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, 2006
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For The Transition Period From To
Commission file number 001-13795
AMERICAN VANGUARD CORPORATION
Delaware | 95-2588080 | |
(State or other jurisdiction of Incorporation or organization) |
(I.R.S. Employer Identification Number) | |
4695 MacArthur Court, Newport Beach, California | 92660 | |
(Address of principal executive offices) | (Zip Code) |
(949) 260-1200
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: |
Name of each exchange on which registered: | |
Common Stock, $.10 par value | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act . Yes ¨ No x
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. Yes ¨ No x
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 registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the voting stock of the registrant held by non-affiliates is $203.1 million. This figure is estimated as of June 30, 2006 at which date the closing price of the registrants Common Stock on the New York Stock Exchange was $15.48 per share. 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. The number of shares of $.10 par value Common Stock outstanding as of June 30, 2006, was 26,060,132. The number of shares of $.10 par value Common Stock outstanding as of March 5, 2007, was 26,131,226.
AMERICAN VANGUARD CORPORATION
December 31, 2006
Page No. | ||||
PART I | ||||
Item 1. |
1 | |||
Item 1A. |
7 | |||
Item 1B. |
12 | |||
Item 2. |
12 | |||
Item 3. |
13 | |||
Item 4. |
19 | |||
PART II | ||||
Item 5. |
20 | |||
Item 6. |
22 | |||
Item 7. |
Managements Discussion and Analysis of Financial Condition and Results of Operation |
23 | ||
Item 7A. |
31 | |||
Item 8. |
32 | |||
Item 9. |
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
32 | ||
Item 9A. |
32 | |||
Item 9B. |
34 | |||
PART III | ||||
Item 10. |
Directors, Executive Officers of the Registrant and Corporate Governance |
34 | ||
Item 11. |
36 | |||
Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
47 | ||
Item 13. |
Certain Relationships and Related Transactions and Director Independence |
50 | ||
Item 14. |
51 | |||
PART IV | ||||
Item 15. |
53 | |||
54 |
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AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
Unless otherwise indicated or in the context otherwise requires, the terms Company, we, us, and our refer to American Vanguard Corporation and its consolidated subsidiaries.
Forward-looking statements in this report, including without limitation, statements relating to the Companys plans, strategies, objectives, expectations, intentions, and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties. (Refer to PART II, Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operation, Risk Factors, of this Annual Report.)
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 subsidiaries, AMVAC Chemical Corporation (AMVAC), GemChem, Inc. (GemChem), 2110 Davie Corporation (DAVIE), AMVAC Chemical UK Ltd. (Chemical UK), Quimica Amvac de Mexico S.A. de C.V. (Quimica Amvac) AMVAC Switzerland GmbH (Refer to Export Operations), and Environmental Mediation, Inc.
Based on similar economic and operational characteristics, the Companys business is aggregated into one reportable segment. Refer to Part I, Item 7 for selective enterprise information.
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. AMVACs business is continually undergoing an evolutionary change. Years ago AMVAC considered itself a distributor-formulator, but now AMVAC primarily manufactures, distributes, and formulates its own proprietary products or custom manufactures or formulates for others.
In December 2006, AMVAC acquired the product line Permethrin (a synthetic pyrethroid insecticide) from Syngenta Crop Protection, Inc. In connection with the transaction, AMVAC acquired both crop and non-crop uses of the product line in the U.S., Mexico and Canada. Acquired assets include registration rights, manufacturing and formulation know-how, inventories, customer lists and the trademarks Ambush® and Prelude® in the aforementioned territories.
In November 2006, AMVAC acquired the global Terbufos insecticide product line and the Lock `N Load® closed delivery system from BASF Aktiengesellschaft (BASF). The product line consisted of the active ingredient Terbufos, the trademarks Counter® and Lock `N Load®, the manufacturing and formulation know-how, registration rights, intellectual property rights and inventories.
In December 2005, AMVAC acquired the cereal herbicide product line, Difenzoquat from BASF. The product line consists of the active ingredient Difenzoquat, the trademark Avenge, the manufacturing and formulation know-how, and registration rights and intellectual property rights in the United States and Canada. Avenge is a post-emergent herbicide primarily to control wild oats in barley and wheat. Avenge has a unique mode of action: it can be tank mixed with many popular broad leaf herbicides to provide broadleaf weed control as well as for effectively managing herbicide resistance problems in wild oats.
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In November 2005, AMVAC acquired the global Phorate insecticide product line from BASF. The product line consisted of the active ingredient Phorate, the trademarks Thimet®, Granutox® and Geomet®, the manufacturing and formulation know-how, registration rights, intellectual property rights and inventories as well as an exclusive license to use BASFs patented, closed delivery system, Lock N Load®, in the United States, Canada and Australia for Phorate. Phorate is registered in more than fifteen countries, with the main markets in Asia Pacific and the Americas. It is used on agricultural crops, mainly potatoes, corn, cotton, rice and sugarcane, to protect against chewing and piercing-sucking insects.
In March 2005, AMVAC entered into an exclusive multi-year agreement with BASF to develop, register and commercialize Topramezone, a new herbicide for post-emergent use in corn in North America. Under the terms of a licensing and supply agreement BASF would supply the product to AMVAC. In August 2005, AMVAC received a registration from the U.S. Environmental Protection Agency for Impact® (active ingredient: Topramezone), a new herbicide for the use in field corn, seed corn, sweet corn and popcorn.
In December 2004, AMVAC entered into an agreement with Bayer CropScience LP, an affiliate of Bayer AG, to market, sell and distribute Bolster 15G, a soybean pesticide used to control nematodes, through AMVACs SmartBox system in key Midwest soybean growing states beginning in the 2005 season. Additionally, in December 2004, AMVAC licensed the trade name Nuvan® to Syngenta India Limited, a business unit of Syngenta Crop Protection AG. The agreement provides a two-year license to Syngenta India to sell products under the Nuvan name in the animal and public health market, as well as the crop protection market in India. AMVAC continues to sell products under the Nuvan name in the animal and public health market in over thirty other countries.
In January 2004, AMVAC entered into an agreement with Syngenta Crop Protection (Syngenta) to supply Force 3G for use through AMVACs SmartBox system beginning in the 2004 season. Force 3G is a corn soil insecticide manufactured and marketed by Syngenta for the control of corn rootworm, wireworm, cutworm and white grub in cotton.
In December 2003, AMVAC acquired certain assets related to the active ingredient dichlorvos (DDVP) used in the animal health business and marketed primarily under the trade name Nuvan® from Novartis Animal Health, Inc. a business unit of Novartis AG. Since 1975, AMVAC has manufactured a technical form of DDVP, used primarily in specialty markets as a broad-spectrum household and specialty insecticide. Nuvan, which is used primarily for animal health to control flies and ecto-parasites, expanded the AMVACs animal health business as well as its international sales of DDVP. DDVP products are highly effective in controlling in enclosed spaces, a wide variety of pests including mosquitoes, flies, and cockroaches. AMVAC has been the primary generator of data to support the registration of DDVP products worldwide.
In February 2003, AMVAC acquired certain assets associated with the global Pre-Harvest Protection business from Pace International, L.L.C. (Pace). Paces global Pre-Harvest Protection business encompassed five product lines:
| Deadline®a line of snail and slug control products used in agriculture and by commercial landscapers; |
| Hivol®44a plant growth regulator used primarily in citrus; |
| Hinder®a deer and rabbit repellant; |
|
Bac-Masterstreptomycin antibiotic used primarily to control Fire Blight (a bacterial disease of apples and pears that kills blossoms, shoots, limbs, and sometimes, entire trees; and |
|
Leffingwell® Supreme 415 Oila horticultural oil insecticide for aphids, mites and scale. |
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Pace continues to manufacture Deadline and Hinder under a multi-year supply agreement with AMVAC. Additionally, AMVAC has an option to acquire Paces Deadline manufacturing facility in Yakima County, Washington.
In January 2003, AMVAC acquired certain assets associated with the Evital® 5G cranberry herbicide business conducted in the United States from Syngenta.
In July 2002, AMVAC acquired from Flowserve U.S. Inc. (Flowserve), all or substantially all of its assets associated with the SmartBox® closed delivery system. The SmartBox system electronically dispenses granular crop protection products, replacing older technology that utilizes mechanically driven sprockets and chains. The state-of-the-art SmartBox technology allows farmers to apply crop protection products accurately and efficiently while avoiding contact with the product. The computer controller enables farmers to monitor and change application rates while planting and provides the farmers with a permanent record of application. Initially the SmartBox system was developed by Flowserve in partnership with E.I. DuPont de Nemours and Company (DuPont) and Zeneca, Inc. which partnership commenced in 1995. At the same time it acquired certain assets associated with the Fortress® corn soil insecticide business from DuPont in 2000, AMVAC assumed DuPonts SmartBox partnership interest. Thereafter, Zeneca, Inc. abandoned its SmartBox partnership interest. In 2000, AMVAC sold its Fortress 5G (5% active ingredientchlorethoxyfoxs) corn soil insecticide to the American farmer in the SmartBox system. Later that year, AMVAC secured exclusive marketing rights in the U.S. Bayer CropSciences Aztec® 4.67G corn soil insecticide which also can be applied through the SmartBox system. By offering both products, AMVAC provides farmers a choice of two different chemistries to apply through the SmartBox system. This allows farmers to rotate products from year to year, thereby preventing insects from building resistance to any one specific product. AMVAC is currently looking at utilizing this system for other crops where the safety features of the system would provide an important benefit.
In July 2002, AMVAC acquired from Syngenta all U.S. Environmental Protection Agency (EPA) end-use product registrations and data support as well as a license to the Ambush 25WP trademark (wettable powder formulation) in the United States. Syngenta continues to own the rights and assets of the liquid formulation (Ambush 2EC) in the United States.
In June 2002, AMVAC acquired certain assets associated with the Folex® cotton defoliant business conducted in the United States by Aventis CropScience USA prior to Bayer AGs acquisition of Aventis CropScience S.A. The purchase included the EPA end-use product registration for Folex as well as the Folex trademark and product inventories. In addition, an existing supply agreement with Bayer Corporation providing for the supply of active ingredient and access to data in support of the end-use product registration has been assigned to AMVAC, allowing AMVAC to purchase the active ingredient in Folex from Bayer. Bayer markets a product under its trademark Def® which is similar to Folex, and continues to sell Def following its acquisition of Aventis.
Seasonality
The agricultural chemical industry in general is cyclical in nature. The demand for AMVACs 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.
Backlog
AMVAC does not believe that backlog is a significant factor in its business. AMVAC primarily sells its products on the basis of purchase orders, although it has entered into requirements contracts with certain customers.
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Customers
United Agri Products, Agriliance and Helena Chemical Company accounted for 18%, 15% and 11%, respectively of the Companys sales in 2006. United Agri Products, Agriliance and Helena Chemical Company accounted for 15%, 13% and 11%, respectively of the Companys sales in 2005. United Agri Products, Helena Chemical Company and Agriliance accounted for 18%, 12% and 11%, respectively of the Companys sales in 2004.
Competition
AMVAC faces competition from many domestic and foreign manufacturers in its marketplaces. Competition in AMVACs 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. AMVACs 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, its price and the technical service and support given to its customers. The inability of AMVAC to effectively compete in several of AMVACs principal products would have a material adverse effect on AMVACs 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. AMVAC has attempted to position itself in smaller niche markets which are no longer of strong focus to larger companies. 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 AMVACs successful acquisitions of certain product lines.
Intellectual Property
AMVACs 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.
EPA Registrations
AMVACs products also receive protection afforded by the effect of the 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 similar state laws. Substantially all of AMVACs 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 AMVACs products are used require a registration by that specific state before it can be marketed or used in that state. 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 registrants, has furnished, and is currently furnishing, certain required data relative to specific products.
Under FIFRA, the federal government requires registrants to submit a wide range of scientific data to support U.S. registrations. This requirement results in operating expenses in such areas as testing and the production of new products. AMVAC expensed $2,884,000, $2,853,000 and $3,081,000 during 2006, 2005 and
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2004 respectively, related to gathering this information. Based on facts known today, AMVAC estimates it will spend approximately $3,770,000 in 2007. Because scientific analyses are constantly improving, it cannot be determined with certainty whether or not 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 as incurred basis. See also PART II, Item 7 of this Annual Report for discussions pertaining to research and development expenses.
Raw Materials
AMVAC 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, AMVAC seeks to secure its supply by either long-term arrangements or advance purchases from its suppliers. AMVAC believes that it is considered to be a valued customer to such sole-source suppliers. Recent increases in energy costs are expected to have an adverse impact on the Company, although the ultimate impact cannot be measured at this time.
Environmental
During 2006, AMVAC continued activities to address environmental issues associated with its facility (the Facility) in Commerce, California.
In March 1997, the California Environmental Protection Agency Department of Toxic Substances Control (DTSC) accepted the Facility into its Expedited Remedial Action Program (ERAP). Under this program, the Facility must prepare and implement an environmental investigation plan. Depending on the findings of the investigation, the Facility may also be required to develop and implement remedial measures to address any historical environmental impairment. The environmental investigation and any remediation activities related to ten underground storage tanks at the Facility, which had been closed in 1995, will also be addressed by AMVAC under ERAP.
Soil and groundwater characterization activities began in December 2002 in accordance with the Site Investigation Plan that was approved by the DTSC. Additional activities were conducted from 2003 to 2006 with oversight provided by the DTSC. Additional investigation is planned over the next year under the oversight of the DTSC. Potential remediation activities may be initiated in 2007 or 2008. These investigation and potential remediation activities are required at all facilities that currently have, or in the past had, hazardous waste storage permits. Because AMVAC previously held a hazardous waste management permit, AMVAC is subject to these requirements. It is uncertain whether the cost associated with the potential remediation activities will have a material impact on the Companys financial statements.
AMVAC is subject to numerous federal and state laws and governmental regulations concerning environmental matters and employee health and safety at the Commerce, California and Axis, Alabama facilities. AMVAC continually adapts its manufacturing process to the environmental control standards of the various regulatory agencies. The U.S. EPA and other federal and state agencies have the authority to promulgate regulations that could have an impact on AMVACs operations.
AMVAC expends substantial funds to minimize the discharge of materials in 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 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.
Employees
As of March 5, 2007, the Company employed approximately 285 persons. 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 Companys 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 Basel, Switzerland in January 2006. The office operates under the name AMVAC Switzerland GmbH and is located in Basel, Switzerland. The Company formed the new subsidiary to expand its resources dedicated to non-U.S. opportunities, primarily in the EU.
The Company opened an office in 1998 in Mexico to conduct business in Mexico and related areas. The office operates under the name Quimica AMVAC De Mexico S.A. de C.V. and markets chemical products for agricultural and commercial uses.
The Company opened an office in August 1994, in the United Kingdom to conduct business in the European chemical market. The office, operating under the name AMVAC Chemical UK Ltd., focuses on developing product registration and distributor networks for AMVACs 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 Companys total operating results for the years ended December 31, 2006, 2005 and 2004.
The Company classifies as export sales all products bearing foreign labeling shipped to a foreign destination.
2006 | 2005 | 2004 | ||||||||||
Export Sales |
$ | 17,246,000 | $ | 13,856,000 | $ | 10,943,000 | ||||||
Percentage of Net Sales |
8.9 | % | 7.3 | % | 6.8 | % |
Risk Management
The Company continually evaluates insurance levels for product liability, property damage and other potential areas of risk. Management believes its facilities and equipment are adequately insured against loss from usual business risks. The Company has purchased claims made products liability insurance. There can be no assurance, however, that such product 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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GEMCHEM, INC.
GemChem is a California corporation incorporated in 1991 and purchased by the Company in 1994. GemChem is a national chemical distributor. GemChem, in addition to purchasing key raw materials for the Company, 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).
2110 DAVIE CORPORATION
DAVIE currently owns real estate for corporate use only. See also PART I, Item 2 of this Annual Report.
ENVIRONMENTAL MEDIATION, INC.
EMI is an environmental consulting firm.
* * *
Available Information
The Company makes available free of charge (through its website, www.american-vanguard.com), its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (SEC). Such reports are also available free of charge on the SECs website, www.sec.gov. Also available free of charge on the Companys website are our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee Charters, our Corporate Governance Guidelines, our Code of Conduct and Ethics, our Employee Complaint Procedures for Accounting and Auditing Matters and our policy on Stockholder Nomination and Communication. The Companys Internet website and the information contained therein or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K.
* * *
ITEM 1A. | RISK FACTORS |
Risk Factors
The Companys business may be adversely affected by cyclical and seasonal effects.
The chemical industry in general is cyclical and demands for its products tend to be slightly seasonal. Seasonal usage follows varying agricultural seasonal patterns, weather conditions and weather related pressure from pests, and customer marketing programs and requirements. Weather patterns can have an impact on the Companys operations. The end user of some of its 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 products and therefore may reduce our revenues and profitability. There can be no assurance that the Company will adequately address any adverse seasonal effects.
The industry in which the Company does business is extremely competitive and its business may suffer if the Company is unable to compete effectively.
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 faces competition from many domestic and foreign manufacturers, marketers and distributors participating in its marketplace. Competition in the
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marketplace is based primarily on efficacy, price, safety and ease of application. Many of the Companys competitors are larger and have substantially greater financial and technical resources. The Companys ability to compete depends on its ability to develop additional applications for its current products, and to expand its product lines and customer base. The Company competes principally on the basis of the quality of its products, and the technical service and support given to its customers. There can be no assurance that the Company will compete successfully with existing competitors or with any new competitors.
The Company faces competition in certain markets from manufacturers of genetically modified seeds.
The Company faces competition from larger chemical companies that market genetically modified (GMO) seeds in certain of the crop protection sectors in which the Company competes, particularly that of corn. To the extent that growers in these markets embrace the use of GMO seeds, such growers may reduce their use of pesticides sold by the Company. There is no guarantee that the Company will maintain its market share or pricing levels in sectors that are subject to competition from GMO seed marketers.
The distribution and sale of the Companys products are subject to prior governmental approvals and thereafter ongoing governmental regulation.
The Companys products are subject to laws administered by federal, state and foreign governments, including regulations requiring registration, approval and labeling of its products. The labeling requirements restrict the use of and type of application for our products. More stringent restrictions could make our products less desirable, which would adversely affect our revenues and profitability. Substantially all of the Companys products are subject to the EPA registration and re-registration requirements, and are conditionally registered in accordance with the FIFRA. Such registration requirements are based, among other things, on data demonstrating that the product will not cause unreasonable adverse effects on human health or the environment when used according to approved label directions. All states where any of the Companys products are used also require registration before they can be marketed or used in that state. Governmental regulatory authorities have required, and may require in the future, that certain scientific data requirements be performed on the Companys products. The Company, on its behalf and in joint efforts with other registrants, have and are currently furnishing certain required data relative to its products. Under FIFRA, the federal government requires registrants to submit a wide range of scientific data to support U.S. registrations. This requirement has significantly increased the Companys operating expenses in such areas as testing and the production of new products. The Company expects such increases to continue in the future. Because scientific analyses are constantly improving, it cannot be determined with certainty whether or not new or additional tests may be required by regulatory authorities. Responding to such requirements may cause delays in the sales of our products which delays would adversely affect our profitability. 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 U.S. EPA, there can be no assurance the EPA will not request certain tests or studies be repeated. In addition, more stringent legislation or requirements may be imposed in the future. The Company can provide no assurance that any testing approvals or registrations will be granted on a timely basis, if at all, or that its resources will be adequate to meet the costs of regulatory compliance.
The Company faces risks related to acquisitions of product lines.
The Company has expanded and intends to continue to expand its operations through the acquisition of additional product lines from these larger competitors. There can be no assurance that the Company will be able to identify, acquire or profitably manage additional product lines, or successfully integrate any acquired product lines without substantial expenses, delays or other operational or financial problems. There is an increasing trend in selling mature product lines through a competitive bid process. As a result, we may not be the successful
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bidder for a desirable product, or, if successful, we may pay a higher price for such product than if there was no competitive bid process. Further, acquisitions may involve a number of special risks or effects, including diversion of managements attention, failure to retain key acquired personnel, unanticipated events or circumstances, minimum purchase quantities, legal liabilities and amortization of acquired intangible assets and other one-time or ongoing acquisition related expenses. Some or all of these special risks or effects could have a material adverse effect on the Companys financial and operating results. Client satisfaction or performance problems associated with a business or product line could have a material adverse impact on the Companys reputation. In addition, there can be no assurance that acquired product lines, if any, will achieve anticipated revenues and earnings.
The Companys future success will depend on its ability to develop additional applications for its products, and to expand its product lines and customer base.
The Company has grown primarily by a strategy of acquiring mature product lines from larger competitors and expanding sales of these products based on new applications and new users. The Companys success will depend, in part, on its ability to develop additional applications for its products, and to expand its product lines and customer base in a highly competitive market. There can be no assurance that the Company will be successful in adequately addressing these development needs on a timely basis or that, if these developments are addressed, the Company will be successful in the marketplace. In addition, there can be no assurance that products or technologies (e.g., genetic engineering) developed by others will not render the Companys products noncompetitive or obsolete, which would have a material adverse effect on its financial and operating results. Many of the mature product lines the Company has acquired from larger competitors were divested as a result of a mergers involving such large competitors.
If the Company is unable to successfully position itself in smaller niche markets, its business may be materially adversely affected.
The Company has attempted to position itself in smaller niche markets that have been or are being abandoned by larger chemical companies. These types of markets tend not to attract larger chemical companies due to the smaller volume demand. As a result, larger chemical companies have been divesting themselves of products that fall into such smaller niche markets. These smaller niche markets require significant and intensive management input and ongoing product research and are near product maturity. There can be no assurance that the Company will be successful in these smaller niche markets or, if it is successful in one or more niche markets, that it will continue to be successful in such niche markets.
The manufacturing of the Companys products is subject to governmental regulations.
The Company operates two manufacturing facilitiesone in Los Angeles, California and the other in Axis, Alabama (the Facilities). The Facilities operate under the terms and conditions imposed by required licenses and permits by state and local authorities. The manufacturing of key ingredients for the Companys products occurs at the Facilities. An inability to renew or maintain a license or permit or a significant increase in the fees for such licenses or permits could impede the Companys access to key ingredients and increase the cost of production, which, in turn, would materially and adversely affect the Companys ability to provide its products in a timely and affordable manner.
The Company may be subject to environmental liabilities.
The Company, its facilities and its products are subject to numerous federal and state laws and governmental regulations concerning environmental matters and employee health and safety. The Company continually adapts
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its manufacturing process to the environmental control standards of the various regulatory agencies. The U.S. EPA and other federal and state agencies have the authority to promulgate regulations that could have a significant impact on the Companys operations. The Company expends substantial funds to minimize the discharge of materials in the environment and to comply with governmental regulations relating to protection of the environment. Federal and state authorities may seek fines and penalties for violation of the various laws and governmental regulations, and could, among other things, impose liability on the Company for cleaning up the damage resulting from release of pesticides and other agents into the environment.
The Companys use of hazardous materials exposes it to potential liabilities.
The Companys development and manufacturing of chemical products involve the controlled use of hazardous materials. While the Company continually adapts its manufacturing process to the environmental control standards of regulatory authorities, it cannot completely eliminate the risk of accidental contamination or injury from hazardous or regulated materials. In the event of such contamination or injury, the Company may be held liable for significant damages or fines. In the event that such damages or fines are assessed, it could have a material adverse effect on the Companys financial and operating results.
The Companys business may give rise to product liability claims not covered by insurance or indemnity agreements.
The manufacturing, marketing, distribution and use of chemical products involve substantial risk of product liability claims. A successful product liability claim which is not insured may require the Company to pay substantial amounts of damages. In the event that such damages are paid, it could have a material adverse effect on the Companys financial and operating results.
Adverse results in pending legal and regulatory proceedings could have adverse effects on the Companys business.
The Company is currently, and may from time to time be, involved in legal and regulatory proceedings. The results of litigation and such proceedings cannot be predicted with certainty. The Company has and will continue to expend resources and incur expenses in connection with these proceedings. There can be no assurance that the Company will be successful in these proceedings. While the Company continually evaluates insurance levels for product liability, property damage and other potential areas of risk, an adverse determination in one or more of these proceedings could subject the Company to significant liabilities, which could have a material adverse effect on its financial condition and operating results.
The Company relies on intellectual property which it may be unable to protect, or may be found to infringe the rights of others.
The Companys proprietary product formulations are protected, to the extent possible, as trade secrets and, to a lesser extent, by patents and trademarks. Most of the mature products that the Company has acquired which were patented are currently off patent because the patent has expired. The Company can provide no assurance that the way it protects its proprietary rights will be adequate or that its competitors will not independently develop similar or competing products.
Further, the Company can provide no assurance that its is not infringing other parties rights. Any claims could require the Company to spend significant sums in litigation, pay damages, develop non-infringing intellectual property, or acquire licenses to the intellectual property which is the subject of asserted infringement.
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The Company relies on key executives in large part for its success.
The Companys success is highly dependent upon the efforts and abilities of its executive officers, particularly Eric G. Wintemute, its President and Chief Executive Officer. Although Mr. Wintemute has entered into an employment agreement with the Company, this does not guarantee that he will continue his employment. The loss of the services of Mr. Wintemute or other executive officers could have a material adverse effect upon its financial and operating results.
Concentration of ownership among the Companys Co-Chairmen of the Board of Directors may prevent new investors from influencing significant corporate decisions.
As of March 5, 2007, Herbert A. Kraft and Glenn A. Wintemute, the Companys Co-Chairmen of the Board of Directors, beneficially owned approximately 12% and 7%, respectively, of the Companys common stock. These stockholders as a group will be able to influence substantially the Companys Board of Directors and thus its management and affairs. If acting together, they would be able to influence most matters requiring the approval by the Companys stockholders, including the election of directors, any merger, consolidation or sale of all or substantially all of the Companys assets and any other significant corporate transaction. The concentration of ownership may also delay or prevent a change in control if opposed by these stockholders irrespective of whether the proposed transaction is at a premium price or otherwise beneficial to the Companys stockholders as a whole.
