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American Vanguard 10-K 2005
Form 10-K for American Vanguard Corporation
Table of Contents

 

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, 2004

 

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

(Registrant’s 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   American Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: NONE

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Securities and Exchange Act of 1934.    Yes  x    No  ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

The aggregate market value of the voting stock of the registrant held by non-affiliates is $114.9 million. This figure is estimated as of June 30, 2004, at which date the closing price of the registrant’s Common Stock on the American Stock Exchange was $33.68 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, 2004, was 8,971,697. The number of shares of $.10 par value Common Stock outstanding as of March 11, 2005, was 9,096,095.

 



Table of Contents

AMERICAN VANGUARD CORPORATION

 

ANNUAL REPORT ON FORM 10-K

December 31, 2004

 

          Page No.

     PART I     
Item 1.   

Business

   1
Item 2.   

Properties

   7
Item 3.   

Legal Proceedings

   8
Item 4.   

Submission of Matters to a Vote of Security Holders

   13
     PART II     
Item 5.   

Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

   14
Item 6.   

Selected Financial Data

   15
Item 7.   

Management’s Discussion and Analysis of Financial Condition and Results of Operation

   16
Item 7A.   

Quantitative and Qualitative Disclosures About Market Risk

   28
Item 8.   

Financial Statements and Supplementary Data

   28
Item 9.   

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

   28
Item 9A.   

Controls and Procedures

   28
Item 9B.   

Other Information

   31
     PART III     
Item 10.   

Directors and Executive Officers of the Registrant

   32
Item 11.   

Executive Compensation

   34
Item 12.   

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   36
Item 13.   

Certain Relationships and Related Transactions

   38
Item 14.   

Principal Accounting Fees and Services

   38
     PART IV     
Item 15.   

Exhibits, Financial Statement Schedules, and Reports on Form 8-K

   39

SIGNATURES AND CERTIFICATIONS

   40

 

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PART I

 

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 Company’s 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, Management’s 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”) (Refer to Export Operations), and Environmental Mediation, Inc.

 

Based on similar economic and operational characteristics, the Company’s 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. AMVAC’s 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 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 AMVAC’s 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 AMVAC’s 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, will expand the AMVAC’s animal health

 

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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”). Pace’s 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®44—a plant growth regulator used primarily in citrus;

 

    Hinder—a deer and rabbit repellant;

 

    Bac-Master—streptomycin antibiotic used primarily to control Fire Blight (a bacterial disease of apples and peers that kills blossoms, shoots, limbs, and sometimes, entire trees; and

 

    Leffingwell® Supreme 415 Oil—a horticultural oil insecticide for aphids, mites and scale.

 

Pace will continue to manufacture Deadline and Hinder under a multi-year supply agreement with AMVAC. Additionally, AMVAC has an option to acquire Pace’s 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 DuPont’s SmartBox partnership interest. Thereafter, Zeneca, Inc. abandoned its SmartBox partnership interest. In 2000, AMVAC sold its Fortress 5G (5% active ingredient—chlorethoxyfoxs) corn soil insecticide to the American farmer in the SmartBox system. Later that year, AMVAC secured exclusive marketing rights in the U.S. Bayer CropScience’s 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 will continue 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 AG’s acquisition of Aventis CropScience S.A. The purchase included the EPA end-use product registration for Folex as well as the Folex

 

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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.

 

In addition to the product line acquisitions disclosed above, in August 2001, AMVAC acquired certain assets associated with the Phosdrin® international insecticide business from BASF Agro B.V. The purchase included all active registrations, access to the underlying data for the registrations and trademarks in 55 countries. AMVAC has manufactured and formulated Phosdrin® for the international market at its Los Angeles facility since 1985. Additionally, AMVAC has been the primary data generator and data holder for the product since 1989. In May 2000, AMVAC acquired certain assets associated with the worldwide Dacthal® (“DCPA”) herbicide business from GB Biosciences Corporation. The purchase included the worldwide rights, including U.S. EPA registration rights and similar regulatory entities in other countries, manufacturing and process technology, trademarks and all product related intellectual property. Dacthal has been sold for weed control in crops such as onions, garlic, cauliflower, cotton and strawberries for approximately thirty years. In February 2000, AMVAC acquired certain assets associated with the Fortress® soil insecticide business from DuPont. AMVAC acquired all U.S. EPA and state registrations, manufacturing and process technology, trademarks and all product related intellectual property. The acquisition included certain rights and obligations to the SmartBox delivery system as well as DuPont’s existing finished and semi-finished inventory including the closed delivery system containers. Fortress insecticide provides control of the corn rootworm, a devastating pest in corn. In 1998, AMVAC acquired certain assets associated with the U.S. Dibrom® insecticide business from Valent USA Corporation (“Valent”), a wholly-owned subsidiary of Sumitomo Chemical Company, Limited. The purchase included all EPA registration rights and state registrations of the product line, an extensive data package, inventory, trademarks and all product related intellectual property. AMVAC had manufactured and formulated Dibrom® prior to its acquisition, dating back to 1981, for Valent and formerly for Chevron, which had held the U.S. rights to Dibrom® prior to Valent. AMVAC has owned certain international rights to the Dibrom® product line since 1991. In 1997 AMVAC purchased the rights, title and interest to Vapam® (Metam Sodium), a soil fumigant, from Zeneca, Inc. The purchase included inventories of Vapam®, EPA registration rights issued under Federal Insecticide, Fungicide and Rodenticide Act (“FIFRA”) and certain other assets. AMVAC has manufactured Metam Sodium at its Los Angeles facility since 1988. In 1993 AMVAC purchased from Du Pont the rights, title and interest (including Du Pont’s EPA registration rights) in Bidrin®, an insecticide for cotton crops, and in 1991 AMVAC purchased from Rhone-Poulenc AG Company its Napthalene Acetic Acid (“NAA”) plant growth regulator product line including Rhone-Poulenc’s EPA registration rights.

 

Seasonality

 

The agricultural chemical industry in general is cyclical in nature. The demand for AMVAC’s products tends to be slightly seasonal. Seasonal usage, however, does not necessarily follow calendar dates, but more closely follows varying growing seasonal patterns, weather conditions and weather related pressure from pests, and customer marketing programs and requirements.

 

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, Helena Chemical Company and Agriliance accounted for 18%, 12% and 11%, respectively of the Company’s sales in 2004. Helena Chemical Company and United Agri Products accounted for 11% each of the Company’s sales in 2003. United Agri Products, Agriliance and Helena Chemical Company accounted for 22%, 12% and 10%, respectively of the Company’s sales in 2002. United Agri Products, Helena and Agriliance are distributors of the Company’s products.

 

Competition

 

AMVAC faces competition from many domestic and foreign manufacturers in its marketplaces. Competition in AMVAC’s marketplace is based primarily on efficacy, price, safety and ease of application. Many of such competitors are larger and have substantially greater financial and technical resources than AMVAC. AMVAC’s ability to compete depends on its ability to develop additional applications for its current products and expand its product lines and customer base. AMVAC competes principally on the basis of the quality of its products price and the technical service and support given to its customers. The inability of AMVAC to effectively compete in several of AMVAC’s principal products would have a material adverse effect on AMVAC’s results of operations.

 

Generally, the treatment against pests of any kind is broad in scope, there being more than one way or one product for treatment, eradication, or suppression. 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 AMVAC’s successful acquisitions of certain product lines.

 

Intellectual Property

 

AMVAC’s proprietary product formulations are protected, to the extent possible, as trade secrets and, to a lesser extent, by patents and trademarks. Although AMVAC considers that, in the aggregate, its trademarks, licenses, and patents constitute a valuable asset, it does not regard its business as being materially dependent upon any single or several trademarks, licenses, or patents.

 

EPA Registrations

 

AMVAC’s 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 AMVAC’s products are subject to EPA registration and re-registration requirements and are conditionally registered in accordance with FIFRA. This licensing by EPA is based, among other things, on data demonstrating that the product will not cause unreasonable adverse effects on human health or the environment when it is used according to approved label directions. All states where any of AMVAC’s products are used require a registration by that specific state before it can be marketed or used 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

 

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production of new products. AMVAC expensed $3,081,000, $4,669,000 and $2,940,000 during 2004, 2003 and 2002 respectively, related to gathering this information. Based on facts known today, AMVAC estimates it will spend approximately $3,000,000 in 2005. 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 2004, 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 in 2003 and 2004 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 late 2005. 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. The cost associated with the potential remediation activities is not expected to have a material impact on the Company’s 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 AMVAC’s operations.

 

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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.

 

Employees

 

As of March 11, 2005, the Company employed approximately 229 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 Company’s employees are subject to a collective bargaining agreement.

 

The Company believes it maintains positive relations with its employees.

 

Export Operations

 

The Company opened an office in 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 AMVAC’s product lines throughout Europe. The office is located in Surrey, England, a city southwest of London. The operating results of this operation were not material to the Company’s total operating results for the years ended December 31, 2004, 2003 and 2002.

 

The Company classifies as export sales all products bearing foreign labeling shipped to a foreign destination.

 

     2004

    2003

    2002

 

Export Sales

   $ 10,265,000     $ 8,943,000     $ 7,470,000  

Percentage of Net Sales

     6.8 %     7.2 %     7.4 %

 

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 products liability coverage insurance will continue to be available to the Company, or if available, that it will be provided at an economical cost to the Company.

 

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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 SEC’s website, www.sec.gov. Also available free of charge on the Company’s website are our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee Charters, our Code of Conduct and Ethics, our Employee Complaint Procedures for Accounting and Auditing Matters and our policy on Stockholder Nomination and Communication. The Company’s 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 2 PROPERTIES

 

The Company’s 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 DuPont’s 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 AMVAC’s capacity while also providing flexibility and geographic diversity. (Refer to PART II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation of this Annual Report.)

 

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The Facility’s production areas are designed to run on a continuous twenty-four hour per day basis. AMVAC regularly adds chemical processing equipment to enhance its production capabilities. AMVAC believes its facilities are in good operating condition and are suitable and adequate for AMVAC’s foreseeable needs, have flexibility to change products, and can produce at greater rates as required. Facilities and equipment are insured against losses from fire 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 Company’s assets are pledged as collateral under the Company’s loan agreements with its primary lender. For further information, refer to note 3 of the Notes to the Consolidated Financial Statements in PART IV, Item 15 of this Annual Report.

 

AMVAC owns approximately 42 acres of unimproved land in Texas for possible future expansion.

 

GemChem’s, Chemical UK’s and Quimica AMVAC’s facilities consist of administration and sales offices which are leased.

 

The Company believes its properties to be suitable and adequate for its current purposes. The Company knows of no material defects in title to, or encumbrances on, any of its properties except that substantially all of the Company’s assets are pledged as collateral under the Company’s loan agreements with its primary lender. For further information, refer to note 2 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report.

 

ITEM 3 LEGAL PROCEEDINGS

 

DBCP LAWSUITS

 

  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 Board’s wells had been contaminated with 1,2-dibromo-3-chloropropane (“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. While the suit could only include damages that had incurred by the time of the scheduled trial date of October 18, 1999, future suits could be filed as a well became contaminated. 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 AMVAC’s (and the Company’s) portion was five hundred thousand dollars ($500,000). [As to matters independent of indemnity issues, the Company recovered four hundred thousand dollars ($400,000) from one of its insurers.] The settlement agreement obligates the defendants to pay 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 defendants are also obligated to pay between ninety and one-hundred percent for the cost of the installation of filtration devices on other wells that may exceed the defined maximum contaminant level in the next forty years. The number of future wells needing remediation could be less than six or more than that amount, however, the maximum number of wells subject to remediation under the agreement is fifty. AMVAC’s share of the ongoing operation and maintenance charges and installation of additional devices on other wells is seventeen and one-half percent. The obligations of the defendants under this agreement are secured by a twenty million-dollar letter of credit obtained by Dow Chemical. AMVAC will pay seventeen and one-half percent of the annual cost of the letter

 

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of credit (which does not have a material impact on the Company’s financial statements) directly to Dow Chemical. On June 10, 2004, AMVAC was notified that the plaintiff had completed conversion of the H’Poko wells from a temporary to a permanent filtration facility. After credits of approximately eight hundred thousand dollars ($800,000) from the settlement were deducted from the one million eight hundred thousand dollars ($1,800,000) cost of a two-vessel system, the claim to the defendants was one million dollars ($1,000,000). The cost of the temporary facility was included in the original settlement. On January 21, 2005, defendants were notified that the claim by the plaintiff would be submitted in approximately sixty days. AMVAC’s share of the permanent filtration system will be one hundred and seventy-five thousand dollars ($175,000) which has been accrued for/reserved by the Company. Thus far, no additional wells have been remediated nor have there been ongoing operation and maintenance charges.

 

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) 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 countries—Guatemala, 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 plaintiffs’ attorneys (from South Carolina) have also represented foreign banana workers in the Texas and Mississippi matters discussed below.) For the last seven years, the focus of the case has been on procedural issues. The defendants moved to dismiss under the doctrine of forum non conveniens. Under this doctrine, the foreign plaintiffs would have to sue in their own countries rather than using the United States courts. The plaintiffs wish to keep the cases in the United States and have them remanded to state court. The plaintiffs also contend that the federal court does not have jurisdiction. In September 1998, the court granted defendants’ motion to dismiss based on the grounds of forum non conveniens. A number of conditions were imposed including consent to jurisdiction in the four foreign countries for the ten named plaintiffs, use of discovery taken in the United States, the requirement that the plaintiffs file suits in their home countries by December 9, 1998, and the agreement by defendants to pay any judgment, if any, that might be entered in the foreign countries. The court order also provided that the plaintiffs could return to the United States if the foreign countries refused to accept jurisdiction. The court then dismissed the case on March 8, 1999. The plaintiffs subsequently appealed to the Ninth Circuit Court of Appeal. The Ninth Circuit issued its decision on May 30, 2001, holding that the federal court did not have jurisdiction. A petition for writ of certiorari (a writ of a superior court to call up the records of an inferior court or quasi-judicial body) was filed in United States Supreme Court on October 5, 2001 and the United States Supreme Court subsequently granted a hearing. Oral argument was held on January 22, 2003. On April 22, 2003, the United States Supreme Court issued its decision in favor of the plaintiffs, holding there was no jurisdiction in federal court. This vacates the order dismissing the case under the forum non conveniens doctrine. One September 5, 2003, the U.S. District Court in Honolulu issued an order that the case will be remanded to state court unless there is an objection filed by September 18, 2003. As the U.S. Supreme Court has issued its final decision on the lack of federal court jurisdiction, the case will be remanded to state. Once the case reaches state court, the defendants will have to decide whether they will file a motion to dismiss under forum non conveniens pursuant to state court procedures. No activity took place on this case throughout 2004 or to date as apparently, the suit has not been officially received in the state court upon remand. The plaintiffs’ attorneys reported that the ten plaintiffs filed suit in their home countries by December 9, 1998,

 

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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. It is too early to provide any evaluation of the likelihood of an unfavorable outcome at this time. 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.

