UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
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 2-70197
OCEAN BIO-CHEM, INC.
(Exact name of Registrant as specified in its charter)
Florida 59-1564329
------- ----------
(State of other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
4041 SW 47 Avenue
Fort Lauderdale, FL 33314-4023
------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 587-6280
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $0.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No |X|
Aggregate market value of Registrant's common stock held by non-affiliates
of the Registrant, based upon the closing price of a share of the Registrant's
common stock on March 10, 2004 as reported by the NASDAQ Small Cap Market on
that date: $3,621,927.
For purposes of this disclosure, the Registrant has assumed that all
directors, officers, and beneficial owners of 5% or more of the Registrant's
common stock are affiliates of the Registrant.
Number of shares of the Registrant's common stock outstanding as of March
10, 2004: 5,277,313 shares Common stock, $0.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for the Annual
Meeting of Shareholders scheduled to be held on June 3, 2004 which will be filed
within 120 days of December 31, 2003 are incorporated by reference to Part III
of this Form 10-K.
Forward-looking Statements:
Certain statements contained herein, including without limitation
expectations as to future sales and operating results, constitute
forward-looking statements pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. For this purpose, any statements
contained in this report that are not statements of historical fact may be
deemed forward-looking statements. Without limiting the generality of the
foregoing, words such as "believe", "may", "will", "expect", "anticipate",
"intend", "could" or the negative other variations thereof or comparable
terminology are intended to identify forward-looking statements. These
statements involve known and unknown risks, uncertainties and other factors
which may cause actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements of the
Company and any such results may be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Factors, which may affect the Company's results
include, but are not limited to, the highly competitive nature of the Company's
industry; reliance on certain key customers; consumer demand for marine
recreational vehicle and automotive products; advertising and promotional
efforts; and other factors. The Company will not undertake and specifically
declines any obligation to update or correct any forward-looking statements to
reflect events or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.
Part I
1. Business
General: The Company was organized on November 13, 1973 under the laws of
the state of Florida. The Company is principally engaged in the manufacturing,
marketing and distribution of a broad line of appearance and maintenance
products for boats, recreational vehicles, automobile and aircraft under the
"Star brite" name within the United States of America and Canada. In addition,
the Company produces private label formulations of many of its products for
various customers as well as provides custom blending and packaging services of
these and other products to customer specifications.
The Registrant's trade name has been trademarked and the Registrant has had
no incidents of infringement. In the event of such infringement, the Registrant
would defend its trade name vigorously. The Registrant holds two patents which
it believes are valuable in limited product lines, but not material to its
success or competitiveness in general.
Products of the Company:
Set forth below is a general description of the products which the Company
manufactures and markets:
Marine: The Marine line consists of polishes, cleaners, protectants and
waxes of various formulations under the Star brite brand name as well as the
Company's customers' private label. The line also includes various vinyl
protectants, cleaners, teak cleaners, teak oils, bilge cleaners, hull cleaners,
silicone sealants, polyurethane sealants, polysulfide sealants, gasket
materials, lubricants, antifouling additives and anti-freeze coolants. Many of
these products include Teflon(R) pursuant to an exclusive licensing agreement
with E.I. Dupont De Nemours and Company. Teflon(R) is a trademark of Dupon and
is used under license to the Company.In addition, the Company manufactures a
line of brushes, poles and tie-downs and other related marine accessories.
Automotive: The Company manufactures a line of automotive products under
the Star brite brand name including brake and transmission fluids, hydraulic,
gear and motor oils, and related items. In addition, anti-freeze and windshield
washes are produced in varying formulations both under the Star brite brand as
well as private labeled for customers. The Company also has a line of automotive
polishes, cleaners and associated appearance items.
Recreational vehicle: The recreational vehicle products are made up of
cleaners, polishes, detergents, fabric cleaners and protectors, silicone
sealants, waterproofers, gasket materials, degreasers, vinyl cleaners,
protectors, toliet treatment fluids, and anti-freeze coolants. Many of these
products include Teflon(R) pursuant to an exclusive licensing agreement with
E.I. Dupont De Nemours and Company. Teflon(R) is a trademark of Dupon and is
used under license to the Company.
Aircraft: The Aircraft product line consists primarily of polishes and
cleaners.
Although the above products are utilized for different types of vehicles,
boats and household purposes, it is management's view that they all constitute
one industry segment.
2
Manufacturing: The Company manufactures the majority of its products as
well as contracts with unrelated companies to package other products which are
manufactured to the Company's specifications, using Company provided formulas.
