes in government policies and producer
supports may impact the amount and type of grains planted, which
in turn, may impact our ability to buy grain in our market
region. Because a portion of our grain sales are to exporters,
the imposition of export restrictions could limit our sales
opportunities.
Our Rail Group is subject to regulation by the American
Association of Railroads and the Federal Railroad
Administration. These agencies regulate rail operations with
respect to health and safety matters. New regulatory rulings
could negatively impact financial results through higher
maintenance costs or reduced economic value of railcar assets.
Our Turf & Specialty Group manufactures lawn
fertilizers and weed and pest control products using potentially
hazardous materials. All products containing pesticides,
fungicides and herbicides must be registered with the
U.S. Environmental Protection Agency, or the
EPA, and state regulatory bodies before they can be
sold. The inability to obtain or the cancellation of such
registrations could have an adverse impact on our business. In
the past, regulations governing the use and registration of
these materials have required us to adjust the raw material
content of our products and make formulation changes. Future
regulatory changes may have similar consequences. Regulatory
agencies, such as the EPA, may at any time reassess the safety
of our products based on new scientific knowledge or other
factors. If it were determined that any of our products were no
longer considered to be safe, it could result in the amendment
or withdrawal of existing approvals, which, in turn, could
result in a loss of revenue, cause our inventory to become
obsolete or give rise to potential lawsuits against us.
Consequently, changes in existing and future government or trade
association polices may restrict our ability to do business and
cause our financial results to suffer.
The
U.S. ethanol industry is highly dependent upon a myriad of
federal and state legislation and regulation and any changes in
legislation or regulation could materially and adversely affect
our future results of operations and financial
position.
The elimination or significant reduction in the blenders
credit could have a material adverse effect on our results of
operations and financial position. The cost of production of
ethanol is made significantly more competitive with regular
gasoline by federal tax incentives. Before January 1, 2005,
the federal excise tax incentive program allowed gasoline
distributors who blended ethanol with gasoline to receive a
federal excise tax rate reduction for each blended gallon they
sold. If the fuel was blended with 10% ethanol, the
refiner/marketer paid $0.052 per gallon less tax, which
equated to an incentive of $0.52 per gallon of ethanol. The
$0.52 per gallon incentive for ethanol was reduced to
$0.51 per gallon in 2005 and is scheduled to expire (unless
extended) in 2010. The blenders credits may not be renewed
in 2010 or may be renewed on different terms. In addition, the
blenders credits, as well as other federal and state
programs benefiting ethanol (such as tariffs), generally are
subject to U.S. government obligations under international
trade agreements, including those under the World Trade
Organization Agreement on Subsidies and Countervailing Measures,
and might be the subject of challenges thereunder, in whole or
in part. The elimination or significant reduction in the
blenders credit or other programs benefiting ethanol may
have a material adverse effect on our results of operations and
financial position.
Ethanol can be imported into the U.S. duty-free from some
countries, which may undermine the ethanol industry in the
U.S. Imported ethanol is generally subject to a
$0.54 per gallon tariff that was designed to offset the
$0.51 per gallon ethanol incentive available under the
federal excise tax incentive program for refineries that blend
ethanol in their fuel. A special exemption from the tariff
exists for ethanol imported from 24 countries in Central America
and the Caribbean Islands. Imports from the exempted countries
may increase as a result of new plants under development. Since
production costs for ethanol in these countries are estimated to
be significantly less than what they are in the U.S., the
duty-free import of ethanol through the countries exempted from
the tariff may negatively affect the demand for domestic ethanol
and the price at which we sell our ethanol. In May 2006, bills
were introduced in both the U.S. House of Representatives
and U.S. Senate to repeal the $0.54 per gallon tariff.
We do not know the extent to which the volume of imports would
increase or the effect on U.S. prices for ethanol if this
proposed legislation is enacted or if the tariff is not renewed
beyond its current expiration in December 2007. Any
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changes in the tariff or exemption from the tariff could have a
material adverse effect on our results of operations and
financial position.
The effect of the Renewable Fuel Standard, or RFS,
in the recent Energy Policy Act is uncertain. The use of fuel
oxygenates, including ethanol, was mandated through regulation,
and much of the forecasted growth in demand for ethanol was
expected to result from additional mandated use of oxygenates.
Most of this growth was projected to occur in the next few years
as the remaining markets switch from methyl tertiary butyl
ether, or MTBE, to ethanol. The recently enacted
energy bill, however, eliminated the mandated use of oxygenates
and established minimum nationwide levels of renewable fuels
(ethanol, biodiesel or any other liquid fuel produced from
biomass or biogas) to be included in gasoline. Because biodiesel
and other renewable fuels in addition to ethanol are counted
toward the minimum usage requirements of the RFS, the
elimination of the oxygenate requirement for reformulated
gasoline may result in a decline in ethanol consumption, which
in turn could have a material adverse effect on our results of
operations and financial condition. The legislation also
included provisions for trading of credits for use of renewable
fuels and authorized potential reductions in the RFS minimum by
action of a governmental administrator. In addition, the rules
for implementation of the RFS and the energy bill are still
under development.
The legislation did not include MTBE liability protection sought
by refiners, and ethanol producers have estimated that this will
result in accelerated removal of MTBE and increased demand for
ethanol. Refineries may use other possible replacement
additives, such as iso-octane, iso-octene or alkylate.
Accordingly, the actual demand for ethanol may increase at a
lower rate than production for estimated demand, resulting in
excess production capacity in our industry, which would
negatively affect our results of operations, financial position
and cash flows.
Waivers of the RFS minimum levels of renewable fuels included in
gasoline could have a material adverse affect on our future
results of operations. Under the Energy Policy Act, the
U.S. Department of Energy, in consultation with the
Secretary of Agriculture and the Secretary of Energy, may waive
the renewable fuels mandate with respect to one or more states
if the EPA determines that implementing the requirements would
severely harm the economy or the environment of a state, a
region or the U.S., or that there is inadequate supply to meet
the requirement. Any waiver of the RFS with respect to one or
more states would adversely offset demand for ethanol and could
have a material adverse effect on our future results of
operations and financial condition.
Fluctuations
in the selling price and production cost of gasoline may reduce
future profit margins of our ethanol business.
We will market ethanol both as a fuel additive to reduce vehicle
emissions from gasoline and as an octane enhancer to improve the
octane rating of gasoline with which it is blended. As a result,
ethanol prices will be influenced by the supply and demand for
gasoline and our future results of operations and financial
position may be materially adversely affected if gasoline demand
or price decreases. Historically, the price of a gallon of
gasoline has been lower than the cost to produce a gallon of
ethanol.
Our
ethanol business will be highly sensitive to corn prices and we
generally will not be able to pass on increases in corn prices
to our customers.
The principal raw material we will use to produce ethanol and
co-products, including dry and wet distillers grains, is corn.
As a result, changes in the price of corn can significantly
affect our business. In general, rising corn prices will produce
lower profit margins for our ethanol business. Because ethanol
competes with non-corn-based fuels, we generally will be unable
to pass along increased corn costs to our customers. At certain
levels, corn prices may make ethanol uneconomical to use in fuel
markets. The price of corn is influenced by weather conditions
and other factors affecting crop yields, farmer planting
decisions and general economic, market and regulatory factors.
These factors include government policies and subsidies with
respect to agriculture and international trade, and global and
local demand and supply. The significance and relative effect of
these factors on the price of corn is difficult to predict. Any
event that tends to negatively affect the supply of corn, such
as adverse weather or crop disease, could increase corn prices
and potentially harm our ethanol business. In addition, we may
also have difficulty, from time to time, in physically sourcing
corn on economical terms due to supply shortages. Such a
shortage could require us to suspend our ethanol operations
until corn is available at economical terms, which would
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have a material adverse effect on our business, results of
operations and financial position. The price we pay for corn at
one of our facilities could increase if an additional ethanol
production facility is built in the same general vicinity.
The
market for natural gas is subject to market conditions that
create uncertainty in the price and availability of the natural
gas that we will use in our ethanol manufacturing
process.
We will rely upon third parties for our supply of natural gas,
which is consumed in the manufacture of ethanol. The prices for
and availability of natural gas are subject to volatile market
conditions. These market conditions often are affected by
factors beyond our control such as higher prices resulting from
colder than average weather conditions and overall economic
conditions. Significant disruptions in the supply of natural gas
could impair our ability to manufacture ethanol for our
customers. Furthermore, increases in natural gas prices or
changes in our natural gas costs relative to natural gas costs
paid by competitors may adversely affect our future results of
operations and financial position.
Growth
in the sale and distribution of ethanol is dependent on the
changes to and expansion of related infrastructure that may not
occur on a timely basis, if at all, and our future operations
could be adversely affected by infrastructure
disruptions.
Substantial development of infrastructure will be required by
persons and entities outside our control for our operations, and
the ethanol industry generally, to grow. Areas requiring
expansion include, but are not limited to:
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additional rail capacity;
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additional storage facilities for ethanol;
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increases in truck fleets capable of transporting ethanol within
localized markets; and
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expansion of refining and blending facilities to handle ethanol.
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Substantial investments required for these infrastructure
changes and expansions may not be made or they may not be made
on a timely basis. Any delay or failure in making the changes to
or expansion of infrastructure could hurt the demand or prices
for our ethanol products, impede our delivery of our ethanol
products, impose additional costs on us or otherwise have a
material adverse effect on our results of operations or
financial position. Our business will be dependent on the
continuing availability of infrastructure and any infrastructure
disruptions could have a material adverse effect on our business.
We may
not be able to implement our expansion strategy in our ethanol
business as planned or at all.
We have never before been in the business of producing ethanol,
and our first plant under construction is not yet operational.
We plan to grow our ethanol business by investing in new or
existing ethanol facilities and to pursue other business
opportunities. We believe that there is increasing competition
for suitable ethanol production sites. We may not find suitable
additional sites for construction of new facilities or other
suitable expansion opportunities. We may need additional
financing to implement our expansion strategy and we may not
have access to the funding required for the expansion of our
business or such funding may not be available to us on
acceptable terms. We may finance the expansion of our business
with additional indebtedness or by issuing additional equity
securities. We could face financial risks associated with
incurring additional indebtedness, such as reducing our
liquidity and access to financial markets and increasing the
amount of cash flow required to service such indebtedness, or
associated with issuing additional stock, such as dilution of
ownership and earnings.
We must also obtain numerous regulatory approvals and permits in
order to construct and operate additional or expanded ethanol
facilities. These regulatory requirements may not be satisfied
in a timely manner or at all. In addition, federal and state
governmental requirements may substantially increase our costs,
which could have a material adverse effect on our results of
operations and the financial position of our ethanol business.
Our expansion plans may also result in other unanticipated
adverse consequences, such as the diversion of managements
attention from our existing operations.
Our construction costs may also increase to levels that would
make a new facility too expensive to complete or unprofitable to
operate. We have not entered into any construction contracts or
other arrangements with respect to
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the construction of our current facilities that might limit our
exposure to higher costs in developing and completing any new
facilities. Contractors, engineering firms, construction firms
and equipment suppliers also receive requests and orders from
other ethanol companies and, therefore, we may not be able to
secure their services or products on a timely basis or on
acceptable financial terms. We may suffer significant delays or
cost overruns as a result of a variety of factors, such as
shortages of workers or materials, transportation constraints,
adverse weather, unforeseen difficulties or labor issues, any of
which could prevent us from commencing operations as expected at
our facilities.
We
handle potentially hazardous materials in our businesses. If
environmental requirements become more stringent or if we
experience unanticipated environmental hazards, we could be
subject to significant costs and liabilities.
A significant part of our operations is regulated by
environmental laws and regulations, including those governing
the labeling, use, storage, discharge and disposal of hazardous
materials. Because we use and handle hazardous substances in our
businesses, changes in environmental requirements or an
unanticipated significant adverse environmental event could have
a material adverse effect on our business. We cannot assure you
that we have been, or will at all times be, in compliance with
all environmental requirements, or that we will not incur
material costs or liabilities in connection with these
requirements. Private parties, including current and former
employees, could bring personal injury or other claims against
us due to the presence of, or exposure to, hazardous substances
used, stored or disposed of by us, or contained in our products.
We are also exposed to residual risk because some of the
facilities and land which we have acquired may have
environmental liabilities arising from their prior use. In
addition, changes to environmental regulations may require us to
modify our existing plant and processing facilities and could
significantly increase the cost of those operations.
We
rely on a limited number of suppliers for certain of our raw
materials and other products and the loss of one or several of
these suppliers could increase our costs and have a material
adverse effect on our business.
We rely on a limited number of suppliers for certain of our raw
materials and other products. If we were unable to obtain these
raw materials and products from our current vendors, or if there
were significant increases in our suppliers prices, it
could disrupt our operations, thereby significantly increasing
our costs and reducing our profit margins.
We are
required to carry significant amounts of inventory across all of
our businesses. If a substantial portion of our inventory
becomes damaged or obsolete, its value would decrease and our
profit margins would suffer.
We are exposed to the risk of a decrease in the value of our
inventories due to a variety of circumstances in all of our
businesses. For example, within our Grain & Ethanol
Group, there is the risk that the quality of our grain inventory
could deteriorate due to damage, moisture, insects, disease or
foreign material. If the quality of our grain were to
deteriorate below an acceptable level, the value of our
inventory could decrease significantly. In our Plant Nutrient
Group, planted acreage, and consequently the volume of
fertilizer and crop protection products applied, is partially
dependent upon government programs and the perception held by
the producer of demand for production. Technological advances in
agriculture, such as genetically engineered seeds that resist
disease and insects, or that meet certain nutritional
requirements, could also affect the demand for our crop
nutrients and crop protection products. Either of these factors
could render some of our inventory obsolete or reduce its value.
Within our Rail Group, major design improvements to loading,
unloading and transporting of certain products can render
existing (especially old) equipment obsolete. A significant
portion of our rail fleet is composed of older railcars. In
addition, in our Turf & Specialty Group, we build
substantial amounts of inventory in advance of the season to
prepare for customer demand. If we were to forecast our customer
demand incorrectly, we could build up excess inventory which
could cause the value of our inventory to decrease.
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The
spread between ethanol and corn prices can vary significantly
and we do not expect the spread to remain at recent high
levels.
The profitability of our ethanol business will depend, in part,
on the spread between ethanol and corn prices. In recent
periods, the spread between ethanol and corn prices has been at
historically high levels, driven in large part by high oil
prices and historically low corn prices. During 2005, however,
this spread fluctuated widely and fluctuations are likely to
continue to occur. Any reduction in the spread between ethanol
and corn prices, whether as a result of an increase in corn
prices or a reduction in ethanol prices, would adversely affect
our future results of operations and financial position.
Our
competitive position, financial position and results of
operations may be adversely affected by technological
advances.
The development and implementation of new technologies may
result in a significant reduction in the costs of ethanol
production. For instance, any technological advances in the
efficiency or cost to produce ethanol from inexpensive,
cellulosic sources such as wheat, oat or barley straw could have
an adverse effect on our business, because our ethanol
facilities are being designed to produce ethanol from corn,
which is, by comparison, a raw material with other high value
uses. We cannot predict when new technologies may become
available, the rate of acceptance of new technologies by our
competitors or the costs associated with new technologies. In
addition, advances in the development of alternatives to ethanol
or gasoline could significantly reduce demand for or eliminate
the need for ethanol.
Any advances in technology which require significant capital
expenditures to remain competitive or which reduce demand or
prices for ethanol would have a material adverse effect on our
results of operations and financial position.
Our
investments in joint ventures are subject to risks beyond our
control.
We currently have investments in six joint ventures. By
operating a business through a joint venture arrangement, we
have less control over operating decisions than if we were to
own the business outright. Specifically, we cannot act on major
business initiatives without the consent of the other investors
who may not always be in agreement with our ideas.
A
significant portion of our business operates in the railroad
industry, which is subject to unique, industry specific risks
and uncertainties. Our failure in assessing these risks and
uncertainties could be detrimental to our Rail Group
business.
Our Rail Group is subject to risks associated with the demands
and restrictions of the Class 1 railroads, a group of
publicly owned rail companies owning a high percentage of the
existing rail lines. These companies exercise a high degree of
control over whether private railcars can be allowed on their
lines and may reject certain railcars or require railcar
improvements to carry higher load limits. This presents risk and
uncertainty for our Rail Group. In addition, a shift in the
railroad strategy to investing in new rail cars and improvements
to existing railcars, instead of investing in locomotives and
infrastructure, could adversely impact our business by causing
increased competition and creating an oversupply of railcars.
Our rail fleet consists of a range of railcar types (boxcars,
gondolas, covered and open top hoppers, tank cars and pressure
differential cars) and locomotives. However a large
concentration of a particular type of railcar could expose us to
risk if demand were to decrease for that railcar type. Failure
on our part to identify and assess risks and uncertainties such
as these could negatively impact our business.
Our
Rail Group relies upon customers continuing to lease rather than
purchase railcar assets. Our business could be adversely
impacted if there were a large shift from leasing to purchasing
railcars, or if railcar leases are not match
funded.
Our Rail Group relies upon customers continuing to lease rather
than purchase railcar assets. There are a number of items that
factor into the customers decision to lease or purchase
assets, such as tax considerations, interest rates, balance
sheet considerations and operational flexibility. We have no
control over these external considerations, and changes in our
customers preferences could negatively impact demand for
our leasing
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products. Profitability is largely dependent on the ability to
maintain railcars on lease (utilization) at satisfactory lease
rates. A number of factors can adversely affect utilization and
lease rates including an economic downturn causing reduced
demand or oversupply in the markets in which we operate, changes
in customer behavior, or any other changes in supply or demand.
Furthermore, match funding (in relation to rail lease
transactions) means matching terms between the lease with the
customer and the funding arrangement with the financial
intermediary. This is not always possible. We are exposed to
risk to the extent that the lease terms do not perfectly match
the funding terms, leading to non-income generating assets if a
replacement lessee cannot be found.
During
economic downturns, the cyclical nature of the railroad business
results in lower demand for railcars and reduced
revenue.
The railcar business is cyclical. Overall economic conditions
and the purchasing and leasing habits of railcar users have a
significant effect upon our railcar leasing business due to the
impact on demand for refurbished and leased products. Economic
conditions that result in higher interest rates increase the
cost of new leasing arrangements, which could cause some of our
leasing customers to lease fewer of our railcars or demand
shorter terms. An economic downturn or increase in interest
rates may reduce demand for railcars, resulting in lower sales
volumes, lower prices, lower lease utilization rates and
decreased profits or losses.
We
have limited production and storage facilities for our products,
and any adverse events or occurrences at these facilities could
disrupt our business operations and decrease our revenues and
profitability.
Our Grain & Ethanol and Plant Nutrient Groups are
dependent on grain elevator and nutrient storage capacity,
respectively. The loss of use of one of our larger storage
facilities could cause a major disruption to our
Grain & Ethanol and Plant Nutrient operations. We are
currently constructing our first ethanol production facilities
and our ethanol operations may be subject to significant
interruption if any of these facilities experiences a major
accident or is damaged by severe weather or other natural
disasters. We currently have only one production facility for
our corncob-based products in our Turf & Specialty
Group, and only one warehouse in which we store the majority of
our retail merchandise inventory for our Retail Group. Any
adverse event or occurrence impacting these facilities could
cause major disruption to our business operations. In addition,
our operations may be subject to labor disruptions and
unscheduled downtime, or other operational hazards inherent in
our industry, such as equipment failures, fires, explosions,
abnormal pressures, blowouts, pipeline ruptures, transportation
accidents and natural disasters. Some of these operational
hazards may cause personal injury or loss of life, severe damage
to or destruction of property and equipment or environmental
damage, and may result in suspension of operations and the
imposition of civil or criminal penalties. Any disruption in our
business operations could decrease our revenues and negatively
impact our financial position.
Our
business involves significant safety risks. Significant
unexpected costs and liabilities would have a material adverse
effect on our profitability and overall financial
position.
Due to the nature of some of the businesses in which we operate,
we are exposed to significant safety risks such as grain dust
explosions, malfunction of equipment and chemical spills or
run-off. If one of our elevators were to experience a grain dust
explosion or if one of our pieces of equipment were to fail or
malfunction due to an accident or improper maintenance, it could
put our employees and others at serious risk. In addition, if we
were to experience a catastrophic failure of a storage facility
in our Plant Nutrient Group or Turf & Specialty Group,
it could harm not only our employees but the environment as well
and could subject us to significant costs.
Our
substantial indebtedness could adversely affect our financial
condition, decrease our liquidity and impair our ability to
operate our business.
We are dependent on a significant amount of debt to fund our
operations and contractual commitments. Our indebtedness could
interfere with our ability to operate our business. For example,
it could:
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increase our vulnerability to general adverse economic and
industry conditions;
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limit our ability to obtain additional financing which could
impact our ability to fund future working capital, capital
expenditures and other general needs as well as limit our
flexibility in planning for or reacting to changes in our
business and restrict us from making strategic acquisitions,
investing in new products or capital assets and taking advantage
of business opportunities;
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require us to dedicate a substantial portion of cash flows from
operating activities to payments on our indebtedness which would
reduce the cash flows available for other areas; and
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place us at a competitive disadvantage compared to our
competitors with less debt.
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If cash on hand is insufficient to pay our obligations or margin
calls as they come due at a time when we are unable to draw on
our credit facility, it could have an effect on our ability to
conduct our business. Our ability to make payments on and to
refinance our indebtedness will depend on our ability to
generate cash in the future. Our ability to generate cash is
dependent on various factors. These factors include general
economic, financial, competitive, legislative, regulatory and
other factors that are beyond our control. Certain of our
long-term borrowings include provisions that impose minimum
levels of working capital and equity, impose limitations on
additional debt and require that grain inventory positions be
substantially hedged. Our ability to satisfy these provisions
can be affected by events beyond our control, such as the demand
for and fluctuating price of grain. Although we are and have
been in compliance with these provisions, noncompliance could
result in default and acceleration of long-term debt payments.
As of March 31, 2006, we had $163.5 million of
long-term indebtedness, which represented approximately 50.0% of
our total book capitalization as of such date, or approximately
41.2% as adjusted to give effect to this offering. In addition,
we may incur substantial additional indebtedness in the future.
Any additional debt incurred by us could increase the risks
associated with our substantial leverage.
Many
of our sales to our customers are executed on credit. Failure on
our part to properly investigate the credit history of our
customers or a deterioration in economic conditions may
adversely impact our ability to collect on our
accounts.
A significant amount of our sales are executed on credit and are
unsecured. Extending sales on credit to new and existing
customers requires an extensive review of the customers
credit history. If we fail to do a proper and thorough credit
check on our customers, delinquencies may rise to unexpected
levels. If economic conditions deteriorate, the ability of our
customers to pay current obligations when due may be adversely
impacted and we may experience an increase in delinquent and
uncollectible accounts.
Our
ability to effectively operate our company could be impaired if
we fail to attract and retain key personnel.
Our ability to operate our business and implement our strategies
effectively depends, in part, on the efforts of our executive
officers and other key employees. Our management team has
significant industry experience and would be difficult to
replace. These individuals possess sales, marketing,
engineering, manufacturing, financial, risk management and
administrative skills that are critical to the operation of our
business. In addition, the market for employees with the
required technical expertise to succeed in our business is
highly competitive and we may be unable to attract and retain
qualified personnel to replace or succeed key employees should
the need arise. The loss of the services of any of our key
employees or the failure to attract or retain other qualified
personnel could impair our ability to operate and make it
difficult to execute our internal growth strategies, thereby
adversely affecting our business.
Compliance
with the internal control requirements of the Sarbanes-Oxley Act
may not detect all errors or omissions. If we fail to maintain
an effective system of internal control over financial
reporting, we may not be able to accurately report our financial
results or prevent fraud. As a result, our shareholders could
lose confidence in our financial reporting, which could harm the
trading price of our stock.
Section 404 of the Sarbanes-Oxley Act requires annual
management assessments of the effectiveness of internal control
over financial reporting and a report by our independent
registered public accounting firm attesting
18
to our evaluation as well as issuing their own opinion on our
internal controls over financial reporting. If we fail to
maintain adequate internal control over financial reporting, it
could not only adversely impact our financial results but also
cause us to fail to meet our reporting obligations. Although
management has concluded that adequate internal control
procedures were in place as of March 31, 2006, no system of
internal control can provide absolute assurance that the
financial statements are accurate and free of error. As a
result, the risk remains that our internal controls may not
detect all errors or omissions in the financial statements or be
able to detect all instances of fraud or illegal acts. In the
fourth quarter of 2005 we implemented new controls and
procedures to remediate a material weakness in our internal
controls over the preparation, review, presentation and
disclosure of our condensed consolidated statement of cash flows
as a result of the need to restate our financial statements for
the quarter ended September 30, 2005 to correct the
accounting for a single class of railcar related debt financing
transactions. If we or our auditors discover a future material
weakness, the disclosure of that fact, even if quickly remedied,
could reduce the markets confidence in our financial
statements and have a negative impact on the trading price of
our stock.
Disruption
or difficulties with our information technology could impair our
ability to operate our business.
Our business depends on our effective and efficient use of
information technology. We expect to continually invest in
updating and expanding our technology, however, a disruption or
failure of these systems could cause system interruptions,
delays in production and a loss of critical data and could
severely affect our ability to conduct normal business
operations.
Changes
in accounting rules can affect our financial position and
results of operations.
We have a significant amount of assets (railcars and related
leases) and liabilities (pension and postretirement benefits)
that are off-balance sheet. If generally accepted accounting
principles were to change to require that these items be
reported in the financial statements, it would cause us to
record a significant amount of assets and liabilities on our
balance sheet that we, up to this point, have not had to do,
which could have a negative impact on our debt covenants. The
Financial Accounting Standards Board, or FASB, has
issued an exposure draft that, if adopted, would require the
recognition of the overfunded and underfunded status of defined
benefit postretirement plans as an asset or a liability on the
balance sheet.
Our
pension and postretirement benefit plans are subject to changes
in assumptions which could have a significant impact on the
necessary cash flows needed to fund these plans and introduce
volatility into the annual expense for these
plans.
We continue to be impacted by the rising cost of pension and
other post-retirement benefits. We may be required to make cash
contributions to the extent necessary to comply with minimum
funding requirements under applicable law. These cash flows are
dependent on various assumptions used to calculate such amounts
including discount rates, long-term return on plan assets,
salary increases, health care cost trend rates and other
factors. Changes to any of these assumptions could have a
significant impact on these estimates. We have amended our
defined benefit pension plans effective January 1, 2007.
The provisions of this amendment include freezing benefits for
the retail line of business employees as of December 31,
2006, modifying the calculation of benefits for the non-retail
line of business employees at December 31, 2006 with future
benefits to be calculated using a new career average formula and
in the case of all employees, compensation for the years from
2007 to 2012 will be includable in the final average pay formula
calculating the final benefit earned for years prior to
December 31, 2006. Our postretirement health care benefit
plans are generally contributory and include a limit on our
share for most retirees. Although we have actively sought to
control increases in these costs, there can be no assurance that
we will succeed in limiting cost increases, and continued upward
pressure could reduce the profitability of our businesses.
Our
business may be adversely affected by numerous factors outside
of our control, such as seasonality and weather conditions,
national and international political developments, or other
natural disasters or strikes.
Many of our operations are dependent on weather conditions. The
success of our Grain & Ethanol Group, for example, is
highly dependent on the weather in the eastern corn belt (Ohio,
Michigan, Indiana and Illinois),
19
primarily during the spring planting season and through the
summer (wheat) and fall (corn and soybean) harvests.
Additionally, wet and cold conditions during the spring
adversely affect the application of fertilizer and other
products by golf courses, lawn care operators and consumers,
which could decrease demand in our Turf & Specialty
Group. These same weather conditions also adversely affect
purchases of lawn and garden products in our Retail Group, which
generates a significant amount of its sales from these products
during the spring season.
National and international political developments subject our
business to a variety of security risks including bio-terrorism,
and other terrorist threats to data security and physical loss
to our facilities. In order to protect ourselves against these
risks and stay current with new government legislation and
regulatory actions affecting us, we may need to incur
significant costs. No level of regulatory compliance can
guaranty that security threats will never occur.
If there were a disruption in available transportation due to
natural disaster, strike or other factors, we may be unable to
get raw materials inventory to our facilities or product to our
customers. This could disrupt our operations and cause us to be
unable to meet our customers demands.
We may
not be able to maintain sufficient insurance
coverage.
Our business operations entail a number of risks including
property damage, business interruption and liability coverage.
We maintain insurance for certain of these risks including
property insurance, workers compensation insurance,
general liability and other insurance. Although we believe our
insurance coverage is adequate for our current operations, there
is no guarantee that such insurance will be available on a
cost-effective basis in the future. In addition, although our
insurance is designed to protect us against losses attributable
to certain events, coverage may not be adequate to cover all
such losses.
The
loss of our largest customer, Cargill, Incorporated, could
result in lower revenues or higher expenses.