 

On or about October 1, 2003, the Company was indirectly advised of a possible claim for ground water contamination on the Island of Maui. (This is separate and distinct from Item 1 (A) above.) The Company was provided with communications between Maui Land & Pineapple Company, Inc. (“Maui Pine”) and Hawaii Water Service Company (“HWSC”). HWSC is a non-municipally owned public water utility owning three water wells allegedly contaminated with DBCP and 1,2,3-tri-chloropropane (“TCP”). HWSC further alleges that the wells were contaminated by the above mentioned chemicals manufactured, marketed, distributed and/or sold by Maui Pine, Maui Pineapple Company (collectively, “Maui Pine”), The Dow Chemical Company, Dow AgroSciences, LLC (collectively, “Dow”), Occidental Petroleum Corporation, Occidental Chemical Corporation (collectively, “Occidental”), Shell Oil Company, Shell Chemical Company (collectively, “Shell”), American Vanguard Corporation, AMVAC Chemical Company (collectively, “AMVAC”), BEI Hawaii and Brewer Environmental Industries Holdings, Inc. (collectively “Brewer”). On or about October 17, 2003, all parties agreed to a tolling of the applicable statute of limitations in order to enter into mediation proceedings. The Company has been advised that the total claim could approximate four million dollars ($4,000,000), inclusive of future expenses for operations and maintenance of filtration devices on the wells. The parties met with an independent mediator on January 14 and 15, 2004 to discuss this claim. On January 15, 2004, the Company reached a settlement with HWSC for fifty-five thousand dollars ($55,000.00), contingent upon obtaining a court order approving the settlement as one made in good faith. The settlement includes future expenses for operations and maintenance. As not all parties settled at the mediation, HWSC filed suit in the Circuit Court of the Second Circuit, State of Hawaii on February 1, 2004. The non-settling parties subsequently removed the case to federal court, which has delayed the filing of motions in state court to approve the settlement as one made in good faith. The case was remanded to state court on January 7, 2005. With the case back in state court, a motion for approval of the good faith settlement will be made. Once the court approves the settlement, the fifty-five thousand dollars ($55,000) will be paid to HWSC to conclude AMVAC’s involvement.

 

  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 entitled Edgar Arroyo-Gonzalez v. Coahoma Chemical Co., Inc., et al, Amilcar Belteton-Rivera v. Coahoma Chemical Co., Inc., et al, Eulogio Garzon-Larreategui v. Coahoma Chemical Co., Inc., et al, Valentin Valdez v. Coahoma Chemical Co., Inc., et al and Carlos Nicanor Espinola-E v. Coahoma Chemical Co., Inc., et al. Other named defendants are: 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 have been 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. Unlike the Patrickson case, the court did not establish detailed procedures or deadlines for the filing of suits in the foreign countries by the five plaintiffs. Defendants have learned that plaintiff Valentin Valdez has filed a suit in Panama, but they

 

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have not been served. 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 plaintiff’s 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. A deposition of the plaintiff Espinola was scheduled but was never taken. The federal court then ordered remand to state court. The attorneys for Dow Chemical Co. filed a motion for reconsideration, explaining that the plaintiffs attorneys did not produce their client for deposition. This motion is still pending. No activity took place on this matter throughout 2004 or to date. No discovery has taken place on the individual claims of these plaintiffs. If the Espinola case is tried in Mississippi state court, the maximum recovery is fifty thousand dollars ($50,000). Without discovery, it is unknown whether any of the plaintiffs were exposed to the Company’s product or what statute of limitation defense may apply. AMVAC intends to contest the cases vigorously. It is too early to provide an evaluation of the likelihood of an unfavorable outcome at this time.

 

  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, they were not served until November 1999. (These complaints were filed in association with the same attorneys who have handled the Delgado and Carcamo matters listed below.) The complaints allege personal injuries from alleged exposure to DBCP (punitive damages are also sought). The plaintiffs (approximately three thousand nine hundred) are primarily from the countries of the Philippines, Costa Rica, Ecuador and Guatemala. In November 1999, the cases were removed to the United States District Court for the Eastern District of Louisiana. The plaintiffs filed a motion to remand the cases back to the state court in December 1999. In February 2000, the plaintiffs’ attorneys withdrew their motion to remand the cases to state court without prejudice, stating that they would wait for an appellate court determination on similar issues in the Mississippi and Texas cases. Dow Chemical Company, Shell Oil Company and Occidental Chemical Corporation contend that the vast majority of these plaintiffs were included in the settlement of some fifteen thousand plaintiffs mentioned in the Delgado and Carcamo matters discussed below. In September 2002, the plaintiffs’ attorneys finally evaluated their list of plaintiffs who had settled previously. They agreed that the plaintiffs who settled with Dow Chemical Company, Shell Oil Company, and Occidental Chemical Corporation were now only proceeding against the grower defendants. The plaintiffs who had not settled previously would continue with the suit against all defendants, including AMVAC. Thus, out of the approximately three thousand nine-hundred plaintiffs, about three hundred and fourteen are left (one hundred and sixty-seven are from Ecuador, one hundred and two are from Costa Rica and forty-five are from Guatemala). The plaintiffs filed a consolidated third amended complaint in October 2002 with Soriano as the lead case. Each plaintiff seeks in excess of the minimum jurisdiction of federal court for diversity of citizenship cases, seventy-five thousand dollars ($75,000). AMVAC has answered the third amended complaint. With the United States Supreme Court holding there was no federal court jurisdiction in the Patrickson case, the federal court judge issued an order to the parties in April 2003 as to why the cases should not be remanded to state court. The defendants argued that there was still federal court jurisdiction because of diversity of citizenship, but this diversity did not exist at the time the suites were originally filed in 1996 and accordingly, the court remanded the cases to state court in June 2003. In state court, the three cases were assigned to two different judges. The defendants considered filing another motion to dismiss based on forum non conveniens. In Louisiana, all defendants must join in making such a motion. By this time, unfavorable anti-forum non conveniens laws had passed or were pending in several of the

 

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countries where the plaintiffs resided. Several of the defendants were against consenting to jurisdiction in those countries, which is a condition required by an order of dismissal under forum non conveniens. As a result, these cases will now be litigated in state court in Louisiana. The state court has not yet scheduled any case management or status conferences. It is likely that the three cases will be reconsolidated in state court. No activity took place on this matter throughout 2004 or to date. As in the other banana worker’s 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 AMVAC’s 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. Texas Matters

 

These matters involve an earlier round of litigation by foreign banana workers. The complaints filed in the United States Court of Appeals, Fifth Circuit entitled Franklin Rodriquez Delgado, et al., Jorge Colindres Carcamo, individually and on behalf of all other similarly situated, et al., Juan Ramon Valdez, et al., and Isae Carcamo v. Shell Oil Company, et al. The complaints are for personal injuries from alleged exposure to DBCP. AMVAC was not sued by the plaintiffs but was sued on a third party complaint by Dow Chemical Company. These cases were originally filed in various state courts in Texas and removed by the defendants to federal court. By order dated July 11, 1995, the United States District Court granted defendants’ motion to dismiss pursuant to the doctrine of forum non conveniens, requiring the plaintiffs to sue in their native countries. The court required the defendants to consent to jurisdiction in the foreign countries along with other conditions. As AMVAC had not been sued by the plaintiffs directly, it refused to consent to jurisdiction in the foreign countries for these plaintiffs. In 1995, Dow Chemical Company dismissed its third party complaint against AMVAC without prejudice. Subsequently, Dow Chemical Company and Shell Oil Company settled with these plaintiffs as well as with about fifteen thousand other banana workers represented by the plaintiffs’ law firm (not the firm representing the Patrickson and Mississippi plaintiffs). Dow Chemical Company was then dismissed by the plaintiffs with prejudice in September 1997. Two intervenors (who are represented by the same attorneys as the plaintiffs in the Patrickson and Mississippi cases) have filed a motion in opposition to this dismissal. The plaintiffs appealed to the Fifth Circuit on the order of dismissal under forum non conveniens. In October 2000, the Fifth Circuit found federal court jurisdiction and affirmed the dismissals based on forum non conveniens. The United States Supreme Court refused to accept a hearing at that time. While AMVAC is not presently a party in this lawsuit having been dismissed without prejudice, the case is still pending, with the focus now shifted to the grower defendants. These remaining claims are apparently now being remanded to state courts in Texas.

 

  E. Nicaragua Matters

 

In March 2004, twenty-five 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 complaint is entitled Tellez et al v. Dole Food Company, Inc. et al. 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. American Vanguard Corporation 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, inhalation of vapors, and from drinking water allegedly contaminated with DBCP. 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 eighteen others, for a total of thirty-six plaintiffs. To date, the parties have worked on a comprehensive case

 

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management order that would permit obtaining plaintiffs’ medical records in Nicaragua and starting depositions of eighteen of the plaintiffs in Los Angeles and independent medical examination scheduled to take place in May 2005. At a status conference on February 9, 2005, a trial date for July 17, 2006 was scheduled. No discovery has yet taken place on the individual claims of the plaintiffs. Thus, it is unknown as to how many of the thirty-six plaintiffs, if any, actually claim exposure to AMVAC’s product, the nature and extent of their injuries, and whether their claims are barred by applicable statutes of limitation. AMVAC intends to vigorously contest this case. It is too early to provide any evaluation of the likelihood of an unfavorable outcome at this time.

 

In January 2003, three new cases were filed in Nicaragua. This time defendants besides Dow Chemical Company, Shell Oil Company and Dole Food were sued, including AMVAC, Occidental Chemical Corporation, Del Monte Fresh Produce, Chiquita Brands, Ameribrom and three Chevron entities. It is reported that these plaintiffs claim damages for sterility and that there are approximately three hundred and fifty plaintiffs named in these three cases. It has also been reported that a suit seeking damages for personal injuries based on alleged exposure to DBCP in groundwater has been filed in Nicaragua. AMVAC has not been served to date and has not seen the complaints. AMVAC disputes that the Nicaraguan courts have jurisdiction over it. 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.

 

OTHER MATTERS

 

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 2004 to a vote of security holders, through the solicitation of proxies or otherwise.

 

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PART II

 

AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES

 

ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The Company’s $0.10 par value common stock (“Common Stock”) is listed on the American Stock Exchange under the ticker symbol AVD (since January 1998). The Company’s 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, low and closing sales prices as reported for the Company’s Common Stock for the calendar quarters indicated (as adjusted for stock splits and stock dividends).

 

     High

   Low

   Close

Calendar 2004

                    

First Quarter

   $ 32.13    $ 22.33    $ 31.33

Second Quarter

     41.50      27.90      33.68

Third Quarter

     36.00      27.25      35.74

Fourth Quarter

     40.95      31.30      36.78

Calendar 2003

                    

First Quarter

   $ 11.11    $ 8.91    $ 11.09

Second Quarter

     13.60      11.10      12.24

Third Quarter

     19.03      12.20      16.63

Fourth Quarter

     26.00      16.57      24.97

 

As of March 11, 2005, the number of stockholders of the Company’s Common Stock was approximately 1,900, which includes beneficial owners with shares held in brokerage accounts under street name and nominees.

 

On September 14, 2004, the Company announced that the Board of Directors declared a cash dividend of $.05 per share which was distributed on October 15, 2004 to stockholders of record as of 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 $.12 per share ($.08 as adjusted for 3 for 2 stock split). 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 Company’s common stock on March 26, 2004. Accordingly, all weighted average share and per share amounts have been restated to reflect the stock split.

 

On September 12, 2003, the Company announced that the Board of Directors declared a cash dividend of $.05 per share ($.033 as adjusted for 3 for 2 stock split announced on March 16, 2004) which was distributed on October 17, 2003 to stockholders of record as of October 3, 2003.

 

On March 19, 2003, the Company announced that the Board of Directors declared a 3 for 2 stock split and a cash dividend of $.13 per share ($.058 as adjusted for stock splits). Both dividends were distributed on April 11, 2003 to stockholders of record at the close of business on March 28, 2003.

 

The Company has issued a cash dividend in each of the last nine years dating back to 1996.

 

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EQUITY COMPENSATION PLAN INFORMATION (1)

 

Plan category


   (a)

   (b)

   (c)

   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 holders

   1,611,000    $ 11.63    317,401

Equity compensation plans not approved by security holders

   —             —  
    
         

Total

   1,611,000           317,401
    
         

(1) Does not include the American Vanguard Corporation Employee Stock Purchase Plan (approved by security holders in June 2001). Under this plan an aggregate of 600,000 shares of Common Stock 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 Company’s Common Stock on the first day of the enrollment period or on the last day of the enrollment period, whichever is lower.

