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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, 1996
[ ] 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: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class:
Common Stock, $.10 par value
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. [ ]
The number of shares of $.10 par value Common Stock outstanding as of March 21,
1997, was 2,507,829. The aggregate market value of the voting stock of the
registrant held by non-affiliates at March 21, 1997, was $6,999,400. 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.
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AMERICAN VANGUARD CORPORATION
ANNUAL REPORT ON FORM 10-K
December 31, 1996
PART I PAGE NO.
Item 1. Business 1
Item 2. Properties 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of
Security Holders 14
PART II
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of
Operation 17
Item 8. Financial Statements and Supplementary
Data 24
Item 9. Changes in and Disagreements With
Accountants on Accounting and
Financial Disclosure 25
PART III
Item 10. Directors and Executive Officers of the
Registrant 26
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain
Beneficial Owners and Management 31
Item 13. Certain Relationships and Related
Transactions 33
PART IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 34
SIGNATURES 36
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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.
On March 31, 1994, the Company purchased all of the issued and
outstanding stock of GemChem, Inc., a national chemical distributor. The
purchase was effective January 15, 1994. 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).
See also PART III, Item 13 of this Annual Report.
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.
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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 labelled products or custom manufactures or
formulates for others.
In January 1997 the Company announced that through AMVAC, it
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.
In March of 1992, AMVAC concluded a transaction with Chevron
Chemical Company ("Chevron") whereby AMVAC purchased the non-United States
distribution and intellectual property rights (excluding, however, sales to
Japan and to the home and residential markets) to Chevron's proprietary
Dibrom(R) (1,2-dibromo-2,2-dichloroethyl dimethyl phosphate) agricultural
chemical product line.
In March of 1991, AMVAC acquired from Rhone-Poulenc AG Company
its Naphthalene Acetic Acid ("NAA") plant growth regulator chemical product
line (except for one product), including Rhone-Poulenc's EPA registration
rights issued under FIFRA, for a nominal cash consideration and royalties
through March 1996. Prior to this acquisition, AMVAC had been a major supplier
of these chemicals to Rhone-Poulenc. This product line includes Tre-Hold(R)
brand Sprout Inhibitor A112, Tre-Hold(R) brand Sprout Inhibitor for Citrus,
NAA-800(R) Plant Regulator, Amid Thin(R) W brand Plant Regulator, Fruitone(R)
N, Technical Naphthaleneacetic acid Ethyl Ester, Technical Naphthalene Acetic
Acid, and Technical Naphthaleneacetic Sodium Salt.
In January of 1989, AMVAC purchased from Du Pont its
Phosdrin(R) (an insecticide) product line and inventory for a price
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equal to the inventory at cost plus a royalty on sales through January 1994.
In June 1994, the Company announced that it had proposed the voluntary
cancellation of the registration and all uses of Phosdrin(R). As such, the
Company agreed to immediately stop production of Phosdrin(R) for sale and
distribution in the United States. On January 13, 1995, AMVAC and the EPA
entered into an agreement concerning the domestic sale, distribution, use and
eventual recall of Phosdrin(R). Under the terms of the agreement, existing
Phosdrin(R) was allowed to be sold, distributed and used in the United States
through November 30, 1995. Effective December 1, 1995, all United States
registrations of Phosdrin(R) were canceled and could no longer be used. AMVAC
developed a recall program to remove Phosdrin(R) from the marketplace. The
recall program was being conducted to the end user level and included financial
reimbursement to AMVAC's distributors for returned, unopened containers. The
last day AMVAC was required to accept returned Phosdrin(R) under the recall
plan was July 27, 1996. The cost of the recall program did not have a material
adverse effect on the Company. In 1995, domestic sales of Phosdrin(R) were
immaterial. They accounted for approximately 14% of the Company's total
consolidated sales in 1994. The Company intends to continue to sell
Phosdrin(R) for export, a market which accounted for approximately 1% of the
Company's total consolidated sales in 1996 and 2% in 1995 and 1994.
Some of the other principal products produced by AMVAC are
PCNB (Pentachloronitrobenzene), Dichlorvos (2,2-Dichlorovinyl dimethyl
phosphate), and various molluscicides. Domestically, AMVAC sells its products
to distributors and dealers. These distributors are some of the largest in the
Unites States. Foreign sales are conducted primarily through foreign
distributors. See also PART I, Item 7 of this Annual Report for further
discussions of product sales.
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.
United Agri Products and Terra International accounted for 33%
and 10%, respectively of the Company's sales in 1996. United Agri Products,
Terra International, Inc., Valent U.S.A. Corporation and Ciba Geigy Corporation
accounted for 24%, 14%, 11% and 10%, respectively, of the Company's sales in
1995. Sales to United Agri Products accounted for 27% of the Company's sales
in 1994. United Agri Products and Terra International, Inc. are a part of the
Company's distribution network and are not consumers of the Company's products.
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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.
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Under FIFRA, the federal government required 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 certain AMVAC products less vulnerable
to direct competition but more vulnerable to inelastic demand because of
significant cost increases. AMVAC expensed $1,932,700, $3,717,400 and
$5,544,000 during 1996, 1995 and 1994, respectively, related to gathering this
information. Based on facts known today, AMVAC estimates it will spend
approximately $3,600,000 in 1997. 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 except for costs that pertained to PCNB (a new
product the Company began producing in October 1990). Total PCNB study costs
incurred and capitalized through September 1995 approximated $5,813,000. During
1995 and 1994, the Company capitalized $185,000 and $509,000, respectively, in
costs relating to the PCNB study costs. Amortization of the PCNB study costs
began in October 1990, and was provided by the units of production method over a
period of five years through September 1995. 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
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.
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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.
See also PART I, Item 3, Legal Proceedings, of this Annual
Report.
EMPLOYEES
As of March 21, 1997, the Company employed approximately 195
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 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, 1996 and 1995.
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.
1996 1995 1994
---- ---- ----
Export Sales $3,535,500 $3,374,700 $3,812,500
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.
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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.
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ITEM 2 PROPERTIES
The Company's corporate headquarters are located in Newport
Beach, California. This facility is leased. See PART IV, Item 14, Note 12 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
offices and plant and some of its warehouse facilities 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; Metam Sodium manufacturing, PCNB manufacturing, 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 4
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.
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ITEM 3 LEGAL PROCEEDINGS
DBCP LAWSUITS
A. California Matters
In 1995 AMVAC settled twenty-three similar lawsuits filed
between January 1990 and December 1994. The Plaintiffs in each matter were
primarily water districts and municipalities that alleged property damage
resulting from, among other things, the fact that each plaintiff's water supply
had been contaminated by Dibromochloropropane ("DBCP"). On February 15, 1995,
the Superior Court of California in San Francisco County approved this
settlement as having been made in "good faith". The effect of the Superior
Court's approval is to bar claims, arising from these pleadings, against AMVAC
by other defendants (and other tortfeasors) for equitable comparative
contribution and/or partial or comparative indemnity. AMVAC's portion of the
settlement was $905,000.
Subsequent to the settlements discussed above, two additional
suits alleging property damage resulting from DBCP contamination of water
supply were filed in the San Francisco Superior Court and served on AMVAC: City
of Madera v. Shell Oil Co., et. al., and Malaga County Water District v. Shell
Oil Co., et. al. A Settlement Conference was held on these two cases on
December 18, 1996. At that time both cases were settled. AMVAC's contribution
to Settlement of the Madera case is $3,500. AMVAC's contribution to the Malaga
County Water District case is $6,500. The City of Madera and the Malaga Count
Water District have accepted the respective settlements. Each Settlement is
subject to the court approval as a good faith settlement.
On February 18, 1997, AMVAC was served with a Complaint in the
action filed in the San Francisco Superior Court entitled Sultana Community
Services District v. Shell Oil Co., et.al. The Compliant alleges property
damage resulting from DBCP contamination of water supply. This suit names as
defendants Shell Oil Company, Dow Chemical Company, Occidental Chemical
Company, Chevron Chemical Company, Amvac Chemical Corporation, and Velsicol
Chemical Company. As the suit has just been served none of the defendants have
answered the complaint, accordingly formal discovery has not yet begun. It is
currently impossible to predict the outcome or the cost that will be involved
in the defense of this matter.