The Company purchases its raw materials from a wide variety of suppliers, none
of which are significant to the Registrant's operations and all raw materials
used in manufacturing are readily available. Each third party packager enters
into a confidentiality agreement with the Company. The Company has patent
protection on two of its products. The Company designs its own packaging and
supplies the external manufacturers with the appropriate design and packaging.
Manufacturing is primarily performed by the Company and two independent entities
located in the northeastern and mid-western areas of the country. The Company
believes that its internal manufacturing capacity as well as the arrangements
with the present outside manufacturers are adequate for its present needs. In
the event that these arrangements are discontinued with any manufacturer, the
Company believes that substitute facilities can be found without substantial
adverse effect on manufacturing and distribution.
On February 27, 1996, the Registrant acquired certain assets of Kinpak,
Inc., (a Georgia corporation) ("Kinpak"), and assumed two (2) leases of land and
facilities leased by Kinpak from the Industrial Development Board of the City of
Montgomery, Alabama and the Alabama State Docks Department. On December 20,
1996, the Registrant entered a new agreement with the Industrial Development
Board of the City of Montgomery, Alabama to issue Industrial Development Bonds
in the amount of $4,990,000 to repay certain financial costs and to expand the
capacity of the Alabama facility. The underlying premises, at that time,
consisted of a manufacturing and distribution facility containing approximately
110,000 square feet located on approximately 20 acres of real property and a
docking facility located on the Alabama River. In addition, Registrant purchased
the machinery, equipment and inventory located on the leased premises.
Subsequent to the acquisition, the Registrant changed the name of its subsidiary
to Kinpak Inc. (an Alabama corporation).
During July 2002, the Registrant completed an additional $3.5 million
Industrial Development Bond financing through the City of Montgomery, Alabama.
Such transaction funded an approximate 70,000 square foot addition to the
manufacturing facility and continues to fund the requisite machinery and
equipment additions required therein as well.
Marketing: The Company's marine products and recreational vehicle products
are sold through national mass merchandisers such as Wal-mart and Home Depot and
through specialized marine retailers such as West Marine and Boater's World. The
Company also sells to national and regional distributors who in turn sell its
products to specialized retail outlets for that specific market. Currently the
Company has one customer (West Marine, Inc., which is an unrelated entity) to
whom sales exceeded 10% of consolidated revenues for the year ended December 31,
2003. Sales to the Company's five largest customers for the year ended December
31, 2003 amounted to approximately 55% of consolidated gross revenues and
outstanding balances due the Company at year-end from these customers aggregated
approximately 76% of consolidated trade receivables. The Company markets its
products through internal salesmen and approximately 250 sales representatives
who work on an independent contractor-commission basis. The Officers of the
Company also participate in sales presentations and trade shows. The Company
also aids marketing through advertising campaigns in national magazines related
to specific marketplaces. The products are distributed primarily from the
Company's manufacturing and distribution facility in Alabama. As of this date,
the Company has no significant backlog of orders. The Registrant does not give
customers the absolute right to return product. The majority of the Company's
products are non-seasonal and are sold throughout the year. Normal trade terms
offered to credit customers range from 30 to 60 days. However, at times special
dating and/or discount arrangements are offered as purchasing incentives to
customers. Such programs do not materially distort normal margins.
Competition:
Marine: The Company has several national and regional competitors in the
marine marketplace. The principal elements of competition are brand recognition,
price, service and the ability to deliver products on a timely basis. In the
opinion of management no one or few competitors holds a dominant market share.
Management believes that it can increase or maintain its market share through
its present methods of advertising and distribution.
Automotive: The automotive marketplace into which the Company began selling
various products during 2001 is the largest in which the Company operates. There
are many entities, both national and regional, which represent competition to
the Company. Many are more established and have greater financial resources than
the Company. However, the market is so large that even a minimal market share
could be significant to the Company. The principal elements of competition are
brand recognition, price, service and the ability to deliver products on a
timely basis. Management believes that it can establish a reasonable market
share through its present methods of advertising and distribution.
3
Recreational Vehicle: The recreational vehicle appearance and maintenance
market is parallel to that of the marine marketplace. In this market the Company
competes with national and regional competitors. None of these singly or as a
few have a dominant market share. The principal elements of competition are
brand recognition, price, service and the ability to deliver products on a
timely basis. Management is of the opinion that it can increase or maintain the
Company's market share by utilizing similar methods as those employed in the
marine market.
Personnel: The Company employs approximately 25 full time employees at its
corporate office in Fort Lauderdale, Florida. These employees are engaged in
administration, clerical and accounting functions. In addition, the Company has
manufacturing and fabrication personnel in both Florida and Alabama.