 

ITEM 6 SELECTED FINANCIAL DATA (in thousands, except for weighted average number of shares and per share data)

 

    2004

  2003

  2002

  2001

  2000

Operating revenues

  $ 150,855   $ 124,863   $ 100,671   $ 83,127   $ 74,517
   

 

 

 

 

Operating income

  $ 24,958   $ 16,542   $ 11,879   $ 10,367   $ 8,828
   

 

 

 

 

Income before income tax expense

  $ 23,733   $ 16,182   $ 11,278   $ 9,023   $ 7,185
   

 

 

 

 

Net income

  $ 14,477   $ 10,263   $ 7,049   $ 5,639   $ 4,311
   

 

 

 

 

Earnings per common share(1)

  $ 1.61   $ 1.16   $ .81   $ .66   $ .49
   

 

 

 

 

Earnings per common share—assuming dilution(1)

  $ 1.51   $ 1.10   $ .78   $ .64   $ .48
   

 

 

 

 

Total assets

  $ 122,346   $ 106,734   $ 75,448   $ 68,565   $ 66,091
   

 

 

 

 

Long-term debt and capital lease obligations, less current portion

  $ 19,474   $ 22,142   $ 17,765   $ 14,164   $ 18,647
   

 

 

 

 

Stockholders’ equity

  $ 63,972   $ 50,334   $ 40,243   $ 33,958   $ 29,288
   

 

 

 

 

Weighted average shares outstanding(1)

    8,981,698     8,811,303     8,670,301     8,605,314     8,877,096
   

 

 

 

 

Weighted average shares outstanding—assuming dilution(1)

    9,583,725     9,314,253     9,091,785     8,870,850     9,024,309
   

 

 

 

 

Dividends per share of common stock(1)

  $ .130   $ .091   $ .069   $ .053   $ .051
   

 

 

 

 

 

The selected consolidated financial data set forth above with respect to each of the calendar years in the five-year period ended December 31, 2004 have been derived from the Company’s consolidated financial statements and are qualified in their entirety by reference to the more detailed consolidated financial statements

 

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and the independent registered public accounting firm’s reports thereon which are included elsewhere in this Report on Form 10-K for the three years ended December 31, 2004. See ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”


(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.

 

ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

Results of Operations

 

2004 Compared with 2003:

 

     2004

   2003

   Change

Net sales:

                    

Crop

   $ 122,498,000    $ 104,895,000    $ 17,603,000

Non-crop

     28,357,000      19,968,000      8,389,000
    

  

  

     $ 150,855,000    $ 124,863,000    $ 25,992,000
    

  

  

Gross profit:

                    

Crop

   $ 58,465,000    $ 47,932,000    $ 10,534,000

Non-crop

     13,793,000      10,942,000      2,851,000
    

  

  

     $ 72,258,000    $ 58,874,000    $ 13,385,000
    

  

  

 

The Company reported net income of $14,477,000 or $1.51 per diluted share in 2004 as compared to net income of $10,263,000 or $1.10 per diluted share in 2003. (Net income per share data has been restated to reflect the effect of a 3 for 2 stock split that was distributed on April 16, 2004.)

 

Net sales in 2004 increased by 21% to $150,855,000 from $124,863,000 in 2003. The record sales levels were as a result of increased sales (primarily attributable to higher sales volume) of the Company’s product lines used for crop protection (primarily on cotton) as well as sales of Bifenthrin, the generic pyrethroid product the Company launched during the first quarter of 2004. Also contributing to the increased sales were sales increases of the Company’s mosquito adulticide which was heavily used as a result of the hurricanes in 2004. There were no unusual or infrequent events or transactions outside of the ordinary course of business, which materially impacted net sales.

 

Gross profits increased $13,384,000 to $72,258,000 in 2004 from $58,874,000 in 2003. Gross profit margins increased to 48% in 2004 from 47% in 2003. The improvement in gross profit margins was due to the changes in the sales mix of the Company’s 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 $4,968,000 to $47,300,000 in 2004 from $42,332,000 in 2003. Operating expenses as a percentage of sales were 31% in 2004 as compared to 34% in 2003. The differences in operating expenses by specific departmental costs are as follows:

 

    Selling expenses increased by $1,662,000 to $17,940,000 in 2004 from $16,278,000 in 2003. The increase was due primarily to increased variable selling expenses that relate to both increased sales levels and the product mix of sales.

 

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    General and administrative expenses increased by $3,301,000 to $12,728,000 in 2004 as compared to $9,427,000 in 2003. The increase was due to increases in outside professional expenses, payroll and payroll related costs, and costs related to the amortization of intangible assets in connection with new asset acquisitions. The increase in outside professional expenses include compliance costs of approximately $575,000 in 2004, related to Section 404 of the Sarbanes-Oxley Act.

 

    Research and product development costs and regulatory registration expenses declined by $769,000 to $6,956,000 in 2004 from $7,725,000 in 2003. The decline was a result of lower costs incurred to generate scientific data related to the registration.

 

    Freight, delivery and warehousing costs increased $774,000 to $9,676,000 in 2004 as compared to $8,902,000 in 2003 due to the increased sales levels.

 

Interest costs before capitalized interest and interest income were $1,310,000 in 2004 as compared to $986,000 in 2003. The Company’s average overall debt in 2004 was $37,822,000 as compared to $24,526,000 in 2003. The higher overall debt levels accounted for the higher gross interest costs. The Company recorded $303,000 in interest income in 2003, which primarily relates to income taxes receivable from the state of California as a result of filing amended tax returns for the years ended December 31, 1995 through 1998. (The overall after tax effect of recording the tax benefit due from California (franchise tax) generated $.03 per diluted share in 2003. The refund was received in July 2003.) The Company capitalized $72,000 of interest costs related to construction in progress during 2004 as compared to $323,000 in 2003.

 

Income tax expense increased by $3,337,000 to $9,256,000 in 2004 as compared to $5,919,000 in 2003. The Company’s effective tax rate was 39.0% in 2004 as compared to 36.5% in 2003. (See note 4 to the Consolidated Financial Statements for additional analysis of the changes in income tax expense.)

 

Weather patterns can have an impact on the Company’s operations. Weather conditions influence pest population by impacting gestation cycles for particular pests and the effectiveness of some of the Company’s products, among other factors. The end user of some of the Company’s products may, because of weather patterns, delay or intermittently disrupt field work during the planting season which may result in a reduction of the use of some of the Company’s products. During 2004, weather patterns did not have a material adverse effect on the Company’s results of operations.

 

Because of elements inherent to the Company’s business, such as differing and unpredictable weather patterns, crop growing cycles, changes in product mix of sales, ordering patterns that may vary in timing, and promotional programs, measuring the Company’s performance on a quarterly basis, (gross profit margins on a quarterly basis may vary significantly) even when such comparisons are favorable, is not as meaningful an indicator as full-year comparisons. The primary reason is that the use cycles do not necessarily coincide with financial reporting cycles. Because of the Company’s cost structure, the combination of variable revenue streams, and the changing product mixes, results in varying quarterly levels of profitability.

 

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Results of Operations

 

2003 Compared with 2002:

 

     2003

   2002

   Change

 

Net sales:

                      

Crop

   $ 104,895,000    $ 79,271,000    $ 25,624,000  

Non-crop

     19,968,000      21,400,000      (1,432,000 )
    

  

  


     $ 124,863,000    $ 100,671,000    $ 24,192,000  
    

  

  


Gross profit:

                      

Crop

   $ 47,932,000    $ 32,834,000    $ 15,098,000  

Non-crop

     10,942,000      11,041,000      (99,000 )
    

  

  


     $ 58,874,000    $ 43,875,000    $ 14,999,000  
    

  

  


 

The Company reported net income of $10,263,000 or $1.10 per diluted share in 2003 as compared to net income of $7,049,000 or $.78 per diluted share in 2002. (Net income per share data have been restated to reflect the effect of a 3 for 2 stock split that was distributed on April 16, 2004.)

 

Net sales in 2003 increased by 24% to $124,863,000 from $100,671,000 in 2002. The record sales levels were as a result of increased sales (primarily attributable to higher sales volume) of the Company’s product lines used for crop protection. Specifically, increased sales of the Company’s insecticides, soil fumigants, molluscicides, and plant growth regulators product lines more than offset a decline in sales of the Company’s defoliant and fungicide product lines, resulting in the overall increase in net sales. There were no unusual or infrequent events or transactions outside of the ordinary course of business, which materially impacted net sales.

 

Gross profits increased $14,999,000 to $58,874,000 in 2003 from $43,875,000 in 2002. Gross profit margins increased to 47% in 2003 from 44% in 2002. The improvement in gross profit margins was due to the changes in the sales mix of the Company’s 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 $10,336,000 to $42,332,000 in 2003 from $31,996,000 in 2002. Operating expenses as a percentage of sales were 34% in 2003 as compared to 32% in 2002. The differences in operating expenses by specific departmental costs are as follows:

 

    Selling expenses increased by $5,602,000 to $16,278,000 in 2003 from $10,676,000 in 2002. The increase was due primarily to increased variable selling expenses that relate to both increased sales levels and the product mix of sales.

 

    General and administrative expenses increased by $1,000,000 to $9,427,000 in 2003 as compared to $8,427,000 in 2002. The increase was due to increases in expenses related to the amortization of intangible assets in connection with new asset acquisitions in 2003 and increased payroll and payroll related costs.

 

    Research and product development costs and regulatory registration expenses increased by $2,008,000 to $7,725,000 in 2003 from $5,717,000 in 2002. The increase was a result of increases in costs incurred to generate scientific data related to the registration and possible new uses of the Company’s products (which accounted for approximately 85% of the increase) and increased payroll and payroll related costs.

 

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    Freight, delivery and warehousing costs increased $1,726,000 to $8,902,000 in 2003 as compared to $7,176,000 in 2002 due to the increased sales levels.

 

Interest costs before capitalized interest and interest income remained virtually unchanged at $986,000 in 2003 as compared to $973,000 in 2002. The Company recorded $303,000 in interest income in 2003, which primarily relates to income taxes receivable from the state of California as a result of filing amended tax returns for the years ended December 31, 1995 through 1998. (The overall after tax effect of recording the tax benefit due from California (franchise tax) generated $.033 per diluted share in 2003. The refund was received in July 2003.) The Company capitalized $323,000 of interest costs related to construction in progress during 2003 as compared to $347,000 in 2002.

 

Income tax expense increased by $1,690,000 to $5,919,000 in 2003 as compared to $4,229,000 in 2002. The Company’s effective tax rate was 36.6% in 2003 as compared to 37.5% in 2002. (See note 4 to the Consolidated Financial Statements for additional analysis of the changes in income tax expense.)

 

Liquidity and Capital Resources

 

Operating activities provided $15,410,000 of cash during the year ended December 31, 2004. Net income of $14,477,000, non-cash depreciation and amortization of $5,800,000 and an increase in accrued expenses and other payables of $7,008,000, provided $27,285,000 of cash for operations. Increases in inventories, prepaid expenses and receivables of $10,246,000, $422,000 and $108,000 along with a decline in deferred taxes and accounts payable of $1,053,000 and $46,000, respectively, used $11,875,000 in cash for operating activities.

 

The Company used $11,066,000 in investing activities in 2004. It invested $8,483,000 in capital expenditures, $2,612,000 in intangible assets while other non-current assets declined by $29,000.

 

The Company used $4,774,000 in financing activities during 2004. The Company received proceeds from new long-term debt of $21,288,000. Net borrowings under the Company’s fully-secured revolving line of credit declined by $12,200,000. The Company made payments on its debt of $13,023,000, received $637,000 from the issuance of common stock, paid cash dividends of $1,175,000 and purchased treasury stock for $301,000.

 

On October 7, 2004, the Company executed an Amended and Restated Credit Agreement, with a syndicate of commercial lenders led by the Company’s primary bank as the administrative agent and a lender, two other banks as lenders and a fourth as a participant, for an $80,000,000 fully-secured credit facility. This credit facility replaced the Company’s previous credit facility with its primary bank and one other bank entered into in May 2002 and amended in March 2004. The new credit facility consists of a $45,000,000 revolving line of credit and a $35,000,000 term loan. These loans bear interest at the prime rate (“Referenced Loans”), or at the Company’s options, a fixed rate of interest offered by the Bank (such as an adjusted LIBOR rate plus certain margins, in each case dependent on certain debt ratios (“Fixed Loans”)). The principal payments of the term loan are payable in equal quarterly installments on or before the last business day of each February, May, August and November, commencing November 30, 2004 and in one final installment in the amount necessary to repay the remaining outstanding principal balance of the term loan in full on the maturity date. Interest accruing on the Referenced Loans are payable quarterly, in arrears, on the last day of each March, June, September and December, and on the maturity date of such loan in the amount of interest then accrued but unpaid. Interest accruing on the Fixed 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 and term loan matures on October 7, 2009 (five years from the closing date) and contain certain covenants as defined in the agreement. The Company had $43,000,000 of availability under its revolving line of credit as of December 31, 2004.

 

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Management continues to believe, that to continue to improve its working capital position and maintain flexibility in financing interim needs, it is prudent to explore all available sources of financing. Accordingly, the Company filed a universal shelf registration statement on Form S-3 with the SEC on February 25, 2005 pursuant to which the Company may issue common and preferred stock, warrants and debt securities from time to time, up to an aggregate offering price of $50,000,000. The terms of any future offering would be established at the time of the offering.

 

Contractual Obligations and Off-Balance Sheet Arrangements

 

The following summarizes our contractual obligations at December 31, 2004 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


   1–3
Years


   4–5
Years


   After
5 Years


Long-term debt

   $ 1,000    $ 1,000    $ —      $ —      $ —  

Note payable to bank

     21,580      4,107      8,213      7,213      2,048

Accrued royalty obligations

     1,837      1,837      —        —        —  

Employment agreement(s)

     1,597      683      914      —        —  

Operating leases

     1,398      278      534      466      120
    

  

  

  

  

     $ 27,412    $ 7,905    $ 9,661    $ 7,679    $ 2,168
    

  

  

  

  

 

Recently Issued Accounting Guidance

 

In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”) Guarantor’s Accounting and Disclosure Requirement for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The following is a summary of the Company’s agreements that the Company has determined is within the scope of FIN 45.

 

Under its bylaws and written indemnification agreements, the Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer or director’s serving in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. However, the Company has a directors’ and officers’ liability insurance policy that reduces its exposure and enables it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal and has no liability recorded for these agreements as of December 31, 2004.

 

The Company enters into indemnification provisions under its agreements with other companies in its ordinary course of business (typically customers). Under these provisions the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities or, in some cases, as a result of the indemnified party’s activities under the agreement. The indemnification provisions may survive the termination of the underlying agreement. In addition, in some cases, the Company has agreed to reimburse employees for certain expenses and to provide salary continuation

 

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during short-term disability. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions may be unlimited. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the Company believes the estimated fair value of these provisions is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2004.