B. Hawaiian Matter
AMVAC and the Company were served with Complaints, on February
6, 1997 and March 5, 1997 respectively, in which each is 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 Compliant alleges property damage resulting from DBCP contamination of the
Board's water wells. As the suit has just been served none of the defendants
have answered the complaint, accordingly formal discovery has not yet begun.
It is currently impossible to predict the outcome or the cost that will be
involved in the defense of this matter.
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C. Mississippi Matters
On May 30,1996, AMVAC was served with five Complaints in which
it is named as a Defendant. The cases are filed in the Circuit Court of
Harrison County, First Judicial District of Mississippi. Each case alleges
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. Defendants are waiting for the Court's ruling on their Motion to
Dismiss based on Forum Non Conveniens and Comity grounds and the Plaintiff's
Motion to Remand the case to State court. It is currently impossible to
predict the outcome or the cost that will be involved in the defense of this
matter.
D. Texas Matters
i) The Carcamo Case.
AMVAC was served with a third-party first amended complaint by
Dow Chemical Company which sought indemnity and contribution from AMVAC, Del
Monte tropical Fruit Company, Del Monte Fresh Produce, N.A., Dead Sea Bromine
Co. Ltd., Ameribrom Inc., Saint Lucia Banana Growers Association, Saint Vincent
Banana Growers Association, Dominica Banana Growers Association, and Program
Nacional de Banano, for any liability Dow Chemical Company may have under a
complaint filed by Jorge Colindres Carcamo, et al. vs. Shell, Dow, et al. (the
"Carcamo Case"). The Carcamo Case was heard in the United States District
Court for the Southern District of Texas, Houston Division, and is an action
originally filed in a Texas state court by a purported class of citizens from
Honduras, Costa Rica, Guatemala, Nicaragua, Panama, Philippines, Dominica, and
the Ivory Coast. These plaintiffs were banana workers and allege that they
were exposed to DBCP while applying the product in their native countries.
Approximately 15,000 plaintiffs have been named in this and the other suits
hereinafter mentioned. On an October 27, 1996 Court Order the third party
action against AMVAC was dismissed without prejudice as well as the Plaintiff's
consolidated cases ordering these claims to be litigated in the foreign
countries where the alleged injuries occurred subject to a number of
conditions. The Court Order is on Appeal to the U.S. Court of Appeals for the
Fifth District.
ii) The Rodriguez Case.
AMVAC was served with a third-party complaint on March 15,
1996 by Defendant Standard Fruit Company and Standard Steamship Company seeking
indemnity and contribution from any liability it may have under a complaint
entitled Ramon Rodriguez et. al. v. Shell Oil Company, et. al. (the "Rodriguez
Case") filed in the District Court of Jim Hogg County, Texas. The underlying
case alleges injuries caused by Plaintiffs' exposure to DBCP when they applied
that pesticide at farms located in Central America, Ecuador and the
Philippines. This Case was removed to the U.S. District Court for the Southern
District of Texas, Larado Division, and then moved to the U.S. District Court
for the Southern District of Texas, Houston
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Division. The Court dismissed the Plaintiff's case on December 20, 1996
ordering these claims to be litigated in the foreign countries where the
alleged injuries occurred subject to a number of conditions. The Court Order
is on Appeal to the U.S. Court of Appeals for the Fifth District.
iii) The Erazo Matter.
AMVAC was joined by Shell Oil Company as a third party
defendant in the case entitled Manuel Antonio Valderamos Erazo v. Shell Oil
Co., et. al. that was filed in the 206th District Court, Hildago County, Texas.
AMVAC was served in this matter on December 20, 1996; the same day which third
party defendant Dead Sea Bromine Company, Ltd. and Bromine Compounds Ltd.
removed the case to the U.S. District Court, Southern District of Texas,
McAllen Division. The complaint alleges the plaintiff suffered damages as a
result of exposure to DBCP while applying the product in his native country.
AMVAC filed an answer in the Federal Court on February 3, 1997. The parties
are waiting for the Court to rule on the Plaintiff's Motion to Remand to state
court.
E. Insurance Coverage
DBCP matters have been submitted to AMVAC's insurance carriers
(including its excess insurers). AMVAC is in discussions with its insurer(s)
over coverage issues.
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). AMVAC is vigorously defending this matter. The parties are
currently engaged in discovery which is anticipated to end in August of 1997.
AMVAC has made a demand against its insurers for indemnity and defense of the
Guzman Case. The insurer Lexington Insurance Company has thus far accepted the
defense under a reservations of rights letter. AMVAC has expensed
approximately $203,000 of its self-insured retention limit of $300,000 under
its insurance policy.
TRAIN DERAILMENTS
A. July 14, 1991; Dunsmuir, California:
In August 1992, the Company settled all personal and economic
injury claims asserted in a class action lawsuit arising from the July 14, 1991
derailment of a rail tank car leased by AMVAC. On March 14, 1995, the federal
court approved the Consent Decree which the Company and the federal and state
governments entered which settled litigation seeking to hold potentially
responsible parties under various federal and state statutes responsible for
the costs of studying and remediating the environmental consequences caused by
the Sacramento Spill, and for damages to the Natural Resources. On
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January 5, 1996, the Court dismissed a third party's appeal of a court order
dismissing their intervention which finally resolved the action.
B. February 1, 1996; Devore, California:
On March 7, 1996, AMVAC was served with a Complaint in an
action entitled Alvin Williams, Administrator of the Estate of Kevin Lewis
Williams v. Burlington Northern Santa Fe Railway Company, et. al. (the
"Williams Estate Case"). The Estate alleges pecuniary loss to family members
in the amount of $ 20,000,000 and prays for other unspecified monetary relief.
Other Defendants presently named in the suit are: Burlington Northern Santa Fe
Railway Company, The Atchison, Topeka & Santa Fe Railway Company, UNOCAL, Rohm
& Haas, and Westinghouse Corporation. At the time of this reporting AMVAC has
been dismissed from the case based on Plaintiff's failure to file an amended
pleading within twenty (20) calendar days from the Court's granting of AMVAC's
demurrer to Plaintiff's third amended complaint based upon the Plaintiff's lack
of standing to sue. Plaintiff's may file a motion for reinstatement of the
case.
The Company has made demand upon its insurers for indemnity
from and defense of the Williams Estate Case. AMVAC's primary carrier has not
yet responded but has cooperated with AMVAC in selecting counsel. AMVAC's
excess carrier has issued a reservation of rights letter disclaiming
responsibility for any exemplary and punitive damages awarded in the event of a
judgment against AMVAC.
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 $4 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.
RAILROAD SIDING
As a result of inspections and sampling conducted by or at the
direction of the California Department of Toxic Substances Control ("DTSC"),
environmental contamination was detected at the railroad siding area located,
in part, immediately adjacent to AMVAC's Commerce, California facility (the
"Facility"). The railroad siding area is owned by Burlington Northern and Santa
Fe Railway Company ("Santa Fe") and Union Pacific Railroad Company (" Union
Pacific").
12
15
In furtherance of addressing the railroad siding area under
the Expediated Remedial Action Program ("ERAP"), during 1996 AMVAC conducted
soil sampling to further define the nature and extent of impacted soils in the
railroad siding area, and prepared and submitted for DTSC review and comment a
draft risk assessment establishing remedial cleanup goals based on an
assumption of continued industrial use of the railroad siding area. In 1996 and
early 1997, AMVAC conducted additional soil sampling to assist it in further
evaluating remedial alternatives for the area. The future costs associated with
the remediation of the railroad siding area, which AMVAC believes could be
significant, cannot be definitively determined until the final characterization
of affected soils, determination of final cleanup standards, evaluation of
remedial options are completed, and the DTSC approves a specific remedial
action for the area. AMVAC currently anticipates that the foregoing will be
completed by the close of the second quarter of 1997, and that remediation will
commence in the third or fourth quarter of 1997.