The following is a tabulation of the total number of personnel working for
the Company and/or its subsidiaries:
Full-time
Location Description Employees
- -------- ----------- ---------
Fort Lauderdale, Florida Administrative 25
Fort Lauderdale, Florida Manufacturing and distribution 17
Montgomery, Alabama Manufacturing and distribution 80
---------
122
=========
New Product Development: The Company continues to develop specialized
products for the marine, automotive, and recreational vehicle trade. The Company
believes that its current operations and working capital financing arrangement
are sufficient to meet development expenditures without securing external
funding. The amounts expended toward this effort in any fiscal period have not
been significant and are charged to operations in the year incurred.
Environmental Costs: The Registrant adheres to a policy of compliance with
applicable regulatory mandates on environmental issues. Amounts expended in this
regard have not been significant and management is not aware of any instances on
non-compliance.
Financial Information Relating to Approximate Domestic and Canadian Gross Sales:
Year ended December 31,
2003 2002 2001
---- ---- ----
United States:
Northeast $ 4,054,000 $ 4,258,000 $ 3,709,000
Southeast 6,218,000 6,242,000 5,520,000
Central 6,384,000 6,454,000 5,684,000
West Coast 4,730,000 4,960,000 4,354,000
----------- ----------- -----------
21,386,000 21,915,000 19,267,000
Canada (US Dollars) 792,000 798,000 609,000
----------- ----------- -----------
$22,178,000 $22,713,000 $19,876,000
=========== =========== ===========
Item 2. Properties
The Registrant's executive offices and warehouse located in Fort
Lauderdale, Florida are held under a lease with an entity owned by certain
officers of the Company. The lease covers approximately 12,700 square feet of
office and warehouse space. On May 1, 1998, the Registrant renewed its lease
agreement for a term of ten years. The lease required an initial annual rental
of $94,800 and provides for a maximum increase of 2% per annum on the annual
anniversary of the lease for the term thereof. Additionally, the landlord is
entitled to collect from the Company its pro-rata share of all taxes,
assessments, insurance premiums, operating charges, maintenance charges and any
other expenses which normally arise from ownership. Rent charged to operations
during the years ended December 31, 2003, 2002 and 2001 amounted to
approximately $100,500 each year.
4
During November 1994, the Company leased an approximately 10,000 square
foot building in Fort Lauderdale, Florida for manufacturing, warehousing and
office space from an unrelated third party. Such lease terminates on October 31,
2004. Rent charged to operations during the year ended December 31, 2003
amounted to approximately $95,500.
The Company's Alabama facility currently contains approximately 180,000
square feet of office, plant and warehouse space located on 20 acres of land
(the "Plant") and also includes a leased 1.5 acre docking facility on the
Alabama River located eleven miles from the Plant. This facility has undergone
two separate expansions of 60,000 and 70,000 square feet, respectively. The
Registrant financed the facility enhancements and related equipment needs with
Industrial Development Bonds issued through the city of Montgomery, AL.
During July 2002, the Registrant completed a $3.5 million Industrial
Development Bond financing through the City of Montgomery, Alabama. Such
transaction funded an approximate 70,000 square foot addition to the
manufacturing facility as well as the requisite machinery and equipment
additions required therein. At December 31, 2003 the construction was complete
and approximately $126,300 was held in trust to be utilized for equipping future
equipment additions at the facility.
Item 3. Legal Proceedings
The Company was not involved in any significant litigation at December 31,
2003.
Item 4. Submission of Matters to a Vote of Security Holders:
No matter was submitted for a vote of shareholders during the fourth
quarter of 2003. Shareholders will vote at the Annual Meeting to be held during
June, 2004 to elect members of the Board of Directors, ratify the engagement of
the Company's Independent Certified Public Accountants, and any other matter
presented at such meeting.
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
A. The Registrant's common stock was sold to the public initially on March
26, 1981. The common stock of the Company is traded on the NASDAQ Small Cap
Market System under the symbol OBCI. A summary of the trading ranges during each
quarter of 2003 and 2002 is presented below.
Market Range of
Common Stock Bid: 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------- -------- -------- --------
2003 High $2.00 $1.20 $1.69 $1.98
Low $1.30 $0.90 $0.97 $1.30
2002 High $1.77 $1.65 $1.70 $1.90
Low $1.31 $1.31 $1.35 $1.10
A. The quotations reflect inter-dealer prices without retail mark-up,
markdown or commission and may not represent actual transactions.
B. The approximate number of Common Stock owners was 800 at December 31,
2003. The aforementioned number was calculated from data provided by the
Company's Transfer Agent and Registrar and indications from broker dealers of
shares held by them as nominee for actual shareholders.