 

On October 22, 2004, the American Jobs Creation Act of 2004 (the “Act”) was signed into law. The Act provides for a special one-time tax deduction of 85% of certain foreign earnings that are repatriated (as defined in the Act) in either an enterprise’s last tax year that began before the enactment date, or the first tax year that begins during the one-year period beginning on the date of enactment. The Act also includes a tax deduction of up to 9% (when fully phased-in) of the lesser of (a) “qualified production activities income”, as defined in the Act or (b) taxable income (after the deduction for the utilization of any net operating loss carryforwards). As a result of the Act, the FASB issued FASB Staff Positions (“FSP”) 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004”, and 109-2, “Accounting and Disclosure Guidance for the Foreign Repatriation Provision within the American Jobs Creation Act of 2004”. These FSPs were issued effective as of December 21, 2004. The Company is still assessing the financial statement impact of the Act and these FSPs.

 

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs.” This statement amends Accounting Research Bulletin (“ARB”) No. 43, Chapter 4 and clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted materials should be recognized as period charges and requires that fixed production overhead be allocated to inventory based on the normal capacity of the production facility. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of this statement is not expected to have a material impact on the Company’s financial statements.

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment”. This statement replaced SFAS No. 123, “Accounting For Stock-Based Compensation” and superseded APB Opinion No. 25, “Accounting for Stock Issued to Employees”. This statement requires that the cost resulting from all share-based payment transactions be recognized through the financial statements at an amount based on the fair value of an award at the date of its grant. The statement is effective for all periods beginning after June 15, 2005. The Company will adopt the statement as of July 1, 2005 and therefore, will incur compensation expenses in the third and fourth quarters of 2005 for any non-vested options granted prior to 2005. The Company is still assessing the financial statement impact of adoption.

 

Foreign Exchange

 

Management does not believe that the fluctuation in the value of the dollar in relation to the currencies of its customers in the last three fiscal years has adversely affected the Company’s ability to sell products at agreed upon prices 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 Company’s operating results.

 

Inflation

 

Management believes inflation has not had a significant impact on the Company’s operations during the past three years.

 

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CRITICAL ACCOUNTING POLICIES

 

Certain of the Company’s 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 Company’s critical accounting polices and estimates include:

 

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.

 

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 may be capitalized at the Company’s 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 entity’s 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.

 

 

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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 Company’s 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. As of January 1, 2002, the Company had an immaterial amount of goodwill and amortization related to the goodwill. As such, the adoption of SFAS 142, did not have a material impact on the Company’s financial statements.

 

Risk Factors

 

The Company’s 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 Company’s 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 marketplace is based primarily on efficacy, price, safety and ease of application. Many of the Company’s competitors are larger and have substantially greater financial and technical resources. The Company’s 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.

 

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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 Company’s products is subject to governmental regulations.

 

The Company operates two manufacturing facilities—one 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 Company’s products occurs at the Facilities. An inability to renew or maintain a license or permit or if the fees for such licenses or permits were increased significantly, wither would impede the Company’s access to key ingredients and the cost of production would increase, either of which would materially and adversely affect the Company’s ability to provide its products in a timely and affordable manner.

 

The distribution and sale of the Company’s products are subject to prior governmental approvals and thereafter ongoing governmental regulation.

 

The Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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.

 

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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 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 Company’s 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 Company’s use of hazardous materials exposes it to potential liabilities.

 

The Company’s 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 Company’s financial and operating results.

 

The Company’s 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 Company’s financial and operating results.

 

Adverse results in pending legal and regulatory proceedings could have adverse effects on the Company’s 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’s 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 Company’s 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 Company’s products

 

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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.

 

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 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 management’s 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 Company’s financial and operating results. Client satisfaction or performance problems associated with a business or product line could have a material adverse impact on the Company’s reputation. In addition, there can be no assurance that acquired product lines, if any, will achieve anticipated revenues and earnings.

 

The Company relies on intellectual property which it may be unable to protect, or may be found to infringe the rights of others.

 

The Company’s 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.

 

The Company relies on key executives in large part for its success.

 

The Company’s 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 Company’s Co-Chairmen of the Board of Directors may prevent new investors from influencing significant corporate decisions.

 

As of March 11, 2005, Herbert A. Kraft and Glenn A. Wintemute, the Company’s Co-Chairmen of the Board of Directors, beneficially owned approximately 16% and 12%, respectively, of the Company’s common stock. These stockholders as a group will be able to influence substantially the Company’s 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 Company’s stockholders, including the election of directors, any merger, consolidation or

 

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sale of all or substantially all of the Company’s 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 Company’s stockholders as a whole.

 

The Company’s stock price may be volatile and an investment in the Company’s stock could decline in value.

 

The market prices for securities of companies in the Company’s 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 Company’s business may be adversely affected by terrorist activities.

 

The Company’s 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 payers 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.

 

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 American 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 granted and become exercisable after June 15, 2005. The Company is in the process of determining the level and impact of such recognition. If the level is high, it could have a significant adverse effect on the Company’s financial results as reported in its 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-

 

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AMERICAN VANGUARD CORPORATION

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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 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 Company’s indebtedness to its primary lender is evidenced by a line of credit with a variable rate of interest, which fluctuates with changes in the lender’s reference rate. At December 31, 2004, the Company’s outstanding indebtedness on the line of credit was $2,000,000. A 1% change in the reference rate during 2004 would have increased or decreased the Company’s interest expense, based on the weighted outstanding balance, by approximately $194,000. 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 Company’s financial position and cash flows when translated into U.S. Dollars. As of December 31, 2004 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 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 Company’s 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, 2004, management, under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s 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 recorded, processed, summarized and reported on a timely basis.

 

There have been no significant changes in the Company’s internal controls or in other factors subsequent to the date of the evaluation that could significantly affect these controls.

 

Management’s 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 Company’s

 

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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 Company’s internal controls over financial reporting based on a framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated 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, 2004, the Company’s internal control over financial reporting is effective.

 

The Company’s independent registered public accounting firm, BDO Seidman LLP, has issued an attestation report on management’s assessment of internal control over financial reporting as of December 31, 2004 and that report is included herein.

 

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Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

 

To the Board of Directors and Stockholders of American Vanguard Corporation

Newport Beach, California

 

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that American Vanguard Corporation (AMVAC) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). AMVAC’s 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 management’s assessment and an opinion on the effectiveness of AMVAC’s 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 management’s 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 company’s 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 company’s 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 being 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 company’s 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, management’s assessment that AMVAC maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, AMVAC maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.

 

We also have 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, 2004 and 2003 and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2004 of AMVAC and our report dated March 3, 2005 expressed an unqualified opinion thereon.

 

/s/    BDO SEIDMAN LLP

 

Los Angeles, California

March 3, 2005

 

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ITEM 9B OTHER INFORMATION

 

None.

 

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PART III

 

ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

The following persons are the current Directors and Executive Officers of Registrant:

 

Name of Director/Officer


   Age

    

Capacity


Herbert A. Kraft

   81      Co-Chairman

Glenn A. Wintemute

   80      Co-Chairman

Eric G. Wintemute

   49      Director, President and Chief Executive Officer

Jay R. Harris (1)(2)

   70      Director

John B. Miles (2)(3)

   61      Director

Carl R. Soderlind (1)(2)(3)

   71      Director

Irving J. Thau (1)(3)

   65      Director

(1) Member of the Audit Committee.

 

(2) Member of the Compensation Committee.

 

(3) Member of the Nominating and Corporate Governance Committee.

 

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 Company’s Co-Chairman, Glenn A. Wintemute.

 

Jay R. Harris has served as director since March 2000. Mr. Harris is President and Founder of Goldsmith & Harris, a broker dealer providing investment research to institutional and professional investors. He has held this position since 1982, the year Goldsmith & Harris (or its predecessors) was founded.

 

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 & Young’s West Region Director of Financial Advisory Services. In 1995, Mr. Thau founded Thau and Associates, Inc., a financial consulting company of which he

 

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currently serves as President. Mr. Thau is also a director and Chairman of the Audit Committee of American Home Mortgage Investment Corp. The Company’s Board of Directors has determined that Mr. Thau is independent under applicable rules and regulations currently prescribed by the SEC and applicable rules and listing standards of the American Stock Exchange. The Company’s Board of Directors has also determined the Mr. Thau is the Audit Committee financial expert within the meaning of applicable SEC rules and regulations.

 

Compliance with Section 16(a) of the Securities Exchange Act of 1934

 

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s executive officers, directors, and persons who own more than ten percent of a registered class of the Company’s equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission.

 

Based solely on the Company’s 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, 2004 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 Company’s principal executive officer, principal financial officer and principal accounting officer. The Code of Ethics is posted on the Company’s Internet website, www.american-vanguard.com. Any amendment to, or waiver from, the Code of Ethics will be posted on the Company’s website within five business days following the date of the amendment or waiver.

 

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ITEM 11 EXECUTIVE COMPENSATION

 

The following table sets forth the aggregate cash and other compensation for services rendered for the years ended December 31, 2004, 2003 and 2002 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

 

        Long-Term Compensation

 
        Annual Compensation(1)

  Awards

  Payouts

 
(a)   (b)   (c)   (d)   (e)   (f)   (g)   (h)   (i)  

Name and Principal Position


  Year

  Salary
($)


  Bonus
($)(3)


  Other Annual
Compensation
($)


  Restricted
Stock
Award(s)
($)


  Securities
Underlying
Options/SARs
(#)


  LTIP
Payouts
($)


  All Other
Compensation
($)


 

Eric G. Wintemute

President and Chief

Executive Officer

  2004
2003
2002
  652,649
620,293
532,518
  —  
—  
—  
  —  
—  
—  
  —  
—  
—  
  —  
—  
—  
  —  
—  
—  
  6,880
6,140
5,380
(2)
(2)
(2)

James A. Barry

Sr. V.P., CFO &

Secretary/Treasurer

  2004
2003
2002
  255,159
226,242
210,542
  —  
—  
—  
  —  
—  
—  
  —  
—  
—  
  —  
—  
—  
  —  
—  
—  
  6,880
5,563
5,380
(2)
(2)
(2)

Mark H. Blincoe

V.P., CAO (4)

  2004
2003
2002
  102,338
—  
—  
  —  
—  
—  
  —  
—  
—  
  —  
—  
—  
  —  
—  
—  
  —  
—  
—  
  1,777
—  
—  
(2)
 
 

Glen D. Johnson

Sr. Vice President of

AMVAC

  2004
2003
2002
  319,109
285,966
246,356
  —  
—  
—  
  —  
—  
—  
  —  
—  
—  
  —  
—  
—  
  —  
—  
—  
  4,013
2,515
260
(2)
(2)
(2)

Christopher K. Hildreth (5)

Sr. Vice President of

AMVAC

  2004
2003
2002
  289,150
199,778
—  
  —  
—  
—  
  —  
—  
—  
  —  
—  
—  
  —  
—  
—  
  —  
—  
—  
  6,348
3,434
—  
(2)
(2)
(2)

Robert F. Gilbane

President of GemChem

  2004
2003
2002
  255,242
237,242
226,143
  —  
—  
—  
  —  
—  
—  
  —  
—  
—  
  —  
—  
—  
  —  
—  
—  
  8,167
6,140
5,380
(2)
(2)
(2)

(1) No executive officer enjoys perquisites that exceed the lesser of $50,000, or 10% of such officer’s salary.

 

(2) These amounts represent the Company’s contribution to the Company’s Retirement Savings Plan, a qualified plan under Internal Revenue Code Section 401(k).

 

(3) Included in salary column.

 

(4) Mr. Blincoe joined the Company as Vice President and Chief Administrative Officer in June 2004.

 

(5) Mr. Hildreth joined AMVAC Chemical Corporation as Senior Vice President in February, 2003.

 

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OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE

 

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, 2004, with respect to options to purchase Common Stock of American Vanguard Corporation. Also reported are the values for “in-the-money” options which represent the positive spread between the exercise price of any such existing stock options and the year-end closing price of the Common Stock. The closing price of the Common Stock on December 31, 2004, the last trading day of American Vanguard’s fiscal year, was $36.78 per share.

 

AGGREGATED OPTION/SAR EXERCISES IN 2004

AND FY-END OPTION/SAR VALUES

 

(a)


   (b)

   (c)

   (d)

   (e)

     Shares
Acquired
on Exercise
(#)


   Value
Realized
($)


   Number of Securities
Underlying Unexercised
Options/SARs at
Fy-End (#)
Exercisable/
Unexercisable


   Value of Unexercised
In-the-Money
Options/SARs at
Fy-End ($)
Exercisable/
Unexercisable


Eric G. Wintemute

   —      —      67,500/101,250    1,821,825/2,732,738

James A. Barry

   —      —      34,500/37,500    977,625/ 921,765

Mark H. Blincoe

   —      —      2,500/10,000    5,700/22,800

Glen D. Johnson

   91,452    3,160,581    4,500/18,000    68,310/273,240

Christopher K. Hildreth

   —      —      45,000/22,500    1,228,950/614,475

Robert F. Gilbane

   —      —      21,000/24,000    622,980/567,120

 

Compensation Committee Interlocks and Insider Participation

 

The Compensation Committee of the Board for the year ended December 31, 2004, consisted of Messrs. Carl R. Soderlind, Jay R. Harris and John B. Miles. The executive compensation philosophy of the Company is aimed at (i) attracting and retaining qualified executives; (ii) motivating performance to achieve specific strategic objectives of the Company; and (iii) aligning the interest of senior management with the long-term interest of the Company’s shareholders.

 

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ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

To the knowledge of the Company, the ownership of the Company’s outstanding Common Stock as of March 11, 2005, by persons who are directors, beneficial owners of 5% or more of the outstanding Common Stock and by all directors and officers as a group is set forth below. Unless otherwise indicated the Registrant believes that each of the persons set forth below has the sole power to vote and to dispose of the shares listed opposite his name.

 

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

   1,416,148(1)    15.5%  

Co-Chairman

  

Glenn A. Wintemute

4695 MacArthur Court

Newport Beach, CA 92660

   1,092,608(2)    12.0%  
    

St. Denis J. Villere & Company

210 Baronne Street

New Orleans, LA 70112

   815,628        9.0%  
    

T. Rowe Price Associates, Inc.

100 E. Pratt Street

Baltimore, MD 21202

   792,125        9.1%  

Director,

President & CEO

  

Eric G. Wintemute

4695 MacArthur Court

Newport Beach, CA 92660

   505,330(3)    5.5%  

Director

  

Jay R. Harris

4695 MacArthur Court

Newport Beach, CA 92660

   442,767(4)    4.9%  
    

Goldsmith & Harris et. al.

