-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AnjRCpraXu65UQZGBz0uqkOR0ZgwYC0ql0hoh+XZvmN29engsMQ6Nnsk7QXFIu3u MYSMD46IMsyUPJw2/7pDvw== 0000892569-98-000902.txt : 19980401 0000892569-98-000902.hdr.sgml : 19980401 ACCESSION NUMBER: 0000892569-98-000902 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN VANGUARD CORP CENTRAL INDEX KEY: 0000005981 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE CHEMICALS [2870] IRS NUMBER: 952588080 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-13795 FILM NUMBER: 98580207 BUSINESS ADDRESS: STREET 1: 4100 E WASHINGTON BLVD CITY: LOS ANGELES STATE: CA ZIP: 90023 BUSINESS PHONE: 2132643910 MAIL ADDRESS: STREET 1: 4100 E WASHINGTON BLVD CITY: LOS ANGELES STATE: CA ZIP: 90023 FORMER COMPANY: FORMER CONFORMED NAME: AEROCON INC DATE OF NAME CHANGE: 19720620 10-K405 1 FORM 10-K FOR YEAR ENDED DECEMBER 31, 1997 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM_______TO______ COMMISSION FILE NUMBER 0-6354 AMERICAN VANGUARD CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 95-2588080 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification Number) 4695 MacArthur Court, Newport Beach, California 92660 (Address of principal executive offices) (Zip Code) (714) 260-1200 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class: Common Stock, $.10 par value Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The number of shares of $.10 par value Common Stock outstanding as of March 23, 1998, was 2,507,582. The aggregate market value of the voting stock of the registrant held by non-affiliates at March 23, 1998, was $9,601,700. For purposes of this calculation, shares owned by executive officers, directors, and 5% stockholders known to the registrant have been deemed to be owned by affiliates. 2 AMERICAN VANGUARD CORPORATION ANNUAL REPORT ON FORM 10-K DECEMBER 31, 1997
PART I PAGE NO. Item 1. Business 1 Item 2. Properties 7 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 10 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 11 Item 6. Selected Financial Data 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation 15 Item 8. Financial Statements and Supplementary Data 22 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 22 PART III Item 10. Directors and Executive Officers of the Registrant 23 Item 11. Executive Compensation 26 Item 12. Security Ownership of Certain Beneficial Owners and Management 29 Item 13. Certain Relationships and Related Transactions 31 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 32 SIGNATURES 33
3 PART I This Report contains forward-looking statements and includes assumptions concerning the Company's operations, future results and prospects. These forward-looking statements are based on current expectations and are subject to a number of risks, uncertainties and other factors. In connection with the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statements identifying important factors which, among other things, could cause the actual results and events to differ materially from those set forth in or implied by the forward- looking statements and related assumptions contained in the entire Report. Such factors include, but are not limited to: product demand and market acceptance risks; the effect of economic conditions; weather conditions; the impact of competitive products and pricing; changes in foreign exchange rates; product development and commercialization difficulties; capacity and supply constraints or difficulties; availability of capital resources; general business and economic conditions; and changes in government laws and regulations, including taxes. ITEM 1 BUSINESS American Vanguard Corporation was incorporated under the laws of the State of Delaware in January 1969 and operates as a holding company. Unless the context otherwise requires, references to the "Company", or the "Registrant" in this Annual Report refer to American Vanguard Corporation and its consolidated subsidiaries. The Company conducts its business through its wholly-owned subsidiaries, Amvac Chemical Corporation ("AMVAC"), GemChem, Inc. ("GemChem"), 2110 Davie Corporation ("DAVIE"), and AMVAC Chemical UK Ltd., (Refer to Export Operations). GEMCHEM, INC. GemChem is a California corporation incorporated in 1991 and purchased by the Company in 1994. GemChem is a national chemical distributor. GemChem, in addition to representing AMVAC as its domestic sales force, also sells into the pharmaceutical, cosmetic and nutritional markets. Prior to the acquisition, GemChem acted in the capacity as the domestic sales force for the Company (from September 1991). 1 4 2110 DAVIE CORPORATION Effective September 30, 1989, the Company sold substantially all operating assets of DAVIE. DAVIE currently invests in real estate for corporate use only. See also PART I, Item 2 of this Annual Report. AMVAC AMVAC is a California corporation that traces its history from 1945. AMVAC is a specialty chemical manufacturer that develops and markets products for agricultural and commercial uses. It manufactures and formulates chemicals for crops, human and animal health protection. These chemicals which include insecticides, fungicides, molluscicides, growth regulators, and soil fumigants, are marketed in liquid, powder, and granular forms. AMVAC's business is continually undergoing an evolutionary change. Years ago AMVAC considered itself a distributor-formulator, but now primarily manufactures, distributes, and formulates its own proprietary products or custom manufactures or formulates for others. In January 1997, AMVAC purchased the rights, title and interest to Vapam(R) (Metam Sodium), a soil fumigant, from Zeneca, Inc. The official closing was December 31, 1996. The purchase included all inventories of Vapam(R), Environmental Protection Agency ("EPA") registration rights issued under the Federal Insecticide, Fungicide and Rodenticide Act ("FIFRA") and certain other assets. AMVAC has manufactured Metam Sodium at its Los Angeles facility since 1988. AMVAC will pay Zeneca a royalty on all Metam Sodium sold by AMVAC in the United States, Canada and Mexico in accordance with the terms and conditions of a definitive agreement. In November of 1993, AMVAC purchased from E.I. du Pont de Nemours & Company ("Du Pont") the rights, title and interest in Bidrin(R), an insecticide for cotton crops, including EPA registration rights issued under FIFRA. The Company purchased Du Pont's inventory of Bidrin(R) at Du Pont's approximate cost, and will pay a royalty on all Bidrin(R) sold by the Company to customers in the United States through December 1997. The chemical industry in general is cyclical in nature. The demand for AMVAC's products tends to be slightly seasonal. Seasonal usage, however, does not necessarily follow calendar dates, but more closely follows varying growing seasonal patterns, weather conditions and weather related pressure from pests, and customer marketing programs and requirements. The Company does not believe that backlog is a significant factor in its business. The Company primarily sells its products on the basis of purchase orders, although it has entered into requirements contracts with certain customers. ConAGRA, Inc. accounted for 29% of the Company's sales in 1997. ConAGRA, Inc. and Terra International accounted for 33% and 10%, respectively of the Company's sales in 1996. ConAGRA, Inc., Terra International, Sumitomo Chemical and Ciba Geigy 2 5 Corporation accounted for 24%, 14%, 11% and 10%, respectively, of the Company's sales in 1995. COMPETITION AMVAC faces competition from many domestic and foreign manufacturers in its marketplaces. Competition in AMVAC's marketplace is based primarily on efficacy, price, safety and ease of application. Many of such competitors are larger and have substantially greater financial and technical resources than AMVAC. AMVAC's ability to compete depends on its ability to develop additional applications for its current products and expand its product lines and customer base. AMVAC competes principally on the basis of the quality of its products and the technical service and support given to its customers. The inability of AMVAC to effectively compete in several of AMVAC's principal products would have a material adverse effect on AMVAC's results of operations. Generally, the treatment against pests of any kind is broad in scope, there being more than one way or one product for treatment, eradication, or suppression. The Company has attempted to position AMVAC in small niche markets in order to reduce the impact of competition. These markets are small by nature, require significant and intensive management input, ongoing product research, and are near product maturity. These types of markets tend not to attract larger chemical companies due to the smaller volume demand, and larger chemical companies have been divesting themselves of products that fall into such niches as is evidenced by AMVAC's successful acquisitions of Vapam(R), Bidrin(R) and NAA. AMVAC's proprietary product formulations are protected to the extent possible as trade secrets and, to a lesser extent, by patents and trademarks. Although AMVAC considers that, in the aggregate, its trademarks, licenses, and patents constitute a valuable asset, it does not regard its business as being materially dependent upon any single or several trademarks, licenses, or patents. AMVAC's products also receive protection afforded by the effect of FIFRA legislation that makes it unlawful to sell any pesticide in the United States unless such pesticide has first been registered by the EPA as well as under state laws of similar effect. Substantially all of AMVAC's products are subject to EPA registration and re-registration requirements and are conditionally registered in accordance with FIFRA. This licensing by EPA is based, among other things, on data demonstrating that the product will not cause unreasonable adverse effects on human health or the environment when it is used according to approved label directions. All states where any of AMVAC's products are used require a registration by that specific state before it can be marketed or used. State registrations are renewed annually, as appropriate. The EPA and state agencies have required, and may require in the future, that certain scientific data requirements be performed on registered products sold by AMVAC. AMVAC, on its own behalf and in joint efforts with other suppliers, has, and is currently furnishing, certain required data relative to specific products. 3 6 Under FIFRA, the federal government requires registrants to submit a wide-range of scientific data to support U.S. registrations. This has significantly increased AMVAC's operating expenses in such areas as testing and the production of new products. This regulation makes AMVAC products less vulnerable to direct competition, however more vulnerable because of significant cost increases which the Company may not have the ability to pass on. AMVAC expensed $2,241,300, $1,932,700, and $3,717,400 during 1997, 1996 and 1995, respectively, related to gathering this information. Based on facts known today, AMVAC estimates it will spend approximately $3,200,000 in 1998. Because scientific analyses are constantly improving, it cannot be determined with certainty whether or not material new or additional tests may be required by the regulatory authorities. Additionally, while FIFRA Good Laboratory Practice standards specify the minimum practices and procedures which must be followed in order to ensure the quality and integrity of data related to these tests submitted to the EPA, there can be no assurance the EPA will not request certain tests/studies be repeated. AMVAC expenses these costs on an incurred basis. See also PART I, Item 7 of this Annual Report for discussions pertaining to research and development expenses. RAW MATERIALS The Company utilizes numerous firms as well as internal sources to supply the various raw materials and components used by AMVAC in manufacturing its products. Many of these materials are readily available from domestic sources. In those instances where there is a single source of supply or where the source is not domestic, the Company seeks to secure its supply by either long-term arrangements or advance purchases from its suppliers. The Company believes that it is considered to be a valued customer to such sole-source suppliers. ENVIRONMENTAL During 1997 AMVAC continued activities to address environmental conditions at the railroad right-of-way which is located adjacent to AMVAC's Commerce California facility (the "Facility"). The railroad right-of-way is jointly owned by the Union Pacific Railroad and the Burlington Northern and Santa Fe Railway Company, and is managed on behalf of both companies by the latter. The site investigation and remediation activities have been conducted pursuant to a January 10, 1996, enforceable agreement and order entered into by AMVAC and the California Department of Toxic Substances Control ("DTSC"). A site investigation and health risk assessment were conducted and completed by AMVAC during the first two quarters of 1997. AMVAC prepared a draft Remedial Action Plan ("RAP") in May, 1997 which evaluated several options for remediating soils at the railroad right-of-way. The RAP concluded that the most appropriate option for remediation was the excavation and offsite disposal of soils which exceeded risk-based cleanup levels. DTSC approved the draft RAP on June 25, 1997. Remedial activities commenced on July 4, 1997 and were completed on July 12, 1997. A post-remediation report 4 7 was prepared by AMVAC and submitted to DTSC on October 13, 1997. AMVAC is currently awaiting DTSC approval of the remedial activities. In March, 1997 the Facility was accepted into the DTSC's Expedited Remedial Action Program ("ERAP"). The remaining environmental investigation and any remediation activities related to the ten underground storage tanks at the Facility which had been closed in 1995 will be addressed by AMVAC under ERAP. Soil characterization activities at other areas of the Facility are expected to commence in the second or third quarter of 1998 and to be conducted in phases over the next two to three years. These activities are required at all facilities which currently have, or in the past had, hazardous waste management permits, because AMVAC previously held a hazardous waste storage permit. AMVAC is subject to these requirements. The Company is subject to numerous federal and state laws and governmental regulations concerning environmental matters and employee health and safety. The Company continually adapts its manufacturing process to the environmental control standards of various regulatory agencies. The EPA and other federal and state agencies have the authority to promulgate regulations that could have an impact on the Company's operations. AMVAC expends substantial funds to minimize the discharge of materials into the environment and to comply with the governmental regulations relating to protection of the environment. Wherever feasible, AMVAC recovers raw materials and increases product yield by recycling in order to partially offset increasing pollution abatement costs. The Company is committed to a long-term environmental protection program that reduces emissions of hazardous materials into the environment, as well as to the remediation of identified existing environmental concerns. Federal and state authorities may seek fines and penalties for violation of the various laws and governmental regulations. As part of its continuing environmental program, except as disclosed in PART I, Item 3, Legal Proceedings, of this Annual Report, the Company has been able to comply with such proceedings and orders without any materially adverse effect on its business. The Company continues to make compliance with environmental requirements an important company policy. As environmental quality requirements and standards become stricter, the Company may have to incur additional substantial costs to maintain regulatory compliance. EMPLOYEES As of March 23, 1998, the Company employed approximately 200 persons. This figure includes approximately 20 temporary (full-time) individuals hired as contract personnel. AMVAC, on an ongoing basis, due to the seasonality of its business, uses temporary contract personnel to perform certain duties primarily related to packaging of its products. The Company believes it is cost 5 8 beneficial to employ temporary contract personnel. None of the Company's employees are subject to a collective bargaining agreement. The Company believes it maintains positive relations with its employees. EXPORT OPERATIONS The Company opened an office in August 1994, in the United Kingdom to conduct business in the European chemical market. The new office, operating under the name AMVAC Chemical UK Ltd., focuses on developing product registration and distributor networks for AMVAC's product lines throughout Europe. The office is located in Surrey, England, a city southwest of London. The operating results of this operation were not material to the Company's total operating results for the years ended December 31, 1997 and 1996. The Company arranges most of its foreign sales through export/import brokers. The Company classifies as export sales all products bearing foreign labeling shipped to a foreign destination.