The Company is dependent on a limited number of customers, which makes us vulnerable to the continued relationship with and financial health of those customers.
In 2006, three customers accounted for 44% of the companys sales. The Companys future prospects will depend on the continued business of such customers and on our continued status as a qualified supplier to such customers. The Company cannot guarantee that our current significant customers will continue to buy products from us at current levels. The loss of a key customer could have a material adverse effect on the Company.
The Companys stock price may be volatile, and an investment in the Companys stock could decline in value.
The market prices for securities of companies in the Companys industry have been highly volatile and may continue to be highly volatile in the future. Often this volatility is unrelated to operating performance of a company.
The Companys business may be adversely affected by terrorist activities.
The Companys business depends on the free flow of products and services through the channels of commerce. Recently, in response to terrorists activities and threats aimed at the United States, transportation, mail, financial and other services have been slowed or stopped altogether. Further delays or stoppages in transportation, mail, financial or other services could have a material adverse effect on the business, results of operations and financial condition. Furthermore, the Company may experience an increase in operating costs, such as costs for transportation, insurance and security as a result of the activities and potential activities. The Company may also experience delays in receiving payments from counterparties that have been affected by the terrorist activities and potential activities. The U.S. economy in general is being adversely affected by the terrorist activities and potential activities and any economic downturn could adversely impact results of operations, impair the ability to raise capital or otherwise adversely affect the ability to grow the business.
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Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.
Complying with changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and changes to the New York Stock Exchange rules, will require the Company to expend significant resources. The Company is committed to maintaining the highest standards of corporate governance and public disclosure. As a result, the Company will continue to invest necessary resources to comply with evolving laws, regulations and standards, and this investment may result in increased expenses and a diversion of management time and attention from revenue-generating activities.
The impact of FAS 123(R) may require recognition of significant financial expense for stock options.
FAS 123(R), as published by the Financial Accounting Standards Board, will require the Company, as a public company, to recognize in its financial statements an expense for stock options that are unvested and become exercisable after December 31, 2005 and for any new grants issued subsequent to January 1, 2006. In 2006, the Company recognized a $984 pre-tax expense related to this requirement. (See Stock-Based Compensation narrative in notes to consolidated financial statements.)
Note On Forward-Looking Statements
This report contains forward-looking statements. Forward-looking statements relate to future periods and include descriptions of our plans, objectives, and underlying assumptions for future operations, our market opportunities, our acquisition opportunities, and our ability to compete. Generally, may, could, will, would, expect, believe, estimate, anticipate, intend, continue and similar words identify forward- looking statements. Forward-looking statements are based on our current expectations and are subject to risks and uncertainties that can cause actual results to differ materially. For information on these risks and uncertainties, see the Risk Factors in this report. We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this report. Forward-looking statements are made only as of the date of this report.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
ITEM 2 | PROPERTIES |
The Companys corporate headquarters are located in Newport Beach, California. This facility is leased. See PART IV, Item 15 of this report for further information.
AMVAC owns in fee the Facility constituting approximately 152,000 square feet of improved land in Commerce, California (Commerce) on which its West-Coast manufacturing and some of its warehouse facilities and offices are located.
DAVIE owns in fee approximately 72,000 square feet of warehouse, office and laboratory space on approximately 118,000 square feet of land in Commerce, California, which is leased to AMVAC.
In 2001, AMVAC completed the acquisition of a manufacturing facility from DuPont. The facility is one of three such units located on DuPonts 510 acre complex in Axis, Alabama. The acquisition consisted of a long- term ground lease of 25 acres and the purchase of all improvements thereon. The facility is a multi-purpose plant designed primarily to manufacture pyrethroids and organophosphates. The acquisition increased AMVACs
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capacity while also providing flexibility and geographic diversity. (Refer to PART II, Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operation of this Annual Report.)
The Facilitys 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 AMVACs foreseeable needs, have flexibility to change products, and can produce at greater rates as required. Facilities and equipment are insured against losses from fire as well as 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 Companys assets are pledged as collateral under the Companys loan agreements with its primary lender. For further information, refer to note 2 of the Notes to the Consolidated Financial Statements in PART IV, Item 15 of this Annual Report.
AMVAC owns approximately 42 acres of unimproved land in Texas for possible future expansion.
GemChems, Chemical UKs and Quimica AMVACs facilities consist of administration and sales offices which are leased.
ITEM 3 | LEGAL PROCEEDINGS |
DBCP LAWSUITS
I. DBCP Litigation
AMVAC and/or the Company have been named or otherwise implicated in a number of lawsuits concerning injuries allegedly arising from either contamination (of water supplies) or personal exposure to 1,2-dibromo-3-chloropropane (DBCP). A summary of these actions follows:
A. Hawaii Matters
AMVAC and the Company were served with complaints in February 1997. The actions were filed in the Circuit Court of the Second Circuit, State of Hawaii entitled Board of Water Supply of the County of Maui v. Shell Oil Co., et. al. The suit named as defendants the Company, AMVAC, Shell Oil Company, The Dow Chemical Company, Occidental Chemical Company, Occidental Petroleum Corporation, Occidental Chemical Corporation, and Brewer Environmental Industry, Inc. Maui Pineapple Company was joined as a cross-defendant. The Complaint alleged that between two and four of the Boards wells had been contaminated with DBCP in excess of the maximum contaminant level (MCL). In addition, the Board of Water Supply contended that future wells may exceed the MCL level and would need remediation. On August 2, 1999, a global settlement was reached, which included the remediation of the existing contaminated wells in addition to the installation of filtration devices on other wells for the next forty years on the island of Maui. The cash settlement was three million dollars ($3,000,000) of which AMVACs (and the Companys) portion was five hundred thousand dollars ($500,000). The settlement agreement obligates the defendants to pay for the installation of filtration devices on other wells that become contaminated later and for the ongoing operation and maintenance of the filtration devices for up to forty years. The annual costs of operation and maintenance per well is estimated to be approximately sixty-nine thousand dollars ($69,000), to be adjusted annually by the consumer price index. The obligations of the defendants under this agreement are secured by a twenty million-dollar letter of credit obtained by Dow Chemical. In connection with the settlement, in October 2005, AMVAC paid for a share of a permanent filtration system in the amount of $222,198.
In October 1997, AMVAC was served with a Complaint(s) in which it was named as a defendant, filed in the Circuit Court, First Circuit, State of Hawaii and in the Circuit Court of the Second Circuit, State of Hawaii
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(two identical suits, one in Oahu and one in Maui) entitled Patrickson, et. al. v. Dole Food Co., et. al (Patrickson Case) alleging damages sustained from injuries caused by plaintiffs exposure to DBCP while applying the product in their native countries. Other named defendants are: Dole Food Co., Dole Fresh Fruit, Dole Fresh Fruit International, Pineapple Growers Association of Hawaii, Shell Oil Company, Dow Chemical Company, Occidental Chemical Corporation, Standard Fruit Company, Standard Fruit & Steamship, Standard Fruit Company De Costa Rica, Standard Fruit Company De Honduras, Chiquita Brands, Chiquita Brands International, Martrop Trading Corporation, and Del Monte Fresh Produce. (American Vanguard Corporation has not been sued in these actions.) The ten named plaintiffs are citizens of four countriesGuatemala, Costa Rica, Panama, and Ecuador. Punitive damages are sought against each defendant. The plaintiffs were banana workers and allege that they were exposed to DBCP in applying the product in their native countries. The case was also filed as a class action on behalf of other workers so exposed in these four countries. The plaintiffs allege sterility and other injuries. The suits were removed to federal court and for the last several years, the focus of the case has been on procedural issues, including the dismissal of the case based on the doctrine of forum non conveniens. This doctrine would require the plaintiffs to pursue their claims in their native countries. On April 22, 2003, the United States Supreme Court issued a decision on the procedural posture of the case, holding there was no jurisdiction in federal court and remanded the case to state court. Starting in early 2004, there had been no activity in the case for about two years. However, a status conference was held on June 1, 2006 at the request of the plaintiffs attorneys, who expressed a desire to pursue the class action aspect or add other individuals. Plaintiffs counsel now claims that his class members will include two pineapple workers in Hawaii who have testicular cancer, and he also claims to have class members from mainland U.S. and other countries. On September 12, 2006, the court ordered the transfer of venue of the Maui action from Maui County to Oahu, where we expect the duplicate suit to be dismissed. Other preliminary issues will be class certification and/or the addition of class members as individual defendants. Written discovery to defendants was conducted on venue-related issues.
Further, the plaintiffs attorneys reported that the ten plaintiffs filed suit in their home countries in 1998, based on the prior order of forum non conveniens, alleging in excess of two million United States dollars ($2,000,000) per plaintiff. The suit in Guatemala was served on AMVAC in March 2001, but no defendant has been required to answer. Suits in the other countries have not been served. AMVAC has engaged local attorneys in the countries to defend these foreign suits. No discovery has taken place on the individual claims of the plaintiffs. Without such discovery, it is unknown whether any of the plaintiffs was exposed to AMVAC brand DBCP or what statute of limitation defenses may apply. AMVAC intends to contest the cases vigorously. However, it is too early to provide an assessment as to the probability of an unfavorable outcome in these matters.
B. Mississippi Matters
In May 1996, AMVAC was served with five complaints in which it is named as a defendant. (These complaints were filed by the same attorneys representing the Patrickson plaintiffs in Hawaii.) The complaints are brought by plaintiffs Edgar Arroyo-Gonzalez, Eulogio Garzon-Larreategui, ValentinValdez, Amilcar Belteton-Rivera, and Carlos Nicanor Espinola-E against one or more of the following other named defendants: Coahoma Chemical Co. Inc., Shell Oil Company, Dow Chemical Co., Occidental Chemical Co., Standard Fruit Co., Standard Fruit and Steamship Co., Dole Food Co., Inc., Dole Fresh Fruit Co., Chiquita Brands, Inc., Chiquita Brands International, Inc. and Del Monte Fresh Produce, N.A. The cases were filed in the Circuit Court of Harrison County, First Judicial District of Mississippi. Each case alleged damages sustained from injuries caused by plaintiffs (who are former banana workers and citizens of a Central American country) exposure to DBCP while applying the product in their native countries. These cases were removed to U.S. District Court for the Southern District of Mississippi, Southern Division. The federal court granted defense motions to dismiss in each case pursuant to the doctrine of forum non conveniens. On January 19, 2001, the court issued an unpublished
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decision, finding that there was jurisdiction in federal court, but remanded just one case (Espinola) back to the trial court to determine if a stipulation which limited the plaintiffs recovery to fifty thousand dollars ($50,000) was binding. If the stipulation is binding, that case will be remanded to state court. If the stipulation is not binding, that case will be dismissed along with the others, requiring the plaintiffs to litigate in their native countries. The federal court then ordered remand to state court. No activity has taken place on this matter since 2001. Without discovery, it is unknown whether any of the plaintiffs were exposed to the Companys product or what defenses may apply. AMVAC intends to contest the cases vigorously. It is too early to provide an evaluation of the likelihood of an unfavorable outcome in this case.
C. Louisiana Matters
In November 1999, AMVAC was served with three complaints filed in the 29th Judicial District Court for the Parish of St. Charles, State of Louisiana entitled Pedro Rodrigues et. al v. AMVAC Chemical Corporation et. al, Andres Puerto, et. al v. Amvac Chemical Corporation, et. al and Eduardo Soriano, et al v. Amvac Chemical Corporation et. al. Other named defendants are: Dow Chemical Company, Occidental Chemical Corporation, Shell Oil Company, Standard Fruit, Dole Food, Chiquita Brands, Tela Railroad Company, Compania Palma Tica, and Del Monte Fresh Produce. American Vanguard Corporation is not named as a defendant. These suits were filed in 1996, but they were not served until November 1999. Following a dismissal of most of the plaintiffs from the action (in light of the fact that they had previously settled their claims in other actions), the complaints, with Soriano as the lead case, allege personal injuries to about 314 persons (167 from Ecuador, 102 from Costa Rica, and 45 from Guatemala) from alleged exposure to DBCP (punitive damages are also sought). With the United States Supreme Court holding there was no federal court jurisdiction in the Patrickson case, the federal court judge remanded the cases to Louisiana state court in June 2003. In state court, the three cases were assigned to two different judges. In 2006, a group of plaintiffs represented by attorney Misko, who had been making claims solely against growers, settled with those growers and dismissed their claims against the Company. On November 17, 2006, the state court separated the cases handled by attorney Scott Hendler from the cases being pursed only against the growers handled by different counsel. The pleadings are not yet finalized as to the number of plaintiffs in these suits.
As in many of the other banana workers cases, no discovery has taken place on the individual claims of the plaintiffs. Thus, it is unknown as to how many of the plaintiffs claim exposure to AMVACs product and whether their claims are barred by applicable statutes of limitation. AMVAC intends to vigorously contest these cases. It is too early to provide any evaluation of the likelihood of an unfavorable outcome at this time.
D. Nicaragua Matters
Tellez et al v. Dole Food Company, Inc. et al
On March 26, 2004, 25 plaintiffs, all residents of Nicaragua, filed suit in state court in Los Angeles County, California, claiming personal injuries from alleged exposure to DBCP while working on banana plantations in their home country. The named defendants are Dole Food Company, Inc., Dole Fresh Fruit Company, Standard Fruit Company, Standard Fruit and Steamship Company, Dow Chemical Company, and AMVAC Chemical Corporation. American Vanguard is not named as a defendant. Punitive damages are also sought against all defendants.
The plaintiffs claim personal injuries for sterility, reduced sperm counts, and other reproductive injuries. They claim exposure from working on banana plantations in Nicaragua from dermal contact with DBCP and inhalation of vapors. The plaintiffs also claimed exposure to DBCP in groundwater that they ingested, but testing of wells in October 2005 did not reveal the presence of any DBCP contamination and this claim of exposure through groundwater is being dropped.
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AMVAC was served with the complaint on April 12, 2004 and filed an answer on May 5, 2004. On May 6, 2004, Dow Chemical removed the case from state court to the United States District Court for the Central District of California. The case was subsequently remanded to state court.
On September 2, 2004, the plaintiffs were permitted to file an amended complaint that dropped seven plaintiffs and added 18 others, so that there were a total of 36 plaintiffs. Since that time, 18 plaintiffs have been dismissed, four others who have not yet obtained U.S. visas to come to the United States for their depositions, and one making a cancer related claim have been transferred to the Mejia case listed below, reducing the total to 13.
The defendants have been taking depositions of the plaintiffs experts. Trial is presently scheduled for May 2, 2007, having recently been rescheduled due to the inability to complete 25 depositions of the plaintiffs and defendants experts within the time lines in the case management order. Plaintiffs and defendants experts will have differing views at their depositions and at trial regarding what types and amounts of exposure to DBCP might cause sterility. Depositions of defense experts will take place primarily in March. AMVAC contends that very few of these plaintiffs worked at a banana farm when its product could have been used. AMVAC also disputes the nature and extent of the claimed injuries. AMVAC intends to continue to vigorously contest this case.
It is too early to provide any evaluation of the likelihood of an unfavorable outcome at this time, as expert discovery is not yet complete. However, this case, like the other pending banana workers suits, presents difficult issues of law and fact to all parties and has a potentially large exposure. In all of these banana worker cases, there is no guarantee that the Company will be able to avoid an adverse judgment or that the size of any such judgment will not have an adverse effect upon the Companys financial performance. If plaintiffs are successful, it is likely that other banana workers from Nicaragua will file suit in California.
Rodolfo Mejia et al v. Dole Food Company, Inc. et al
On September 20, 2005, the attorneys who also represent plaintiffs in Tellez et al v. Dole Food Company et al filed an action on behalf of 16 Nicaraguan plaintiffs in the Los Angeles County Superior Court against Dole Food Company, Inc., Dole Fresh Fruit Company, Standard Fruit Company, Standard Fruit and Steamship Company, the Dow Chemical Company, and AMVAC Chemical Corporation. The complaint alleges that the 16 plaintiffs worked at various banana farms in Nicaragua and were exposed to DBCP from 1970 to 1984, suffering irreversible sterility or infertility. The complaint seeks unspecified compensatory and punitive damages against each defendant. The suit has been assigned to the same judge for case management as in the Tellez matter.
Plaintiffs have served a First Amended Complaint naming 21 banana plantation workers in Nicaragua as plaintiffs, including five plaintiffs who were transferred from the Tellez action. The Mejia action has been designated as related to the Tellez action has been stayed pending developments in the Tellez action, except for the preliminary steps of collecting plaintiffs medical and employment records in Nicaragua so that they are available for use once discovery gets underway. Discovery has not yet begun in this case. It is too early to provide any evaluation of the likelihood of an unfavorable outcome at this time.
Suits filed in Nicaragua
The Los Angeles attorneys representing these workers in California have recently stated that they have as many as 10,000 clients in Nicaragua. Thirteen of them are plaintiffs in the Tellez suit and 21 are plaintiffs in the Mejia suit pending in the Los Angeles County Superior Court.
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In prior descriptions of pending litigation and other matters, several suits filed in Nicaragua in January 2003 on behalf of banana workers claiming exposure to DBCP were mentioned. It was reported that AMVAC had been named in these suits, but was not served with the complaints.
In May 2005, two suits filed in Nicaragua in 2004 were received that name AMVAC, The Dow Chemical Company, Dole Food Co., Dole Fresh Fruit, and Standard Fruit Company. The two suits for personal injuries for sterility and reduced sperm counts have been filed on behalf of a total of 15 banana workers: Flavio Apolinar Castillo et al. v. AMVAC Chemical Corporation et al., No. 535/04 and Luis Cristobal Martinez Suazo et al. v. AMVAC Chemical Corporation et al., No. 679/04. In December 2005, AMVAC received six additional, similar lawsuits filed on behalf of a total of 30 plaintiffs. These plaintiffs each claim $1 million in special and general damages and $5 million in punitive damages.
AMVAC has retained an attorney in Nicaragua and understands that the receipt of these eight suits constitutes first notice and an invitation to attend mediation. All but one of these suits is based on Nicaraguan Public Law 364 issued in October 2000 that is directed solely at DBCP and requires the posting of a $100,000 bond, sets forth a lessened standard of proof to show that the claimed injuries are due to DBCP, and establishes an unreasonable amount of minimum compensation for injuries. This law also provides that there is no statute of limitations.
On January 25, 2006, AMVAC was served with the Flavio Apolinar Castillo and Luis Cristobal Martinez Suazo suits listed above. In March 2006, counsel in Nicaragua filed objections to jurisdiction over Amvac in these two cases. AMVACs local counsel reports that the court has not yet ruled on the objections to jurisdiction.
A review of court filings in Chinandega, Nicaragua, by local counsel has found 83 suits filed pursuant to Public Law 364 that name AMVAC and include approximately 3,497 plaintiffs. However, only the two Castillo and Suazo cases have been served on Amvac . Each of these plaintiffs claims $1 million in special and general damages and $5 million in punitive damages. It is anticipated that the plaintiffs attorneys will continue to file additional actions on a monthly basis in Nicaragua.
In an earlier round of suits brought in Nicaragua against Dow, Shell, and Standard Fruit only, the Nicaragua court issued judgments for $490 million in December 2002 based on claims of 583 banana workers, despite defenses of lack of personal jurisdiction and the unconstitutionality of Public Law 364. It has been reported that in 2003, the United States District Court in Los Angeles refused to enforce these judgments on the basis that the judgments did not properly name the defendants. The U.S. District Court did not reach the issue of due process under Public Law 364. An appeal to the U.S. Court of Appeals for the Ninth Circuit is pending.
AMVAC contends that the Nicaragua courts do not have jurisdiction over it and that Public Law 364 violates international due process of law. AMVAC intends to contest personal jurisdiction and demand under Law 364 that the claims be litigated in the United States. Thus far, it appears that the Nicaraguan courts have denied all requests of other defendants under Law 364 that allow the defendants the option of consenting to jurisdiction in the United States. It is not presently known as to how many of these plaintiffs actually claim exposure to DBCP at the time AMVACs product was allegedly used nor is there any verification of the claimed injuries. Based on the precedent of the earlier suits in Nicaragua, it would appear likely that the Nicaragua courts will, over the defendants objections, enter multi-million dollar judgments for the plaintiffs and against all defendants in these cases. One such judgment was entered in August 2005 for $97 million for 150 plaintiffs against Dole Food and other entities. It has also been reported that on December 1, 2006, the Nicaraguan court rendered a judgment for $802 million against Dow, Shell, Occidental, and Standard Fruit for some 1200 plaintiffs.
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E. Ivory Coast Cases
On October 6, 2006, AMVAC was served with seven suits filed in the Los Angeles County Superior Court and one suit in the United States District Court in Los Angeles that include a total of 668 residents of the Ivory Coast as plaintiffs. Each plaintiff claims bodily injuries from exposure to DBCP while residing or working on banana or pineapple plantations in that country from the 1970s to the present. The suits name AMVAC, Dow Chemical, Shell Oil Company, and Dole Food as defendants. All these suits also seek punitive damages and the action filed in federal court alleges a claim under the Alien Tort Claims Act, alleging that the sale and use of DBCP amounted to genocide in the Ivory Coast. AMVAC does not believe that it sold any DBCP into the Ivory Coast at any time and intends to defend these cases vigorously. Discovery has not yet begun in these cases, and it is too early to provide any evaluation as to the probability of an unfavorable outcome.
On November 3, 2006, Dow and Shell removed the seven state court cases to federal court, alleging that the naming of AMVAC and the Dole entities amounted to a fraudulent joinder of those defendants by plaintiffs to defeat federal jurisdiction. However, the federal court has remanded all of those cases on its own motion back to state court. On December 7, 2006 AMVAC answered the Alien Tort Claims Act case. A defense motion for judgment on the pleadings in the Alien Tort Claims Act case in federal court is pending for a hearing on March 12, 2007.
F. Other Matters
Other attorneys filed suits in the Los Angeles County Superior Court in April 2005 on behalf of hundreds of banana workers in other countries, including Costa Rica, Panama, and Honduras. AMVAC has not been named in these suits.
II. Other Litigation.
On July 19, 2006, AMVACs registered agent was served with a complaint entitled Latrice McLendon, et al. v. Philip Service Corporation etc. et al (including AMVAC), which was filed in the Superior State Court of Fulton County, State of Georgia No. 2006CN119863 and subsequently removed to the United States District Court for the Northern District of Georgia No. 1:06-CV-1770-CAP, in which a class of plaintiffs seek damages, including punitive damages, in an unspecified amount for personal injuries and diminution in property value allegedly arising from the airborne release of propyl mercaptan and ethoprop from a waste treatment facility operated by PSC Recovery Services (PSC) in Fairburn, Georgia. Plaintiffs, residents living in the vicinity of the PSC plant, allege trespass, nuisance and negligence on behalf of defendants in handling, storing and treating waste which was generated by AMVACs Axis, Alabama facility. In addition, in January 2007, the Alabama Department of Environmental Management issued a proposed administrative order citing AMVAC for, among other things, storing rejected washwater (which is the subject of the McLendon case) in violation of applicable regulations regarding the storage of hazardous materials. The company is negotiating a consent order with ADEM which it expects to complete in the near future. It is too early in the McLendon litigation to make an assessment of the likelihood of there being an adverse judgment against AMVAC or whether such judgment could have an adverse effect upon the Companys financial performance. AMVAC plans to defend the action vigorously.
On March 1, 2006, AMVAC and AVD accepted tender of defense and indemnity from Valent U.S.A. Corporation (Valent) with respect to an action entitled Victoria Espinoza, et al. v. Does 1, et al., including Valent U.S.A. Corporation filed in the Los Angeles Superior Court No. BC322590 in March 2005, in which plaintiff, who worked as a temporary employee intermittently in the packaging department at one of AMVACs facilities between August 1994 and August 2000, seeks damages for injuries, specifically acute myelogenous leukemia, allegedly arising from exposure to chemical products at that AMVAC facility. The defense and
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indemnity obligations arise from a toll manufacturing and supply agreement dated in September 1991 between AMVAC and Valents predecessor, and an asset purchase agreement dated in June 1998 between AMVAC and Valent by which the former purchased the Dibrom® product line from the latter. The company believes that the action is without merit and plans to defend it vigorously. Although the punitive damages claim has been dismissed from the action, however, there is no guarantee that the Company will be able to avoid an adverse judgment or that the size of any such judgment will not have an adverse effect upon the Companys financial performance. Trial is currently scheduled for July 30, 2007.
OTHER
The Company may be, from time to time, involved in other legal proceedings arising in the ordinary course of its business. The results of litigation cannot be predicted with certainty. The Company has and will continue to expend resources and incur expenses in connection with these proceedings. There can be no assurance that the Company will be successful in these proceedings. While the Company continually evaluates insurance levels for product liability, property damage and other potential areas of risk, an adverse determination in one or more of these proceedings could subject the Company to significant liabilities, which could have a material adverse effect on its financial condition and operating results.
ITEM 4 | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
No matters were submitted during the fourth quarter of 2006 to a vote of security holders, through the solicitation of proxies or otherwise.
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ITEM 5 | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Effective March 7, 2006, the Companys $0.10 par value common stock (Common Stock) is listed on the New York Stock Exchange under the ticker symbol AVD. From January 1998 through March 6, 2006, the Common Stock was listed on the American Stock Exchange under the ticker symbol AVD. The Companys Common Stock traded on The NASDAQ Stock Market under the symbol AMGD from March 1987 through January 1998.
The following table sets forth the range of high and low sales prices as reported for the Companys Common Stock for the calendar quarters indicated (as adjusted for stock splits and stock dividends).