C. The Registrant has not paid any cash dividends since it has been
organized. However, during the years ended December 31, 2002 and 2000, the
Company declared and distributed a 10% and a 5% stock dividend, respectively.
The Company has no other dividend policy except as stated herein.
5
D. Securities authorized for issuance under equity compensation plans:
Equity compensation plans approved by security holders:
Number of securities
Number of securities Weighted average remaining available
to be issued upon exercise price of for future issuance
exercise of outstanding outstanding options, under equity com-
options, warrants & rights warrants & rights pensation plans
1991 Plan 161,700 $ .758 -
1992 Plan 193,875 $1.039 6,125
1994 Plan 294,635 $ .624 105,365
2002 Plan - Qualified 150,000 $1.260 250,000
2002 Plan - Non-qualified 75,000 $1.137 125,000
In addition to the above stock options, during the years ended December 31,
2003, 2002, and 2001 the Company awarded 155,000, 129,000, and 134,000 shares of
restricted common stock, respectively to certain executives, key employees and
others as a component of annual compensation. Charges to operations attributable
to such awards aggregated approximately, $67,500, $67,700, and $36,200 for each
of such periods, respectively.
Item 6. Selected Financial Data
The following tables set forth selected financial data as of, and for the
years ended December 31,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Operations:
Gross sales $22,178,352 $22,712,991 $19,876,095 $18,072,784 $15,952,165
Net sales $19,997,702 $20,585,898 $18,013,393 $16,139,256 $14.317,485
Net income (loss) $ 345,071 $ 134,518 $ 106,384 ($ 244,823) $ 431,484
Earnings (loss) per
Common share $ .07 $ .03 $ .03 ($ .06 ) $ .11
Balance Sheet:
Working capital $ 2,869,172 $ 2,212,872 $ 1,385,016 $ ,724,043 $ 2,797,708
Total assets $18,303,184 $18,650,237 $15,030,206 $15,410,264 $13,547,452
Long-term
obligations $ 5,883,302 $ 6,745,232 $ 3,843,515 $ 3,963,145 $ 4,152,332
Total liabilities $12,899,189 $13,727,315 $10,268,884 $10,737,972 $ 8,629,991
Shareholders'
equity $ 5,403,995 $ 4,922,922 $ 4,761,322 $ 4,672,292 $ 4,917,461
Cash dividends declared
per share of common stock $ - $ - $ - $ - $ -
6
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the Company's
consolidated financial statements contained herein as Item 15.
Liquidity and Capital Resources:
The primary sources of the Registrant's liquidity are its operations and
short-term borrowings from a commercial bank pursuant to a revolving line of
credit aggregating $5 million. Such line matures May 31, 2004, bears interest at
approximately prime and is secured by the Registrant's trade receivables and
inventory. The Registrant is required to maintain a minimum working capital of
$1.5 million and meet certain other financial covenants during the term of the
agreement. As of December 31, 2003, the Company was not in compliance with the
requirement of maintaining a current ratio of at least 1.5:1 The bank has waived
such non-compliance. As of December 31, 2003, the Company was obligated under
this arrangement in the amount of $4,550,000.
The Registrant has conducted discussions with its lender related to renewal
of the line of credit and extending the maximum borrowings to $6 million. It is
anticipated that these discussions will be finalized during April, 2004.
During March, 2004, certain employees of the Registrant exercised stock
options scheduled to expire during 2004 covering 316,470 shares of its common
stock. Such transaction resulted in an approximate $229,700 of additional
paid-in capital.
In connection with the purchase and expansion of the Alabama facility, the
Registrant closed on Industrial Development Bonds during 1997. The proceeds were
utilized for both the repayment of certain advances used to purchase the Alabama
facility and to expand such facility for the Registrant's future needs. During
July 2002, the Registrant completed another $3.5 million Industrial Development
Bond financing through the City of Montgomery, Alabama. Such transaction funded
an approximate 70,000 square foot addition to the manufacturing facility as well
as the remaining machinery and equipment additions required therein. At December
31, 2003, approximately $126,300 was held in trust to pay for remaining
equipment required at the facility.
In order to market its Alabama Industrial Development Bonds at favorable
rates, the Registrant obtained a substitute irrevocable letter of credit for its
1997 issue and a new irrevocable letter of credit for the 2002 issue. Under such
letters of credit agreements maturing on July 31, 2005, the Company is required
to maintain a stipulated level of working capital, a designated maximum debt to
tangible ratio, and a required debt service coverage ratio. Such letters of
credit are secured by a first priority mortgage on the underlying Alabama
facility and equipment.