1997 1996 1995 ---- ---- ---- Export Sales $6,646,000 $3,535,500 $3,374,700
INSURANCE Management believes its facilities and equipment are adequately insured against loss from usual business risks. The Company has purchased claims made products liability insurance. There can be no assurance, however, that such products liability coverage insurance will continue to be available to the Company, or if available, that it will be provided at an economical cost to the Company. 6 9 ITEM 2 PROPERTIES The Company's corporate headquarters are located in Newport Beach, California. This facility is leased. See PART IV, Item 14, Note 11 of this report for further information. AMVAC owns in fee approximately 152,000 square feet of improved land in Commerce, California, on which substantially all of its plant and some of its warehouse facilities and offices are located. DAVIE owns in fee approximately 72,000 square feet of warehouse and office space on approximately 118,000 square feet of land in Commerce, California, which is leased to AMVAC. AMVAC's manufacturing facilities are divided into five cost-centers; Vapam (Metam Sodium), PCNB, granular products, small packaging, and the production and formulation of all other products. All production areas are designed to run on a continuous twenty-four hour per day basis. AMVAC regularly adds chemical processing equipment to enhance its production capabilities. AMVAC believes its facilities are in good operating condition and are suitable and adequate for AMVAC's foreseeable needs, have flexibility to change products, and can produce at greater rates as required. Facilities and equipment are insured against losses from fire and other usual business risks. The Company knows of no material defects in title to, or encumbrances on, any of its properties except that substantially all of the Company's assets are pledged as collateral under the Company's loan agreements with its primary lender. For further information, refer to Note 3 of the Notes to the Consolidated Financial Statements in PART IV, Item 14 of this Annual Report. AMVAC purchased unimproved land in Texas for possible future expansion. GemChem's facilities consist of administration and sales offices which are leased. The Company believes its properties to be suitable and adequate for its current purposes. 7 10 ITEM 3 LEGAL PROCEEDINGS DBCP LAWSUITS A. CALIFORNIA MATTERS In 1997, Amvac was served with a Complaints in two actions filed in the San Francisco Superior Court entitled the Sultana Community Services District v. Shell Oil Co., et.al. and the County of San Joaquin v. Shell Oil Co., et. al. Both Complaints allege property damage resulting from Dibromochloropropane ("DBCP") contamination of water supply. Both complaints name as defendants AMVAC, Shell Oil Company, Dow Chemical Company, Occidental Chemical Company, Chevron Chemical Company, and Velsicol Chemical Company. In Sultana Plaintiff has not produced documentation to support its claim for damage. Any damages proven may be significantly offset by Plaintiff's receipt of a Government grant for a new well. In County of San Joaquin discovery is proceeding slowly and the claims are subject to a statute of limitation defense. It is currently impossible to predict the outcome or the cost that will be involved in the defense of this matter. B. HAWAII MATTERS AMVAC and the Company were served with Complaints, on February 7, 1997 and March 4, 1997 respectively, in the action filed in the Circuit Court of the Second Circuit, State of Hawaii entitled Board of Water Supply of the County of Maui v. Shell Oil Co., et.al. The suit names as defendants AMVAC, Shell Oil Company, The Dow Chemical Company, Occidental Chemical Company, Occidental Petroleum Corporation, Occidental Chemical Corporation, and Brewer Environmental Industry, Inc. The Compliant alleges property damage resulting from DBCP contamination of the Board's water wells. Jurisdictional disputes have delayed any formal discovery and there remain numerous procedural defenses. It is currently impossible to predict the outcome or the cost that will be involved in the defense of this matter. On October 20, 1997, AMVAC was served with a Complaint in which it was named as a Defendant, filed in the Circuit Court, First Circuit, state of Hawaii entitled Patrickson, et.al. v. Dole Food Co., et.al. alleging damages sustained from injuries caused by Plaintiff's exposure to DBCP while applying the product in their native countries. Other named defendants are: Dole Food Co., Dole Fresh Fruit, Dole Fresh Fruit International, Pineapple Growers Association of Hawaii, Shell Oil Company, Dow Chemical Company, Occidental Chemical Corporation, Standard Fruit Company, Standard Fruit & Steamship, Standard Fruit company De Costa Rica, Standard Fruit company De Honduras, Chiquita Brands, Chiquita Brands International, Martrop Trading corporation, and Del Monte Fresh Produce. The case has been removed to U.S. District Court. Defendants are waiting for the Court's ruling on their Motion to Dismiss based on numerous procedural grounds. It is currently impossible to predict the outcome or the cost that will be involved in the defense of this matter. 8 11 C. MISSISSIPPI MATTERS On May 30,1996, AMVAC was served with five Complaints in which it is named as a Defendant. Other named defendants are: Coahoma Chemical Co. Inc., Shell Oil Company, Dow Chemical Co., Occidential Chemical Co., Standard Fruit Co., Standard Fruit and Steamship Co., Dole Food Co., Inc., Dole Fresh Fruit Co., Chiquita Brands, Inc., Chiquita Brands International, Inc. and Del Monte Fresh Produce, N.A. The cases were filed in the Circuit Court of Harrison County, First Judicial District of Mississippi. Each case alleged damages sustained from injuries caused by Plaintiff's exposure to DBCP while applying the product in their native countries. These cases have been removed to U.S. District Court for the Southern District of Mississippi, Southern Division. Three of the cases were conditionally dismissed. Another case was closed for administrative purposes due to its similarity to the other matters. Only one case is still open but no substantive activity has occurred since its filing. It is currently impossible to predict the outcome or the cost that will be involved in the defense of these matters. PHOSDRIN(R) LAWSUIT On September 21, 1995, AMVAC was served with a complaint filed in the Superior Court of King County, Washington on September 12, 1995 entitled Ricardo Ruiz Guzman, et. al. v. Amvac Chemical Corporation, et. al. (the "Guzman Case"). The Complaint is for unspecified monetary damages based on Plaintiffs' (farm workers') alleged injuries from their exposure to the pesticide Phosdrin(R). On October 14, 1997 the Court dismissed with prejudice all Plaintiffs' claims against AMVAC. Plaintiffs have appealed the judgement to the United States Court of Appeals for the Ninth Circuit. It is currently impossible to predict the outcome of the matter. AMVAC's insurance carrier has assumed costs of the appeal. NAA DATA TRADE SECRET On November 1, 1996 AMVAC filed an action in U.S. District Court in Oregon against four defendants relating to their misuse of AMVAC's exclusive right associated with Naphthalene Acetic Acid ("NAA") (Amvac Chemical Corporation v. Termilind, Inc., et.al.). On November 25, 1996, defendants Termilind and Inchema asserted counterclaims against AMVAC: violation of antitrust laws (Sherman Act section 2 and ORS 646.730), unfair competition, tortious interference, defamation, and breach of contract. Termilind and Inchema seek treble damages in the amount of $6 million for the antitrust claims, and compensatory damages in the amount of $2 million, together with punitive and exemplary damages. On November 1, 1996, AMVAC filed a demand for arbitration with the American Arbitration Association seeking approximately $8 million in compensation from Termilind. It is impossible to predict the outcome or the cost that will be involved with this matter. 9 12 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of 1997 to a vote of security holders, through the solicitation of proxies or otherwise. 10 13 PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS On January 27, 1998 the Company announced the listing of its $0.10 par value common stock ("Common Stock") on the American Stock Exchange under the ticker symbol AVD. The Company's Common Stock traded on The NASDAQ Stock Market under the symbol AMGD from March 3, 1987 through January 26, 1998. The following table sets forth the range of high and low sales prices as reported on NASDAQ's National Market System for the Company's Common Stock for the calendar quarters indicated.