High | Low | |||||
Calendar 2006 |
||||||
First Quarter |
$ | 22.91 | $ | 16.50 | ||
Second Quarter |
32.04 | 14.09 | ||||
Third Quarter |
16.91 | 12.91 | ||||
Fourth Quarter |
18.25 | 13.45 | ||||
Calendar 2005 |
||||||
First Quarter |
$ | 17.16 | $ | 12.00 | ||
Second Quarter |
16.91 | 12.68 | ||||
Third Quarter |
18.49 | 13.53 | ||||
Fourth Quarter |
20.24 | 13.67 |
As of March 5, 2007 the number of stockholders of the Companys Common Stock was approximately 3,900, which includes beneficial owners with shares held in brokerage accounts under street name and nominees.
On September 14, 2006, the Company announced that the Board of Directors declared a cash dividend of $0.03 per share. The dividend was distributed on October 13, 2006, to stockholders of record at the close of business on September 29, 2006. Cash dividends paid October 13, 2006, totaled approximately $783,000.
On March 23, 2006, the Company announced that the Board of Directors declared a 4 for 3 stock split and a cash dividend of $0.07 per share ($0.0525 as adjusted for the 4 for 3 stock split). Both dividends were distributed on April 17, 2006 to stockholders of record at the close of business on April 3, 2006. The cash dividend was paid on the number of shares outstanding prior to the 4 for 3 stock split. Stockholders entitled to fractional shares resulting from the stock split received cash in lieu of such fractional share based on the closing price of the Companys stock on April 3, 2006.
On September 14, 2005, the Company announced that the Board of Directors declared a cash dividend of $0.03 per share which was distributed on October 14, 2005, to stockholders of record at the close of business on September 30, 2005.
On March 21, 2005, the Company announced that the Board of Directors declared a 2 for 1 stock split (100% stock dividend) and a cash dividend of $0.11 per share ($0.055 as adjusted for the stock split). Both dividends were distributed on April 15, 2005 to stockholders of record at the close of business on March 29, 2005. The cash dividend was paid on the number of shares outstanding prior to the 2 for 1 stock split. Stockholders entitled to fractional shares resulting from the stock split received cash in lieu of such fractional share based on the closing price of the Companys stock on March 29, 2005.
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AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
On September 14, 2004, the Company announced that the Board of Directors declared a cash dividend of $.05 per share ($0.025 as adjusted for stock splits) which was distributed on October 15, 2004 to stockholders of record at the close of business on October 1, 2004.
On March 16, 2004, the Company announced that the Board of Directors declared a 3 for 2 stock split and a cash dividend of $.12 per share ($0.040 as adjusted for stock splits). Both dividends were distributed on April 16, 2004 to stockholders of record at the close of business on March 26, 2004. The cash dividend was paid on the number of shares outstanding prior to the 3 for 2 stock split. Stockholders entitled to fractional shares resulting from the stock split received cash in lieu of such fractional share based on the closing price of the Companys common stock on March 26, 2004.
The Company has issued a cash dividend in each of the last ten years dating back to 1996.
Stock Performance Graph
The following graph presents a comparison of the cumulative, five-year total return for the Company, the S&P 500 Stock Index, and a peer group selected by Value Line (ChemicalSpecialty Industry). The graph assumes that the beginning values of the investments in the Company, the S&P 500 Stock Index, and the peer group of companies each was $100. All calculations assume reinvestment of dividends. Returns over the indicated period should not be considered indicative of future returns.
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AMERICAN VANGUARD CORPORATION
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ITEM 6 | SELECTED FINANCIAL DATA (in thousands, except for weighted average number of shares and per share data) |
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||
Net sales |
$ | 193,771 | $ | 189,796 | $ | 150,855 | $ | 124,863 | $ | 100,671 | |||||
Gross profit |
$ | 82,358 | $ | 85,679 | $ | 72,258 | $ | 58,874 | $ | 43,875 | |||||
Operating income |
$ | 29,216 | $ | 32,267 | $ | 24,958 | $ | 16,542 | $ | 11,879 | |||||
Income before income tax expense |
$ | 26,522 | $ | 30,939 | $ | 23,733 | $ | 16,182 | $ | 11,278 | |||||
Net income |
$ | 15,448 | $ | 19,002 | $ | 14,477 | $ | 10,263 | $ | 7,049 | |||||
Earnings per common share(1) |
$ | 0.60 | $ | 0.78 | $ | 0.60 | $ | 0.44 | $ | 0.30 | |||||
Earnings per common shareassuming dilution(1) |
$ | 0.57 | $ | 0.74 | $ | 0.57 | $ | 0.42 | $ | 0.29 | |||||
Total assets |
$ | 262,376 | $ | 183,227 | $ | 122,346 | $ | 106,734 | $ | 75,448 | |||||
Working capital |
$ | 99,233 | $ | 41,668 | $ | 36,275 | $ | 31,624 | $ | 27,862 | |||||
Long-term debt and capital lease obligations, less current portion |
$ | 93,761 | $ | 34,367 | $ | 19,474 | $ | 22,142 | $ | 17,765 | |||||
Stockholders equity |
$ | 120,877 | $ | 82,448 | $ | 63,972 | $ | 50,334 | $ | 40,243 | |||||
Weighted average shares outstandingbasic(1) |
25,933,650 | 24,344,179 | 23,951,195 | 23,496,808 | 23,120,803 | ||||||||||
Weighted average shares outstandingassuming dilution(1) |
27,186,369 | 25,758,740 | 25,556,600 | 24,358,008 | 24,244,760 | ||||||||||
Dividends per share of common stock(1) |
$ | 0.083 | $ | 0.064 | $ | 0.049 | $ | 0.035 | $ | 0.026 | |||||
The selected consolidated financial data set forth above with respect to each of the calendar years in the five-year period ended December 31, 2006 have been derived from the Companys consolidated financial statements and are qualified in their entirety by reference to the more detailed consolidated financial statements and the independent registered public accounting firms reports thereon which are included elsewhere in this Report on Form 10-K for the three years ended December 31, 2006. See ITEM 7, Managements Discussion and Analysis of Financial Condition and Results of Operations.
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (SFAS 123(R)) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to the Employee Stock Purchase Plan (employee stock purchases) based on estimated fair values. In 2006, the Company recorded a pre-tax expense of $576 related to the adoption of SFAS 123(R) for employee stock options. All periods prior to 2006 did not include any expense related to share-based payment awards for employee stock options.
(1) | The basic and diluted weighted average number of shares outstanding, net income per share and dividend information for all periods presented have been restated to reflect the effects of stock splits and dividends. |
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AMERICAN VANGUARD CORPORATION
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ITEM 7 | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION |
Results of Operations (in Thousands)
2006 Compared with 2005:
2006 | 2005 | Change | ||||||||
Net sales: |
||||||||||
Crop |
$ | 162,447 | $ | 157,327 | $ | 5,120 | ||||
Non-crop |
31,324 | 32,469 | (1,145 | ) | ||||||
$ | 193,771 | $ | 189,796 | $ | 3,975 | |||||
Gross profit: |
||||||||||
Crop |
$ | 68,629 | $ | 69,895 | $ | (1,266 | ) | |||
Non-crop |
13,729 | 15,784 | (2,055 | ) | ||||||
$ | 82,358 | $ | 85,679 | $ | (3,321 | ) | ||||
The Company reported net income of $15,448 or $ 0.57 per diluted share in 2006 as compared to net income of $19,002 or $ 0.74 per diluted share in 2005. (Net income per share data has been restated to reflect the effect of a 4 for 3 stock split that was distributed on April 17, 2006.)
Net sales in 2006 increased 2% to $193,771 from $189,796 in 2005. Sales of products acquired through recent acquisitions accounted for approximately $16 million of additional sales. However, sales of certain corn soil and cotton insecticides and mosquito adulticides were significantly lower in 2006 compared to 2005.
Gross profit decreased by $3,321 to $82,358 (43% of sales) in 2006 from $85,679 (45% of sales) in 2005 due primarily to competitive pricing pressures, additional manufacturing overhead costs and changes in product mix.
Gross profit margins may not be comparable to those of other companies, since some companies include their distribution network in cost of goods sold and the Company, as well as others, include distribution costs in operating expenses (or other line items other than cost of goods sold).
Operating expenses, which are net of other income and expenses, decreased by $270 to $53,142 in 2006 from $53,412 in 2005. Operating expenses as a percentage of sales were 27% in 2006 as compared to 28% in 2005. The changes in operating expenses by specific departmental costs are as follows:
2006 | 2005 | Change | ||||||||
Selling |
$ | 17,231 | $ | 20,140 | $ | (2,909 | ) | |||
General and administrative |
11,729 | 14,382 | (2,653 | ) | ||||||
Research, product development and regulatory |
8,243 | 7,175 | 1,068 | |||||||
Freight, delivery and warehousing |
15,939 | 11,715 | 4,224 | |||||||
$ | 53,142 | $ | 53,412 | $ | (270 | ) | ||||
| Selling expenses decreased by $2,909 to $17,231 in 2006 from $20,140 in 2005 due primarily to lower sales program costs ($3.1 million) and royalties ($0.7 million) offset by additional sales compensation ($0.5 million) and advertising costs ($0.3 million). |
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AMERICAN VANGUARD CORPORATION
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| General and administrative expenses decreased by $2,653 to $11,729 in 2006 as compared to $14,382 in 2005 due primarily to lower bonus accruals ($1.3 million) and legal fees ($1.2 million). |
| Research and product development costs and regulatory registration expenses increased by $1,068 to $8,243 in 2006 from $7,175 in 2005 due primarily to U.K. product registration activities ($0.8 million) and other headcount and product development related costs. |
| Freight, delivery and warehousing costs increased $4,224 to $15,939 in 2006 as compared to $11,715 in 2005 due primarily to significant cost increases passed on to us by our freight carriers and the expansion of our distribution network. |
Interest costs before capitalized interest and interest income were $3,382 in 2006 as compared to $1,720 in 2005. The Companys average overall debt in 2006 was $55,520 as compared to $30,137 in 2005. Higher effective interest rates accounted for the higher gross interest costs. The Company capitalized $658 of interest costs related to construction in progress in 2006 as compared to $363 in 2005. The Company recognized $30 in interest income in 2006 as compared to $29 in 2005.
Income tax expense decreased by $863 to $11,074 in 2006 as compared to $11,937 in 2005. The Companys effective tax rate was 41.8% in 2006 as compared to 38.6% in 2005. (See note 3 to the Consolidated Financial Statements for additional analysis of the changes in income tax expense.)
Liquidity and Capital Resources
Net cash used in operating activities amounted to $29,817 in 2006 compared to net cash provided by operating activities of $18,749 in 2005. The change of $48,566 during the period relates primarily to lower net income ($3,554) and higher levels of working capital ($45,550). The increase in accounts receivable ($15,475) from 2005 relates primarily to a shift of monthly sales within the fourth quarter. The increase in inventory levels ($22,269) from 2005 relates primarily to the acquisition of new product lines and an anticipated but unrealized fourth quarter sales increase similar to 2005 (see Note 13- Quarterly DataUnaudited).
Net cash used in investing activities amounted to $47,071 in 2006 consisting of capital expenditures ($7,058), the acquisition of the Terbufos and Permethrin product lines ($39,737) and other assets ($276). Net cash used in investing activities amounted to $35,231 in 2005 consisting of capital expenditures ($13,186) and the acquisition of the Phorate insecticide product line ($22,112).
Net cash provided by financing activities amounted to $77,340 in 2006 consisting of borrowings under the credit facilities less subsequent repayments ($55,393), proceeds of the private equity placement, stock option exercises and employee stock purchase plan ($24,111) and the payment of cash dividends ($2,164). Net cash provided by financing activities amounted to $17,358 in 2005 consisting of borrowings under the credit facilities less subsequent repayments ($17,893), proceeds of stock option exercises and employee stock purchase plan ($1,015) and the payment of cash dividends ($1,550).
In December 2006, the Company entered into a Credit Agreement for a $165,000 secured credit facility. This credit facility replaced the Companys previous Amended and Restated Credit Agreement with its primary bank and syndicate of other commercial lenders. The new credit facility consists of a $75,000 revolving line of credit, $60,000 term loan and an accordion term feature of $30,000. The senior secured revolving line of credit matures on December 15, 2011 and term loan matures on December 15, 2013. The Company had $39,500 of availability under its revolving line of credit as of December 31, 2006. (See Note 2 for additional information)
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AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
In February 2006, the Company completed a $23,400 private placement, consisting of 1,040,000 shares of its common stock with a group of institutional investors. Net proceeds of the financing were approximately $22,500. The Company filed a shelf registration statement on Form S-3 under the Securities Act of 1933, as amended (Registration No. 333-122981) covering the offering and sale of its common stock. (Refer to the Companys Current Report on Form 8-K filed February 13, 2006 and incorporated herein by reference.)
Weather patterns can have an impact on the Companys operations. Weather conditions influence pest population by impacting gestation cycles for particular pests and the effectiveness of some of the Companys products, among other factors. The end user of some of the Companys 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 Companys products. During 2006, weather patterns did not have a material adverse effect on the Companys results of operations.
Contractual Obligations and Off-Balance Sheet Arrangements
The following summarizes our contractual obligations at December 31, 2006 and the effects such obligations are expected to have on liquidity and cash flow in future periods:
Payments Due by Period | |||||||||||||||
Total | Less than 1 Year |
13 Years |
45 Years |
After 5 Years | |||||||||||
Long-term debt |
$ | 62,367 | $ | 4,106 | $ | 8,212 | $ | 16,212 | $ | 33,837 | |||||
Note payable to bank |
35,500 | | | 35,500 | | ||||||||||
Accrued royalty obligations |
603 | 603 | | | | ||||||||||
Employment agreement(s) |
502 | 502 | | | | ||||||||||
Purchase orders |
26,187 | 26,187 | | | | ||||||||||
Operating leases |
1,017 | 305 | 607 | 20 | 85 | ||||||||||
$ | 126,176 | $ | 31,703 | $ | 8,819 | $ | 51,732 | $ | 33,922 | ||||||
There were no off-balance sheet arrangements as of December 31, 2006.
We believe that our cash flows from operations and cash and cash equivalents will be sufficient to meet our working capital and capital expenditure requirements and provide us with adequate liquidity to meet our anticipated operating needs for at least the next 12 months. Although operating activities are expected to provide cash, to the extent we grow significantly in the future, our operating and investing activities may use cash and, consequently, this growth may require us to obtain additional sources of financing. There can be no assurance that any necessary additional financing will be available to us on commercially reasonable terms, if at all. We intend to finance our long-term liquidity requirements out of net cash provided by operations and cash and cash equivalents.
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AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
Results of Operations
2005 Compared with 2004:
2005 | 2004 | Change | |||||||
Net sales: |
|||||||||
Crop |
$ | 157,327 | $ | 122,498 | $ | 34,829 | |||
Non-crop |
32,469 | 28,357 | 4,112 | ||||||
$ | 189,796 | $ | 150,855 | $ | 38,941 | ||||
Gross profit: |
|||||||||
Crop |
$ | 69,895 | $ | 58,465 | $ | 11,430 | |||
Non-crop |
15,784 | 13,793 | 1,991 | ||||||
$ | 85,679 | $ | 72,258 | $ | 13,421 | ||||
The Company reported net income of $19,002 or $0.74 per diluted share in 2005 as compared to net income of $14,477 or $0.57 per diluted share in 2004. (Net income per share data has been restated to reflect the effect of a 4 for 3 stock split that was distributed on April 17, 2006.)
Net sales in 2005 increased by 26% to $189,796 from $150,855 in 2004. The record sales levels were achieved through growth (primarily attributable to higher sales volume) across the vast majority of the Companys product lines coupled with the selling of a new insecticide product line (Phorate) we acquired from BASF in November which represented the Companys largest acquisition to date, the fourth quarter sales, of which, exceeded the Company sales expectations. There were no unusual or infrequent events or transactions outside of the ordinary course of business, which materially impacted net sales.
Gross profits increased $13,421 to $85,679 in 2005 from $72,258 in 2004. Gross profit margins declined to 45% in 2005 from 48% in 2004. The reduction in gross profit margins was due to the changes in the sales mix of the Companys products.
Gross profit margins may not be comparable to those of other companies, since some companies include their distribution network in cost of goods sold and the Company, as well as others, include distribution costs in operating expenses (or other line items other than cost of goods sold).
Operating expenses, which are net of other income and expenses, increased by $6,112 to $53,412 in 2005 from $47,300 in 2004. Operating expenses as a percentage of sales were 28% in 2005 as compared to 31% in 2004. The differences in operating expenses by specific departmental costs are as follows:
| Selling expenses increased by $2,200 to $20,140 in 2005 from $17,940 in 2004. Increases in payroll and payroll related costs, programs and related costs and advertising and promotion costs accounted for 22%, 19% and 15% of the increase respectively, with the balance of the increase resulting from increases in other variable selling expenses related to both increased sales levels and the product mix of sales. |
| General and administrative expenses increased by $1,654 to $14,382 in 2005 as compared to $12,728 in 2004. The increase was due to increased legal expenses (which accounted for approximately 47%), payroll, payroll related costs and other compensation costs. |
| Research and product development costs and regulatory registration expenses increased by $219 to $7,175 in 2005 from $6,956 in 2004. The increase was a result of higher licenses and registration fees and payroll and payroll related costs. |
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AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
| Freight, delivery and warehousing costs increased $2,039 to $11,715 in 2005 as compared to $9,676 in 2004 due to the increased sales levels. |
Interest costs before capitalized interest and interest income were $1,720 in 2005 as compared to $1,310 in 2004. The Companys average overall debt in 2005 was $30,137 as compared to $37,822 in 2004. Higher effective interest rates accounted for the higher gross interest costs. The Company capitalized $363 of interest costs related to construction in progress in 2005 as compared to $72 in 2004. The Company recognized $29 in interest income in 2005 as compared to $13 in 2004.
Income tax expense increased by $2,681 to $11,937 in 2005 as compared to $9,256 in 2004. The Companys effective tax rate was 38.6% in 2005 as compared to 39% in 2004. (See note 4 to the Consolidated Financial Statements for additional analysis of the changes in income tax expense.)
Liquidity and Capital Resources in 2005
Operating activities provided $18,749 of cash during the year ended December 31, 2005. Net income of $19,002, non-cash depreciation and amortization of $7,016, an increase in accounts payable, accrued expenses and other payables of $24,409, a decrease in other current assets of $767 and a change in deferred income taxes of $243 provided $51,437 of cash for operations. Increases in receivables of $31,964 and inventories of $724 used $32,688 in cash for operating activities.
The Company used $35,231 in investing activities in 2005. It invested $13,186 in capital expenditures, $22,112 in intangible assets while other non-current assets declined by $67.
Financing activities provided $17,358 in 2005. The Company received proceeds from new long-term debt of $20,000. Net borrowings under the Companys fully-secured revolving line of credit increased by $3,000 while $1,015 was received related to the issuance of common stock. The Company made payments on its debt of $5,107 and paid cash dividends of $1,550.
On October 31, 2005, AMVAC completed the acquisition of assets constituting the global Phorate insecticide product line from BASF Aktiengesellschaft (BASF), for approximately $26.1 million in purchase price consideration, subject to a post-closing adjustment to reflect the value of inventories as of the time of closing. The assets purchased by AMVAC included the active ingredient Phorate, the trademarks Thimet®, Granutox®, Granutox 5®, and Geomet®, the manufacturing and formulation know-how, registration rights, intellectual property rights and inventories, as well as an exclusive license to use BASFs patent, closed delivery system, Lock N Load®, in the United States, Canada and Australia for Phorate.
In order to finance the acquisition of the global Phorate insecticide product line, AMVAC borrowed under its revolving line of credit on October 31, 2005.
Recently Issued Accounting Guidance
In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which provides companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS No. 159 is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for the Company as of January 1, 2008. We have not completed our evaluation of SFAS No. 159 but do not expect the adoption of SFAS No. 159 to have a material effect on our operating results or financial position.
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AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
In November 2006, the FASB issued FASB Staff Position No. EITF 00-19-2, Accounting for Registration Payment Arrangements, which specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured. Additionally, this guidance further clarifies that a financial instrument subject to a registration payment arrangement should be accounted for in accordance with other applicable GAAP without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years. The Company is currently evaluating the impact of EITF 00-19-2 on the consolidated financial statements.
In September 2006, the SEC Staff issued Staff Accounting Bulletin No. 108 (SAB No. 108), Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, which addresses how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. SAB No. 108 will require companies to quantify misstatements using both the balance sheet and income statement approaches to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. When the initial adoption is determined to be material, SAB No. 108 allows companies to record that effect as a cumulative effect adjustment to beginning-of-the-year retained earnings. The accounting provisions of SAB No. 108 are effective for the Companys fiscal year ending December 31, 2006. The Company has determined that the effect of the adoption of SAB No. 108 did not have a material effect on the consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. The statement requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. This statement is effective as of the end of the fiscal year ending after December 15, 2006. The adoption of SFAS 158 did not have a material impact on the consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company does not currently believe that the adoption of SFAS 157 will have a material impact on the consolidated financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (FIN 48) an interpretation of FASB Statement No. 109, Accounting for Income Taxes. FIN 48 requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e. a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Upon adoption, the cumulative effect of applying the recognition and measurement provisions of FIN 48, if any, shall be reflected as an adjustment to the opening balance of retained earnings. FIN 48 requires that subsequent to initial adoption a change in judgment that results in subsequent recognition, derecognition or change in a measurement of a tax position taken in a prior annual period (including any related interest and penalties) be recognized as a discrete item in the period in which the change occurs. Currently, we record such changes in judgment, including audit settlements, as a component of the Companys income tax provision. Thus, the Companys reported quarterly income tax rate may become more volatile upon adoption of FIN 48. This change will not impact the manner in which we record income tax expense on an annual basis. FIN 48 also requires expanded disclosures including identification of tax positions
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AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
for which it is reasonably possible that total amounts of unrecognized tax benefits will significantly change in the next twelve months, a description of tax years that remain subject to examination by major tax jurisdiction, a tabular reconciliation of the total amount of unrecognized tax benefits at the beginning and end of each annual reporting period, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate and the total amounts of interest and penalties recognized in the statements of operations and financial position. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of this standard on its Consolidated Financial Statements.
In March 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 156, Accounting for Servicing of Financial Assetsan amendment of FASB Statement No. 140 (SFAS 156). SFAS 156 requires recognition of a servicing asset or liability at fair value each time an obligation is undertaken to service a financial asset by entering into a servicing contract. SFAS 156 also provides guidance on subsequent measurement methods for each class of servicing assets and liabilities and specifies financial statement presentation and disclosure requirements. This statement is effective for fiscal years beginning after September 15, 2006. The Company is currently evaluating the impact of SFAS 156 on the consolidated financial statements.
Foreign Exchange
Management does not believe that the fluctuation in the value of the dollar in relation to the currencies of its customers in the last three fiscal years has adversely affected the Companys ability to sell products at agreed upon prices denominated in U.S. dollars. No assurance can be given, however, that adverse currency exchange rate fluctuations will not occur in the future. Should adverse currency exchange rate fluctuations occur in geographies where the Company sells/exports its products, management is not certain such fluctuations will materially impact the Companys operating results.
Inflation
Management believes inflation has not had a significant impact on the Companys operations during the past three years.
CRITICAL ACCOUNTING POLICIES
Certain of the Companys policies require the application of judgment by management in selecting the appropriate assumptions for calculating financial estimates. These judgments are based on historical experience, terms of existing contracts, commonly accepted industry practices and other assumptions that the Company believes are reasonable under the circumstances. These estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Actual results may differ from these estimates under different assumptions or conditions. The Companys critical accounting polices and estimates include:
Revenue Recognition and Allowance for Doubtful Accounts
Revenue from sales is recognized at the time title and the risks of ownership passes. This is when the customer has made the fixed commitment to purchase the goods, the products are shipped per the customers instructions, the sales price is determinable, and collection is reasonably assured. Allowance for doubtful accounts is estimated based on estimates of losses related to customer receivable balances. Estimates are developed by using standard quantitative measures based on historical losses, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances.
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AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
Though the Company considers these balances adequate and proper, changes in economic conditions in specific markets in which the Company operates could have a material effect on reserve balances required.
Inventories
The Company values its inventories at lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method, including material, labor and factory overhead. The Company writes down its inventory for estimated obsolescence equal to the cost of the inventory. Product obsolescence may be caused by shelf-life expiration, discontinuance of a product line, replacement products in the marketplace or other competitive situations.
Long-lived Assets
The carrying value of long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Measurement of the impairment loss is based on the fair value of the asset. Generally, fair value will be determined using valuation techniques such as the present value of expected future cash flows.
Property, Plant and Equipment and Depreciation
Property, plant and equipment includes the cost of land, buildings, machinery and equipment, office furniture and fixtures, automobiles, and construction projects and significant improvements to existing plant and equipment. Interest costs related to significant construction projects are capitalized at the Companys weighted average cost of capital. Expenditures for maintenance and minor repairs are expensed as incurred. When property or equipment is sold or otherwise disposed of, the related cost and accumulated depreciation is removed from the respective accounts and the gain or loss realized on disposition is reflected in earnings. All plant and equipment is depreciated using the straight-line method, utilizing estimated useful property lives. Building lives range from 10 to 30 years; machinery and equipment lives range from 3 to 15 years; office furniture and fixture lives range from 3 to 10 years, automobile lives range from 3 to 6 years; construction projects and significant improvements to existing plant and equipment lives range from 3 to 15 years when placed in service.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries, where the local currency is the functional currency, have been translated at year end exchange rates and profit and loss accounts have been translated using weighted average yearly exchange rates. Adjustments resulting from translation have been recorded in the equity section of the balance sheet as cumulative translation adjustments in other comprehensive income.