Also during 1996, DTSC conducted a Resource Conservation and
Recovery Act ("RCRA") Facility Assessment ("RFA") at the Facility. The RFA was
conducted pursuant to a federal requirement that DTSC conduct such RFAs at all
RCRA permitted hazardous waste management facilities in California. The RFA
identified that further investigation of environmental conditions at the
Facility is necessary. The DTSC has advised AMVAC that AMVAC can conduct this
further investigation, and any related remediation if required, under DTSC
oversight using a phased approach under the ERAP, and AMVAC currently intends
to do so.
The Company has made claims against its insurance carriers for
the remediation of the railroad siding. Costs expensed to date now exceed its
$100,000 self-insured retention. The Company and its insurers are currently
discussing the claim. There can be no assurance that its insurers will provide
coverage for the remediation.
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16
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1996 to a vote
of security holders, through the solicitation of proxies or otherwise.
14
17
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's $0.10 par value common stock ("Common Stock") trades on
The NASDAQ Stock Market under the symbol AMGD. 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 1996 HIGH LOW
------------- ---- ---
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
Calendar 1995
-------------
First Quarter 9 6 5/8
Second Quarter 8 6 3/4
Third Quarter 7 3/4 4 1/2
Fourth Quarter 6 3/4 4 1/2
The Company's share activity is reported in the Wall Street
Journal and is listed as "Am Vngrd".
As of March 21, 1997, 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 12, 1997, the Company announced that the Board of
Directors declared a cash dividend of $.06 per share which will be distributed
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.
Prior to the declaration of the 1996 and 1997 dividends, the
Company had not declared any dividends since 1989. The resumption of dividends
can only be considered if profitable operations continue. Certain loan
covenants described in Note 4 to the Notes to Consolidated Financial
Statements, limit payments of cash dividends to a maximum of 25% of net income.
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18
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
ITEM 6 SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT FOR WEIGHTED AVERAGE
NUMBER OF SHARES AND PER SHARE DATA)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Operating revenues $ 48,628 $ 55,402 $ 45,098 $ 45,478 $ 38,664
========= ========= ========= ========= =========
Operating income $ 3,523 $ 5,971 $ 3,346 $ 4,160 $ 3,824
========= ========= ========= ========= =========
Income from operations
before income tax
expense $ 2,611 $ 5,043 $ 1,465 $ 3,333 $ 2,965
========= ========= ========= ========= =========
Net income $ 1,616 $ 3,124 $ 1,203 $ 2,225 $ 1,861
========= ========= ========= ========= =========
Net income
per share(1) $ .65 $ 1.23 $ .47 $ .89 $ .74
========= ========= ========= ========= =========
Total assets $ 48,028 $ 39,341 $ 40,929 $ 36,025 $ 32,916
========= ========= ========= ========= =========
Long-term debt and capital
lease obligations, less
current portion $ 4,373 $ 5,540 $ 3,695 $ 4,316 $ 5,348
========= ========= ========= ========= =========
Stockholders' equity $ 19,386 $ 18,005 $ 15,143 $ 13,503 $ 11,278
========= ========= ========= ========= =========
Weighted average number
of shares(1) 2,472,883 2,546,471 2,562,398 2,509,536 2,509,536
========= ========= ========= ========= =========
Dividends per share of
common stock(2) $ .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, 1996, 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 Report on Form 10-K for the three
years ended December 31, 1996. 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.
On March 12, 1997, the Company announced that the Board of Directors
declared a cash dividend of $.06 per share to be distributed on March 31, 1997
to shareholders of record at the close of business on March 20, 1997.
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19
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
RESULTS OF OPERATIONS
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 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
17
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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 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
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21
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 5 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.
1995 COMPARED WITH 1994:
The Company reported net income of $3,124,000 or $1.23 per
share in 1995 as compared to net income of $1,202,700 or $.47 per share in
1994. (All per share amounts have been restated to give effect to a 10% stock
dividend paid on March 15, 1996 to stockholders of record as of February 29,
1996.) The increase in net income in 1995 is attributable to a 22.8% increase
in net sales which is primarily related to increases in volume of products sold
and not to increases in prices, while operating expenses increased only 15.7%.
Another significant factor is that there were no legal settlement costs
incurred during 1995. The positive factors are mitigated to an extent by an
increase in the effective income tax rate to 38% in 1995 from 17% in 1994.
19
22
Net sales increased by $10,304,000 to $55,402,100 in 1995 as
compared to $45,098,100 in 1994. AMVAC's sales increased by approximately
$10,632,000 in 1995 as compared to 1994. $8,945,200 of this increase was due
to an increase in the sales of Bidrin(R). In December 1994 the appropriate
permitting was finally obtained and the Company began manufacturing Bidrin(R).
The late start in manufacturing resulted in reduced sales of Bidrin(R) in 1994,
however the latent demand was satisfied in the first half of 1995 resulting in
strong Bidrin(R) sales in the first and second quarters of 1995. Sales of
Bidrin(R) in the fourth quarter 1995 were significantly higher than the fourth
quarter 1994. During 1995 AMVAC was also able to generate significant sales
increases in its PCNB products of $4,187,900 to $12,002,100 as compared to
$7,814,200 in 1994 and Naled products of $3,541,600 to $6,393,900 from
$2,852,300 in 1994. However, these increases were substantially offset by a
decrease in the sales of Phosdrin(R) in the amount of $6,755,900 to $413,000 in
1995 from $7,169,000 in 1994. As a result of agreements reached with the
Environmental Protection Agency ("EPA") during 1994, the Company agreed to
phaseout the domestic distribution, sale and use of Phosdrin(R). Although the
effective date of the cessation of Phosdrin(R) use domestically was November
30, 1995, domestic sales of Phosdrin(R) began to drop off significantly
beginning in July 1994. Essentially all of the Phosdrin(R) sales in 1995 were
export sales. The remaining change in AMVAC's sales was attributable to less
significant changes in the sales mix of AMVAC's products. GemChem's sales
(after elimination of intercompany sales) declined from approximately
$4,700,000 in 1994 to approximately $4,200,000 in 1995 reflecting competition
in GemChem's non-ag markets.
Gross profits increased by $4,928,600 to $24,660,400 in 1995
as compared to $19,731,800. The increase in 1995 is a result of the higher
volume of sales in 1995. The gross profit percentage increased to 44.5% in
1995 from 43.8% in 1994. While the phaseout of Phosdrin(R), a very profitable
product, had a negative impact on gross profit in 1995, the overall gross
profit percentage increased as the sales volume increased proportionately
higher than cost of sales.
Operating expenses increased by $2,533,800 to $18,689,400 in
1995 from $16,155,600 in 1994. The following is a discussion of operating
expenses:
Selling and Regulatory:
Selling and regulatory expenses increased by $2,190,200 to $6,772,900
in 1995 from $4,582,700 in 1994. The increase in selling and
regulatory expenses is primarily attributable to an increase in
variable selling costs. Due to the significant increase in Bidrin(R)
sales in 1995, related Bidrin(R) rebates and royalties increased by
approximately $1,360,000. Rebates and royalties on NAA products
increased approximately $943,500 in 1995 primarily as a result of
agreements with distributors to promote the Company's products in the
market. Expenses of GemChem increased
20
23
approximately $334,000 in 1995. Product liability insurance, which
varies directly with sales levels, also increased approximately
$160,000 in 1995 as a result of the increased sales volume. The only
significant decrease in selling and regulatory costs was attributable
to a $647,000 decline in Phosdrin(R) related rebates which was a
result of the phase out of Phosdrin(R).