Calendar 1997 HIGH LOW ------ ----- First Quarter 8 3/4 6 1/4 Second Quarter 8 1/16 6 1/4 Third Quarter 10 7/8 6 7/8 Fourth Quarter 10 5 5/8 Calendar 1996 First Quarter 15 1/2 4 7/8 Second Quarter 14 9 1/2 Third Quarter 7 1/2 6 1/8 Fourth Quarter 7 7/8 6 1/2
The Company's share activity is reported in the Wall Street Journal and is listed as "AMVNGRD". As of March 23, 1998, the number of shareholders of the Company's Common Stock was approximately 600 which includes beneficial owners with shares held in brokerage accounts under street name and nominees. On March 4, 1998, the Company announced that the Board of Directors declared a cash dividend of $.07 per share which will be distributed on March 25, 1998 to shareholders of record at the close of business on March 13, 1998. The Company distributed a cash dividend of $.06 per share on March 31, 1997 to shareholders of record at the close of business on March 20, 1997. The Company distributed a $.06 cash dividend and a 10% stock dividend on March 15, 1996 to shareholders of record at the close of business on February 29, 1996. The cash dividend was paid on the number of shares outstanding prior to the 10% stock dividend. Shareholders entitled to fractional shares resulting from the 10% stock dividend received cash in lieu of such fractional shares based on $9.50 per share. 11 14 The Company, as disclosed above, has issued a cash dividend in each of the last three years (1996, 1997 and 1998). There is no assurance as to future dividends because they depend on future earnings, capital requirements, and financial condition. In addition, the payment of dividends is subject to certain loan covenants described in Note 3 to the Notes to Consolidated Financial Statements, which limit payments of cash dividends to a maximum of 25% of net income. 12 15 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES ITEM 6 SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT FOR WEIGHTED AVERAGE NUMBER OF SHARES AND PER SHARE DATA)
1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- Operating revenues $ 67,701 $ 48,628 $ 55,402 $ 45,098 $ 45,478 ========== ========== ========== ========== ========== Operating income $ 4,785 $ 3,523 $ 5,971 $ 3,346 $ 4,160 ========== ========== ========== ========== ========== Income from operations before income tax expense $ 3,283 $ 2,611 $ 5,043 $ 1,465 $ 3,333 ========== ========== ========== ========== ========== Net income $ 2,025 $ 1,616 $ 3,124 $ 1,203 $ 2,225 ========== ========== ========== ========== ========== Basic and diluted net income per common share(1) $ .81 $ .65 $ 1.23 $ .47 $ .89 ========== ========== ========== ========== ========== Total assets $ 55,206 $ 48,028 $ 39,341 $ 40,929 $ 36,025 ========== ========== ========== ========== ========== Long-term debt and capital lease obligations, less current portion $ 3,980 $ 4,373 $ 5,540 $ 3,695 $ 4,316 ========== ========== ========== ========== ========== Stockholders' equity $ 21,260 $ 19,386 $ 18,005 $ 15,143 $ 13,503 ========== ========== ========== ========== ========== Weighted average number of shares(1) 2,507,829 2,472,883 2,546,471 2,562,398 2,509,536 ========== ========== ========== ========== ========== Dividends per share of common stock(2) $ .06 $ .06 $ -- $ -- $ -- ========== ========== ========== ========== ==========
The selected consolidated financial data set forth above with respect to each of the calendar years in the five-year period ended December 31, 1997, have been derived from the Company's consolidated financial statements and are qualified in their entirety by reference to the more detailed consolidated financial statements and the independent certified public accountants' reports thereon which are included elsewhere in this 13 16 Report on Form 10-K for the three years ended December 31, 1997. See ITEM 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." - ------------------ 1 All per share amounts have been restated to reflect a 10% stock dividend (see footnote 2 below). 2 In February 1996, the Company announced that the Board of Directors declared a cash dividend of $.06 per share as well as a 10% stock dividend. Both dividends were distributed on March 15, 1996 to shareholders of record at the close of business on February 29, 1996. The cash dividend was paid on the number of shares outstanding prior to the 10% stock dividend. The Company distributed a $.06 cash dividend March 31, 1997 to shareholders of record at the close of business on March 20, 1997. On March 4, 1998, the Company announced that the Board of Directors declared a cash dividend of $.07 per share to be distributed on March 25, 1998 to shareholders of record at the close of business on March 13, 1998. 14 17 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION RESULTS OF OPERATIONS 1997 COMPARED WITH 1996: The Company reported net income of $2,024,700 or $.81 per share in 1997 as compared to net income of $1,615,500 or $.65 per share in 1996. The increase in net income in 1997 was primarily attributable to growth of the Company. The Company achieved record level sales in 1997, however, a decrease in the gross profit percentage as well as an increase in interest expense incurred to finance the growth of the Company resulted in the increase in net income not being proportionate to the increase in sales. Net sales increased 39% to $67,700,500 in 1997 as compared to $48,627,900 in 1996. The reason for the significant increase in sales was due to the strong demand for certain of the Company's product lines during 1997. The $19,072,600 increase was primarily driven by increased sales of Metam Sodium, Bidrin, Mevinphos and Naled products. The increase in Metam Sodium sales was attributable to the acquisition of the Vapam product line in December 1996. Sales of Mevinphos were driven by export orders which were the result of a concentrated effort to develop foreign markets. Gross profits increased by $7,037,000 to $27,384,900 in 1997 from $20,347,900 in 1996. Despite the increase in gross profits, the gross profit percentage decreased to 40.5% in 1997 from 41.8% in 1996. The gross profit percentage in 1997 was negatively impacted due to competitive pricing pressures for certain of the Company's products and an enhancement of the Company's PCNB manufacturing facility. The Company invested in an octane recovery and waste reduction system for the PCNB manufacturing facility which effort curtailed PCNB manufacturing for approximately seventy-five days during the quarter ended September 30, 1997. Based upon historical performance, PCNB manufacturing operations would have absorbed in excess of one million dollars of manufacturing costs during the seventy-five day period. The octane recovery and waste reduction system is expected to save an estimated $350,000 per year. Operating expenses increased by $5,775,200 to $22,600,100 in 1997 from $16,824,900 in 1996. The following is a discussion of operating expenses: Selling and Regulatory: 15 18 Selling and regulatory expenses increased by $1,657,900 to $7,758,400 in 1997 from $6,100,500 in 1996. The Company, in order to support and grow the Vapam product line, as well as certain other product lines, made investments in its technical, sales and marketing infrastructure which included the hiring of additional technical and sales individuals. This program accounted for approximately $1,031,000 of the increase in selling and regulatory expenses. The Company's registration related costs, both domestically and internationally, as well as environmental related taxes and assessments increased by approximately $221,800 due to the growth of the Company during 1997. Variable selling expenses, primarily rebates and royalties, accounted for the balance of the increase in selling and regulatory expenses. General, Administrative and Corporate: General, administrative and corporate costs increased by $2,033,300 to $6,212,100 in 1997 from $4,178,800 in 1996. The increase was primarily attributable to an increase in legal fees of $1,081,000. Most of this increase has been incurred in legal actions in which the Company is plaintiff. General, administrative and corporate expenses also increased in 1997 due to the amortization of goodwill purchased in connection with the acquisition of the Vapam product line in December 1996 in the amount of $317,600. The Company also completed railroad remediation work related to the railroad siding matter (see additional discussion in PART I, Item 1, Business, Environmental) which resulted in total expenditures of approximately $526,000. The balance of the increase in general, administrative and corporate expenses in 1997 resulted from increases in personnel and costs related thereto. Research and Development: Research and development costs increased by $304,400 to $3,328,200 in 1997 from $3,023,800 in 1996 primarily as a result of increased costs to generate scientific data related to the registration of the Company's products. Increases in data generation costs for DDVP products, Mevinphos products and Metam Sodium products accounted for the majority of the increase in research and development costs. The changes in data generation costs are a function of the status of related research studies and current regulatory requirements. Freight, Delivery and Warehousing: Freight, delivery and warehousing costs increased by $1,780,400 to $5,301,400 in 1997 from $3,521,000 in 1996. This increase was primarily attributable to the overall increase in sales volume 16 19 with most of the increase related to Metam Sodium freight, delivery and storage costs. As a result of the acquisition of Vapam in December 1996, the Company established additional storage sites and added additional rail cars to its rail car fleet in order to handle the increased volume. These costs, along with increased trucking and rail car freight charges due to the significant increase in volume in 1997, accounted for approximately $1,600,000 of the increase in freight, delivery and warehousing expenses. Interest costs were $1,513,400 in 1997 as compared to $919,900 in 1996. The average level of borrowing under the Company's line of credit agreement increased by $8,865,100 to $13,288,600 in 1997 from $4,423,500 in 1996. The average level of long-term debt decreased by $1,884,000 to $4,990,900 in 1997 from $6,174,900 in 1996. On a combined basis, the Company's average debt for 1997 was $18,279,500 as compared to $10,598,400, in 1996. The significantly higher debt during 1997, which was used to finance the growth of the Company, accounted for the increase in interest costs. Income tax expense increased by $262,200 to $1,258,100 in 1997 as compared to $995,900 in 1996. Higher pre-tax income was the reason for the increased income tax expense. The Company's effective tax rate of 38.3% for 1997 was comparable to the 38.1% effective tax rate for 1996. See Note 4 to the Consolidated Financial Statements for additional analysis of the changes in income tax expense. Weather patterns can have an impact on the Company's operations. The Company manufactures and formulates chemicals for crops, human and animal health protection. The end user of some of the Company's products may, because of weather patterns, delay or intermittently disrupt field work during the planting season which may result in a reduction of the use of some of the Company's products. Because of elements inherent to the Company's business, such as differing and unpredictable weather patterns, crop growing cycles, changes in product mix of sales and ordering patterns that may vary in timing, measuring the Company's performance on a quarterly basis, (gross profit margins on a quarterly basis may vary significantly) even when such comparisons are favorable, is not as good an indicator as full-year comparisons. 