The effect of foreign currency exchange gains and losses on transactions that are denominated in currencies other than the entitys functional currency are remeasured into the functional currency using the end of the period exchange rates. The effects of remeasurement related to foreign currency transactions are included in current profit and loss accounts.
Goodwill and Other Intangible Assets
The primary identifiable intangible assets of the Company relate to product rights associated with its product acquisitions. The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. Under the provisions of SFAS No. 142, identifiable intangibles with finite lives are amortized and those with indefinite lives are not amortized. The estimated useful life of an identifiable intangible asset to the Company is based upon a number of factors including the effects of
30
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demand, competition, and expected changes in the marketability of the Companys products. The Company tests identifiable intangible assets for impairment at least annually, relying on a number of factors including operating results, business plans and future cash flows. Identifiable intangible assets that are subject to amortization are evaluated for impairment using a process similar to that used to evaluate elements of property. The impairment test for identifiable intangible assets not subject to amortization consists of a comparison of the fair value of the intangible asset with its carrying amount. An impairment loss, if any, is recognized for the amount by which the carrying value exceeds the fair value of the asset. Fair value is typically estimated using a discounted cash flow analysis, which requires the Company to estimate the future cash flows anticipated to be generated by the particular asset(s) being tested for impairment as well as select a discount rate to measure the present value of the anticipated cash flows. When determining future cash flow estimates, the Company considers historical results adjusted to reflect current and anticipated operating conditions. Estimating future cash flows requires significant judgment by the Company in such areas as future economic conditions, industry-specific conditions, product pricing and necessary capital expenditures. The use of different assumptions or estimates for future cash flows could produce different impairment amounts (or none at all) for long-lived assets, goodwill and identifiable intangible assets.
Income Taxes
The Company recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. The Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance based upon historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences.
Stock-Based Compensation
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (SFAS 123(R)) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to the Employee Stock Purchase Plan (employee stock purchases) based on estimated fair values. The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Companys fiscal year 2006. The Companys Consolidated Financial Statements as of and for the year ended December 31, 2006 reflect the impact of SFAS 123(R). In accordance with the modified prospective transition method, the Companys Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R).
ITEM 7A | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The Company is exposed to market risk related to changes in interest rates, primarily from its borrowing activities. The Companys indebtedness to its primary lender is evidenced by two term loans and a revolving line of credit with a variable rate of interest, which fluctuates with changes in the lenders reference rate. At December 31, 2006, the Companys outstanding indebtedness was $97,867. A 1% change in the reference rate during 2006 would have increased or decreased the Companys interest expense, based on the weighted outstanding balance, by approximately $555,000. The Company does not use derivative financial instruments for speculative or trading purposes.
The Company conducts business in various foreign currencies, primarily in Europe and Mexico. Therefore changes in the value of the currencies of such countries or regions affect the Companys financial position and cash flows when translated into U.S. Dollars. As of December 31, 2006, the Company had not established a formal foreign currency hedging program. The Company has mitigated and will continue to mitigate a portion of its currency exchange exposure through operation of decentralized foreign operating companies in which the
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majority of all costs are local-currency based. A 10% change in the value of all foreign currencies would have an immaterial effect on the Companys financial position and cash flows.
ITEM 8 | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The Financial Statements and Supplementary Data are listed at PART IV, Item 15, Exhibits, Financial Statement Schedules.
ITEM 9 | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
As of December 31, 2006, management, under the supervision of the Companys Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Companys disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that these disclosure controls and procedures are effective, in all material respects, in ensuring that the information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported on a timely basis, and (ii) accumulated and communicated to the Companys management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Managements Report on Internal Control over Financial Reporting
Management of the Company is responsible for the establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) of the Securities Exchange Act of 1934. The Companys internal control over financial reporting is designed to provide reasonable assurance to management and the Board of Directors as to the fair, reliable and timely preparation and presentation of consolidated financial statements filed with the SEC.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even processes determined to be effective can provide only reasonable assurance with respect to the financial statement preparation and presentation.
Management conducted an evaluation of the Companys internal controls over financial reporting based on a framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal ControlIntegrated Framework. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the effectiveness of controls and a conclusion on the evaluation. Based on this evaluation, management believes that as of December 31, 2006, the Companys internal control over financial reporting is effective.
The Companys independent registered public accounting firm, BDO Seidman, LLP, has issued an attestation report on managements assessment of internal control over financial reporting as of December 31, 2006 and that report is included herein.
Changes in Internal Controls over Financial Reporting
There were no changes in internal controls over financial reporting during the quarter ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of American Vanguard Corporation
Newport Beach, California
We have audited managements assessment, included in the accompanying Managements Report on Internal Control over Financial Reporting, that American Vanguard Corporation (the Company) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of American Vanguard Corporation as of December 31, 2006 and 2005, and the related consolidated statements of income and comprehensive income, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2007 and our report dated March 14, 2007 expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
Los Angeles, California
March 14, 2007
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ITEM 9B | OTHER INFORMATION |
None.
ITEM 10 | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The following persons are the current Directors and Executive Officers of Registrant:
Name of Director/Officer |
Age |
Capacity | ||
Herbert A. Kraft |
83 | Co-Chairman | ||
Glenn A. Wintemute |
82 | Co-Chairman | ||
Eric G. Wintemute |
51 | Director, President and Chief Executive Officer | ||
Lawrence S. Clark(1)(2) |
48 | Director | ||
John B. Miles(2)(3) |
63 | Director | ||
Carl R. Soderlind(1)(2)(3) |
73 | Director | ||
Irving J. Thau(1)(3) |
67 | Director | ||
James A. Barry |
56 | Senior Vice President, Chief Financial Officer & Secretary/Treasurer | ||
Glen Johnson |
52 | Senior Vice President of AMVAC Chemical Corporation(4) | ||
Christopher K. Hildreth |
55 | Senior Vice President of AMVAC | ||
Robert F. Gilbane |
56 | President of GemChem, Inc.(5) |
(1) | Member of the Audit Committee. |
(2) | Member of the Compensation Committee. |
(3) | Member of the Nominating and Corporate Governance Committee. |
(4) | AMVAC Chemical Corporation (AMVAC) is a wholly-owned subsidiary of American Vanguard Corporation |
(5) | GemChem, Inc. (GemChem) is a wholly-owned subsidiary of American Vanguard Corporation |
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. He is the son of the Companys Co-Chairman, Glenn A. Wintemute.
Lawrence S. Clark was appointed a director in February 2006. Mr. Clark is the Chief Operating Officer and CFO for Legendary Pictures, a motion picture production company that develops, co-produces and co-finances major motion pictures in partnership with Warner Bros. From 2000 to 2003, Mr. Clark was the Chief Financial Officer of Creative Artists Agency, a leading entertainment talent, literary and marketing agency. From 1997 to 2000, he served as Senior Vice President, Corporate Development for Sony Pictures Entertainment. Mr. Clark was DirectorInternational for The Carlyle Group, a private equity firm, from 1995 to 1997. In 1992, he co-founded Global Film Equity Corp., which provided strategic, business advisory and capital raising services to media companies. From 1989 to 1992, Mr. Clark was Vice President, Corporate Finance at Salomon Brothers, Inc. Prior to that, he was a Corporate Finance Associate at Goldman Sachs & Co. from 1987 to 1989.
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John B. Miles has served as a director since March 1999. Mr. Miles is a Partner with the law firm McDermott Will & Emery and has held the position of Partner since 1987. Prior to 1987, Mr. Miles was a partner with Kadison Pfaelzer Woodward Quinn & Rossi. Mr. Miles has previously served on boards of directors for public and private corporations.
Carl R. Soderlind has served as a director since June 2000. Mr. Soderlind served as Chairman and Chief Executive Officer of Golden Bear Oil Specialties, a producer of niche specialty oil and chemical products used in a variety of industrial applications from 1997 to 2001. From 1961 to 1996 he served in various capacities of Witco Corporation, with his most recent position being Senior Executive Vice President and member of the Management Committee.
Irving J. Thau has served as a director since September 2003. From 1962 to 1995, he held various positions with Ernst & Young LLP, where his primary responsibilities were directing and providing accounting, auditing, and business advisory services to publicly held and privately owned organizations. He was admitted to partnership in 1974, and most recently served as Ernst & Youngs West Region Director of Financial Advisory Services. In 1995, Mr. Thau founded Thau and Associates, Inc., a financial consulting company of which he currently serves as President. Mr. Thau is also a director and Chairman of the Audit Committee of American Home Mortgage Investment Corp.
James A. Barry has served as Senior Vice President and Secretary since 1998. He has served as Treasurer since 1994 and as Chief Financial Officer of the Company and all operating subsidiaries since 1987. He also served as Vice President from 1990 through 1997 and as Assistant Secretary from 1990 to 1997. From 1990 to 1993, he also served as Assistant Treasurer. Mr. Barry also served as a director of the Company from 1994 through June 2004.
Glen D. Johnson has served as Senior Vice President and Director of Business Development of AMVAC since February 1999. Mr. Johnson was previously the North American Senior Marketing Manager for Contract Sales at Zeneca Ag Products. Prior to joining AMVAC, Mr. Johnson had over 20 years of experience in sales and marketing, acquisition and licensing, market development, and field research and development with three multinational agrochemical companies.
Christopher K. Hildreth has served as Senior Vice President and Director of Sales of AMVAC since February 2003. From 1980 to 1988, Mr. Hildreth held sales management positions at Pfizer Crop Protection. From 1988 to 1993, when United Agri Product (UAP) acquired Pfizer Crop Protection, Mr. Hildreth held sales management positions. From 1993 to 2001, he served as General Manager of UAP Canada. From 2001 to 2002, Mr. Hildreth held various executive positions at UAP, including Executive Vice PresidentInternational, President & General ManagerDistribution, and PresidentProducts Company.
Robert F. Gilbane has served as President of GemChem since June 1999. He served as Executive Vice President from January 1994 (when the Company acquired GemChem) to June 1999. He co-founded GemChem in 1991 with Eric G. Wintemute.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Companys executive officers, directors, and persons who own more than ten percent of a registered class of the Companys equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission.
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Based solely on the Companys review of the copies of such forms received by the Company, or representations obtained from certain reporting persons, the Company believes that during the year ended December 31, 2006 all filing requirements applicable to its officers, directors, and greater than ten percent beneficial stockholders were complied with.
Code of Ethics
The Company has adopted a code of ethics, the American Vanguard Corporation Code of Conduct and Ethics (the Code of Ethics), that applies to all employees, including the Companys principal executive officer, principal financial officer and principal accounting officer. The Code of Ethics is posted on the Companys Internet website, www.american-vanguard.com. Any amendment to, or waiver from, the Code of Ethics will be posted on the Companys website within five business days following the date of the amendment or waiver.
Audit Committee
The Audit Committee is currently composed of Messrs. Irving J. Thau (Chairperson), Carl R. Soderlind and Lawrence S. Clark, who are all non-employee directors and are financially literate. The Board has determined that all members of the Audit Committee are independent directors under the applicable rules and regulations currently prescribed by the Securities Exchange Commission (SEC) and the applicable rules and listing standards currently prescribed by the New York Stock Exchange, and that each of Irving J. Thau and Lawrence S. Clark are audit committee financial experts within the meaning of applicable SEC rules and regulations.
ITEM 11 | EXECUTIVE COMPENSATION |
Compensation Discussion and Analysis
Compensation Objectives
The companys compensation program has several objectives. First, we believe that our compensation should attract and retain top-quality executives. Many of our executives have transferred to the Company from our competitors, which are typically much larger organizations. In addition, we realize that our key executives could find work in the industry very easily. We must, therefore, be mindful that we do not fall below that of public companies of similar size in paying its executives. In February 2006, the Compensation Committee commissioned its compensation consultant, ECG Advisors, to review compensation of the top 10 most highly paid executives at the Company, including benchmarking against public companies having annual revenues of between $225 million and $400 million. According to that study, the Companys executive salaries were between 4 percent above and 5 percent below the 50th percentile, executive bonuses were approximately 5 percent above the 50th percentile for target bonuses, and option values were 1 percent above the market.
Second, we believe in paying for performance. Performance, however, is not limited to company-wide objectives or personal goals. In fact, we hold our executives as a group accountable for both company-wide performance (typically in terms of net sales and net earnings) and individual performance, which varies by position. We are mindful of the fact that an executive may have an off-year, while the company has an excellent year, and vice versa. We take these factors into account in determining compensation, particularly incentive-based compensation.
Third, we believe that compensation decisions should be made with the benefit of as much current information as possible. Compensation decisions that are rigorously tied to formulas can lead to undesirable results and can fail to reward positive conduct. Indeed, it is very difficult to catalog in advance all of the factors that should be taken into account in making compensation decisions. While we do set company-wide goals and
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individual performance goals for our executives, when applying those criteria, we do take into account real market conditions, compensation trends, peer practices, and other factors in making compensation decisions. Thus, for example, if the entire industry is down due to unusual weather conditions, and our company has performed well compared to our peers, we will take that into account in setting compensation.
Fourth, we compensate, in part, so that our executives have a long term interest in the companys success. This is especially so in the case of equity awards. Through granting options with a 7 to 10 year term, for example, we give the optionee motivation to plan for the long-term, rather than to seek to maximize short term returns at the expense of long term returns. Equity awards also serve to align our executives interests with those of our shareholders.
Elements of Compensation
Our named executive officers receive a base salary and certain benefits (including paid vacation, subsidized health and dental insurance, subsidized life insurance, and an automobile allowance). In addition, they participate in an annual incentive compensation plan and, from time to time, receive awards of equity, typically in the form of stock options. Further, they may choose to participate in voluntary benefit programs, such as a 401K plan and an Employee Stock Purchase Plan.
Base salarybase salary provides the executive with a reasonable standard of living and permits the company to put certain other elements of compensation at risk. Further, it would be virtually impossible to attract or retain qualified executives without this element of compensation. It forms the bulk of the executives compensation. This is the portion of compensation that does not vary with annual changes in company-wide performance or stock market fluctuations. The executive can count on his or her salary and can plan around it. In 2006, base salary accounted for more than half, but less than two-thirds of total compensation among named executive officers.
Benefitshealth and dental insurance subsidies are also universally paid to executives in virtually all industries. In other words, the company must provide these subsidies in order to remain competitive. In addition, they are a good investment by the employer, as they serve to help keep the executives healthy or, when injury or sickness strikes, to bring them back to productive service. These coverages also help the executive to limit family medical expenses that, if not otherwise insured, might cause the executive severe financial hardship. Life insurance subsidies serve as a mechanism by which the company can give something of value back to the executives family in the case of death. We believe that when our executives join the company, they are not alone in making a commitment to us; their families are making a commitment as well. Finally, the automobile allowance serves to help the executive to offset the increasingly high cost of operating a motor vehicle. It is also a common perquisite, which the company offers in order to remain competitive. The size of the allowance is consistent with ensuring that the executive will have reliable transportation to and from work, rather than permitting the executive to obtain something extravagant.
Voluntary benefitsour 401K plan is a tool for retirement planning, which serves to encourage the executive to plan for retirement now. The company matching contribution has a strong retention effect; a generous 401K plan can make a significant difference in ones employment decisions. Similarly, the American Vanguard Corporation Stock Purchase Plan serves as a means for retaining executives. It gives our executives (and other employees) the opportunity to acquire equity at a discount, which right is not available to outsiders. It also provides a means for acquiring stock at a discounted price through relatively minimal payroll deductions over a period of time. Further, the ESPP is a mechanism by which the executive can put some skin in the game by investing in the company. Equity ownership helps to align the executives interests with that of our shareholders and serves to foster a long term perspective in the executive.
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The only two forms of long-term compensation are the Companys equity awards and the executives voluntary participation in the 401K plan. Our policy for allocating between long-term (equity) and current compensation depends largely on the perceived value of the equity. For example, to the extent that the Companys stock price has appreciated continuously over multiple quarters and industry prospects look promising, we would tend to place a greater value on an award of equity. Conversely, if the stock price has exhibited volatility or lost value over time, then we might place a lesser value on equity awards, particularly if industry conditions are fair to poor. In the former case, we would place a greater emphasis on equity awards, while, in the latter case, we would place a greater emphasis on current compensation.
The Compensation Committee, working with its compensation consultant, regularly visits the question of whether, when and how to award equity. In making its recommendation, the Committee considers the length of time since the last equity award, the performance of the Companys stock, the Companys financial performance, the executives performance, and the financial impact of making awards. The Committees recommendations are also guided by the research of its compensation consultant, including benchmarking of similarly situated companies as to the prevalence of equity awards and total compensation among senior executives. In addition, the Committee maintains a relatively continuous discourse with the Chief Executive Officer on both the performance and expectations of senior management. Through this hermeneutic, the Committee selects grant dates and recommends awards that are perceived to be of value, that are consistent with those made by our peers, that have a reasonable financial impact on the Company, and that are warranted by the Companys and executives performance. The Committee is mindful of avoiding grants while in possession of material non-public information and, with respect to option grants in particular, pursuant to the Companys 1994 Stock Incentive Plan, sets the strike price of the grant to be the closing price of the Companys common stock as of the date of the award.
The Company is currently reviewing potential equity ownership guidelines for all of its executives
We do take into account the accounting and tax treatments for the Company of all forms of compensation. For example, in order to maximize the Companys ability to deduct the executive compensation under the Internal Revenue Code of 1986, as amended, (IRC) Section 162(m), we have historically limited the number of Incentive Stock Option awards given to an individual in a given year to those having a fair market value of under $100,000. Further, under the terms of the Change of Control Agreements, benefits paid thereunder will be reduced to the extent that they would constitute a nondeductible excess parachute payment under IRC Section 280G or nondeductible employee remuneration under Section 162(m). We follow all applicable accounting rules and tax laws in respect of all forms of compensation; for example, we expense options and stock awards. Because the timing of this expense depends upon the vesting of these equity awards, we set vesting schedules to optimize deferring costs into the future. In making equity awards, we do consider the tax impact upon the recipient. We have tended to favor stock option awards over awards of restricted stock, as the latter can have immediate, adverse tax consequences for our executives.
Compensation Policies and Benchmarking
The Compensation Committee retains considerable discretion to structure and adjust compensation with respect to both individuals and executives as a group. We do not follow a formulaic approach toward setting compensation. While formulaic approaches do tend to lead to greater certainty in results, they can also have unintended consequences. It is very difficult to capture in a formula all of the factors that should be taken into account when setting or adjusting compensation. We believe that, in making compensation decisions, it is important to consider not only corporate performance, but also individual performance and further, that corporate performance should be considered in the context of the industry. Thus, for example, if company performance was behind plan in a down market, but the executive team performed well, the Compensation Committee might adjust
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the incentive pool downward and make reduced awards to executives. Conversely, if company performance was ahead of plan in a solid market, but certain executives were not contributing, then the Committee might reduce awards to those certain individuals.
The Chief Executive Officer defines performance goals for his direct reports (which include all of the other named executive officers) and, working with the board and the management team, defines financial performance goals for the company. These goals serve as the foundation upon which the Compensation Committee can build a compensation scheme in keeping with other information, including studies performed by the Committees compensation consultant as well as its own research and experience. Throughout the year, the Committee maintains an open dialogue with the CEO with respect to compensation philosophy, changing business conditions, and executive performance. Further, annually, the CEO provides the Committee with recommendations for defining the incentive pool and allocating that pool among employees generally. The CEO serves as a source of information for the Committee, and, in making its own decisions, the Committee does give consideration to the CEOs recommendations. However, the Committee makes independent decisions with respect to compensation and freely draws upon all sources that it deems necessary for guidance in making its those decisions.
With respect to corporation performance, the Company considers several factors. First, we consider top and bottom line performance, specifically in terms of net sales and earnings per share. Specifically, we observe whether we have grown net sales and net earnings with respect to the prior year, the past several years, and the budget contained within the Companys financial plan. Second, we look at the relative performance of each of our product lines and compare that performance to our product line budget. Third, we consider the relative performance of our company, particularly net sales and net earnings, with that of our peer companies. Fourth, we analyze whether we have met our strategic goals.
With respect to individual performance, without discussing more specific factors that are competition sensitive, we consider the following general factors in making compensation decisions. We believe that these factors are reasonable and attainable by our executives.
President and Chief Executive Officer
| Achieving financial results that equal or exceed the Companys financial plan. |
| Attracting and maintaining excellent relationships with desirable investors. |
| The setting and achievement of strategic goals, including anticipation of, and response to, industry trends. |
| Building and retaining a sound management team. |
Senior Vice President, Chief Financial Officer, Secretary/Treasurer
| Maintaining sound internal financial controls and accounting systems that result in timely and reliable financial disclosures. |
| Attracting and retaining sources of capital necessary to permit the Company to operate and to grow through acquisition. |
| Providing the CEO and board with long and short term budgets, including strategic capital planning. |
| Keeping the board apprised of current and recent financial performance in detail sufficient to permit the board to carry out its duties toward our shareholders. |
Senior Vice President and Director of Business Development
| Finding and acquiring new product lines that are accretive to the Companys financial performance consistent with the Companys financial plan. |
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| Developing business opportunities through research and development, licensing, or other means. |
| Achieving growth of existing product lines through expansion of permitted uses, improvement of product performance, and packaging and delivery systems. |
Senior Vice President and Director of Sales
| Achieving net sales that equal or exceed those set forth in the Companys financial plan. |
| Maintaining excellent relations with existing customers and attracting new customers. |
| Successfully launching new product lines. |
| Managing a global sales team and distribution chain for the Companys products. |
President of GemChem Inc.
| Maintaining a continuous supply chain for raw materials and intermediates at globally competitive prices. |
| Launching new products and expanding the use of certain existing products outside of agriculture. |
We might decide to increase compensation materially if some or all of the following factors were present: the executives compensation is materially below that of his or her peers; the executive has taken on additional responsibilities; the executive has saved the Company significant costs; the executive has far exceeded individual performance goals. Conversely, we might decide to decrease compensation materially if some or all of the following factors were present: the executive has shown an inability to carry out responsibilities or manage his or her function; the executive seeks to work on a reduced schedule; the executive has had material duties taken away; the executives function or duties material thereto have become materially less important to the Company.
With respect to equity awards, we would consider the relative value of prior stock option awards in determining whether or in what amount to make additional awards of equity. If, for example, recent option awards were under water, we might be more inclined to make an additional award of options or an award of restricted stock.
Severance and Change of Control Provisions
Each of the named executive officers is party to a Change of Control Severance Agreement dated as of January 1, 2004 and expiring December 31, 2008. Under the terms of those agreements, the employee is entitled to receive certain payments in the event that there is a change of control during the term of agreement and such employee is either terminated (for reasons other than cause) or resigns for good reason. If the employee is terminated for cause or due to death or disability, he is not entitled to severance under the agreement. Provided the conditions for payment are met, employee is entitled to receive a lump sum amount equal to two years base salary, 24 months worth of COBRA coverage for medical insurance, executive level outplacement costs, and acceleration of unvested options (or other securities to which employee may have a right). For purposes of these agreements, change in control is defined to mean, in effect, either (i) a merger or consolidation of the company in which those who were shareholders immediately before the effective time of the merger or consolidation have less than 50% of the voting power of the new corporation or entity; (ii) a sale or disposition of all or substantially all of the companys assets; or (iii) when any person (as defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) directly or indirectly owns more than 50% of the common stock of the company. As a condition to payment, the employee must enter into a written release of claims against the company.
The company chose the three change of control events to protect these key executives in the event of new ownership. Our executive team has helped to build this company over many years into what it is today. In recognition of the teams contribution, and out of a sense of fairness, we believe it is appropriate to make provision for the executive team in advance, given that a new owner would not likely have any allegiance to the team. Further, these arrangements would give current management a disincentive to undercut an otherwise desirable merger.
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Compensation Committee Report
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402 (b) of Regulation S-K with management and, based on the review and discussions referred to in paragraph (e)(5)(i)(A) of that Item, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the registrants annual report on Form 10-K
Carl R. Soderlind, Chairman
Lawrence S. Clark, Member
John B. Miles, Member
EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash and other compensation for services rendered for the year ended December 31, 2006 paid or awarded by the Company and its subsidiaries to the its Chief Executive Officer and certain highly compensated executive officers of the Corporation, whose aggregate remuneration exceeded $100,000 (the named executive officers).
SUMMARY COMPENSATION TABLE
(a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) | (j) | |||||||||
Name and Principal Position |
Year | Salary ($) |
Bonus ($) |
Stock Awards ($) |
Option Awards ($) |
Non-Equity Incentive Plan Compensation ($) |
Change in ($) |
All ($)(1) |
Total ($) | |||||||||
Eric G. Wintemute President and Chief Executive Officer |
2006 | 480,774 | 300,000 | | | | | 55,794 | 836,568 | |||||||||
James A. Barry Sr. V.P., CFO & Secretary/Treasurer |
2006 | 212,000 | 150,000 | | | | | 25,392 | 387,392 | |||||||||
Glen D. Johnson Sr. Vice President of AMVAC |
2006 | 229,744 | 150,000 | | | | | 16,920 | 396,664 | |||||||||
Christopher K. Hildreth Sr. Vice President of AMVAC |
2006 | 246,317 | 125,000 | | | | | 31,712 | 403,029 | |||||||||
Robert F. Gilbane President of GemChem |
2006 | 220,000 | 100,000 | | | | | 22,438 | 342,438 |
(1) | See table following for details of all other compensation. |
41
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
SUMMARY COMPENSATION TABLE
ALL OTHER COMPENSATION
Perquisites ($) |
Tax ($) |
Insurance ($) |
Company ($) (3) |
Severance ($) |
Change in ($) | ||||||||
Eric G. Wintemute |
41,812 | (1) | | 1,242 | 12,740 | | | ||||||
James A. Barry |
8,604 | (2) | | 2,322 | 14,466 | | | ||||||
Glen D. Johnson |
11,928 | (2) | | 1,242 | 3,750 | | | ||||||
Christopher K. Hildreth |
13,800 | (2) | | 1,242 | 16,670 | | | ||||||
Robert F. Gilbane |
9,000 | (2) | | 2,322 | 11,116 | | |
(1) | Automobile allowance$16,812, personal expense allowance$25,000 |
(2) | Automobile allowance |
(3) | Effective January 1, 2007, the Company matches employee contributions to its 401(k) savings plan dollar for dollar up to 5% of base salary not to exceed $11,250 per annum. |
GRANTS OF PLAN-BASED AWARDS
The following table sets forth the grant of plan-based awards for the year ended December 31, 2006 to the named executive officers. There were no grants of plan-based awards for the year ended December 31, 2006.