Research and Development:
Research and development costs, which include costs incurred to
generate scientific data and other activities performed in the
department, decreased by $1,365,100 to $4,846,400 in 1995 from
$6,211,500 in 1994. Costs incurred to generate scientific data
decreased by $1,826,600 to $3,717,400 in 1995 as compared to
$5,544,000 in 1994. The largest reduction in scientific data
generation was in connection with Phosdrin(R). Due to the phase out
of Phosdrin(R) as discussed above, data generation costs with respect
to Phosdrin(R) decreased approximately $1,236,000 in 1995 to
approximately $54,000. The NAA, DDVP and PCNB product groups also
experienced significant declines in scientific data generation of
approximately $301,000, $239,000 and $196,000, respectively, in 1995
due to the maturation of the products and of the related research
studies being conducted. Bidrin(R), which is a relatively recent
addition to AMVAC's product line, was the only major product group to
experience an increase in scientific data generation in 1995.
Bidrin(R) scientific data generation costs increased approximately
$212,000 in 1995. In 1994 the Company received a benefit of $350,000
as a result of an unrelated chemical company paying the Company for
the right to cite and rely upon data developed by the Company. The
Company did not receive any benefits of this kind in 1995.
Freight, Delivery and Warehousing:
Freight, delivery and warehousing costs increased by $447,600 to
$3,008,300 in 1995 from $2,560,700 in 1994. The increase in costs is
primarily due to increased freight costs as a result of the higher
sales at AMVAC and additions to shipping department personnel to
handle the additional demand.
General, Administrative and Corporate:
General, administrative and corporate costs increased by $1,261,100 to
$4,061,800 in 1995 from $2,800,700 in 1994. The increase was
primarily attributable to environmental consulting projects and legal
fees which accounted for approximately $913,700. Additionally, the
Company elected to provide for the remaining expected costs in
connection with the phase out of Phosdrin(R) in the amount of
$175,000.
Interest costs were $935,400 in 1995 as compared to $978,200
in 1994. The average level of short-term borrowing
21
24
decreased by $313,900 to $6,526,200 in 1995 from $6,840,100 in 1994. The
average level of long-term debt declined by $1,552,400 to $3,816,600 in 1995
from $5,369,000 in 1994. The reduction in the average debt and the change in
effective interest rates accounted for the decrease in interest costs in 1995.
Income tax expense increased by $1,657,200 to $1,919,000 in
1995 as compared to $261,800 in 1994. Higher pre-tax income combined with
lower tax credits are the reason for the increased income tax expense. See
Note 5 to the Consolidated Financial Statements for additional analysis of the
changes in income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $17,852,900 as of December 31, 1996 reflecting a $2,158,300
improvement over working capital of $15,694,600 as of December 31, 1995.
Current assets were $4,696,800 higher at December 31, 1996 than at December 31,
1995. Most of this increase was attributable to increases in trade accounts
receivable and inventory. Trade receivables increased $1,301,600 due to strong
sales in the month of December. Inventories increased $3,080,700 primarily in
consideration of expected sales volume in 1997.
Current liabilities increased $2,538,500 in 1996 over the 1995 level. The
primary reasons for this increase were the recording of liabilities in the
amount of $1,600,000, representing the estimated current portion of a royalty
obligation, and $713,800, for the acquisition of the existing product inventory
as of December 31, 1996, both in connection with the acquisition of an
established product line by the Company in December 1996. Also during 1996,
there were increases in accrued but unpaid royalties and rebates of $332,000
and $400,000, respectively, related to two of the Company's products. The
increases in current liabilities were partially offset by a decrease in Phosdrin
rebates of approximately $200,000 due to the recall of Phosdrin completed in
July 1996 and a decrease in income taxes payable of $420,100 due to lower income
taxes in 1996.
The Company invested $1,451,400 in capital expenditures in 1996. These
expenditures represent additions or improvements to 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 $76,200 in deferred
charges in 1996, most of which relate to the Company's acquisition of a new
product line during the year. The Company also invested $150,000 in other
long-term assets during 1996, most of which related to loan fees incurred in
connection with
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25
the amendment of the Company's credit facilities as discussed below. The
Company recognized $2,349,100 of depreciation and amortization expense in 1996.
As of December 31, 1996, the Company does not have any material commitments for
future capital expenditures. The Company's long-term intangible assets also
increased by $4,662,000 as the result of the acquisition of a new product line
by the Company in December 1996. The Company recorded a royalty obligation of
$4,662,000 in consideration of the assets acquired with $3,062,000 classified
as a long- term liability.
As part of an amendment to the Company's credit agreement in December 1996, the
Company increased its credit limit under its fully secured existing line of
credit to $15,500,000 from $10,500,000 and extended the expiration date of the
line of credit to July 31, 1998 from July 31, 1997. Also, as part of the
amendment, the Company negotiated a new revolving acquisition loan in the
amount of $5,000,000 with an expiration date of July 31, 2002. There were no
borrowings under the revolving acquisition loan as of December 31, 1996. The
Company had $8,500,000 of availability under its line of credit agreement as of
December 31, 1996. The Company made principal payments on its long-term debt
of $1,368,100 during 1996.
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 $3,600,000
in 1997 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 1997. 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.
Inflation has not had a significant impact on the Company's costs and prices
during the past three years.
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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.
24
27
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
25
28
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 73 Co-Chairman
Glenn A. Wintemute 72 Co-Chairman
Eric G. Wintemute 41 Director, President and
Chief Executive Officer
James A. Barry 46 Director, Vice President,
Chief Financial Officer,
Treasurer and Assistant
Secretary
Glenn E. Mallory 87 Director and Corporate
Secretary
Dr. Alan B. Sass 58 Director
Jesse E. Stephenson 73 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 & 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 since June 1994. Mr.
Barry was appointed Treasurer in July 1994. He has served as Chief Financial
Officer of the Company and all
26
29
operating subsidiaries since 1987, and as Vice President and 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.
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 1996 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, except that one report on
Form 4 was filed late by Mr. Glenn A. Wintemute.
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ITEM 11 EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash and other
compensation for services rendered for the years ended December 31, 1996, 1995,
and 1994 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 $100,000 (the "named executive officers").
28
31
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------- ------ -------
(A) (B) (C) (D) (E) (F) (G) (H) (I)
OTHER RE- SECURITIES ALL
NAME ANNUAL STRICTED UNDERLYING OTHER
AND COMPEN- STOCK OPTIONS/ LTIP COMPEN-
PRINCIPAL SALARY BONUS SATION AWARD(S) SARS PAYOUTS SATION
POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
-------- ---- ------- ------ -------- --------- --------- ------- --------
Eric G. Wintemute 1996 201,306 - - - - - 4,855(4)
President and 1995 172,000 - - - - - 4,993(4)
Chief Executive 1994 140,771 - - - 33,000(2) - 4,990(4)
Officer
James A. Barry 1996 129,692 - - - - - 3,457(4)
Vice President, CFO 1995 122,751 - - - 5,500(3) - 4,070(4)
and Treasurer 1994 103,009 - - - - - 3,245(4)
Herbert A. Kraft(5) 1996 - - - - - - 226,923(6)
Co-Chairman 1995 - - - - - - 254,086(6)
1994 142,008 - - - - - 131,857(7)
Glenn A. Wintemute(5) 1996 - - - - - - 226,923(6)
Co-Chairman 1995 - - - - - - 254,086(6)
1994 141,171 - - - - - 131,857(7)
___________________
(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 issued
to Eric Wintemute in connection with the acquisition of GemChem, Inc., by the
Company during 1994. The options issued to Mr. Wintemute represent
approximately 43% of the total options issued by the Company in 1994. The
exercise price of the options is $9.09 per share and the options vest one-fourth
on January 15, 1995, 1996, 1997 and 1998 and all options expire on April 15,
1998.
(3) 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.
(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) 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.
(6) Amounts represent payments received by each individual under his
consulting agreement.
(7) Amounts include $127,164 paid to each individual under his
consulting agreement and the Company's contribution of $4,693 on behalf of each
individual as a retirement savings plan contribution.
29
32
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board consists of Messrs. Herbert A.