We have a five-year lease agreement and a five-year marketing
agreement with Cargill, Incorporated, relating to Cargills
Maumee and Toledo, Ohio grain handling and storage facilities.
The lease agreement covers 10%, or approximately
8.5 million bushels, of our total storage space and the
marketing agreement covers four of our facilities. Grain sales
to Cargill totaled $132.0 million in 2005, and included
grain covered by the marketing agreement as well as grain sold
to Cargill via normal forward sales from locations not covered
by the marketing agreement. Both agreements were renewed with
amendments in 2003 for an additional five years. If the
agreements are terminated or are not renewed and Cargill ceases
to purchase grain from us, our revenues could decline, which
could cause our business, financial condition and operating
results to suffer.
Risks
Relating to this Offering
Volatility
of our stock price could adversely affect our
shareholders.
The market price of our common stock could fluctuate
significantly as a result of numerous factors, some of which
include:
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quarterly variations in our operating results;
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general conditions in the ethanol or general agricultural
industry;
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changes in the supply and demand of our raw materials;
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interest rate changes or changes in our hedging strategies;
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changes in governmental laws and regulations affecting our
businesses;
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changes in the markets expectations about our operating
results;
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changes in the financial estimates and recommendations by
securities analysts concerning our company or the agricultural
industry in general;
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20
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failure of our operating results in meeting the expectations of
securities analysts or investors in a particular period;
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operating and stock price performance of other companies that
investors deem comparable to us;
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news reports relating to trends in our markets;
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material announcements by our competitors, manufacturers or
suppliers;
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sales of substantial amounts of our common stock by our
directors, executive officers or significant shareholders or the
perception that such sales could occur; and
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general economic and political conditions such as recessions,
natural disasters and war or terrorism.
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Any of the factors listed above could cause fluctuations in the
price of our common stock, and our common stock may trade at
prices significantly below the offering price. As a result, you
could lose part or all of your investment in our common stock.
You
may not receive the level of dividends historically paid by us
or any dividends at all.
We are not obligated to pay dividends. Dividend payments are not
guaranteed and are within the absolute discretion of our board
of directors. Future dividends with respect to shares of our
common stock, if any, will depend on, among other things, our
results of operations, working capital requirements, financial
condition, contractual restrictions, business opportunities,
anticipated cash needs, provisions of applicable law and other
factors that our board of directors may deem relevant.
We might not generate sufficient cash from operations in the
future to pay dividends on our common stock in the intended
amounts or at all. Our board of directors may decide not to pay
dividends at any time and for any reason. Our dividend practice
is based upon our directors current assessment of our
business and the environment in which we operate, and that
assessment could change based on competitive developments (which
could, for example, increase our need for capital expenditures),
new growth opportunities or other factors. If our cash flows
from operations for future periods were to fall below our
minimum expectations, we would need to either reduce or
eliminate dividends or fund a portion of our dividends with
borrowings or from other sources. If we were to use working
capital or permanent borrowings to fund dividends, we would have
less cash
and/or
borrowing capacity available for future dividends and other
purposes, which could negatively affect our financial condition,
our results of operations, our liquidity and our ability to
maintain or expand our business. Our board of directors may, in
its sole discretion, cease payment of dividends at any time and
could do so, for example, if it were to determine that we had
insufficient cash to take advantage of growth opportunities. See
Price Range of Our Common Stock and Dividends. The
reduction or elimination of dividends may negatively affect the
market price of our common stock.
We
will require a significant amount of cash, which may not be
available to us, to service our debt, pay dividends and fund our
other liquidity needs.
Our ability to make payments on, or to refinance or repay, our
debt, fund planned capital expenditures, pay dividends on our
common stock and expand our business will depend largely upon
our future operating performance. Our future operating
performance is subject to general economic, financial,
competitive, legislative and regulatory factors, as well as
other factors that are beyond our control. Our business may not
generate enough cash flow, or future borrowings may not be
available to us under our senior credit facilities or otherwise,
in an amount sufficient to enable us to pay our debt, pay
dividends or fund our other liquidity needs. If we are unable to
generate sufficient cash to service our debt requirements, we
will be required to refinance our senior credit facilities. We
may not be able to refinance any of our debt, including the
senior credit facilities, under such circumstances, on
commercially reasonable terms or at all. If we are unable to
refinance our debt or obtain new financing under these
circumstances, we would have to consider other options,
including sales of certain assets to meet our debt service
requirements, sales of equity and negotiations with our lenders
to restructure the applicable debt.
Our senior credit facilities could restrict our ability to do
some of these things. If we are forced to pursue any of the
above options under distressed conditions, our business
and/or the
value of our common stock could be adversely affected.
21
Provisions
in our charter documents could discourage potential acquisition
proposals, could delay, deter or prevent a change in control and
could limit the price certain investors might be willing to pay
for our stock.
Certain provisions of our amended and restated articles of
incorporation and amended and restated code of regulations may
inhibit changes in control of our company not approved by our
board of directors or changes in the composition of our board of
directors, which could result in the entrenchment of current
management. These provisions include:
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a prohibition on shareholder action through written consents;
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a requirement that special meetings of shareholders be called
only by the board of directors;
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advance notice requirements for shareholder proposals and
director nominations;
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limitations on the ability of shareholders to amend, alter or
repeal the code of regulations; and
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the authority of the board of directors to issue, without
shareholder approval, preferred stock with such terms as the
board of directors may determine and additional shares of our
common stock.
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These provisions could limit the price that certain investors
might be willing to pay in the future for shares of our common
stock.
22
FORWARDLOOKING
STATEMENTS
This prospectus, including the sections entitled
Prospectus Summary, Risk Factors and
Managements Discussion and Analysis of Financial
Condition and Results of Operations, contains
forward-looking statements. These statements relate to future
events or our future financial performance and involve known and
unknown risks, uncertainties and other factors that may cause
our actual results, levels of activity, performance or
achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or
implied by these forward-looking statements. You are urged to
carefully consider these risks and factors, including those
listed under Risk Factors and elsewhere in this
prospectus. In some cases, you can identify forward-looking
statements by terminology such as may,
will, should, expects,
intends, plans, anticipates,
believes, estimates,
predicts, potential,
continue or the negative of these terms or other
comparable terminology. These statements are only predictions.
Actual events or results may differ materially. The
forward-looking statements made in this prospectus relate only
to events as of the date on which the statements are made, and
we undertake no ongoing obligation, other than any imposed by
law, to update these statements. Although we believe that the
expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.
Forward-looking statements include, but are not limited to, the
following:
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the statements in Prospectus Summary The
Offering and Price Range of our Common Stock and
Dividends about our intention to pay dividends;
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the statements in Prospectus Summary The
Offering and Use of Proceeds about the
intended use of our proceeds from this offering;
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the statements in Risk Factors concerning, among
other things, the competition in our industry; changes in the
supply and demand of ethanol; changes in the supply and demand
of commodities; changes in government or trade association
regulation; our environmental liability exposure; our dependence
on certain suppliers for raw materials; the effect of our
inventory levels; changes in the spread between ethanol and corn
prices; our investments in the ethanol business; our investments
in joint ventures; unique risks associated with the railroad
industry; our limited production and storage facilities; safety
risks; our ability to assess our customers credit
worthiness; our ability to attract and retain key personnel; our
ability to maintain an effective system of internal control over
financial reporting; our susceptibility to changes in accounting
policies; general and political factors outside of our control;
our ability to maintain adequate insurance; our ability to
maintain large customers; our ability to pay dividends; and our
indebtedness; and
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all of the statements in Prospectus Summary
Our Business Strategy, Business Our
Business Strategy and related summaries about our plans,
goals, intentions, expectations and beliefs, including those
concerning the ethanol industry, our customers and distribution
channels, product offerings and cost structure.
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All forward-looking statements in this prospectus are made as of
the date hereof, based on information available to us as of the
date hereof, and we caution you not to rely on these statements
without also considering the risks and uncertainties associated
with these statements and our business that are addressed in
this prospectus. We assume no obligation to update any
forward-looking statement.
23
USE OF
PROCEEDS
We expect to receive net proceeds from this offering of
approximately $69.9 million, after deducting underwriting
discounts, commissions and other offering-related expenses. We
intend to use the net proceeds from this offering for
investments in the ethanol industry, including additional
ethanol plants, investments in additional railcar assets and for
general corporate purposes. We retain broad discretion in the
allocation and use of such proceeds, since the amounts that we
actually expend for working capital purposes will vary
significantly depending on a number of factors, including future
revenue growth, if any, and the amount of cash we generate from
our operations. Pending the uses of proceeds described herein,
we intend to invest the net proceeds of this offering in
short-term, interest-bearing, investment-grade securities. We
will not receive any of the proceeds from the sale of common
stock by the selling shareholders in this offering.
PRICE
RANGE OF OUR COMMON STOCK AND DIVIDENDS
Our common stock is quoted on the Nasdaq Global Select Market
under the symbol ANDE. The following table sets
forth, for the periods indicated, the high and low sale price
for shares of our common stock as reported on the Nasdaq Global
Select Market and the cash dividends declared per share of our
common stock, in each case after giving effect to our
two-for-one
stock split which occurred on June 28, 2006.
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High
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Low
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Dividend
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Fiscal Year 2004
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First Quarter Ended March 31
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$
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10.00
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$
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7.75
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$
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0.0375
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Second Quarter Ended June 30
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9.88
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|
|
|
8.04
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|
0.0375
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Third Quarter Ended
September 30
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10.65
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|
|
|
8.23
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0.0400
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Fourth Quarter Ended
December 31
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13.15
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|
10.01
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0.0400
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Fiscal Year 2005
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First Quarter Ended March 31
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$
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16.66
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$
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11.57
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$
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0.0400
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Second Quarter Ended June 30
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18.30
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|
13.22
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|
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0.0425
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Third Quarter Ended
September 30
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|
21.17
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|
|
13.75
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0.0425
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Fourth Quarter Ended
December 31
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22.41
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|
13.25
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0.0425
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Fiscal Year 2006
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First Quarter Ended March 31
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$
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40.83
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|
$
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21.11
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$
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0.0450
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Second Quarter Ended June 30
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62.70
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|
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35.01
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0.0450
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On August 22, 2006, the last reported sale price of our
common stock on the Nasdaq Global Select Market was
$37.25 per share. As of August 22, 2006, there were
485 holders of record of our common stock.
On August 17, 2006, our board of directors approved a cash
dividend of $0.045 per common share to shareholders of record on
October 2, 2006, which will be paid on October 23,
2006. This will be our
40th consecutive
quarterly cash dividend since the listing of our common stock on
Nasdaq on February 20, 1996.
We intend to pay quarterly dividends in the future, however, our
historical dividend practice could be modified or revoked at any
time in the absolute discretion of our board of directors,
depending on a number of factors, including our future earnings,
capital requirements, financial condition, future prospects and
other factors as the board of directors may deem relevant. In
addition, our current loan agreements restrict the payment of
annual dividends to amounts specified in such agreements.
24
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
consolidated capitalization as of March 31, 2006:
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on an actual basis; and
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on an as adjusted basis, to reflect the receipt by us of the
estimated net proceeds from this offering of approximately
$69.9 million, after deducting underwriting discounts,
commissions and other offering-related expenses payable by us,
assuming no exercise of the underwriters over-allotment
option.
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This capitalization table should be read in conjunction with our
consolidated financial statements and related notes thereto
included elsewhere in this prospectus.
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As of March 31, 2006
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Actual
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As Adjusted
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(In thousands)
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Cash and cash equivalents
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$
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15,821
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$
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85,746
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Long-term debt:
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Long-term debt-non-recourse, less
current maturities
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86,269
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86,269
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Long-term debt, less current
maturities
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77,217
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77,217
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Total long-term debt
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163,486
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163,486
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Shareholders equity:
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Common shares, without par value;
25,000 shares authorized; 16,860 and 18,860 shares
issued actual and as adjusted, respectively
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84
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94
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Additional paid-in capital
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72,597
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142,512
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Treasury shares
(1,658 shares; at cost)
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(14,534
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)
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(14,534
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)
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Accumulated other comprehensive
loss
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(311
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)
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(311
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)
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Retained earnings
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105,737
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105,737
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Total shareholders equity
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163,573
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|
|
233,498
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Total capitalization
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$
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327,059
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$
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396,984
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25
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA
The table below sets forth selected historical consolidated
financial data for the periods presented. We have prepared this
information using our consolidated financial statements for the
five fiscal years ended December 31, 2001, 2002, 2003, 2004
and 2005, and for the three months ended March 31, 2005 and
March 31, 2006. The financial statements for the three most
recent fiscal years identified above are included in this
prospectus and have been audited by PricewaterhouseCoopers LLP,
independent accountants. The financial statements for the fiscal
years ended December 31, 2001 and 2002 are not included in
this prospectus but have been audited by PricewaterhouseCoopers
LLP, independent accountants. The financial statements for the
three months ended March 31, 2005 and March 31, 2006
have not been audited, but we believe our unaudited statements
include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of our financial
condition and results of operations for these periods, and in
the opinion of management, have been prepared on the same basis
as the audited financial statements.
The summary historical consolidated financial and operating
information may not be indicative of our results of future
operations and should be read in conjunction with the discussion
under the section Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our audited and unaudited consolidated financial statements
and related notes thereto included elsewhere in this prospectus.
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Year Ended December 31,
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Three Months Ended March 31,
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2001
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2002
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2003
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2004
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2005
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2005
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2006
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(Dollars in thousands, except per share data)
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Statement of Operations
Data:
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Sales and merchandising revenues
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|
$
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976,033
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|
|
$
|
1,070,266
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|
|
$
|
1,239,005
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|
|
$
|
1,266,932
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|
|
$
|
1,296,652
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|
|
$
|
258,656
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|
|
$
|
280,658
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Cost of sales and merchandising
revenues
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|
|
815,282
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|
|
|
907,165
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|
|
|
1,074,911
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|
|
|
1,077,833
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|
|
|
1,098,506
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|
|
|
218,697
|
|
|
|
239,173
|
|
|
|
|
|
|
|
|
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|
|
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Gross profit
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|
|
160,751
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|
|
|
163,101
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|
|
|
164,094
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|
|
|
189,099
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|
|
|
198,146
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|
|
|
39,959
|
|
|
|
41,485
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|
Operating, administrative and
general expenses
|
|
|
141,091
|
|
|
|
141,028
|
|
|
|
143,129
|
|
|
|
154,895
|
|
|
|
153,759
|
|
|
|
36,901
|
|
|
|
37,906
|
|
Interest expense
|
|
|
11,570
|
|
|
|
9,812
|
|
|
|
8,048
|
|
|
|
10,545
|
|
|
|
12,079
|
|
|
|
2,950
|
|
|
|
4,194
|
|
Other income/gains:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
3,846
|
|
|
|
3,728
|
|
|
|
4,701
|
|
|
|
4,973
|
|
|
|
4,683
|
|
|
|
1,079
|
|
|
|
3,059
|
|
Equity in earnings of affiliates
|
|
|
(5
|
)
|
|
|
13
|
|
|
|
347
|
|
|
|
1,471
|
|
|
|
2,321
|
|
|
|
446
|
|
|
|
3,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
11,931
|
|
|
|
16,002
|
|
|
|
17,965
|
|
|
|
30,103
|
|
|
|
39,312
|
|
|
|
1,633
|
|
|
|
5,997
|
|
Income tax provision
|
|
|
2,889
|
|
|
|
5,238
|
|
|
|
6,264
|
|
|
|
10,959
|
|
|
|
13,225
|
|
|
|
599
|
|
|
|
2,162
|
|
Cumulative effect of a change in
accounting principle(2)
|
|
|
(185
|
)
|
|
|
3,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,857
|
|
|
$
|
14,244
|
|
|
$
|
11,701
|
|
|
$
|
19,144
|
|
|
$
|
26,087
|
|
|
$
|
1,034
|
|
|
$
|
3,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
|
|
$
|
0.61
|
|
|
$
|
0.98
|
|
|
$
|
0.82
|
|
|
$
|
1.32
|
|
|
$
|
1.76
|
|
|
$
|
0.07
|
|
|
$
|
0.26
|
|
Diluted earnings
|
|
$
|
0.61
|
|
|
$
|
0.96
|
|
|
$
|
0.80
|
|
|
$
|
1.28
|
|
|
$
|
1.70
|
|
|
$
|
0.07
|
|
|
$
|
0.25
|
|
Dividends paid
|
|
$
|
0.13
|
|
|
$
|
0.13
|
|
|
$
|
0.14
|
|
|
$
|
0.1525
|
|
|
$
|
0.165
|
|
|
$
|
0.04
|
|
|
$
|
0.045
|
|
Weighted average shares
outstanding Basic
|
|
|
14,562
|
|
|
|
14,566
|
|
|
|
14,282
|
|
|
|
14,492
|
|
|
|
14,842
|
|
|
|
14,746
|
|
|
|
15,090
|
|
Weighted average shares
outstanding Diluted
|
|
|
14,632
|
|
|
|
14,858
|
|
|
|
14,680
|
|
|
|
14,996
|
|
|
|
15,410
|
|
|
|
15,286
|
|
|
|
15,638
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
March 31,
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Sales and merchandising
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain & Ethanol Group
|
|
$
|
471,625
|
|
|
$
|
577,685
|
|
|
$
|
696,615
|
|
|
$
|
664,565
|
|
|
$
|
627,958
|
|
|
$
|
120,937
|
|
|
$
|
128,625
|
|
Rail Group
|
|
|
31,061
|
|
|
|
18,747
|
|
|
|
35,200
|
|
|
|
59,283
|
|
|
|
92,009
|
|
|
|
17,705
|
|
|
|
34,383
|
|
Plant Nutrient Group
|
|
|
182,571
|
|
|
|
178,322
|
|
|
|
194,600
|
|
|
|
236,574
|
|
|
|
271,371
|
|
|
|
44,071
|
|
|
|
46,033
|
|
Turf & Specialty Group
|
|
|
112,827
|
|
|
|
114,315
|
|
|
|
134,017
|
|
|
|
127,814
|
|
|
|
122,561
|
|
|
|
40,891
|
|
|
|
39,505
|
|
Retail Group
|
|
|
177,949
|
|
|
|
181,197
|
|
|
|
178,573
|
|
|
|
178,696
|
|
|
|
182,753
|
|
|
|
35,052
|
|
|
|
32,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
976,033
|
|
|
$
|
1,070,266
|
|
|
$
|
1,239,005
|
|
|
$
|
1,266,932
|
|
|
$
|
1,296,652
|
|
|
$
|
258,656
|
|
|
$
|
280,658
|
|
Gross Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain & Ethanol Group
|
|
$
|
52,029
|
|
|
$
|
47,348
|
|
|
$
|
41,783
|
|
|
$
|
52,680
|
|
|
$
|
50,159
|
|
|
$
|
10,199
|
|
|
$
|
6,945
|
|
Rail Group
|
|
|
7,267
|
|
|
|
8,718
|
|
|
|
13,626
|
|
|
|
28,793
|
|
|
|
43,281
|
|
|
|
8,515
|
|
|
|
14,092
|
|
Plant Nutrient Group
|
|
|
33,363
|
|
|
|
33,284
|
|
|
|
34,923
|
|
|
|
34,692
|
|
|
|
32,774
|
|
|
|
5,582
|
|
|
|
4,133
|
|
Turf & Specialty Group
|
|
|
20,337
|
|
|
|
22,876
|
|
|
|
23,367
|
|
|
|
21,503
|
|
|
|
18,888
|
|
|
|
5,858
|
|
|
|
6,635
|
|
Retail Group
|
|
|
47,755
|
|
|
|
50,875
|
|
|
|
50,395
|
|
|
|
51,431
|
|
|
|
53,044
|
|
|
|
9,805
|
|
|
|
9,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
160,751
|
|
|
$
|
163,101
|
|
|
$
|
164,094
|
|
|
$
|
189,099
|
|
|
$
|
198,146
|
|
|
$
|
39,959
|
|
|
$
|
41,485
|
|
Operating income
(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain & Ethanol Group
|
|
$
|
14,460
|
|
|
$
|
9,627
|
|
|
$
|
6,018
|
|
|
$
|
14,174
|
|
|
$
|
12,623
|
|
|
$
|
1,738
|
|
|
$
|
1,780
|
|
Rail Group
|
|
|
(349
|
)
|
|
|
1,563
|
|
|
|
4,062
|
|
|
|
10,986
|
|
|
|
22,822
|
|
|
|
3,640
|
|
|
|
6,218
|
|
Plant Nutrient Group
|
|
|
5,305
|
|
|
|
5,527
|
|
|
|
7,850
|
|
|
|
7,128
|
|
|
|
10,351
|
|
|
|
(787
|
)
|
|
|
(1,235
|
)
|
Turf & Specialty Group
|
|
|
(7,654
|
)
|
|
|
(1,322
|
)
|
|
|
1,022
|
|
|
|
(144
|
)
|
|
|
(3,044
|
)
|
|
|
1,077
|
|
|
|
2,149
|
|
Retail Group
|
|
|
1,868
|
|
|
|
4,003
|
|
|
|
3,413
|
|
|
|
2,108
|
|
|
|
2,921
|
|
|
|
(2,098
|
)
|
|
|
(2,441
|
)
|
Other
|
|
|
(1,699
|
)
|
|
|
(3,396
|
)
|
|
|
(4,400
|
)
|
|
|
(4,149
|
)
|
|
|
(6,361
|
)
|
|
|
(1,937
|
)
|
|
|
(474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,931
|
|
|
$
|
16,002
|
|
|
$
|
17,965
|
|
|
$
|
30,103
|
|
|
$
|
39,312
|
|
|
$
|
1,633
|
|
|
$
|
5,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
March 31,
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
14,264
|
|
|
$
|
14,314
|
|
|
$
|
15,139
|
|
|
$
|
21,435
|
|
|
$
|
22,888
|
|
|
$
|
5,490
|
|
|
$
|
6,047
|
|
Cash invested in
acquisitions/investments in affiliates
|
|
|
|
|
|
|
|
|
|
|
1,182
|
|
|
|
85,753
|
|
|
|
16,005
|
|
|
|
1,895
|
|
|
|
22,852
|
|
Investments in property, plant and
equipment
|
|
|
9,155
|
|
|
|
9,834
|
|
|
|
11,749
|
|
|
|
13,201
|
|
|
|
11,927
|
|
|
|
1,896
|
|
|
|
2,495
|
|
Net investment in (sale of)
railcars(3)
|
|
|
6,414
|
|
|
|
(7,782
|
)
|
|
|
3,788
|
|
|
|
(90
|
)
|
|
|
29,810
|
|
|
|
12,008
|
|
|
|
(1,051
|
)
|
Interest expense
|
|
|
11,570
|
|
|
|
9,812
|
|
|
|
8,048
|
|
|
|
10,545
|
|
|
|
12,079
|
|
|
|
2,950
|
|
|
|
4,194
|
|
EBITDA(4)
|
|
|
37,765
|
|
|
|
40,128
|
|
|
|
41,152
|
|
|
|
62,083
|
|
|
|
74,279
|
|
|
|
10,073
|
|
|
|
16,238
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of March 31,
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,697
|
|
|
$
|
6,095
|
|
|
$
|
6,444
|
|
|
$
|
8,439
|
|
|
$
|
13,876
|
|
|
$
|
6,138
|
|
|
$
|
15,821
|
|
Total assets
|
|
|
458,718
|
|
|
|
469,780
|
|
|
|
493,292
|
|
|
|
573,598
|
|
|
|
634,144
|
|
|
|
625,830
|
|
|
|
700,667
|
|
Long-term debt(5)
|
|
|
91,316
|
|
|
|
84,272
|
|
|
|
82,127
|
|
|
|
89,803
|
|
|
|
79,329
|
|
|
|
89,151
|
|
|
|
77,217
|
|
Long-term debt, non-recourse(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,343
|
|
|
|
88,714
|
|
|
|
61,465
|
|
|
|
86,269
|
|
Total shareholders equity
|
|
|
94,934
|
|
|
|
105,765
|
|
|
|
115,791
|
|
|
|
133,876
|
|
|
|
158,833
|
|
|
|
134,755
|
|
|
|
163,573
|
|
Working capital(6)
|
|
|
73,608
|
|
|
|
80,044
|
|
|
|
86,871
|
|
|
|
102,170
|
|
|
|
96,219
|
|
|
|
92,525
|
|
|
|
72,312
|
|
|
|
|
(1) |
|
Includes gains of $0.3 million in each of 2002 and 2001 for
insurance settlements received. |
|
(2) |
|
FAS 133 (2001) and EITF D-96 (2002). |
|
(3) |
|
Represents net purchases of railcars offset by proceeds on sales
of railcars. In 2002 and 2004, proceeds exceeded purchases. In
2004, cars acquired as described in Note 3 to the audited
consolidated financial statements included elsewhere in this
prospectus have been excluded from this number. |
|
(4) |
|
Earnings before interest, taxes, depreciation and amortization,
or EBITDA, is a non-GAAP measure. We believe that EBITDA
provides additional information for investors and others in
determining our ability to meet debt service obligations. EBITDA
does not represent and should be not be considered as an
alternative to net income or cash flow from operations as
determined by generally accepted accounting principles, and
EBITDA does not necessarily indicate whether cash flow will be
sufficient to meet cash requirements. Because EBITDA, as
determined by us, excludes some, but not all, items that affect
net income, it may not be comparable to EBITDA or similarly
titled measures used by other companies. |
28
The following table sets forth our calculation of EBITDA and
provides a reconciliation to net cash provided by/(used in)
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Year Ended December 31,
|
|
|
Ended March 31,
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Income before cumulative change in
accounting principal
|
|
$
|
9,042
|
|
|
$
|
10,764
|
|
|
$
|
11,701
|
|
|
$
|
19,144
|
|
|
$
|
26,087
|
|
|
$
|
1,034
|
|
|
$
|
3,835
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
2,889
|
|
|
|
5,238
|
|
|
|
6,264
|
|
|
|
10,959
|
|
|
|
13,225
|
|
|
|
599
|
|
|
|
2,162
|
|
Interest expense
|
|
|
11,570
|
|
|
|
9,812
|
|
|
|
8,048
|
|
|
|
10,545
|
|
|
|
12,079
|
|
|
|
2,950
|
|
|
|
4,194
|
|
Depreciation and amortization
|
|
|
14,264
|
|
|
|
14,314
|
|
|
|
15,139
|
|
|
|
21,435
|
|
|
|
22,888
|
|
|
|
5,490
|
|
|
|
6,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
37,765
|
|
|
$
|
40,128
|
|
|
$
|
41,152
|
|
|
$
|
62,083
|
|
|
$
|
74,279
|
|
|
$
|
10,073
|
|
|
$
|
16,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add/(subtract):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
(2,889
|
)
|
|
|
(5,238
|
)
|
|
|
(6,264
|
)
|
|
|
(10,959
|
)
|
|
|
(13,225
|
)
|
|
|
(599
|
)
|
|
|
(2,162
|
)
|
Interest expense
|
|
|
(11,570
|
)
|
|
|
(9,812
|
)
|
|
|
(8,048
|
)
|
|
|
(10,545
|
)
|
|
|
(12,079
|
)
|
|
|
(2,950
|
)
|
|
|
(4,194
|
)
|
Gain on insurance settlements
|
|
|
(338
|
)
|
|
|
(302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) loss on disposal of
property, plant and equipment
|
|
|
(336
|
)
|
|
|
(406
|
)
|
|
|
(273
|
)
|
|
|
(431
|
)
|
|
|
540
|
|
|
|
(11
|
)
|
|
|
(45
|
)
|
Realized and unrealized gains
(losses) on railcars and related leases
|
|
|
1,172
|
|
|
|
(179
|
)
|
|
|
(2,146
|
)
|
|
|
(3,127
|
)
|
|
|
(7,682
|
)
|
|
|
(473
|
)
|
|
|
(2,759
|
)
|
Deferred income taxes
|
|
|
(539
|
)
|
|
|
1,432
|
|
|
|
382
|
|
|
|
3,184
|
|
|
|
1,964
|
|
|
|
(447
|
)
|
|
|
(370
|
)
|
Excess tax benefit from
share-based
payment arrangement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,199
|
)
|
Changes in working capital,
unremitted earnings of affiliates and other
|
|
|
(29,373
|
)
|
|
|
(2,374
|
)
|
|
|
19,290
|
|
|
|
22,287
|
|
|
|
(5,917
|
)
|
|
|
(86,919
|
)
|
|
|
(88,919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in)
operations
|
|
$
|
(6,108
|
)
|
|
$
|
23,249
|
|
|
$
|
44,093
|
|
|
$
|
62,492
|
|
|
$
|
37,880
|
|
|
$
|
(81,326
|
)
|
|
$
|
(84,410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5) |
|
Excludes current portion of long-term debt. |
|
(6) |
|
Working capital is defined as total current assets minus total
current liabilities. |
29
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
The statements in this discussion regarding industry outlook,
our expectations regarding the future performance of our
business and other non-historical statements are forward-looking
statements. These forward-looking statements are subject to
numerous risks and uncertainties, including, but not limited to,
the risks and uncertainties described under Risk
Factors. See Forward-Looking Statements for
more information. You should read the following discussion
together with our consolidated financial statements and related
notes thereto included elsewhere or incorporated by reference in
this prospectus.