Name (a) |
Grant Date (b) |
Estimated Future Payouts Under Non-Equity Incentive Plan Awards |
Estimated Future Payouts Under Equity Incentive Plan Awards | |||||||||||
Threshhold ($ ) (c) |
Target ($) (d) |
Maximum ($) (e) |
Threshhold ($) (f) |
Target ($) (g) |
Maximum ($) (h) | |||||||||
Eric G. Wintemute |
N/A | |||||||||||||
James A. Barry |
N/A | |||||||||||||
Glen D. Johnson |
N/A | |||||||||||||
Christopher K. Hildreth |
N/A | |||||||||||||
Robert F. Gilbane |
N/A |
GRANTS OF PLAN-BASED AWARDS (Continued)
All Other Stock (#) (i) |
All Other Option (#) (j) |
Exercise or Base Price of ($/Share) (k) |
Grant Date Fair ($) (l) | |||||
Eric G. Wintemute |
| | | | ||||
James A. Barry |
| | | | ||||
Glen D. Johnson |
| | | | ||||
Christopher K. Hildreth |
| | | | ||||
Robert F. Gilbane |
| | | |
42
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table shows, with respect to the named executive officers, the number of shares covered by both exercisable and non-exercisable stock options as of December 31, 2006, with respect to options to purchase Common Stock of American Vanguard Corporation. The closing price of the Common Stock on December 29, 2006, the last trading day of American Vanguards fiscal year, was $15.90 per share.
Option Awards | |||||||||||
Name (a) |
Number of Securities (#) Exercisable (b) |
Number of Securities (#) Unexercisable (c) |
Equity (#) (d) |
Option ($) (e) |
Option (f) | ||||||
Eric G. Wintemute |
360,000 | 90,000 | | $ | 3.67 | 12/31/2012 | |||||
James A. Barry |
80,000 | | | $ | 1.76 | 09/07/2008 | |||||
James A. Barry |
54,000 | 18,000 | | $ | 3.94 | 03/21/2010 | |||||
James A. Barry |
24,000 | 16,000 | | $ | 8.10 | 12/15/2010 | |||||
Glen D. Johnson |
36,000 | 24,000 | | $ | 8.10 | 12/15/2010 | |||||
Glen D. Johnson |
187 | | | $ | 14.74 | 09/13/2012 | |||||
Christopher K. Hildreth |
180,000 | | | $ | 3.55 | 02/02/2010 | |||||
Robert F. Gilbane |
16,000 | | | $ | 1.76 | 09/07/2008 | |||||
Robert F. Gilbane |
8,000 | 16,000 | | $ | 8.10 | 12/15/2010 | |||||
Robert F. Gilbane |
467 | | | $ | 14.74 | 12/13/2012 |
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END (continued)
Stock Awards | ||||||||
Name (a) |
Number of Shares or Units (#) (g) |
Market Value of Shares ($) (h) |
Equity Incentive Plan (#) (i) |
Equity Incentive Plan ($) (i) | ||||
Eric G. Wintemute |
| | | | ||||
James A. Barry |
| | | | ||||
Glen D. Johnson |
| | | | ||||
Christopher K. Hildreth |
| | | | ||||
Robert F. Gilbane |
| | | |
43
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
OPTION EXERCISES AND STOCK VESTED
The following table shows, with respect to the named executive officers, the number of shares acquired on the exercise of stock options and the value realized (market price less exercise price) for the year ended December 31, 2006.
Option Awards | Stock Awards | |||||||
Name (a) |
Number of Shares (#) (b) |
Value Realized on ($) (c) |
Number of Shares (#) (d) |
Value Realized on ($) (e) | ||||
Eric G. Wintemute |
| | | | ||||
James A. Barry |
| | | | ||||
Glen D. Johnson |
| | | | ||||
Christopher K. Hildreth |
| | | | ||||
Robert F. Gilbane |
80,000 | 1,191,600 | | |
PENSION BENEFITS
The following table sets forth the pension benefits payable to the named executive officers for the year ended December 31, 2006. This table is for illustrative purposes only as the Company currently does not provide this benefit to the named executive officers.
Name (a) |
Plan Name (b) |
Number of Years (#) (c) |
Present Value of ($) (d) |
Payments ($) (e) | ||||
Not Applicable |
| | | |
NON-QUALIFIED DEFERRED COMPENSATION
The following table sets forth the non-qualified deferred compensation benefits payable to the named executive officers for the year ended December 31, 2006. This table is for illustrative purposes only as the Company currently does not provide this benefit to the named executive officers.
Name (a) |
Executive ($) (b) |
Registrant ($) (c) |
Aggregate ($) (d) |
Aggregate Withdrawls/ ($) (e) |
Aggregate ($) (e) | |||||
Not Applicable |
| | | | |
44
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL
The following table summarizes the estimated payments to be made to the Named Executive Officers in the event of a termination without cause or voluntary resignation for good reason after a change in control assuming, for illustration purposes, that such change in control had occurred on December 31, 2006.
Salary ($) |
COBRA Insurance ($) |
Outplacement Services ($) |
Accelerated Option Vesting ($) (1) |
Total Change in ($) | ||||||
Eric G. Wintemute |
1,004,000 | 24,000 | 25,000 | | 1,053,000 | |||||
James A. Barry |
424,000 | 24,000 | 25,000 | 380,000 | 853,000 | |||||
Glen D. Johnson |
460,000 | 24,000 | 25,000 | 215,000 | 724,000 | |||||
Christopher K. Hildreth |
492,000 | 24,000 | 25,000 | | 541,000 | |||||
Robert F. Gilbane |
440,000 | 24,000 | 25,000 | 143,000 | 632,000 |
(1) | At current market price on March 5, 2007 of $17.07 |
DIRECTOR COMPENSATION
The following table summarizes compensation paid to the Directors of the Company for the year ended December 31, 2006.
Name (a) |
Fees Earned (b) |
Stock (c) |
Option (d) |
Non-Equity (e) |
Change in Pension ($) (f) |
All Other ($) (g) |
Total ($) (h) | |||||||
Herbert A. Kraft |
44,000 | 50,000 | | | | | 94,000 | |||||||
Glenn A. Wintemute |
37,000 | 50,000 | | | | | 87,000 | |||||||
Eric G. Wintemute |
| | | | | | | |||||||
Lawrence S. Clark |
44,333 | 66,185 | | | | | 110,518 | |||||||
John B. Miles |
52,000 | 50,000 | | | | | 102,000 | |||||||
Carl R. Soderlind |
59,000 | 50,000 | | | | | 109,000 | |||||||
Irving J. Thau |
67,500 | 50,000 | | | | | 117,500 | |||||||
Jay R. Harris |
2,500 | | | | | | 2,500 |
The Company has the following compensatory arrangements with the non-employee members of its Board of Directors:
Cash Compensation:
Effective as of January 1, each non-employee director of the Board of Directors is entitled to receive cash compensation for his or her services on the Board of Directors as follows:
| Quarterly retainer fee of $5,000 for services on the Board of Directors. |
| Quarterly retainer fee of $2,500 for service as chairperson of the Audit Committee. |
| Quarterly retainer fee of $1,250 for service as chairperson of the Compensation Committee or the Nominating and Corporate Governance Committee. |
45
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
| Attendance fee of $2,500 per meeting of the Board of Directors. |
| Attendance fee of $1,000 per meeting of the committees of the Board of Directors, except that the Audit Committee chairperson will receive an attendance fee of $1,500 per Audit Committee meeting. |
| Per diem fee of $2,000 for special assignments as determined from time to time by the Board of Directors. |
Stock Awards:
In accordance with the terms and conditions of the Companys Amended and Restated 1994 Stock Incentive Plan, as amended through May 12, 2005 (the Plan), each non-employee director of the Board of Directors is entitled to receive awards of Restricted Stock or Restricted Stock Units (as each term is defined in the Plan) of the Companys Common Stock, par value $.10 (Common Stock), as follows:
| In connection with each non-employee directors election or re-election to the Board of Directors, such director is entitled to receive an award that equals $50,000 (the Stock Award). |
| If a person is appointed to the Board of Directors for any partial year (for example, due to a vacancy on the Board of Directors), such director will receive a pro rata portion of the Stock Award as determined by the Compensation Committee or the Board of Directors. |
| Each Stock Award will be calculated based on the closing price of the Common Stock, as reported on the New York Stock Exchange or other national exchange on which the Common Stock is traded. No fractional share of any Stock Award will be issued; the value of such fractional share will be paid in cash. |
| Each Stock Award will vest immediately in full upon grant. |
The Company has entered into written indemnification agreements with each of its directors. The agreement is effective as of the first day of such persons service as a director. The agreement provides for contractual indemnification obligations by the Company to the extent permitted by applicable law and the advancement of expenses in connection therewith. The agreement also provides that any legal action against a director must be brought within two years from the date of the accrual of such action or such shorter period as provided by law.
See Description of Compensatory Arrangements Applicable to Non-Employee Directors for 2005 which was filed as Exhibit 10.1 to the Companys Form 8-K which was filed with the Securities and Exchange Commission on June 15, 2005.
Employee Contracts, Termination of Employment and Change of Control Arrangements
The Company and Eric G. Wintemute entered into a written employment agreement, dated as of January 15, 2003, pursuant to which Mr. Wintemute serves as the Companys President and Chief Executive Officer. Mr. Wintemutes annual base compensation is $435,000, with annual increases based on a percentage increase in the Consumer Price Index. Mr. Wintemute may receive a bonus in an amount as determined by the Board based on his performance against reasonable qualitative and quantitative benchmarks as determined by the Board. The agreement also provides Mr. Wintemute with certain additional benefits which are customary for executives at this level in the industry, including a car allowance of $1,500 per month and reimbursement of up to $25,000 for certain expenses. Mr. Wintemutes agreement expires on December 31, 2007, provided that his employment may be earlier terminated for cause, disability or death. If the Company terminates Mr. Wintemutes employment without cause and not due to disability or death, the Company shall pay to Mr. Wintemute an amount equal to his current annual base salary or his base salary due for the remainder of the term of the agreement, whichever is
46
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
higher. If Mr. Wintemute dies during the term of the agreement, the Company will pay his designated beneficiary any amounts (including salary) and continue any benefits due to Mr. Wintemute under the agreement for 12 months after his death.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board for the year ended December 31, 2006 consisted of Messrs. Carl R. Soderlind, Lawrence S. Clark and John B. Miles. During 2006, no officer or employee of the Company served on the board of directors of any other entity, where any officer or director of such entity also served on the Companys Board.
Related Person Transactions
John B. Miles, a current member of the Board and the Compensation Committee and the current chairperson of the Nominating and Corporate Governance Committee, is a partner in the law firm of McDermott Will & Emery LLP (MWE), which, among other firms, provides legal services to the Company. During FY2006, MWE, which has annual revenues in excess of $1 billion, provided legal services to the Company totaling approximately $470K. Please see Item 13 below.
ITEM 12 | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Common Stock Ownership of Certain Beneficial Owners
To the knowledge of the Company, the ownership of the Companys outstanding Common Stock as of March 5, 2007 by persons who are beneficial owners of 5% or more of the outstanding Common Stock is set forth below.
Name and Address of Beneficial Owner |
Amount and Nature of Beneficial Ownership(*) |
Percent of Class |
||||
Herbert A. Kraft 4695 MacArthur Court Newport Beach, CA 92660 |
3,387,219 | (1) | 11.5 | % | ||
Glenn A. Wintemute 4695 MacArthur Court Newport Beach, CA 92660 |
2,017,626 | (2) | 6.9 | % | ||
St. Denis J. Villere & Company 210 Baronne Street New Orleans, LA 70112 (**) |
3,009,024 | 10.3 | % | |||
T. Rowe Price Associates, Inc. 100 E. Pratt Street Baltimore, MD 21202 (**) |
2,357,464 | 8.0 | % | |||
Eric G. Wintemute 4695 MacArthur Court Newport Beach, CA 92660 |
1,527,547 | (3) | 5.2 | % | ||
Jay R. Harris 80 Pine Street New York, NY 10005 (**) |
2,278,303 | (4) | 7.8 | % |
47
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
(*) | Beneficial ownership figures are adjusted for stock splits and stock dividends distributed to date, including the 4 for 3 stock split distributed April 17, 2006. |
(**) | Based on information reported to the SEC by or on behalf of such beneficial owner. |
To the knowledge of the Company, the ownership of the Companys outstanding Common Stock as of March 5, 2007, by persons who are directors and nominees for directors, the executive officers of the Company named in the Summary Compensation Table, and by all directors and officers as a group is set forth below. Unless otherwise indicated the Company 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.
Office (if any) |
Name and Address Beneficial Owner |
Amount and Nature of Beneficial Ownership(*) |
Percent of Class |
|||||
Co-Chairman |
Herbert A. Kraft 4695 MacArthur Court Newport Beach, CA 92660 |
3,387,219 | (1) | 11.5 | % | |||
Co-Chairman |
Glenn A. Wintemute 4695 MacArthur Court Newport Beach, CA 92660 |
2,017,626 | (2) | 6.9 | % | |||
Director, President & CEO |
Eric G. Wintemute 4695 MacArthur Court Newport Beach, CA 92660 |
1,527,547 | (3) | 5.2 | % | |||
Director |
Carl R. Soderlind 4695 MacArthur Court Newport Beach, CA 92660 |
90,227 | (9) | | (13) | |||
Director |
John B. Miles 4695 MacArthur Court Newport Beach, CA 92660 |
91,950 | (10) | | (13) | |||
Director |
Irving J. Thau 4695 MacArthur Court Newport Beach, CA 92660 |
40,472 | (11) | | (13) | |||
Director |
Lawrence S. Clark 4695 MacArthur Court Newport Beach, CA 92660 |
7,663 | (12) | | (13) | |||
President (GEMCHEM) |
Bob Gilbane 4695 MacArthur Court Newport Beach, CA 92660 |
423,976 | (5) | 1.4 | % | |||
Senior Vice President (AMVAC) |
Glen D. Johnson 4695 MacArthur Court Newport Beach, CA 92660 |
113,719 | (6) | | (13) | |||
Senior Vice President (AMVAC) |
Christopher K. Hildreth 4695 MacArthur Court Newport Beach, CA 92660 |
183,537 | (7) | | (13) | |||
Sr.V.P.,CFO & Secretary/Treasurer |
James A. Barry 4695 MacArthur Court Newport Beach, CA 92660 |
181,999 | (8) | | (13) | |||
Directors and Officers as a Group (11) |
8,065,935 | 27.5 | % |
48
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
(*) | Beneficial ownership figures are adjusted for stock splits and stock dividends distributed to date, including the 4 for 3 stock split distributed April 17, 2006. |
(1) | Mr. Kraft owns all of his shares with his spouse in a family trust where he and his spouse are co-trustees, except as to 13,834 shares held in an Individual Retirement Account. This figure includes 29,040 shares of Common Stock Mr. Kraft is entitled to acquire pursuant to stock options exercisable within sixty days of March 5, 2007. |
(2) | Mr. Glenn Wintemute owns all of his shares with his spouse in a family trust where he and his spouse are co-trustees. This figure includes 29,040 shares of Common Stock Mr. Glenn Wintemute is entitled to acquire pursuant to stock options exercisable within sixty days of March 5, 2007. |
(3) | This figure includes 450,000 shares of Common Stock Mr. Eric Wintemute is entitled to acquire pursuant to stock options exercisable within sixty days of March 5, 2007. Mr. Wintemute shares voting and investment power with his spouse with respect to certain shares, including 139,360 shares of Common Stock owned by Mr. Wintemutes minor children for whom Mr. Wintemute and his spouse are trustees or custodians and for which he disclaims beneficial ownership. |
(4) | This figure includes 1,052,194 shares of Common Stock Mr. Harris has either sole or shared voting or dispositive power for which he disclaims beneficial ownership. |
(5) | This figure includes 24,467 shares of Common Stock Mr. Gilbane is entitled to acquire pursuant to stock options exercisable within sixty days of the filing of this Annual Report. |
(6) | This figure includes 36,187 shares of Common Stock Mr. Johnson is entitled to acquire pursuant to stock options exercisable within sixty days of March 5, 2007. |
(7) | This figure includes 180,000 shares of Common Stock Mr. Hildreth is entitled to acquire pursuant to stock options exercisable within sixty days of March 5, 2007. |
(8) | This figure includes 176,000 shares of Common Stock Mr. Barry is entitled to acquire pursuant to stock options exercisable within sixty days of March 5, 2007. |
(9) | This figure includes 9,680 shares of Common Stock Mr. Soderlind is entitled to acquire pursuant to stock options exercisable within sixty days of March 5, 2007. Certain shares are held in a family trust where Mr. Soderlind and his spouse are co-trustees. |
(10) | This figure includes 29,040 shares of Common Stock Mr. Miles is entitled to acquire pursuant to stock options exercisable within sixty days of March 5, 2007. Certain shares are held in a family trust where Mr. Miles and his spouse are co-trustees and certain shares are held by Mr. Miles or his spouse in individual retirement accounts. |
(11) | This figure includes 33,880 shares of Common Stock Mr. Thau is entitled to acquire pursuant to stock options exercisable within sixty days of March 5, 2007. |
(12) | This figure includes 533 shares of Common Stock owned by Mr. Clarks minor children for whom Mr. Clark and his spouse are trustees or custodians and for which he disclaims beneficial ownership. |
(13) | Under 1% of class. |
49
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
EQUITY COMPENSATION PLAN INFORMATION (1)
(a) | (b) | (c) | |||||
Plan category |
Number of securities to be issued upon exercise of outstanding options, warrants and rights |
Weighted- average exercise price of outstanding options, warrants and rights |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | ||||
Equity compensation plans approved by security |
1,951,217 | $ | 6.13 | 901,739 | |||
Equity compensation plans not approved by security |
| | |||||
Total |
1,951,217 | 901,739 | |||||
(1) | As of December 31, 2006. Does not include the American Vanguard Corporation Employee Stock Purchase Plan (approved by security holders in June 2001). Under this plan an aggregate of 1,760,000 shares of Common Stock (as adjusted for stock splits) may be sold to eligible employees pursuant to the plan. The purchase price shall be equal to 85% of the fair market value of the Companys Common Stock on the first day of the enrollment period or on the last day of the enrollment period, whichever is lower. There were 1,503,209 shares available for issuance under the Plan as of December 31, 2006. |
ITEM 13 | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
John B. Miles, a current member of the Board and the Compensation Committee and the current chairperson of the Nominating and Corporate Governance Committee, is a partner in the law firm of McDermott, Will & Emery LLP (MWE), which, among other firms, provides legal services to the Company. During FY2006, MWE, which has annual revenues in excess of $1 billion, provided legal services to the Company totaling approximately $470K. Mr. Herbert A. Kraft, Co-Chairman of the Board of Directors, is paid on an hourly basis to provide, as needed, information necessary to defend the Company relative to the DBCP lawsuits described in Item 3 herein. Total payments to Mr. Kraft in 2006 for these services totaled $46,187.
The board believes that, as a matter of policy, a significant majority of its members should be independent directors who (i) have no close family or similar relationship with a key member of management; (ii) are not significant advisors or consultants with the Company; (iii) do not have (and their companies do not have) significant contracts with the Company or its subsidiaries; and (iv) do not have any other relationship with the Company or its subsidiaries which, in the opinion of the board, would adversely affect a directors ability to execise independent judgment as a director. Further, the Company will not retain a director or directors firm to provide significant professional or financial services to the Company except in exceptional circumstances and only upon recommendation of Management and with the consent of a majority of the independent directors of the board. The Company has posted the preceding policy on its website under its Corporate Governance Guidelines. There were no related party transactions in 2006 that did not obtain this review and approval of the board. ,
It is the expectation and practice of the board that, in their roles as members of the board, all members will exercise their independent judgment diligently and in good faith and in the best interests of the Company and its stockholders as a whole, notwithstanding any members other activities or affiliations. The board currently consists of seven members. The board has determined that Messrs Irving J. Thau, Carl R. Soderlind, John B.
50
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
Miles and Lawrence S Clark, who constitute a majority of the board, are independent in accordance with the applicable rules and listing standards of the New York Stock Exchange. All members of the Audit, Compensation and Nominating/Corporate Governance Committees are independent. The boa rds determination concerning independence was based upon information provided by the Companys directors and discussions among the Companys directors. The board will re-examine the independence of each of its members at least once per year and more frequently if there is any change in a members material relationship with the Company that would interfere with the members exercise of independent judgment.
ITEM 14 | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The Audit Committee of American Vanguard Corporation appointed and the stockholders ratified BDO Seidman, LLP (BDO) as the Companys independent registered public accounting firm for the year ended December 31, 2006.
Aggregate fees for professional services rendered to the Company by BDO for the years ended December 31, 2006 and 2005, were (in thousands):
2006 | 2005 | |||||
Audit |
$ | 503 | $ | 474 | ||
Tax |
186 | 135 | ||||
$ | 689 | $ | 609 | |||
Audit fees for 2006 and 2005 were for professional services rendered for the audits of the consolidated financial statements of the Company including the audit of managements assessment of internal controls under Section 404 of the Sarbanes Oxley Act, timely reviews of quarterly financial statements, consents, income tax provision procedures, and assistance with review of documents filed with the SEC.
Audit Related fees, if any, would primarily relate to assurance services, accounting consultations in connection with acquisitions, and consultations concerning financial accounting and reporting standards. There were none in 2006 and 2005.
Tax fees for 2006 and 2005 were for services related to tax compliance, including the preparation of tax returns and claims for refund, and tax planning and tax advice, including assistance with and representation in tax audits, advice related to acquisitions, and requests for technical advice from tax authorities.
Our Audit Committee has considered whether the provision of the non-audit services described above is compatible with maintaining our auditors independence and determined that such services are appropriate.
REPORT OF THE AUDIT COMMITTEE
The responsibilities of the Audit Committee, which are set forth in the Audit Committee Charter, include providing oversight to the Companys financial reporting process through periodic meetings with the Companys independent auditors and management to review accounting, auditing, internal controls and financial reporting matters. The management of the Company is responsible for the preparation and integrity of the financial reporting information and related systems of internal controls. The Audit Committee, in carrying out its role, relies on the Companys senior management, including senior financial management, and its independent auditors.
51
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
We have reviewed and discussed with senior management the Companys audited financial statements included in the Companys Annual Report on Form 10-K for filing with the Securities and Exchange Commission. Management has confirmed to us that such financial statements (i) have been prepared with integrity and objectivity and are the responsibility of management and (ii) have been prepared in conformity with generally accepted accounting principles.
We have discussed with BDO Seidman, LLP, the Companys independent auditors, the matters required to be discussed by SAS 61 (Communications with Audit Committee). SAS 61 requires our independent auditors to provide us with additional information regarding the scope and results of their audit of the Companys financial statements, including with respect to (i) their responsibility under generally accepted auditing standards, (ii) significant accounting policies, (iii) management judgments and estimates, (iv) any significant audit adjustments, (v) any disagreements with management, and (vi) any difficulties encountered in performing the audit.
We have received from BDO Seidman, LLP, a letter providing the disclosures required by Independence Standards Board Standard No. 1. (Independence Discussions with Audit Committees) with respect to any relationships between BDO Seidman, LLP and the Company that in their professional judgment may reasonably be thought to bear on independence. BDO Seidman, LLP has discussed its independence with us, and has confirmed in such letter that, in its professional judgment, it is independent of the Company within the meaning of the federal securities laws.
Based on the review and discussions described above with respect to the Companys audited financial statements, we have recommended to the Board of Directors that such financial statements be included in the Companys Annual Report on Form 10-K for filing with the Securities and Exchange Commission.
As specified in the Audit Committee Charter, it is not the duty of the Audit Committee to plan or conduct audits or to determine that the Companys financial statements are complete and accurate and in accordance with generally accepted accounting principles. That is the responsibility of management and the Companys independent auditors. In addition, it is not the duty of the Audit Committee to conduct investigations, to resolve disagreements, if any, between management and the independent auditors, or to assure compliance with laws and regulations and the Companys Code of Conduct and Ethics. In giving our recommendation to the Board of Directors, we have relied on (i) managements representation that such financial statements have been prepared with integrity and objectivity and in conformity with generally accepted accounting principles, and (ii) the report of the Companys independent auditors with respect to such financial statements.
AUDIT COMMITTEE
Irving J. Thau, Chair
Carl R. Soderlind
Lawrence S. Clark
March 9, 2007
52
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
ITEM 15 | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) | The following documents are filed as part of this report: |
Index to Consolidated Financial Statements and Supplementary Data:
(b) | Exhibits: |
The exhibits listed on the accompanying Index To Exhibits, page 72 are filed as part of this annual report.