Kraft, Jesse E. Stephenson and James A. Barry. 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.
30
33
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 21, 1997, 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 704,985(2) 28.1%
4695 MacArthur Court
Newport Beach, CA 92660
Co-Chairman Herbert A. Kraft 639,295(3) 25.5%
4695 MacArthur Court
Newport Beach, CA 92660
Goldsmith & Harris et al. 153,560(4) 6.1%
80 Pine Street
New York, NY 10005
Director Jesse E. Stephenson 55,850(5) 2.2%
4695 MacArthur Court
Newport Beach, CA 92660
Director, Eric G. Wintemute 61,553(6) 2.4%
President 4695 MacArthur Court
& CEO Newport Beach, CA 92660
Director, James A. Barry 3,667(7) --(10)
Vice President, 4695 MacArthur Court
CFO & Treasurer Newport Beach, CA 92660
Director Dr. Allan Sass 3,500(8) --(10)
4695 MacArthur Court
Newport Beach, CA 92660
Director Glenn E. Mallory 2,500(9) --(10)
4695 MacArthur Court
Newport Beach, CA 92660
Directors and Officers 1,481,350 58.2%
as a group (8)
- ---------------------
Refer to footnotes on next page.
31
34
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 2,500 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 24,750 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 2,500 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) Under 1% of class.
32
35
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In September 1991, the Company entered into an agreement with
GemChem to represent the Company as its sales representative. No director,
officer or significant shareholder of the Company had any direct or indirect
relationship with or interest in GemChem; however, Eric G. Wintemute, the
Company's President and Chief Executive Officer and the son of the Company's
then President Glenn A. Wintemute, owned an approximate one-third equity
interest in GemChem.
In March 1994, the Company concluded the purchase of all the
issued and outstanding stock of GemChem. The purchase was effective January
15, 1994. See also Note 11 of the Notes to the Consolidated Financial
Statements in PART IV, Item 14 of this Annual Report.
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 and $243,750 for the year
ended July 14, 1996. They will also, under the agreements, each receive
$200,000 for the year ending July 14, 1997, $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 12 of the Notes to the Consolidated Financial Statements in PART IV,
Item 14 of this Annual Report.
33
36
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 37
Financial Statements:
Consolidated Balance Sheets as of
December 31, 1996 and 1995 38
Consolidated Statements of Income for
the Years Ended December 31, 1996, 1995,
and 1994 40
Consolidated Statements of Changes in
Stockholders' Equity for the Years Ended
December 31, 1996, 1995, and 1994 41
Consolidated Statements of Cash Flows for
the Years Ended December 31, 1996, 1995,
and 1994 42
Summary of Significant Accounting Policies
and Notes to Consolidated Financial
Statements 44
(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.
34
37
(3) Exhibits:
The exhibits listed on the accompanying Index To Exhibits, page
59, are filed as part of this annual report.
(b) Reports on Form 8-K were filed during the quarter ended
December 31, 1996.
None.
35
38
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, Vice President,
Chief Executive Officer Chief Financial Officer,
and Director Treasurer and Director
March 24, 1997 March 24, 1997
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 24, 1997 March 26, 1997
/s/ Glenn E. Mallory /s/ Allan Sass
- ----------------------- --------------------
GLENN E. MALLORY ALLAN SASS
Corporate Secretary and Director
Director March 25, 1997
March 25, 1997
/s/ Jesse E. Stephenson
- -----------------------
JESSE E. STEPHENSON
Director
March 26, 1997
36
39
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, 1996 and 1995 and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
March 6, 1997
37
40
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS (NOTE 4) 1996 1995
---- ----
Current assets:
Cash $ 632,400 $ 331,600
Receivables:
Trade 16,529,900 15,228,300
Legal settlements (note 7) - 195,000
Other 198,800 62,700
---------- ----------
16,728,700 15,486,000
---------- ----------
Inventories:
Finished products 8,108,800 6,001,600
Raw materials 3,241,500 2,268,000
---------- -----------
11,350,300 8,269,600
---------- -----------
Prepaid expenses 653,600 581,000
---------- ----------
Total current assets 29,365,000 24,668,200
Property, plant and equipment, at cost,
less accumulated depreciation of
$16,284,300 in 1996 and $14,079,900
in 1995 (notes 1,3,4, and 6) 12,927,500 13,680,400
Land held for development 210,800 210,800
Costs in excess of net assets acquired, net of
accumulated amortization of $199,300 in
1996 and $165,900 in 1995 (note 11) 3,532,200 442,100
Deferred charges, net of accumulated
amortization of $25,000 in 1996 and
$6,035,600 in 1995 (notes 2 and 11) 1,660,100 57,900
Other assets 332,700 281,600
---------- ----------
$48,028,300 $39,341,000
========== ==========
(Continued)
38
41
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
---- ----
Current liabilities:
Current installments of long-term debt (note 3) $ 1,160,500 $ 1,265,600
Accounts payable 3,002,300 2,810,800
Accrued expenses 4,750,600 3,486,200
Accrued royalty obligation-current portion (note 11) 1,600,000 -
Income taxes payable 946,200 1,366,300
Legal settlements payable (note 7) 52,500 44,700
---------- ----------
Total current liabilities 11,512,100 8,973,600
Note payable to bank (note 4) 7,000,000 3,900,000
Long-term debt, excluding current
installments (note 3) 4,373,100 5,539,500
Accrued royalty obligation, excluding
current portion (note 11) 3,062,000 -
Deferred income taxes (note 5) 2,695,600 2,922,500
---------- ----------
Total liabilities 28,642,800 21,335,600
---------- ----------
Commitments and contingent liabilities
(notes 3, 4, 6, 7, 10 and 12)
Stockholders' equity: (notes 12 and 14)
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
2,564,429 shares in 1996 and 2,331,371
shares in 1995 256,400 233,100
Additional paid-in capital 3,879,000 1,688,200
Retained earnings 15,609,000 16,345,600
---------- ----------
19,744,400 18,266,900
Less treasury stock, 56,600 shares in 1996
and 38,500 shares in 1995 358,900 261,500
---------- ----------
Total stockholders' equity 19,385,500 18,005,400
---------- ----------
$48,028,300 $39,341,000
========== ==========
See summary of significant accounting policies and notes to consolidated
financial statements.
39
42
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
---- ---- ----
Net sales (note 9) $48,627,900 $55,402,100 $45,098,100
Cost of sales 28,280,000 30,741,700 25,366,300
---------- ---------- ----------
Gross profit 20,347,900 24,660,400 19,731,800
Operating expenses (note 13) 16,824,900 18,689,400 16,155,600
Legal settlement expenses (note 7) - - 230,000
---------- ---------- ----------
Operating income 3,523,000 5,971,000 3,346,200
Interest expense (919,900) (935,400) (978,200)
Interest income 8,300 7,400 6,500
Other settlement expenses (note 7) - - (910,000)
---------- ---------- ----------
Income before
income tax expense 2,611,400 5,043,000 1,464,500
Income tax expense (note 5) 995,900 1,919,000 261,800
---------- ---------- ----------
Net income $ 1,615,500 $ 3,124,000 $ 1,202,700
========== ========== ==========
Per share information:
Net income $ .65 $ 1.23 $ .47
========== ========== ==========
Weighted average number
of shares 2,472,883 2,546,471 2,562,398
========== ========== ==========
See summary of significant accounting policies and notes to consolidated
financial statements.
40
43
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
------ ---------- -------- -------- -----
Balance, January 1, 1994 $228,100 $1,255,700 $12,018,900 $ - $13,502,700
Common stock issued in
connection with
acquisition of
GemChem, Inc. 5,000 432,500 - - 437,500
(note 11)
Net income - - 1,202,700 - 1,202,700
------- --------- ---------- ---------- ----------
Balance, December 31, 1994 233,100 1,688,200 13,221,600 - 15,142,900
Net income - - 3,124,000 - 3,124,000
Treasury stock acquired - - - (261,500) (261,500)
------- --------- ---------- ---------- ----------
Balance, December 31, 1995 233,100 1,688,200 16,345,600 (261,500) 18,005,400
Common stock dividend 23,300 2,190,800 (2,214,100) - -
Cash dividends on common
stock ($.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
======= ========= ========== ========== ===========
See summary of significant accounting policies and notes to consolidated
financial statements.