1996 COMPARED WITH 1995: The Company reported net income of $1,615,500 or $.65 per share in 1996 as compared to net income of $3,124,000 or $1.23 per share in 1995. (All per share amounts have been restated, where applicable to give effect to a 10% stock dividend paid on March 15, 1996 to stockholders of record as of February 29, 1995.) The decrease in net income in 1996 was primarily attributable to a $6,774,200 or 12.2% decrease in net sales. The reduction in net income was tempered by a decrease in operating expenses of $1,864,500 or 10.0%. Net sales decreased to $48,627,900 in 1996 as compared to $55,402,100 in 1995. Of the $6,774,200 decrease in net sales, approximately $5,041,900 was attributable to a reduction in 17 20 AMVAC's net sales. The reductions occurred primarily in cotton related products which decreased a combined $10,935,700, and resulted from unanticipated weather conditions, a softness in pest populations, and competitive conditions. The decreases were offset to an extent by increased sales of Metam Sodium products in the amount of $4,035,100 which was attributable to the Company's emphasis on expanding its market share. GEMCHEM's nonagricultural sales declined from approximately $4,100,000 in 1995 to approximately $2,626,800 in 1996 reflecting continuing aggressive competition in the market and a reduction in marketing efforts applied to GEMCHEM's pharmaceutical products. Gross profits decreased by $4,312,500 to $20,347,900 in 1996 from $24,660,400 in 1995. The gross profit percentage decreased to 41.8% in 1996 from 44.5% in 1995. The decrease in 1996 is largely attributable to the reduction in sales without realizing a corresponding reduction in fixed manufacturing overhead. Gross profits were also negatively impacted by pricing allowances provided by the Company on some of its products in order to retain or expand market share. Operating expenses decreased by $1,864,500 to $16,824,900 in 1996 from $18,689,400 in 1995. The following is a discussion of operating expenses: Selling and Regulatory: Selling and regulatory expenses decreased by $672,400 to $6,100,500 in 1996 from $6,772,900 in 1995. The decrease in selling and regulatory expenses is primarily attributable to a decrease in variable selling costs. Due to the significant decrease in Bidrin sales in 1996, related Bidrin rebates and royalties decreased by approximately $830,000. Rebates on NAA products increased an additional $400,000 in 1996 over the $943,500 increase in 1995 as a result of continuing and expanded agreements with distributors to promote the Company's products in the market and support pricing. Royalties on NAA products decreased approximately $100,000 in 1996 due to the expiration of a related royalty agreement. Rebates on Phosdrin decreased approximately $200,000 in 1996 due to the reversal of an accrual deemed no longer necessary as a result of the completion of the Phosdrin recall as mandated by the Environmental Protection Agency in July 1996. Although most selling related expenses declined, expenses of GEMCHEM increased approximately $185,600 in 1996 reflecting increased sales efforts, mostly the hiring of additional sales personnel. Product liability insurance, which varies directly with sales levels, also decreased approximately $80,000 in 1996 as a result of the decreased sales volume. General, Administrative and Corporate: General, administrative and corporate costs increased by $117,000 to $4,178,800 in 1996 from $4,061,800 in 1995. The increase was primarily attributable to rent expense for the 18 21 Company's corporate headquarters which was $82,400 higher than in 1995 and the incurrence of $49,000 in salary expense for AMVAC's executive vice president hired in 1996. Although the accrual for the remaining expected costs in connection with the phase out of Phosdrin in the amount of $175,000 recorded in 1995 did not impact 1996, the Company did record an accrual of $150,000 for estimated railroad remediation costs in connection with the ongoing railroad siding matter (see additional discussion in PART I, Item 3, Legal Proceedings). Research and Development: Research and development costs, which include costs incurred to generate scientific data and other activities performed in the department, decreased by $1,822,600 to $3,023,800 in 1996 from $4,846,400 in 1995. Costs incurred to generate scientific data accounted for the most significant portion of this decrease. The PCNB, Bidrin and NAA product groups experienced significant declines in scientific data generation of approximately $1,070,000, $390,000 and $290,000, respectively, in 1996 due to the maturation of the products and of the related research studies being conducted. Freight, Delivery and Warehousing: Freight, delivery and warehousing costs increased by $513,500 to $3,521,000 in 1996 from $3,008,300 in 1995. There was a reduction in non rail car freight costs to customers of approximately $89,200 as a result of the decline in sales volume in 1996. However, rail car and internal freight costs increased approximately $553,800. Most of this increase was in rail car freight which increased because of the increased sales volume of Metam Sodium products and also because of efforts to increase Metam Sodium inventory at storage sites as of the end of 1996 in anticipation of sales expected to materialize in the first quarter of 1997. Due to personnel additions to the department, employee wages increased approximately $56,700 in 1996. Interest costs were $919,900 in 1996 as compared to $935,400 in 1995. The average level of short-term borrowing decreased by $2,102,700 to $4,423,500 in 1996 from $6,526,200 in 1995. The average level of long-term debt increased by $2,358,300 to $6,174,900 in 1996 from $3,816,600 in 1995. Although overall average debt was higher in 1996, lower interest rates of 0.5% to 1.0% on average debt accounted for the decrease in interest costs in 1996. Income tax expense decreased by $923,100 to $995,900 in 1996 as compared to $1,919,000 in 1995. Lower pre-tax income was the reason for the decreased income tax expense. See Note 4 to the Consolidated Financial Statements for additional analysis of the changes in income tax expense. 19 22 LIQUIDITY AND CAPITAL RESOURCES Working capital was $25,846,200 as of December 31, 1997 reflecting a $7,993,300 improvement over working capital of $17,852,900 as of December 31, 1996. Current assets were $7,041,100 higher at December 31, 1997 than at December 31, 1996. Most of this increase was attributable to increases in trade accounts receivable and inventory. Trade receivables increased $4,957,300 due to strong sales in the month of December. Inventories increased $1,587,600 primarily in consideration of expected sales volume in 1998. Current liabilities decreased $952,200 in 1997 from the 1996 level. The Company invested $2,768,400 in capital expenditures in 1997. These expenditures improve and/or maintain the existing capacity of the Company's manufacturing facility, and address the Company's continual effort to adapt its manufacturing processes to the environmental control standards of its various controlling agencies. The Company invested $1,375,400 of the increase in the PCNB octane recovery system described above. The Company recognized $2,732,600 of depreciation and amortization expense in 1997. As of December 31, 1997, the Company does not have any material commitments for future capital expenditures. As part of an amendment to the Company's credit agreement in July 1997, the Company increased its credit limit under its fully secured existing long-term line of credit to $20,500,000 from $15,500,000 and extended the expiration date of the long-term line of credit to July 20 23 31, 1999 from July 31, 1998. The Company had $6,400,000 of availability under its long-term line of credit agreement as of December 31, 1997. During 1997, the Company refinanced an existing real estate loan whereby the old loan in the amount of $1,133,200 was paid off and replaced by a new loan in the amount of $1,837,500. In addition to the payoff of the real estate loan mentioned above, the Company made principal payments on its other long-term debt in the amount of $1,245,300 during 1997. There has been constant public pressure upon the federal and state governments to require FIFRA product registrants to supply new scientific data (such as toxicological and environmental fate tests), which has resulted in government action requiring additional studies and the submission of more data. Based on facts known today, the Company estimates it will spend approximately $3,200,000 in 1998 on these studies. Because scientific analyses are constantly improving, it cannot be determined with certainty whether or not material new or additional tests may be required. For further information, refer to PART I, Item 1, Business, Competition of this Annual Report. AMVAC is a manufacturer and formulator of chemicals for crops, human and animal health protection. This is a high risk industry with ever present industry-wide litigation. For discussions pertaining to the Company's litigation refer to PART I, Item 3, Legal Proceedings of this Annual Report. Management believes current financial resources (working capital and borrowing arrangements) and anticipated funds from operations will be adequate to meet total financial needs in 1998. Management also continues to believe, to improve its working capital position and maintain flexibility in financing interim needs, it is prudent to explore alternate sources of financing. The Company, as previously disclosed, is required to supply studies and the submission of data to federal and state governmental agencies. Because scientific analyses are constantly improving, it cannot be determined with certainty whether or not additional tests that may be material will be required. FOREIGN EXCHANGE Management does not believe that the fluctuation in the value of the dollar in relation to the currencies of its customers in the last three fiscal years has adversely affected the Company's ability to sell products at agreed upon prices. No assurance can be given, however, that adverse currency exchange rate fluctuations will not occur in the future. Should adverse currency exchange rate fluctuations occur in geographies where the Company sells/exports its products, management does not believe such fluctuations will materially impact the Company's operating results. INFLATION Management believes inflation has not had a significant impact on the Company's operations during the past three years. YEAR 2000 COMPLIANCE The Company has elected to install a new Enterprise Resource Planning Manufacturing software system, the decision of which, was not driven by Year 2000 Compliance. The new software system is Year 2000 capable. The installation of this system is expected to be completed by the end of calendar 1998. Management has also reviewed the Company's other software products for Year 2000 problems and believes that such systems and products are, or will soon be, Year 2000 compliant, and management therefore does not expect Year 2000 considerations will materially impact the Company's internal operations. 21 24 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements and Supplementary Data are listed at PART IV, Item 14, Exhibits, Financial Statement Schedules, and Reports on Form 8-K in this report. ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 22 25 PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following persons are the current Directors and Executive Officers of Registrant:
Name of Director/Officer Age Capacity ---------------- --- -------- Herbert A. Kraft 74 Co-Chairman Glenn A. Wintemute 73 Co-Chairman Eric G. Wintemute 42 Director, President and Chief Executive Officer James A. Barry 47 Director, Senior Vice President, Chief Financial Officer, Treasurer and Asst. Secretary Glenn E. Mallory 88 Director and Corporate Secretary Alan B. Sass 59 Director Jesse E. Stephenson 74 Director James Strock 41 Director