(c) | Valuation and qualifying accounts: |
Schedule II-AValuation and Qualifying Accounts
Allowance for Doubtful Accounts Receivable (in thousands)
Fiscal Year Ended |
Balance Period |
Additions Charged to | Deductions | Balance at End of Period | |||||||
Costs and Expenses |
Other | ||||||||||
December 31, 2004 |
| 200 | 200 | ||||||||
December 31, 2005 |
200 | 214 | 414 | ||||||||
December 31, 2006 |
414 | (64 | ) | 350 |
53
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
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)
By: | /s/ ERIC G. WINTEMUTE |
By: | /s/ JAMES A. BARRY | |||
Eric G. Wintemute | James A. Barry | |||||
President, Chief Executive Officer and Director |
Senior Vice President, Chief Financial Officer and Secretary/Treasurer | |||||
March 14, 2007 | March 14, 2007 |
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.
By: | /s/ HERBERT A. KRAFT |
By: | /s/ GLENN A. WINTEMUTE | |||
Herbert A. Kraft | Glenn A. Wintemute | |||||
Co-Chairman | Co-Chairman | |||||
March 14, 2007 | March 14, 2007 | |||||
By: | /s/ JOHN B. MILES |
By: | /s/ CARL R. SODERLIND | |||
John B. Miles | Carl R. Soderlind | |||||
Director | Director | |||||
March 14, 2007 | March 14, 2007 | |||||
By: | /s/ LAWRENCE S. CLARK |
By: | /s/ IRVING J. THAU | |||
Lawrence S. Clark | Irving J. Thau | |||||
Director | Director | |||||
March 14, 2007 | March 14, 2007 |
54
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of American Vanguard Corporation
Newport Beach, California
We have audited the accompanying consolidated balance sheets of American Vanguard Corporation as of December 31, 2006 and 2005 and the related consolidated statements of income and comprehensive income, stockholders equity and cash flows for each of the three years in the period ended December 31, 2006. We have also audited the schedule listed in the accompanying index. These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Vanguard Corporation at December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of American Vanguard Corporations internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 14, 2007 expressed an unqualified opinion thereon.
Also, in our opinion, the schedule presents fairly, in all material respects, the information set forth therin.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards 123(R), Share-Based Payment.
/s/ BDO Seidman, LLP
Los Angeles, California
March 14, 2007
55
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
December 31, 2006 and 2005
(Dollars in thousands, except share and per share data)
2006 | 2005 | |||||||
Assets | ||||||||
Current assets: |
||||||||
Cash |
$ | 1,844 | $ | 1,342 | ||||
Receivables: |
||||||||
Trade, net of allowance for doubtful accounts of $350 and $414, respectively |
75,158 | 58,955 | ||||||
Other |
586 | 1,314 | ||||||
75,744 | 60,269 | |||||||
Inventories |
66,628 | 44,359 | ||||||
Prepaid expenses |
1,354 | 848 | ||||||
Total current assets |
145,570 | 106,818 | ||||||
Property, plant and equipment, net |
36,652 | 34,339 | ||||||
Land held for development |
211 | 211 | ||||||
Intangible assets |
79,030 | 41,222 | ||||||
Other assets |
913 | 637 | ||||||
$ | 262,376 | $ | 183,227 | |||||
Liabilities and Stockholders Equity | ||||||||
Current liabilities: |
||||||||
Current installments of long-term debt |
$ | 4,106 | $ | 8,107 | ||||
Accounts payable |
15,688 | 28,392 | ||||||
Accrued program costs |
17,893 | 18,954 | ||||||
Accrued expenses and other payables |
4,794 | 6,067 | ||||||
Accrued royalty obligations |
603 | 1,801 | ||||||
Income taxes payable |
3,253 | 1,829 | ||||||
Total current liabilities |
46,337 | 65,150 | ||||||
Long-term debt, excluding current installments |
93,761 | 34,367 | ||||||
Deferred income taxes |
1,401 | 1,262 | ||||||
Total liabilities |
141,499 | 100,779 | ||||||
Commitments and contingent liabilities (Notes 2, 5, 7 and 9) |
||||||||
Stockholders equity: |
||||||||
Preferred stock, $.10 par value per share; authorized 400,000 shares; none issued |
| | ||||||
Common stock, $.10 par value per share; authorized 40,000,000 shares; issued 28,354,322 shares in 2006 and 26,614,607 shares in 2005 |
2,835 | 2,661 | ||||||
Additional paid-in capital |
34,821 | 9,900 | ||||||
Accumulated other comprehensive loss |
(148 | ) | (198 | ) | ||||
Retained earnings |
86,114 | 72,830 | ||||||
123,622 | 85,193 | |||||||
Less treasury stock, at cost, 2,226,796 shares in 2006 and 2005 |
(2,745 | ) | (2,745 | ) | ||||
Total stockholders equity |
120,877 | 82,448 | ||||||
$ | 262,376 | $ | 183,227 | |||||
See summary of significant accounting policies and notes to consolidated financial statements.
56
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2006, 2005 and 2004
(Dollars in thousands, except share and per share data)
2006 | 2005 | 2004 | ||||||||||
Net sales |
$ | 193,771 | $ | 189,796 | $ | 150,855 | ||||||
Cost of sales |
111,413 | 104,117 | 78,597 | |||||||||
Gross profit |
82,358 | 85,679 | 72,258 | |||||||||
Operating expenses |
53,142 | 53,412 | 47,300 | |||||||||
Operating income |
29,216 | 32,267 | 24,958 | |||||||||
Interest expense |
3,382 | 1,720 | 1,310 | |||||||||
Interest income |
(30 | ) | (29 | ) | (13 | ) | ||||||
Interest capitalized |
(658 | ) | (363 | ) | (72 | ) | ||||||
Income before provision for income taxes |
26,522 | 30,939 | 23,733 | |||||||||
Income taxes |
11,074 | 11,937 | 9,256 | |||||||||
Net income |
$ | 15,448 | $ | 19,002 | $ | 14,477 | ||||||
Earnings per common sharebasic |
$ | 0.60 | $ | 0.78 | $ | 0.60 | ||||||
Earnings per common shareassuming dilution |
$ | 0.57 | $ | 0.74 | $ | 0.57 | ||||||
Weighted average shares outstandingbasic |
25,933,650 | 24,344,179 | 23,951,195 | |||||||||
Weighted average shares outstandingassuming dilution |
27,186,369 | 25,758,740 | 25,556,600 | |||||||||
See summary of significant accounting policies and notes to consolidated financial statements.
57
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
Years ended December 31, 2006, 2005 and 2004
(Dollars in thousands, except per share data)
Common Stock | Additional Paid-in |
Retained |
Accumulated Comprehensive |
Comprehensive Income |
Treasury Stock | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Total | |||||||||||||||||||||||||
Balance, December 31, 2003 |
26,038,441 | $ | 2,604 | $ | 8,305 | $ | 42,076 | $ | (207 | ) | | 2,199,681 | $ | (2,444 | ) | $ | 50,334 | ||||||||||||
Stocks issued under ESPP |
22,501 | 2 | 186 | | | | | | 188 | ||||||||||||||||||||
Cash dividends on common stock ($0.065 per share) |
| | | (1,175 | ) | | | | | (1,175 | ) | ||||||||||||||||||
Foreign currency translation adjustment, net |
| | | | | | | | | ||||||||||||||||||||
Treasury stock acquired |
| | | | | | 27,115 | (301 | ) | (301 | ) | ||||||||||||||||||
Stock options exercised |
422,109 | 42 | 407 | | | | | | 449 | ||||||||||||||||||||
Net income |
| | | 14,477 | | 14,477 | | | 14,477 | ||||||||||||||||||||
Total comprehensive income |
| | | | | $ | 14,477 | | | | |||||||||||||||||||
Balance, December 31, 2004 |
26,483,051 | 2,648 | 8,898 | 55,378 | (207 | ) | | 2,226,796 | (2,745 | ) | 63,972 | ||||||||||||||||||
Stocks issued under ESPP |
41,169 | 4 | 536 | | | | | | 540 | ||||||||||||||||||||
Cash dividends on common stock ($0.085 per share) |
| | | (1,550 | ) | | | | | (1,550 | ) | ||||||||||||||||||
Foreign currency translation adjustment, net |
| | | | 9 | 9 | | | 9 | ||||||||||||||||||||
Stock options exercised |
90,387 | 9 | 466 | | | | | | 475 | ||||||||||||||||||||
Net income |
| | | 19,002 | | 19,002 | | | 19,002 | ||||||||||||||||||||
Total comprehensive income |
| | | | | $ | 19,011 | | | | |||||||||||||||||||
Balance, December 31, 2005 |
26,614,607 | 2,661 | 9,900 | 72,830 | (198 | ) | | 2,226,796 | (2,745 | ) | 82,448 | ||||||||||||||||||
Stocks issued under ESPP |
42,115 | 4 | 582 | | | | | | 586 | ||||||||||||||||||||
Cash dividends on common stock ($0.0825 per share) |
| | | (2,164 | ) | | | | | (2,164 | ) | ||||||||||||||||||
Foreign currency translation adjustment, net |
| | | | 50 | 50 | | | 50 | ||||||||||||||||||||
Private equity offering |
1,385,970 | 139 | 22,395 | | | | | | 22,534 | ||||||||||||||||||||
FAS 123(R) expense |
| | 984 | | | | | | 984 | ||||||||||||||||||||
Stock options exercised and grants of restricted stock units |
311,630 | 31 | 960 | | | | | | 991 | ||||||||||||||||||||
Net income |
| | | 15,448 | | 15,448 | | | 15,448 | ||||||||||||||||||||
Total comprehensive income |
| | | | | $ | 15,498 | | | | |||||||||||||||||||
Balance, December 31, 2006 |
28,354,322 | $ | 2,835 | $ | 34,821 | $ | 86,114 | $ | (148 | ) | | 2,226,796 | $ | (2,745 | ) | $ | 120,877 | ||||||||||||
See summary of significant accounting policies and notes to consolidated financial statements.
58
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2006, 2005 and 2004
(Dollars in thousands)
2006 | 2005 | 2004 | ||||||||||
Increase (decrease) in cash |
||||||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 15,448 | $ | 19,002 | $ | 14,477 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization of property, plant and equipment |
4,745 | 4,965 | 4,042 | |||||||||
Amortization of other assets |
1,929 | 2,051 | 1,758 | |||||||||
Stock-based compensation expense related to stock options, employee stock purchases and directors fees |
984 | | | |||||||||
Deferred income taxes |
139 | 243 | (1,053 | ) | ||||||||
Changes in assets and liabilities associated with operations: |
||||||||||||
Increase in net receivables |
(15,475 | ) | (31,964 | ) | (108 | ) | ||||||
Increase in inventories |
(22,269 | ) | (724 | ) | (10,246 | ) | ||||||
(Increase) decrease in prepaid expenses |
(506 | ) | 767 | (422 | ) | |||||||
Increase (decrease) in accounts payable |
(12,704 | ) | 15,456 | (46 | ) | |||||||
Increase (decrease) in other payables and accrued expenses |
(2,108 | ) | 8,953 | 7,008 | ||||||||
Net cash (used in) provided by operating activities |
(29,817 | ) | 18,749 | 15,410 | ||||||||
Cash flows from investing activities: |
||||||||||||
Capital expenditures |
(7,058 | ) | (13,186 | ) | (8,483 | ) | ||||||
Acquisitions of intangible assets |
(39,737 | ) | (22,112 | ) | (2,612 | ) | ||||||
Net decrease (increase) in other non-current assets |
(276 | ) | 67 | 29 | ||||||||
Net cash used in investing activities |
(47,071 | ) | (35,231 | ) | (11,066 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Net (repayments) borrowings under line of credit agreement |
30,500 | 3,000 | (12,200 | ) | ||||||||
Proceeds from issuance of long-term debt |
60,000 | 20,000 | 12,065 | |||||||||
Payments on long-term debt and capital lease obligations |
(35,107 | ) | (5,107 | ) | (3,800 | ) | ||||||
Proceeds from the issuance of common stock |
24,111 | 1,015 | 637 | |||||||||
Purchase of treasury stock |
| | (301 | ) | ||||||||
Payment of cash dividends |
(2,164 | ) | (1,550 | ) | (1,175 | ) | ||||||
Net cash provided by (used in) financing activities |
77,340 | 17,358 | (4,774 | ) | ||||||||
Net increase (decrease) in cash |
452 | 876 | (430 | ) | ||||||||
Cash at beginning of year |
1,342 | 457 | 887 | |||||||||
Effect of exchange rate changes on cash |
50 | 9 | | |||||||||
Cash at end of year |
$ | 1,844 | $ | 1,342 | $ | 457 | ||||||
Supplemental cash flow information: |
||||||||||||
Cash paid during the year for: |
||||||||||||
Interest |
$ | 2,992 | $ | 1,580 | $ | 1,090 | ||||||
Income taxes |
$ | 9,472 | $ | 11,552 | $ | 9,402 | ||||||
See summary of significant accounting policies and notes to consolidated financial statements.
59
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
Supplemental schedule of non-cash investing and financing activities:
On March 23, 2006, the Company announced that the Board of Directors declared a 4 for 3 stock split and a cash dividend of $0.07 per share ($0.0525 as adjusted for the 4 for 3 stock split). Both dividends were distributed on April 17, 2006 to stockholders of record at the close of business on April 3, 2006. The cash dividend was paid on the number of shares outstanding prior to the 4 for 3 stock split. Stockholders entitled to fractional shares resulting from the stock split received cash in lieu of such fractional share based on the closing price of the Companys stock on April 3, 2006.
On March 21, 2005, the Company announced that the Board of Directors declared a 2 for 1 stock split (100% stock dividend) and a cash dividend of $.11 per share ($.055 as adjusted for the stock split). Both dividends were distributed on April 15, 2005 to stockholders of record at the close of business on March 29, 2005. The cash dividend was paid on the number of shares outstanding prior to the 2 for 1 split. Stockholders entitled to fractional shares resulting from the stock split received cash in lieu of such fractional share based on the closing price of the Companys stock on March 29, 2005.
On March 16, 2004, the Company announced that the Board of Directors declared a cash dividend of $.12 per share ($.08) as adjusted for a 3 for 2 stock split) as well as a 3 for 2 stock split. Both the cash dividend and stock split were distributed on April 16, 2004 to stockholders of record at the close of business on March 26, 2004. The cash dividend was paid on the number of shares outstanding prior to the 3 for 2 stock split. Stockholders entitled to fractional shares resulting from the stock split received cash in lieu of such fractional share based on the closing price of the Companys common stock on March 26, 2004.
See summary of significant accounting policies and notes to consolidated financial statements.
60
AND SUBSIDIARIES
(Dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2006, 2005 and 2004
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 manufactures and formulates chemicals for crops, human and animal protection. The consolidated financial statements include the accounts of American Vanguard Corporation (Company) and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company operates within a single operating segment.
Based on similar economic and operational characteristics, the Companys business is aggregated into one reportable segment. Selective enterprise information is as follows:
2006 | 2005 | 2004 | |||||||
Net sales: |
|||||||||
Crop |
$ | 162,447 | $ | 157,327 | $ | 122,498 | |||
Non-crop |
31,324 | 32,469 | 28,357 | ||||||
$ | 193,771 | $ | 189,796 | $ | 150,855 | ||||
The Companys subsidiary, GemChem, Inc., procures certain raw materials used in the Companys manufacturing operations and is also a distributor of various pharmaceutical and nutritional supplement products.
Because of elements inherent to the Companys 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 Companys 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.
Cost of Goods Sold
In addition to normal centers (i.e., direct labor, raw materials) of cost of goods sold, the Company includes such cost centers as Health and Safety, Environmental, Maintenance and Quality Control in cost of goods sold.
Other Than Cost of Goods SoldOperating Expenses
Operating expenses include such cost centers as Selling, General and Administrative, Research and Product Development, Regulatory/Registration, Freight, Delivery and Warehousing in operating expenses.
Freight, Delivery and Warehousing Expense
Freight, delivery and warehousing costs incurred by the Company are reported as operating expenses. All amounts billed to a customer in a sales transaction related to freight, delivery and warehousing are recorded as a reduction in operating expenses. Freight, delivery and warehousing costs were $15,939 in 2006, $11,715 in 2005 and $9,676 in 2004.
Advertising Expense
The Company expenses advertising costs in the period incurred. Advertising expenses, which include promotional costs, is recognized in operating costs (specifically in selling expenses) in the consolidated statements of income and were $1,270 in 2006, $1,044 in 2005 and $703 in 2004.
61
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method.
The components of inventories consist of the following:
2006 | 2005 | |||||
Finished products |
$ | 58,060 | $ | 40,166 | ||
Raw materials |
8,568 | 4,193 | ||||
$ | 66,628 | $ | 44,359 | |||
Long-lived Assets
The carrying values of long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Measurement of the impairment loss is based on the fair value of the asset. Generally, fair value will be determined using valuation techniques such as the present value of expected future cash flows. Substantially all of the Companys long-lived assets are held domestically. There was no impairment for the years ended December 31, 2006, 2005 and 2004.
Revenue Recognition
Revenue from sales is recognized at the time title and the risks of ownership passes. This is when the customer has made the fixed commitment to purchase the goods, the products are shipped per the customers instructions, the sales price is determinable, and collection is reasonably assured.
Programs
The Company has adopted Emerging Issues Task Force Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendors Products (EITF 01-9). In accordance with EITF 01-9, the Company is required to classify certain payments to its customers as a reduction of sales. The Company engages in various customer programs. The Company accounts for these programs as operating expenses or as a reduction in sales in accordance with EITF 01-9.
Property, Plant and Equipment and Depreciation
Property, plant and equipment includes the cost of land, buildings, machinery and equipment, office furniture and fixtures, automobiles, and construction projects and significant improvements to existing plant and equipment. Interest costs related to significant construction projects may be capitalized at the Companys weighted average cost of capital. Expenditures for maintenance and minor repairs are expensed as incurred. When property or equipment is sold or otherwise disposed of, the related cost and accumulated depreciation is removed from the respective accounts and the gain or loss realized on disposition is reflected in earnings. All plant and equipment is depreciated using the straight-line method, utilizing estimated useful property lives. Building lives range from 10 to 30 years; machinery and equipment lives range from 3 to 15 years; office furniture and fixtures lives range from 3 to 10 years, automobile lives range from 3 to 6 years; construction projects and significant improvements to existing plant and equipment lives range from 3 to 15 years when placed in service.
62
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries, where the local currency is the functional currency, have been translated at year end exchange rates and profit and loss accounts have been translated using weighted average yearly exchange rates. Adjustments resulting from translation have been recorded in the equity section of the balance sheet as cumulative translation adjustments in other comprehensive loss.
The effect of foreign currency exchange gains and losses on transactions that are denominated in currencies other than the entitys functional currency are remeasured into the functional currency using the end of the period exchange rates. The effects of foreign currency transactions are included in current profit and loss accounts and are immaterial.
The Company had total comprehensive income of $15,498, $19,011 and $14,477 for the years ended December 31, 2006, 2005 and 2004, respectively, which include foreign currency gains of $50, $9 and $0 for the years ended December 31, 2006, 2005 and 2004, respectively.
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 Companys long-term debt and note payable to bank is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. Such fair value approximates the respective carrying values of the Companys long-term debt and note payable to bank.
Income Taxes
The Company uses the asset and liability method to account for income taxes, including recognition of deferred tax assets for the anticipated future tax consequences attributable to differences between financial statement amounts and their respective tax bases. Income tax expense is recognized currently for taxes payable. The Company reviews its deferred tax assets for recovery. A valuation allowance is established when the Company believes that it is more likely than not that some portion of its deferred tax assets will not be realized. Changes in valuation allowances from period to period are included in the Companys tax provision in the period of change.
Per Share Information
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share (EPS) requires dual presentation of basic EPS and diluted EPS on the face of all income statements. Basic EPS is computed as net income divided by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects potential dilution that could occur if securities or other contracts, which, for the Company, consists of options to purchase shares of the Companys common stock are exercised.
63
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The components of basic and diluted earnings per share were as follows:
2006 | 2005 | 2004 | |||||||
Numerator: |
|||||||||
Net income |
$ | 15,448 | $ | 19,002 | $ | 14,477 | |||
Denominator: |
|||||||||
Weighted averages shares outstanding |
25,934 | 24,344 | 23,951 | ||||||
Assumed exercise of stock options |
1,252 | 1,415 | 1,606 | ||||||
27,186 | 25,759 | 25,557 | |||||||
The effect of options to purchase 34,280 for the year ended December 31, 2004 were excluded from the computation of earnings per dilutive share. The impact of such common stock equivalents are excluded from the calculation of net income per share on a diluted basis as their effect is anti-dilutive. There were no anti-dilutive common stock equivalents for the years ended December 31, 2006 and 2005.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses at the date that the financial statements are prepared. Actual results could differ from those estimates.
Reclassifications
Certain prior years amounts have been reclassified to conform to the current years presentation.
Goodwill and Other Intangible Assets
The primary identifiable intangible assets of the Company relate to product rights associated with its product acquisitions. The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. Under the provisions of SFAS No. 142, identifiable intangibles with finite lives are amortized and those with indefinite lives are not amortized. The estimated useful life of an identifiable intangible asset to the Company is based upon a number of factors including the effects of demand, competition, and expected changes in the marketability of the Companys products. The Company tests identifiable intangible assets for impairment at least annually, relying on a number of factors including operating results, business plans and future cash flows. Identifiable intangible assets that are subject to amortization are evaluated for impairment using a process similar to that used to evaluate elements of property. The impairment test for identifiable intangible assets not subject to amortization consists of a comparison of the fair value of the intangible asset with its carrying amount. An impairment loss, if any, is recognized for the amount by which the carrying value exceeds the fair value of the asset. Fair value is typically estimated using a discounted cash flow analysis, which requires the Company to estimate the future cash flows anticipated to be generated by the particular asset(s) being tested for impairment as well as selecting a discount rate to measure the present value of the anticipated cash flows. When determining future cash flow estimates, the Company considers historical results adjusted to reflect current and anticipated operating conditions. Estimating future cash flows requires significant judgment by the Company in such areas as future economic conditions, industry-specific conditions, product pricing and necessary capital expenditures. The use of different assumptions or estimates for future cash
64
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
flows could produce different impairment amounts (or none at all) for long-lived assets, goodwill and identifiable intangible assets.
Stock-Based Compensation
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (SFAS 123(R)) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to the Employee Stock Purchase Plan (employee stock purchases) based on estimated fair values. SFAS 123(R) supersedes the Companys previous accounting under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) for periods beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB 107) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).
The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Companys fiscal year 2006. The Companys Consolidated Financial Statements as of and for the year ended December 31, 2006 reflect the impact of SFAS 123(R). In accordance with the modified prospective transition method, the Companys Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Stock-based compensation expense recognized under SFAS 123(R) for the year ended December 31, 2006 was $984. Stock based compensation expense recognized consisted of the following:
Year Ended December 31, | |||
Expense related to employee stock options |
$ | 576 | |
Expense related to director stock awards |
316 | ||
Expense related to employee stock purchases |
92 | ||
Total SFAS 123(R) expense |
$ | 984 | |
The impact of adopting SFAS 123(R) for year ended December 31, 2006 was a reduction of $0.01 per share on a diluted basis.
SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Companys Consolidated Statement of Operations. Prior to the adoption of SFAS 123(R), the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). Under the intrinsic value method, no stock-based compensation expense had been recognized in the Companys Consolidated Statement of Operations, other than as related to acquisitions and investments, because the exercise price of the Companys stock options granted to employees and directors equaled the fair market value of the underlying stock at the date of grant.
Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Stock-based compensation
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
expense recognized in the Companys Consolidated Statement of Operations for the year ended December 31, 2006 included compensation expense for share-based payment awards granted prior to, but not yet vested as of December 31, 2005 based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123 and compensation expense for the share-based payment awards granted subsequent to December 31, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). In conjunction with the adoption of SFAS 123(R), the Company changed its method of attributing the value of stock-based compensation to expense from the accelerated multiple-option approach to the straight-line single option method. Compensation expense for all share-based payment awards granted on or prior to December 31, 2005 will continue to be recognized using the accelerated multiple-option approach while compensation expense for all share-based payment awards granted subsequent to December 31, 2005 is recognized using the straight-line single-option method. Stock-based compensation expense recognized in the Consolidated Statement of Operations for periods subsequent to December 31, 2005 has not been reduced for forfeitures as estimated forfeitures are anticipated to be immaterial. Instead forfeitures are being recognized as they occur. SFAS 123(R) requires forfeitures to be estimated, if material, at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the Companys pro forma information required under SFAS 123 for the periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred.
As of December 31, 2006, the Company had approximately $363 of unamortized stock-based compensation expenses, which will be recognized over the weighted-average period of 1.5 years. This projected expense will change if any stock options are granted or cancelled prior to the respective reporting periods or if there are any changes required to be made for estimated forfeitures.
Upon adoption of SFAS 123(R), the Company continued its method of valuation for share-based awards granted beginning in fiscal 2006 based on the Black-Scholes option-pricing model (Black-Scholes model) which was previously used for the Companys pro forma information required under SFAS 123 using the following weighted average assumptions:
2006 | 2005 | 2004 | ||||||
Risk free interest rate |
N/A | 4.7 | % | 3.6 | % | |||
Dividend yield |
N/A | 0.26 | % | 0.26 | % | |||
Volatility factor |
N/A | 38 | % | 38 | % | |||
Weighted average life (years) |
N/A | 1-5 years | 1-5 years |
The weighted average fair value on the date of grant for options granted during 2005 and 2004 was $5.20 and $5.81, respectively. There were no options granted during the year ended December 31, 2006.
The expected volatility and expected life assumptions are highly complex and subjective variables. The variables take into consideration, among other things, actual and projected employee stock option exercise behavior. The Company estimates expected term using the safe harbor provisions of SAB 107. The Company used historical volatility as a proxy for estimating expected volatility.