41
44
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
INCREASE (DECREASE) IN CASH 1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income $ 1,615,500 $ 3,124,000 $ 1,202,700
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization
of property, plant and equipment 2,204,300 2,098,700 2,012,000
Amortization of intangible
assets and deferred charges 144,800 1,316,600 1,485,800
Changes in assets and liabilities
associated with operations:
Increase in receivables (1,242,700) (5,400) (4,621,500)
Increase in inventories (3,080,700) (1,051,700) (1,785,100)
Decrease (increase)
in prepaid expenses (72,600) 348,700 (66,400)
Increase (decrease) in
accounts payable 191,500 (80,800) 833,100
Increase (decrease) in other
payables and accrued expenses 852,100 (2,279,100) 2,896,800
Increase (decrease) in
deferred income taxes (226,900) 105,200 (221,500)
---------- ---------- ----------
Net cash provided by
operating activities 385,300 3,576,200 1,735,900
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures (1,451,400) (755,000) (939,200)
Additions to deferred charges (76,200) (226,500) (520,900)
Net increase in other
noncurrent assets (150,000) (123,800) (4,100)
---------- ---------- ----------
Net cash used in
investing activities (1,677,600) (1,105,300) (1,464,200)
---------- ---------- ----------
(Continued)
42
45
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
INCREASE (DECREASE) IN CASH 1996 1995 1994
---- ---- ----
Cash flows from financing activities:
Net borrowings (repayments) under
line of credit agreement $ 3,100,000 $(4,100,000) $ 400,000
Proceeds from issuance of
long-term debt 96,600 3,702,300 592,000
Principal payments on long-term debt (1,368,100) (1,797,800) (1,236,800)
Acquisition of treasury stock (97,400) (261,500) -
Payment of cash dividends (138,000) - -
---------- ---------- ----------
Net cash provided by
(used in) financing
activities 1,593,100 (2,457,000) (244,800)
---------- ---------- ----------
Net increase in cash 300,800 13,900 26,900
Cash at beginning of year 331,600 317,700 290,800
---------- ---------- ----------
Cash at end of year $ 632,400 $ 331,600 $ 317,700
========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 851,500 $ 1,011,100 $ 993,100
Income taxes 1,630,900 1,119,800 940,800
========== ========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During 1994, in connection with the acquisition of GemChem, Inc. (see note 11),
as part of the purchase price, the Company issued 50,000 shares of its common
stock with a fair value of $437,500.
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 11). 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.
43
46
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DECEMBER 31, 1996 AND 1995
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. (see note 11),
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.
Intangible Assets
Intangible assets resulting from business acquisitions (see note 11), 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 15 years. Management has a
policy to review intangible assets and other 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.
Depreciation
Depreciation of property, plant and equipment is calculated on the
straight-line method over the estimated useful lives of the assets.
44
47
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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 and approximate respective carrying values.
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
Earnings per share amounts are computed based on the weighted average number of
shares of common stock. Common stock equivalents, which consisted of options to
purchase the Company's common stock, were anti-dilutive in 1996, 1995 and 1994.
Earnings per share 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.
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.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS No. 121") issued by the Financial Accounting Standards Board ("FASB") is
effective for financial statements for fiscal years beginning after December
15, 1995. The new standard establishes guidelines regarding when impairment
losses on long-lived assets, which include plant and equipment, and certain
identifiable intangible assets, should be recognized and how impairment losses
should be measured. The Company's adoption of this pronouncement did not have
a material effect on its financial position or results of operations for the
year ended December 31, 1996.
Statements of Financial Accounting Standards No. 123, "Accounting for the
Stock-Based Compensation" ("SFAS No. 123") issued by the FASB is effective for
specific transactions entered into after December 15, 1995, while the
disclosure requirements of SFAS No. 123 are effective for financial statements
for fiscal years beginning no later than December 15, 1995. The new standard
establishes a fair value method of
45
48
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
accounting for stock-based compensation plans and for transactions in which an
entity acquires goods or services from non-employees in exchange for equity
instruments. The Company's adoption of this pronouncement did not have a
material effect on its financial position or results of operations for the year
ended December 31, 1996.
Reclassifications
Certain prior years' amounts have been reclassified to conform to the current
year's presentation.
46
49
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(1) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1996 and 1995 consists of
the following:
ESTIMATED
1996 1995 USEFUL LIVES
---- ---- ------------
Land $ 2,382,600 $ 2,319,800
Buildings and improvements 3,812,300 3,539,900 10 to 30 years
Machinery and equipment 20,677,000 19,998,800 3 to 10 years
Office furniture and fixtures 1,031,400 971,800 3 to 10 years
Automotive equipment 105,000 105,000 3 to 6 years
Construction in progress 1,203,500 825,000
---------- ----------
29,211,800 27,760,300
Less accumulated depreciation 16,284,300 14,079,900
---------- ----------
$12,927,500 $13,680,400
========== ==========
(2) DEFERRED CHARGES
During 1995, the Company capitalized $185,000 in deferred charges
relating to certain Environmental Protection Agency study costs for
a new product the Company began producing in October 1990. Amortization
of these costs began in October 1990, and was provided by the units of
production method over a period of five years through September 1995.
Total study costs incurred and capitalized through September 1995 for
this product approximated $5,812,500. See note 11 for composition of
deferred charges as of December 31, 1996.
47
50
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) LONG-TERM DEBT
Long-term debt of the Company at December 31, 1996 and 1995 is summarized
as follows:
1996 1995
---- ----
Note payable, secured by certain real
property, renewed and amended in
September 1995, principal increased
to $5,250,000, payable in 60 fixed
monthly installments of $87,500
commencing January 1, 1996,
plus interest at prime plus .5%
(prime was 8.25% at December 31, 1996),
with remaining unpaid principal
due December 1, 2000 $ 4,112,500 $ 5,250,000
Note payable, secured by certain
real property, refinanced in August 1996,
payable in 66 fixed monthly installments
of $13,335, plus interest at prime plus .5%
with remaining unpaid principal due
February 1, 2002 1,266,500 1,439,900
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% 94,900 -
Obligations under capitalized
leases (see note 6) 59,700 115,200
---------- ----------
5,533,600 6,805,100
Less current installments 1,160,500 1,265,600
---------- ----------
$ 4,373,100 $ 5,539,500
========== ==========
Approximate principal payments on long-term debt mature as follows:
1997 $1,160,500
1998 1,225,600
1999 1,214,200
2000 1,214,600
2001 238,900
Thereafter 479,800
---------
$5,533,600
=========
(4) NOTE PAYABLE TO BANK
Under a credit agreement with a bank, the Company may borrow up to
$15,500,000. The note bears interest at a rate of prime plus .25%
(prime was 8.25% at December 31, 1996), which is payable monthly.
Additionally, the Company, at its option, may pay a fixed rate 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, 1998. The
Company had $8,500,000 available under this credit agreement as of
December 31, 1996. The credit agreement, among other financial
covenants, limits payments of cash dividends to a maximum of 25% of
net
48
51
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
income. The Company was in compliance with the financial covenants as
of December 31, 1996. The balance outstanding at December 31, 1996
and 1995 was $7,000,000 and $3,900,000. The average amount
outstanding during the years ended December 31, 1996 and 1995 was
$4,423,500 and $6,526,200. The weighted average interest rate during
the years ended December 31, 1996 and 1995 was 8.17% and 9.10%.