Overview
We are an entrepreneurial, customer focused company with
diversified interests in the agriculture and transportation
markets. Since our founding in 1947, we have developed specific
core competencies in risk management, bulk handling,
transportation and logistics and an understanding of commodity
markets. We have leveraged these competencies to diversify our
operations into other complementary markets, including ethanol,
railcar leasing, plant nutrients, turf products and general
merchandise retailing. For the year ended December 31,
2005, our sales and merchandising revenues were
$1,296.7 million, our operating income was
$39.3 million and our EBITDA was $74.3 million, which
represented increases over 2004 levels of 2%, 31% and 20%,
respectively. For the three months ended March 31, 2006,
our sales and merchandising revenues were $280.7 million,
our operating income was $6.0 million and our EBITDA was
$16.2 million, which represented increases over 2005 levels
of 9%, 267% and 61%, respectively.
We operate our business in five segments: the Grain &
Ethanol Group, the Rail Group, the Plant Nutrient Group, the
Turf & Specialty Group and the Retail Group. Included
below in Other are the corporate level amounts that
are not attributable to an operating group and other amounts
that are attributable to the sale of excess real estate.
The
Grain & Ethanol Group
Our Grain & Ethanol Group operates grain elevators in
Ohio, Michigan, Indiana and Illinois, which have 81 million
bushels of capacity and shipped approximately 167 million
bushels of grain in 2005. In addition to storage and
merchandising, we perform grain trading, risk management and
other services for our customers. We are also the developer and
largest investor in two ethanol facilities currently under
construction in Indiana and Michigan. In addition to our equity
investment, we provide management, grain origination, risk
management and other services to these joint ventures for which
we are paid annual service fees. We are also an investor in a
third ethanol facility located in Indiana for which we also
provide grain origination services. For the year ended
December 31, 2005 and the three months ended March 31,
2006, our Grain & Ethanol Group represented 48% and 46%
of our sales and merchandising revenues, respectively, and 32%
and 30% of our operating income, respectively.
We intend to continue building our trading operations,
increasing our investments and service offerings to the ethanol
industry and growing our traditional grain business. Our
investment in Lansing increases our trading capabilities,
including ethanol, and extends our reach into the western corn
belt. We anticipate making additional investments in large scale
ethanol plants through joint venture agreements and providing
origination, management, logistics, merchandising and other
services to the facilities. We believe efficiently using capital
in this manner will extend our geographic reach and availability
of ethanol as well as leverage our core competencies in the
growing ethanol industry.
The Rail
Group
With over 19,000 railcars, we own one of the largest
diversified, private fleets (exclusive of railroads) in the
U.S. Our Rail Group provides leasing, repair and management
services as well as periodically sells cars from the fleet. We
also operate a leading refurbishment business that extends the
life and uses of railcars and a custom component manufacturing
business. For the year ended December 31, 2005 and the
three months ended March 31, 2006, our Rail Group
represented 7% and 12% of our sales and merchandising revenues,
respectively, and 58% and 104% of our operating income,
respectively.
30
We intend to grow our fleet of rail cars and locomotives through
targeted portfolio acquisitions and open market purchases. We
also plan to expand our repair and refurbishment operations by
adding fixed and mobile facilities. Our growing operations in
the rail industry positions us to take advantage of a favorable
pricing environment and the increasing need for transportation.
The Plant
Nutrient Group
We are a significant plant nutrient distributor in North America
with 1.5 million tons of shipments in 2005 and 600,000 tons
of storage capacity. We operate 12 distribution centers and 7
farm centers serving approximately 1,800 wholesale and 2,500
farm center customers. For the year ended December 31, 2005
and the three months ended March 31, 2006, our Plant
Nutrient Group represented 21% and 17% of our sales and
merchandising revenues, respectively, and 26% and (21)% of our
operating income, respectively.
We intend to transition our offering to more premium products
from commodity products and services. For example, we are
currently exploring an expansion in our Plant Nutrient
Groups product offerings by selling reagents for air
pollution control technologies used in coal-fired power plants
and marketing the resulting byproducts that can be used as plant
nutrients. Focusing on higher value added products and services
and improving our sourcing of raw materials will leverage our
infrastructure.
The
Turf & Specialty Group
Our Turf & Specialty Group produces granular fertilizer
products for the professional lawn care and golf course markets.
We also produce private label fertilizer and corncob based
animal bedding and cat litter for the consumer markets. For the
year ended December 31, 2005 and the three months ended
March 31, 2006, our Turf & Specialty Group
represented 10% and 14% of our sales and merchandising revenues,
respectively, and (8)% and 36% of our operating income,
respectively.
We intend to focus on leveraging our leading position in the
golf fertilizer market and our research and development
capabilities to develop higher value, proprietary products. For
example, we have recently developed a patented premium
dispersible golf course fertilizer and a patented corncob-based
cat litter that will be sold through a major national brand. We
also plan to continue to improve our cost structure and asset
utilization.
The
Retail Group
We operate six large format stores in Ohio that feature More
for Your
Home®.
Our stores focus on providing significant product breadth with
offerings in hardware, plumbing, electrical, building supplies
and other housewares as well as specialty foods and indoor and
outdoor garden centers. The majority of our non-perishable goods
are received at our 245,000 square foot distribution center
in Maumee, Ohio. For the year ended December 31, 2005 and
the three months ended March 31, 2006, our Retail Group
represented 14% and 11% of our sales and merchandising revenues,
respectively, and 7% and (41)% of our operating income,
respectively.
We intend to continue to refine our More for Your
Home®
concept and focus on expense control and customer service. We
also plan to expand our offering of specialty foods, wine and
produce.
31
Results
of Operations
The following tables highlight sales and merchandising revenues,
gross profit and operating income by segment. In the first
quarter of 2006, we re-aligned our business segments by
separating the business segment that we had previously referred
to as the Agriculture Group into two distinct
segments: the Grain & Ethanol Group and the
Plant Nutrient Group. The decision to change our
Agriculture segment was made in order to provide more meaningful
information, as the Grain & Ethanol Group is
redeploying certain of its assets into supporting the ethanol
market. All prior periods have been restated for this change in
reporting and the updated presentation is consistent with the
reporting to management during the first quarter of 2006.
Additional segment information is included in Note 14 to
our consolidated financial statements contained elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
March 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Sales and merchandising
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain & Ethanol Group
|
|
$
|
696,615
|
|
|
$
|
664,565
|
|
|
$
|
627,958
|
|
|
$
|
120,937
|
|
|
$
|
128,625
|
|
Rail Group
|
|
|
35,200
|
|
|
|
59,283
|
|
|
|
92,009
|
|
|
|
17,705
|
|
|
|
34,383
|
|
Plant Nutrient Group
|
|
|
194,600
|
|
|
|
236,574
|
|
|
|
271,371
|
|
|
|
44,071
|
|
|
|
46,033
|
|
Turf & Specialty Group
|
|
|
134,017
|
|
|
|
127,814
|
|
|
|
122,561
|
|
|
|
40,891
|
|
|
|
39,505
|
|
Retail Group
|
|
|
178,573
|
|
|
|
178,696
|
|
|
|
182,753
|
|
|
|
35,052
|
|
|
|
32,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,239,005
|
|
|
$
|
1,266,932
|
|
|
$
|
1,296,652
|
|
|
$
|
258,656
|
|
|
$
|
280,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
March 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain & Ethanol Group
|
|
$
|
41,783
|
|
|
$
|
52,680
|
|
|
$
|
50,159
|
|
|
$
|
10,199
|
|
|
$
|
6,945
|
|
Rail Group
|
|
|
13,626
|
|
|
|
28,793
|
|
|
|
43,281
|
|
|
|
8,515
|
|
|
|
14,092
|
|
Plant Nutrient Group
|
|
|
34,923
|
|
|
|
34,692
|
|
|
|
32,774
|
|
|
|
5,582
|
|
|
|
4,133
|
|
Turf & Specialty Group
|
|
|
23,367
|
|
|
|
21,503
|
|
|
|
18,888
|
|
|
|
5,858
|
|
|
|
6,635
|
|
Retail Group
|
|
|
50,395
|
|
|
|
51,431
|
|
|
|
53,044
|
|
|
|
9,805
|
|
|
|
9,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
164,094
|
|
|
$
|
189,099
|
|
|
$
|
198,146
|
|
|
$
|
39,959
|
|
|
$
|
41,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
March 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Operating income
(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain & Ethanol Group
|
|
$
|
6,018
|
|
|
$
|
14,174
|
|
|
$
|
12,623
|
|
|
$
|
1,738
|
|
|
$
|
1,780
|
|
Rail Group
|
|
|
4,062
|
|
|
|
10,986
|
|
|
|
22,822
|
|
|
|
3,640
|
|
|
|
6,218
|
|
Plant Nutrient Group
|
|
|
7,850
|
|
|
|
7,128
|
|
|
|
10,351
|
|
|
|
(787
|
)
|
|
|
(1,235
|
)
|
Turf & Specialty Group
|
|
|
1,022
|
|
|
|
(144
|
)
|
|
|
(3,044
|
)
|
|
|
1,077
|
|
|
|
2,149
|
|
Retail Group
|
|
|
3,413
|
|
|
|
2,108
|
|
|
|
2,921
|
|
|
|
(2,098
|
)
|
|
|
(2,441
|
)
|
Other
|
|
|
(4,400
|
)
|
|
|
(4,149
|
)
|
|
|
(6,361
|
)
|
|
|
(1,937
|
)
|
|
|
(474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,965
|
|
|
$
|
30,103
|
|
|
$
|
39,312
|
|
|
$
|
1,633
|
|
|
$
|
5,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
Three
Months Ended March 31, 2006 Compared to Three Months Ended
March 31, 2005
Sales
and merchandising revenues
Sales and merchandising revenues for the three months ended
March 31, 2006 totaled $280.7 million, an increase of
$22.0 million, or 8.5%, from the three months ended
March 31, 2005.
Grain & Ethanol Group. In the first
quarter of 2006, sales in the Grain & Ethanol Group
were up $11.8 million, or 10%, over the prior year period
due entirely to an increase in volume. The 2004 record corn crop
is being followed by, what appears at this time, to be the
second largest corn crop on record. This expectation has
continued to hold down prices. In the first quarter of 2006,
merchandising revenues were down $4.1 million, or 63%, over
the prior year period due to a $5.3 million decrease in
grain space income partially offset by management fees earned of
$0.4 million from contracts with our two ethanol equity
method investees as well as $0.8 million in other
merchandising revenues. Space income is earned on grain held for
our account or for our customers and includes storage fees
earned and appreciation in the value of grain owned. We
anticipate that some or all of this space income decrease will
be recovered in the second quarter of 2006. A majority of this
space income decrease has resulted from inventory of wheat that
we hold in our Toledo area grain elevators. Toledo is one of a
limited number of designated delivery locations for the
fulfillment of Chicago Board of Trade, or CBOT,
futures contracts for soft red wheat and physical demand for
this specific commodity has been soft for some time, despite
strong demand and price increases in the wheat futures market.
Our decline in space income results from the economics of soft
demand for and high supply of the physical commodity
all impacting the basis component of grain price. Grain
inventories on hand at March 31, 2006 were
58.4 million bushels, of which 11.8 million bushels
were stored for others. This compares to 63.1 million
bushels on hand at March 31, 2005, of which
10.4 million bushels were stored for others. Wheat held in
inventory was 19.8 million and 18.3 million bushels at
March 31, 2006 and 2005, respectively. Crop conditions at
June 30, 2006 are the same or slightly better than last
year with all planting complete in the four states in which we
source grain. The wheat harvest begins in these same states in
late June.
We have continued, and are continuing, repair of the grain
storage and loading facility located on the Maumee River in
Toledo, Ohio that was damaged on July 1, 2005. Although
leased, we insured the facility for full replacement cost under
the terms of the lease agreement. Until this facility is fully
operational, we anticipate some logistical challenges due to the
reduction in capacity, the inability to segregate grains to
facilities and the loss of the use of a grain dryer and
boat-loading facility. Claims for business interruption,
including inventory loss, are in process.
With our significant investments in ethanol production
facilities and the commitment to convert two of the existing
grain elevator locations to service ethanol plants under
construction, our Grain & Ethanol Group is expected to
continue to grow. Ethanol industry growth could impact us in a
variety of ways. In certain situations, construction of
unrelated ethanol production facilities could negatively impact
existing grain elevators buying corn for more traditional uses.
However, growth of ethanol is expected to increase demand for
corn as well. Opportunities exist for us to leverage our grain
origination services, DDGS and ethanol marketing services and
commodity risk management services to our own and other ethanol
production facilities. We continue to evaluate additional
opportunities to move into the ethanol industry through
investments in stand-alone facilities or contracts to provide
services to new or existing facilities. Four of the limited
liability companies in which we hold investments also
participate
and/or are
expected to participate in the ethanol industry either through
commodity trading or production. Increased demand for corn could
be positive for our Plant Nutrient Group as corn requires more
nutrients (as opposed to other crops) that are supplied by this
segment. Finally, ethanol transportation requirements could
benefit our Rail Group.
Rail Group. In the first quarter of 2006, the
Rail Group had a $16.7 million, or 94%, increase in
revenues over the prior year period. The increase is due to a
$9.5 million increase in car sales, a $4.3 million
increase in leasing revenue in our lease fleet and a
$2.9 million increase in revenue from our railcar repair
and fabrication shops. Included in the $9.5 million of car
sales are $0.9 million of revenue on cars at the end of
their useful lives sold for scrap. A significant component of
the railcar repair shop increase related to activity in the
repair shop opened in Mississippi in the third quarter of 2005
and relates primarily to repairing cars damaged by Hurricane
Katrina. Finally, our purchase of additional product lines in
the third quarter of 2005 added some additional revenues.
Railcars under management (owned, leased or managed for
financial institutions in non-recourse arrangements) at
33
March 31, 2006 were 19,185 compared to 16,106 at
March 31, 2005. The railcar utilization rate (railcars
under management in lease service, exclusive of railcars managed
for third party investors) increased from 93% at March 31,
2005 to 95% at March 31, 2006.
Plant Nutrient Group. In the first quarter of
2006, sales in our Plant Nutrient Group were up
$2.0 million, or 5% over the prior year period, due to a
12% increase in the average price per ton sold partially offset
by a 7% decrease in volume. Much of the price increase relates
to escalation in prices of the basic raw materials, primarily
nitrogen, phosphates and potassium. Generally, these increases
can be passed through to customers although price increases may
also reduce demand at the producer level. Merchandising revenues
decreased $0.1 million, or 12%, from the first quarter of
2005 due to decreases in storage income. Planting of corn and
soybeans is nearly complete in the four states we serve.
Turf & Specialty Group. In the first
quarter of 2006, the Turf & Specialty Group had a
$1.4 million, or 3%, decrease in sales and merchandising
revenues over the prior year period resulting from decreased
sales of $7.8 million in the Groups consumer and
industrial lawn business partially offset by a $6.3 million
or 43% increase in sales in the Groups professional lawn
business. The decrease in the consumer and industrial lawn
business was a direct result of a 34% decrease in volume. The
decrease in volume is a result of the restructuring plan that
was announced in the third quarter of 2005. The increase in the
professional lawn business was a result of a 42% increase in
volume. The cob-based business realized a sales increase of
$0.1 million or 4% due to a 24% increase in the average
price per ton sold partially offset by a 16% decrease in volume.
Retail Group. In the first quarter of 2006,
the Retail Group had a $2.9 million, or 8%, decrease in
same-store sales over the prior year period with decreases
experienced in each of the Groups market areas. The
average sale per customer decreased approximately 6% and
customer counts were down 3%. Sales for the Easter holiday
occurred in the first quarter in 2005 and second quarter in
2006. Typically, the retail stores see a large spike in revenues
before this holiday.
Gross
profit
Gross profit for the first quarter of 2006 totaled
$41.5 million, an increase of $1.5 million, or less
than 4%, from the first quarter of 2005. Gross profit in the
Grain & Ethanol Group was down $3.3 million,
resulting primarily from the decrease in merchandising revenues
and specifically space income mentioned previously. Gross profit
in the Rail Group increased $5.6 million, or 65%. Lease
fleet income increased by $1.5 million and income generated
from car sales increased $2.5 million. The railcar repair
and fabrication shops realized an increase in gross profit of
$1.6 million, primarily due to the additional work in the
Mississippi railcar repair shop as a result of Hurricane Katrina
and the product lines added in the third quarter of 2005.
Gross profit in the Plant Nutrient Group decreased
$1.4 million or 26% resulting primarily from improvements
to the absorption costing of wholesale fertilizer tons
manufactured and warehoused in the second quarter of 2005. This
change resulted in a reclassification of approximately
$1.8 million from operating, administrative and general
expenses to cost of sales. Gross profit for the Turf &
Specialty Group increased $0.7 million, or 13%, due to
increased volumes in the professional lawn business and
increased margins in the cob businesses. Gross profit in the
consumer and industrial business was down 14% due to lower
volumes. The 2005 restructuring of this Group is resulting in a
shift in product mix to higher margin, value-added product lines
from commodity or contract manufacturing resulting in more gross
profit on lower revenues. Gross profit in the Retail Group
decreased $0.1 million, or 1%, from the first quarter of
2005. In spite of lower sales, favorable first quarter inventory
results limited the gross profit reduction.
Operating,
administrative and general expenses
Operating, administrative and general expenses for the first
quarter of 2006 totaled $37.9 million, a $1.0 million,
or 3%, increase from the first quarter of 2005. Employee costs
were up $0.2 million and include $0.3 million increase
for stock compensation recognized in accordance with
SFAS 123(R), a $0.8 million increase in cash incentive
plan accrual due to increased earnings and a reduction in
benefits expense for the one time 2005 correction. Insurance
expense increased by $0.2 million. Approximately
$1.8 million of additional product related
34
costs were reclassified to cost of sales for certain Plant
Nutrient Group products. The remaining increases were spread
across a variety of lines and generally reflect business growth.
Interest
expense
Interest expense for the first quarter of 2006 was
$4.2 million, a $1.2 million, or 42%, increase from
2005. The majority of the increase was due to increased short
term interest expense. Average 2006 daily short-term
borrowings were significantly higher in the first quarter of
2006 compared to the first quarter of 2005 going from
$71.4 million to $103.0 million. The average daily
short-term interest rate increased 2.0% to 5.05%. Long-term
interest increased slightly.
Equity
in earnings of unconsolidated subsidiaries and other
income
We received $3.0 million from TACE for services provided
relating to the formation of this entity of which
$1.9 million was recognized in other income for the first
quarter of 2006. Additionally, our share of earnings in our
equity investees increased from $0.4 million in the first
quarter of 2005 to $3.6 million in the first quarter of
2006. Nearly all of this income was recognized from our
investment in Lansing. All of this income was included in the
Grain & Ethanol Group and caused income to remain flat
in that group despite the decrease in gross profit as noted
previously.
Pretax
income; Income tax expense
As a result of the above, the pretax income of $6.0 million
for the first quarter of 2006 was $4.4 million higher than
pretax income of $1.6 million recognized in the first
quarter of 2005. Income tax expense of $2.2 million was
provided at 36.0%. We anticipate that our 2006 effective annual
tax rate will be 36.0%. In the first quarter of 2005, income tax
expense of $0.6 million was provided at 36.7%. Our actual
2005 effective tax rate was 33.6% after a one-time adjustment of
$0.6 million for a change in legislation relating to the
State of Ohio franchise tax law.
Year
Ended December 31, 2005 Compared to Year Ended
December 31, 2004
Sales
and merchandising revenues
Sales and merchandising revenues for 2005 totaled
$1.3 billion, an increase of $29.7 million, or 2%,
from 2004.
Grain & Ethanol Group. Sales in the
Grain & Ethanol Group for 2005 decreased
$41.0 million from 2004 resulting from a 12% decrease in
the average price of bushels sold partially offset by a 6%
volume increase. The largest decrease in average price per
bushel sold was a decrease in corn of 20%. Revenues in the grain
businesses are significantly impacted by the market price of the
commodities being sold. Merchandising revenues for 2005 in the
Grain & Ethanol Group increased $4.4 million, or
18%, from 2004 due primarily to increased space income (before
interest charges). Space income is income earned on grain held
for our account or for our customers and includes storage fees
earned and appreciation or depreciation in the value of grain
owned. Grain on hand at December 31, 2005 was
63.8 million bushels, of which 16.9 million bushels
were stored for others. This compares to 67.1 million
bushels on hand at December 31, 2004, of which
14.5 million bushels were stored for others. The 2005
harvest results were weaker than 2004 in our market area for all
three primary grains handled corn, soybeans and
wheat. Although weaker, the 2005 harvest was better than
originally anticipated. Corn production in 2005 in Ohio,
Indiana, Illinois and Michigan decreased from 2004 production by
11%, soybean production decreased by 7% and wheat production
decreased by 10%. Illinois crops were the hardest hit in the
region by dry weather and consequently experienced the largest
reduction.
In July 2005, we invested approximately $13.1 million for a
44% interest in TAAE, which began construction of a
55 million
gallon-per-year
ethanol production facility adjacent to our Albion, Michigan
grain facility. We are under contract to lease the grain
elevator facility to TAAE upon completion, operate the ethanol
facility under a management contract and provide origination,
marketing and risk management services also under contracts with
TAAE. We also invested $2.0 million in 2005 for a 7.9%
interest in another limited liability company constructing an
ethanol plant in Rensselaer, Indiana.
35
Rail Group. Sales in the Rail Group for 2005
increased $32.7 million, or 55% from 2004. Lease fleet
income increased $19.0 million or 42% when compared with
2004. The lease fleet revenue increase is a direct result of
increased cars in lease service along with continued increases
in lease rates. Sales of railcars and related leases increased
$9.0 million or 104%. Sales transacted in the fourth
quarter accounted for 69% of total 2005 sales. One of these
sales, amounting to $5.7 million, occurred when one of our
lessees negotiated the outright purchase of railcars under
lease. The remainder of the increase in the Rail Group resulted
from a $4.7 million or 88% increase in revenue in the
repair and fabrication shops due to both growth in railcar
repair and new product lines added in the beginning of July
2005. Railcars under management at December 31, 2005 were
19,363 compared to 14,649 under management at December 31,
2004. Locomotives under management were 96 at December 31,
2005 and 118 at December 31, 2004. The railcar utilization
(railcars in lease service) rate was 94% at December 31,
2005 and 92% at December 31, 2004. Demand for railcars
continued to strengthen in 2005. Continual lease renewals for
higher monthly rates and longer terms puts this segment in a
good position for continued growth.
Plant Nutrient Group. Sales in our Plant
Nutrient Group for 2005 were up $35.3 million, or 15%, from
2004 due to an 18% increase in the average price per ton sold
partially offset by a 3% decrease in volume. Much of the price
increase relates to escalation in prices of the basic raw
materials, primarily phosphates, potassium and nitrogen.
Generally, these increases can be passed through to customers
although a price increase may also reduce consumer demand at the
producer level. As in the grain business, revenues in the
fertilizer business are significantly impacted by the price of
the commodities being sold.
Turf & Specialty Group. Sales and
merchandising revenues in the Turf & Specialty Group
for 2005 decreased $5.3 million, or 4% from 2004, resulting
primarily from an overall 10% decrease in volume partially
offset by a 7% increase in the average price per ton sold. In
the professional lawn business, serving the golf course and lawn
care operator markets, sales increased $1.4 million or 3%
due primarily to a 12% increase in the average price per ton
sold partially offset by a 9% decrease in volume. In the
consumer and industrial lawn businesses, where we announced some
customer rationalization in the third quarter of 2005, volume
was down 16% and sales down 13%. This industry continues to
operate with excess manufacturing capacity. In response to this,
as mentioned previously, we announced a restructuring of our
Turf & Specialty Group in the third quarter of 2005.
The Turf & Specialty Group has re-focused on the
professional lawn market and on areas where value can be added
in the consumer and industrial markets. The cob business, a much
smaller component of the Turf & Specialty Group, had a
15% increase in sales due both to a 5% increase in volume and a
9% increase in the average price per ton sold.
Retail Group. Same-store sales and revenues in
the Retail Group increased slightly in 2005 as compared to 2004
with increases experienced in each of the Retail Groups six
retail stores. In 2005, the Retail Groups fiscal year
ended on the same day as the calendar year, which resulted in an
extra week of sales for the Retail Group. This occurrence
happens approximately once every seven years and is the primary
reason for the increase in sales in 2005 as compared to 2004.
After removing the additional week of sales, retail sales were
up slightly. The retail business continues to be faced with
continued competition in its primary markets by competitors of
significant size.
Gross
profit
Gross profit for 2005 totaled $198.1 million, an increase
of $9.0 million, or 5%, from 2004. Gross profit in the
Grain & Ethanol Group totaled $50.2 million, a
decrease of $2.5 million, or 5% resulting primarily from
the decrease in grain sales mentioned previously. Gross profit
in the Rail Group increased $14.5 million, or 50%. This
increase included $8.0 million in increased lease fleet
income, a $4.1 million increase in gross profit on car
sales, and a $2.4 million increase in gross profit in the
railcar repair and fabrication shops. Lease fleet income is
gross lease (rent) and fleet management income less direct costs
of cars leased to customers (rental expense or depreciation,
property taxes and maintenance).
The Plant Nutrient Group recognized a decrease in gross profit
in 2005 of $2.0 million as compared to 2004 in spite of the
significant increase in sales. Cost of goods sold in 2005
includes approximately $5.8 million of additional labor and
overhead costs for which the classification has been changed
from operating, administrative and general expenses when
compared to 2004. Turf & Specialty Group gross profit
in 2005 decreased $2.6 million, or 12%, when compared to
2004 due primarily to increases in product costs in the
Turf & Specialty Groups consumer and industrial
business that were not recovered from customers as well as the
overall reduction in sales.
36
Gross profit in the professional turf business was flat and
gross profit in the cob business increased 8% when compared to
2004.
Gross profit in the Retail Group in 2005 increased
$1.6 million, or 3%, from 2004 due to a strong fourth
quarter performance in each of the Groups market areas.
Additional gross profit from the 53rd week in 2005
mentioned previously was $0.9 million of the
$1.6 million overall increase.
Equity
in earnings of unconsolidated subsidiaries and other
income
In 2005, we recognized $2.3 million of equity in earnings
of unconsolidated subsidiaries, most notably from Lansing. This
was a 58% increase from 2004, which was $1.5 million. This
increase was attributable to increased performance of
unconsolidated subsidiaries, as well as an increase in the
percentage that we owned in Lansing from 21.9% to approximately
29%.
Operating,
administrative and general expenses
Operating, administrative and general expenses for 2005 totaled
$153.8 million, a $1.1 million decrease from 2004.
Approximately $5.8 of the 2005 expense reduction is related to a
change in classification of overhead costs from expense to cost
of sales for certain manufactured and stored fertilizer
inventory within the Plant Nutrient Group. Included in
operating, administrative and general expenses for 2005 was
$1.2 million in one-time termination benefits and fixed
asset write-downs related to the Turf & Specialty Group
restructuring noted previously. In addition, there were
$0.9 million in unreimbursed losses and deductibles related
to the grain and cob fires and the Mississippi railcar repair
shop loss also noted previously. In the first quarter of 2005,
there was a $0.6 million adjustment to correct errors in
measuring our pension and postretirement benefit expense that
occurred from 2001 through 2004. Also contributing to the
increase in 2005 were $1.1 million in increased performance
incentive accruals due to our strong performance for the year.
We have taken steps to mitigate continued increases in
retirement and health care benefits expense in 2006 based on
known changes in actuarial assumptions and health care claims
inflation by evaluating our benefit programs, amending our plans
and looking for additional opportunities to provide competitive
benefits at a reasonable cost.
Interest
expense
Interest expense for 2005 was $12.1 million, a
$1.5 million, or 15%, increase from 2004 primarily due to a
68% increase in short-term interest expense. Average daily
short-term borrowings for 2005 were down 15.2% when compared to
2004, however, the average short-term interest rate increased
from 1.9% for 2004 to 3.8% for 2005. Long-term interest expense
increased 3% for the same period and relates primarily to higher
weighted average outstanding borrowings in 2005.