The bonds are marketed weekly at the prevailing rates for such instruments.
Currently such bonds carry interest ranging between 1.2% and 1.5% annually.
Interest and principal are payable quarterly. The Registrant believes that
current operations are sufficient to meet these obligations.
The Registrant is involved in making sales in the Canadian market and must
deal with the currency fluctuations of the Canadian currency. The Registrant
does not engage in currency hedging and deals with such currency risk as a
pricing issue.
During the past few years, the Registrant has introduced various new
products to the marketplace. This has required the Registrant to carry greater
amounts of overall inventory and has resulted in lower inventory turnover rates.
The effects of such inventory turnover have not been material to the overall
operations of the Registrant. The Registrant believes that all required capital
to maintain such increases can continue to be provided by operations and current
financing arrangements.
Many of the raw materials used by the Registrant in the manufacturing
process are commodities that are subject to fluctuating prices. The Registrant
reacts to long-term increases by passing along all or a portion of such
increases to its customers.
7
Contractual obligations:
Less than One - three Three - five More than
Total one year years years five years
---------- ---------- ---------- ---------- ----------
Long-term debt obligations $6,547,608 $ 882,238 $1,380,370 $ 920,000 $3,365,000
Capital leases 29,048 16,726 12,322 - -
Operating leases 860,050 185,672 313,685 219,717 140,976
Purchase obligations - - - - -
Other - - - - -
---------- ---------- ---------- ----------- ----------
Total $7,436,706 $ 1084,636 $1,706,377 $1,139,717 $3,505,976
========== ========== ========== =========== ==========
Results of Operations:
Sales and earnings varied when comparing the year ended December 31, 2003
to 2002 principally due to the factors enumerated below.
Net sales - Net sales decreased approximately $588,000 or 3 % comparing the
year ended December 31, 2003 with the 2002 period. This was primarily due to
decreased sales of the Company's marine anti-freeze and certain automotive
products. The anti-freeze decrease was attributed to commodity pricing of raw
materials and related freight issues, and the automotive decrease resulted from
initial customer reaction to the Company's strategic decision to achieve higher
margins on these products.
Cost of goods sold - Gross margins improved and cost of goods sold
decreased as a percentage of net sales when comparing the years ended December
31, 2003 and 2002. The cost of goods sold percentages were 75.7% and 77.5% for
the periods during 2003 and 2002, respectively. This change was primarily due to
management's on-going initiatives towards improving operating margins including
a general sales price increase, utilization of cash discounts offered by
suppliers, and product pricing in response to current commodity costs.
Advertising and promotion - Advertising expense decreased approximately
$27,000 or 4% when comparing 2003 to 2002. This was primarily due to planned
decreases in media advertising expenditures and lower customer co-op
advertising.
Selling, general and administrative - Selling, general and administrative
expenses increased approximately $45,000 or1% when comparing 2003 to 2002.
Interest expense - Interest expense incurred during 2003 decreased by
approximately $95,000 compared to 2002. The decrease was primarily due to
prevailing interest rates.
Years ended December 31, 2002 and 2001:
Sales and earnings varied when comparing the year ended December 31, 2002
and 2001 principally due to the factors enumerated below.
Net sales - Net sales increased approximately $2,572,500 or 14% comparing
the year ended December 31, 2002 with the 2001 period. This was primarily due to
increased sales of Star brite and private labeled marine products, antifreeze,
automotive fluids and other contract packaging.
Cost of goods sold - Cost of goods sold increased from 76.3% to 77.5% as a
percentage of net sales when comparing 2002 and 2001. This was primarily
attributable to a differing product mix which was impacted by the increasing
cost of petroleum related raw materials and an increase in private label and
contract packaging revenues which typically yield lower margins.
8
Advertising and promotion - Advertising expense increased approximately
$105,400 or 16% when comparing 2002 and 2001. This was primarily due to planned
increases in media advertising expenditures and lower customer co-op
advertising.
Selling, general and administrative - Selling, general and administrative
expenses increased approximately $337,200 or 11.4% when comparing 2002 to 2001.
The most significant single item reflected therein was an increase in legal fees
and costs associated with settling outstanding litigation. Increased personnel
costs and other administrative expenses in line with increased overall revenues
also affected the change for the year.
Interest expense - Interest expense incurred during 2002 decreased by
approximately $125,200 compared to 2001. The decrease was primarily due to
reductions in prevailing interest rates.
Item 8. Financial Statements and Supplementary Data
See consolidated financial statements as set forth in Item 15.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Item 9a. Controls and Procedures
Management of the Registrant has conducted a review of the Company's
disclosure controls and procedures and has determined that they are adequate to
produce periodic reports that present financial condition and results of
operations free of material misstatements. In addition, there have been no
significant changes in the Registrant's underlying internal controls during the
period covered by this report.