Herbert A. Kraft has served as Co-Chairman of the Board since July 1994. Mr. Kraft served as Chairman of the Board and Chief Executive Officer from 1969 to July 1994. Glenn A. Wintemute has served as Co-Chairman of the Board since July 1994. Mr. Wintemute served as President of the Company and all operating subsidiaries since 1984 and was elected a director in 1971. He served as President of AMVAC from 1963 to July 1994. Eric G. Wintemute has served as a director since June 1994. Mr. Wintemute has also served as President and Chief Executive Officer since July 1994. He was appointed Executive Vice President and Chief Operating Officer of the Company in January 1994, upon the Company's acquisition of GemChem. He co- founded GemChem, a national chemical distributor, in 1991 and served as its President. Mr. Wintemute was previously employed by AMVAC from 1977 to 1982. From 1982 to 1991, Mr. Wintemute worked with R. W. Greeff 23 26 & Co., Inc., a former distributor of certain of AMVAC's products. During his tenure with R. W. Greeff & Co., Inc., he served as Vice President and Director. He is the son of the Company's Co-Chairman, Glenn A. Wintemute. James A. Barry has served as a director of the Company since 1994. Mr. Barry was appointed Senior Vice President in February 1998. He has served as Treasurer since July 1994 and as Chief Financial Officer of the Company and all operating subsidiaries since 1987. He also served as Vice President from 1990 through February 1998 and has held the position of Assistant Secretary since 1990. From 1990 to July 1994, he also served as Assistant Treasurer. Glenn E. Mallory has served as a director of the Company since 1971 and its Secretary since 1976. Mr. Mallory was appointed Vice President of the Company in July 1994. He served as Treasurer from 1976 to July 1994. He also served as Vice President of AMVAC from 1970 to September 1993. Dr. Allan Sass was elected a director of the Company in June 1996. Dr. Sass served as Vice President of Technology of Wheelabrator Technologies (an environmental issues firm) from 1994 through April 1996, and served as Vice President of New Business Development from 1992 to 1994. He was the Chief Executive Officer and Chairman of Westates Carbon Company, Inc. from 1985 to 1992. Westates Carbon Company, Inc. was acquired by Wheelabrator Technologies in April 1992. From 1968 to 1985, Dr. Sass was with Occidental Petroleum Corporation serving as President and Chief Executive Officer of Occidental Oil Shale, reporting directly to Dr. Armand Hammer. Jesse E. Stephenson has served as director of the Company since 1977 (except for a 10-month period following March 1992). He was the General Manager of Calhart Corporation, then a wholly-owned subsidiary of the Company, from 1968 to 1978. Mr. Stephenson is retired and is a private investor. James M. Strock, age 41, was appointed a director in February 1998. Mr. Strock is President of Strock Enterprises, Inc., a consulting firm that provides domestic and international strategic planning, environmental consulting, and marketing and communication services. From March 1991 through May 1997, Mr. Strock served in Governor Pete Wilson's Cabinet as California's first Secretary for Environmental Protection. From 1989 until 1991, Mr. Strock served as the Assistant Administrator for Enforcement (chief law enforcement officer) of the U.S. Environmental Protection Agency. Mr. Strock's other work experience ranges from private law practice, to service as Special Counsel to the U.S. Senate Environment & Public Works Committee, and as a special assistant to the Administrator of the U.S. Environmental Protection Agency. Mr. Strock also serves on the board of Thermatrix,a publicly held company traded on NASDAQ (Stock symbol TMX). 24 27 Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's executive officers, directors, and persons who own more than ten percent of a registered class of the Company's equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission. The Company believes that during 1997 all reports required to be filed under Section 16(a) by its executive officers, directors, and greater than ten percent beneficial owners were timely filed. 25 28 ITEM 11 EXECUTIVE COMPENSATION The following table sets forth the aggregate cash and other compensation for services rendered for the years ended December 31, 1997, 1996, and 1995 paid or awarded by the Corporation and its subsidiaries to the Corporation's Chief Executive Officer and each of the four most highly compensated executive officers of the Corporation, whose aggregate remuneration exceeded $100,000 (the "named executive officers"). 26 29 SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ----------------------------------------------- ANNUAL COMPENSATION(1) AWARDS PAYOUTS -------------------------------------------- ----------------------- ------- (A) (B) (C) (D) (E) (F) (G) (H) (I) OTHER RE- SECURITIES ALL NAME ANNUAL STRICTED UNDERLYING OTHER AND COMPEN- STOCK OPTIONS/ LTIP COMPEN- PRINCIPAL SALARY BONUS SATION AWARD(S) SARS PAYOUTS SATION POSITION YEAR ($) ($) ($) ($) (#) ($) ($) ---- ------- ----- ------ -------- ------------ ------- ------- Eric G. Wintemute 1997 244,244 -- -- -- -- -- 4,723(4) President and 1996 201,306 -- -- -- -- -- 4,855(4) Chief Executive Officer 1995 172,000 -- -- -- -- -- 4,993(4) James A. Barry 1997 134,819 -- -- -- -- -- 4,608(4) Senior Vice President, 1996 129,692 -- -- -- -- -- 3,457(4) CFO and Treasurer 1995 122,751 -- -- -- 5,500(2) -- 4,070(4) David B. Cassidy(3) 1997 175,414 -- -- -- -- -- 562(4) Executive Vice 1996 45,769 -- -- -- 30,000(5) -- -- President (AMVAC) 1995 -- -- -- -- -- -- -- Herbert A. Kraft(7) 1997 -- -- -- -- -- -- 180,168(6) Co-Chairman 1996 -- -- -- -- -- -- 226,923(6) 1995 -- -- -- -- -- -- 254,086(6) Glenn A. Wintemute(7) 1997 -- -- -- -- -- -- 195,192(6) Co-Chairman 1996 -- -- -- -- -- -- 226,923(6) 1995 -- -- -- -- -- -- 254,086(6)
- ------------------- (1) No executive officer enjoys perquisites that exceed the lesser of $50,000, or 10% of such officer's salary. (2) Represents options to purchase Common Stock of the Company. The options issued to Mr. Barry represent approximately 13% of the total options issued by the Company in 1995. The exercise price of the options is $6.82 per share and the options vest one-third on January 18, 1996, 1997 and 1998 and all options expire on January 18, 2000. (3) Mr. Cassidy joined Amvac Chemical Corporation as Executive Vice President in September 1996. (4) These amounts represent the Company's contribution to the Company's Retirement Savings Plan, a qualified plan under Internal Revenue Code Section 401(k). (5) Represents options to purchase Common Stock of the Company in accordance with the terms and conditions of Mr. Cassidy's Employment Agreement. (6) Amounts represent payments received by each individual (during calendar year) under his consulting agreement. (7) Messrs. Kraft and Wintemute retired from the Company as active employees in July 1994. The Company entered into consulting agreements with Messrs. Kraft and Wintemute in July 1994. In 1996 the consulting agreements were extended for an additional year and now expire in July 2000. 27 30 Compensation Committee Interlocks and Insider Participation The Compensation Committee of the Board consists of Messrs. Herbert A. Kraft, Alan B. Sass and Jesse E. Stephenson. The executive compensation philosophy of the Company is aimed at (i) attracting and retaining qualified executives; (ii) motivating performance to achieve specific strategic objectives of the Company; and (iii) aligning the interest of senior management with the long-term interest of the Company's shareholders. 28 31 ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT To the knowledge of the Registrant, the ownership of the Registrant's outstanding Common Stock as of March 23, 1998, by persons who are directors, beneficial owners of 5% or more of the outstanding Common Stock and by all directors and officers as a group is set forth below. Unless otherwise indicated the Registrant believes that each of the persons set forth below has the sole power to vote and to dispose of the shares listed opposite his name.
Amount and Nature Office Name and Address of Beneficial Percent (if any) Beneficial Owner Ownership(1) of Class - -------- ---------------- ----------- -------- Co-Chairman Glenn A. Wintemute 642,205(2) 25.6% 4695 MacArthur Court Newport Beach, CA 92660 Co-Chairman Herbert A. Kraft 590,707(3) 23.6% 4695 MacArthur Court Newport Beach, CA 92660 Goldsmith & Harris et al. 153,560(4) 6.1% 80 Pine Street New York, NY 10005 Director, Eric G. Wintemute 69,903(6) 2.8% President 4695 MacArthur Court & CEO Newport Beach, CA 92660 Director Jesse E. Stephenson 46,850(5) 1.9% 4695 MacArthur Court Newport Beach, CA 92660 Director, James A. Barry 5,500(7) --12 Sr. Vice President, 4695 MacArthur Court CFO & Treasurer Newport Beach, CA 92660 Director Dr. Allan Sass 4,500(8) --12 4695 MacArthur Court Newport Beach, CA 92660 Director Glenn E. Mallory 3,500(9) --12 4695 MacArthur Court Newport Beach, CA 92660 Director James Strock 2,500(10) --12 4695 MacArthur Court Newport Beach, CA 92660 Executive Vice David B. Cassidy 15,000(11) --12 President (AMVAC) 4695 MacArthur Court Newport Beach, CA 92660 Directors and Officers as a group (9) 1,380,665 53.9%
Refer to footnotes on next page. 29 32 ITEM 12 - Continued Footnotes (1) Record and Beneficial. (2) This figure includes 22,220 shares of Common Stock owned by Mr. G. A. Wintemute's minor children for which Mr. Wintemute is a trustee and disclaims beneficial ownership. (3) Mr. Kraft owns all of his shares with his spouse in a family trust, except as to 1,430 shares held in an Individual Retirement Account. (4) The Company has relied on information reported on a Statement on Schedule 13D filed by Goldsmith & Harris et al. with the Securities and Exchange Commission as adjusted for the 10% stock dividend issued March 15, 1996. (5) Mr. Stephenson holds all of his shares in a family trust. This figure includes 3,500 shares of Common Stock Mr. Stephenson is entitled to acquire pursuant to stock options exercisable within sixty days of the filing of this Annual Report. (6) This figure includes 33,000 shares of Common Stock Mr. Wintemute is entitled to acquire pursuant to stock options exercisable within sixty days of the filing of this Annual Report. (7) This figure represents shares of Common Stock Mr. Barry is entitled to acquire pursuant to stock options exercisable within sixty days of the filing of this Annual Report. (8) This figure includes 3,500 shares of Common Stock Dr. Sass is entitled to acquire pursuant to stock options exercisable within sixty days of the filing of this Annual Report. (9) This figure represents shares of Common Stock Mr. Mallory is entitled to acquire pursuant to stock options exercisable within sixty days of the filing of this Annual Report. (10) This figure represents shares of Common Stock Mr. Strock is entitled to acquire pursuant to stock options exercisable within sixty days of the filing of this Annual Report. (11) This figure includes 5,000 shares of Common Stock Mr. Cassidy is entitled to acquire pursuant to stock options exercisable within sixty days of the filing of this Annual Report. (12) Under 1% of class. 30 33 ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In connection with their retirement from the Company as active employees in July 1994, Messrs. Herbert A. Kraft and Glenn A. Wintemute entered into written consulting agreements with the Company effective July 14, 1994. Pursuant to the consulting agreements, Messrs. Kraft and Wintemute perform management and financial consulting services for the Company as assigned by the Board of Directors or the Chief Executive Officer. The agreements originally were to expire on July 14, 1999. In 1996, the agreements were extended for an additional year now scheduled to expire July 14, 2000. The agreements provide that neither Messrs. Kraft or Wintemute will be required to expend more than 400 hours in any twelve month period or forty hours in any one month period. Under the agreements, Messrs. Kraft and Wintemute each received $287,500 for the year ended July 14, 1995, $243,750 for the year ended July 14, 1996 and $200,000 for the year ended July 14, 1997. They will also, under the agreements, each receive $156,250 for the year ending July 14, 1998, $112,500 for the year ending July 14, 1999 and $100,000 for the year ending July 14, 2000. In the event of death or disability prior to July 14, 2000, such payments will continue to be paid to the individual or his estate, as applicable. The agreements also provide for continuation of medical and dental insurance benefits until the expiration of the term of the agreements. See Note 11 of the Notes to the Consolidated Financial Statements in PART IV, Item 14 of this Annual Report. 31 34 PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) Index to Consolidated Financial Statements and Supplementary Data: DESCRIPTION
PAGE NO. Report of Independent Certified Public Accountants 34 Financial Statements: Consolidated Balance Sheets as of December 31, 1997 and 1996 35 Consolidated Statements of Income for the Years Ended December 31, 1997, 1996, and 1995 37 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1997, 1996, and 1995 38 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996, and 1995 39 Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements 41
(2) Financial Statement Schedules: All schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto. (3) Exhibits: The exhibits listed on the accompanying Index To Exhibits, page 53, are filed as part of this annual report. (b) Reports on Form 8-K were filed during the quarter ended December 31, 1997. None. 32 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, American Vanguard Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN VANGUARD CORPORATION (Registrant) /s/ Eric G. Wintemute /s/ James A. Barry - ------------------------------- ------------------------------- By: ERIC G. WINTEMUTE By: JAMES A. BARRY President, Senior Vice President, Chief Executive Officer Chief Financial Officer, and Director Treasurer and Director March 25, 1998 March 25, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated. /s/ Herbert A. Kraft /s/ Glenn A. Wintemute - ------------------------------- ------------------------------- HERBERT A. KRAFT GLENN A. WINTEMUTE Co-Chairman Co-Chairman March 25, 1998 March 25, 1998 /s/ Glenn E. Mallory /s/ Allan Sass - ------------------------------- ------------------------------- GLENN E. MALLORY ALLAN SASS Corporate Secretary and Director Director March 25, 1998 March 25, 1998 /s/ Jesse E. Stephenson /s/ James Strock - ------------------------------- ------------------------------- JESSE E. STEPHENSON JAMES STROCK Director Director March 25, 1998 March 25, 1998 33 36 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Stockholders American Vanguard Corporation We have audited the accompanying consolidated balance sheets of American Vanguard Corporation and subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Vanguard Corporation and their subsidiaries at December 31, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. BDO SEIDMAN, LLP Los Angeles, California March 3, 1998 34 37 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996