On November 10, 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. FAS 123(R)-3 Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards. The Company has elected to adopt the alternative transition method provided in the FASB Staff Position for calculating the tax effects of stock-based compensation pursuant to SFAS 123(R). The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123(R).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Pro Forma Information under SFAS 123 for the years ended December 31, 2005 and 2004 (periods prior to fiscal 2006) is as follows: (amounts in thousands, except for per share data)
2005 | 2004 | |||||||
Net income attributable to common stockholders |
$ | 19,002 | $ | 14,477 | ||||
Stock-based employee compensation expense included in reported net income, net of related tax effects |
-0- | -0- | ||||||
Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
(589 | ) | (600 | ) | ||||
Pro forma |
$ | 18,413 | $ | 13,877 | ||||
Earnings per common sharebasic, as reported |
$ | 0.78 | $ | 0.60 | ||||
Pro forma |
$ | 0.76 | $ | 0.58 | ||||
Earnings per common sharediluted, as reported |
$ | 0.74 | $ | 0.57 | ||||
Pro forma |
$ | 0.71 | $ | 0.54 | ||||
Recently Issued Accounting Guidance
In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which provides companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS No. 159 is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for the Company as of January 1, 2008. We have not completed our evaluation of SFAS No. 159 but do not expect the adoption of SFAS No. 159 to have a material effect on our operating results or financial position.
In November 2006, the FASB issued FASB Staff Position No. EITF 00-19-2, Accounting for Registration Payment Arrangements, which specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured. Additionally, this guidance further clarifies that a financial instrument subject to a registration payment arrangement should be accounted for in accordance with other applicable GAAP without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years. The Company is currently evaluating the impact of EITF 00-19-2 on the consolidated financial statements.
In September 2006, the SEC Staff issued Staff Accounting Bulletin No. 108 (SAB No. 108), Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, which addresses how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. SAB No. 108 will require companies to quantify misstatements using both the balance sheet and income statement approaches to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. When the initial adoption is determined to be material, SAB No. 108 allows companies to record that effect as a cumulative
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
effect adjustment to beginning-of-the-year retained earnings. The accounting provisions of SAB No. 108 are effective for the Companys fiscal year ending December 31, 2006. The Company has determined that the effect of the adoption of SAB No. 108 did not have a material effect on the consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. The statement requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. This statement is effective as of the end of the fiscal year ending after December 15, 2006. The adoption of SFAS 158 did not have a material impact on the consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company does not currently believe that the adoption of SFAS 157 will have a material impact on the consolidated financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (FIN 48) an interpretation of FASB Statement No. 109, Accounting for Income Taxes. FIN 48 requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e. a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Upon adoption, the cumulative effect of applying the recognition and measurement provisions of FIN 48, if any, shall be reflected as an adjustment to the opening balance of retained earnings. FIN 48 requires that subsequent to initial adoption a change in judgment that results in subsequent recognition, derecognition or change in a measurement of a tax position taken in a prior annual period (including any related interest and penalties) be recognized as a discrete item in the period in which the change occurs. Currently, we record such changes in judgment, including audit settlements, as a component of the Companys income tax provision. Thus, the Companys reported quarterly income tax rate may become more volatile upon adoption of FIN 48. This change will not impact the manner in which we record income tax expense on an annual basis. FIN 48 also requires expanded disclosures including identification of tax positions for which it is reasonably possible that total amounts of unrecognized tax benefits will significantly change in the next twelve months, a description of tax years that remain subject to examination by major tax jurisdiction, a tabular reconciliation of the total amount of unrecognized tax benefits at the beginning and end of each annual reporting period, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate and the total amounts of interest and penalties recognized in the statements of operations and financial position. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of this standard on its Consolidated Financial Statements.
In March 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 156, Accounting for Servicing of Financial Assetsan amendment of FASB Statement No. 140 (SFAS 156). SFAS 156 requires recognition of a servicing asset or liability at fair value each time an obligation is undertaken to service a financial asset by entering into a servicing contract. SFAS 156 also provides guidance on subsequent measurement methods for each class of servicing assets and liabilities an specifies financial statement presentation and disclosure requirements. This statement is effective for fiscal years beginning after September 15, 2006. The Company is currently evaluating the impact of SFAS 156 on the consolidated financial statements.
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AMERICAN VANGUARD CORPORATION
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(1) Property, Plant and Equipment
Property, plant and equipment at December 31, 2006 and 2005 consists of the following:
2006 | 2005 | Estimated useful lives | ||||||
Land |
$ | 2,441 | $ | 2,441 | ||||
Buildings and improvements |
6,699 | 5,202 | 10 to 30 years | |||||
Machinery and equipment |
58,529 | 47,814 | 3 to 15 years | |||||
Office furniture, fixtures and equipment |
4,853 | 3,685 | 3 to 10 years | |||||
Automotive equipment |
209 | 209 | 3 to 6 years | |||||
Construction in progress |
7,418 | 13,739 | ||||||
80,149 | 73,090 | |||||||
Less accumulated depreciation |
43,497 | 38,751 | ||||||
$ | 36,652 | $ | 34,339 | |||||
(2) Long-Term Debt
Long-term debt of the Company at December 31, 2006 and 2005 is summarized as follows (amounts in thousands):
2006 | 2005 | |||||
Note payable, secured by certain real property, payable in monthly installments of $9, plus interest (7.35% as of December 31, 2006) with remaining unpaid principal due April 1, 2011 (a) |
$ | 2,367 | $ | 2,474 | ||
Term loan, secured by personal property, payable in quarterly principal installments of $1,000 plus interest (7.93% as of December 31, 2006) through December 31, 2009 and $2,000 plus interest thereafter with remaining unpaid principal due December 15, 2013 (b) |
60,000 | 35,000 | ||||
Revolving line of credit (interest rate of 7.69% at December 31, 2006) (b) |
35,500 | 5,000 | ||||
97,867 | 42,474 | |||||
Less current installments |
4,106 | 8,107 | ||||
$ | 93,761 | $ | 34,367 | |||
Approximate principal payments on long-term debt mature as follows:
2007 |
$ | 4,106 | |
2008 |
4,106 | ||
2009 |
4,106 | ||
2010 |
8,106 | ||
2011 |
43,606 | ||
Thereafter |
33,837 | ||
$ | 97,867 | ||
(a) | This note payable, secured by certain real property, was refinanced effective March 19, 2004. |
(b) | In December 2006, the Company entered into a Credit Agreement with a syndicate of commercial lenders led by the Companys primary bank as the administrative agent and a lender along with six other banks, for a $165,000 secured credit facility. This credit facility replaced the Companys previous Amended and Restated Credit Agreement with its primary bank and syndicate of other commercial lenders. The new credit |
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AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
facility consists of a $75,000 revolving line of credit, $60,000 term loan and an accordion term feature of $30,000. These loans bear interest at the prime rate (Prime Rate Loans), or at the Companys option, a fixed rate of interest offered by the Bank (such as adjusted LIBOR rate plus certain margins, in each case dependent on certain debt ratios (Eurodollar Rate Loans)). The principal payments of the term loan are payable in equal quarterly installments of $1,000 on or before the last business day of each March, June, September and December, commencing March 31, 2007 through December 31, 2009, and in equal quarterly installments of $2,000 on or before the last business day of each March, June, September and December, commencing March 31, 2010 through September 30, 2013. One final installment in the amount necessary to repay the remaining outstanding principal balance of the term loan is due in full on the maturity date. Interest accruing on Prime Rate Loans is payable monthly. Interest accruing on the Eurodollar Rate Loans are payable on the last day of the interest period, provided that, with an interest period longer than three months, interest is payable on the last day of each three-month period after the commencement of such interest period. The senior secured revolving line of credit matures on December 15, 2011 and term loan matures on December 15, 2013. These loans contain certain covenants (with which the Company is in compliance) as defined in the agreement. The Company had $39,500 of availability under its revolving line of credit as of December 31, 2006. |
Substantially all of the Companys assets not otherwise specifically pledged as collateral on existing loans and capital leases are pledged as collateral under the credit agreement.
The average amount outstanding of the senior secured revolving line of credit during the years ended December 31, 2006 and 2005 was $26,573 and $10,055. The weighted average interest rate during the years ended December 31, 2006 and 2005 was 7.07% and 5.63%.
(3) Income Taxes
The components of income tax expense are:
2006 | 2005 | 2004 | |||||||||
Current: |
|||||||||||
Federal |
$ | 8,596 | $ | 9,626 | $ | 8,391 | |||||
State |
2,178 | 2,554 | 1,918 | ||||||||
Foreign |
161 | | | ||||||||
Deferred: |
|||||||||||
Federal |
42 | (320 | ) | (959 | ) | ||||||
State |
97 | 77 | (94 | ) | |||||||
$ | 11,074 | $ | 11,937 | $ | 9,256 | ||||||
Total income tax expense differed from the amounts computed by applying the U.S. Federal income tax rate of 35% to income before income tax expense as a result of the following:
2006 | 2005 | 2004 | |||||||||
Computed tax provision at statutory Federal rates |
$ | 9,283 | $ | 10,829 | $ | 8,307 | |||||
Increase (decrease) in taxes resulting from: |
|||||||||||
State taxes, net of Federal income tax benefit |
1,350 | 1,575 | 1,241 | ||||||||
Other expenses |
441 | (467 | ) | (222 | ) | ||||||
Benefit of tax credits |
| | (70 | ) | |||||||
$ | 11,074 | $ | 11,937 | $ | 9,256 | ||||||
In 2006 the Company recorded an additional non-recurring $353 income tax expense. This adjustment increased the Companys 2006 effective tax rate by 1.3% to 41.7% compared to 38.6% in 2005.
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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, 2006 and 2005 relate to the following:
2006 | 2005 | |||||||
Current: |
||||||||
Inventories |
$ | 968 | $ | 702 | ||||
State income taxes |
324 | 504 | ||||||
Vacation pay accrual |
199 | 182 | ||||||
Accrued bonuses |
549 | | ||||||
Other |
150 | 291 | ||||||
Net deferred tax asset |
2,190 | 1,679 | ||||||
Non-Current: |
||||||||
Plant and equipment, principally due to differences in depreciation and capitalized interest |
(3,591 | ) | (2,941 | ) | ||||
Net deferred tax liability |
(3,591 | ) | (2,941 | ) | ||||
Total net deferred tax liability |
$ | (1,401 | ) | $ | (1,262 | ) | ||
The Company believes it is more likely than not that the deferred tax assets above will be realized in the normal course of business. Undistributed earnings of foreign subsidiaries are considered to be indefinitely reinvested and, accordingly, no provision for United States federal and state income taxes has been provided thereon. Upon distribution of earnings in the form of dividends or otherwise, the Company would be subject to both United States income taxes (subject to adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred United States income tax liability is not practicable because of the complexities associated with its hypothetical calculation.
(4) Litigation and Environmental
DBCP LAWSUITS
I. DBCP Litigation
AMVAC and/or the Company have been named or otherwise implicated in a number of lawsuits concerning injuries allegedly arising from either contamination (of water supplies) or personal exposure to 1,2-dibromo-3-chloropropane (DBCP). A summary of these actions follows:
A. Hawaii Matters
AMVAC and the Company were served with complaints in February 1997. The actions were filed in the Circuit Court of the Second Circuit, State of Hawaii entitled Board of Water Supply of the County of Maui v. Shell Oil Co., et. al. The suit named as defendants the Company, AMVAC, Shell Oil Company, The Dow Chemical Company, Occidental Chemical Company, Occidental Petroleum Corporation, Occidental Chemical Corporation, and Brewer Environmental Industry, Inc. Maui Pineapple Company was joined as a cross-defendant. The Complaint alleged that between two and four of the Boards wells had been contaminated with DBCP in excess of the maximum contaminant level (MCL). In addition, the Board of Water Supply contended that future wells may exceed the MCL level and would need remediation. On August 2, 1999, a global settlement was reached, which included the remediation of the existing contaminated wells in addition to the installation of filtration devices on other wells for the next forty years on the island of Maui. The cash settlement was three
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
million dollars ($3,000,000) of which AMVACs (and the Companys) portion was five hundred thousand dollars ($500,000). The settlement agreement obligates the defendants to pay for the installation of filtration devices on other wells that become contaminated later and for the ongoing operation and maintenance of the filtration devices for up to forty years. The annual costs of operation and maintenance per well is estimated to be approximately sixty-nine thousand dollars ($69,000), to be adjusted annually by the consumer price index. The obligations of the defendants under this agreement are secured by a twenty million-dollar letter of credit obtained by Dow Chemical. In connection with the settlement, in October 2005, AMVAC paid for a share of a permanent filtration system in the amount of $222,198.
In October 1997, AMVAC was served with a Complaint(s) in which it was named as a defendant, filed in the Circuit Court, First Circuit, State of Hawaii and in the Circuit Court of the Second Circuit, State of Hawaii (two identical suits, one in Oahu and one in Maui) entitled Patrickson, et. al. v. Dole Food Co., et. al (Patrickson Case) alleging damages sustained from injuries caused by plaintiffs exposure to DBCP while applying the product in their native countries. Other named defendants are: Dole Food Co., Dole Fresh Fruit, Dole Fresh Fruit International, Pineapple Growers Association of Hawaii, Shell Oil Company, Dow Chemical Company, Occidental Chemical Corporation, Standard Fruit Company, Standard Fruit & Steamship, Standard Fruit Company De Costa Rica, Standard Fruit Company De Honduras, Chiquita Brands, Chiquita Brands International, Martrop Trading Corporation, and Del Monte Fresh Produce. (American Vanguard Corporation has not been sued in these actions.) The ten named plaintiffs are citizens of four countriesGuatemala, Costa Rica, Panama, and Ecuador. Punitive damages are sought against each defendant. The plaintiffs were banana workers and allege that they were exposed to DBCP in applying the product in their native countries. The case was also filed as a class action on behalf of other workers so exposed in these four countries. The plaintiffs allege sterility and other injuries. The suits were removed to federal court and for the last several years, the focus of the case has been on procedural issues, including the dismissal of the case based on the doctrine of forum non conveniens. This doctrine would require the plaintiffs to pursue their claims in their native countries. On April 22, 2003, the United States Supreme Court issued a decision on the procedural posture of the case, holding there was no jurisdiction in federal court and remanded the case to state court. Starting in early 2004, there had been no activity in the case for about two years. However, a status conference was held on June 1, 2006 at the request of the plaintiffs attorneys, who expressed a desire to pursue the class action aspect or add other individuals. Plaintiffs counsel now claims that his class members will include two pineapple workers in Hawaii who have testicular cancer, and he also claims to have class members from mainland U.S. and other countries. On September 12, 2006, the court ordered the transfer of venue of the Maui action from Maui County to Oahu, where we expect the duplicate suit to be dismissed. Other preliminary issues will be class certification and/or the addition of class members as individual defendants. Written discovery to defendants was conducted on venue-related issues.
Further, the plaintiffs attorneys reported that the ten plaintiffs filed suit in their home countries in 1998, based on the prior order of forum non conveniens, alleging in excess of two million United States dollars ($2,000,000) per plaintiff. The suit in Guatemala was served on AMVAC in March 2001, but no defendant has been required to answer. Suits in the other countries have not been served. AMVAC has engaged local attorneys in the countries to defend these foreign suits. No discovery has taken place on the individual claims of the plaintiffs. Without such discovery, it is unknown whether any of the plaintiffs was exposed to AMVAC brand DBCP or what statute of limitation defenses may apply. AMVAC intends to contest the cases vigorously. However, it is too early to provide an assessment as to the probability of an unfavorable outcome in these matters.
B. Mississippi Matters
In May 1996, AMVAC was served with five complaints in which it is named as a defendant. (These complaints were filed by the same attorneys representing the Patrickson plaintiffs in Hawaii.) The complaints are
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
brought by plaintiffs Edgar Arroyo-Gonzalez, Eulogio Garzon-Larreategui, ValentinValdez, Amilcar Belteton-Rivera, and Carlos Nicanor Espinola-E against one or more of the following other named defendants: Coahoma Chemical Co. Inc., Shell Oil Company, Dow Chemical Co., Occidental Chemical Co., Standard Fruit Co., Standard Fruit and Steamship Co., Dole Food Co., Inc., Dole Fresh Fruit Co., Chiquita Brands, Inc., Chiquita Brands International, Inc. and Del Monte Fresh Produce, N.A. The cases were filed in the Circuit Court of Harrison County, First Judicial District of Mississippi. Each case alleged damages sustained from injuries caused by plaintiffs (who are former banana workers and citizens of a Central American country) exposure to DBCP while applying the product in their native countries. These cases were removed to U.S. District Court for the Southern District of Mississippi, Southern Division. The federal court granted defense motions to dismiss in each case pursuant to the doctrine of forum non conveniens. On January 19, 2001, the court issued an unpublished decision, finding that there was jurisdiction in federal court, but remanded just one case (Espinola) back to the trial court to determine if a stipulation which limited the plaintiffs recovery to fifty thousand dollars ($50,000) was binding. If the stipulation is binding, that case will be remanded to state court. If the stipulation is not binding, that case will be dismissed along with the others, requiring the plaintiffs to litigate in their native countries. The federal court then ordered remand to state court. No activity has taken place on this matter since 2001. Without discovery, it is unknown whether any of the plaintiffs were exposed to the Companys product or what defenses may apply. AMVAC intends to contest the cases vigorously. It is too early to provide an evaluation of the likelihood of an unfavorable outcome in this case.
C. Louisiana Matters
In November 1999, AMVAC was served with three complaints filed in the 29th Judicial District Court for the Parish of St. Charles, State of Louisiana entitled Pedro Rodrigues et. al v. AMVAC Chemical Corporation et. al, Andres Puerto, et. al v. Amvac Chemical Corporation, et. al and Eduardo Soriano, et al v. Amvac Chemical Corporation et. al. Other named defendants are: Dow Chemical Company, Occidental Chemical Corporation, Shell Oil Company, Standard Fruit, Dole Food, Chiquita Brands, Tela Railroad Company, Compania Palma Tica, and Del Monte Fresh Produce. American Vanguard Corporation is not named as a defendant. These suits were filed in 1996, but they were not served until November 1999. Following a dismissal of most of the plaintiffs from the action (in light of the fact that they had previously settled their claims in other actions), the complaints, with Soriano as the lead case, allege personal injuries to about 314 persons (167 from Ecuador, 102 from Costa Rica, and 45 from Guatemala) from alleged exposure to DBCP (punitive damages are also sought). With the United States Supreme Court holding there was no federal court jurisdiction in the Patrickson case, the federal court judge remanded the cases to Louisiana state court in June 2003. In state court, the three cases were assigned to two different judges. In 2006, a group of plaintiffs represented by attorney Misko, who had been making claims solely against growers, settled with those growers and dismissed their claims against the Company. On November 17, 2006, the state court separated the cases handled by attorney Scott Hendler from the cases being pursed only against the growers handled by different counsel. The pleadings are not yet finalized as to the number of plaintiffs in these suits.
As in many of the other banana workers cases, no discovery has taken place on the individual claims of the plaintiffs. Thus, it is unknown as to how many of the plaintiffs claim exposure to AMVACs product and whether their claims are barred by applicable statutes of limitation. AMVAC intends to vigorously contest these cases. It is too early to provide any evaluation of the likelihood of an unfavorable outcome at this time.
D. Nicaragua Matters
Tellez et al v. Dole Food Company, Inc. et al
On March 26, 2004, 25 plaintiffs, all residents of Nicaragua, filed suit in state court in Los Angeles County, California, claiming personal injuries from alleged exposure to DBCP while working on banana plantations in
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
their home country. The named defendants are Dole Food Company, Inc., Dole Fresh Fruit Company, Standard Fruit Company, Standard Fruit and Steamship Company, Dow Chemical Company, and AMVAC Chemical Corporation. American Vanguard is not named as a defendant. Punitive damages are also sought against all defendants.
The plaintiffs claim personal injuries for sterility, reduced sperm counts, and other reproductive injuries. They claim exposure from working on banana plantations in Nicaragua from dermal contact with DBCP and inhalation of vapors. The plaintiffs also claimed exposure to DBCP in groundwater that they ingested, but testing of wells in October 2005 did not reveal the presence of any DBCP contamination and this claim of exposure through groundwater is being dropped.
AMVAC was served with the complaint on April 12, 2004 and filed an answer on May 5, 2004. On May 6, 2004, Dow Chemical removed the case from state court to the United States District Court for the Central District of California. The case was subsequently remanded to state court.
On September 2, 2004, the plaintiffs were permitted to file an amended complaint that dropped seven plaintiffs and added 18 others, so that there were a total of 36 plaintiffs. Since that time, 18 plaintiffs have been dismissed, four others who have not yet obtained U.S. visas to come to the United States for their depositions, and one making a cancer related claim have been transferred to the Mejia case listed below, reducing the total to 13.
The defendants have been taking depositions of the plaintiffs experts. Trial is presently scheduled for May 2, 2007, having recently been rescheduled due to the inability to complete 25 depositions of the plaintiffs and defendants experts within the time lines in the case management order. Plaintiffs and defendants experts will have differing views at their depositions and at trial regarding what types and amounts of exposure to DBCP might cause sterility. Depositions of defense experts will take place primarily in March. AMVAC contends that very few of these plaintiffs worked at a banana farm when its product could have been used. AMVAC also disputes the nature and extent of the claimed injuries. AMVAC intends to continue to vigorously contest this case.
It is too early to provide any evaluation of the likelihood of an unfavorable outcome at this time, as expert discovery is not yet complete. However, this case, like the other pending banana workers suits, presents difficult issues of law and fact to all parties and has a potentially large exposure. In all of these banana worker cases, there is no guarantee that the Company will be able to avoid an adverse judgment or that the size of any such judgment will not have an adverse effect upon the Companys financial performance. If plaintiffs are successful, it is likely that other banana workers from Nicaragua will file suit in California.
Rodolfo Mejia et al v. Dole Food Company, Inc. et al
On September 20, 2005, the attorneys who also represent plaintiffs in Tellez et al v. Dole Food Company et al filed an action on behalf of 16 Nicaraguan plaintiffs in the Los Angeles County Superior Court against Dole Food Company, Inc., Dole Fresh Fruit Company, Standard Fruit Company, Standard Fruit and Steamship Company, the Dow Chemical Company, and AMVAC Chemical Corporation. The complaint alleges that the 16 plaintiffs worked at various banana farms in Nicaragua and were exposed to DBCP from 1970 to 1984, suffering irreversible sterility or infertility. The complaint seeks unspecified compensatory and punitive damages against each defendant. The suit has been assigned to the same judge for case management as in the Tellez matter.
Plaintiffs have served a First Amended Complaint naming 21 banana plantation workers in Nicaragua as plaintiffs, including five plaintiffs who were transferred from the Tellez action. The Mejia action has been
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designated as related to the Tellez action has been stayed pending developments in the Tellez action, except for the preliminary steps of collecting plaintiffs medical and employment records in Nicaragua so that they are available for use once discovery gets underway. Discovery has not yet begun in this case. It is too early to provide any evaluation of the likelihood of an unfavorable outcome at this time.
Suits filed in Nicaragua
The Los Angeles attorneys representing these workers in California have recently stated that they have as many as 10,000 clients in Nicaragua. Thirteen of them are plaintiffs in the Tellez suit and 21 are plaintiffs in the Mejia suit pending in the Los Angeles County Superior Court.
In prior descriptions of pending litigation and other matters, several suits filed in Nicaragua in January 2003 on behalf of banana workers claiming exposure to DBCP were mentioned. It was reported that AMVAC had been named in these suits, but was not served with the complaints.
In May 2005, two suits filed in Nicaragua in 2004 were received that name AMVAC, The Dow Chemical Company, Dole Food Co., Dole Fresh Fruit, and Standard Fruit Company. The two suits for personal injuries for sterility and reduced sperm counts have been filed on behalf of a total of 15 banana workers: Flavio Apolinar Castillo et al. v. AMVAC Chemical Corporation et al., No. 535/04 and Luis Cristobal Martinez Suazo et al. v. AMVAC Chemical Corporation et al., No. 679/04. In December 2005, AMVAC received six additional, similar lawsuits filed on behalf of a total of 30 plaintiffs. These plaintiffs each claim $1 million in special and general damages and $5 million in punitive damages.
AMVAC has retained an attorney in Nicaragua and understands that the receipt of these eight suits constitutes first notice and an invitation to attend mediation. All but one of these suits is based on Nicaraguan Public Law 364 issued in October 2000 that is directed solely at DBCP and requires the posting of a $100,000 bond, sets forth a lessened standard of proof to show that the claimed injuries are due to DBCP, and establishes an unreasonable amount of minimum compensation for injuries. This law also provides that there is no statute of limitations.
On January 25, 2006, AMVAC was served with the Flavio Apolinar Castillo and Luis Cristobal Martinez Suazo suits listed above. In March 2006, counsel in Nicaragua filed objections to jurisdiction over Amvac in these two cases. AMVACs local counsel reports that the court has not yet ruled on the objections to jurisdiction.
A review of court filings in Chinandega, Nicaragua, by local counsel has found 83 suits filed pursuant to Public Law 364 that name AMVAC and include approximately 3,497 plaintiffs. However, only the two Castillo and Suazo cases have been served on Amvac . Each of these plaintiffs claims $1 million in special and general damages and $5 million in punitive damages. It is anticipated that the plaintiffs attorneys will continue to file additional actions on a monthly basis in Nicaragua.
In an earlier round of suits brought in Nicaragua against Dow, Shell, and Standard Fruit only, the Nicaragua court issued judgments for $490 million in December 2002 based on claims of 583 banana workers, despite defenses of lack of personal jurisdiction and the unconstitutionality of Public Law 364. It has been reported that in 2003, the United States District Court in Los Angeles refused to enforce these judgments on the basis that the judgments did not properly name the defendants. The U.S. District Court did not reach the issue of due process under Public Law 364. An appeal to the U.S. Court of Appeals for the Ninth Circuit is pending.