Part III
Item 10. Executive Officers and Directors of the Registrant
The following tables set forth the name and ages of all elected directors
and officers of the Registrant, as of December 31, 2003.
All directors will serve until the next annual meeting of directors or
untiltheir successors are duly elected and qualified. Each officer serves at the
discretion of the board of directors.
There are no arrangements or understandings between any of the officers or
directors of the Company and the Company and any other persons pursuant to which
any officer or director was or is to be selected as a director or officer.
NAME OFFICE AGE
---- ------ ---
Peter G. Dornau President, Chief Executive Officer, and 64
Director since 1973
Edward Anchel Vice President-Finance, Chief Financial 57
Officer since 1999 and Director since 1998
Jeffrey Tieger Vice President, Secretary and Director 60
Since 1977
James Kolisch Director since 1998 52
Laz L. Schneider Director since 1998 64
John B. Turner Director since 2000 56
Sonia B. Beard Director since 2002 33
9
Peter G. Dornau, a founder of the Company, has been President, Chief
Executive Officer and a Director since 1973.
Edward Anchel joined the Company in March 1999 as Vice President-Finance
and Chief Financial Officer. For the five years immediately preceding his
employment, he was an officer of a privately owned manufacturing company and in
private practice as a Certified Public Accountant. He was initially elected to
serve as an outside Director of the Company during May 1998.
Jeffrey Tieger joined the Company in June 1977 as Vice President-Advertising and
has served in that office since 1977.
James Kolisch is engaged in the insurance industry and serves as president
of USI Florida an entity that sources most of the Registrant's insurance needs.
Mr. Kolisch was elected to serve as an outside Director of the Company during
May 1998. Mr. Kolisch serves on the Board of Directors' Audit Committee.
Laz L. Schneider is, and has for the past five years, been an attorney in
private practice and was elected to serve as an outside Director of the Company
during May 1998. Mr. Schneider is a partner in the law firm that serves as the
Company's lead counsel in various corporate and litigation matters.
John B. Turner has for the past five years been retired. Prior to his
retirement, he was an insurance executive. He was elected to serve as an outside
Director of the Company during June 2000. In addition to his insurance
credentials, Mr. Turner holds a Series 7 stock brokerage license. His
professional experience in the aforementioned areas spans in excess of
twenty-five years. Mr. Turner serves on the Board of Directors' Audit Committee.
Sonia B. Beard is a Florida Certified Public Accountant working for Walt
Disney World since 1997. Her current position is their Domestic Programs
Manager. Ms. Beard has in excess of twelve years financial experience. She is an
outside director and serves as the Chairperson and Financial Expert of the Board
of Directors' Audit Committee.
Based solely on reviews of Forms 3 and 4 furnished to the Registrant by the
aforementioned individuals, it was determined that no reporting person failed to
file a timely submission of ownership changes and that the Registrant was in
compliance with Rule 16(a)3(e) of the Exchange Act during its most recent fiscal
year.
The Company has adopted a Code of Ethics and the information required by
Item 406 of Regulation SK is incorporated by reference to the Registrant's
Definitive Proxy Statement, which will be filed with the United States
Securities and Exchange Commission within 120 days of December 31, 2003
Item 11. Management Remuneration and Transactions
The information required for this item is incorporated by reference to the
Registrant's Definitive Proxy Statement to be filed with the United States
Securities and Exchange Commission in conjunction with the Annual Shareholders'
Meeting that shall be sent out to shareholders prior to 120 days past the
Registrant's year-end of December 31, 2003.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information at December 31, 2003 with
respect to the beneficial ownership of the Registrant's common stock by holders
of more than 5% of such stock and by all directors and officers of the
Registrant as a group:
Title of Name and Address of Amount and Nature of Percent
Class Beneficial Owner Beneficial Ownership* of Class
- -------- ---------------------------------------- --------------------- --------
Common Peter G. Dornau, President, Director 2,969,568* 52.3%
Fort Lauderdale, FL 33317
Common Edward Anchel, Vice President - Finance,
Director
Boynton Beach, FL 33437 316,026* 5.6%
10
Title of Name and Address of Amount and Nature of Percent
Class Beneficial Owner Beneficial Ownership* of Class
- -------- ---------------------------------------- --------------------- --------
Common Jeffrey Tieger, Vice President, Secretary,
Director
Plantation, FL 33314 423,480* 7.5%
Common James Kolisch, Director
Coral Gables, FL 33114 36,167* .6%
Common Laz L. Schneider, Director
Fort Lauderdale, FL 33305 20,000* .4%
Common John B. Turner, Director
Miami, FL 33186 28,663* .5%
Common Sonia B. Beard, Director
Merritt Island, FL 32952 10,000* .2%
Common All directors and officers as a group
7 individuals 3,803,904* 67.1%
*Includes all outstanding options to purchase shares of the Company's common
stock as follows:
On March 25, 1999, the Company granted Messrs. Dornau and Tieger a
five-year option for 115,500 shares each, as adjusted for the Company's stock
dividend distributions of 2000 and 2002, at an exercise price of $.758 per share
representing the market price at the time of grant. Such grants were awarded in
consideration of their making a loan to the Company in the amount of $400,000
from an affiliated company in which they are each 50% co-shareholders.
