1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO _______________ COMMISSION FILE NUMBER 0-6354 AMERICAN VANGUARD CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 95-2588080 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification Number) 4695 MacArthur Court, Newport Beach, California 92660 (Address of principal executive offices) (Zip Code) (949) 260-1200 (Registrant's telephone number, including area code) -------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 ----- ----- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.10 Par Value -- 2,492,582 shares as of March 31, 1999
2 AMERICAN VANGUARD CORPORATION INDEX <TABLE> <CAPTION> PART I - FINANCIAL INFORMATION Page Number ----------- <S> <C> Item 1. Financial Statements: Consolidated Statements of Operations for the three months ended March 31, 1999 and 1998 1 Consolidated Balance Sheets as of March 31, 1999, and December 31, 1998 2 Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998 4 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II - OTHER INFORMATION 12 SIGNATURE PAGE 13 </TABLE>
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) <TABLE> <CAPTION> For the three months ended March 31 --------------------------------- 1999 1998 ------------ ------------ <S> <C> <C> Net sales $ 10,186,200 $ 10,793,000 Cost of sales 5,964,700 6,634,300 ------------ ------------ Gross profit 4,221,500 4,158,700 Operating expenses 4,617,200 4,133,500 ------------ ------------ Operating income(loss) (395,700) 25,200 Interest expense (481,500) (454,000) Interest income 1,600 1,300 ------------ ------------ Loss before income tax (875,600) (427,500) Income tax benefit 350,200 (171,000) ------------ ------------ Net loss $ (525,400) $ (256,500) ============ ============ Basic and diluted net loss per common share $ (.21) $ (.10) ============ ============ Weighted average number of shares outstanding 2,492,582 2,507,582 ============ ============ </TABLE> See notes to consolidated financial statements. 1
4 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS <TABLE> <CAPTION> March 31, Dec. 31, 1999 1998 ----------- ----------- (Unaudited) (Note) <S> <C> <C> Current assets: Cash $ 524,200 $ 767,000 Receivables: Trade 16,780,800 17,786,700 Other 713,200 852,900 ----------- ----------- 17,494,000 18,639,600 ----------- ----------- Inventories 19,925,400 15,735,800 Prepaid expenses 927,600 814,600 ----------- ----------- Total current assets 38,871,200 35,957,000 Property, plant and equipment, net 12,089,000 12,576,300 Land held for development 210,800 210,800 Intangible assets 9,442,800 9,616,800 Other assets 466,200 486,100 ----------- ----------- $61,080,000 $58,847,000 =========== =========== </TABLE> 2
5 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY <TABLE> <CAPTION> March 31, Dec. 31, 1999 1998 ----------- ----------- (Unaudited) (Note) <S> <C> <C> Current liabilities: Current installments of long-term debt $ 2,792,600 $ 3,118,500 Accounts payable 7,298,900 6,448,400 Accrued expenses 1,675,100 3,599,700 Accrued royalty obligation - current portion 1,600,000 1,600,000 Income taxes payable -- 1,379,900 ----------- ----------- Total current liabilities 13,366,600 16,146,500 Notes payable to bank 16,400,000 10,000,000 Long-term debt, excluding current installments 6,099,800 6,457,800 Accrued royalty obligation - excluding current portion 570,600 1,074,300 Deferred income taxes 2,040,100 2,040,100 ----------- ----------- Total liabilities 38,477,100 35,718,700 ----------- ----------- Stockholders' Equity: Preferred stock, $.10 par value per share Authorized 400,000 shares; none issued -- -- Common stock, $.10 par value per share Authorized 10,000,000 shares; issued and outstanding 2,564,182 shares 256,400 256,400 Additional paid-in capital 3,879,000 3,879,000 Retained earnings 18,908,900 19,434,300 ----------- ----------- 23,044,300 23,569,700 Treasury stock at cost (71,600 shares) 441,400 441,400 ----------- ----------- Total stockholders' equity 22,602,900 23,128,300 ----------- ----------- $61,080,000 $58,847,000 =========== =========== </TABLE> Note: The balance sheet at December 31, 1998 has been derived from the audited financial statements at that date. See notes to consolidated financial statements. 3