Pretax
income; Income tax expense
As a result of the above, pretax income of $39.3 million
for 2005 was 31% higher than the pretax income of
$30.1 million in 2004. Income tax expense of
$13.2 million was recorded in 2005 at an effective rate of
33.6% after a one-time reduction of $0.6 million related to
state deferred tax liabilities associated with the State of
Ohio. On June 30, 2005, the State of Ohio enacted
legislation that repealed the Ohio franchise tax, phasing out
the tax over five years. Accordingly, the deferred tax
liabilities associated with the State of Ohio were decreased to
reflect this phase out. In addition, a decrease in tax reserves
for uncertain tax positions and the tax accounting for the
Medicare Part D reimbursement contributed to the lower
effective tax rate in 2005. In 2004, income tax expense of
$11.0 million was recorded at an effective rate of 36.4%.
In May, 2004, the Financial Accounting Standards Board issued
FASB Staff Position (FSP) 106-2, providing final
guidance on accounting for the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003. Under the provisions
of FSP 106-2, we determined in 2004 that the benefits for a
small group of retirees were actuarially equivalent to Medicare
Part D and qualified for the future U.S. government
subsidy. In January 2005, the Centers for Medicare and Medicaid
Services issued their final regulations on determination of
actuarial equivalency. During the third quarter of 2005, our
actuaries completed their final determination of actuarial
equivalency of our postretirement health plan in accordance with
these regulations and determined that our plans for all retirees
37
would qualify as actuarially equivalent. The total reduction of
the January 1, 2005 accumulated postretirement benefit
obligation related to Medicare Part D is $4.6 million
and the
year-to-date
2005 expense reduction (from previous expectations) is
$0.7 million. The amount recognized as a reduction in 2004
for Medicare Part D actuarially equivalency was less than
$0.1 million.
Net
income
The 2005 net income of $26.1 million was
$7.0 million higher than the 2004 net income of
$19.1 million. Basic earnings per share of $1.76 increased
$0.44 from 2004 and diluted earnings per share of $1.70
increased $0.42 from 2004.
Year
Ended December 31, 2004 Compared to Year Ended
December 31, 2003
Sales
and merchandising revenues
Sales and merchandising revenues for 2004 totaled
$1.3 billion, an increase of $27.9 million, or 2%,
from 2003.
Grain & Ethanol Group. Sales in the
Grain & Ethanol Group for 2004 decreased
$41.0 million from 2003 resulting from a 7% decrease in the
average price of bushels sold partially offset by a 1% volume
increase. Corn volume and price per bushel increased but volume
in soybeans, wheat and oats declined. In both 2004 and 2003,
grain expected to ship in the following calendar year was
shipped in the fourth quarter. This occurred because of
increased demand
and/or
market prices favoring sales rather than storage of grain.
Revenues in the grain businesses are significantly impacted by
the market price of the commodities being sold. Merchandising
revenues in the Grain & Ethanol Group for 2004 were up
$8.9 million, or 57% from 2003, due primarily to increased
space income (before interest charges). Space income is income
earned on grain held for our account or for our customers and
includes storage fees earned and appreciation or depreciation in
the value of grain owned. Grain on hand at December 31,
2004 was 67.1 million bushels, of which 14.5 million
bushels were stored for others. This compares to
56.1 million bushels on hand at December 31, 2003, of
which 17.3 million bushels were stored for others. The 2004
harvest results were strong in our market area for both corn and
soybeans. Corn production in Ohio, Indiana, Illinois and
Michigan exceeded the 2003 production by 13% and soybean
production in the same states exceeded 2003 production by 33%.
Although the wheat production for 2004 was down 10% as compared
to 2003, it exceeded our initial expectations. We received more
grain in 2004 than 2003 for all grain types. Despite this strong
harvest, demand continued and we were able to sell grain
throughout the fourth quarter. Winter wheat acres planted in
2004 for harvest in 2005 were down 15%.
Rail Group. Sales in the Rail Group increased
$24.1 million, or 68% from 2003. Lease fleet income
increased $30.2 million, $21.6 million of which was
from the large railcar acquisition completed in February 2004.
Sales of railcars and related leases decreased $6.8 million
and the remainder of the increase resulted from a
$0.7 million increase in revenue in the repair and
fabrication shops. Railcars under management at
December 31, 2004 were 14,649 compared to 6,291 under
management at December 31, 2003. Locomotives under
management were 118 at December 31, 2004 and 74 at
December 31, 2003. The railcar utilization (railcars in
lease service) rate was 92% at both December 31, 2004 and
December 31, 2003 in spite of the significant increase in
railcars and locomotives. Demand for railcars continued to
strengthen in 2004 and high steel prices have limited new car
construction. Continual lease renewals for higher monthly rates
and longer terms position this segment well for continued growth.
Plant Nutrient Group. Sales in the Plant
Nutrient Group for 2004 were up $42.5 million, or 23% from
2003, due to an 11% increase in the average price per ton sold
and an 11% increase in volume. Much of the price increase
relates to escalation in prices of the basic raw materials,
primarily potassium and nitrogen. Generally, these increases can
be passed through to customers although a price increase may
also reduce consumer demand at the producer level. As in the
grain business, revenues in the fertilizer business are
significantly impacted by the market price of the commodities
being sold.
Turf & Specialty Group. Sales and
merchandising revenues for the Turf & Specialty Group
for 2004 decreased $6.2 million, or 5% from 2003, resulting
primarily from an overall 8% decrease in volume partially offset
38
by a 4% increase in the average price per ton sold. In the
professional lawn business, serving the golf course and lawn
care operator markets, volume was down 6% and sales down 5%,
primarily due to reduced demand in the golf course market.
Pressure on golf course profitability, coupled with some
low-price competition has reduced demand for premium golf course
fertilizers. In the consumer and industrial lawn businesses,
where we serve as contract manufacturer for several large
brand companies, a manufacturer of private label
products and also manufacture our own brands, volume was down
15% and sales down 5%. This industry continues to operate with
excess manufacturing capacity and some of our customers have
struggled with their own programs. Because of this excess
capacity, we decided in the fourth quarter of 2004 to close down
a small (five employee) manufacturing operation in a leased
facility in Pennsylvania. The cob business, a much smaller
component of the Turf & Specialty Group, had a 3%
increase in sales primarily due to an 11% increase in volume.
Retail Group. Same-store sales and revenues in
the Retail Group were flat in 2004 as compared to 2003.
Individual store results were mixed; however, the Columbus
market again showed improvement. As expected, sales in the
Toledo market were down due to significant new competition from
national Big Box retailers. This business continues
to be faced with continued competition in its primary markets by
competitors of significant size.
Gross
profit
Gross profit for 2004 totaled $189.1 million, an increase
of $25.0 million, or 15%, from 2003. Gross profit in the
Grain & Ethanol Group totaled $52.7 million, an
increase of $10.9 million, or 26% resulting primarily from
the increased merchandising revenues mentioned previously along
with a $1.6 million increase in gross profit on grain
sales. Gross profit in the Rail Group increased
$15.2 million, or 111%. This increase included
$15.3 million in increased lease fleet income
($12.4 million on the newly acquired fleet), a
$0.6 million increase in gross profit on car sales, and a
$0.7 million reduction in gross profit in the railcar
repair and fabrication shops. Lease fleet income is gross lease
(rent) and fleet management income less direct costs of cars
leased to customers (rental expense or depreciation, property
taxes and maintenance).
The Plant Nutrient Group recognized a decrease in gross profit
of $0.2 million from 2003 to 2004, primarily due to a
significant increase in cost per ton that could not be fully
recouped through increased prices. Gross profit for the
Turf & Specialty Group in 2004 decreased
$1.9 million, or 8%, when compared to 2003. Although there
was a slight increase in gross profit per ton, the significant
decrease in volume in the lawn businesses resulted in the
overall decrease. The majority of the decreased gross profit
occurred in the consumer/industrial lawn business. Gross profit
in the cob business was flat from 2003 to 2004. Gross profit in
the Retail Group increased $1.0 million, or 2%, from 2003.
This was due to a modest increase in margins, as a result of
changes in the mix of products sold on flat sales.
Equity
in earnings of unconsolidated subsidiaries and other
income
In 2004, we recognized $1.5 million of equity in earnings
of unconsolidated subsidiaries, most notably Lansing. This was a
significant increase from the 2003 amount of $0.3 million
and resulted both from increased performance of unconsolidated
subsidiaries as well as an increase in the percentage that we
owned from 15.1% to 21.9%.
Operating,
administrative and general expenses
Operating, administrative and general expenses for 2004 totaled
$154.9 million, an $11.8 million increase from 2003.
Included in this increase is $4.5 million related to growth
in the Rail and Plant Nutrient Groups. The remaining
$7.3 million increase is 5% higher than 2003 and represents
a variety of cost increases, most notably $1.9 million in
increased retirement and health care benefits expense,
$1.4 million in professional services costs relating to
compliance with the Sarbanes-Oxley Act, and $2.8 million in
additional labor and performance incentives. A portion of the
additional labor was related to additional staffing to support
the ongoing requirements of the Sarbanes-Oxley Act.
39
Interest
expense
Interest expense for 2004 was $10.5 million, a
$2.5 million, or 31%, increase from 2003. Average daily
short-term borrowings for 2004 were down 17.5% when compared to
2003 while the average short-term interest rate decreased from
2.1% for 2003 to 1.9% for 2004. Long-term interest expense
increased 53% for the same period and relates primarily to the
significant increase in long-term debt incurred to complete the
railcar acquisition.
Pretax
income; Income tax expense
As a result of the above, pretax income of $30.1 million
for 2004 was 68% higher than the pretax income of
$18.0 million in 2003. Income tax expense of
$11.0 million was recorded in 2004 at an effective rate of
36.4%. In 2003, income tax expense of $6.3 million was
recorded at an effective rate of 34.9%. The increase in
effective tax rates between 2003 and 2004 resulted primarily
from an increase in state income taxes and a slight reduction in
the Extraterritorial Income (ETI) exclusion. In
October 2004, the American Jobs Creation Act was enacted. Two
provisions of this Act will impact our 2005 effective tax rate.
The Act repealed the Extraterritorial Income regime for
transactions entered into after December 31, 2004, subject
to a phase-out that allows us to claim 80% of the normal ETI
benefit in 2005. In addition, the Act provides for a tax
deduction for certain domestic production activities. The
deduction for 2005 is equal to 3% of the lesser of:
(a) taxable income derived from qualified production
activities or (b) total taxable income for the year. The
impact of these provisions were reflected in the 2005 first
quarter effective tax rate.
Net
income
The 2004 net income of $19.1 million was
$7.4 million higher than the 2003 net income of
$11.7 million. Basic earnings per share of $1.32 increased
$0.50 from 2003 and diluted earnings per share of $1.28
increased $0.48 from 2003.
Liquidity
and Capital Resources
Operating
Activities and Liquidity
Our operations used cash of $84.5 million in the first
quarter of 2006, a change from a use of cash in operating
activities of $81.3 million in the first quarter of 2005.
This significant use of cash for operating activities is common
in the first quarter of the year due to the nature of our
commodity businesses. Our operations provided cash of
$37.9 million in 2005, a decrease of $24.6 million
from 2004 due to changes in working capital. Short-term
borrowings used to fund these operations increased
$0.3 million from December 31, 2004 to
December 31, 2005. Net working capital at March 31,
2006 was $72.3 million, a $23.9 million decrease from
December 31, 2005 and a $20.2 million decrease from
March 31, 2005. Net working capital at December 31,
2005 was $96.2 million, a decrease of $6.0 million
from December 31, 2004. We have significant short-term
lines of credit available to finance working capital, primarily
inventories and accounts receivable.
Cash dividends of $0.04 per common share were paid in the first
two quarters of 2005 with a dividend of $0.0425 per common share
in the third and fourth quarters of 2005. A cash dividend of
$0.0425 per common share was paid on January 23, 2006 and a
cash dividend of $0.045 per common share was paid on
April 24, 2006. We made income tax payments of
$2.6 million in the first quarter of 2006 and expect to
make payments totaling approximately $10.9 million for the
remainder of 2006. During the first three months of 2006, we
issued approximately 148,000 shares to employees under our
share compensation plans. We made income tax payments of
$6.9 million in 2005, and also issued approximately
336,000 shares to employees and directors under our share
compensation plans.
Capital
Expenditures
Total capital spending for 2006 on property, plant and equipment
within our base business is expected to approximate
$28.6 million and may include $3.8 million in the Rail
Group for expansion of operations in railcar repair facilities,
$2.5 million in the Retail Group including information
technology and store improvements, $2.9 million for
expansion and improvements in the Plant Nutrient Group,
$1.2 million for additional grain storage
40
in the Grain & Ethanol Group and $0.8 million for
manufacturing improvements in the Turf & Specialty
Group. The remaining amount of $17.4 million will be spent
on numerous assets and projects; no single such project
expecting to cost more than $0.6 million. This forecasted
spending does not include any expected repairs to the Toledo
grain facility damaged in the events of July 1, 2005 as we
expect to receive insurance proceeds to cover such repairs.
Total capital spending for 2005 on property, plant and equipment
was $11.9 million which includes $1.4 million for
expansion and improvements in the Grain & Ethanol Group
and $0.6 million in the Plant Nutrient Group. The remaining
amount was spent on numerous assets and projects with no single
project costing more than $0.5 million. In addition to the
spending on conventional property, plant and equipment, we spent
$98.9 million in 2005 for the purchase of railcars and
capitalized modifications on railcars for use in our Rail Group
and sold or financed $69.1 million of railcars during 2005.
We invested $21.0 million in TACE in the first quarter of
2006 for approximately 37% of the business. We increased our
investment in Lansing in March 2005 and March 2006 by
$0.9 million and $2.4 million, respectively. At
March 31, 2006, we owned approximately 36.1% of the equity
and account for it under the equity method. We also hold an
option to increase our investment in each of 2007 and 2008, with
the potential of attaining majority ownership in 2008. In July
2005, we invested approximately $13.1 million for a 44%
interest in TAAE which began construction of a 55 million
gallon-per-year
ethanol production facility adjacent to our Albion, Michigan
grain facility. We account for this investment using the equity
method as well.
In the first quarter of 2005, we invested $1 million in
Iroquois Bio-Energy Company, LLC, an ethanol plant which began
construction in 2005 in Rensselaer, Indiana. An additional
$1 million was invested in the fourth quarter of 2005 to
increase our ownership to 7.9%. We will also act as the corn
originator for this facility.
Financing
Arrangements
In November 2002, we entered into a borrowing arrangement with a
syndicate of banks. This borrowing arrangement was renewed in
the third quarter of 2005. The agreement provides us with
$100 million in short-term lines of credit and an
additional $100 million in a three-year line of credit. In
addition, the amended agreements include a flex line, which
allows us to increase our available short-term line by
$50 million. Prior to the syndication agreement, we managed
several separate short-term lines of credit. We had drawn
$132.1 million on our short-term line of credit at
March 31, 2006. Peak short-term borrowing to date was
$152.5 million on March 2, 2006. Typically, our
highest borrowing occurs in the spring due to seasonal inventory
requirements in the fertilizer and retail businesses, credit
sales of fertilizer and a customary reduction in grain payables
due to the cash needs and market strategies of grain customers.
Certain of our long-term borrowings include provisions that
impose minimum levels of working capital and equity, impose
limitations on additional debt and require that grain inventory
positions be substantially hedged. We were in compliance with
all of these provisions as of March 31, 2006. In addition,
certain of our long-term borrowings are secured by first
mortgages on various facilities or are collateralized by railcar
assets. Additional long-term debt financing of
$41.0 million was obtained in the fourth quarter of 2005
and we pledged, as collateral, 2,293 railcars and related leases
which are held by a wholly-owned bankruptcy-remote entity.
Because we are a significant consumer of short-term debt in peak
seasons, the majority of which is variable rate debt, increases
in interest rates could have a significant impact on our
profitability. In addition, periods of high grain prices
and/or
unfavorable market conditions could require us to make
additional margin deposits on our CBOT futures contracts.
Conversely, in periods of declining prices, we receive a return
of cash. The marketability of our grain inventories and the
availability of short-term lines of credit enhance our
liquidity. In the opinion of management, our liquidity is
adequate to meet short-term and long-term needs.
We utilize interest rate contracts to manage a portion of our
interest rate risk on both our short and long-term debt and
lease commitments. At March 31, 2006, the fair value of
these derivative financial instruments recorded in the balance
sheet (primarily interest rate swaps and interest rate caps) was
a net asset of $0.3 million.
41
Contractual
Obligations
The following table reflects a summary of our contractual
obligations as of March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
After 5
|
|
|
|
|
Contractual Obligations
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
Years
|
|
|
Total
|
|
|
Long-term debt
|
|
$
|
10,952
|
|
|
$
|
18,943
|
|
|
$
|
26,064
|
|
|
$
|
31,983
|
|
|
$
|
87,942
|
|
Long-term debt non
recourse
|
|
|
13,777
|
|
|
|
26,282
|
|
|
|
26,628
|
|
|
|
33,359
|
|
|
|
100,046
|
|
Capital lease obligations
|
|
|
71
|
|
|
|
227
|
|
|
|
|
|
|
|
|
|
|
|
298
|
|
Operating leases
|
|
|
18,419
|
|
|
|
33,359
|
|
|
|
24,888
|
|
|
|
14,767
|
|
|
|
91,433
|
|
Purchase commitments(1)
|
|
|
291,823
|
|
|
|
102,757
|
|
|
|
|
|
|
|
|
|
|
|
394,580
|
|
Other long-term liabilities(2)
|
|
|
6,870
|
|
|
|
3,758
|
|
|
|
4,006
|
|
|
|
6,985
|
|
|
|
21,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
341,912
|
|
|
$
|
185,326
|
|
|
$
|
81,586
|
|
|
$
|
87,094
|
|
|
$
|
695,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes the value of purchase obligations in our business
groups, including $364.0 million for the purchase of grain
from producers. There are also forward grain sales contracts to
consumers and traders and the net of these forward contracts are
offset by exchange-traded futures and options contracts. |
|
(2) |
|
Other long-term liabilities include estimated obligations under
our retiree healthcare programs and the estimated 2006
contribution to our defined benefit pension plan. Obligations
under the retiree healthcare programs are not fixed commitments
and will vary depending on various factors, including the level
of participant utilization and inflation. Our estimates of
postretirement payments through 2011 have considered recent
payment trends and actuarial assumptions. We have not estimated
pension contributions beyond 2006 due to the significant impact
that return on plan assets and changes in discount rates might
have on such amounts. |
We had standby letters of credit outstanding of
$18.0 million at March 31, 2006, of which
$8.3 million are credit enhancements for industrial revenue
bonds included in the contractual obligations table above.
Approximately 82% of the operating lease commitments above
relate to 6,563 railcars and 30 locomotives that we lease from
financial intermediaries. See Off-Balance
Sheet Arrangements.
We are subject to various loan covenants as highlighted
previously. Although we are, and have been, in compliance with
our debt covenants, noncompliance could result in default and
acceleration of long-term debt payments. We do not anticipate
noncompliance with our covenants.
Off-Balance
Sheet Arrangements
Our Rail Group utilizes leasing arrangements that provide
off-balance sheet financing for its activities. We lease
railcars from financial intermediaries through sale-leaseback
transactions, the majority of which involve operating
leasebacks. Railcars that we own or lease from a financial
intermediary are generally leased to a customer under an
operating lease. We also arrange non-recourse lease transactions
under which we sell railcars or locomotives to a financial
intermediary, and assign the related operating lease to the
financial intermediary on a non-recourse basis. In such
arrangements, we generally provide ongoing railcar maintenance
and management services for the financial intermediary, and
receive a fee for such services. On most of the railcars and
locomotives, we hold an option to purchase these assets at the
end of the lease.
42
The following table describes our railcar and locomotive
positions at March 31, 2006:
|
|
|
|
|
|
|
Method of Control
|
|
Financial Statement
|
|
Number
|
|
Owned-railcars available for sale
|
|
On balance sheet
current
|
|
|
127
|
|
Owned-railcar assets leased to
others
|
|
On balance sheet
non-current
|
|
|
10,785
|
|
Railcars leased from financial
intermediaries
|
|
Off balance sheet
|
|
|
6,563
|
|
Railcars-non-recourse arrangements
|
|
Off balance sheet
|
|
|
1,710
|
|
|
|
|
|
|
|
|
Total railcars
|
|
|
|
|
19,185
|
|
|
|
|
|
|
|
|
Locomotive assets leased to others
|
|
On balance sheet
non-current
|
|
|
15
|
|
Locomotives leased
from financial intermediaries under limited recourse arrangements
|
|
Off balance sheet
|
|
|
30
|
|
Locomotives
non-recourse arrangements
|
|
Off balance sheet
|
|
|
44
|
|
|
|
|
|
|
|
|
Total locomotives
|
|
|
|
|
89
|
|
|
|
|
|
|
|
|
In addition, we manage approximately 728 railcars for
third-party customers or owners for which we receive a fee. We
have future lease payment commitments aggregating
$75.4 million for the railcars that we lease from financial
intermediaries under various operating leases. Remaining lease
terms vary with none exceeding seven years. The majority of
these railcars have been leased to customers at March 31,
2006 over similar terms. This segment manages risk by match
funding (which means matching terms between the lease to the
customer and the funding arrangement with the financial
intermediary), where possible, and ongoing evaluation of lessee
credit worthiness. In addition, we prefer non-recourse lease
transactions, whenever possible, in order to minimize our credit
risk.
Quantitative
and Qualitative Disclosures about Market Risk
The market risk inherent in our market risk-sensitive
instruments and positions is the potential loss arising from
adverse changes in commodity prices and interest rates as
discussed below.
Commodity
Prices
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, we follow a policy of
hedging our inventories and related purchase and sale contracts.
The instruments used are exchange-traded futures and options
contracts that function as hedges. The market value of
exchange-traded futures and options used for hedging has a high,
but not perfect correlation, to the underlying market value of
grain inventories and related purchase and sale contracts. The
less correlated portion of inventory and purchase and sale
contract market value (known as basis, which is defined as the
difference between the cash price of a commodity in our facility
and the nearest exchange-traded futures price) is much less
volatile than the overall market value of exchange-traded
futures and tends to follow historical patterns. We manage this
less volatile risk using our daily grain position report to
constantly monitor our position relative to the price changes in
the market. Our accounting policy for our futures and options
hedges, as well as the underlying inventory positions and
purchase and sale contracts, is to
mark-to-market
the 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 our
exposure to market risk of our commodity position (exclusive of
basis risk). Our daily net commodity position consists of
inventories, related purchase and sale contracts and
exchange-traded contracts. The fair value of the 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
43
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:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Net long position
|
|
$
|
(3,058
|
)
|
|
$
|
478
|
|
Market risk
|
|
|
306
|
|
|
|
48
|
|
Interest
Rates
The fair value of our long-term debt is estimated using quoted
market prices or discounted future cash flows based on our
current incremental borrowing rates for similar types of
borrowing arrangements. In addition, we have derivative interest
rate contracts recorded in our balance sheet at their fair
value. 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:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Fair value of long-term debt and
interest rate contracts
|
|
$
|
182,587
|
|
|
$
|
192,844
|
|
Fair value in excess of (less
than) carrying value
|
|
|
(5,366
|
)
|
|
|
(4,570
|
)
|
Market risk
|
|
|
5,645
|
|
|
|
4,659
|
|
Critical
Accounting Policies and Estimates
Our discussion and analysis of our financial condition and
results of operations are based on our consolidated financial
statements, which have been prepared in accordance with GAAP.
The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of
our assets, liabilities and expenses, as well as the recognition
of revenues and expenses. We review our estimates on an ongoing
basis. We base our estimates on our experience,
managements knowledge and understanding of certain facts
and circumstances and on various other assumptions that we
believe to be reasonable under the circumstances. Actual results
may differ from these estimates under different assumptions or
conditions. While our significant accounting policies are
described in more detail in the notes to our consolidated
financial statements included elsewhere in this prospectus, we
believe the following accounting policies are critical to the
judgments and estimates used in the preparation of our
consolidated financial statements.
Grain
Inventories
We
mark-to-market
all grain inventory, forward purchase and sale contracts for
grain, and exchange-traded futures and options contracts. The
grain inventories are freely traded, have quoted market prices,
and may be sold without significant additional processing.
Management estimates market value based on exchange-quoted
prices, adjusted for differences in local markets. Changes in
market value are recorded as merchandising revenues in the
statement of income. If management used different methods or
factors to estimate market value, amounts reported as
inventories and merchandising revenues could differ.
Additionally, if market conditions change subsequent to
year-end, amounts reported in future periods as inventories and
merchandising revenues could differ.
Because we
mark-to-market
inventories and sales commitments, gross profit on a grain sales
transaction is recognized when a contract for sale of the grain
is executed. The related revenue is recognized upon shipment of
the grain, at which time title transfers and customer acceptance
occurs. Grain inventories contain valuation reserves established
to recognize the difference in quality and value between
contractual grades and the actual quality grades of inventory
that we hold. These quality reserves also require management to
exercise judgment.
44
Marketing
Agreement
We have negotiated a marketing agreement with Cargill,
Incorporated that covers four of our grain facilities (two of
which are leased from Cargill). Under this five-year amended and
restated agreement (ending in May 2008), we sell grain from
these facilities to Cargill at a price determined by Cargill.
Income earned from operating the facilities (including buying,
storing and selling grain and providing grain marketing services
to our producer customers) over a specified threshold is shared
equally with Cargill. If the income earned from operating the
facilities falls below such threshold, then Cargill will pay us
50% of any such shortfall. Measurement of this threshold is made
on a cumulative basis and cash is paid to Cargill or to us (if
required) at each contract year end. We recognize our share of
income to date at each month-end and accrue for any payment to
Cargill in accordance with Emerging Issues Task Force Topic
D-96, Accounting for Management Fees Based on a Formula.
The adoption of this standard, effective for periods beginning
after January 1, 2002, resulted in a cumulative effect
adjustment increase of $3.5 million after tax in 2002.
Derivatives
Commodity Contracts
We utilize regulated commodity futures and options contracts to
hedge our market price exposure on the grain we own, and related
forward purchase and sale contracts. These contracts are
included in our balance sheet in inventory at their current
market value. Realized and unrealized gains and losses in the
market value of these futures and option contracts are included
in our income statement as a component of sales and
merchandising revenues. While we consider all of our commodity
contracts to be effective economic hedges, we do not designate
our commodity futures and options contracts as hedges.
Therefore, we do not defer gains and losses on these same
contracts as we would for designated hedges under FASB Statement
No. 133, Accounting for Derivative Instruments and
Hedging Activities. Both the underlying inventory and
forward purchase and sale contracts and the related futures and
options contracts are marked to market on a daily basis.
Impairment
of Long-Lived Assets
Our business segments are each highly capital intensive and
require significant investments in facilities
and/or
rolling stock. In addition, we have a limited amount of
intangible assets and goodwill (described more fully in
Note 5 to our consolidated financial statements included
elsewhere in this prospectus) that we acquired in various
business combinations. Whenever changing conditions warrant, we
review the fair value of the tangible and intangible assets that
may be impacted. We also annually review the balance of goodwill
for impairment in the fourth quarter. These impairment reviews
take into account estimates of future undiscounted cash flows.
Our estimates of future cash flows are based upon a number of
assumptions including lease rates, lease terms, operating costs,
life of the assets, potential disposition proceeds, budgets and
long-range plans. While we believe the assumptions we use to
estimate future cash flows are reasonable, there can be no
assurance that the expected future cash flows will be realized.
If management used different estimates and assumptions in our
evaluation of these cash flows, we could recognize different
amounts of expense in future periods.
Employee
Benefit Plans
We provide substantially all full-time employees with pension
benefits and full-time employees hired before January 1,
2003 with postretirement health care benefits. In order to
measure the expense and funded status of these employee benefit
plans, management makes several estimates and assumptions,
including interest rates used to discount certain liabilities,
rates of return on assets set aside to fund these plans, rates
of compensation increases, employee turnover rates, anticipated
mortality rates and anticipated future healthcare cost trends.
These estimates and assumptions are based on our historical
experience combined with managements knowledge and
understanding of current facts and circumstances. We use
third-party specialists to assist management in measuring the
expense and funded status of these employee benefit plans. If
management used different estimates and assumptions regarding
these plans, for example, the funded status of the plans could
vary significantly and we could recognize different amounts of
expense over future periods.
As of December 31, 2005, we amended our defined benefit
pension plans effective January 1, 2007. The provisions of
this amendment include freezing benefits for the retail line of
business employees as of December 31,
45
2006, modifying the calculation of benefits for the non-retail
line of business employees as of December 31, 2006 with
future benefits to be calculated using a new career average
formula and in the case of all employees, compensation for the
years from 2007 to 2012 will be includable in the final average
pay formula calculating the final benefit earned for years prior
to December 31, 2006.
Certain accounting guidance, including the guidance applicable
to pensions and postretirement benefits does not require
immediate recognition of the effects of a deviation between
actual and assumed experience or the revision of an estimate.