80 Pine Street

New York, NY 10005

   338,682(5)    3.7%  

President

(GEMCHEM)

  

Bob Gilbane

4695 MacArthur Court

Newport Beach, CA 92660

   193,929(6)    2.1%  

Senior Vice President

(AMVAC)

  

Glen D. Johnson

4695 MacArthur Court

Newport Beach, CA 92660

   54,352(7)    —(1 4)

Senior Vice President

(AMVAC)

  

Christopher K. Hildreth

4695 MacArthur Court

Newport Beach, CA 92660

   45,642(8)    —(1 4)

Sr. V.P., CFO &

Secretary/Treasurer

  

James A. Barry

4695 MacArthur Court

Newport Beach, CA 92660

   36,566(9)      —(1 4)

Director

  

Carl R. Soderlind

4695 MacArthur Court

Newport Beach, CA 92660

   34,724(10)    —(1 4)

 

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Office (if any)


  

Name and Address
Beneficial Owner


   Amount and Nature
of Beneficial Ownership


   Percent of
Class


Director

  

John B. Miles

4695 MacArthur Court

Newport Beach, CA 92660

   28,933(11)   

—(14)

Director

  

Irving J. Thau

4695 MacArthur Court

Newport Beach, CA 92660

   12,705(12)   

—(14)

V.P. & CAO

  

Mark H. Blincoe

4695 MacArthur Court

Newport Beach, CA 92660

   2,500(13)   

—(14)

Directors and Officers as a group (15)

   3,938,272          41.8%

 

(1) Mr. Kraft owns all of his shares with his spouse in a family trust, except as to 5,188 shares held in an Individual Retirement Account. This figure includes 10,890 shares of Common Stock Mr. Kraft is entitled to acquire pursuant to stock options exercisable within sixty days of the filing of this Annual Report.

 

(2) This figure includes 10,890 shares of Common Stock Mr. Glenn Wintemute is entitled to acquire pursuant to stock options exercisable within sixty days of the filing of this Annual Report.

 

(3) This figure includes 101,250 shares of Common Stock Mr. Eric Wintemute is entitled to acquire pursuant to stock options exercisable within sixty days of the filing of this report as well as 52,260 shares of Common Stock owned by Mr. Wintemute’s minor children for which Mr. Wintemute is a trustee and disclaims beneficial ownership.

 

(4) This figure includes 7,260 shares of Common Stock Mr. Harris is entitled to acquire pursuant to stock options exercisable within sixty days of the filing of this Annual Report.

 

(5) This figure does not include shares beneficially owned by Jay Harris. Mr. Harris shares with Goldsmith & Harris et. al. the power to direct the disposition of 442,767 shares of the security.

 

(6) This figure includes 21,000 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.

 

(7) This figure represents 4,500 shares of Common Stock Mr. Johnson is entitled to acquire pursuant to stock options exercisable within sixty days of the filing of this Annual Report.

 

(8) This figure represents 45,000 shares of Common Stock Mr. Hildreth is entitled to acquire pursuant to stock options exercisable within sixty days of the filing of this Annual Report.

 

(9) This figure includes 34,500 shares of Common Stock Mr. Barry is entitled to acquire pursuant to stock options exercisable within sixty days of the filing of this Annual Report.

 

(10) This figure represents 3,630 shares of Common Stock Mr. Soderlind is entitled to acquire pursuant to stock options exercisable within sixty days of the filing of this Annual Report.

 

(11) This figure represents 18,150 shares of Common Stock Mr. Miles is entitled to acquire pursuant to stock options exercisable within sixty days of the filing of this Annual Report.

 

(12) This figure represents 12,705 shares of Common Stock Mr. Thau is entitled to acquire pursuant to stock options exercisable within sixty days of the filing of this Annual Report.

 

(13) This figure represents 2,500 shares of Common Stock Mr. Blincoe is entitled to acquire pursuant to stock options exercisable within sixty days of the filing of this Annual Report.

 

(14) Under 1% of class.

 

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ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

John B. Miles, a Director of the Company, is also a partner in the law firm of McDermott, Will & Emery which provides legal services to the Company.

 

ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The Audit Committee of American Vanguard Corporation appointed and the stockholders ratified BDO Seidman, LLP (“BDO”) as the Company’s independent registered public accounting firm for the year ended December 31, 2004.

 

Aggregate fees for professional services rendered to the Company by BDO for the years ended December 31, 2004 and 2003, were (in thousands):

 

     2004

   2003

Audit

   $ 251    $ 187

Audit related

     —        25

Tax

     94      81
    

  

     $ 345    $ 293
    

  

 

Audit fees for 2004 and 2003 were for professional services rendered for the audits of the consolidated financial statements of the Company, timely reviews of quarterly financial statements, consents, income tax provision procedures, and assistance with review of documents filed with the SEC.

 

Audit Related fees for 2003 were primarily for assurance services, accounting consultations in connection with acquisitions, and consultations concerning financial accounting and reporting standards.

 

Tax fees for 2004 and 2003 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.

 

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PART IV

 

ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

 

  (a) The following documents are filed as part of this report:

 

(1) Index to Consolidated Financial Statements and Supplementary Data:

 

Description


   Page No.

Financial Statements:

    

Consolidated Balance Sheets as of December 31, 2004 and 2003

   42

Consolidated Statements of Income for the Years Ended December 31, 2004, 2003, and 2002

   43

Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the Years Ended December 31, 2004, 2003 and 2002

   44

Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003, and 2002

   45

Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements

   47

 

  (b) Reports on Form 8-K

 

Date of the Report: October 7, 2004

 

Description: On October 7, 2004 American Vanguard Corporation issued a press release announcing that American Vanguard Corporation executed an Amended and Restated Credit Agreement with a syndicate of commercial lenders.

 

Date of the Report: November 3, 2004

 

Description: On November 3, 2004 American Vanguard Corporation issued a press release announcing its financial results for the three and nine months ended September 30, 2004. This Report on Form 8-K was furnished under Item 2.02.

 

Date of the Report: December 6, 2004

 

Description: On December 6, 2004 American Vanguard Corporation issued a press release announcing that its wholly-owned subsidiary, Amvac Chemical Corporation, entered into an agreement with Bayer CropScience LP., an affiliate of Bayer AG, to market, sell and distribute Bolster 15G.

 

Date of the Report: December 15, 2004

 

Description: On December 15, 2004 American Vanguard Corporation issued a press release announcing that its wholly-owned subsidiary, Amvac Chemical Corporation, licensed the trade name Nuvan® to Syngenta India Limited, a business unit of Syngenta Crop Protection AG.

 

  (c) Exhibits:

 

The exhibits listed on the accompanying Index To Exhibits, page 69 are filed as part of this annual report.

 

39


Table of Contents

AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, American Vanguard Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

AMERICAN VANGUARD CORPORATION

(Registrant)

       
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 15, 2005

         

March 15, 2005

 

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 15, 2005

         

March 15, 2005

By:   /s/    JOHN B. MILES               By:   /s/    CARL R. SODERLIND         
    John B. Miles           Carl R. Soderlind
    Director           Director
   

March 15, 2005

         

March 15, 2005

By:   /s/    JAY R. HARRIS               By:   /s/    IRVING J. THAU        
    Jay R. Harris           Irving J. Thau
    Director           Director
   

March 15, 2005

         

March 15, 2005

 

40


Table of Contents

AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders

of American Vanguard Corporation

Newport Beach, California

 

We have audited the accompanying consolidated balance sheets of American Vanguard Corporation as of December 31, 2004 and 2003, the related consolidated statements of income and comprehensive income, shareholders’ equity and cash flows for the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Vanguard Corporation at December 31, 2004 and 2003, and the results of its operations and cash flows for the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of American Vanguard Corporation’s internal control over financial reporting as of December 31, 2004, 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 3, 2005 expressed an unqualified opinion thereon.

 

/s/ BDO Seidman, LLP

 

Los Angeles, California

March 3, 2005

 

41


Table of Contents

AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

December 31, 2004 and 2003

(Dollars in thousands, except share and per share data)

 

     2004

    2003

 
Assets (note 2)                 

Current assets:

                

Cash

   $ 457     $ 887  

Receivables:

                

Trade

     27,773       27,803  

Other

     532       394  
    


 


       28,305       28,197  
    


 


Inventories

     43,635       33,389  

Prepaid expenses

     1,479       1,057  

Deferred tax asset (note 4)

     140       140  
    


 


Total current assets

     74,016       63,670  

Property, plant and equipment, net (note 1)

     26,118       21,677  

Land held for development

     211       211  

Intangible assets

     21,161       20,307  

Other assets

     840       869  
    


 


     $ 122,346     $ 106,734  
    


 


Liabilities and Stockholders’ Equity                 

Current liabilities:

                

Current installments of long-term debt (note 2)

   $ 5,107     $ 6,374  

Accounts payable

     12,984       13,030  

Accrued program costs

     10,335       6,763  

Accrued expenses and other payables

     5,791       3,778  

Accrued royalty obligations (notes 7 and 8)

     1,837       1,521  

Income taxes payable

     1,687       580  
    


 


Total current liabilities

     37,741       32,046  

Long-term debt, excluding current installments (note 2)

     19,474       22,142  

Deferred income taxes (note 3)

     1,159       2,212  
    


 


Total liabilities

     58,374       56,400  
    


 


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 9,931,144 shares in 2004 and 9,764,415 shares in 2003

     993       976  

Additional paid-in capital

     10,553       9,933  

Accumulated other comprehensive loss

     (207 )     (207 )

Retained earnings

     55,378       42,076  
    


 


       66,717       52,778  

Less treasury stock, at cost, 835,049 shares in 2004 and 824,881 shares in 2003

     (2,745 )     (2,444 )
    


 


Total stockholders’ equity

     63,972       50,334  
    


 


     $ 122,346     $ 106,734  
    


 


 

See summary of significant accounting policies and notes to consolidated financial statements.

 

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Table of Contents

AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

Years ended December 31, 2004, 2003 and 2002

(Dollars in thousands, except share and per share data)

 

     2004

    2003

    2002

 

Net sales (note 6)

   $ 150,855     $ 124,863     $ 100,671  

Cost of sales

     78,597       65,989       56,796  
    


 


 


Gross profit

     72,258       58,874       43,875  

Operating expenses (note 11)

     47,300       42,332       31,996  
    


 


 


Operating income

     24,958       16,542       11,879  

Interest expense

     1,310       986       973  

Interest income

     (13 )     (303 )     (25 )

Interest capitalized

     (72 )     (323 )     (347 )
    


 


 


Income before income taxes

     23,733       16,182       11,278  

Income taxes (note 3)

     9,256       5,919       4,229  
    


 


 


Net income

   $ 14,477     $ 10,263     $ 7,049  
    


 


 


Earnings per common share—basic

   $ 1.61     $ 1.16     $ 0.81  
    


 


 


Earnings per common share—assuming dilution

   $ 1.51     $ 1.10     $ 0.78  
    


 


 


Weighted average shares outstanding

     8,981,698       8,811,303       8,670,301  
    


 


 


Weighted average shares outstanding—assuming dilution

     9,583,725       9,314,253       9,091,785  
    


 


 


 

See summary of significant accounting policies and notes to consolidated financial statements.

 

43


Table of Contents

AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

Years ended December 31, 2004, 2003 and 2002

(Dollars in thousands, except per share data)

 

    Common Stock

  Additional
Paid-in
Capital


  Retained
Earnings


    Accumulated
Other
Comprehensive
Income


    Comprehensive
Income


    Treasury Stock

    Total

 
    Shares

  Amount

          Shares

  Amount

   

Balance, January 1, 2002

  9,360,000   $ 936   $ 8,694   $ 26,170     $ —         —       763,444   $ (1,842 )   $ 33,958  

Stocks issued under ESPP

  36,661     4     170     —         —         —       —       —         174  

Cash dividends on common stock ($0.069 per share)

  —       —       —       (599 )     —         —       —       —         (599 )

Foreign currency translation adjustment, net

  —       —       —       —         (272 )     (272 )   —       —         (272 )

Treasury stock acquired

  —       —       —       —         —         —       46,305     (394 )     (394 )

Stock options exercised

  138,889     14     313     —         —         —       —       —         327  

Net income

  —       —       —       7,049       —         7,049     —       —         7,049  
                                   


                   

Total comprehensive income

  —       —       —       —         —       $ 6,777     —       —         —    
   
 

 

 


 


 


 
 


 


Balance, December 31, 2002

  9,535,550     954     9,177     32,620       (272 )     —       809,881     (2,236 )     40,243  

Stocks issued under ESPP

  19,956     2     359     —         —         —       —       —         361  

Cash dividends on common stock ($0.091 per share)

  —       —       —       (807 )     —         —       —       —         (807 )

Foreign currency translation adjustment, net

  —       —       —       —         65       65     —       —         65  

Treasury stock acquired

  —       —       —       —         —         —       15,000     (208 )     (208 )

Stock options exercised

  208,909     20     397     —         —         —       —       —         417  

Net income

  —       —       —       10,263       —         10,263     —       —         10,263  
                                   


                   

Total comprehensive income

  —       —       —       —         —       $ 10,328     —       —         —    
   
 

 

 


 


 


 
 


 


Balance, December 31, 2003

  9,764,415     976     9,933     42,076       (207 )     —       824,881     (2,444 )     50,334  

Stocks issued under ESPP

  8,438     1     187     —         —         —       —       —         188  

Cash dividends on common stock ($0.13 per share)

  —       —       —       (1,175 )     —         —       —       —         (1,175 )

Foreign currency translation adjustment, net

  —       —       —       —         —         —       —       —         —    

Treasury stock acquired

  —       —       —       —         —         —       10,168     (301 )     (301 )

Stock options exercised

  158,291     16     433     —         —         —       —       —         449  

Net income

  —       —       —       14,477       —         14,477     —       —         14,477  
   
 

 

 


 


 


 
 


 


Total comprehensive income

                                  $ 14,477                      
                                   


                   

Balance, December 31, 2004

  9,931,144   $ 993   $ 10,553   $ 55,378     $ (207 )     —       835,049   $ (2,745 )   $ 63,972  
   
 

 

 


 


 


 
 


 


 

See summary of significant accounting policies and notes to consolidated financial statements.