6 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED) <TABLE> <CAPTION> Increase (decrease) in cash 1999 1998 ----------- ----------- <S> <C> <C> Cash flows from operating activities: Net loss $ (525,400) $ (256,500) Adjustments to reconcile net income loss to net cash used in operating activities: Depreciation and amortization 821,100 705,900 Changes in assets and liabilities associated with operations: Decrease in receivables 1,145,600 566,100 Increase in inventories (4,189,600) (1,332,700) Decrease (increase) in prepaid expenses (113,000) 184,100 Increase in accounts payable 850,500 999,400 Decrease in other payables and accrued expenses (3,808,200) (2,121,200) ----------- ----------- Net cash used in operating activities (5,819,000) (1,254,900) ----------- ----------- Cash flows from investing activities: Capital expenditures (141,600) (192,000) Net decrease (increase)in other noncurrent assets 1,700 (141,000) ----------- ----------- Net cash used in investing activities (139,900) (333,000) ----------- ----------- </TABLE> (Continued) 4
7 AMERICAN VANGUARD CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED) <TABLE> <CAPTION> 1999 1998 ----------- ----------- <S> <C> <C> Cash flows from financing activities: Net additions under lines of credit agreement $ 6,400,000 $ 2,100,000 Principal payments on long-term debt (683,900) (203,700) Payment of cash dividends -- (175,500) ----------- ----------- Net cash provided by financing activities 5,716,100 1,720,800 ----------- ----------- Net increase (decrease) in cash (242,800) 132,900 Cash at beginning of year 767,000 746,600 ----------- ----------- Cash at end of period $ 524,200 $ 879,500 =========== =========== </TABLE> See notes to consolidated financial statements. 5
8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation, have been included. As of January 1, 1999, the Company changed its method of computing the overhead rate to be included in inventory costs for interim financial reporting purposes. The Company's inventory overhead rate is now based on the expected amount of overhead to be incurred for the year, rather than the actual amount incurred each quarter. This change in calculation had an effect of increasing gross profit for the quarter ended March 31, 1999 by approximately $108,000. Operating results for the three months ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999 For further information, refer to the consolidated financial statements and footnotes thereto, included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. 2. Inventories - The components of inventories at March 31, 1999 and December 31, 1998 consists of the following: <TABLE> <CAPTION> March 31, 1999 December 31, 1998 -------------- ----------------- <S> <C> <C> Finished Products $16,130,500 $13,127,700 Raw Materials 3,794,900 2,608,100 ----------- ----------- $19,925,400 $15,735,800 =========== =========== </TABLE> 3. Property, plant and equipment at March 31, 1999 and December 31, 1998 consists of the following: <TABLE> <CAPTION> March 31, December 31, 1999 1998 ----------- ----------- <S> <C> <C> Land $ 2,382,600 $ 2,382,600 Buildings and improvements 4,718,400 4,708,660 Machinery and equipment 23,418,800 23,384,900 Office furniture and fixtures 2,419,200 2,393,800 Automotive equipment 105,000 105,000 Construction in progress 760,200 687,700 ----------- ----------- 33,804,200 33,662,600 Less accumulated depreciation 21,715,200 21,086,300 ----------- ----------- $12,089,000 $12,576,300 =========== =========== </TABLE> 6
9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 4. On March 31, 1999, the Company announced that the Board of Directors declared a cash dividend of $.06 per share. The dividend was distributed on April 19, 1999 to stockholders of record as of April 8, 1999. 5. Earnings Per Share ("EPS") - Basic EPS is computed as net income divided by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects potential dilution that could occur if securities or other contracts, which, for the Company, consists of options to purchase shares of the Company's common stock are exercised. These options were anti-dilutive for the periods ended March 31, 1999 and 1998, and as such, dilutive EPS amounts are the same as basic EPS for the periods presented. 6. 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 Company's credit agreement with a bank. As referenced in note 1, for further information, refer to the consolidated financial statements and footnotes thereto (specifically note 3) included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. 7. Reclassification - Certain items have been reclassified in the prior period consolidated financial statements to conform with the March 31, 1999 presentation. 7