ASSETS (NOTE 3) 1997 1996 ----------- ----------- Current assets: Cash $ 746,600 $ 632,400 Receivables: Trade 21,244,600 16,529,900 Other 441,400 198,800 ----------- ----------- 21,686,000 16,728,700 ----------- ----------- Inventories: Finished products 9,847,700 8,108,800 Raw materials 3,090,200 3,241,500 ----------- ----------- 12,937,900 11,350,300 ----------- ----------- Prepaid expenses 1,035,600 653,600 ----------- ----------- Total current assets 36,406,100 29,365,000 Property, plant and equipment, at cost, less accumulated depreciation of $18,541,200 in 1997 and $16,284,300 in 1996(notes 1,2,3, and 5) 13,439,000 12,927,500 Land held for development 210,800 210,800 Costs in excess of net assets acquired, net of accumulated amortization of $441,000 in 1997 and $199,300 in 1996 (note 10) 3,290,500 3,532,200 Other intangible assets, net of accumulated amortization of $144,300 in 1997 and $25,000 in 1996 (note 10) 1,571,200 1,660,100 Other assets 288,700 332,700 ----------- ----------- $55,206,300 $48,028,300 =========== ===========
(CONTINUED) 35 38 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 ----------- ----------- Current liabilities: Current installments of long-term debt (note 2) $ 1,059,500 $ 1,160,500 Accounts payable 3,785,200 3,002,300 Accrued expenses 3,561,100 4,803,100 Accrued royalty obligation-current portion (note 10) 1,600,000 1,600,000 Income taxes payable 554,100 946,200 ----------- ----------- Total current liabilities 10,559,900 11,512,100 Note payable to bank (note 3) 14,100,000 7,000,000 Long-term debt, excluding current installments (note 2) 3,980,400 4,373,100 Accrued royalty obligation, excluding current portion (note 10) 2,659,700 3,062,000 Deferred income taxes (note 4) 2,646,500 2,695,600 ----------- ----------- Total liabilities 33,946,500 28,642,800 ----------- ----------- Commitments and contingent liabilities (notes 2, 3, 5, 6, 9 and 11) Stockholders' equity: (note 13) Preferred stock, $.10 par value per share; authorized 400,000 shares; none issued -- -- Common stock, $.10 par value per share; authorized 10,000,000 shares; issued 2,564,182 shares in 1997 and 1996 256,400 256,400 Additional paid-in capital 3,879,000 3,879,000 Retained earnings 17,483,300 15,609,000 ----------- ----------- 21,618,700 19,744,400 Less treasury stock, at cost, 56,600 shares in 1997 and 1996 358,900 358,900 ----------- ----------- Total stockholders' equity 21,259,800 19,385,500 ----------- ----------- $55,206,300 $48,028,300 =========== ===========
See summary of significant accounting policies and notes to consolidated financial statements. 36 39 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ------------ ------------ ------------ Net sales (note 8) $ 67,700,500 $ 48,627,900 $ 55,402,100 Cost of sales 40,315,600 28,280,000 30,741,700 ------------ ------------ ------------ Gross profit 27,384,900 20,347,900 24,660,400 Operating expenses (note 12) 22,600,100 16,824,900 18,689,400 ------------ ------------ ------------ Operating income 4,784,800 3,523,000 5,971,000 Interest expense (1,513,400) (919,900) (935,400) Interest income 11,400 8,300 7,400 ------------ ------------ ------------ Income before income tax expense 3,282,800 2,611,400 5,043,000 Income tax expense (note 4) 1,258,100 995,900 1,919,000 ------------ ------------ ------------ Net income $ 2,024,700 $ 1,615,500 $ 3,124,000 ============ ============ ============ Per share information: Basic and diluted Net income per share $ .81 $ .65 $ 1.23 ============ ============ ============ Weighted average number of shares 2,507,829 2,472,883 2,546,471 ============ ============ ============
See summary of significant accounting policies and notes to consolidated financial statements. 37 40 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
ADDITIONAL COMMON PAID-IN RETAINED TREASURY STOCK CAPITAL EARNINGS STOCK TOTAL ------------ ------------ ------------ ------------ ------------ Balance, January 1, 1995 $ 233,100 $ 1,688,200 $ 13,221,600 $ -- $ 15,142,900 Net income -- -- 3,124,000 -- 3,124,000 Treasury stock acquired -- -- -- (261,500) (261,500) ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1995 233,100 1,688,200 16,345,600 (261,500) 18,005,400 Common stock dividend 23,300 2,190,800 (2,214,100) -- -- Cash dividends on common stock ($.06 per share) -- -- (138,000) -- (138,000) Net income -- -- 1,615,500 -- 1,615,500 Treasury stock acquired -- -- -- (97,400) (97,400) ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1996 256,400 3,879,000 15,609,000 (358,900) 19,385,500 Cash dividends on common stock ($.06 per share) -- -- (150,400) -- (150,400) Net income -- -- 2,024,700 -- 2,024,700 ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1997 $ 256,400 $ 3,879,000 $ 17,483,300 $ (358,900) $ 21,259,800 ============ ============ ============ ============ ============
See summary of significant accounting policies and notes to consolidated financial statements. 38 41 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
INCREASE (DECREASE) IN CASH 1997 1996 1995 ----------- ----------- ----------- Cash flows from operating activities: Net income $ 2,024,700 $ 1,615,500 $ 3,124,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization of property, plant and equipment 2,256,900 2,204,300 2,098,700 Amortization of intangible assets 475,700 144,800 1,316,600 Changes in assets and liabilities associated with operations: Increase in receivables (4,957,300) (1,242,700) (5,400) Increase in inventories (1,587,600) (3,080,700) (1,051,700) Decrease (increase) in prepaid expenses (382,000) (72,600) 348,700 Increase (decrease) in accounts payable 782,900 191,500 (80,800) Increase (decrease) in other payables and accrued expenses (2,036,400) 852,100 (2,279,100) Increase (decrease) in deferred income taxes (49,100) (226,900) 105,200 ----------- ----------- ----------- Net cash provided by (used in)operating activities (3,472,200) 385,300 3,576,200 ----------- ----------- ----------- Cash flows from investing activities: Capital expenditures (2,768,400) (1,451,400) (755,000) Additions to intangible assets (33,100) (76,200) (226,500) Net increase in other noncurrent assets (68,000) (150,000) (123,800) ----------- ----------- ----------- Net cash used in investing activities (2,869,500) (1,677,600) (1,105,300) ----------- ----------- -----------
(Continued) 39 42 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
INCREASE (DECREASE) IN CASH 1997 1996 1995 ----------- ----------- ----------- Cash flows from financing activities: Net borrowings (repayments) under line of credit agreement 7,100,000 $ 3,100,000 $(4,100,000) Proceeds from issuance of long-term debt 1,884,800 96,600 3,702,300 Principal payments on long-term debt (2,378,500) (1,368,100) (1,797,800) Acquisition of treasury stock -- (97,400) (261,500) Payment of cash dividends (150,400) (138,000) -- Net cash provided by (used in) financing 6,455,900 1,593,100 (2,457,000) ----------- ----------- ----------- activities Net increase in cash 114,200 300,800 13,900 Cash at beginning of year 632,400 331,600 317,700 ----------- ----------- ----------- Cash at end of year $ 746,600 $ 632,400 $ 331,600 =========== =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 1,562,800 $ 851,500 $ 1,011,100 Income taxes 1,721,000 1,630,900 1,119,800 =========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: On March 15, 1996, the Company distributed 233,058 shares of Common Stock in connection with a 10% Common Stock dividend to stockholders of record as of February 29, 1996. As a result of the stock dividend, Common Stock was increased by $23,300, additional paid-in capital was increased by $2,190,800, and retained earnings was decreased by $2,214,100. In December 1996, the Company completed the acquisition of an established product line from a large chemical manufacturer (see note 10). In connection with the acquisition, the Company recorded costs in excess of net assets acquired and other intangible assets in the amount of $4,662,000 in consideration of a minimum royalty obligation in the same amount. See summary of significant accounting policies and notes to consolidated financial statements. 40 43 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business and Basis of Consolidation The Company is primarily a specialty chemical manufacturer that develops and markets safe and effective products for agricultural and commercial uses. The Company manufacturers and formulates chemicals for crops, human and animal protection. One of the Company's subsidiaries, GemChem, Inc., procures certain raw materials used in the Company's manufacturing operations and is also a distributor of various pharmaceutical and nutritional supplement products. The consolidated financial statements include the accounts of American Vanguard Corporation ("Company") and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Because of elements inherent to the Company's business, such as differing and unpredictable weather patterns, crop growing cycles, changes in product mix of sales and ordering patterns that may vary in timing, measuring the Company's performance on a quarterly basis, (gross profit margins on a quarterly basis may vary significantly) even when such comparisons are favorable, is not as good an indicator as full-year comparisons. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Long-lived Assets Intangible assets resulting from business acquisitions (see note 10), consist of cost in excess of net assets (goodwill) acquired and other intangible assets, including customer lists, product registrations, trademarks and contracts. These intangible assets are being amortized on a straight-line basis over the period of an expected benefit of years. Management has a policy to review intangible assets and productive assets at each quarterly balance sheet date for possible impairment. This policy includes recognizing write-downs if it is probable that measurable undiscounted future cash flows and/or the aggregate net cash flows of an asset, as measured by current revenues and costs (exclusive of depreciation or amortization) over the asset's remaining depreciable life, are not sufficient to recover the net book value of an asset. Revenue Recognition Sales are recognized upon shipment of products or transfer of title to the customer. 41 44 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED Depreciation Depreciation of property, plant and equipment is calculated on the straight-line method over the estimated useful lives of the assets. Fair Value of Financial Instruments The carrying values of cash, receivables and accounts payable approximate their fair values because of the short maturity of these instruments. The fair value of the Company's long-term debt and note payable to bank is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. Such fair value approximates the respective carrying values of the Company's long-term debt and note payable to bank. Income Taxes Income taxes have been provided using the asset and liability method in accordance with Financial Accounting Standard No. 109, "Accounting for Income Taxes". The asset and liability method requires the recognition of deferred tax assets and liabilities for future tax consequences of temporary differences between the financial statement bases and tax bases of assets and liabilities at the date of the financial statements using the provisions of the tax laws then in effect. Per Share Information In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share ("EPS"). SFAS No. 128 requires dual presentation of basic EPS and diluted EPS on the face of all income statements issued after December 15, 1997, for all entities with complex capital structures. Basic EPS is computed as net income divided by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects potential dilution that could occur if securities or other contracts, which, for the Company, consists of options to purchase 174,400 shares of the Company's common stock, are exercised. These options were anti-dilutive in 1997, 1996 and 1995, and, as such, dilutive EPS amounts are the same as basic EPS for all periods presented. No prior year EPS amounts have been restated as a result of SFAS 128. EPS have been retroactively restated to reflect a 10% common stock dividend payable March 15, 1996 to common stockholders of record as of February 29, 1996. 