AMVAC contends that the Nicaragua courts do not have jurisdiction over it and that Public Law 364 violates international due process of law. AMVAC intends to contest personal jurisdiction and demand under
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Law 364 that the claims be litigated in the United States. Thus far, it appears that the Nicaraguan courts have denied all requests of other defendants under Law 364 that allow the defendants the option of consenting to jurisdiction in the United States. It is not presently known as to how many of these plaintiffs actually claim exposure to DBCP at the time AMVACs product was allegedly used nor is there any verification of the claimed injuries. Based on the precedent of the earlier suits in Nicaragua, it would appear likely that the Nicaragua courts will, over the defendants objections, enter multi-million dollar judgments for the plaintiffs and against all defendants in these cases. One such judgment was entered in August 2005 for $97 million for 150 plaintiffs against Dole Food and other entities. It has also been reported that on December 1, 2006, the Nicaraguan court rendered a judgment for $802 million against Dow, Shell, Occidental, and Standard Fruit for some 1200 plaintiffs.
F. Ivory Coast Cases
On October 6, 2006, AMVAC was served with seven suits filed in the Los Angeles County Superior Court and one suit in the United States District Court in Los Angeles that include a total of 668 residents of the Ivory Coast as plaintiffs. Each plaintiff claims bodily injuries from exposure to DBCP while residing or working on banana or pineapple plantations in that country from the 1970s to the present. The suits name AMVAC, Dow Chemical, Shell Oil Company, and Dole Food as defendants. All these suits also seek punitive damages and the action filed in federal court alleges a claim under the Alien Tort Claims Act, alleging that the sale and use of DBCP amounted to genocide in the Ivory Coast. AMVAC does not believe that it sold any DBCP into the Ivory Coast at any time and intends to defend these cases vigorously. Discovery has not yet begun in these cases, and it is too early to provide any evaluation as to the probability of an unfavorable outcome.
On November 3, 2006, Dow and Shell removed the seven state court cases to federal court, alleging that the naming of AMVAC and the Dole entities amounted to a fraudulent joinder of those defendants by plaintiffs to defeat federal jurisdiction. However, the federal court has remanded all of those cases on its own motion back to state court. On December 7, 2006 AMVAC answered the Alien Tort Claims Act case. A defense motion for judgment on the pleadings in the Alien Tort Claims Act case in federal court is pending for a hearing on March 12, 2007.
F. Other Matters
Other attorneys filed suits in the Los Angeles County Superior Court in April 2005 on behalf of hundreds of banana workers in other countries, including Costa Rica, Panama, and Honduras. AMVAC has not been named in these suits.
II. Other Litigation.
On July 19, 2006, AMVACs registered agent was served with a complaint entitled Latrice McLendon, et al. v. Philip Service Corporation etc. et al (including AMVAC), which was filed in the Superior State Court of Fulton County, State of Georgia No. 2006CN119863 and subsequently removed to the United States District Court for the Northern District of Georgia No. 1:06-CV-1770-CAP, in which a class of plaintiffs seek damages, including punitive damages, in an unspecified amount for personal injuries and diminution in property value allegedly arising from the airborne release of propyl mercaptan and ethoprop from a waste treatment facility operated by PSC Recovery Services (PSC) in Fairburn, Georgia. Plaintiffs, residents living in the vicinity of the PSC plant, allege trespass, nuisance and negligence on behalf of defendants in handling, storing and treating waste which was generated by AMVACs Axis, Alabama facility. In addition, in January 2007, the Alabama Department of Environmental Management issued a proposed administrative order citing AMVAC for, among other things,
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storing rejected washwater (which is the subject of the McLendon case) in violation of applicable regulations regarding the storage of hazardous materials. The company is negotiating a consent order with ADEM which it expects to complete in the near future. It is too early in the McLendon litigation to make an assessment of the likelihood of there being an adverse judgment against AMVAC or whether such judgment could have an adverse effect upon the Companys financial performance. AMVAC plans to defend the action vigorously.
On March 1, 2006, AMVAC and AVD accepted tender of defense and indemnity from Valent U.S.A. Corporation (Valent) with respect to an action entitled Victoria Espinoza, et al. v. Does 1, et al., including Valent U.S.A. Corporation filed in the Los Angeles Superior Court No. BC322590 in March 2005, in which plaintiff, who worked as a temporary employee intermittently in the packaging department at one of AMVACs facilities between August 1994 and August 2000, seeks damages for injuries, specifically acute myelogenous leukemia, allegedly arising from exposure to chemical products at that AMVAC facility. The defense and indemnity obligations arise from a toll manufacturing and supply agreement dated in September 1991 between AMVAC and Valents predecessor, and an asset purchase agreement dated in June 1998 between AMVAC and Valent by which the former purchased the Dibrom® product line from the latter. The company believes that the action is without merit and plans to defend it vigorously. Although the punitive damages claim has been dismissed from the action, however, there is no guarantee that the Company will be able to avoid an adverse judgment or that the size of any such judgment will not have an adverse effect upon the Companys financial performance. Trial is currently scheduled for July 30, 2007.
OTHER
The Company may be, from time to time, involved in other legal proceedings arising in the ordinary course of its business. The results of litigation cannot be predicted with certainty. The Company has and will continue to expend resources and incur expenses in connection with these proceedings. There can be no assurance that the Company will be successful in these proceedings. While the Company continually evaluates insurance levels for product liability, property damage and other potential areas of risk, an adverse determination in one or more of these proceedings could subject the Company to significant liabilities, which could have a material adverse effect on its financial condition and operating results.
Environmental
During 2006, AMVAC continued activities to address environmental issues associated with its facility (the Facility) in Commerce, California.
In March 1997, the California Environmental Protection Agency Department of Toxic Substances Control (DTSC) accepted the Facility into its Expedited Remedial Action Program (ERAP). Under this program, the Facility must prepare and implement an environmental investigation plan. Depending on the findings of the investigation, the Facility may also be required to develop and implement remedial measures to address any historical environmental impairment. The environmental investigation and any remediation activities related to ten underground storage tanks at the Facility, which had been closed in 1995, will also be addressed by AMVAC under ERAP.
Soil and groundwater characterization activities began in December 2002 in accordance with the Site Investigation Plan that was approved by the DTSC. Additional activities were conducted from 2003 to 2006 with oversight provided by the DTSC. Additional investigation is planned over the next year under the oversight of the DTSC. Potential remediation activities may be initiated in 2007 or 2008. These investigation and potential remediation activities are required at all facilities that currently have, or in the past had, hazardous waste storage
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permits. Because AMVAC previously held a hazardous waste management permit, AMVAC is subject to these requirements. It is uncertain whether the cost associated with the potential remediation activities will have a material impact on the Companys financial statements.
AMVAC is subject to numerous federal and state laws and governmental regulations concerning environmental matters and employee health and safety at the Commerce, California and Axis, Alabama facilities. AMVAC continually adapts its manufacturing process to the environmental control standards of the various regulatory agencies. The U.S. EPA and other federal and state agencies have the authority to promulgate regulations that could have an impact on AMVACs operations.
AMVAC expends substantial funds to minimize the discharge of materials in 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 in order to partially offset increasing pollution abatement costs.
The Company is committed to a long-term environmental protection program that reduces emissions of hazardous materials into the environment, as well as to the remediation of identified existing environmental concerns. Federal and state authorities may seek fines and penalties for violation of the various laws and governmental regulations. As part of its continuing environmental program, except as disclosed in PART I, Item 3, Legal Proceedings, of this Annual Report, the Company has been able to comply with such proceedings and orders without any materially adverse effect on its business.
(5) Employee Deferred Compensation Plan and Employee Stock Purchase Plan
The Company maintains a deferred compensation plan (the Plan) for all eligible employees. The Plan calls for each eligible employee, at the employees 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 up to an additional 15% of their salaries of which the company will match 50% of the first 6% of the additional contribution. The Companys contributions to the Plan amounted to $586, $585 and $385 in 2006, 2005 and 2004. Effective January 1, 2005, the Company matched 100% of the elective deferrals of all eligible participants up to a maximum of 5% of compensation.
During 2001, the Companys Board of Directors adopted the American Vanguard Corporation Employee Stock Purchase Plan (the Plan). The Plan allows eligible employees to purchase shares of common stock through payroll deductions at a discounted price. An aggregate of 200,000 shares of the Companys Common Stock, par value $.10 per share (subject to adjustment for any stock dividend, stock split or other relevant changes in the Companys capitalization) may be sold pursuant to the Plan which is intended to qualify under Section 423 of the Internal Revenue Code. The Plan allows for purchases in a series of offering periods, each six months in duration, with new offering periods (other than the initial offering period) commencing on January 1 and July 1 of each year. The initial offering period commenced on July 1, 2001. Unless terminated earlier by the Companys Board of Directors, the Plan will terminate on December 31, 2010.
Shares of common stock purchased through the Plan for 2006, 2005 and 2004 were 42,115, 41,196 and 22,501, respectively.
(6) Major Customers and Export Sales
In 2006, there were three companies that accounted for 18%, 15% and 11% of the Companys consolidated sales. In 2005, there were three companies that accounted for 15%, 13% and 11% of the Companys consolidated
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sales. In 2004, there were three companies that accounted for 18%, 12% and 11% of the Companys consolidated sales. These companies are distributors of the Companys products.
The Company primarily sells its products to large distributors and buying cooperatives and extends credit based on an evaluation of the customers financial condition. The Company had three significant customers who each accounted for approximately 28%, 14% and 6% of the Companys receivables as of December 31, 2006. The Company had three significant customers who each accounted for approximately 19%, 17% and 15% of the Companys receivables as of December 31, 2005. The Company has long-standing relationships with its customers and the Company considers the credit risk to be low.
Worldwide export sales for 2006, 2005 and 2004 were as follows:
2006 | 2005 | 2004 | |||||||
Canada |
$ | 3,492 | $ | 2,396 | $ | 1,991 | |||
Mexico |
2,757 | 2,229 | 1,818 | ||||||
Asia |
1,544 | 75 | | ||||||
Africa |
1,705 | 1,556 | 792 | ||||||
Europe |
2,080 | 2,416 | 2,359 | ||||||
Rest of World |
5,668 | 5,184 | 3,305 | ||||||
$ | 17,246 | $ | 13,856 | $ | 10,265 | ||||
(7) Royalties
The Company has various royalty agreements in place extending through December 2007. These agreements relate to the acquisition of certain products as well as licensing arrangements. No agreements contains a minimum royalty provision. Certain royalty agreements contain confidentiality covenants. Royalty expenses were $809, $1,465 and $1,733, respectively, for 2006, 2005 and 2004.
(8) Product Acquisitions
All product acquisitions have been accounted for as asset purchases and not businesses pursuant to FASB 141 and EITF 98-3.
In December 2006, AMVAC acquired the product line Permethrin (a synthetic pyrethroid insecticide) from Syngenta Crop Protection, Inc. In connection with the transaction, AMVAC acquired both crop and non-crop uses of the product line in the U.S., Mexico and Canada. Acquired assets include registration rights, manufacturing and formulation know-how, inventories, customer lists and the trademarks Ambush® and Prelude® in the aforementioned territories.
In November 2006, AMVAC acquired the global Terbufos insecticide product line and the Lock `N Load® closed delivery system from BASF Aktiengesellschaft (BASF). The product line consisted of the active ingredient Terbufos, the trademarks Counter® and Lock `N Load®, the manufacturing and formulation know-how, registration rights, intellectual property rights and inventories.
In December 2005, AMVAC acquired the cereal herbicide product line, Difenzoquat from BASF. The product line consists of the active ingredient Difenzoquat, the trademark Avenge, the manufacturing and formulation know-how, and registration rights and intellectual property rights in the United States and Canada. Avenge is a post-emergent herbicide primarily to control wild oats in barley and wheat. Avenge has a unique mode of action: it can be tank mixed with many popular broad leaf herbicides to provide broadleaf weed control as well as for effectively managing herbicide resistance problems in wild oats.
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In November 2005, AMVAC acquired the global Phorate insecticide product line from BASF. The product line consisted of the active ingredient Phorate, the trademarks Thimet®, Granutox® and Geomet®, the manufacturing and formulation know-how, registration rights, intellectual property rights and inventories as well as an exclusive license to use BASFs patented, closed delivery system, Lock N Load®, in the United States, Canada and Australia for Phorate. Phorate is registered in more than fifteen countries, with the main markets in Asia Pacific and the Americas. It is used on agricultural crops, mainly potatoes, corn, cotton, rice and sugarcane, to protect against chewing and piercing-sucking insects.
In March 2005, AMVAC entered into an exclusive multi-year agreement with BASF to develop, register and commercialize Topramezone, a new herbicide for post-emergent use in corn in North America. Under the terms of a licensing and supply agreement BASF would supply the product to AMVAC. In August 2005, AMVAC received a registration from the U.S. Environmental Protection Agency for Impact® (active ingredient: Topramezone), a new herbicide for the use in field corn, seed corn, sweet corn and popcorn.
In December 2004, AMVAC entered into an agreement with Bayer CropScience LP, an affiliate of Bayer AG, to market, sell and distribute Bolster 15G, a soybean pesticide used to control nematodes, through AMVACs SmartBox system in key Midwest soybean growing states beginning in the 2005 season. Additionally, in December 2004, AMVAC licensed the trade name Nuvan® to Syngenta India Limited, a business unit of Syngenta Crop Protection AG. The agreement provides a two-year license to Syngenta India to sell products under the Nuvan name in the animal and public health market, as well as the crop protection market in India. AMVAC will continue to sell products under the Nuvan name in the animal and public health market in over thirty other countries.
In January 2004, AMVAC entered into an agreement with Syngenta Crop Protection (Syngenta) to supply Force 3G for use through AMVACs SmartBox system beginning in the 2004 season. Force 3G is a corn soil insecticide manufactured and marketed by Syngenta for the control of corn rootworm, wireworm, cutworm and white grub in cotton.
The primary identifiable intangible assets of the Company relate to product rights associated with its product acquisitions. These rights, for the most part, consist of product registrations and related data filed with the United States Environmental Protection Agency and state regulatory agencies to support such registrations and other supporting data. The amount of goodwill allocated to the product acquisitions has not been material. The following schedule represents intangible assets recognized in connection with product acquisitions (See Summary of Significant Accounting PoliciesGoodwill and Other Intangible Assets for the Companys accounting policy regarding intangible assets):
The following schedule represents intangible assets recognized in connection with product acquisitions (See note 1 for the Companys accounting policy regarding intangible assets):
Amount | ||||
Intangible assets at December 31, 2003 |
$ | 20,307 | ||
Acquisitions during fiscal 2004 |
2,612 | |||
Amortization expense |
(1,758 | ) | ||
Intangible assets at December 31, 2004 |
21,161 | |||
Acquisitions during fiscal 2005 |
22,112 | |||
Amortization expense |
(2,051 | ) | ||
Intangible assets at December 31, 2005 |
41,222 | |||
Acquisitions during fiscal 2006 |
39,737 | |||
Amortization expense |
(1,929 | ) | ||
Intangible assets at December 31, 2006 |
$ | 79,030 | ||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The above amounts represent the total cash consideration paid during the period for product acquisitions and certain related capitalized expenses incurred in connection with such acquisitions.
The following schedule represents the gross carrying amount and accumulated amortization of the intangible assets recognized in connection with product acquisitions. Intangible assets are amortized over their expected useful lives which range from 15 to 25 years.
2006 | 2005 | |||||||
Gross carrying amount |
$ | 89,252 | $ | 49,515 | ||||
Accumulated amortization |
(10,222 | ) | (8,293 | ) | ||||
$ | 79,030 | $ | 41,222 | |||||
The following schedule represents future amortization charges related to intangible assets recognized in connection with product acquisitions:
Year ending December 31, |
|||
2007 |
$ | 3,405 | |
2008 |
3,405 | ||
2009 |
3,405 | ||
2010 |
3,405 | ||
2011 |
3,405 | ||
Thereafter |
62,005 | ||
$ | 79,030 | ||
The following schedule represents the Companys obligations under product acquisition agreements:
Amount | ||||
Obligations under acquisition agreements at December 31, 2003 |
$ | 4,800 | ||
Additional obligations acquired |
2,396 | |||
Payments on existing obligations |
(6,196 | ) | ||
Obligations under acquisition agreements at December 31, 2004 |
1,000 | |||
Additional obligations acquired |
-0- | |||
Payments on existing obligations |
(1,000 | ) | ||
Obligations under acquisition agreements at December 31, 2005 |
-0- | |||
Additional obligations acquired |
-0- | |||
Payments on existing obligations |
-0- | |||
Obligations under acquisition agreements at December 31, 2006 |
$ | -0- | ||
As of December 31, 2006, there were no future commitments pertaining to obligations under product acquisitions.
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(9) Commitments
The Company entered into long-term employment agreements with certain officers. Amounts to be paid under those agreements are summarized as follows:
Year ending December 31, |
|||
2007 |
$ | 502 | |
$ | 502 | ||
The Company has various lease agreements for offices as well as a long-term ground lease for its Axis, Alabama facility. The office leases contain provisions to pass through to the Company its pro-rata share of certain of the buildings operating expenses. The long-term ground lease is for twenty years (commencing May 2001) with up to five automatic renewals of three years each for a total of thirty-five years. Rent expense for the years ended December 31, 2006, 2005 and 2004 was $ 312, $306 and $352. Future minimum lease payments under the terms of the leases are as follows:
Year ending December 31, |
|||
2007 |
$ | 305 | |
2008 |
316 | ||
2009 |
281 | ||
2010 |
10 | ||
2011 |
10 | ||
Thereafter |
95 | ||
$ | 1,017 | ||
(10) Research and Development
Research and development expenses which are included in operating expenses were $2,884, $2,853 and $3,081 for the years ended December 31, 2006, 2005 and 2004.
(11) Stock Options
Incentive Stock Option Plans (ISOP)
Under the terms of the Companys ISOP, under which options to purchase 4,296,000 shares of common stock can be issued, all key employees are eligible to receive non-assignable and non-transferable options to purchase shares. The exercise price of any option may not be less than the fair market value of the shares on the date of grant; provided, however, that the exercise price of any option granted to an eligible employee owning more than 10% of the outstanding common stock may not be less than 110% of the fair market value of the shares underlying such option on the date of grant. No options granted may be exercisable more than ten years after the date of grant. The options granted generally vest evenly over a three to five year period, beginning from the date of the grant.
During 2006 the Company did not grant any incentive stock options. During 2005, the Company granted incentive stock options to purchase an aggregate of 276,933 shares of common stock to key employees. These options were fully exercisable on the date of grant. All options granted are non-assignable and non-transferable.
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Nonstatutory Stock Options (NSSO)
The Company did not grant any non-statutory stock options in either 2006 or 2005.
Option activity within each plan is as follows:
Rollforward Table of Option Activity Within Each Plan:
Incentive Stock Option Plans |
Non-Statutory Stock Options Plans |
Weighted Average Price Per Share |
Exercisable Per Share | ||||||||||
Balance outstanding, December 31, 2003 |
2,212,621 | 127,453 | $ | 3.49 | $ | 2.39 | |||||||
Options granted, range from $11.29$14.44 |
41,333 | 58,080 | 13.69 | ||||||||||
Options exercised, range from $0.83$8.10 |
(339,861 | ) | (16,133 | ) | (1.18 | ) | |||||||
Options expired |
(27,360 | ) | | (1.16 | ) | ||||||||
Balance outstanding, December 31, 2004 |
1,886,733 | 169,400 | 4.35 | 3.26 | |||||||||
Options granted, range from $14.74$14.98 |
276,933 | | 14.75 | ||||||||||
Options exercised, range from $1.76$3.19 |
(61,333 | ) | (8,805 | ) | (1.84 | ) | |||||||
Options expired |
(16,000 | ) | (875 | ) | (1.76 | ) | |||||||
Balance outstanding, December 31, 2005 |
2,086,333 | 159,720 | 5.71 | 6.06 | |||||||||
Options granted |
| | | ||||||||||
Options exercised, range from $1.76$14.74 |
(262,463 | ) | (29,040 | ) | 3.66 | ||||||||
Options expired |
(3,333 | ) | | (14.74 | ) | ||||||||
Balance outstanding, December 31, 2006 |
1,820,537 | 130,680 | $ | 6.09 | $ | 6.13 | |||||||
Information relating to stock options at December 31, 2006 summarized by exercise price is as follows:
Outstanding Weighted Average | Exercisable Weighted Average | |||||||||||
Exercise Price Per Share |
Shares | Remaining Life |
Exercise Price |
Shares | Exercise Price | |||||||
Incentive Stock Option Plan: |
||||||||||||
$1.76 |
398,068 | 20 | $ | 1.76 | 398,068 | $ | 1.76 | |||||
$3.19 |
18,667 | 31 | $ | 3.19 | 18,667 | $ | 3.19 | |||||
$3.52$8.10 |
1,098,000 | 55 | $ | 5.10 | 821,500 | $ | 4.74 | |||||
$11.30$12.94 |
41,333 | 54 | $ | 12.62 | 25,333 | $ | 12.59 | |||||
$14.74$14.99 |
264,469 | 68 | $ | 14.74 | 264,469 | $ | 14.74 | |||||
1,820,537 | $ | 5.93 | 1,528,037 | $ | 5.81 | |||||||
Nonstatutory Stock Options: |
||||||||||||
$3.03 |
29,040 | 6 | $ | 3.03 | 29,040 | $ | 3.03 | |||||
$4.68 |
29,040 | 18 | $ | 4.68 | 29,040 | $ | 4.68 | |||||
$7.05 |
24,200 | 20 | $ | 7.05 | 24,200 | $ | 7.05 | |||||
$14.45 |
48,400 | 29 | $ | 14.45 | 48,400 | $ | 14.45 | |||||
130,680 | $ | 8.37 | 130,680 | $ | 8.37 | |||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The weighted average exercise prices for options granted and exercisable and the weighted average remaining contractual life for options outstanding as of December 31, 2005 and 2006 was as follows:
Number of Shares |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Life (Months) |
Intrinsic (thousands) | |||||||
As of December 31, 2005: |
||||||||||
Incentive Stock Option Plans: |
||||||||||
Outstanding |
2,086,333 | $ | 5.56 | 54 | $ | 37,809 | ||||
Expected to Vest |
2,086,333 | $ | 5.56 | 54 | $ | 37,809 | ||||
Exercisable |
1,508,770 | $ | 5.62 | 55 | $ | 26,892 | ||||
Non-statutory Stock Option Plans: |
||||||||||
Outstanding |
159,720 | $ | 8.11 | 31 | $ | 2,449 | ||||
Expected to Vest |
159,720 | $ | 8.11 | 31 | $ | 2,449 | ||||
Exercisable |
159,720 | $ | 8.11 | 31 | $ | 2,449 | ||||
As of December 31, 2006: |
||||||||||
Incentive Stock Option Plans: |
||||||||||
Outstanding |
1,820,537 | $ | 5.93 | 49 | $ | 18,151 | ||||
Expected to Vest |
1,820,537 | $ | 5.93 | 49 | $ | 18,151 | ||||
Exercisable |
1,528,037 | $ | 5.81 | 48 | $ | 15,418 | ||||
Non-statutory Stock Option Plans: |
||||||||||
Options Outstanding |
130,680 | $ | 8.37 | 20 | $ | 984 | ||||
Expected to Vest |
130,680 | $ | 8.37 | 20 | $ | 984 | ||||
Options Exercisable |
130,680 | $ | 8.37 | 20 | $ | 984 |
The total intrinsic value of options exercised during 2004, 2005 and 2006 was $1,693, $554 and $4,332, respectively. Cash received from stock options exercised during 2004, 2005 and 2006 was $449, $417 and $959, respectively. The total weighted average grant date fair value of shares vested during 2004, 2005 and 2006 was approximately $1,829, $4,285 and $1,279, respectively.
(12) Private Equity Offering
On February 8, 2006, the Company entered into Stock Purchase Agreements with several institutional investors for the purchase and sale of, in the aggregate, 1,040,000 (before giving effect for the 4 for 3 stock split distributed April 17, 2006) shares of the Companys common stock for a purchase price of $22.50 per share (before giving effect for the 4 for 3 stock split distributed April 17, 2006) in connection with a private placement of such shares. The shares were registered under the Companys Registration Statement on Form S-3 (No. 333,122981) which was filed with the Securities Exchange Commission on February 25, 2005. (Refer to the Companys Report on Form 8-K dated February 7, 2006, and filed with the Securities and Exchange Commission.)
84
AMERICAN VANGUARD CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(13) Quarterly DataUnaudited
Quarterly Data2006 |
March 31 | June 30 | September 30 | December 31 | ||||||||
Net sales |
$ | 44,744 | $ | 42,721 | $ | 51,244 | $ | 55,062 | ||||
Gross profit |
18,307 | 17,658 | 22,327 | 24,066 | ||||||||
Net income |
2,475 | 3,315 | 4,249 | 5,409 | ||||||||
Basic net income per share |
.10 | .13 | .16 | .21 | ||||||||
Diluted net income per share |
.09 | .12 | .16 | .20 | ||||||||
Quarterly Data2005 |
||||||||||||
Net sales |
$ | 41,230 | $ | 37,325 | $ | 49,754 | $ | 61,487 | ||||
Gross profit |
17,545 | 15,796 | 22,158 | 30,180 | ||||||||
Net income |
3,135 | 2,748 | 5,268 | 7,851 | ||||||||
Basic net income per share |
.13 | .11 | .22 | .32 | ||||||||
Diluted net income per share |
.12 | .11 | .20 | .30 |
Note: Totals may not agree with full year amounts due to rounding and separate calculations each quarter.
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (SFAS 123(R)) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to the Employee Stock Purchase Plan (employee stock purchases) based on estimated fair values. In 2006, the Company recorded a