This approach allows the favorable and unfavorable effects that
fall within an acceptable range to be netted. Although this
netting occurs outside the basic financial statements, the net
amount is disclosed as an unrecognized gain or loss in
Note 12 to our audited consolidated financial statements
included elsewhere in this prospectus. At December 31,
2005, we had an unrecognized loss related to our pension plans
of $24.7 million compared to an unrecognized loss of
$16.7 million at December 31, 2004. For the
postretirement benefit plans, our December 31, 2005
unrecognized loss was $13.2 million as compared to an
unrecognized loss of $17.0 million at December 31,
2004. A portion of the December 31, 2005 unrecognized loss
for both pension and postretirement benefits will be amortized
into earnings in 2006. The effect on years after 2006 will
depend in large part on the actual experience of the plans in
2006 and beyond. In 2005, benefits expense included
$1.4 million and $0.7 million of amortization of the
unrecognized loss existing at December 31, 2004 for the
pension and postretirement plans, respectively.
Revenue
Recognition
We recognize revenues for the sales of our products at the time
of shipment. Gross profit on sales of grain is recognized when
sales contracts are entered into, since the contracts are
marked-to-market
on a daily basis. Revenues from other merchandising activities
are recognized as open grain contracts, and are either
marked-to-market
or as the related services are provided. Rental revenues on
operating leases are recognized on a straight-line basis over
the terms of the leases. Sales returns and allowances, if
required, are provided for at the time that the sales are
recorded. Shipping and handling costs are included in the cost
of sales.
We sell railcars to financial intermediaries and other
customers. Proceeds from railcar sales, including railcars sold
in non-recourse transactions, are recognized as revenue at the
time of sale if there is no leaseback or the operating lease is
assigned to the buyer, non-recourse to us. Revenues on operating
leases (where we are the lessor) and on servicing and
maintenance contracts in non-recourse transactions are
recognized over the term of the lease or service contract.
Leasing
Activities
We account for our leasing activity in accordance with FASB
Statement No. 13, as amended, and related pronouncements.
Our Rail Group leases and manages railcars for third parties and
leases railcars for internal use. Most leases to our Rail Group
customers are structured as operating leases. Railcars that we
lease to our customers are either owned by us, leased from
financial intermediaries under operating leases or leased from
financial intermediaries under capital leases. The leases from
financial intermediaries are generally structured as
sale-leaseback transactions. Lease income and lease expense are
recognized on a straight-line basis over the term of the lease
for most leases.
As part of the railcar acquisition of used railcar rolling stock
and leasing assets from Progress Energy, Inc. and subsidiaries
described in Note 3 to our audited consolidated financial
statements included elsewhere in this prospectus, we acquired
some existing leases where the monthly lease fee is contingent
upon some measure of usage (per diem leases). This
monthly usage is tracked, billed and collected by third-party
service providers and funds are generally remitted to us along
with usage data three months after they are earned. We record
lease revenue for these per diem arrangements based on recent
historical usage patterns and record a true up adjustment when
the actual data is received. Revenues recognized under per diem
arrangements totaled $10.5 million in 2005 and
$8.4 million in 2004.
We periodically finance some of our railcars through leases with
a financial intermediary, the terms of which require us to
capitalize the assets and record the net present value of the
lease obligation on our balance sheet as a long-term borrowing.
There are no gains or losses on these financing transactions.
The obligation is included with
46
our long-term debt as described in Note 8 to our audited
consolidated financial statements included elsewhere in this
prospectus. Railcars under these leases are being depreciated to
their residual value over the term of the lease.
We also arrange non-recourse lease transactions under which we
sell railcars or locomotives to financial intermediaries and
assign the related operating lease on a non-recourse basis. We
generally provide ongoing railcar maintenance and management
services for the financial intermediaries, and receive a fee for
such services when earned. On the date of sale, we recognize the
proceeds from sales of railcars in non-recourse lease
transactions as revenue. Management and service fees are
recognized as revenue as the underlying services are provided,
which is generally spread evenly over the lease term.
Taxes
Our annual tax rate is based on our income, statutory tax rates
and tax planning opportunities available to us in the various
jurisdictions in which we operate. Significant judgment is
required in determining our annual tax rate and in evaluating
our tax positions. We establish reserves when, despite our
belief that our tax return positions are fully supportable, we
believe that certain positions are likely to be challenged and
that we may not prevail. We adjust these reserves in light of
changing facts and circumstances, such as the progress of a tax
audit. An estimated effective tax rate for a year is applied to
our quarterly operating results. In the event there is a
significant or unusual item recognized in our quarterly
operating results, the tax attributable to that item is
separately calculated and recorded at the same time as that item.
Recent
Accounting Pronouncements
In March 2005, the FASB issued Interpretation No. 47,
Accounting for Conditional Asset Retirement Obligations.
This standard provides guidance on the recognition of a
liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably
assured. This standard is effective no later than the end of
fiscal years ending after December 15, 2005. We have
adopted this standard for our fiscal year ending
December 31, 2005. This standard does not have a material
impact to our consolidated financial statements.
In May 2005, the FASB issued Statement No. 154,
Accounting Changes and Error Corrections, a replacement
of APB No. 20 and FAS No. 3. This standard
requires retrospective application to prior period financial
statements for changes in accounting principles. This standard
also provides guidance on reporting the correction of an error
by requiring the restatement of previously issued financial
statements. This standard is effective for accounting changes
and corrections of errors made in fiscal years beginning after
December 15, 2005. We have adopted this new standard for
our fiscal year beginning January 1, 2006. This standard
does not have a material impact to our consolidated financial
statements.
In December 2004, the FASB issued Statement No. 123
(Revised 2004), Share-Based Payment, or
SFAS No. 123(R). This standard requires
expensing of stock options and other share-based payments and
supersedes SFAS No. 123, which had allowed companies
to choose between expensing stock options or showing pro forma
disclosure only. On April 14, 2005, the Securities and
Exchange Commission, or the SEC, approved a delay to
the effective date of SFAS No. 123(R). Under the new
rule, SFAS No. 123(R) became effective for us as of
January 1, 2006 and will apply to all awards granted,
modified, cancelled or repurchased after that date as well as
the unvested portion of prior awards.
47
BUSINESS
Our
Business
We are an entrepreneurial, customer focused company with
diversified interests in the agriculture and transportation
markets. Since our founding in 1947, we have developed specific
core competencies in risk management, bulk handling,
transportation and logistics and an understanding of commodity
markets. We have leveraged these competencies to diversify our
operations into other complementary markets, including ethanol,
railcar leasing, plant nutrients, turf products and general
merchandise retailing. For the year ended December 31,
2005, our sales and merchandising revenues were
$1,296.7 million, our operating income was
$39.3 million and our EBITDA was $74.3 million, which
represented increases over 2004 levels of 2%, 31% and 20%,
respectively. For the three months ended March 31, 2006,
our sales and merchandising revenues were $280.7 million,
our operating income was $6.0 million and our EBITDA was
$16.2 million, which represented increases over 2005 levels
of 9%, 267% and 61%, respectively.
We operate our business in five segments: the Grain &
Ethanol Group, the Rail Group, the Plant Nutrient Group, the
Turf & Specialty Group and the Retail Group. The
principal activities of each of these groups are as follows:
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The Grain & Ethanol Group, which achieved 2005 sales
and merchandising revenues of approximately $628.0 million,
operates grain elevators in Ohio, Michigan, Indiana and
Illinois. The Grain & Ethanol Group collectively
shipped approximately 167 million bushels of grain in 2005.
We are leveraging our expertise in the grain markets by focusing
on the growing market for ethanol. We are the developer, manager
and largest investor in two ethanol facilities currently under
construction in Indiana and Michigan and have an investment in a
third ethanol facility located in Indiana. We also will be
providing grain origination services for each of these three
facilities, which collectively have nameplate
capacity of 205 MMGY. We have expanded our trading
operations through a 36% ownership interest in Lansing, which is
an established commodity trader and service provider to the
grain and ethanol industries.
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The Rail Group, which achieved 2005 sales of approximately
$92.0 million, leases and manages a fleet of over 19,000
railcars of various types and 89 locomotives. The Rail Group
also operates a repair, refurbishment and custom steel
fabrication business.
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The Plant Nutrient Group, which achieved 2005 sales and
merchandising revenues of approximately $271.4 million,
operates fertilizer distribution terminals and farm centers in
Ohio, Michigan, Indiana and Illinois, which collectively handle
approximately 1.5 million tons of dry and liquid fertilizer
products annually. In addition, the Plant Nutrient Group
manufactures liquid fertilizer and blends granular fertilizer
for sale to both third-party and its own farm centers.
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The Turf & Specialty Group, which achieved 2005 sales
of approximately $122.6 million, produces and markets turf
and ornamental plant fertilizer and pest control products with a
particular focus on the professional lawn care and golf course
markets. The Turf & Specialty Group also produces
corncob-based products for a variety of uses, including animal
bedding and cat litter.
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The Retail Group, which achieved 2005 sales of approximately
$182.8 million, operates six large stores in Ohio offering
what we refer to as More for Your
Home®.
Our stores are a combination traditional home center with
hardware, plumbing, electrical and building supplies, as well as
unique specialty food offerings, indoor and outdoor garden
centers, extensive lines of housewares and other domestic
products, automotive supplies and pet supplies.
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In recent years we have entered new lines of business which we
believe are natural extensions of, or complementary to, our
existing lines of business, and in which we can leverage our
core competencies to create synergies within and across our
business groups. For example, our Grain & Ethanol Group
will be providing value added services to the ethanol industry
including plant management, transportation and logistics, corn
origination, and the marketing of ethanol and DDGS. In addition,
we believe our extensive experience in risk management can be
utilized to help reduce earnings volatility and protect capital
investments related to our ethanol operations. We are
continuously evaluating additional investments and joint venture
opportunities in this growing industry.
48
Industry
Overview
Our businesses are largely impacted by the overall market for
grain and related commodities. The principal grains sold by us
are corn, soybeans and wheat, the three principal crops produced
in the U.S.
Grains. The U.S. is the largest producer
and exporter of corn, the largest producer and exporter of
soybeans and the largest exporter of wheat in the world. As
measured by production value, corn was the largest
U.S. grain crop at $21 billion in 2005, 24% larger
than the $17 billion soybean market and three times as
large as the $7.1 billion U.S. wheat market.
U.S. corn production has increased in recent years on
average versus historical production levels due in part to
increased yields, favorable weather conditions, and broader
usage of genetically modified corn seeds that are resistant to
insects, disease and chemicals. In 2004, the U.S. harvested
11.8 billion bushels of corn, an increase in production of
17% from 2003. 2005 current crop production forecasts have
called for total U.S. corn production of 11.1 billion
bushels, a
year-over-year
decline of 6% but still the second-largest harvest on record.
U.S. soybean production has increased significantly in
recent years due primarily to increased yields, the expansion of
acreage, usage of new seed varieties, and improved fertilizer
and pesticide applications and management practices. In 2004,
the U.S. harvested a record setting 3.12 billion
bushels of soybeans, an increase in production of 27.3% from
2003. 2005 current crop production forecasts have called for
total U.S. soybean production of 3.09 billion bushels,
a
year-over-year
decline of 1% but still the second-largest harvest on record.
U.S. wheat production has continued to decrease since its
production and acreage peak in 1981 due in part due to declining
returns relative to other crops as a result of foreign
competition, the availability of alternative options under
government programs, and the slow pace of genetic improvement
for wheat. These factors have contributed to the nearly
one-third loss of wheat acreage since the 1980s. In 2004,
the U.S. harvested 2.16 billion bushels of wheat, a
decrease in production of 8.0% from 2003. 2005 current crop
production forecasts have called for total U.S. wheat
production of 2.10 billion bushels, a
year-over-year
decline of 3.0%.
Ethanol. Ethanol is a type of alcohol produced
in the U.S. principally from corn. It is primarily used as
a blend component in the U.S. gasoline fuel market, which
approximated 140 billion gallons in 2005 according to the
U.S. Energy Information Administration. Gasoline refiners and
marketers generally use ethanol as an up to 10% blend component
per gallon of gasoline to increase octane and as an oxygenate to
reduce tailpipe emissions. According to the RFA,
4.0 billion gallons of ethanol were produced in the
U.S. in 2005, accounting for approximately 3% of the
domestic gasoline fuel supply. The ethanol industry has grown
significantly over the last few years. Production capacity has
doubled since 2001 and has expanded at a compounded annual
growth rate of approximately 20% from 2000 to 2005.
The key drivers of growth in the grain industry include, among
others: continued world population and GDP growth; the
favorability of weather conditions; the use of more effective
fertilizers and chemicals; levels of planted acreage; and the
increased production of renewable fuels from corn, soybeans and
other crops. We expect the demand for grain to increase during
the next few years as a result of favorable macro trends
including worldwide population growth and increasing demand for
fuel and other products. In addition, we believe that increased
production of grain and ethanol will result in an increased
demand for rail transportation services and plant nutrient
products.
Our
Competitive Strengths
We have developed specific core competencies in customer
service, risk management, bulk handling, transportation and
logistics and an understanding of commodities markets, each of
which are used across our business groups. We believe that these
core competencies and the following strengths differentiate us
from our competitors and position us for continued growth:
Strategically Diversified Agribusiness
Model. Throughout our history we have leveraged
our core competencies to selectively and strategically extend
our base grain business. For example, the Rail Group began as an
attempt to leverage our expertise in moving grain and fertilizer
and now this group helps our ethanol business source ethanol
tank cars and reconfigured DDGS railcars. We have transferred
our core competencies across our business groups and captured
synergies as these businesses interact. In addition, we have
achieved cost savings through the use of, among other things,
shared labor and corporate services across
49
our business groups. Our service culture underlies
each of our business groups, placing an emphasis on
entrepreneurship and meeting the needs of our customers.
Large Established Grain Infrastructure. We
have an established infrastructure and nearly 60 years of
experience in purchasing, storing, processing, marketing and
transporting corn, soybeans, wheat and other commodities. We
operate a network of 14 grain elevators in four states that are
strategically located near production and transportation hubs,
making us a leading grain handler in the eastern corn belt with
81 million bushels of storage capacity. Throughout our
history, we have developed business relationships with an
extensive network of grain suppliers and producers and have
worked with them to improve risk management capabilities and
have provided marketing tools to help improve operating
performance.
Risk Management Capabilities. We believe we
are a leading developer and user of proprietary and other risk
management tools and instruments in certain of our business
groups. We believe we were among the first to use several
products and techniques which allow us and grain suppliers to
minimize risk, including delayed price and HTA, cash contracts.
We also developed the Crop Revenue
Profiler®
software program which enables farmers to create a marketing
plan that takes into account current and expected grain prices,
available subsidies and incentives, insurance and applicable
risks to help reduce earnings volatility and protect capital
investments. We have developed a specific risk management
strategy for certain of our business groups. For example, we
manage risks associated with commodity contracts through daily
position management and the ability to mark to
market all of our positions at the end of every business
day. In addition, we use historical data and forecasting to
enable us to effectively manage counterparty credit risk. In our
Rail Group, we manage risk exposure by, among other things,
utilizing match-funding of lease commitments, securitized
financing and reviews of counterparty credit quality.
Transportation and Logistics Expertise. We
believe that the maturation and evolution of any commodities
industry favors those market participants that possess
competitive advantages in logistics and transportation
expertise. Our large fleet of railcars and nearly 60 years
of experience with the U.S. rail system gives us the
ability to quickly and cost effectively satisfy the
transportation needs of commodity contracts. This experience
enables us to negotiate favorable rates, allows us to manage
delivery of commodities across a geographic network to minimize
freight costs and maximize efficiency and gives us access to
rail assets. We believe that we are in position to leverage our
strengths in these areas as the ethanol industry continues to
evolve.
Growing Commodity Trading Platform. Our
Grain & Ethanol Groups trading capabilities
combined with the over 80-year operating history of our Lansing
affiliate positions us as a significant provider of commodity
trading and delivery services. Our relationship with Lansing
allows us to enter into storage and commodity trading contracts
outside of our traditional geographic markets in the eastern
corn belt. In addition, our investment in Lansing allows us to
expand our trading platform into non-storage facility-based
transactions and additional commodities, including ethanol. For
the year ended December 31, 2005 and the three months ended
March 31, 2006, Lansing had revenues of approximately
$1.2 billion and $343.7 million, respectively, which
represented increases of 22.5% and 18.9%, respectively, over
2004 and the three months ended March 31, 2005. We believe
our ethanol operations will provide synergistic opportunities
with our trading operations.
Rail Car Expertise. We manage and lease the
nations eighth largest private fleet (exclusive of
railroads) and, in 2005, we grew our fleet by 32% as a result of
targeted, focused acquisitions. We believe we have developed
industry leading positions in railcar refurbishing, leasing and
component manufacturing. Significant areas of leadership include
refurbishing and utilizing jumbo hopper cars, which have since
become the standard for shipping grain and in retrofitting
existing cars to make them capable of transporting DDGS, an
important byproduct of ethanol production that is sold to the
animal feed industry. With over 19,000 railcars and 89
locomotives that we manage and lease at March 31, 2006, we
have the ability to meet our customers needs as demand for
rail transportation equipment continues to rise.
Experienced and Proven Management Team. Our
management team has significant experience both with our company
and within the markets in which we operate. Our 12 top managers
have an average of
50
27 years of experience with our company. Our current
management team has fostered a service culture that encourages
and rewards continuous improvement in all areas of our business.
Our
Business Strategy
Our objective is to use our core competencies in an
entrepreneurial manner to grow sales and maximize profitability
across our business groups. We will accomplish this objective by:
Increasing Services to and Investments in the Grain and
Ethanol Industries. We plan to leverage our core
competencies by investing in and providing plant management,
grain origination and other services to ethanol producers. We
expect our future ethanol investments will be in a form similar
to our current joint venture investments in TAAE and TACE, and
our minority investment in a new facility in Rensselaer,
Indiana. We believe that investments through joint ventures in
high volume, cost efficient ethanol plants will allow us to
deploy capital more efficiently across more plants (enabling us
to share in more industry capacity), achieve geographic
diversity, reduce earnings volatility, and increase annual
management and service contract revenues. We also intend to grow
our base grain business through focused, targeted acquisitions
and business extensions that complement our core competencies.
Increasing Our Grain Trading Operations. We
intend to increase our trading operations and broaden our
trading expertise through continued development of our internal
trading group and continued investments in Lansing. Expanding
our trading operations is a significant growth opportunity that
leverages our grain and commodity, risk management and
transportation and logistics expertise. We have the option to
increase our ownership in Lansing in 2007 and 2008 and, if both
options are exercised, we would be the majority owner in 2008.
Growing Our Fleet of Railcars and
Locomotives. We plan to continue to grow our
diversified fleet of railcars through targeted portfolio
acquisitions and open market purchases, which could include both
owned and managed railcars and locomotives. We intend to
continue our practice of match funding where practical or
otherwise financing the acquisitions in ways that mitigate risk.
We also expect to increase our investment in railcar
refurbishment, conversion and repair facilities. We expect
increased demand for transportation services to continue,
allowing us to enter into new leases or replace existing leases
at higher rates and for longer terms.
Improving Our Plant Nutrient Groups Product
Offerings. We intend to expand into product and
service offerings that are more premium in nature. For example,
we are currently negotiating with a customer to sell reagents
for air pollution control technologies used in coal-fired power
plants and to market the resulting byproducts that can be used
as plant nutrients.
Focusing on our Turf & Specialty and Retail
Operations. We intend to continue to focus on
improving profitability in our Turf & Specialty and
Retail Groups. Within our Turf & Specialty Group, we
are focusing on higher value, proprietary products with greater
profitability as compared to commodity products. With respect to
our retail operations, we plan to continue increasing our
specialty offerings such as premium food items, wine and
produce, to further grow sales and improve margins.
Our
Business
Our business is organized into five business segments including
the Grain & Ethanol, Plant Nutrient, Rail, Retail and
Turf & Specialty Groups. Each operating segment
benefits from common synergies and has a common
customer-centric, entrepreneurial culture.
Grain &
Ethanol Group
Our Grain & Ethanol Group operates grain elevators,
invests in, and provides management services to ethanol
production facilities and holds a 36.1% ownership stake in
Lansing, an established grain and ethanol trading business.
51
Grain
Operations
Our grain operations involve merchandising grain and operating
terminal grain elevator facilities. This includes purchasing,
handling, processing and conditioning grain, storing grain
purchased by us as well as grain owned by others, and selling
grain. The principal grains that we sell are yellow corn, yellow
soybeans and soft red and white wheat. Our grain storage
practical capacity was approximately 81.0 million bushels
at December 31, 2005.
Inventory. We merchandise grain grown in the
Midwestern portion of the U.S. (the eastern corn-belt) and
acquired from country elevators (grain elevators located in a
rural area, served primarily by trucks (inbound and outbound)
and possibly rail (outbound)), dealers and producers. We
purchase grain at prices referenced to CBOT quotations. We
compete for the purchase of grain with grain processors,
regional cooperatives and animal feed operations, as well as
with other grain merchandisers. Because we generally buy in
smaller lots, our competition is generally local or regional in
scope, although there are some large, national and international
companies that maintain regional grain purchase and storage
facilities. Some of these competitors are significantly larger
than us.
Sales and Customers. In 1998, we signed a
five-year lease agreement and a five-year marketing agreement
with Cargill, Incorporated, for Cargills Maumee and
Toledo, Ohio grain handling and storage facilities. As part of
these agreements, Cargill was given the rights to market the
grain in the Cargill-owned facilities as well as the grain in
adjacent facilities that we own in Maumee and Toledo. The lease
agreement covers 10%, or approximately 8.5 million bushels,
of our total storage space, and became effective on June 1,
1998. Both agreements were renewed with amendments in 2003 for
an additional five years. Grain sales to Cargill totaled
$132.0 million in 2005, and included grain covered by the
marketing agreement as well as grain sold to Cargill via normal
forward sales from locations not covered by the marketing
agreement. If the marketing agreement were not in place for the
Maumee and Toledo locations, it is likely that Cargill would
still purchase grain from us at these locations, either for
consumption in their processing facilities or to market to other
end users. There were no sales to any other customer in excess
of 10% of consolidated net sales.
Approximately 81% of the grain bushels that we sold in 2005 were
purchased by U.S. grain processors and feeders, and
approximately 19% were exported. Exporters purchased most of the
exported grain for shipment to foreign markets, while 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 of Mexico or east coast.
Boat shipments are from the Port of Toledo. Grain sales are made
on a negotiated basis by our merchandising staff, except for
grain sales subject to the marketing agreement with Cargill
which are made on a negotiated basis with Cargills
merchandising staff.
Risk Management and Hedging Activities. Fixed
price purchase and sale commitments for grain and grain held in
inventory, relating in part to the seasonality of the grain
business, expose us to risks related to adverse changes in
price. We attempt to manage these risks by hedging fixed price
purchase and sale contracts and inventory through the use of
futures and option contracts with the CBOT. The Grain &
Ethanol Groups profitability is primarily derived from
margins on grain sold, and revenues generated from other
merchandising activities with its customers (including storage
income), and not from hedging transactions. We have a long
history of risk management and have set policies that specify
the key controls over our hedging program. These policies
include descriptions of the hedging programs, mandatory review
of positions by key management outside of the trading function
on a biweekly basis, daily position limits, daily review and
reconciliation, modeling of positions for changes in market
conditions and other internal controls. In addition, we review
our purchase contracts and the parties to those contracts on a
regular basis for credit worthiness, defaults and non-delivery.
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 we purchase grain at a fixed
price, the purchase is hedged with the sale of a futures
contract on the CBOT. Similarly, when we sell grain at a fixed
price, the sale is hedged with the purchase of a futures
contract on the CBOT. At the close of business each day, the
open inventory ownership positions as well as open futures and
option positions are
marked-to-market.
Gains and losses in the value of our inventory positions due to
changing market prices are netted with and generally offset by
losses and gains in the value of the our futures positions. Our
grain operations rely on forward purchase contracts with
producers, dealers and country elevators to ensure an adequate
supply of grain to our facilities throughout the year.
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Bushels contracted for future delivery at January 31, 2006
approximated 94.2 million, the majority of which is
scheduled to be delivered to us for the 2005 and 2006 crop years
(i.e., through September 2007).
Ethanol
Operations
Our ethanol operations invest in, and provide management
services to, ethanol production facilities. We have invested in
three ethanol production facilities and are continuously
evaluating other potential investment opportunities in the
ethanol industry, as well as providing management services to
other ethanol facilities. We currently provide corn origination,
plant management, risk management and ethanol and DDGS marketing
services to our TAAE and TACE facilities.
Our site selection criteria includes many factors, including
proximity to and availability of corn and storage of corn, corn
price levels, air/zoning permit requirements, state and local
tax incentives, good road and rail access, competitive threats
to our existing facilities, availability of natural gas and
water, availability of land for construction of facility,
proximity to customers for both ethanol and its by-products
(DDGS and carbon dioxide).
The table below provides a summary of ethanol facilities under
construction that we have invested in:
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Iroquois
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TAAE
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TACE
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BioEnergy
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Location
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Albion, MI
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Clymers, IN
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Rensselaer, IN
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Estimated Start Date
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Q3 2006
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Q1 2007
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Q1 2007
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Nameplate Capacity (MMGY)
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55
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110
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40
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Production Process
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Dry Mill
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Dry Mill
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Dry Mill
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Primary Energy Source
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Natural Gas
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Natural Gas
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Natural Gas
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Estimated Bushels Processed
(millions)
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20
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40
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14
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Estimated DDGS Production (tons)
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155,000
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310,000
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115,000
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Design / Builder
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ICM
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ICM
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Fagen
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Ownership
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44%
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37%
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8%
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Ethanol Services Provided(1)
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X
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X
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X
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(1) |
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For TAAE and TACE, ethanol services provided include corn
origination, risk and plant management, and DDGS and ethanol
marketing. For Iroquois, only corn origination services are
provided. |
The Andersons Albion Ethanol LLC. In July
2005, we invested approximately $13.1 million for a 44%
interest in TAAE. We organized the creation of TAAE, are
overseeing construction of the facility and have contracted to
manage the facility. In September 2005, construction commenced
on a 55 MMGY nameplate ethanol plant on approximately
40 acres adjacent to our Albion, Michigan grain facility.
Construction is expected to be completed in the third quarter of
2006. The Albion facility is expected to process approximately
20 million bushels of corn per year and produce
approximately 55 MMGY of ethanol and 155,000 tons of DDGS
per year.
We will lease our Albion grain elevator facility to TAAE upon
completion of the facility. We will also operate the ethanol
production facility under a management contract and provide corn
origination, plant management, risk management and ethanol and
DDGS marketing services. We have an arrangement with TAAE under
which the facility will be staffed by 35 of our employees. The
Albion facility is being designed to operate on a continuous
basis. We expect the Albion Facility will transport ethanol and
DDGS by rail and truck, as needed and will have significant
capacity for both forms of transportation. Planned logistics
include
on-site rail
and truck loading and unloading systems. Depending on relative
costs, transportation methods can be easily changed. It is
located on the Northeastern edge of the eastern corn belt with
convenient rail access.
The Andersons Clymers Ethanol LLC. In February
2006, we invested approximately $21.0 million for a 37%
interest in TACE. We organized the creation of TACE, are
overseeing construction of the facility and have contracted to
manage the facility. In February 2006, construction commenced on
a 110 MMGY ethanol plant on approximately 24 acres
adjacent to our Clymers, Indiana grain facility. Construction is
expected to be completed in
53
the first quarter of 2007. The Clymers facility is expected to
process approximately 40 million bushels of corn per year
and produce approximately 110 MMGY of ethanol and 310,000
tons of DDGS per year.
We will lease our Clymers grain elevator facility to TACE upon
completion of the facility. We will also operate the ethanol
production facility under a management contract and provide corn
origination, plant management, risk management and ethanol and
DDGS marketing services. We have an arrangement with TACE under
which the facility will be staffed by 38 of our employees. The
Clymers facility is being designed to operate on a continuous
basis. We expect the Clymers facility will transport ethanol and
DDGS by rail and truck, as needed and will have significant
capacity for both forms of transportation. Planned logistics
include
on-site rail
and truck loading and unloading systems. Depending on relative
costs, transportation methods can be easily changed. It is
located on the Northeastern edge of the eastern corn belt with
convenient rail access.
Iroquois Bio-Energy Company, LLC. We have
invested $2 million for a 7.9% ownership interest in
Iroquois, an ethanol plant for which construction began this
year in Rensselaer, Indiana. We will also act as the corn
originator for this facility. The Iroquois facility is expected
to process approximately 14 million bushels of corn per
year and produce approximately 40 MMGY of ethanol and
115,000 tons of DDGS per year.
We are continuing our investigation into other possible
opportunities in the ethanol industry and may increase our
involvement through additional investments in stand-alone
facilities, investments in holding companies or contracts to
provide services to new or existing facilities.