 

44


Table of Contents

AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2004, 2003 and 2002

(Dollars in thousands)

 

     2004

    2003

    2002

 

Increase (decrease) in cash

                        

Cash flows from operating activities:

                        

Net income

   $ 14,477     $ 10,263     $ 7,049  

Adjustments to reconcile net income to net cash provided by operating activities:

                        

Depreciation and amortization of property, plant and equipment

     4,042       2,755       1,392  

Amortization of other assets

     1,758       1,298       945  

Deferred income taxes

     (1,053 )     833       1,108  

Changes in assets and liabilities associated with operations:

                        

(Increase) decrease in receivables

     (108 )     (11,003 )     (79 )

Decrease (increase) in inventories

     (10,246 )     (12,161 )     2,802  

(Increase) decrease in prepaid expenses

     (422 )     (187 )     276  

Increase (decrease) in accounts payable

     (46 )     7,872       (4,241 )

Increase (decrease) in other payables and accrued expenses

     7,008       4,754       (1,093 )
    


 


 


Net cash provided by operating activities

     15,410       4,424       8,159  
    


 


 


Cash flows from investing activities:

                        

Capital expenditures

     (8,483 )     (4,448 )     (7,978 )

Acquisitions of intangible assets

     (2,612 )     (5,926 )     (1,774 )

Other noncurrent assets

     29       (267 )     (69 )
    


 


 


Net cash used in investing activities

     (11,066 )     (10,641 )     (9,821 )
    


 


 


Cash flows from financing activities:

                        

Net (repayments) borrowings under line of credit agreement

     (12,200 )     6,200       (4,200 )

Proceeds from issuance of long-term debt

     12,065       —         10,000  

Payments on long-term debt and capital lease obligations

     (3,800 )     (2,199 )     (952 )

Exercise of common stock options and sale of stock under ESSP

     637       778       501  

Purchase of treasury stock

     (301 )     (208 )     (394 )

Payment of cash dividends

     (1,175 )     (807 )     (599 )
    


 


 


Net cash provided by (used in) financing activities

     (4,774 )     3,764       4,356  
    


 


 


Net increase (decrease) in cash

     (430 )     (2,453 )     2,694  

Cash at beginning of year

     887       3,275       853  

Effect of exchange rate changes on cash

     —         65       (272 )
    


 


 


Cash at end of year

   $ 457     $ 887     $ 3,275  
    


 


 


Supplemental cash flow information:

                        

Cash paid during the year for:

                        

Interest

   $ 1,090     $ 996     $ 879  
    


 


 


Income taxes

   $ 9,402     $ 3,620     $ 4,731  
    


 


 


 

See summary of significant accounting policies and notes to consolidated financial statements.

 

45


Table of Contents

AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

 

Supplemental schedule of non-cash investing and financing activities:

 

On September 14, 2004, the Company announced that the Board of Directors declared a cash dividend of $.05 per share which was distributed on October 15, 2004 to stockholders of record as of October 1, 2004.

 

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 Company’s common stock on March 26, 2004.

 

On April 11, 2003, the Company distributed 3,183,210 shares of common stock in connection with a 3 for 2 stock split to stockholders of record as of March 28, 2003.

 

During 2003, The Company completed the acquisition of seven product lines, one used in the animal health business, one related to the herbicide business and five related to a pre-harvest crop protection business. In connection with these acquisitions, the Company recorded intangible assets in the amount of $10,726 of which $5,926 was paid in cash during the period.

 

On April 12, 2002, the Company distributed 1,435,512 shares of common stock in connection with a 4 for 3 stock split to stockholders of record as of March 29, 2002.

 

 

 

 

See summary of significant accounting policies and notes to consolidated financial statements.

 

46


Table of Contents

AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2004, 2003 and 2002

 

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 subsidiaries AMVAC Chemical Corporation (“AMVAC”), GemChem, Inc. (“GemChem”), 2110 Davie Corporation (“DAVIE”), AMVAC Chemical UK Ltd., (“Chemical UK”) and Quimica Amvac de Mexico S.A. de C.V. (“Quimica Amvac”), and Environmental Mediation, Inc. 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 Company’s business is aggregated into one reportable segment. Selective enterprise information is as follows:

 

     2004

   2003

   2002

Net sales:

                    

Crop

   $ 122,498    $ 104,895    $ 79,271

Non-crop

     28,357      19,968      21,400
    

  

  

     $ 150,855    $ 124,863    $ 100,671
    

  

  

 

The Company’s subsidiary, GemChem, Inc., procures certain raw materials used in the Company’s manufacturing operations and is also a distributor of various pharmaceutical and nutritional supplement products.

 

Because of elements inherent to the Company’s business, such as differing and unpredictable weather patterns, crop growing cycles, changes in product mix of sales and ordering patterns that may vary in timing, measuring the Company’s performance on a quarterly basis (gross profit margins on a quarterly basis may vary significantly) even when such comparisons are favorable, is not as good an indicator as full-year comparisons.

 

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 $703 in 2004, $1,207 in 2003 and $570 in 2002.

 

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 Sold—Operating 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.

 

47


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AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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 $9,676 in 2004, $8,902 in 2003 and $7,176 in 2002.

 

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:

 

     2004

   2003

Finished products

   $ 39,244    $ 30,159

Raw materials

     4,391      3,230
    

  

     $ 43,635    $ 33,389
    

  

 

Long-lived Assets

 

The carrying values of long-lived assets is 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 Company’s long-lived assets are held domestically. There was no impairment for the years ended December 31, 2004, 2003 and 2002.

 

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

 

Effective January 1, 2002, the Company adopted Emerging Issues Task Force Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products (“EITF 01-9”). Upon adoption of 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

 

48


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AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

equipment. Interest costs related to significant construction projects may be capitalized at the Company’s 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.

 

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 entity’s 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.

 

The Company had total comprehensive income of $14,477, $10,328 and $6,777 for the years ended December 31, 2004, 2003 and 2002, respectively, which include foreign currency gain (loss) of $0, $65 and $(272) for the years ended December 31, 2004, 2003 and 2002, 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 Company’s long-term debt and note payable to bank is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. Such fair value approximates the respective carrying values of the Company’s long-term debt and note payable to bank.

 

Income Taxes

 

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 Company’s 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

 

49


Table of Contents

AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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 Company’s common stock are exercised.

 

The components of basic and diluted earnings per share were as follows:

 

     2004

   2003

   2002

Numerator:

                    

Net income

   $ 14,477    $ 10,263    $ 7,049
    

  

  

Denominator:

                    

Weighted averages shares outstanding

     8,981,698      8,811,303      8,670,301

Assumed exercise of stock options

     602,027      502,950      421,484
    

  

  

       9,583,725      9,314,253      9,091,785
    

  

  

 

The effect of options to purchase 34,280, 151,575 and 126,563 shares for the years ended December 31, 2004, 2003 and 2002 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.

 

Accounting Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses at the date that the financial statements are prepared. Actual results could differ from those estimates.

 

Reclassifications

 

Certain prior years amounts have been reclassified to conform to the current year’s presentation.

 

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 Company’s 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.

 

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AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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. As of January 1, 2002, the Company had an immaterial amount of goodwill and amortization related to the goodwill. As such, the adoption of SFAS 142, did not have a material impact on the Company’s financial statements.

 

Stock-Based Compensation

 

The Company has adopted the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” In accordance with SFAS No. 123, the Company has elected the disclosure-only provisions related to employee stock options and follows the Accounting Principals Board Opinion (APB) No. 25 in accounting for stock options issued to employees. Under APB No. 25, compensation expense, if any, is recognized as the difference between the exercise price and the fair value of the common stock on the measurement date, which is typically the date of grant, and is recognized over the service period, which is typically the vesting period.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”. SFAS No. 148 amends SFAS No. 123 and provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 to require more prominent and frequent disclosures in financial statements about the effects of stock-based compensation. The Company adopted the disclosure requirements of SFAS No. 148 in the fourth quarter of 2002.

 

All stock options issued to employees have an exercise price not less than the fair market value of the Company’s common stock on the date of the grant, and in accordance with accounting for such options utilizing the intrinsic value method there is no related compensation expense recorded in the Company’s consolidated financial statements. Had compensation cost for stock-based compensation been determined based on the fair value of the grant dates consistent with the method of FASB 123, the Company’s net income and income per share for the years ended December 31, 2004, 2003 and 2002 would have been adjusted to the pro forma amounts presented:

 

     2004

    2003

    2002

 

Net income attributable to common stockholders

   $ 14,477     $ 10,263     $ 7,049  

Stock-based employee compensation expense included in reported net income, net of related tax effects

   $ -0-     $ -0-     $ -0-  

Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

   $ (600 )   $ (446 )   $ (142 )
    


 


 


Pro forma

   $ 13,877     $ 9,817     $ 6,907  
    


 


 


Earnings per common share

   $ 1.61     $ 1.16     $ 0.81  

Pro forma

   $ 1.55     $ 1.14     $ 0.81  

Earnings per common share—assuming dilution, as reported

   $ 1.51     $ 1.10     $ 0.78  

Pro forma

   $ 1.45     $ 1.08     $ 0.78  

 

The fair value of option grants is estimated on the date of grant utilizing the Black-Scholes option-pricing model with the weighted average assumptions for grants in 2004, 2003 and 2002; expected life of options was one to five years, expected volatility of 38%, 43% and 47%, risk-free interest rate of 3.6%, 3.0% and 4.3% and a .26% dividend yield. The weighted average fair value on the date of grants for options granted during 2004, 2003 and 2002 was $11.61, $9.31 and $3.48 per option, respectively.

 

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AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Recently Issued Accounting Guidance

 

In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”) Guarantor’s Accounting and Disclosure Requirement for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The following is a summary of the Company’s agreements that the Company has determined is within the scope of FIN 45.

 

Under its bylaws, and written indemnification agreements, the Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer or director’s serving in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. However, the Company has a directors’ and officers’ liability insurance policy that reduces its exposure and enables it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal and has no liability recorded for these agreements as of December 31, 2004.

 

The Company enters into indemnification provisions under its agreements with other companies in its ordinary course of business (typically customers). Under these provisions the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities or, in some cases, as a result of the indemnified party’s activities under the agreement. The indemnification provisions may survive the termination of the underlying agreement. In addition, in some cases, the Company has agreed to reimburse employees for certain expenses and to provide salary continuation during short-term disability. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions may be unlimited. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the Company believes the estimated fair value of these provisions is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2004.

 

On October 22, 2004, the American Jobs Creation Act of 2004 (the “Act”) was signed into law. The Act provides for a special one-time tax deduction of 85% of certain foreign earnings that are repatriated (as defined in the Act) in either an enterprise’s last tax year that began before the enactment date, or the first tax year that begins during the one-year period beginning on the date of enactment. The Act also includes a tax deduction of up to 9% (when fully phased-in) of the lesser of (a) “qualified production activities income”, as defined in the Act or (b) taxable income (after the deduction for the utilization of any net operating loss carryforwards). As a result of the Act, the FASB issued FASB Staff Positions (“FSP”) 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004”, and 109-2, “Accounting and Disclosure Guidance for the Foreign Repatriation Provision within the American Jobs Creation Act of 2004”. These FSPs were issued effective as of December 21, 2004. The Company is still assessing the financial statement impact of the Act and these FSPs.

 

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs.” This statement amends Accounting Research Bulletin (“ARB”) No. 43, Chapter 4 and clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted materials should be recognized as period charges and requires that fixed production overhead be allocated to inventory based on the normal capacity of the production facility. SFAS No. 151 is

 

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AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of this statement is not expected to have a material impact on the Company’s financial statements.

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment”. This statement replaced SFAS No. 123, “Accounting For Stock-Based Compensation” and superseded APB Opinion No. 25, “Accounting for Stock Issued to Employees”. This statement requires that the cost resulting from all share-based payment transactions be recognized through the financial statements at an amount based on the fair value of an award at the date of its grant. The statement is effective for all periods beginning after June 15, 2005. The Company will adopt the statement as of July 1, 2005 and therefore, will incur compensation expenses in the third and fourth quarters of 2005 for any non-vested options granted prior to 2005. The Company is still assessing the financial statement impact of adoption.

 

(1) Property, Plant and Equipment

 

Property, plant and equipment at December 31, 2004 and 2003 consists of the following:

 

     2004

   2003

   Estimated
useful lives


Land

   $ 2,441    $ 2,441     

Buildings and improvements

     5,105      4,903    10 to 30 years

Machinery and equipment

     44,772      39,273    3 to 15 years

Office furniture, fixtures and equipment

     3,378      2,882    3 to 10 years

Automotive equipment

     209      124    3 to 6 years

Construction in progress

     3,999      1,798     
    

  

    
       59,904      51,421     

Less accumulated depreciation

     33,786      29,744     
    

  

    
     $ 26,118    $ 21,677     
    

  

    

 

The Company began the re-commissioning phase during the third quarter of 2001 of the Axis, Alabama manufacturing facility it acquired in May 2001 from E.I. Du Pont de Nemours. The Company began the commissioning phase of this facility during the third quarter of 2001 and this facility was placed in service in May 2003. As of December 31, 2003, all costs related to the re-commissioning of the Axis, Alabama manufacturing facility have been placed into service and depreciation over their estimated useful lives has commenced.