As of December 31, 2003, pursuant to the Company's various stock option
plans, and other, Mr. Dornau has options to acquire 241,700 shares of the
Company's common stock of which 194,200 shares are exercisable at prices ranging
between $.57 and $1.39 within 60 days of the issuance of the Registrant's
December 31, 2003 financial statements.
As of December 31, 2003, pursuant to the Company's various stock option
plans, and other, the Company's directors and officers as a group, have options
to acquire 708,475 shares of the Company's common stock of which 501,975 shares
are exercisable at prices ranging between $.57 and $1.39 per share within 60
days of the issuance of the Registrant's December 31, 2003 financial statements.
Item 13. Certain Relationships and Related Transactions
On May 1, 1998, the Company entered into a ten year lease for approximately
12,700 square feet of office and warehouse facilities in Fort Lauderdale,
Florida from an entity owned by certain officers of the Registrant. The lease
required a minimum rental of $94,800 the first year and provides for a maximum
2% increase on the anniversary of the lease throughout the term. Additionally,
the landlord is entitled to collect from the Company its pro-rata share of all
taxes, assessments, insurance premiums, operating charges, maintenance charges
and any other expenses, which normally arise from ownership. The Registrant
believes that the terms of this lease are comparable to those of similar
properties in the same geographic area of the Company available from unrelated
third parties. Rent charged to operations during the years ended December 31,
2003, 2002 and 2001 amounted to approximately $100,500 each year.
The Registrant acquired the rights to the "Star brite" name and related
products for the United States and Canada in conjunction with its original
public offering during March 1981. The president of the Registrant is the
beneficial owner of three companies that market Star brite products outside the
United States and Canada. The Registrant has advanced monies to assist in such
foreign marketing in order to establish an international trademark. At December
31, 2003 and 2002, the Company had amounts due from affiliated companies, which
are directly or beneficially owned by the Company's president aggregating
approximately $172,900 and $612,300, respectively. Such advances were made
primarily to international affiliates that are in the process of expanding sales
of Star brite products in Europe, Asia and South America. These amounts had been
advanced by the Company on open account and, through December 31, 2002, carried
interest at the same rate charged to the Company on its line of credit.
11
Sales of Star brite products to such affiliates aggregated approximately
$373,600, $317,100 and $344,600 during the years ended December 31, 2003, 2002
and 2001, respectively.
A subsidiary of the Registrant currently uses the services of an entity
that is owned by its President to conduct product research and development. Such
entity received $30,000 per year during the years ended December 31, 2003, 2002
and 2001 under such relationship.
Item 14. Principal Accounting Fees and Services
The information required for this item is incorporated by reference to the
Registrant's Definitive Proxy Statement to be filed with the United States
Securities and Exchange Commission in conjunction with the annual shareholders'
meeting that shall be sent out to shareholders prior to 120 days past the
Registrant's year-end of December 31, 2003.
Item 15. Exhibits, Financial Statements, Schedules and Reports Filed on Form 8K
The following documents are filed as part of this report:
(A) Consolidated financial statements:
(i) Consolidated balance sheets as of December 31, 2003 and 2002.
(ii) Consolidated statements of operations for each of the three
years ended December 31, 2003, 2002 and 2001.
(iii) Consolidated statement of shareholders' equity for each of the
three years ended December 31, 2003, 2002 and 2001.
(iv) Consolidated statements of cash flows for each of the three
years ended December 31, 2003, 2002 and 2001.
(v) Notes to consolidated financial statements.
(a) All schedules are omitted because either they are not
applicable or the required information is shown in
the consolidated financial statement or the notes
thereto.
Exhibits:
(3) Articles of Incorporation and By-laws are incorporated by
reference to the Company's Registration Statement on Form
S-18 filed on March 26, 1981.
(22) Subsidiaries of the Registrant.