If the projected growth of the ethanol industry occurs, it could
impact our grain business in potentially significant ways. It is
expected to increase demand for corn, with resulting higher
prices and increased competition. Our ethanol business will
compete with other corn processors, ethanol producers and
refiners, a number of whom will be divisions of substantially
larger enterprises and have substantially greater financial
resources than we do. As of June 23, 2006, the top ten
producers accounted for 42.0% of the ethanol production capacity
in the U.S. according to RFA. Smaller competitors,
including farmer-owned cooperatives and independent firms
consisting of groups of individual farmers and investors, will
also pose a threat. For more information, see Risk
Factors We face increasing competition and pricing
pressure from other companies in our industries. If we are
unable to compete effectively with these companies, our sales
and profit margins would decrease, and our earnings and cash
flows would be adversely affected. Providing grain
origination services and ethanol and DDGS marketing services to
the ethanol industry is a potential growth opportunity for our
grain trading operations. We also believe that the increase in
demand for corn to serve the growing ethanol industry may force
a reduction in the plantings of other crops, which would
positively impact the Plant Nutrient Group by increasing demand
for nitrogen, phosphates and potassium. The growth of corn is
more dependent on these fertilizer products than soybeans or
wheat.
Lansing Trade Group LLC. In January 2003, we
became a minority investor in Lansing, formerly known as Lansing
Grain Company, LLC, which was formed in late 2002 with the
contribution of substantially all the assets of Lansing Grain
Company, which was founded in 1931. Lansing achieved 2005
revenues of approximately $1.2 billion and has trading
offices in Michigan, Minnesota and Kansas. Lansing is an active
trader in grain, ethanol and feed ingredients and provides risk
management, storage and transportation services to its trading
partners. Additionally, an affiliate of Lansing offers corn
origination, merchandising, transportation, DDGS marketing and
risk management services to ethanol producers. Lansing currently
operates approximately 564 grain railcars and a subsidiary
has 850 ethanol railcars on order. In addition, Lansing has
approximately 12 million bushels of storage capacity that
is either owned by Lansing or through investments in facilities
and other companies owning storage capacity. Our investment in
Lansing extends our reach outside of our traditional geographic
region and increases our capabilities into non-storage facility
based commodities trading. We hold an option to increase our
investment in each of 2007 and 2008 with the potential of
becoming the majority holder in 2008. In the first quarter of
2006, we made an additional investment to increase our ownership
from approximately 29% to 36.1%. Our investment in Lansing is
accounted under the equity method and as a result, the results
of operations are not consolidated in our financial statements.
Rail
Group
Our Rail Group buys, sells, leases, refurbishes and repairs
various types of used railcars and rail equipment. The Rail
Group also operates a custom steel fabrication business. A large
portion of the railcar fleet is leased from
54
financial lessors and sub-leased to end-users, generally under
operating leases which do not appear on the balance sheet. In
addition, we also arrange non-recourse lease transactions under
which we sell railcars or locomotives to a financial
intermediary and assign the related operating lease to the
financial intermediary on a non-recourse basis. In such
transactions, we generally provide ongoing railcar maintenance
and management services for the financial intermediary,
receiving a fee for these services. We generally hold purchase
options on most railcars owned by financial intermediaries. Of
the 19,185 railcars and 89 locomotives that we managed at
March 31, 2006, 10,927 units or 57%, were included on
the balance sheet, primarily as long-lived assets. The remaining
8,273 railcars and 74 locomotives are either in off-balance
sheet operating leases or non-recourse arrangements. We also
managed approximately 728 railcars for third party investors or
owners at March 31, 2006. We are under contract to provide
maintenance services for 15,204 of the railcars that we own or
manage.
Our risk management philosophy includes the match-funding of
lease commitments where possible and a detailed review of lessee
credit quality. Match-funding (in relation to rail lease
transactions) means matching the terms between the lease with
the customer and the funding arrangement with the financial
intermediary for cars where we are both lessor and lessee. The
2004 investment in TOP CAT Holding Co., a corporation which is
one of our wholly owned subsidiaries, was not match-funded.
Other 2005 non-recourse borrowings where railcars serve as the
sole collateral for debt are also not match-funded as the terms
of the debt are generally longer than the current lease terms.
Generally, we complete non-recourse lease or debt transactions
whenever possible to minimize credit risk. Competition for
railcar marketing and fleet maintenance services is based
primarily on service ability and access to both used rail
equipment and third party financing. Repair and fabrication shop
competition is based primarily on price, quality and location.
We have a diversified fleet of railcar types (boxcars, gondolas,
covered and open top hoppers, tank cars and pressure
differential cars) and locomotives and also serve a diversified
customer base. We plan to grow and continue to diversify our
fleet through portfolio acquisition and open market purchases,
which could include both owned and managed railcars and
locomotives. We operate primarily in the used car
market purchasing used cars and repairing and
refurbishing them for specific markets and customers. The recent
increase in demand for railcars has allowed us to place new
leases or renew existing leases at higher rates and for longer
terms. Additionally, two of our railcar repair shops located in
Maumee, Ohio and Darlington, South Carolina, continue to operate
at high capacity doing both repair and reconfiguration work.
We outsource all of our locomotive and a large part of our
railcar maintenance needs. In April 2005, we opened a third
railcar repair shop in Bay St. Louis, Mississippi. In late
August 2005, the shop was damaged as a result of Hurricane
Katrina. The value of property that was damaged was minimal,
however, our business was interrupted for a short period of
time. Currently this facility is repairing cars damaged by
Hurricane Katrina. Hurricane Katrina also impacted our rail
marketing operations because there were two lessees in the area
unable to receive railcars from us and, in addition, some of
their leased railcars were damaged. The estimated losses are not
expected to be material.
Lease revenues and railcar sales in our rail marketing business
were $81.9 million, $53.9 million, $30.5 million
and $29.5 million for 2005, 2004, 2003 and the first
quarter of 2006, respectively. Sales in the railcar repair and
fabrication shops were $10.1 million, $5.4 million,
$4.7 million and $4.9 million for 2005, 2004, 2003 and
the first quarter of 2006, respectively.
Plant
Nutrient Group
Our Plant Nutrient Group is involved in purchasing, storing,
formulating and selling dry and liquid fertilizer to dealers and
farmers; providing warehousing and services to manufacturers and
customers; formulating liquid anti-icers and deicers for use on
roads and runways; distributing seeds and various farm supplies;
and developing several other products for use in industrial
applications within the energy and paper industries. The major
fertilizer ingredients that we sell are nitrogen, phosphate and
potash, all of which are readily available, although from a
decreasing number of suppliers. We are utilizing our active
research and development effort in the Plant Nutrient Group to
transition our product and service offerings to be premium in
nature. For example, we are currently exploring the sale of
reagents for air pollution control technologies used in
coal-fired power plants and marketing the resulting byproducts
that can be used as plant nutrients.
55
The market area for the Plant Nutrient Group includes major
agricultural states in the Midwest, North Atlantic and South.
States with the highest concentration of sales are also the
states where our facilities are located Illinois,
Indiana, Michigan and Ohio. Our customers are principally retail
dealers. Sales of agricultural fertilizer products are heaviest
in the spring and fall. The Plant Nutrient Groups seven
farm centers, located throughout Michigan, Indiana and Ohio, are
located within the same regions as our other agricultural
facilities. These farm centers offer agricultural fertilizer,
custom application of fertilizer, and chemicals, seeds and
supplies to the farmer. Storage capacity at our fertilizer
facilities, including farm centers, was approximately
13.9 million cubic feet for dry fertilizers and
approximately 35.8 million gallons for liquid fertilizers
at March 31, 2006. We reserve 6.5 million cubic feet
of our dry storage capacity for various fertilizer manufacturers
and customers and 16.8 million gallons of our liquid
fertilizer capacity is reserved for manufacturers and customers.
The agreements for reserved space provide us with storage and
handling fees and are generally for an initial term of one year,
renewable at the end of each term. We also lease
0.8 million gallons of liquid fertilizer capacity under
arrangements with various fertilizer dealers and warehouses in
locations where we do not have facilities.
In the Plant Nutrient Group, we compete with regional and local
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 we do. Competition in
the agricultural products business is based principally on
price, location and service. Sales of dry and liquid fertilizers
(primarily nitrogen, phosphate and potash) to dealers and
related merchandising revenues totaled $231.9 million,
$198.7 million, $157.8 million and $42.3 million
in 2005, 2004, 2003 and the first quarter of 2006, respectively.
Sales of fertilizer, chemicals, seeds and supplies to farmers
and related merchandising revenues totaled $39.5 million,
$37.9 million, $36.8 million and $3.7 million in
2005, 2004, 2003 and the first quarter of 2006, respectively.
Turf &
Specialty Group
During the third quarter of 2005, we announced a restructuring
of the Turf & Specialty Group. The Turf &
Specialty Group was re-focused on the professional lawn market
and on areas where value can be added in the consumer and
industrial markets. The Turf & Specialty Group,
formerly the Processing Group, produces and markets turf and
ornamental plant fertilizer and control products, and also
produces and distributes corncob-based products to the chemical
carrier, pet and industrial markets. Professional turf products
are sold both directly and through distributors to golf courses
under the Andersons Golf
Products®
label and lawn service applicators. We also sell consumer
fertilizer and control products for do-it-yourself
application, under private labels to mass merchandisers, small
independent retailers and other lawn fertilizer manufacturers.
The turf products industry is highly seasonal, with the majority
of sales occurring from early spring to early summer. During the
off-season, we sell ice melt products to many of the same
customers that purchase consumer turf products. Principal raw
materials for the turf care products are nitrogen, phosphate and
potash, which are purchased primarily from our Plant Nutrient
Group.
Sales of turf and ornamental plant fertilizer and control
products totaled $110.1 million, $116.9 million,
$123.5 million and $36.3 million in 2005, 2004, 2003
and the first quarter of 2006, respectively. We are one of a
limited number of processors of corncob-based products in the
U.S. These products serve the chemical and feed ingredient
carrier, animal litter and industrial markets, and are
distributed throughout the U.S. and Canada and into Europe and
Asia. The principal sources for the corncobs are seed corn
producers. Sales of corncob and related products totaled
$12.4 million, $10.9 million, $10.5 million and
$3.2 million in 2005, 2004, 2003 and the first quarter of
2006, respectively.
Retail
Group
Our 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 More for Your
Home®
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
and 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). In 2005, we opened a meat market in our fifth store.
These meat markets are operated by a third party and we earn a
percentage commission on each sale. Each store carries
56
more than 100,000 different items, has 85,000 square feet
or more of in-store display space plus outdoor garden center
space, and features do-it-yourself clinics, special promotions
and varying merchandise displays. The majority of our
non-perishable merchandise is received at a distribution center
located in Maumee, Ohio. Sales of retail merchandise including
commissions on third-party sales totaled $182.8 million,
$178.7 million, $178.6 million and $32.1 million
in 2005, 2004, 2003 and the first quarter of 2006, respectively.
The Retail Groups merchandising business is highly
competitive, competing with a variety of retail merchandisers
such as home centers, department stores and hardware stores.
Many of these competitors have substantially greater financial
resources and purchasing power than our company. The principal
competitive factors are location, quality of product, price,
service, reputation and breadth of selection. Our Retail
Groups business is affected by seasonal factors with
significant sales occurring in the spring and during the
Christmas season.
Properties
and Equipment
Set forth below is information describing our principal
agriculture, retail and other properties as of March 31,
2006. Except as otherwise indicated, we own all the properties.
We believe that our properties, including our machinery,
equipment and vehicles, are adequate for our business, well
maintained and utilized, suitable for their intended uses and
adequately insured.
Grain &
Ethanol and Plant Nutrient Groups
The following table sets forth information regarding our
Grain & Ethanol and Plant Nutrient Groups:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural Fertilizer
|
|
|
|
Grain Storage
|
|
|
Dry Storage
|
|
|
Liquid Storage
|
|
Location
|
|
(Bushels)
|
|
|
(Cubic Feet)
|
|
|
(Gallons)
|
|
|
|
(In thousands)
|
|
|
Maumee, Ohio(3)
|
|
|
21,942
|
|
|
|
4,500
|
|
|
|
2,878
|
|
Toledo, Ohio Port(4)
|
|
|
11,196
|
|
|
|
1,800
|
|
|
|
5,623
|
|
Metamora, Ohio
|
|
|
5,774
|
|
|
|
|
|
|
|
|
|
Toledo, Ohio(1)
|
|
|
983
|
|
|
|
|
|
|
|
|
|
Lyons, Ohio
|
|
|
350
|
|
|
|
|
|
|
|
|
|
Lordstown, Ohio
|
|
|
|
|
|
|
530
|
|
|
|
|
|
Gibsonburg, Ohio(2)
|
|
|
|
|
|
|
37
|
|
|
|
349
|
|
Fremont, Ohio(2)
|
|
|
|
|
|
|
40
|
|
|
|
271
|
|
Fostoria, Ohio(2)
|
|
|
|
|
|
|
40
|
|
|
|
250
|
|
Champaign, Illinois
|
|
|
12,732
|
|
|
|
1,200
|
|
|
|
|
|
Dunkirk, Indiana
|
|
|
7,800
|
|
|
|
833
|
|
|
|
|
|
Delphi, Indiana
|
|
|
7,063
|
|
|
|
923
|
|
|
|
|
|
Clymers, Indiana(5)
|
|
|
4,716
|
|
|
|
|
|
|
|
|
|
Oakville, Indiana
|
|
|
3,450
|
|
|
|
|
|
|
|
|
|
Walton, Indiana(2)
|
|
|
|
|
|
|
435
|
|
|
|
8,690
|
|
Poneto, Indiana
|
|
|
|
|
|
|
10
|
|
|
|
5,750
|
|
Logansport, Indiana
|
|
|
|
|
|
|
83
|
|
|
|
3,652
|
|
Waterloo, Indiana(2)
|
|
|
|
|
|
|
992
|
|
|
|
1,656
|
|
Seymour, Indiana
|
|
|
|
|
|
|
720
|
|
|
|
943
|
|
North Manchester, Indiana(2)
|
|
|
|
|
|
|
25
|
|
|
|
211
|
|
Albion, Michigan(5)
|
|
|
2,552
|
|
|
|
|
|
|
|
|
|
White Pigeon, Michigan
|
|
|
2,703
|
|
|
|
|
|
|
|
|
|
Webberville, Michigan
|
|
|
|
|
|
|
1,747
|
|
|
|
5,060
|
|
Litchfield, Michigan(2)
|
|
|
|
|
|
|
30
|
|
|
|
457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
81,261
|
|
|
|
13,945
|
|
|
|
35,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Facility leased. |
|
(2) |
|
Facility is or includes a farm center. |
57
|
|
|
(3) |
|
Includes leased facilities with a 3,842-bushel capacity. |
|
(4) |
|
Due to explosion and resulting fire that occurred at the leased
portion of this facility in the third quarter of 2005, current
capacity has been reduced from the normal 5,900 bushels to 4,650. |
|
(5) |
|
Planned lease to ethanol production facilities under
construction. |
Our grain facilities are mostly concrete and steel tanks, with
some flat storage, which is primarily
cover-on-first
temporary storage. We also own grain inspection buildings and
dryers, maintenance buildings and truck scales and dumps.
The properties in our Plant Nutrient Group consist mainly of
fertilizer warehouse and distribution facilities for dry and
liquid fertilizers. The Maumee, Ohio; Champaign, Illinois;
Seymour, Indiana; and Walton, Indiana locations have fertilizer
mixing, bagging and bag storage facilities. The Maumee, Ohio;
Webberville, Michigan; Logansport, Indiana; Walton, Indiana; and
Poneto, Indiana locations also include liquid manufacturing
facilities.
Rail
Group
In our railcar business, we own, lease or manage for financial
institutions 89 locomotives and 19,185 railcars. Future minimum
lease payments for the railcars and locomotives are
$77.6 million with future minimum contractual lease and
service income of approximately $169.0 million for all
railcars, regardless of ownership. Lease terms range from one to
eight years. We operate railcar repair facilities in Maumee,
Ohio; Darlington, South Carolina; and Bay St. Louis,
Mississippi and a steel fabrication facility in Maumee, Ohio. We
also own or lease a number of switch engines, mobile repair
units, cranes and other equipment.
Retail
Group
The following table describes the locations and approximate
square footage of the stores in our Retail Group:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Store Name
|
|
Location
|
|
Square Feet
|
|
|
Maumee Store
|
|
Maumee, Ohio
|
|
|
153,000
|
|
Toledo Store
|
|
Toledo, Ohio
|
|
|
149,000
|
|
Woodville Store*
|
|
Northwood, Ohio
|
|
|
120,000
|
|
Lima Store*
|
|
Lima, Ohio
|
|
|
120,000
|
|
Sawmill Store
|
|
Columbus, Ohio
|
|
|
146,000
|
|
Brice Store
|
|
Columbus, Ohio
|
|
|
159,000
|
|
Distribution Center*
|
|
Maumee, Ohio
|
|
|
245,000
|
|
|
|
|
* |
|
These facilities are leased. The leases for the two stores and
the distribution center are operating leases with several
renewal options and provide for minimum aggregate annual lease
payments approximating $1.0 million. The two store leases
provide for contingent lease payments based on achieved sales
volume. One store had sales triggering payments of contingent
rental each of the last three years. In addition, we own a
service and sales facility for outdoor power equipment adjacent
to our Maumee, Ohio retail store. |
Turf &
Specialty Group
We own lawn fertilizer production facilities in Maumee, Ohio;
Bowling Green, Ohio; and Montgomery, Alabama, and corncob
processing and storage facilities in Maumee, Ohio and Delphi,
Indiana. A portion of the Maumee, Ohio facility was closed in
late 2005 and the milling operations were consolidated in
Delphi, Indiana. We also lease a lawn warehouse facility in
Toledo, Ohio.
Other
We also own an auto service center that is leased to our former
venture partner. Our administrative office building is leased
under a net lease expiring in 2015. We own approximately
1,147 acres of land on which the above properties and
facilities are located and approximately 306 acres of
farmland and land held for sale or future use.
58
Our real properties, machinery and equipment were subject to
aggregate encumbrances of approximately $59.7 million at
March 31, 2006. Additionally, 8,336 railcars and 16
locomotives are held in bankruptcy-remote entities
collateralizing $95.1 million of non-recourse debt at
March 31, 2006. Additions to property, including intangible
assets but excluding railcar assets, for the three months ended
March 31, 2006, 2005 and 2004 amounted to
$2.5 million, $1.9 million and $5.5 million,
respectively. Additions to our railcar assets totaled
$12.3 million, $21.8 million and $4.5 million for
the 3 months ended March 31, 2006, 2005 and 2004,
respectively. These additions were offset by sales and
financings of railcars of $13.4 million, $9.8 million
and $4.9 million for the same periods.
Seasonality
The results of our operations fluctuate due to seasonality. We
generally experience our lowest level of sales during the third
quarter. When possible, we design production schedules to
maintain uniform manufacturing activity throughout the year.
Many of our operations are dependent on weather conditions. The
success of our Grain & Ethanol and Plant Nutrient
Groups, for example, are highly dependent on the weather in the
eastern corn belt (Ohio, Michigan, Indiana and Illinois),
primarily during the spring planting season and through the
summer (wheat) and fall (corn and soybean) harvests.
Additionally, wet and cold conditions during the spring
adversely affects the application of fertilizer and other
products to golf course and other consumers which could decrease
demand in our Turf & Specialty Group. These same
weather conditions also adversely affect purchases of lawn and
garden products in our Retail Group which generates a
significant amount of their sales from these products during the
spring season.
Research
and Development
Our research and development program is mainly involved with the
development of improved products and processes, primarily for
the Turf & Specialty Group, as well as the
Grain & Ethanol and Plant Nutrient Groups. We expended
approximately $635,000 on research and development activities
during 2005 and $650,000 in each of 2004 and 2003.
Employees
As of December 31, 2005, we employed 1,208 full-time
and 1,542 part-time or seasonal employees. We believe that
we have good relations with our employees. We have never
experienced a labor-related work stoppage of any kind.
Government
Regulation
The grain that we sell must conform to official grade standards
imposed under a federal system of grain grading and inspection
administered by the USDA. The production levels, markets and
prices of the grains that are merchandised are materially
affected by U.S. government programs, which include acreage
control and price support programs of the USDA. For our
investments in ethanol production facilities, the
U.S. Government provides incentives to the ethanol blender
and also has mandated certain volumes of ethanol to be produced.
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 our grain sales are to
exporters, the imposition of such restrictions could have an
adverse effect upon our operations.
The U.S. Food and Drug Administration, or FDA,
has developed bioterrorism prevention regulations for food
facilities, which require that we register our grain operations
with the FDA, provide prior notice of any imports of food or
other agricultural commodities coming into the U.S. and maintain
records to be made available upon request that identifies the
immediate previous sources and immediate subsequent recipients
of our grain commodities.
Like other companies engaged in similar businesses, we are
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
our existing plant and processing facilities and could restrict
the expansion of future
59
facilities or significantly increase the cost of our operations.
We made capital expenditures of approximately $1.6 million,
$1.5 million and $1.4 million in order to comply with
these regulations in 2005, 2004 and 2003, respectively.
Environmental
Matters and Insurance
We are subject to federal, state and local environmental laws,
regulations and ordinances, including laws relating to the use,
storage, discharge, and disposal of hazardous materials. Some of
our operations involve air emissions, wastewater discharges, and
solid and hazardous waste management and require environmental
permits from governmental authorities. Governmental authorities
have the power to enforce compliance with these environmental
laws and permits, and noncompliance may subject us to penalties,
fines or injunctions. While we endeavor to operate in compliance
with environmental laws and our permits, we cannot assure you
that we will not be subject to enforcement actions or material
fines or penalties in the future. Other than with respect to the
item described in the paragraph below, we do not anticipate
material capital expenditures for environmental controls in
2006. Environmental laws and regulations generally tend to
become increasingly stringent over time, however, and we cannot
assure you that compliance with more stringent environmental
requirements or other unforeseen environmental liabilities will
not have an adverse effect on our operations.
In 2004, we received notice of an alleged violation of certain
City of Toledo Municipal Code environmental regulations in
connection with storm water drainage from potentially
contaminated soil at our Toledo, Ohio port facility. In
response, we submitted a surface water drainage plan to address
the concerns raised in the notice. We have been advised by
regulatory authorities that our proposed surface water drainage
plan has been approved, and we have been advised by the City of
Toledo, Department of Public Utilities, Division of
Environmental Services that no orders or findings will be issued
in connection with the notice of the alleged violation. We are
keeping local authorities apprised of our drainage
implementation schedule, have secured consent from required
landowners and our board has approved $580,000 of expenditures
to implement the plan. We have no reason to believe that
implementation of the approved surface water drainage plan will
materially affect our operations.
On July 1, 2005, two explosions and a resulting fire
occurred at the Maumee river facility in Toledo, Ohio leased
from Cargill. There were no injuries; however, a portion of the
grain at the facility was destroyed along with damage to a
portion of the storage capacity and the conveyor systems. We had
insured the facility for full replacement cost on the property,
inventory and business interruption with a total deductible of
$0.25 million. We are continuing to reclaim grain, perform
site clean-up, conduct necessary demolition and have begun the
repair and reconstruction of the facility. We anticipate
insurance recoveries for property damage, business interruption
and extra expenses incurred. The majority of these insurance
proceeds will not be available to us until 2006, while business
losses were partially incurred in 2005. As of March 31,
2006, our costs of $3.8 million related to clean up and
emergency expenses and $0.9 million in inventory losses
(after deductible) have been funded by the insurance company
with a $6 million advance.
Other
Legal Proceedings
From time to time, we are subject to various product liability
legal actions and other claims arising in the ordinary operation
of our business. In the opinion of management, there are no
actions, suits or proceedings, threatened or pending, which, if
resolved adversely to us, will have a material adverse effect on
our financial position or results of operations.
60
MANAGEMENT
Executive
Officers and Directors
The following table sets forth information concerning our
directors and executive officers. Our executive officers are
appointed by, and serve at the direction of, our board of
directors. A brief biography of each director and executive
officer follows the table.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Dennis J. Addis
|
|
|
53
|
|
|
President, Plant Nutrient Group
|
Daniel T. Anderson
|
|
|
50
|
|
|
President, Retail Group
|
Michael J. Anderson
|
|
|
55
|
|
|
President, Chief Executive Officer
and Director
|
Naran U. Burchinow
|
|
|
53
|
|
|
Vice President, General Counsel
and Secretary
|
Dale W. Fallat
|
|
|
61
|
|
|
Vice President, Corporate Services
|
Philip C. Fox
|
|
|
64
|
|
|
Vice President, Corporate Planning
|
Charles E. Gallagher
|
|
|
64
|
|
|
Vice President, Human Resources
|
Richard R. George
|
|
|
56
|
|
|
Vice President, Controller and
Chief Information Officer
|
Harold M. Reed
|
|
|
50
|
|
|
President, Grain &
Ethanol Group
|
Rasesh H. Shah
|
|
|
51
|
|
|
President, Rail Group
|
Gary L. Smith
|
|
|
60
|
|
|
Vice President, Finance and
Treasurer
|
Thomas Waggoner
|
|
|
52
|
|
|
President, Turf &
Specialty Group
|
Richard P. Anderson
|
|
|
77
|
|
|
Chairman of the Board of Directors
|
Thomas H. Anderson
|
|
|
82
|
|
|
Director
|
John F. Barrett
|
|
|
57
|
|
|
Director
|
Robert J. King, Jr.
|
|
|
51
|
|
|
Director
|
Paul M. Kraus
|
|
|
73
|
|
|
Director
|
Donald L. Mennel
|
|
|
60
|
|
|
Director
|
David L. Nichols
|
|
|
65
|
|
|
Director
|
Dr. Sidney A. Ribeau
|
|
|
58
|
|
|
Director
|
Charles A. Sullivan
|
|
|
71
|
|
|
Director
|
Jacqueline F. Woods
|
|
|
58
|
|
|
Director
|
Dennis J. Addis joined the Company in 1971 and has served
in positions of increasing responsibility since that time.
Currently, he serves as president of the Plant Nutrient Group
and from 2000 to 2005, he served as President of the Plant
Nutrient Division of the Agriculture Group.
Daniel T. Anderson currently serves as President of our
Retail Group, a position that he has held since 1996. He joined
the Company in 1974.
Michael J. Anderson has served as our President and Chief
Executive Officer since January 1999. From 1996 through 1998, he
served as President and Chief Operating Officer. From 1994
through 1996, Mr. Anderson served as Vice President and
General Manager of the Companys Retail Group, and from
1990 through 1994, he served as Vice President and General
Manager of our Grain Group. Mr. Anderson joined the Company
in 1978. Mr. Anderson has served as a member of our board
of directors since 1988. In addition, he also serves as a
director of Interstate Bakeries Corporation and Fifth Third
Bank, Northwest Ohio.
Naran U. Burchinow has served as Vice President, General
Counsel and Secretary of the Company since December 2005. From
2003 to December 2005, he was formerly Operations Counsel of GE
Commercial Distribution Finance Corporation. Prior thereto,
Mr. Burchinow served as General Counsel of ITT Commercial
Finance Corporation and Deutsche Financial Services from 1993 to
2003, where he was employed since 1991.
61
Dale W. Fallat currently serves as the Companys
Vice President of Corporate Services, a position that he has
held since 1992. He joined the Company in 1967.
Philip C. Fox currently serves as the Companys Vice
President of Corporate Planning, a position that he has held
since 1996. He joined the Company in 1980.
Charles E. Gallagher currently serves as the
Companys Vice President of Corporate Planning, a position
that he has held since 1996. He joined the company in 1974.
Richard R. George has served as our Vice President,
Controller and Chief Information Officer since 2002. From 1996
to 2002, he served as Vice President and Controller. He joined
the Company in 1976.
Harold R. Reed joined the Company in 1980 and has served
in positions of increasing responsibility since that time.
Currently, he serves as president of the Grain &
Ethanol Group and from 2000 to 2005, he served as President of
the Grain Division of the Agriculture Group.
Rasesh H. Shah currently serves as President of the
Companys Rail Group, a position that he has held since
1999. He joined the Company in 1978.
Gary L. Smith has served as our Vice President, Finance
and Treasurer since 1996. He joined the Company in 1980.
Thomas Waggoner joined the Company in 1986 and worked in
the Retail Group in positions of increasing responsibility until
2000 when he was named as Director of Supply Chain in our
Turf & Specialty Group. In 2001, he served as Director
of Supply Chain/Consumer & Industrial Sales in the
Turf & Specialty Group, and in 2002, Mr. Waggoner
was promoted to Vice President, Sales & Marketing in
our Turf & Specialty Group. In 2005 he became President
of the Turf & Specialty Group, the position that he
currently holds.
Richard P. Anderson currently serves as Chairman of the
Board, and has served in such capacity since 1996.
Mr. Anderson served as Chief Executive Officer of the
Company from 1987 to 1998; Managing Partner from 1984 to 1987;
and general partner and member of the Managing Committee from
1947 to 1987. Mr. Anderson has served as a director since
1988.