 

(2) Long-Term Debt

 

Long-term debt of the Company at December 31, 2004 and 2003 is summarized as follows:

 

     2004

   2003

Note payable, secured by certain real property, payable in monthly installments of $9, plus interest at prime (4.75% as of December 31, 2004) plus 2% with remaining unpaid principal due April 30, 2012 (a)

   $ 2,581    $ 1,391

Term loan, secured by personal property, payable in quarterly installments of $1,000 plus interest at prime (4.75% as of December 31, 2004) with remaining unpaid principal due October 7, 2009 (b)

     19,000      8,125

Revolving line of credit (b)

     2,000      14,200

Obligations under product acquisition agreements

     1,000      4,800
    

  

       24,581      28,516

Less current installments

     5,107      6,374
    

  

     $ 19,474    $ 22,142
    

  

 

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AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Approximate principal payments on long-term debt, excluding the revolving line of credit, mature as follows:

 

2005

   $ 5,107

2006

     4,108

2007

     4,108

2008

     4,108

2009

     3,108

Thereafter

     2,042
    

     $ 22,581
    


(a) This note payable, secured by certain real property, was refinanced effective March 19, 2004 (new financed amount of $2,660). The new loan bears interest at prime, or at the Company’s option, at a fixed rate of interest offered by the bank. The new monthly installments, effective April 2004, are $9, plus interest. The Company will make principal plus interest payments over a seven-year term of the loan (loan matures April 1, 2011), based on a twenty-five-year amortization schedule. The proceeds from the loan, were used to payoff this maturing term loan and repay bank debt (fully-secured revolving line).
(b) In October 2004, the Company entered into an Amended and Restated Credit Agreement with a syndicate of commercial lenders led by the Company’s primary bank as the administrative agent and a lender, two other banks as lenders and a fourth as a participant, for an $80,000 fully-secured credit facility. This credit facility replaced the Company’s previous credit facility with its primary bank and one other bank entered into in May 2002 and amended in March 2004. The new credit facility consists of a $45,000 revolving line of credit and a $35,000 term loan. These loans bear interest at the prime rate (“Referenced Loans”), or at the Company’s 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 (“Fixed 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 February, May, August and November, commencing November 30, 2004 and in one final installment in the amount necessary to repay the remaining outstanding principal balance of the term loan in full on the maturity date. Interest accruing on the Referenced Loans are payable quarterly, in arrears, on the last day of each March, June, September and December, and on the maturity date of such loan in the amount of interest then accrued but unpaid. Interest accruing on the Fixed 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 and term loan both mature on October 7, 2009 (five years from the closing date) and contain certain covenants (with which the Company is in compliance) as defined in the agreement. The Company had $43,000,000 of availability under its revolving line of credit as of December 31, 2004.

 

Substantially all of the Company’s assets not otherwise specifically pledged as collateral on existing loans and capital leases are pledged as collateral under the credit agreement.

 

The average amount outstanding of the senior secured revolving line of credit during the years ended December 31, 2004 and 2003 was $19,400 and $12,800. The weighted average interest rate during the years ended December 31, 2004 and 2003 was 3.40% and 3.45%.

 

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AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(3) Income Taxes

 

The components of income tax expense are:

 

     2004

    2003

   2002

Current:

                     

Federal

   $ 8,391     $ 4,049    $ 2,846

State

     1,918       1,185      282

Deferred:

                     

Federal

     (959 )     613      964

State

     (94 )     72      137
    


 

  

     $ 9,256     $ 5,919    $ 4,229
    


 

  

 

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:

 

     2004

    2003

    2002

 

Computed tax provision at statutory Federal rates

   $ 8,307     $ 5,648     $ 3,834  

Increase (decrease) in taxes resulting from:

                        

State taxes, net of Federal income tax benefit

     1,241       322       491  

Other expenses

     (292 )     28       (6 )

Benefit of tax credits

     —         (79 )     (90 )
    


 


 


     $ 9,256     $ 5,919     $ 4,229  
    


 


 


 

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, 2004 and 2003 relate to the following:

 

     2004

    2003

 

Current:

                

Inventories

   $ 953     $ 543  

State income taxes

     410       372  

Vacation pay accrual

     161       143  

Other

     (93 )     (79 )
    


 


Net deferred tax asset

     1,431       979  
    


 


Non-Current:

                

Plant and equipment, principally due to differences in depreciation and capitalized interest

     (2,450 )     (3,051 )
    


 


Net deferred tax liability

     (2,450 )     (3,051 )
    


 


Total net deferred tax liability

   $ (1,019 )   $ (2,072 )
    


 


 

The Company believes it is more likely than not that the deferred tax assets above will be realized in the normal course of business.

 

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AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(4) Litigation and Environmental

 

DBCP LAWSUITS

 

  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 Board’s wells had been contaminated with 1,2-dibromo-3-chloropropane (“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. While the suit could only include damages that had incurred by the time of the scheduled trial date of October 18, 1999, future suits could be filed as a well became contaminated. 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 AMVAC’s (and the Company’s) portion was five hundred thousand dollars ($500,000). [As to matters independent of indemnity issues, the Company recovered four hundred thousand dollars ($400,000) from one of its insurers.] The settlement agreement obligates the defendants to pay 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 defendants are also obligated to pay between ninety and one-hundred percent for the cost of the installation of filtration devices on other wells that may exceed the defined maximum contaminant level in the next forty years. The number of future wells needing remediation could be less than six or more than that amount, however, the maximum number of wells subject to remediation under the agreement is fifty. AMVAC’s share of the ongoing operation and maintenance charges and installation of additional devices on other wells is seventeen and one-half percent. The obligations of the defendants under this agreement are secured by a twenty million-dollar letter of credit obtained by Dow Chemical. AMVAC will pay seventeen and one-half percent of the annual cost of the letter of credit (which does not have a material impact on the Company’s financial statements) directly to Dow Chemical. On June 10, 2004, AMVAC was notified that the plaintiff had completed conversion of the H’Poko wells from a temporary to a permanent filtration facility. After credits of approximately eight hundred thousand dollars ($800,000) from the settlement were deducted from the one million eight hundred thousand dollars ($1,800,000) cost of a two-vessel system, the claim to the defendants was one million dollars ($1,000,000). The cost of the temporary facility was included in the original settlement. On January 21, 2005, defendants were notified that the claim by the plaintiff would be submitted in approximately sixty days. AMVAC’s share of the permanent filtration system will be one hundred and seventy-five thousand dollars ($175,000) which has been accrued for/reserved by the Company. Thus far, no additional wells have been remediated nor have there been ongoing operation and maintenance charges.

 

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) 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

 

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AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Corporation, and Del Monte Fresh Produce. (American Vanguard Corporation has not been sued in these actions.) The ten named plaintiffs are citizens of four countries—Guatemala, 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 plaintiffs’ attorneys (from South Carolina) have also represented foreign banana workers in the Texas and Mississippi matters discussed below.) For the last seven years, the focus of the case has been on procedural issues. The defendants moved to dismiss under the doctrine of forum non conveniens. Under this doctrine, the foreign plaintiffs would have to sue in their own countries rather than using the United States courts. The plaintiffs wish to keep the cases in the United States and have them remanded to state court. The plaintiffs also contend that the federal court does not have jurisdiction. In September 1998, the court granted defendants’ motion to dismiss based on the grounds of forum non conveniens. A number of conditions were imposed including consent to jurisdiction in the four foreign countries for the ten named plaintiffs, use of discovery taken in the United States, the requirement that the plaintiffs file suits in their home countries by December 9, 1998, and the agreement by defendants to pay any judgment, if any, that might be entered in the foreign countries. The court order also provided that the plaintiffs could return to the United States if the foreign countries refused to accept jurisdiction. The court then dismissed the case on March 8, 1999. The plaintiffs subsequently appealed to the Ninth Circuit Court of Appeal. The Ninth Circuit issued its decision on May 30, 2001, holding that the federal court did not have jurisdiction. A petition for writ of certiorari (a writ of a superior court to call up the records of an inferior court or quasi-judicial body) was filed in United States Supreme Court on October 5, 2001 and the United States Supreme Court subsequently granted a hearing. Oral argument was held on January 22, 2003. On April 22, 2003, the United States Supreme Court issued its decision in favor of the plaintiffs, holding there was no jurisdiction in federal court. This vacates the order dismissing the case under the forum non conveniens doctrine. One September 5, 2003, the U.S. District Court in Honolulu issued an order that the case will be remanded to state court unless there is an objection filed by September 18, 2003. As the U.S. Supreme Court has issued its final decision on the lack of federal court jurisdiction, the case will be remanded to state. Once the case reaches state court, the defendants will have to decide whether they will file a motion to dismiss under forum non conveniens pursuant to state court procedures. No activity took place on this case throughout 2004 or to date as apparently, the suit has not been officially received in the state court upon remand. The plaintiffs’ attorneys reported that the ten plaintiffs filed suit in their home countries by December 9, 1998, 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. It is too early to provide any evaluation of the likelihood of an unfavorable outcome at this time. 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.

 

On or about October 1, 2003, the Company was indirectly advised of a possible claim for ground water contamination on the Island of Maui. (This is separate and distinct from Item 1 (A) above.) The Company was provided with communications between Maui Land & Pineapple Company, Inc. (“Maui Pine”) and Hawaii Water Service Company (“HWSC”). HWSC is a non-municipally owned public water utility owning three water wells allegedly contaminated with DBCP and 1,2,3-tri-chloropropane (“TCP”). HWSC further alleges that the wells were contaminated by the above mentioned chemicals manufactured, marketed, distributed and/or sold by Maui Pine, Maui Pineapple Company (collectively, “Maui Pine”), The Dow Chemical Company, Dow AgroSciences, LLC (collectively, “Dow”), Occidental Petroleum Corporation, Occidental Chemical Corporation (collectively, “Occidental”), Shell Oil Company, Shell Chemical Company (collectively, “Shell”), American

 

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AMERICAN VANGUARD CORPORATION

AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Vanguard Corporation, AMVAC Chemical Company (collectively, “AMVAC”), BEI Hawaii and Brewer Environmental Industries Holdings, Inc. (collectively “Brewer”). On or about October 17, 2003, all parties agreed to a tolling of the applicable statute of limitations in order to enter into mediation proceedings. The Company has been advised that the total claim could approximate four million dollars ($4,000,000), inclusive of future expenses for operations and maintenance of filtration devices on the wells. The parties met with an independent mediator on January 14 and 15, 2004 to discuss this claim. On January 15, 2004, the Company reached a settlement with HWSC for fifty-five thousand dollars ($55,000.00), contingent upon obtaining a court order approving the settlement as one made in good faith. The settlement includes future expenses for operations and maintenance. As not all parties settled at the mediation, HWSC filed suit in the Circuit Court of the Second Circuit, State of Hawaii on February 1, 2004. The non-settling parties subsequently removed the case to federal court, which has delayed the filing of motions in state court to approve the settlement as one made in good faith. The case was remanded to state court on January 7, 2005. With the case back in state court, a motion for approval of the good faith settlement will be made. Once the court approves the settlement, the fifty-five thousand dollars ($55,000) will be paid to HWSC to conclude AMVAC’s involvement.

 

  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 entitled Edgar Arroyo-Gonzalez v. Coahoma Chemical Co., Inc., et al, Amilcar Belteton-Rivera v. Coahoma Chemical Co., Inc., et al, Eulogio Garzon-Larreategui v. Coahoma Chemical Co., Inc., et al, Valentin Valdez v. Coahoma Chemical Co., Inc., et al and Carlos Nicanor Espinola-E v. Coahoma Chemical Co., Inc., et al. Other named defendants are: 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 have been 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. Unlike the Patrickson case, the court did not establish detailed procedures or deadlines for the filing of suits in the foreign countries by the five plaintiffs. Defendants have learned that plaintiff Valentin Valdez has filed a suit in Panama, but they have not been served. 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 plaintiff’s 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. A deposition of the plaintiff Espinola was scheduled but was never taken. The federal court then ordered remand to state court. The attorneys for Dow Chemical Co. filed a motion for reconsideration, explaining that the plaintiffs attorneys did not produce their client for deposition. This motion is still pending. No activity took place on this matter throughout 2004 or to date. No discovery has taken place on the individual claims of these plaintiffs. If the Espinola case is tried in Mississippi state court, the maximum recovery is fifty thousand dollars ($50,000). Without discovery, it is unknown whether any of the plaintiffs were exposed to the Company’s product or what statute of limitation defense may apply. AMVAC intends to contest the cases vigorously. It is too early to provide an evaluation of the likelihood of an unfavorable outcome at this time.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

  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, they were not served until November 1999. (These complaints were filed in association with the same attorneys who have handled the Delgado and Carcamo matters listed below.) The complaints allege personal injuries from alleged exposure to DBCP (punitive damages are also sought). The plaintiffs (approximately three thousand nine hundred) are primarily from the countries of the Philippines, Costa Rica, Ecuador and Guatemala. In November 1999, the cases were removed to the United States District Court for the Eastern District of Louisiana. The plaintiffs filed a motion to remand the cases back to the state court in December 1999. In February 2000, the plaintiffs’ attorneys withdrew their motion to remand the cases to state court without prejudice, stating that they would wait for an appellate court determination on similar issues in the Mississippi and Texas cases. Dow Chemical Company, Shell Oil Company and Occidental Chemical Corporation contend that the vast majority of these plaintiffs were included in the settlement of some fifteen thousand plaintiffs mentioned in the Delgado and Carcamo matters discussed below. In September 2002, the plaintiffs’ attorneys finally evaluated their list of plaintiffs who had settled previously. They agreed that the plaintiffs who settled with Dow Chemical Company, Shell Oil Company, and Occidental Chemical Corporation were now only proceeding against the grower defendants. The plaintiffs who had not settled previously would continue with the suit against all defendants, including AMVAC. Thus, out of the approximately three thousand nine-hundred plaintiffs, about three hundred and fourteen are left (one hundred and sixty-seven are from Ecuador, one hundred and two are from Costa Rica and forty-five are from Guatemala). The plaintiffs filed a consolidated third amended complaint in October 2002 with Soriano as the lead case. Each plaintiff seeks in excess of the minimum jurisdiction of federal court for diversity of citizenship cases, seventy-five thousand dollars ($75,000). AMVAC has answered the third amended complaint. With the United States Supreme Court holding there was no federal court jurisdiction in the Patrickson case, the federal court judge issued an order to the parties in April 2003 as to why the cases should not be remanded to state court. The defendants argued that there was still federal court jurisdiction because of diversity of citizenship, but this diversity did not exist at the time the suites were originally filed in 1996 and accordingly, the court remanded the cases to state court in June 2003. In state court, the three cases were assigned to two different judges. The defendants considered filing another motion to dismiss based on forum non conveniens. In Louisiana, all defendants must join in making such a motion. By this time, unfavorable anti-forum non conveniens laws had passed or were pending in several of the countries where the plaintiffs resided. Several of the defendants were against consenting to jurisdiction in those countries, which is a condition required by an order of dismissal under forum non conveniens. As a result, these cases will now be litigated in state court in Louisiana. The state court has not yet scheduled any case management or status conferences. It is likely that the three cases will be reconsolidated in state court. No activity took place on this matter throughout 2004 or to date. As in the other banana worker’s 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 AMVAC’s 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. Texas Matters