10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS QUARTER ENDED MARCH 31: Net sales decreased $606,800 or 6% to $10,186,200 for the quarter ended March 31, 1999 from $10,793,000 for the same period in 1998. Gross profits, however, increased by $62,800 to $4,221,500 for the three months ended March 31, 1999 from $4,158,700 for the same period in 1998. The gross profit percentage increased to 41.4% for the quarter ended March 31, 1999 from 38.5% for the same period in 1998. As of January 1, 1999, the Company changed its method of computing the overhead rate to be included in inventory costs for interim financial reporting purposes. The Company's inventory overhead rate is now based on the expected amount of overhead to be incurred for the year, rather than the actual amount incurred each quarter. This change in calculation had an effect of increasing gross profit for the quarter ended March 31, 1999 by approximately $108,000. Operating expenses, which are net of other income, increased by $483,700 to $4,617,200 for the quarter ended March 31, 1999 as compared to $4,133,500 for the same period in 1998. The differences in operating expenses by specific departmental costs are as follows: o Selling expenses increased by $61,300 to $1,127,500 from $1,066,200 for the prior year first quarter. Increased costs of advertising and other business promotion related to the Company's product lines were the primary reason for the increase. o General and administrative expenses increased $209,900 to $1,461,700 for the quarter ended March 31, 1999 from $1,251,800 for the first quarter of 1998 primarily due to increases in legal expenses (related to legal expenses incurred in legal actions in which the Company is the plaintiff). o Research and product development costs and regulatory/registration expenses remained virtually unchanged at $974,900 for the three months ended March 31, 1999 as compared to $972,700 for the same period in 1998. These expenses include costs incurred to generate scientific data related to the registration of and possible new uses of the Company's products as well as the costs of other activities performed by the departments. o Freight, delivery, storage and warehousing costs increased $210,300 to $1,053,100 for the quarter ended March 31, 1999 as compared to $842,800 for the quarter ended March 31, 1998. Increased delivery costs of the Company's fumigant 8
11 product line accounted for approximately $190,000 of the increase with increased delivery costs of the Company's insecticide product line accounting for the balance of the increase. Interest costs were $481,500 during the three months ended March 31, 1999 as compared to $454,000 for the same period in 1998. The average level of borrowing under the Company's fully-secured revolving line of credit declined by $2,999,000 to $13,483,000 for the first quarter of 1999 as compared to $16,482,000 for the same period in 1998. The average level of other long-term debt increased by $4,314,000 to $9,210,000 for the first quarter ended March 31, 1999 from $4,896,000 for the same period in 1998 (refer to notes 2 and 10 of the Notes to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998). On a combined basis the Company's average debt for the first quarter of 1999 was $22,693,000 as compared to $21,378,000 for the first quarter of 1998. As interest rates have remained relatively stable (on a quarter-to-quarter comparison), the increase in interest costs is directly related to the increase in combined average debt levels for the quarter ended March 31, 1999 as compared to the same period in 1998. 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. 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/early order 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. Because most of the Company's cost structure is fixed, at least in the short-term, the combination of variable revenue streams, changing product mixes, and a fixed cost structure results in varying quarterly levels of profitability. LIQUIDITY AND CAPITAL RESOURCES Working capital was $25,504,600 as of March 31, 1999 reflecting a $5,694,100 improvement over working capital of $19,810,500 as of December 31, 1998. 9
12 The Company used cash in operations of $5,819,000 in the first quarter of 1999 primarily to build inventory and reduce accrued expenses. Inventories increased by $4,189,600 during the first quarter of 1999 in anticipation of product demand during the late spring and summer months of 1999. Accrued expenses declined by $3,808,500 during the first quarter of 1999 due to payments of income taxes, product rebates and royalties, and other sales related expenses. The Company invested $141,600 in capital expenditures and had a nominal increase in its other non-current assets of $1,700. The Company procured cash from its financing activities of $5,716,100 through an increase in borrowing of $6,400,000 under the Company's fully-secured revolving line of credit, while it made principal payments of $683,900 related to its long-term debt. The Company had $7,600,000 in availability under its fully- secured $24,000,000 revolving line of credit as of March 31, 1999. Management believes current financial resources (working capital and short-term borrowing arrangements) and anticipated funds from operations will be adequate to meet financial needs during the remainder of 1999. Management also believes, to continue to improve its working capital position and maintain flexibility in financing interim needs, it is prudent to explore alternate sources of financing. This Report may contain forward-looking statements and may include assumptions concerning the Company's operations, future results and prospects. These forward-looking statements are based on current expectations and are subject to a number of risks, uncertainties and other factors. In connection with the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statements identifying important factors which, among other things, could cause the actual results and events to differ materially from those set forth in or implied by the forward-looking statements (if any) and related assumptions contained in the entire Report. Such factors include, but are not limited to: product demand and market acceptance risks; the effect of economic conditions; weather conditions; the impact of competitive products and pricing; changes in foreign exchange rates; product development and commercialization difficulties; capacity and supply constraints or difficulties; availability of capital resources; general business and economic conditions; and changes in government laws and regulations, including taxes. 10
13 YEAR 2000 COMPLIANCE Computers, software and other equipment utilizing microprocessors that use only two digits to identify a year in a date field may be unable to process certain date-based information at or after the year 2000. This is commonly referred to as the "Year 2000 Issue", and the Company is addressing this issue on several different fronts. The Company elected, as disclosed in prior filings, to invest in and install a new Enterprise Resource Planning Manufacturing software system, the decision of which, was not driven solely by Year 2000 compliance. The new software system is Year 2000 compliant. The installation of this system is expected to be completed, for the most part, during the first half of 1999. The Company has established a separate team to coordinate solutions to the Year 2000 issue for the Company's other internal data processing systems with a goal of having all of its internal systems Year 2000 compliant, although no assurances are made that this goal will be met. The Company has requested Year 2000 compliance certification from each of its major vendors and suppliers for their hardware and software products and for their internal business applications and processes. Should key vendors or suppliers have significant Year 2000 issues, the Company will need to develop a contingency plan for obtaining required materials should sources be interrupted. The Company believes there are alternative sources of its required materials. The Company does not anticipate amounts incurred in connection with the Year 2000 compliance program will be material to its financial condition or results of operations. The Company does not believe that its business will be adversely affected by the Year 2000 issue in any material respect. Nevertheless, achieving Year 2000 compliance is dependent on many factors, some of which, are not completely within the Company's control, including without limitations, the availability and cost of trained personnel and effectiveness of software upgrades used by the Company and its vendors and suppliers. Should either the Company's internal systems or the internal systems of one or more significant vendors or suppliers fail to achieve Year 2000 compliance, the Company's business and its results of operations could be adversely affected. 11
14 PART II. OTHER INFORMATION The Company was not required to report any matters or changes for any items of Part II. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 27 - FDS (b) The Company did not file any reports on Form 8-K during the three months ended March 31, 1999. 12
15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN VANGUARD CORPORATION Dated: May 14, 1999 By: /s/ Eric G. Wintemute -------------------------------- Eric G. Wintemute President, Chief Executive Officer and Director Dated: May 14, 1999 By: /s/ J. A. Barry -------------------------------- J. A. Barry Senior Vice President Chief Financial Officer 13
16 EXHIBIT INDEX (a) Exhibits Exhibit 27 - FDS 14