42 45 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses at the date that the financial statements are prepared. Actual results could differ from those estimates. Reclassifications Certain prior years' amounts have been reclassified to conform to the current year's presentation. Recent Accounting Pronouncements Statement of Financial Accounting Standards No. 129, "Disclosure of Information about Capital Structure", ("SFAS 129") issued by the FASB is effective for financial statements ended after December 15, 1997. The new standard reinstates various securities disclosure requirements previously in effect under Accounting Principles Board Opinion No. 15, which has been superseded by SFAS No. 128. Adoption of SFAS No. 129 did not have an impact on the Comapny's financial position or results of operations. Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", ("SFAS 130") issued by the FASB is effective for financial statements with fiscal years beginning after December 15, 1997. SFAS 130 establishes standards for reporting and displaying of comprehensive income and its components in a full set of general-purpose financial statements. The Company does not expect adoption of SFAS 130 to have an impact on its financial position or results of operations and any effect will be limited to the form and content of its disclosures. Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information", ("SFAS 131") issued by the FASB is effective for financial statements with fiscal years beginning after December 15, 1997. SFAS 131 requires that public companies report certain information about operating segments, products, services, and geographical areas in which they operate and their major customers. The Company does not expect adoption of SFAS 131 to have an impact on its financial position or results of operations. The Company believes it may have expanded disclosures, in the future, with respect to certain of these items. 43 46 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (1) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31, 1997 and 1996 consists of the following:
ESTIMATED 1997 1996 USEFUL LIVES ---------- ---------- ------------ Land $ 2,382,600 $ 2,382,600 Buildings and improvements 4,573,600 3,812,300 10 to 30 years Machinery and equipment 22,864,000 20,677,000 3 to 10 years Office furniture and fixtures 1,128,800 1,031,400 3 to 10 years Automotive equipment 105,000 105,000 3 to 6 years Construction in progress 926,200 1,203,500 ---------- ---------- 31,980,200 29,211,800 Less accumulated depreciation 18,541,200 16,284,300 ---------- ---------- $13,439,000 $12,927,500 =========== ===========
(2) LONG-TERM DEBT Long-term debt of the Company at December 31, 1997 and 1996 is summarized as follows:
1997 1996 ---------- ---------- Note payable, secured by certain real property, payable in 60 fixed monthly installments of $87,500 commencing January 1, 1996, plus interest at prime plus .5% (prime was 8.5% at December 31, 1997), with remaining unpaid principal due December 1, 2000 $3,062,500 $4,112,500 Note payable, refinanced in November 1997 secured by certain real property, payable in 83 fixed monthly installments of $6,125, plus interest at prime with remaining unpaid principal due October 15, 2004 1,831,400 1,266,500 Note payable, secured by certain real property, payable in 60 monthly principal and interest installments of $923 with remaining unpaid principal due July 1, 2001, interest rate at 8.00% 91,300 94,900 Obligations under capitalized leases (see note 5) 54,700 59,700 ---------- ---------- 5,039,900 5,533,600 Less current installments 1,059,500 1,160,500 ---------- ---------- $3,980,400 $4,373,100 ========== ==========
44 47 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Approximate principal payments on long-term debt mature as follows: 1998 $1,059,500 1999 1,136,600 2000 1,138,000 2001 163,300 2002 78,600 Thereafter 1,463,900 ---------- $5,039,900
(3) NOTE PAYABLE TO BANK Under a credit agreement with a bank as amended on July 31, 1997, the Company may borrow up to $20,500,000. The note bears interest at a rate of prime plus .25% (prime was 8.5% at December 31, 1997), which is payable monthly. Additionally, the Company, at its option, may pay a fixed rate of interest offered by the bank for terms not less than 30 nor more than 180 days and provided that any such period of time does not extend beyond the expiration date of the credit agreement. Substantially all of the Company's assets not otherwise specifically pledged as collateral on existing loans and capital leases are pledged as collateral under the credit agreement. The note payable expires on July 31, 1999. The Company had $6,400,000 available under this credit agreement as of December 31, 1997. The credit agreement, among other financial covenants, limits payments of cash dividends to a maximum of 25% of net income. The Company was in compliance with the financial covenants as of December 31, 1997. The balance outstanding at December 31, 1997 was $14,100,000. The average amount outstanding during the years ended December 31, 1997 and 1996 was $13,288,600 and $4,423,500. The weighted average interest rate during the years ended December 31, 1997 and 1996 was 8.14% and 8.17%. (4) INCOME TAXES The components of income tax expense are:
1997 1996 1995 ----------- ----------- ----------- Current: Federal $ 997,800 $ 936,400 $ 1,255,400 State 197,600 285,200 539,800 Other, primarily foreign 8,200 1,200 18,600 Deferred: Federal (20,700) (134,000) 242,300 State 75,200 (92,900) (137,100) ----------- ----------- ----------- $ 1,258,100 $ 995,900 $ 1,919,000 =========== =========== ===========
Total income tax expense differed from the amounts computed by applying the U.S. Federal income tax rate of 34% to income before income tax expense as a result of the following: 45 48 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1997 1996 1995 ----------- ----------- ----------- Computed tax provision at statutory Federal rates $ 1,116,200 $ 887,900 $ 1,714,600 Increase (decrease) in taxes resulting from: State taxes, net of Federal income tax benefit 180,800 144,000 300,600 Nondeductible expenses 35,900 28,000 33,000 Other (primarily foreign taxes) 8,200 1,900 18,600 Benefit of research and development and alternative minimum tax credits (83,000) (65,900) (147,800) ----------- ----------- ----------- $ 1,258,100 $ 995,900 $ 1,919,000 =========== =========== ===========
Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to significant portions of the net deferred tax liability at December 31, 1997 and 1996 relate to the following:
1997 1996 ----------- ----------- Plant and equipment, principally due to differences in depreciation and capitalized interest $ 2,654,800 $ 3,222,400 Inventories, principally due to additional costs inventoried for tax purposes pursuant to the Tax Reform Act of 1986 (307,800) (285,300) State income taxes (91,900) (73,000) Vacation pay accrual (113,500) (94,300) Imputed interest on royalty obligation 85,800 -- Discount on accounts receivable 433,000 -- Accrual for railroad remediation -- (60,200) Other (13,900) (14,000) ----------- ----------- Net deferred income tax liability $ 2,646,500 $ 2,695,600 =========== ===========
The Company believes it is more likely than not that the deferred tax assets above will be realized in the normal course of business. 46 49 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (5) LEASES The Company leases certain manufacturing equipment, and office furniture, fixtures and equipment under long-term capital lease agreements. Property, plant and equipment include the following leased property under capital leases by major classes: Machinery and equipment $ 84,800 Office furniture and fixtures 90,900 ------ 175,700 Less accumulated depreciation 80,900 ------ $ 94,800 ========
The following is a schedule of future minimum lease payments for capital leases as of December 31, 1997 Year ending December 31: 1998 $ 24,400 1999 12,500 2000 12,500 2001 12,500 2002 5,100 -------- Total minimum lease payments 67,000 Less amount representing interest 12,300 Present value of net minimum lease payments $ 54,700 ========
47 50 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (6) LITIGATION AND ENVIRONMENTAL DBCP LAWSUITS A. California Matters In 1997, Amvac was served with a Complaints in two actions filed in the San Francisco Superior Court entitled the Sultana Community Services District v. Shell Oil Co., et.al. and the County of San Joaquin v. Shell Oil Co., et. al. Both Complaints allege property damage resulting from DBCP contamination of water supply. Both suits name as defendants Shell Oil Company, Dow Chemical Company, Occidental Chemical Company, Chevron Chemical Company, and Velsicol Chemical Company. In Sultana Plaintiff has not produced documentation to support its claim for damage. Any damages proven may be significantly offset by Plaintiff's receipt of a Government grant for a new well. In County of San Joaquin discovery is proceeding slowly and the claims are subject to a statute of limitation defense. It is currently impossible to predict the outcome or the cost that will be involved in the defense of this matter. B. Hawaii Matters AMVAC and the Company were served with Complaints, on February 7, 1997 and March 4, 1997 respectively, in which each was named as a Defendant in the action filed in the Circuit Court of the Second Circuit, State of Hawaii entitled Board of Water Supply of the County of Maui v. Shell Oil Co., et.al. The suit also names as defendants Shell Oil Company, The Dow Chemical Company, Occidental Chemical Company, Occidental Petroleum Corporation, Occidental Chemical Corporation, and Brewer Environmental Industry, Inc. The Compliant alleges property damage resulting from DBCP contamination of the Board's water wells. Jurisdictional disputes have delayed any formal discovery and there remain numerous procedural defenses. It is currently impossible to predict the outcome or the cost that will be involved in the defense of this matter. On October 20, 1997, AMVAC was served with a Complaint in which it was named as a Defendant, filed in the Circuit Court, First Circuit, state of Hawaii entitled Patrickson, et.al. v. Dole Food Co., et.al. alleging damages sustained from injuries caused by Plaintiff's exposure to DBCP while applying the product in their native countries. Other named defendants are: Dole Food Co., Dole Fresh Fruit, Dole Fresh Fruit International, Pineapple Growers Association of Hawaii, Shell Oil Company, Dow Chemical Company, Occidental Chemical Corporation, Standard Fruit Company, Standard Fruit & Steamship, Standard Fruit company De Costa Rica, Standard Fruit company De Honduras, Chiquita Brands, 48 51 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Chiquita Brands International, Martrop Trading corporation, and Del Monte Fresh Produce. The case has been removed to U.S. District Court. Defendants are waiting for the Court's ruling on their Motion to Dismiss based on numerous procedural grounds. It is currently impossible to predict the outcome or the cost that will be involved in the defense of this matter. C. Mississippi Matters On May 30,1996, AMVAC was served with five Complaints in which it is named as a Defendant. The cases were filed in the Circuit Court of Harrison County, First Judicial District of Mississippi. Each case alleged damages sustained from injuries caused by Plaintiff's exposure to DBCP while applying the product in their native countries. These cases have been removed to U.S. District Court for the Southern District of Mississippi, Southern Division. Three of the cases were conditionally dismissed. Another case was closed for administrative purposes due to its similarity to the other matters. Only one case is still open but no substantive activity has occurred since its filing. It is currently impossible to predict the outcome or the cost that will be involved in the defense of these matters. PHOSDRIN(R) LAWSUIT On September 21, 1995, AMVAC was served with a complaint filed in the Superior Court of King County, Washington on September 12, 1995 entitled Ricardo Ruiz Guzman, et. al. v. Amvac AMVAC Chemical Corporation, et. al. (the "Guzman Case"). The Complaint is for unspecified monetary damages based on Plaintiffs farm workers' alleged injuries from their exposure to the pesticide