 

These matters involve an earlier round of litigation by foreign banana workers. The complaints filed in the United States Court of Appeals, Fifth Circuit entitled Franklin Rodriquez Delgado, et al., Jorge Colindres

 

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Carcamo, individually and on behalf of all other similarly situated, et al., Juan Ramon Valdez, et al., and Isae Carcamo v. Shell Oil Company, et al. The complaints are for personal injuries from alleged exposure to DBCP. AMVAC was not sued by the plaintiffs but was sued on a third party complaint by Dow Chemical Company. These cases were originally filed in various state courts in Texas and removed by the defendants to federal court. By order dated July 11, 1995, the United States District Court granted defendants’ motion to dismiss pursuant to the doctrine of forum non conveniens, requiring the plaintiffs to sue in their native countries. The court required the defendants to consent to jurisdiction in the foreign countries along with other conditions. As AMVAC had not been sued by the plaintiffs directly, it refused to consent to jurisdiction in the foreign countries for these plaintiffs. In 1995, Dow Chemical Company dismissed its third party complaint against AMVAC without prejudice. Subsequently, Dow Chemical Company and Shell Oil Company settled with these plaintiffs as well as with about fifteen thousand other banana workers represented by the plaintiffs’ law firm (not the firm representing the Patrickson and Mississippi plaintiffs). Dow Chemical Company was then dismissed by the plaintiffs with prejudice in September 1997. Two intervenors (who are represented by the same attorneys as the plaintiffs in the Patrickson and Mississippi cases) have filed a motion in opposition to this dismissal. The plaintiffs appealed to the Fifth Circuit on the order of dismissal under forum non conveniens. In October 2000, the Fifth Circuit found federal court jurisdiction and affirmed the dismissals based on forum non conveniens. The United States Supreme Court refused to accept a hearing at that time. While AMVAC is not presently a party in this lawsuit having been dismissed without prejudice, the case is still pending, with the focus now shifted to the grower defendants. These remaining claims are apparently now being remanded to state courts in Texas.

 

  E. Nicaragua Matters

 

In March 2004, twenty-five 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 complaint is entitled Tellez et al v. Dole Food Company, Inc. et al. 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. American Vanguard Corporation 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, inhalation of vapors, and from drinking water allegedly contaminated with DBCP. 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 eighteen others, for a total of thirty-six plaintiffs. To date, the parties have worked on a comprehensive case management order that would permit obtaining plaintiffs’ medical records in Nicaragua and starting depositions of eighteen of the plaintiffs in Los Angeles and independent medical examination scheduled to take place in May 2005. At a status conference on February 9, 2005, a trial date for July 17, 2006 was scheduled. No discovery has yet taken place on the individual claims of the plaintiffs. Thus, it is unknown as to how many of the thirty-six plaintiffs, if any, actually claim exposure to AMVAC’s product, the nature and extent of their injuries, and whether their claims are barred by applicable statutes of limitation. AMVAC intends to vigorously contest this case. It is too early to provide any evaluation of the likelihood of an unfavorable outcome at this time.

 

In January 2003, three new cases were filed in Nicaragua. This time defendants besides Dow Chemical Company, Shell Oil Company and Dole Food were sued, including AMVAC, Occidental Chemical Corporation, Del Monte Fresh Produce, Chiquita Brands, Ameribrom and three Chevron entities. It is reported that these plaintiffs claim damages for sterility and that there are approximately three hundred and fifty plaintiffs named in

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

these three cases. It has also been reported that a suit seeking damages for personal injuries based on alleged exposure to DBCP in groundwater has been filed in Nicaragua. AMVAC has not been served to date and has not seen the complaints. AMVAC disputes that the Nicaraguan courts have jurisdiction over it. 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.

 

OTHER MATTERS

 

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 2004, 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 in 2003 and 2004 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 late 2005. 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. The cost associated with the potential remediation activities is not expected to have a material impact on the Company’s financial statements.

 

The Company 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. The Company 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 the Company’s 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.

 

(5) Employee Deferred Compensation Plan

 

The Company maintains a deferred compensation plan (“the Plan”) for all eligible employees. The Plan calls for each eligible employee, at the employee’s election, to participate in an income deferral arrangement under Internal Revenue Code Section 401(k) whereby the Company will match the first $5.00 of weekly employee contributions. The Plan also permits employees to contribute up to an additional 15% of their salaries of which the company will match 50% of the first 6% of the additional contribution. The Company’s contributions to the Plan amounted to $385, $328 and $301 in 2004, 2003 and 2002. Effective January 1, 2005, the Company will match 100% of the elective deferrals of all eligible participants up to a maximum of 5% of compensation.

 

(6) Major Customers and Export Sales

 

In 2004 there were three companies that accounted for 18%, 12% and 11% of the Company’s consolidated sales. In 2003 there were two companies that accounted for 11% each of the Company’s consolidated sales. In 2002 there were three companies that accounted for 22%, 12% and 10% of the Company’s consolidated sales. These companies are distributors of the Company’s products.

 

The Company primarily sells its products to large distributors and buying cooperatives and extends credit based on an evaluation of the customer’s financial condition. The Company had three significant customers who each accounted for approximately 15%, 12% and 11% of the Company’s receivables as of December 31, 2004. Two customers accounted for 13% of the Company’s receivables as of December 31, 2003. The Company has long-standing relationships with its customers and the Company considers the credit risk to be low.

 

Worldwide export sales were $10,265, $8,943 and $7,470 for 2004, 2003 and 2002, respectively. For the year ended December 31, 2004, sales to Mexico and Canada accounted for more than 10% of foreign sales, with sales of $1,818 to Mexico and $1,991 to Canada in 2004. Of total foreign sales, sales to Mexico and Canada accounted for more than 10% individually for the years ended December 31, 2003 and 2002, with foreign sales to Mexico of $2,284, and $1,210, respectively and sales to Canada for the same periods of $1,944 and $2,149.

 

(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. One agreement, which expired December 31, 2003, contained a minimum aggregate royalty amount, which had previously been met. No other agreement contains a minimum royalty provision. Certain royalty agreements contain confidentiality covenants. Royalty expenses were $1,733, $1,988 and $1,752, respectively, for 2004, 2003 and 2002.

 

(8) Product Acquisitions

 

All product acquisitions have been accounted for as asset purchases and not businesses pursuant to FASB 141 and EITF 98-3.

 

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In 2004, the Company purchased the rights to sell a pyrethroid insecticide.

 

In 2003, the Company completed the acquisition of seven product lines, one used in animal health, one related to its herbicides business and five related to pre-harvest crop protection. The assets purchased included, but may not have been limited to, end-use product registrations and data in support of such registrations, trademarks, as well as other intellectual property. One asset purchase was for $5,786 (which included a number of products) and another was for $4,500. In connection with these asset acquisitions, the Company recorded intangible assets in the amount of $10,726, of which $5,926 was paid in cash during the period. The balance due under these asset purchase agreements was $4,800 at December 31, 2003 and is included in long-term debt on the consolidated financial statements (note 2).

 

In 2002, the Company acquired certain assets associated with a domestic product line from a chemical company. The Company acquired all U.S. EPA end-use product registrations and data in support of such registrations as well as a license to the trademark.

 

Also in 2002, the Company acquired certain assets associated with a domestic product line from a chemical company. The Company acquired the U.S. EPA end-use product registrations as well as the trademark and product inventories. In addition, the Company negotiated a supply agreement providing for the supply of active ingredient. Access to data in support of the end-use product registration has been assigned to the Company.

 

In 2001, the Company acquired an international product line from a chemical company. The purchase included all active registrations, access to the underlying data for the registrations and trademarks in 55 countries. The Company has manufactured and formulated the product for the international market since 1985. Additionally, the Company has been the primary data generator and data holder for the product since 1989. The acquisition was for a fixed amount which was paid in 2001.

 

In 2000, the Company completed the acquisition of a product line from a wholly-owned subsidiary of a large chemical company. The purchase included the worldwide rights including U. S. Environmental Protection Agency (“EPA”) registrations rights and similar regulatory entities in other countries worldwide, manufacturing and process technology, trademarks and all product related intellectual property. In addition, the Company entered into a royalty obligation commencing on or about May 2002 to continue for five years from May 2002.

 

Additionally in 2000, the Company completed the acquisition of a product line from a large chemical company. The Company acquired all U.S. EPA and state registrations, manufacturing and process technology, trademarks and all product related intellectual property. The acquisition included all rights and obligations to a closed delivery system as well as the seller’s existing finished and semi-finished inventory including the closed delivery system containers.

 

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 Policies – Goodwill and Other Intangible Assets for the Company’s accounting policy regarding intangible assets):

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following schedule represents intangible assets recognized in connection with product acquisitions (See note 1 for the Company’s accounting policy regarding intangible assets):

 

     Amount

 

Intangible assets at December 31, 2001

   $ 10,049  

Acquisitions during fiscal 2002

     1,774  

Amortization expense

     (945 )
    


Intangible assets at December 31, 2002

     10,878  

Acquisitions during fiscal 2003

     10,726  

Amortization expense

     (1,297 )
    


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  
    


 

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 of 15 years:

 

     2004

    2003

 

Gross carrying amount

   $ 27,403     $ 24,791  

Accumulated amortization

     (6,242 )     (4,484 )
    


 


     $ 21,161     $ 20,307  
    


 


 

The following schedule represents future amortization charges related to intangible assets recognized in connection with product acquisitions:

 

Year ending December 31,


    

2005

   $ 1,883

2006

     1,883

2007

     1,883

2008

     1,883

2009

     1,883

Thereafter

     11,746
    

     $ 21,161
    

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following schedule represents the Company’s obligations under product acquisition agreements:

 

     Amount

 

Obligations under acquisition agreements at December 31, 2000

     4,203  

Additional obligations acquired

     422  

Payments on existing obligations

     (3,725 )
    


Obligations under acquisition agreements at December 31, 2001

     900  

Additional obligations acquired

     —    

Payments on existing obligations

     (650 )
    


Obligations under acquisition agreements at December 31, 2002

     250  

Additional obligations acquired

     10,726  

Payments on existing obligations

     (6,176 )
    


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  
    


 

Future commitments on obligations under product acquisition agreements are due as follows:

 

December 31


   Amount

2005

   $ 1,000
    

 

(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,


    

2005

   $ 683

2006

     468

2007

     446
    

     $ 1,597
    

 

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 building’s 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, 2004, 2003 and 2002 was $352, $368 and $322. Future minimum lease payments under the terms of the leases are as follows:

 

Year ending December 31,


    

2005

   $ 278

2006

     279

2007

     255

2008

     253

2009

     213

Thereafter

     120
    

     $ 1,398
    

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(10) Research and Development

 

Research and development expenses were $3,081, $4,669 and $2,940 for the years ended December 31, 2004, 2003 and 2002.

 

(11) Stock Options

 

Incentive Stock Option Plans (“ISOP”)

 

Under the terms of the Company’s ISOP, under which options to purchase 1,611,000 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 2004 and 2003, the Company granted incentive stock options to purchase an aggregate of 15,500 and 423,750 shares of common stock to key employees. These options are non-assignable and non-transferable, are exercisable over a seven-year period from the date of grant and vest in five equal annual installments commencing one year from the date of grant.

 

Nonstatutory Stock Options (“NSSO”)

 

During 2004 and 2003, the Company granted nonstatutory stock options to purchase an aggregate of 21,780 and 26,014 shares of common stock. These options are non-assignable and non-transferable, are exercisable over a five year period from the date of grant and vested upon grant.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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
Weighted
Average
Price

Per Share


Balance outstanding, December 31, 2000

   416,663     28,622     1.82      

Options granted, range from $2.22–$4.70

   308,651     19,623     4.70      

Options exercised, range from $1.93–$4.59

   (4,000 )   (26,000 )   (2.57 )    
    

 

 

   

Balance outstanding, December 31, 2001

   721,314     22,245     3.05      

Options granted, range from $8.06–$8.51

   16,875     18,150     8.34      

Options exercised, range from $2.03–$8.06

   (129,347 )   (9,542 )   (2.15 )    
    

 

 

   

Balance outstanding, December 31, 2002

   608,842     30,853     3.48     3.51
                      

Options granted, range from $9.38–$21.6

   423,750     26,014     13.61      

Options exercised, range from $1.80–$12.47

   (202,860 )   (6,049 )   (4.16 )    
    

 

 

   

Balance outstanding, December 31, 2003

   829,732     50,818     9.31     6.38
                      

Options granted, range from $30.12–$38.52

   15,500     21,780     36.50      

Options exercised, range from $2.22–$21.6

   (127,448 )   (6,050 )   (3.15 )    

Options expired

   (10,260 )   —       (3.07 )    
    

 

 

   

Balance outstanding, December 31, 2004

   707,524     66,548     11.61     8.69
    

 

 

 

 

Information relating to stock options at December 31, 2004 summarized by exercise price is as follows:

 

     Outstanding
Weighted Average


   Exercisable
Weighted Average


Exercise Price Per Share


   Shares

   Life
(Months)


   Exercise
Price


   Shares

   Exercise
Price


Incentive Stock Option Plan:

                            

$4.70

   254,400    36    $ 4.70    152,640    $ 4.70

$8.51

   16,874    27    $ 8.51    7,594    $ 8.51

$9.38–$21.60

   420,750    16    $ 16.19    211,050    $ 11.39

$30.12–$34.50

   15,500    6    $ 33.65    1,550    $ 33.65
    
  
  

  
  

     707,524    23    $ 12.26    372,834    $ 8.69
    
  
  

  
  

Nonstatutory Stock Options:

                            

$1.72

   3,025    12    $ 1.72    3,025    $ 1.72

$2.30

   3,630    60    $ 2.46    3,630    $