(5) INCOME TAXES
The components of income tax expense are:
1996 1995 1994
---- ---- ----
Current:
Federal $ 936,400 $1,255,400 $ 490,000
State 285,200 539,800 (16,800)
Other, primarily foreign 1,200 18,600 10,100
Deferred:
Federal (134,000) 242,300 (138,500)
State (92,900) (137,100) (83,000)
---------- --------- ---------
$ 995,900 $1,919,000 $ 261,800
========== ========= =========
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:
1996 1995 1994
---- ---- ----
Computed tax provision at
statutory Federal rates $ 887,900 $1,714,600 $ 497,900
Increase (decrease) in
taxes resulting from:
State taxes, net of
Federal income tax
benefit 144,000 300,600 30,400
Refund of prior year
State income taxes from
utilization of net
operating loss
carryforward - - (145,900)
Nondeductible expenses 28,000 33,000 68,600
Other 1,900 18,600 10,100
Benefit of research and
development and
alternative minimum
tax credits (65,900) (147,800) (199,300)
---------- --------- ---------
$ 995,900 $1,919,000 $ 261,800
========== ========= =========
49
52
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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, 1996 and 1995 relate to the
following:
1996 1995
---- ----
Plant and equipment, principally due
to differences in depreciation and
capitalized interest $3,222,400 $3,405,300
Inventories, principally due to
additional costs inventoried for
tax purposes pursuant to the Tax
Reform Act of 1986 (285,300) (150,300)
State income taxes (73,000) (153,600)
Vacation pay accrual (94,300) (92,400)
Accrual for product recall costs - (70,200)
Accrual for railroad remediation (60,200) -
Other (14,000) (16,300)
--------- ---------
Net deferred income tax liability $2,695,600 $2,922,500
========= =========
The Company believes it is more likely than not that the deferred tax
assets above will be realized in the normal course of business.
(6) 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 $241,800
Office furniture and fixtures 204,300
-------
446,100
Less accumulated depreciation 191,300
-------
$254,800
=======
50
53
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following is a schedule of future minimum lease payments for
capital leases as of December 31, 1996:
Year ending December 31:
1997 $ 51,300
1998 11,900
--------
Total minimum lease payments 63,200
Less amount representing interest 3,500
-------
Present value of net minimum lease payments $ 59,700
=======
(7) LITIGATION AND ENVIRONMENTAL
DBCP LAWSUITS
A. California Matters
In 1995 AMVAC settled twenty-three similar lawsuits filed between
January 1990 and December 1994. The Plaintiffs in each matter were
primarily water districts and municipalities that alleged property
damage resulting from, among other things, the fact that each
plaintiff's water supply had been contaminated by Dibromochloropropane
("DBCP"). On February 15, 1995, the Superior Court of California in
San Francisco County approved this settlement as having been made in
"good faith". The effect of the Superior Court's approval is to bar
claims, arising from these pleadings, against AMVAC by other
defendants (and other tortfeasors) for equitable comparative
contribution and/or partial or comparative indemnity. AMVAC's portion
of the settlement was $905,000.
Subsequent to the settlements discussed above, two additional suits
alleging property damage resulting from DBCP contamination of water
supply were filed in the San Francisco Superior Court and served on
AMVAC: City of Madera v. Shell Oil Co., et. al., and Malaga County
Water District v. Shell Oil Co., et. al. A Settlement Conference was
held on these two cases on December 18, 1996. At that time both cases
were settled. AMVAC's contribution to Settlement of the Madera case
is $3,500. AMVAC's contribution to the Malaga County Water District
case is $6,500. The City of Madera and the Malaga Count Water
District have accepted the respective settlements. Each Settlement is
subject to the court approval as a good faith settlement.
On February 18, 1997, AMVAC was served with a Complaint in the action
filed in the San Francisco Superior Court entitled Sultana Community
Services District v. Shell Oil Co., et.al. The Compliant alleges
property damage resulting from DBCP contamination of water supply.
This suit names as defendants Shell Oil Company, Dow Chemical Company,
Occidental Chemical Company, Chevron Chemical Company, Amvac Chemical
Corporation, and Velsicol Chemical Company. As the suit has just been
served none of the defendants have answered the complaint, accordingly
formal discovery has not yet begun. It is currently impossible to
51
54
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
predict the outcome or the cost that will be involved in the defense
of this matter.
B. Hawaiian Matter
AMVAC and the Company were served with Complaints, on February 6, 1997
and March 5, 1997 respectively, in which each is 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 Compliant alleges property damage resulting
from DBCP contamination of the Board's water wells. As the suit has
just been served none of the defendants have answered the complaint,
accordingly formal discovery has not yet begun. 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 are filed in the Circuit Court of
Harrison County, First Judicial District of Mississippi. Each case
alleges 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. Defendants are waiting
for the Court's ruling on their Motion to Dismiss based on Forum Non
Conveniens and Comity grounds and the Plaintiff's Motion to Remand the
case to State court. It is currently impossible to predict the
outcome or the cost that will be involved in the defense of this
matter.
D. Texas Matters
i) The Carcamo Case.
AMVAC was served with a third-party first amended complaint by Dow
Chemical Company which sought indemnity and contribution from AMVAC,
Del Monte tropical Fruit Company, Del Monte Fresh Produce, N.A., Dead
Sea Bromine Co. Ltd., Ameribrom Inc., Saint Lucia Banana Growers
Association, Saint Vincent Banana Growers Association, Dominica Banana
Growers Association, and Program Nacional de Banano, for any liability
Dow Chemical Company may have under a complaint filed by Jorge
Colindres Carcamo, et al. vs. Shell, Dow, et al. (the "Carcamo Case").
The Carcamo Case was heard in the United States District Court for the
Southern District of Texas, Houston Division, and is an action
originally filed in a Texas state court by a purported class of
citizens from Honduras, Costa Rica, Guatemala, Nicaragua, Panama,
Philippines, Dominica, and the Ivory Coast. These plaintiffs were
banana workers and allege that they were exposed to DBCP while
applying the product in their native countries. Approximately 15,000
plaintiffs have been named in this and the other suits hereinafter
mentioned. On an October 27, 1996 Court Order the third party action
against AMVAC was dismissed without prejudice as well as the
Plaintiff's consolidated cases ordering these claims to be litigated
in the foreign countries where the alleged injuries occurred subject
to a number of conditions. The Court Order is on Appeal to the U.S.
Court of Appeals for the Fifth District.
52
55
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
ii) The Rodriguez Case.
AMVAC was served with a third-party complaint on March 15, 1996 by
Defendant Standard Fruit Company and Standard Steamship Company
seeking indemnity and contribution from any liability it may have
under a complaint entitled Ramon Rodriguez et. al. v. Shell Oil
Company, et. al. (the "Rodriguez Case") filed in the District Court of
Jim Hogg County, Texas. The underlying case alleges injuries caused
by Plaintiffs' exposure to DBCP when they applied that pesticide at
farms located in Central America, Ecuador and the Philippines. This
Case was removed to the U.S. District Court for the Southern District
of Texas, Larado Division, and then moved to the U.S. District Court
for the Southern District of Texas, Houston Division. The Court
dismissed the Plaintiff's case on December 20, 1996 ordering these
claims to be litigated in the foreign countries where the alleged
injuries occurred subject to a number of conditions. The Court Order
is on Appeal to the U.S. Court of Appeals for the Fifth District.
iii) The Erazo Matter.
AMVAC was joined by Shell Oil Company as a third party defendant in
the case entitled Manuel Antonio Valderamos Erazo v. Shell Oil Co.,
et. al. that was filed in the 206th District Court, Hildago County,
Texas. AMVAC was served in this matter on December 20, 1996; the same
day which third party defendant Dead Sea Bromine Company, Ltd. and
Bromine Compounds Ltd. removed the case to the U.S. District Court,
Southern District of Texas, McAllen Division. The complaint alleges
the plaintiff suffered damages as a result of exposure to DBCP while
applying the product in his native country. AMVAC filed an answer in
the Federal Court on February 3, 1997. The parties are waiting for
the Court to rule on the Plaintiff's Motion to Remand to state court.