Thomas H. Anderson currently serves as our director. He
has served as Chairman Emeritus since 1996; Chairman of the
Board from 1987 until 1996; Senior Partner in 1987; and general
partner and member of the Managing Committee from 1947 to 1987.
Mr. Anderson has been a director of the Company since 1987.
John F. Barrett presently serves as a director of the
Company. He has served as a director since 1992.
Mr. Barrett is currently the Chairman, President and Chief
Executive Officer of The Western and Southern Financial Group,
and previously served as President and Chief Operating Officer
and Executive Vice President and Chief Financial Officer of the
Company. Mr. Barrett also serves as a director of Convergys
Corp., Inc. and Fifth Third Bancorp.
Robert J. King, Jr. has served as our director since
2005. Mr. King is currently the Managing Director of
Western Reserve Partners LLC. From 2002 through 2004, he served
as Regional President of Fifth Third Bank and from 1997 to 2002,
he was the Chairman, President and Chief Executive Officer of
Fifth Third Bank (Northeastern Ohio). Mr. King is also
a director of Shiloh Industries, Inc. and MTD Holdings Inc.
Paul M. Kraus has served as a director of the Company
since 1988. Mr. Kraus is currently Of Counsel to the
Toledo, Ohio law firm of Marshall & Melhorn, LLC, where
he has been a member since 1962.
Donald L. Mennel has served as a director of the Company
since 1998. Mr. Mennel is currently the President and
Treasurer of The Mennel Milling Company, where he has served in
such capacity since 1984. Mr. Mennel has served as a member
of the Federal Grain Inspection Service Advisory Board and a
past chairman of the Eastern Soft Wheat Technical Board.
David L. Nichols has served as a director of the Company
since 1995. From 2000 through 2005, Mr. Nichols served as
President and Chief Operating Officer of the Richs Lazarus
Goldsmiths Macys Division of Federated Department
Stores, Inc. Prior thereto, Mr. Nichols served as Chairman
and Chief Executive Officer of Mercantile
62
Stores, Inc. Mr. Nichols is also a director of R. G. Barry
Corporation and a past director of the Federal Reserve Bank,
Cleveland, Ohio.
Dr. Sidney A. Ribeau has served as a director of the
Company since 1997. He currently serves as President of Bowling
Green State University, where he has held such position since
1995. Prior thereto, Dr. Ribeau was Vice President for
Academic Affairs at California State Polytechnic University,
Pomona, California. Dr. Ribeau is also a director of
Worthington Industries, Inc. and Convergys Corp., Inc.
Charles A. Sullivan has served as a director since 1996.
Currently retired, Mr. Sullivan formerly served as Chairman
of the Board and Chief Executive Officer of Interstate
Bakeries Corporation. In addition, he served as a director
of UMB Bank of Kansas City, Missouri and advisory director of
Plaza Belmont, LLC.
Jacqueline F. Woods has served as a director since 1999.
Currently retired, Ms. Woods formerly served as President
of Ameritech Ohio (subsequently renamed AT&T Ohio).
Ms. Woods also serves as director of The Timken Company.
63
PRINCIPAL
AND SELLING SHAREHOLDERS
The following table sets forth information, as of the date of
this prospectus, regarding the beneficial ownership of our
common stock: (1) immediately prior to the consummation of
this offering; and (2) as adjusted to reflect the sale of
the shares of common stock by us and the selling shareholders in
this offering by:
|
|
|
|
|
each of our Named Executive Officers;
|
|
|
|
each of our directors;
|
|
|
|
each person that is a beneficial owner of more than 5% of our
outstanding common stock; and
|
|
|
|
all directors and executive officers as a group.
|
Beneficial ownership is determined under the rules of the SEC
and generally includes voting or investment power over
securities. Except in cases where community property laws apply
or as indicated in the footnotes to this table, we believe that
each shareholder identified in the table possesses sole voting
and investment power over all shares of common stock shown as
beneficially owned by the shareholder. Percentage of beneficial
ownership is based on 15,281,255 shares of our common stock
outstanding as of August 22, 2006, and
17,281,255 shares of our common stock outstanding after the
completion of this offering. Shares of common stock subject to
options that are currently exercisable or exercisable within
60 days of the date of this prospectus are considered
outstanding and beneficially owned by the person holding the
options for the purposes of computing the percentage ownership
of that person but are not treated as outstanding for the
purpose of computing the percentage ownership of any other
person. Unless indicated otherwise in the footnotes, the address
of each individual listed in the table is c/o The
Andersons, Inc., 480 W. Dussel Drive, Maumee, Ohio 43537.
We have been advised by each selling shareholder that he, she or
it is not a broker/dealer or affiliate of a broker/dealer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially Owned
|
|
|
Number of
|
|
|
Shares Beneficially Owned After
|
|
|
|
Prior to the Offering
|
|
|
Shares
|
|
|
the Offering
|
|
Name and Address of Beneficial Owner
|
|
Number
|
|
|
Percentage
|
|
|
Offered
|
|
|
Number
|
|
|
Percentage
|
|
|
Dennis J. Addis
|
|
|
86,058
|
|
|
|
*
|
|
|
|
|
|
|
|
86,058
|
|
|
|
*
|
|
Michael J. Anderson
|
|
|
538,119
|
|
|
|
3.5
|
%
|
|
|
20,000
|
|
|
|
518,119
|
|
|
|
3.0
|
%
|
Naran U. Burchinow
|
|
|
5,600
|
|
|
|
*
|
|
|
|
|
|
|
|
5,600
|
|
|
|
*
|
|
Harold M. Reed
|
|
|
114,770
|
|
|
|
*
|
|
|
|
|
|
|
|
114,770
|
|
|
|
*
|
|
Rasesh H. Shah
|
|
|
96,548
|
|
|
|
*
|
|
|
|
|
|
|
|
96,548
|
|
|
|
*
|
|
Richard P. Anderson(1)
|
|
|
866,828
|
|
|
|
5.6
|
%
|
|
|
180,000
|
|
|
|
686,828
|
|
|
|
4.0
|
%
|
Thomas H. Anderson
|
|
|
482,284
|
|
|
|
3.2
|
%
|
|
|
|
|
|
|
482,284
|
|
|
|
2.8
|
%
|
John F. Barrett
|
|
|
46,430
|
|
|
|
*
|
|
|
|
|
|
|
|
46,430
|
|
|
|
*
|
|
Robert J. King Jr.
|
|
|
3,000
|
|
|
|
*
|
|
|
|
|
|
|
|
3,000
|
|
|
|
*
|
|
Paul M. Kraus(2)
|
|
|
210,260
|
|
|
|
1.4
|
%
|
|
|
28,000
|
|
|
|
182,260
|
|
|
|
1.1
|
%
|
Donald L. Mennel
|
|
|
42,803
|
|
|
|
*
|
|
|
|
|
|
|
|
42,803
|
|
|
|
*
|
|
David L. Nichols
|
|
|
32,000
|
|
|
|
*
|
|
|
|
|
|
|
|
32,000
|
|
|
|
*
|
|
Dr. Sidney A. Ribeau
|
|
|
30,054
|
|
|
|
*
|
|
|
|
|
|
|
|
30,054
|
|
|
|
*
|
|
Charles A. Sullivan
|
|
|
56,267
|
|
|
|
*
|
|
|
|
|
|
|
|
56,267
|
|
|
|
*
|
|
Jacqueline F. Woods
|
|
|
31,465
|
|
|
|
*
|
|
|
|
|
|
|
|
31,465
|
|
|
|
*
|
|
Advisory Research, Inc.(3)
|
|
|
970,990
|
|
|
|
6.4
|
%
|
|
|
|
|
|
|
970,990
|
|
|
|
5.6
|
%
|
Dale W. Fallat
|
|
|
43,696
|
|
|
|
*
|
|
|
|
2,000
|
|
|
|
41,696
|
|
|
|
*
|
|
Charles E. Gallagher
|
|
|
28,576
|
|
|
|
*
|
|
|
|
|
|
|
|
28,576
|
|
|
|
*
|
|
Richard R. George
|
|
|
65,176
|
|
|
|
*
|
|
|
|
10,000
|
|
|
|
55,176
|
|
|
|
*
|
|
Gary L. Smith
|
|
|
57,112
|
|
|
|
*
|
|
|
|
10,000
|
|
|
|
47,112
|
|
|
|
*
|
|
All directors and executive
officers as a group (22 persons)
|
|
|
3,228,681
|
|
|
|
20.0
|
%
|
|
|
250,000
|
|
|
|
2,978,681
|
|
|
|
16.5
|
%
|
|
|
|
* |
|
Less than 1%. |
|
(1) |
|
Includes 160,000 shares to be sold by Richard P.
Anderson, LLC. |
|
(2) |
|
Includes 14,000 shares to be sold by Ms. Carol A.
Kraus, spouse of Paul M. Kraus. |
|
(3) |
|
The address of Advisory Research, Inc. is 180 North Stetson
Street, Suite 5500, Chicago, Illinois 60601. The
information in the table with respect to Advisory Research, Inc.
is as of the date of the most recent filing by Advisory
Research, Inc. with the SEC and is based solely on information
contained in such filing. |
64
DESCRIPTION
OF CAPITAL STOCK
The discussion set forth below describes the most important
terms of our capital stock, our amended and restated articles of
incorporation, or our articles of incorporation, our amended and
restated code of regulations, or our code of regulations, and
the applicable provisions of Ohio law, our state of
incorporation, that will be in effect upon the completion of the
offering. Because it is only a summary, it does not contain all
of the information that may be important to you and does not
describe all provisions of our capital stock, articles of
incorporation, code of regulations or Ohio law. For a more
thorough understanding of the terms of our capital stock, you
should refer to our articles of incorporation and code of
regulations, copies of which have been incorporated by reference
as exhibits to the registration statement of which the
prospectus is a part, and to the applicable provisions of Ohio
law.
Pursuant to our articles of incorporation, our authorized
capital stock consists of 25,000,000 shares of common
stock, no par value per share, and 1,000,000 shares of
preferred shares, no par value per share. Upon completion of
this offering, there will be approximately
17,281,255 shares of common stock outstanding and no shares
of preferred stock outstanding.
Common
Stock
Set forth below is a brief discussion of the principal terms of
our common stock:
Dividend
Rights
Holders of shares of our common stock will be entitled to
receive dividends and other distributions in cash, stock or
property of ours as may be declared by our board of directors
from time to time, out of our assets or funds legally available
for dividends or other distributions. Our board of directors has
adopted a dividend practice, which reflects an intention to
distribute a portion of the cash generated by our business in
excess of operating needs, interest and principal payments on
our indebtedness and capital expenditures, subject to board of
director approval and loan covenant restrictions, as regular
quarterly dividends to our shareholders. The historical dividend
practice may be modified or ended at any time in the absolute
discretion of our board of directors, depending on a number of
factors, including our future earnings, capital requirements,
financial condition, future prospects and other factors as the
board of directors may deem relevant. See Price Range of
our Common Stock and Dividends for a complete description
of the dividends we expect to declare on shares of our common
stock.
Voting
Rights
Each outstanding share of our common stock will be entitled to
one vote on all matters submitted to a vote of the shareholders.
There is no cumulative voting.
Preemptive
or Similar Rights
The holders of our common stock will not be entitled to
preemptive or other similar subscription rights to purchase any
of our securities.
Right
to Receive Liquidation Distributions
Upon our liquidation, dissolution or winding up of our business,
the holders of our common stock will be entitled to receive pro
rata our assets that are legally available for distribution,
after payment of all debts and other liabilities and subject to
the prior rights of holders of preferred stock, if any, then
outstanding.
Nasdaq
Listing
Our common stock is listed on the Nasdaq Global Select Market
under the symbol ANDE.
Preferred
Stock
The board of directors has the sole authority, without further
action by the shareholders, to issue up to 1,000,000 shares
of preferred stock in one or more series or classes of preferred
shares and to fix the rights,
65
preferences, privileges and restrictions thereof, including
dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares
constituting any series or the designation of such series. The
satisfaction of any dividend preference on outstanding preferred
shares would reduce the amount of funds available for the
payment of dividends on our common stock. In addition, holders
of preferred shares may be entitled to receive a preference
payment in the event of any liquidation, dissolution or winding
up of our business before any payment is made to holders of our
common stock, and may receive voting and conversion rights that
could adversely affect the holders of our common shares. Under
certain circumstances, the issuance of preferred shares may make
it more difficult or tend to discourage a merger, tender offer
or proxy contest. There are currently no shares of preferred
shares outstanding and we have no present plan to issue any
shares of preferred stock.
Anti-takeover
Effects of our Articles of Incorporation and Code of
Regulations
Our articles of incorporation and code of regulations contain
certain provisions that are intended to enhance the likelihood
of continuity and stability in the composition of the board of
directors and which may have the effect of delaying, deferring
or preventing a future takeover or change in control of the
company unless such takeover or change in control is approved by
the board of directors.
These provisions include:
Shareholder
Action
Our code of regulations provides that shareholder action can be
taken only at an annual or special meeting of shareholders and
cannot be taken by written consent in lieu of a meeting. Our
code of regulations provide that special meetings of the
shareholders may be called by our Chairman of the board of
directors, President or by a majority of our directors then in
office. Shareholders are not permitted to call a special meeting
or to require our board of directors to call a special meeting
of the shareholders. A shareholder could not force shareholder
consideration of a proposal over the opposition of our board of
directors by calling a special meeting of the shareholders prior
to the time our Chairman of the board of directors, President or
a majority of the whole Board of Directors believes such
consideration to be appropriate.
Advance
Notice Procedures
Our code of regulations establishes an advance notice procedure
for shareholder proposals to be brought before an annual meeting
of our shareholders, including proposed nominations of persons
for election to the board of directors. Shareholders at an
annual meeting will only be able to consider proposals or
nominations specified in the notice of meeting or brought before
the meeting by or at the direction of the board of directors or
by a shareholder who was a shareholder of record on the record
date for the meeting, who is entitled to vote at the meeting and
who has given our Secretary timely written notice, in proper
form, of the shareholders intention to bring such business
before the meeting. To be timely, a shareholder must deliver
notice to our Secretary at our principal executive offices not
less than 90 days nor more than 120 days prior to the
first anniversary of the preceding years annual meeting of
our shareholders, unless the record date of the annual meeting
of our shareholders is more than 30 days prior to or more
than 60 days after the anniversary date. In such case, the
notice must be delivered to our Secretary at our principal
executive offices not earlier than 120 days prior to the
annual meeting of our shareholders and not later than the close
of business on the later of the 90th day prior to the
annual meeting of our shareholders or the 10th day
following the day of public announcement of the date of the
annual meeting of shareholders. Although the code of regulations
do not give our board of directors the power to approve or
disapprove shareholder nominations of candidates or proposals
regarding other business to be conducted at a special or annual
meeting, the code of regulations have the effect of precluding
the conduct of certain business at a meeting if the proper
procedures are not followed and may discourage or defer a
potential acquiror from conducting a solicitation of proxies to
elect its own slate of directors or otherwise attempting to
obtain control of the company.
Number
of Directors; Removal; Vacancies
Our code of regulations provides that the number of directors
will be set by resolution of our board of directors adopted by
the affirmative vote of two-thirds of the directors then in
office. Our code of regulations further provides
66
that generally vacancies or newly created directorships may only
be filled by a resolution approved by two-thirds of the
directors then in office. The provisions regarding the number of
directors, removal and filling of newly-created directorships
and vacancies, each of which may not be amended, altered,
changed or repealed in any respect without the affirmative vote
of two-thirds of our shareholders, prevent shareholders from
creating additional directorships and filling the resulting
vacancies with their own nominees.
Super-Majority
Approval Requirements
Our code of regulations provide that the affirmative vote of
holders of at least two-thirds of the total votes eligible to be
cast in the election of directors will be required to amend,
alter, change or repeal specified provisions. This requirement
of a super-majority vote to approve amendments to our code of
regulations could enable a minority of our shareholders to
exercise veto power over any such amendments.
Fair
Price Provisions
Our articles of incorporation provide certain protections for
our shareholders in the event that a person becomes a
controlling person and seeks to implement a
business combination of our company with such
person. Our articles provide a special vote, in addition to
whatever other vote may be required, of two-thirds of the
outstanding shares of common stock not held by the controlling
person, in order to approve such transaction. This special vote
is not required if a minimum price per share is to be paid to
those holders of common shares who do not vote in favor of the
business combination and whose proprietary interest will be
terminated in connection with such business combination, and if
a proxy statement is distributed for purposes of soliciting
shareholder approval of the business combination. This provision
is intended to prevent unfair pricing or other tactics that
might occur if a person in control of our company negotiates a
business combination with the company. This special vote is not
required if our board of directors, by affirmative vote of
two-thirds of the directors, approves a business combination
initiated by a controlling person and determines that the
transaction is in the best interests of the company.
A controlling person is defined as any person who
beneficially owns more than 10% of our common
shares. Beneficially owns is defined broadly to
include all forms of ownership and all types of arrangements
that give a person, either directly or indirectly, actual or
potential voting rights or investment decision authority with
respect to the companys common shares.
Business combination includes virtually every
transaction between a controlling person (and certain of such
persons affiliates and associates) and the company (or a
subsidiary of the company) that would involve a combination of
the business operations or assets of such persons. The phrase
also encompasses reclassifications and recapitalizations
involving our common shares that occur within three years after
a person becomes a controlling person.
Minimum Price Per Share is defined as the higher of
(i) the highest gross per share price paid or agreed to be
paid within three years prior to the record date set for voting
on the business combination to acquire any of our common shares
beneficially owned by a controlling person, or (ii) the
highest per share market price of our common shares during such
three-year period.
By its terms, this provision cannot be amended, altered, changed
or repealed in any respect without the affirmative vote of at
least two-thirds of shareholders (excluding any controlling
persons interests).
Business
Combinations
Our articles of incorporation provide that if a proposal is made
that we enter into a merger or consolidation with any other
corporation (other than one of our direct or indirect
wholly-owned subsidiaries), or sell or otherwise dispose of all
or substantially all of our assets or business in one
transaction or a series of transactions, or liquidate or
dissolve, the affirmative vote of the holders of at least
two-thirds of our outstanding shares will be required for the
approval of such proposal. The foregoing does not apply to any
such merger, consolidation, sale, disposition, liquidation or
dissolution which is approved by resolution of two-thirds of our
directors then in office, if the majority of the members of our
board of directors adopting such resolution were members of our
board of directors prior to the public announcement of the
proposed merger, consolidation, sale, disposition, dissolution
or liquidation
67
and prior to the public announcement of any transaction relating
to such merger, consolidation, sale, disposition, dissolution or
liquidation. If such approval is granted, then such transaction
will only require the additional approval, if any, that is
otherwise required under the other provisions of our articles of
incorporation and under applicable law.
Control
Share Acquisitions
Our articles of incorporation provide that a control share
acquisition of our common shares can only be made with the
prior approval of our shareholders. A control share
acquisition is defined as any acquisition of our shares
that, when added to all other shares of the company owned by the
acquiror, would entitle the acquiror to exercise levels of
voting power in the following ranges: one-fifth or more but less
than one-third, one-third or more but less than a majority, and
a majority or more.
The acquiror may make the proposed control share acquisition
only if both of the following occur: (i) our shareholders
authorize the acquisition by an affirmative vote at a special
meeting of (a) a majority of the voting power of the
company represented at the meeting in person or by proxy and
(b) a majority of the portion of such voting power,
excluding the voting power of shares that may be voted by the
acquiror, by any officer of the corporation elected or appointed
by the directors and by any employee of the company who is also
a director; and (ii) the proposed control share acquisition
is consummated no later than 360 days following the
shareholders authorization of such acquisition.
This provision does not apply to an acquisition of shares by any
shareholder or group of shareholders who were shareholders at
the time our articles of incorporation were amended and
restated, or to any acquisition of shares by certain affiliates
of any such shareholder or group of shareholders. This provision
will begin to apply to such shareholders and affiliates,
however, from and after the point at which they collectively own
less than 25% of our common shares.
Transactions
with Interested Shareholders
Our articles of incorporation prevent an interested
shareholder (defined generally as a person owning 10% or
more of our common shares) from engaging in an interested
shareholder transaction (generally, a merger,
consolidation, sale, lease or other disposition of substantial
assets either by the company to the interested shareholder or
vice versa, certain reclassifications of our shares, or a loan
or other financial benefit to the interested shareholder not
shared pro rata with other shareholders) with us for three years
following the date that person became an interested shareholder
unless (i) before that person became an interested
shareholder, our board of directors approved the transaction in
which the interested shareholder became an interested
shareholder, (ii) upon the consummation of the transaction
that resulted in the shareholder becoming an interested
shareholder, such shareholder owned 85% or more of our
outstanding common shares (excluding shares owned by our
officers and by certain employee share plans) or (iii) our
board of directors approves the interested shareholder
transaction.
This provision does not apply to an acquisition of shares by any
shareholder or group of shareholders who were shareholders at
the time our articles of incorporation were amended and
restated, or to any acquisition of shares by certain affiliates
of any such shareholder or group of shareholders. This provision
will begin to apply to such shareholders and affiliates,
however, from and after the point at which they collectively own
less than 25% of our common shares.
By its terms, this provision cannot be amended, altered, changed
or repealed in any respect without the affirmative vote of at
least two-thirds of our shareholders (excluding any interested
shareholders interests).
Authorized
but Unissued Shares
Our authorized but unissued shares of common stock and preferred
stock will be available for future issuance without shareholder
approval. These additional shares may be utilized for a variety
of corporate purposes, including future public offerings to
raise additional capital, corporate acquisitions and employee
benefit plans. The existence of authorized but unissued shares
of common stock and preferred stock could render more difficult
or discourage an
68
attempt to obtain control of a majority of our common stock by
means of a proxy contest, tender offer, merger or otherwise.
Factors
for Consideration by our Board of Directors in a Takeover
Context
Section 1701.59 of the Ohio General Corporation Law allows
our directors, in the context of an unsolicited takeover
proposal, to consider the interests of our employees, suppliers,
creditors and customers, the economy of the state and the
nation, community and societal considerations, and the long-term
as well as the short term interests of our company and
shareholders, including the possibility that such interests may
best be served by our continued independence.
Director
and Officer Indemnification and Limitation on
Liability
Our articles of incorporation and code of regulations permit us
to indemnify our officers and directors to the greatest extent
permitted by applicable law. Our code of regulations provides
for indemnification of any person who was or is made, or
threatened to be made, a party to any action, suit or other
proceeding, whether criminal, civil, administrative or
investigative, other than an action by or in the right of our
company, because of his or her status as a director, officer or
employee of our company, or service at our request as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against
all expenses, liabilities and losses reasonably incurred by such
person if such person acted in good faith and in a manner he or
she believed to be in or not opposed to the best interest of the
company and, in the context of a criminal proceeding, had no
reason to believe his or her action was unlawful. Our code of
regulations also provides for indemnification for any person who
was or is a party or is threatened to be made a party, to any
threatened, pending, or completed action or suit by or in the
right of our company to procure a judgment in its favor by
reason of the fact that he or she is or was a director, officer,
or employee of the company, or is or was serving at the request
of the company as a director, trustee, officer, employee or
agent of another corporation, partnership, joint venture, trust
or other enterprise, against expenses reasonably incurred by
such person if such person acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the
best interests of our company, except that no indemnification
shall be made, unless a court of common pleas or the court in
which such action was brought determines that such person is
fairly and reasonably entitled to indemnity, if such person is
adjudged to be liable for negligence in the performance of such
persons duties to the company or for any action or suit in
which the only liability asserted against such person is related
to unlawful loans, dividends or distributions. Further, our code
of regulations provides that we may purchase and maintain
insurance on our own behalf and on behalf of any other person
who is or was a director, officer or agent of the company or was
serving at our request as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or
other enterprise.
Indemnification
for Securities Act Liabilities
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted for
directors, officers or controlling persons pursuant to the
provisions described in the preceding paragraph, we have been
informed that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act of
1933, as amended, and is therefore unenforceable.
Transfer
Agent and Registrar
Our transfer agent and registrar is Computershare Investor
Services, LLC, 2 North LaSalle Street, Chicago, Illinois 60602.
69
CERTAIN
UNITED STATES TAX CONSEQUENCES TO
NON-U.S. HOLDERS
OF COMMON STOCK
The following discussion of certain material U.S. federal
income and estate tax considerations related to the ownership
and disposition of our common stock by
non-U.S. Holders
is for general information only.
As used in this discussion, the term
non-U.S. holder
means a beneficial owner of our common stock that is not, for
U.S. federal income tax purposes:
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An individual citizen or resident of the United States;
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A corporation (or any other entity treated as a corporation for
United States federal income tax purposes) created or organized
in or under the laws of the United States, any state thereof or
the District of Columbia;
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An estate, the income of which is included in gross income for
U.S. federal income tax purposes regardless of its
source; or
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A trust if (a) a court within the United States is able to
exercise primary supervision over the administration of the
trust and one or more U.S. persons have the authority to
control all substantial decisions of the trust, or (b) it
has a valid election in effect under applicable United States
Treasury regulations to be treated as a United States person.
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If a partnership, including any entity treated as a partnership
for U.S. federal income tax purposes, is a holder of our
common stock, the tax treatment of a partner in the partnership
will generally depend upon the status of the partner and the
activities of the partnership. A holder that is a partnership,
and partners in such partnership, should consult their own tax
advisors regarding the tax consequences of the purchase,
ownership and disposition of our common stock.
This summary does not purport to deal with all aspects of
U.S. federal income taxation that may be relevant to an
investors decision to purchase shares of our common stock.
This discussion does not consider:
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U.S. federal income, estate or gift tax consequences other
than as expressly set forth below;
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Any tax consequences arising under the laws of any state,
locality or
non-U.S. jurisdiction;
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The tax consequences to the stockholders, beneficiaries or
holders of other beneficial interests in a
non-U.S. Holder;
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Special tax rules that may apply to selected
non-U.S. Holders,
including without limitation, partnerships or other pass-through
entities for U.S. federal income tax purposes, banks or
other financial institutions, insurance companies, dealers in
securities, traders in securities, tax-exempt entities and
certain former citizens or residents of the U.S.;
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Special tax rules that may apply to a
non-U.S. Holder
that holds our common stock as part of a straddle,
hedge or conversion transaction; or
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A
non-U.S. Holder
that does not hold our common stock as a capital
asset within the meaning of Section 1221 of the
Internal Revenue Code (generally property held for investment).
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This discussion is based upon the provisions of the Internal
Revenue Code of 1986, as amended (the Code), the
final and temporary Treasury Regulations promulgated there under
and administrative rulings and judicial decisions now in effect,
all of which are subject to change (possibly with retroactive
effect) or different interpretations. Any change could alter the
tax consequences to
non-U.S. holders
described in this prospectus. We have not requested a ruling
from the U.S. Internal Revenue Service or an opinion of
counsel with respect to the U.S. federal income tax
consequences of the purchase, ownership or disposition of our
common stock to a
non-U.S. Holder.
There can be no assurance that the U.S. Internal Revenue
Service will not take a position contrary to such statements or
that any such contrary position taken by the U.S. Internal
Revenue Service would not be sustained.
WE STRONGLY URGE PROSPECTIVE INVESTORS TO CONSULT WITH THEIR OWN
TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE
U.S. FEDERAL INCOME TAX LAWS TO THEIR
70
PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING
UNDER THE U.S. FEDERAL ESTATE OR GIFT TAX RULES OR
UNDER THE LAWS OF ANY STATE, LOCAL,
NON-U.S. OR
OTHER TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.
Dividends
We anticipate paying cash dividends on our common stock in the
foreseeable future. See Price Range of our Common Stock
and Dividends. Distributions paid on shares of our common
stock will constitute dividends for U.S. federal income tax
purposes to the extent paid from our current or accumulated
earnings and profits, as determined under U.S. federal
income tax principles. If a distribution exceeds our current and
accumulated earnings and profits, the excess will be treated as
a return of capital, up to the holders adjusted tax basis
in our common stock. Any remaining excess will be treated as
gain realized on the sale or other disposition of our common
stock and will be treated as described under
Gain on Disposition of Common Stock.
To the extent treated as dividends for U.S. federal income
tax purposes, distributions paid to
non-U.S. holders
on our common stock generally will be subject to
U.S. withholding tax at a 30% rate or, if an income tax
treaty applies, a lower rate specified by the treaty. However,
dividends that are effectively connected with the conduct of a
trade or business by the
non-U.S. holder
within the United States (and, where an income tax treaty
applies, are attributable to a United States permanent
establishment or fixed base of the
non-U.S. holder)
will not be subject to U.S. withholding tax, provided
certain certification and disclosure requirements are satisfied.
Instead, such dividends will be subject to U.S. federal
income tax on a net income basis in the same manner as if the
non-U.S. holder
were a United States person as defined under the Code. Any such
effectively connected dividends received by a foreign
corporation may be subject to an additional branch profits
tax at a 30% rate or such lower rate as may be specified
by an applicable income tax treaty.