Phosdrin(R). On October 14, 1997 the Court dismissed with prejudice all Plaintiff's claims against AMVAC. Plaintiffs have appealed the judgement to the United States Court of Appeals for the Ninth Circuit. It is currently impossible to predict the outcome of the matter. AMVAC's carrier has assumed costs of the appeal. NAA DATA TRADE SECRET On November 1, 1996 AMVAC filed an action in U.S. District Court in Oregon against four defendants relating to their misuse of AMVAC's exclusive right associated with Naphthalene Acetic Acid ("NAA") (Amvac Chemical Corporation v. Termilind, Inc., et.al.). On November 25, 1996, defendants Termilind and Inchema asserted counterclaims against AMVAC: violation of antitrust laws (Sherman Act section 2 and ORS 646.730), unfair competition, tortious interference, defamation, and breach of 49 52 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED contract. Termilind and Inchema seek treble damages in the amount of $6 million for the antitrust claims, and compensatory damages in the amount of $2 million, together with punitive and exemplary damages. On November 1, 1996, AMVAC filed a demand for arbitration with the American Arbitration Association seeking approximately $8 million in compensation from Termilind. It is impossible to predict the outcome or the cost that will be involved with this matter. ENVIRONMENTAL During 1997 AMVAC continued activities to address environmental conditions at the railroad right-of-way which is located adjacent to AMVAC's Commerce California facility (the "Facility"). The railroad right-of-way is jointly owned by the Union Pacific Railroad and the Burlington Northern and Santa Fe Railway Company, and is managed on behalf of both companies by the latter. The site investigation and remediation activities have been conducted pursuant to a January 10, 1996, enforceable agreement and order entered into by AMVAC and the California Department of Toxic Substances Control ("DTSC"). A site investigation and health risk assessment were conducted and completed by AMVAC during the first two quarters of 1997. AMVAC prepared a draft Remedial Action Plan ("RAP") in May, 1997 which evaluated several options for remediating soils at the railroad right-of-way. The RAP concluded that the most appropriate option for remediation was the excavation and offsite disposal of soils which exceeded risk-based cleanup levels. DTSC approved the draft RAP on June 25, 1997. Remedial activities commenced on July 4, 1997 and were completed on July 12, 1997. A post-remediation report was prepared by AMVAC and submitted to DTSC on October 13, 1997. AMVAC is currently awaiting DTSC approval of the remedial activities. In March, 1997 the Facility was accepted into the DTSC's Expedited Remedial Action Program ("ERAP"). The remaining environmental investigation and any remediation activities related to the ten underground storage tanks at the Facility which had been closed in 1995 will be addressed by AMVAC under ERAP. Soil characterization activities at other areas of the Facility are expected to commence in the second or third quarter of 1998 and to be conducted in phases over the next two to three years. These activities are required at all facilities which currently have, or in the past had, hazardous waste management permits. Because AMVAC previously held a hazardous waste storage permit, AMVAC is subject to these requirements. 50 53 The Company is committed to a long-term environmental protection program that reduces emissions of hazardous materials into the environment, as well as to the remediation of identified existing environmental concerns. Federal and state authorities may seek fines and penalties for violation of the various laws and governmental regulations. As part of its continuing environmental program, except as disclosed above, the Company has been able to comply with such proceedings and orders without any materially adverse effect on its business. The Company continues to make compliance with environmental requirements an important company policy. As environmental quality requirements and standards become stricter, the Company may have to incur additional substantial costs to maintain regulatory compliance. (7) EMPLOYEE DEFERRED COMPENSATION PLAN The Company maintains a deferred compensation plan (Plan) for all eligible employees. The Plan calls for each eligible employee, at the employee's election, to participate in an income deferral arrangement under Internal Revenue Code Section 401(k) whereby the Company will match the first $5.00 of weekly employee contributions. The Plan also permits employees to contribute an additional 15% of their salaries of which the Company will match 50% of the first 6% of the additional contribution. The Company's contributions to the Plan amounted to approximately $195,100, $196,600 and $175,100 in 1997, 1996 and 1995. (8) MAJOR CUSTOMERS AND EXPORT SALES In 1997, there were sales to a major customer that accounted for 29% of the Company's consolidated sales. In 1996, there were two major customers that accounted for 33% and 10% of the Company's consolidated sales. The Company had sales to four major customers that accounted for 24%, 14%, 11%, and 10% of the Company's consolidated sales in 1995. Export sales were $6,646,000, $3,535,500 and $3,374,700 for 1997, 1996 and 1995. (9) ROYALTIES The Company has various royalty agreements in place extending through December 2003, some of which relate to the Company's acquisition of certain products. Royalty expenses were $426,700, $416,900 and $786,800 for 1997, 1996 and 1995. 51 54 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (10) BUSINESS ACQUISITIONS In December 1996, the Company completed the acquisition of an established product line from a large chemical manufacturer. The Company acquired all of the seller's existing product as of December 31, 1996 for an agreed upon value of $1,463,800 as well as intangible assets, including customer lists, existing contracts and product registrations and trademarks with an agreed upon value of $1,538,500. In consideration of the above, the Company paid cash for the existing product and recorded a minimum obligation of $4,662,000. As a result of the above, the Company has recorded costs in excess of net assets acquired (goodwill) in the amount of $3,123,500. Pro forma financial statements are not presented since the financial position and results of operations of the product line acquired are not material in relation to the Company. (11) COMMITMENTS In July 1994, the Company entered into consulting agreements with two former employees who are the current Co-Chairmen of the Company's Board of Directors. The agreements originally were set to expire in July 1999 and provided for total remuneration of $1,000,000 over the five year period to be paid to each former employee. In 1996, the consulting agreements were extended for an additional year through July 2000 with additional remuneration of $100,000 to be paid to each former employee. The Company also has an employment agreement with an officer of one of its subsidiaries. The employment agreement commenced September 16, 1996 and expires August 31, 1999. The employment agreement originally provided for an annual salary of $170,000 which amount was adjusted to $181,488 effective January 1, 1998. Annual increases are at the discretion of the Board of Directors but shall not be less than the increase in an agreed upon cost of living index. Amounts to be paid under the aforementioned consulting and employment agreements are summarized as follows:
Year ending December 31, 1998 470,200 1999 334,500 2000 108,300 --------- $ 913,000 =========
52 55 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED In July 1995, the Company entered into a noncancellable operating sublease for its corporate headquarters expiring in October 1999. The lease contains a provision to pass through to the Company the Company's pro rata share of the building's operating expenses commencing July 1, 1996 in excess of the amount passed through to the sublandlord during the first year of the sublease. Rent expense for the years ended December 31, 1997, 1996 and 1995 was $131,800, $131,800 and $49,400. Future minimum lease payments under the terms of the sublease are as follows:
Year ending December 31, 1998 131,800 1999 109,800 ------- $241,600 ========
(12) RESEARCH AND DEVELOPMENT Research and development expenses were $2,241,300, $1,932,700 and $3,717,400 for the years ended December 31, 1997, 1996 and 1995. (13) SUBSEQUENT EVENT On March 4, 1998, the Company announced that the Board of Directors declared a cash dividend of $.07 per share. The dividend will be distributed on March 25, 1998 to stockholders of record as of March 13, 1998. 53 56 INDEX TO EXHIBITS ITEM 14(a)3
Page Sequentially Numbered -------- 2.1 Purchase and Sales Agreement dated November 15, 1993, between Amvac Chemical Corporation and E.I. du Pont de Nemours and Company.4 -- 3.1 Certificate of Incorporation of Registrant.1 -- 3.2 Bylaws of Registrant (as amended as of January 14, 1993).3 -- 4.1 Specimen Certificate of Common Stock.2 -- 10.1 Indemnification Agreement dated January 6, 1993 between Registrant and each of its officers and directors.3 -- 10.2 Line of Credit Agreement dated June 18, 1991, related amendments one through eight between the Registrant and Sanwa Bank California and related Security Agreement.3 -- 10.3 Line of Credit Agreement dated April 30, 1993, and related amendments, between the Registrant and Sanwa Bank California and related Security Agreement.5 -- 10.4 Line of Credit Agreement dated April 14, 1994, and related amendments, between the Registrant and Sanwa Bank California and related Security Agreement.6 -- 10.5 Employment Agreement between American Vanguard Corporation and Eric G. Wintemute.6 -- 10.6 Employment Agreement between American Vanguard Corporation and Alfred J. Moskal.6 --
54 57 10.7 Employment Agreement between American Vanguard Corporation and Robert F. Gilbane.(6) -- 10.8 Agreement and General Release between American Vanguard Corporation and Herbert A. Kraft.(6) -- 10.9 Agreement and General Release between American Vanguard Corporation and Glenn A. Wintemute.(6) -- 10.10 American Vanguard Corporation 1994 Stock Incentive Plan.(7) -- 10.11 Amended and Restated Credit Agreement dated September 12, 1995, and related documents between the Registrant and Sanwa Bank California.(8) -- 21. List of Subsidiaries of Registrant. 56 27. Financial Data Schedule 57
- ---------------------- (1) Incorporated by reference as an Exhibit to Registrant's Form 10 Registration Statement No. 2-85599 filed June 13, 1972. (2) Incorporated by reference as an Exhibit to Registrant's Form 10-K filed June 13, 1972. (3) Incorporated by reference as an Exhibit to Registrant's Form 10-K filed March 30, 1993. (4) Incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated November 23, 1993. (5) Incorporated by reference as an Exhibit to Registrant's Form 10-K filed March 30, 1994. (6) Incorporated by reference as an Exhibit to Registrant's Form 10-K filed March 30, 1995. (7) Incorporated by reference as Appendix A to Registrant's Proxy Material filed June 3, 1995. (8) Incorporated by reference as an Exhibit to Registrant's Form 10-K filed March 28, 1996.
55 EX-21 2 LIST OF SUBSIDIARIES OF REGISTRANT 1 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES EXHIBIT 21 LISTING OF SUBSIDIARIES Subsidiaries of the Company and the jurisdiction in which each company was incorporated are listed below. Unless otherwise indicated parenthetically, 100% of the voting securities of each subsidiary are owned by the Company. All companies indicated with an asterisk (*) are subsidiaries of AMVAC. All of the following subsidiaries are included in the Company's consolidated financial statements: AMVAC Chemical Corporation California GemChem, Inc. California 2110 Davie Corporation California (formerly ABSCO Distributing) AMVAC Chemical UK Ltd.* Surrey, England Agrosevicions Amvac, SA de CV Mexico Quimica Amvac de Mexico SA de CV Mexico Environmental Mediation, Inc. (51%) California Calhart Corporation California Manufacturers Mirror & Glass Co., Inc. California Todagco (80%)* California American Vanguard Corporation of Imperial Valley (90%)* California AMVAC Ag-Chem* California AMVAC Chemical Corporation-Nevada* Nevada
EX-27 3 FINANCIAL DATA SCHEDULE
5 0000005981 AMERICAN VANGUARD CORPORATION 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 746,600 0 21,686,000 0 12,937,900 36,406,100 31,980,200 18,541,200 55,206,300 10,559,900 19,139,900 256,400 0 0 21,003,400 55,206,300 67,700,500 67,700,500 40,315,600 40,315,600 22,600,100 0 1,502,000 3,282,800 1,258,100 2,024,700 0 0 0 2,024,700 .81 .81
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