E. Insurance Coverage
DBCP matters have been submitted to AMVAC's insurance carriers
(including its excess insurers). AMVAC is in discussions with its
insurer(s) over coverage issues.
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). AMVAC is vigorously defending
this matter. The parties are currently engaged in discovery which is
anticipated to end in August of 1997. AMVAC has made a demand against
its insurers for indemnity and defense of the Guzman Case. The
insurer Lexington Insurance Company has thus far accepted the defense
under a reservations of rights letter. AMVAC has expensed
approximately $203,000 of its self-insured retention limit of $300,000
under its insurance policy.
53
56
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
TRAIN DERAILMENTS
A. July 14, 1991; Dunsmuir, California:
In August 1992, the Company settled all personal and economic injury
claims asserted in a class action lawsuit arising from the July 14,
1991 derailment of a rail tank car leased by AMVAC. On March 14,
1995, the federal court approved the Consent Decree which the Company
and the federal and state governments entered which settled litigation
seeking to hold potentially responsible parties under various federal
and state statutes responsible for the costs of studying and
remediating the environmental consequences caused by the Sacramento
Spill, and for damages to the Natural Resources. On January 5, 1996,
the Court dismissed a third party's appeal of a court order dismissing
their intervention which finally resolved the action.
B. February 1, 1996; Devore, California:
On March 7, 1996, AMVAC was served with a Complaint in an action
entitled Alvin Williams, Administrator of the Estate of Kevin Lewis
Williams v. Burlington Northern Santa Fe Railway Company, et. al. (the
"Williams Estate Case"). The Estate alleges pecuniary loss to family
members in the amount of $ 20,000,000 and prays for other unspecified
monetary relief. Other Defendants presently named in the suit are:
Burlington Northern Santa Fe Railway Company, The Atchison, Topeka &
Santa Fe Railway Company, UNOCAL, Rohm & Haas, and Westinghouse
Corporation. At the time of this reporting AMVAC has been dismissed
from the case based on Plaintiff's failure to file an amended pleading
within twenty (20) calendar days from the Court's granting of AMVAC's
demurrer to Plaintiff's third amended complaint based upon the
Plaintiff's lack of standing to sue. Plaintiff's may file a motion
for reinstatement of the case.
The Company has made demand upon its insurers for indemnity from and
defense of the Williams Estate Case. AMVAC's primary carrier has not
yet responded but has cooperated with AMVAC in selecting counsel.
AMVAC's excess carrier has issued a reservation of rights letter
disclaiming responsibility for any exemplary and punitive damages
awarded in the event of a judgment against AMVAC.
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 $4 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.
54
57
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
RAILROAD SIDING
As a result of inspections and sampling conducted by or at the
direction of the California Department of Toxic Substances Control
("DTSC"), environmental contamination was detected at the railroad
siding area located, in part, immediately adjacent to AMVAC's
Commerce, California facility (the "Facility"). The railroad siding
area is owned by Burlington Northern and Santa Fe Railway Company
("Santa Fe") and Union Pacific Railroad Company (" Union Pacific").
In furtherance of addressing the railroad siding area under the
Expediated Remedial Action Program ("ERAP"), during 1996 AMVAC
conducted soil sampling to further define the nature and extent of
impacted soils in the railroad siding area, and prepared and submitted
for DTSC review and comment a draft risk assessment establishing
remedial cleanup goals based on an assumption of continued industrial
use of the railroad siding area. In 1996 and early 1997, AMVAC
conducted additional soil sampling to assist it in further evaluating
remedial alternatives for the area. The future costs associated with
the remediation of the railroad siding area, which AMVAC believes
could be significant, cannot be definitively determined until the
final characterization of affected soils, determination of final
cleanup standards, evaluation of remedial options are completed, and
the DTSC approves a specific remedial action for the area. AMVAC
currently anticipates that the foregoing will be completed by the
close of the second quarter of 1997, and that remediation will
commence in the third or fourth quarter of 1997.
Also during 1996, DTSC conducted a Resource Conservation and Recovery
Act ("RCRA") Facility Assessment ("RFA") at the Facility. The RFA was
conducted pursuant to a federal requirement that DTSC conduct such
RFAs at all RCRA permitted hazardous waste management facilities in
California. The RFA identified that further investigation of
environmental conditions at the Facility is necessary. The DTSC has
advised AMVAC that AMVAC can conduct this further investigation, and
any related remediation if required, under DTSC oversight using a
phased approach under the ERAP, and AMVAC currently intends to do so.
The Company has made claims against its insurance carriers for the
remediation of the railroad siding. Costs expensed to date now exceed
its $100,000 self-insured retention. The Company and its insurers are
currently discussing the claim. There can be no assurance its
insurers will provide coverage for the remediation.
(8) 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
55
58
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
contribution. The Company's contributions to the Plan amounted to
approximately $196,600, $175,100 and $154,000 in 1996, 1995 and 1994.
(9) MAJOR CUSTOMERS AND EXPORT 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. In 1994, there were sales to
one major customer that accounted for 27% of the Company's
consolidated sales.
Export sales were $3,535,500, $3,374,700 and $3,812,500 for 1996, 1995
and 1994.
(10) 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 $416,900, $786,800 and
$91,600 for 1996, 1995 and 1994.
(11) 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 has agreed to pay cash for
the existing product, of which $750,000 had been paid as of December
31, 1996 with the remainder to be paid March 27, 1997, and has 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.
In September 1991, the Company entered into an agreement with GemChem,
Inc. ("GemChem"), a related party, to represent the Company as its
sales representative. Eric G. Wintemute, the son of the Company's
former President, Glenn A. Wintemute, owned an approximate one- third
equity interest in GemChem.
Effective January 15, 1994, the Company purchased all of the issued
and outstanding stock of GemChem. The results of operations of
GemChem have been included in the consolidated results of operations
since the effective date of the purchase. The aggregate purchase
price consisted of 50,000 unregistered shares of the Company's common
stock and approximately $592,000 in two year notes with interest at
prime plus .75%. The Company has valued the 50,000 shares at
$437,500. All assets acquired were valued at book value, which
approximated fair market value, resulting in an allocation to cost in
excess of net assets acquired of $437,500 which is being amortized
over 15 years. The
56
59
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
results of operations of GemChem are not material in relation to the
Company.
(12) 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. As part of the acquisition of GemChem, the Company
entered into employment agreements with GemChem's former three
officers and shareholders. The employment agreements commenced
January 15, 1994 and expire January 14, 1998. The agreements provide
for aggregate salaries of $390,000 per year. Annual increases shall
be determined by the Board of Directors or its designee but shall not
be less than the increase in an agreed upon cost of living index. The
employment agreements with the former officers and shareholders of
GemChem also provide for the issuance of stock options to purchase an
aggregate of 70,000 shares of the Company's common stock. The options
are exercisable at the rate of 25% per year commencing January 15,
1995. The exercise price is $10.00 per share. Unexercised options
expire on April 15, 1998.
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 provides
for an annual salary of $170,000. 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,
1997 $ 919,900
1998 458,600
1999 326,900
2000 108,300
---------
$1,813,700
=========
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, 1996 and 1995 was $131,800 and $49,400.
There was no rent
57
60
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
expense in 1994. Future minimum lease payments under the terms of the
sublease are as follows:
Year ending
December 31,
1997 $131,800
1998 131,700
1999 109,800
-------
$373,300
=======
(13) RESEARCH AND DEVELOPMENT
Research and development expenses were $1,932,700, $3,717,400 and
$5,544,000 for the years ended December 31, 1996, 1995 and 1994.
(14) SUBSEQUENT EVENT
On March 12, 1997, the Company announced that the Board of Directors
declared a cash dividend of $.06 per share. The dividend will be
distributed on March 31, 1997 to stockholders of record as of March
20, 1997.
58
61
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) --
10.7 Employment Agreement between American Vanguard Corporation and Robert F. Gilbane.(6) --
59
62
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. 63
27. Financial Data Schedule 64
______________________
(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.
60