A
non-U.S. holder
of our common stock who wishes to claim the benefit of an
applicable treaty rate and avoid backup withholding, as
discussed below, for dividends will be required to
(a) complete Internal Revenue Service
Form W-8BEN
(or other applicable form) and certify under penalty of perjury
that such holder is a not a United States person as defined
under the Code or (b) if our common stock is held through
certain foreign intermediaries, satisfy the relevant
certification requirements of applicable United States Treasury
regulations. Special certification and other requirements apply
to certain
non-U.S. holders
that are entities other than individuals.
Non-U.S. Holders
should consult their tax advisors regarding their entitlement to
benefits under a relevant income tax treaty.
A
non-U.S. Holder
that is eligible for a reduced rate of U.S. federal
withholding tax or exclusion from withholding under an income
tax treaty but that did not timely provide required
certifications or satisfy other requirements, or that has
received a distribution subjected to withholding on an amount in
excess of the amount properly treated as a dividend, may obtain
a refund or credit of any excess amounts withheld by timely
filing an appropriate claim for refund with the
U.S. Internal Revenue Service.
Gain on
Disposition of Common Stock
In general, a
non-U.S. holder
will not be subject to U.S. federal income tax on any gain
realized upon such holders sale, exchange or other
disposition of our common stock, unless:
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The gain is effectively connected with a trade or business
carried on by the
non-U.S. holder
within the United States, and if required by an applicable
income tax treaty, is attributable to a permanent establishment
or fixed base of the
non-U.S. holder
maintained in the United States; or
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The
non-U.S. holder
is an individual and is present in the United States for
183 days or more in the taxable year of disposition and
certain other tests are met; or
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We are or have been a United States real property holding
corporation for U.S. federal income tax purposes at
any time during the shorter of the five-year period ending on
the date of disposition or the period that the non-U.S. Holder
held our common stock.
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A non-U.S. Holder that is an individual described in the first
bullet above will be subject to tax on any gain derived from the
sale, exchange or other disposition under regular graduated U.S.
federal income tax rates. A non-
71
U.S. Holder that is an individual described in the second bullet
point immediately above will be subject to a flat 30% tax on the
gain derived from the sale, exchange or other disposition, which
may be offset by U.S. source capital losses (even though such
non-U.S. Holder is not considered a resident of the U.S.). A
non-U.S. Holder that is a corporation described in the first
bullet above will be subject to tax on gain under regular
graduated U.S. federal income tax rates and, in addition, may be
subject to the branch profits tax on its effectively connected
earnings and profits for the taxable year, which would include
such gain, at a rate of 30% or at such lower rate as specified
by an applicable income tax treaty, subject to adjustments.
Generally, a corporation is a United States real property
holding corporation if the fair market value of its
United States real property interests equals or
exceeds 50% of the sum of the fair market value of its worldwide
real property interests plus its other assets used or held for
use in a trade or business. The tax relating to stock in a
United States real property holding corporation
generally will not apply to a
non-U.S. Holder
whose holdings, direct and indirect, at all times during the
applicable five-year period, constituted 5% or less of our
common stock, provided that our common stock is regularly traded
on an established securities market. We believe we have never
been, are not currently, and are not likely to become a United
States real property holding corporation for U.S. federal
income tax purposes, although no assurance can be given that we
will not become one.
Income or
Gain Effectively Connected With a U.S. Trade or
Business
If a
non-U.S. holder
of our common stock is engaged in a trade or business in the
United States and if dividends or gain realized on the sale,
exchange or other disposition of the common stock is effectively
connected with the
non-U.S. holders
conduct of such trade or business (and, if an applicable tax
treaty requires, is attributable to a U.S. permanent
establishment or fixed base maintained by the
non-U.S. holder
in the U.S.), the
non-U.S. holder,
although exempt from U.S. withholding tax (provided that
the requirements discussed in the next sentence are met), will
generally be subject to U.S. federal income tax on such
dividends or gain on a net income basis in the same manner as if
it were a resident of the United States. The
non-U.S. holder
will be required, under currently effective Treasury
regulations, to provide a properly executed Internal Revenue
Service
Form W-8ECI
or successor form in order to claim an exemption from
U.S. withholding tax. In addition, if such
non-U.S. holder
is a foreign corporation, it may be subject to a branch profits
tax equal to 30% (or such lower rate provided by an applicable
U.S. income tax treaty) of its effectively connected
earnings and profits for the taxable year.
U.S. Federal
Estate Tax
Common stock owned or treated as owned by an individual who is a
non-U.S. Holder
at the time of death will be included in such individuals
gross estate for U.S. federal estate tax purposes, unless
an applicable estate tax or other treaty provides otherwise.
Backup
Withholding, Information Reporting and Other Reporting
Requirements
We must report annually to the U.S. Internal Revenue
Service and to each
non-U.S. Holder
the amount of dividends paid to that holder and the tax
withheld, if any, with respect to those dividends. Copies of the
information returns reporting those dividends and the amount of
tax withheld may also be made available to the tax authorities
in the country in which the
non-U.S. Holder
is a resident under the provisions of an applicable treaty.
A
non-U.S. holder
will be subject to U.S. federal backup withholding,
currently at a 28% rate, for dividends paid to such holder
unless such holder certifies under penalty of perjury that it is
a
non-U.S. holder
and the payor does not have actual knowledge or reason to know
that such holder is a United States person, or such holder
otherwise establishes an exemption.
Information reporting and, depending on the circumstances,
backup withholding will apply to the proceeds of a sale or other
disposition (including a redemption) of our common stock within
the United States, unless the beneficial owner certifies under
penalty of perjury that it is a
non-U.S. holder
(and the payor does not have actual knowledge or reason to know
that the beneficial owner is a United States person as defined
under the Code) or such owner otherwise establishes an
exemption. Payments of the proceeds from a disposition or a
redemption effected outside the U.S. by or through a
non-U.S. broker
generally will not be subject to information reporting or backup
withholding. However, information reporting, but generally not
backup withholding, will apply to such a payment if
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the broker has certain connections with the U.S. unless the
broker has documentary evidence in its records that the
beneficial owner thereof is a
non-U.S. Holder
and specified conditions are met or an exemption is otherwise
established.
Backup withholding is not an additional tax. Any amounts
withheld may be refunded or credited against the
non-U.S. holders
U.S. federal income tax liability, if any, provided that
the required information is furnished to the U.S. Internal
Revenue Service in a timely manner.
Non-U.S. Holders
should consult their own tax advisors regarding application of
information reporting and backup withholding in their particular
circumstance and the availability of, and procedure for
obtaining, an exemption from information reporting and backup
withholding under current Treasury regulations.
73
UNDERWRITING
We, the selling shareholders and the underwriters for this
offering named below have entered into an underwriting agreement
with respect to the shares being offered. Subject to the terms
and conditions contained in the underwriting agreement, each
underwriter has severally agreed to purchase the number of
shares of our common stock set forth opposite its name below.
The underwriters obligations are several, which means that
each underwriter is required to purchase a specified number of
shares, but it is not responsible for the commitment of any
other underwriter to purchase shares.
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Name
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Number of Shares
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BB&T Capital Markets, a
division of Scott & Stringfellow, Inc.
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787,500
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Piper Jaffray & Co.
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787,500
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Stephens Inc.
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337,500
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Stifel, Nicolaus &
Company, Incorporated
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337,500
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Total
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2,250,000
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Of the 2,250,000 shares to be purchased by the
underwriters, 2,000,000 shares will be purchased from us
and 250,000 shares will be purchased from the selling
shareholders.
The underwriters propose to offer the shares of common stock
directly to the public at the public offering price set forth on
the cover of this prospectus and to certain securities dealers
at that price, less a selling concession not to exceed
$1.09 per share. The underwriters may allow, and these
dealers may re-allow, a discount not more than $0.10 per
share on sales to other brokers or dealers. If all of the shares
are not sold at the public offering price, the underwriters may
change this offering price and other selling terms.
We have granted to the underwriters an option, exercisable for
30 days after the date of this prospectus, to purchase up
to 337,500 additional shares of our common stock at the
public offering price, less the underwriting discount set forth
on the cover page of this prospectus. The underwriters may
exercise these options only to cover over-allotments, if any,
made in connection with this offering. The Company will be
obligated, pursuant to the option, to sell these additional
shares of common stock to the underwriters to the extent the
option is exercised. If any additional shares of common stock
are purchased, the underwriters will offer the additional shares
on the same terms as those on which the 2,250,000 shares of
common stock are being offered.
The underwriting agreement provides that the underwriters are
obligated to purchase all the shares of our common stock in this
offering if any are purchased, other than those shares covered
by the over-allotment option described above.
The shares of our common stock are being offered by the
underwriters, subject to prior sale, when, as and if issued to
and accepted by them, subject to the approval of certain legal
matters by counsel for the underwriters and other conditions
specified in the underwriting agreement. The underwriters
reserve the right to withdraw, cancel or modify this offer and
to reject orders in whole or in part.
Each underwriter has represented, warranted and agreed that:
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it has not offered or sold and, prior to expiration of a period
of six months from the closing date, will not offer or sell any
shares included in this offering to persons in the United
Kingdom except to persons whose ordinary activities involve them
in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purpose of their business or
otherwise in circumstances which have not resulted and will not
result in an offer to the public in the United Kingdom within
the meaning of the Public Offers of Securities Regulations 1995;
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it has only communicated and caused to be communicated and will
only communicate or cause to be communicated any invitation or
inducement to engage in investment activity (within the meaning
of section 21 of the Financial Services and Markets Act
2000, or FSMA) received by it in connection with the issue or
sale of any shares included in this offering in circumstances in
which section 21(1) of the FSMA does not apply to us;
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it has complied and will comply with all applicable provisions
of the FSMA with respect to anything done by it in relation to
the shares included in this offering in, from or otherwise
involving the United Kingdom; and
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the offer in The Netherlands of the shares included in this
offering is exclusively limited to persons who trade or invest
in securities in the conduct of a profession or business (which
include banks, stockbrokers, insurance companies, pension funds,
other institutional investors and finance companies and treasury
departments of large enterprises).
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The following table shows the per share and total underwriting
discount we and the selling stockholders will pay to the
underwriters. These amounts are shown assuming both no exercise
and full exercise of the underwriters over-allotment
option to purchase additional shares.
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Total
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Without
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|
Over-
|
|
|
With
|
|
|
|
Per Share
|
|
|
Allotment
|
|
|
Over-Allotment
|
|
|
Public offering price
|
|
$
|
37.00
|
|
|
$
|
83,250,000
|
|
|
$
|
95,737,500
|
|
Underwriting discount
|
|
$
|
1.81
|
|
|
$
|
4,072,500
|
|
|
$
|
4,683,375
|
|
Proceeds, before expenses, to us
|
|
$
|
35.19
|
|
|
$
|
70,380,000
|
|
|
$
|
82,256,625
|
|
Proceeds, before expenses, to the
selling shareholders
|
|
$
|
35.19
|
|
|
$
|
8,797,500
|
|
|
$
|
8,797,500
|
|
We estimate that the total expenses of this offering, excluding
underwriting discount, will be approximately $455,000, which
includes legal, accounting and printing costs and various other
fees associated with registration and listing of our common
stock. Such expenses are payable by us.
We, our executive officers and directors have each agreed not
to, directly or indirectly, offer, sell, offer to sell, contract
to sell, pledge, grant any option to purchase or otherwise sell
or dispose of any shares of our common stock or any securities
convertible into or exchangeable or exercisable for any shares
of our common stock for a period of 90 days from the date
of this prospectus, without the prior written consent of
BB&T Capital Markets and Piper Jaffray & Co. This
consent may be given at any time without public notice.
BB&T Capital Markets and Piper Jaffray & Co. may,
in their sole discretion, and at any time without notice,
release all or any portion of the shares subject to these
lock-up
agreements. In determining whether to consent to a request to
release shares from the
lock-up,
BB&T Capital Markets and Piper Jaffray & Co. would
consider the circumstances related to the proposed sale on a
case-by-case
basis. These circumstances are likely to include the current
equity market condition, the performance of the price of our
common stock since the offering, the likely impact of any
release or waiver on the price of our common stock, the number
of shares requested to be sold, and the requesting partys
reason for making the request.
In connection with this offering, the underwriters may engage in
stabilizing transactions, over-allotment transactions, syndicate
covering transactions and penalty bids in accordance with
Regulation M under the Securities Exchange Act of 1934, as
amended, or the Exchange Act.
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|
|
|
|
Stabilizing transactions permit bids to purchase shares of
common stock so long as the stabilizing bids do not exceed a
specified maximum, and are engaged in for the purpose of
preventing or retarding a decline in the market price of the
common stock while the offering is in progress.
|
|
|
|
Over-allotment transactions involve sales by the underwriters of
shares of common stock in excess of the number of shares the
underwriters are obligated to purchase. This creates a syndicate
short position which may be either a covered short position or a
naked short position. In a covered short position, the number of
shares over-allotted by the underwriters is not greater than the
number of shares that they may purchase in the over-allotment
option. In a naked short position, the number of shares involved
is greater than the number of shares in the over-allotment
option. The underwriters may close out any short position by
exercising their over-allotment option
and/or
purchasing shares in the open market.
|
|
|
|
Syndicate covering transactions involve purchases of common
stock in the open market after the distribution has been
completed in order to cover syndicate short positions. In
determining the source of shares to close out the short
position, the underwriters will consider, among other things,
the price of shares available for
|
75
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|
|
|
|
purchase in the open market as compared with the price at which
they may purchase shares through exercise of the over-allotment
option. If the underwriters sell more shares than could be
covered by exercise of the over-allotment option and, therefore,
have a naked short position, the position can be closed out only
by buying shares in the open market. A naked short position is
more likely to be created if the underwriters are concerned that
after pricing there could be downward pressure on the price of
the shares in the open market that could adversely affect
investors who purchase in this offering.
|
|
|
|
|
|
Penalty bids permit the representative to reclaim a selling
concession from a syndicate member when the common stock
originally sold by that syndicate member is purchased in
stabilizing or syndicate covering transactions to cover
syndicate short positions.
|
These stabilizing transactions, syndicate covering transactions
and penalty bids may have the effect of raising or maintaining
the market price of our common stock or preventing or retarding
a decline in the market price of our common stock. As a result,
the price of our common stock in the open market may be higher
than it would otherwise be in the absence of these transactions.
Neither we nor the underwriters make any representation or
prediction as to the effect that the transactions described
above may have on the price of our common stock. These
transactions may be effected on the Nasdaq Global Select Market
or otherwise and, if commenced, may be discontinued at any time.
In connection with this offering, some underwriters (and selling
group members) may also engage in passive market marking
transactions in common stock on the Nasdaq Global Select Market.
Passive market making consists of displaying bids on the Nasdaq
Global Select Market limited by the prices of independent market
makers and effecting purchases limited by those prices in
response to order flow. Rule 103 of Regulation M
promulgated by the SEC limits the amount of the net purchases
that each passive market maker may make and the displayed size
of each bid. Passive market making may stabilize the market
price of the common stock at a level above that which might
otherwise prevail in the open market and, if commenced, may be
discontinued at any time.
In the ordinary course of certain of the underwriters
respective businesses, the underwriters and their affiliates
have engaged and may engage in commercial investment banking and
other advisory transactions with us and our affiliates for which
they have received and will receive customary fees and expenses.
A prospectus in electronic format may be made available on the
websites maintained by one or more of the underwriters. The
representatives may agree to allocate a number of shares to
underwriters for sale to their online brokerage account holders.
The representatives will allocate shares to underwriters that
may make Internet distributions on the same basis as other
allocations. In addition, shares may be sold by the underwriters
to securities dealers who resell shares to online brokerage
account holders.
We have agreed to indemnify the underwriters against specified
liabilities, including liabilities under the Securities Act of
1933, as amended, and to contribute to payments that the
underwriters may be required to make in respect thereof.
Notice to
Prospective Investors in the European Economic Area
In relation to each member state of the European Economic Area
that has implemented the Prospectus Directive (each, a relevant
member state), each underwriter has represented and agreed that
with effect from and including the date on which the Prospectus
Directive is implemented in that relevant member state, or the
relevant implementation date, it has not made and will not make
an offer of our common stock to the public in that relevant
member state prior to the publication of a prospectus in
relation to our common stock that has been approved by the
competent authority in that relevant member state or, where
appropriate, approved in another relevant member state and
notified to the competent authority in that relevant member
state, all in accordance with the Prospectus Directive, except
that it may, with effect from and including the relevant
implementation date, make an offer of our common stock to the
public in that relevant member state at any time:
|
|
|
|
|
to any legal entity that is authorized or regulated to operate
in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in securities;
|
76
|
|
|
|
|
to any legal entity that has two or more of (1) an average
of at least 250 employees during the last financial year;
(2) a total balance sheet of more than 43,000,000 and
(3) an annual net turnover of more than 50,000,000,
as shown in its last annual or consolidated accounts; or
|
|
|
|
in any other circumstances that do not require the publication
of a prospectus pursuant to Article 3 of the Prospectus
Directive.
|
Each purchaser of our common stock located within a relevant
member state will be deemed to have represented, acknowledged
and agreed that it is a qualified investor within
the meaning of Article 2(1)(e) of the Prospectus Directive.
For purposes of this provision, the expression an offer to
the public in any relevant member state means the
communication in any form and by any means of sufficient
information on the terms of the offer and the securities to be
offered so as to enable an investor to decide to purchase or
subscribe the securities, as the expression may be varied in
that member state by any measure implementing the Prospectus
Directive in that member state, and the expression
Prospectus Directive means Directive 2003/71/EC and
includes any relevant implementing measure in each relevant
member state.
We have not authorized and do not authorize the making of any
offer of our common stock through any financial intermediary on
our behalf, other than offers made by the underwriters with a
view to the final placement of the common stock as contemplated
in this prospectus supplement. Accordingly, no purchaser of our
common stock, other than the underwriters, is authorized to make
any further offer of our common stock on behalf of the sellers
or the underwriters.
Notice to
Prospective Investors in the United Kingdom
This prospectus is only being distributed to, and are only
directed at, persons in the United Kingdom that are qualified
investors within the meaning of Article 2(1)(e) of the
Prospectus Directive, or Qualified Investors, that are also
(i) investment professionals falling within
Article 19(5) of the FSMA (Financial Promotion) Order 2005,
or the Order, or (ii) high net worth entities, and other
persons to whom it may lawfully be communicated, falling within
Article 49(2)(a) to (d) of the Order (all such persons
together being referred to as, relevant persons). This
prospectus is confidential and should not be distributed,
published or reproduced (in whole or in part) or disclosed by
recipients to any other persons in the United Kingdom. Any
person in the United Kingdom that is not a relevant persons
should not act or rely on this document or any of its contents.
77
LEGAL
MATTERS
The validity of the common stock offered hereby will be passed
upon for us by Naran U. Burchinow, our Vice President, General
Counsel and Secretary. The Company and the selling shareholders
are represented by Kirkland & Ellis LLP, Chicago,
Illinois, and the underwriters are represented by
Hunton & Williams LLP.
EXPERTS
The financial statements as of December 31, 2004 and 2005
and for each of the three years in the period ended
December 31, 2005 (included in this prospectus) and
managements assessment of the effectiveness of internal
control over financial reporting (which is included in
Managements Report on Internal Control over Financial
Reporting) as of December 31, 2005 (not presented herein)
appearing under Item 8 of the Companys 2005 Annual
Report on
Form 10-K
which is incorporated by reference, have been so included or
incorporated in reliance on the report of PricewaterhouseCoopers
LLP, an independent registered public accounting firm, given on
the authority of said firm as experts in auditing and accounting.
AVAILABLE
INFORMATION
We are required to file annual, quarterly and current reports,
proxy statements and other information with the SEC. You may
read and copy any documents filed by us at the SECs public
reference room at 100 F Street, N.E., Washington, D.C.
20549. Please call the SEC at
1-800-SEC-0330
for further information on the public reference room. Our
filings with the SEC are also available to the public through
the SECs Internet website at
http://www.sec.gov.
We currently provide annual reports to our shareholders that
include financial information reported on by our independent
public accountants.
We have filed a registration statement on
Form S-3
with the SEC. This prospectus is a part of the registration
statement but does not contain all of the information in the
registration statement. Whenever a reference is made in this
prospectus to any of our contracts or other documents, please be
aware that such reference is not necessarily complete and that
you should refer to the exhibits that are a part of the
registration statement for a copy of the contract or other
document. You may review a copy of the registration statement at
the SECs public reference room in Washington, D.C.,
as well as through the SECs Internet website.
INCORPORATION
OF DOCUMENTS BY REFERENCE
The SEC allows us to incorporate by reference into this
prospectus the information we filed with it. This means that we
can disclose important business, financial and other information
to you by referring you to other documents separately filed with
the SEC. All information incorporated by reference is part of
this prospectus, unless and until that information is updated
and superceded by the information contained in this prospectus
or any information subsequently incorporated by reference. The
documents incorporated by reference are those documents we have
previously filed with the SEC, excluding any portions of such
documents that have been furnished but not
filed for purposes of the Exchange Act. These
documents contain important information about us and our
financial performance.
We incorporate by reference the documents listed below:
1. Our annual report on
Form 10-K,
for the fiscal year ended December 31, 2005, filed on
March 14, 2006, as amended by our annual report on Form
10-K/A filed on July 27, 2006.
2. Our quarterly reports on
Form 10-Q,
for the quarterly periods ended March 31, 2006, filed on
May 10, 2006, and June 30, 2006, filed on
August 7, 2006.
3. Our definitive proxy statement on Schedule 14A,
filed with the SEC on March 17, 2006.
4. Our current reports on
Form 8-K,
filed on July 10, 2006 (to disclose the signing of a letter
of intent with a subsidiary of Marathon Oil Corporation under
Item 8.01); July 5, 2006 (to disclose the sale of
homes by the Company to three of its directors under
Item 1.01); May 15, 2006 (to disclose approval of a
two-for-one
stock split for holders of record on June 1, 2006 under
Item 8.01); February 9, 2006 (to disclose issuance of
a press
78
release reporting fourth quarter and fiscal year 2005 earnings
under Item 8.01); and January 5, 2006 (to disclose
off-balance sheet arrangement with wholly-owned subsidiary under
Items 1.01 and 2.03 and related agreements under
Item 9.01).
We will provide to you without charge, upon written or oral
request, a copy of any or all of these documents that have been
incorporated by reference, other than exhibits, unless such
exhibits have been specifically incorporated by reference.
Requests for such documents should be made to:
The Andersons, Inc.
c/o Investor Relations
480 W. Dussel Drive
Maumee, Ohio 43537
Telephone:
(419) 893-5050
We also incorporate by reference all future filings we make with
the SEC under Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act on or (1) after the date of the filing of the
registration statement containing this prospectus and prior to
the effectiveness of the registration statement and
(2) after the date of this prospectus and prior to the
closing of the offering made hereby. Those documents will become
a part of this prospectus from the date that the documents are
filed with the SEC.
79
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
The Andersons, Inc. Audited
Consolidated Financial Statements
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
|
|
|
F-38
|
|
The Andersons, Inc. Unaudited
Condensed Consolidated Financial Statements
|
|
|
|
|
|
|
|
F-39
|
|
|
|
|
F-40
|
|
|
|
|
F-41
|
|
|
|
|
F-42
|
|
|
|
|
F-43
|
|
F-1
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
The Andersons, Inc.:
We have completed integrated audits of The Andersons,
Inc.s 2005 and 2004 consolidated financial statements and
of its internal control over financial reporting as of
December 31, 2005 and an audit of its 2003 consolidated
financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our
opinions, based on our audits, are presented below.
Consolidated
financial statements and financial statement
schedule
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of The Andersons, Inc. and its
subsidiaries at December 31, 2005 and 2004, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2005 in conformity
with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). 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 of financial statements includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
Internal
control over financial reporting
Also, in our opinion, managements assessment, included in
Managements Report on Internal Control Over Financial
Reporting (not presented herein) appearing under Item 8 of
the Companys 2005 Annual Report on Form 10-K, that
the Company maintained effective internal control over financial
reporting as of December 31, 2005 based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), is fairly
stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2005, based on criteria
established in Internal Control Integrated
Framework issued by the COSO. The Companys management
is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express opinions on managements assessment and on
the effectiveness of the Companys internal control over
financial reporting based on our audit. We conducted our audit
of internal control over financial reporting in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was
maintained in all material respects. An audit of internal
control over financial reporting includes obtaining an
understanding of internal control over financial reporting,
evaluating managements assessment, testing and evaluating
the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance
F-2
with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in
accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Toledo, Ohio
March 14, 2006, except as to Note 14, and the effects
of the stock split described in the second paragraph of
Note 1 to the consolidated financial statements, which are
as of June 29, 2006.
F-3
The
Andersons, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per common share data)
|
|
|
Sales and merchandising revenues
|
|
$
|
1,296,652
|
|
|
$
|
1,266,932
|
|
|
$
|
1,239,005
|
|
Cost of sales and merchandising
revenues
|
|
|
1,098,506
|
|
|
|
1,077,833
|
|
|
|
1,074,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
198,146
|
|
|
|
189,099
|
|
|
|
164,094
|
|
Operating, administrative and
general expenses
|
|
|
153,759
|
|
|
|
154,895
|
|
|
|
143,129
|
|
Interest expense
|
|
|
12,079
|
|
|
|
10,545
|
|
|
|
8,048
|
|
Other income / gains:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income net
|
|
|
4,683
|
|
|
|
4,973
|
|
|
|
4,701
|
|
Equity in earnings of affiliates
|
|
|
2,321
|
|
|
|
1,471
|
|
|
|
347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
39,312
|
|
|
|
30,103
|
|
|
|
17,965
|
|
Income tax provision
|
|
|
13,225
|
|
|
|
10,959
|
|
|
|
6,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
26,087
|
|
|
$
|
19,144
|
|
|
$
|
11,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
|
|
$
|
1.76
|
|
|
$
|
1.32
|
|
|
$
|
.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings
|
|
$
|
1.70
|
|
|
$
|
1.28
|
|
|
$
|
.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
$
|
.165
|
|
|
$
|
.1525
|
|
|
$
|
.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Notes to Consolidated Financial Statements are an integral
part of these statements.
F-4
The
Andersons, Inc.
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
13,876
|
|
|
$
|
8,439
|
|
Restricted cash
|
|
|
3,936
|
|
|
|
1,532
|
|
Accounts and notes receivable:
|
|
|
|
|
|
|
|
|
Trade receivables, less allowance
for doubtful accounts of $2,106 in 2005; $2,136 in 2004
|
|
|
74,436
|
|
|
|
64,458
|
|
Margin deposits
|
|
|
8,855
|
|
|
|
1,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,291
|
|
|
|
66,235
|
|
Inventories
|
|
|
240,806
|
|
|
|
251,428
|
|
Railcars available for sale
|
|
|
5,375
|
|
|
|
6,937
|
|
Deferred income taxes
|
|
|
2,087
|
|
|
|
2,650
|
|
Prepaid expenses and other current
assets
|
|
|
23,170
|
|
|
|
21,072
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
372,541
|
|
|
|
358,293
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Pension asset
|
|
|
10,130
|
|
|
|
6,936
|
|
Other assets and notes receivable,
less allowance for doubtful notes receivable of $32 in 2005;
$173 in 2004
|
|
|
8,393
|
|
|
|
10,464
|
|
Investments in and advances to
affiliates
|
|
|
20,485
|
|
|
|
4,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,008
|
|
|
|
21,437
|
|
Railcar assets leased to others, net
|
|
|
131,097
|
|
|
|
101,358
|
|
Property, plant and equipment, net
|
|
|
91,498
|
|
|
|
92,510
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
634,144
|
|
|
$
|
573,598
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
12,400
|
|
|
$
|
12,100
|
|
Accounts payable for grain
|
|
|
80,945
|
|
|
|
87,322
|
|
Other accounts payable
|
|
|
72,240
|
|
|
|
66,208
|
|
Customer prepayments and deferred
revenue
|
|
|
53,502
|
|
|
|
50,105
|
|
Accrued expenses
|
|
|
27,684
|
|
|
|
24,320
|
|
Current maturities of long-term
debt non-recourse
|
|
|
19,641
|
|
|
|
10,063
|
|
Current maturities of long-term debt
|
|
|
9,910
|
|
|
|
6,005
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
276,322
|
|
|
|
256,123
|
|
Deferred income and other long-term
liabilities
|
|
|
1,131
|
|
|
|
1,213
|
|
Employee benefit plan obligations
|
|
|
14,290
|
|
|
|
14,123
|
|
Long-term debt
non-recourse, less current maturities
|
|
|
88,714
|
|
|
|
64,343
|
|
Long-term debt, less current
maturities
|
|
|
79,329
|
|
|
|
89,803
|
|
Deferred income taxes
|
|
|
15,475
|
|
|
|
14,117
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
475,261
|
|
|
|
439,722
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Common shares, without par value,
25, |