(B) Reports Filed on Form 8-K
On December 29, 2003, the Registrant filed a Form 8-K with the United
States Securities and Exchange Commission disclosing that it had
entered into a Letter of Intent to purchase certain assets of Clear
Cote Corporation of St.Petersburg, FL.
On February 19, 2004 the Registrant filed a Form 8-K with the United
States Securities and Exchange Commission disclosing that it had
terminated the Letter of Intent and contemplated asset purchase
with Clear Cote Corporation of St. Petersburg,FL without reaching
a successful completion.
12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, hereunto duly authorized.
OCEAN BIO-CHEM, INC.
------------------------------
Registrant
By:/s/ Peter G. Dornau
--------------------------------
PETER G. DORNAU
Chairman of the Board of Directors
and Chief Executive Officer
March 29, 2004
By:/s/ Edward Anchel
________________________________
EDWARD ANCHEL
Chief Financial Officer
March 29, 2004
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By:/s/ Jeffrey Tieger
--------------------------------
JEFFREY TIEGER
Director
March 29, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has not sent an annual report or proxy material to security-holders
as of this date. Subsequent to this filing the Registrant will produce an annual
report and definitive proxy materials for its Annual Meeting of Shareholders.
Copies of such shall be filed with the United States Securities and Exchange
Commission pursuant to the current requirements.
13
CERTIFICATIONS
I, Peter Dornau certify that:
1. I have reviewed this annual report on Form 10-K of Ocean Bio-Chem, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operation and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a - 14 and 15d - 14) for the Registrant and we have:
a) Designed such disclosure controls and procedures to ensure material
information relating to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date");
c) Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluations as of the
Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the Audit Committee
or Registrant's Board of Directors (or persons performing the equivalent
function);
a) All significant deficiencies in the design or operation of internal
controls that could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weakness in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
OCEAN BIO-CHEM, INC.
Date: March 29, 2004 /s/ Peter G. Dornau
--------------------------------
Peter G. Dornau
Chairman of the Board of Directors
and Chief Executive Officer
CERTIFICATIONS
I, Edward Anchel certify that:
1. I have reviewed this annual report on Form 10-K of Ocean Bio-Chem, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operation and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a - 14 and 15d - 14) for the Registrant and we have:
a) Designed such disclosure controls and procedures to ensure material
information relating to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluations as of the
Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the Audit Committee
or Registrant's Board of Directors (or persons performing the equivalent
function);
a) All significant deficiencies in the design or operation of internal
controls that could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weakness in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
OCEAN BIO-CHEM, INC.
Date: March 29, 2004 /s/ Edward Anchel
--------------------------------
Edward Anchel
Chief Financial Officer
EXHIBIT (See 22)
The following is a list of the Registrant's subsidiaries:
Name: Ownership %
Star brite Distributing, Inc. 100
Star brite Distributing Canada, Inc. 1000
D & S Advertising Services, Inc. 100
Star brite Staput, Inc. 100
Star brite Service Centers, Inc. 100
Star brite Automotive, Inc. 100
Kinpak, Inc. 100
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Page
Report of independent auditors 1
Consolidated balance sheets 2
Consolidated statements of operations 3
Consolidated statement of shareholders' equity 4
Consolidated statements of cash flows 5
Notes to consolidated financial statements 6-12
1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Ocean Bio-Chem, Inc. and its Subsidiaries
Ft. Lauderdale, Florida
We have audited the consolidated balance sheets of Ocean Bio-Chem, Inc.
(the "Company") and its Subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2003. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Ocean Bio-Chem,
Inc. and its Subsidiaries at December 31, 2003 and 2002, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
BERKOVITS, LAGO & COMPANY, LLP
Fort Lauderdale, Florida
March 25, 2004
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
ASSETS
Current Assets 2003 2002
--------- ---------
Cash $ 42,923 $ 1,093,826
Trade accounts receivable net of allowance for
doubtful accounts of approximately $206,000 and
$200,700, respectively 4,333,023 3,190,357
Inventories 5,315,741 4,541,150
Prepaid expenses and other current assets 193,372 129,622
Recoverable income taxes - 240,000
------------ ------------
Total current assets 9,885,059 9,194,955
------------ ------------
Property, plant and equipment, net 7,506,586 6,977,003
------------ ------------
Other assets:
Funds held in escrow for equipment 126,295 1,161,194
Trademarks, trade names, and patents 330,439 330,439
Due from affiliated companies 172,925 612,275
Deposits and other assets 281,880 374,371
------------ ------------
Total other assets 911,539 2,478,279
------------ ------------
Total assets $18,303,184 $18,650,237
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable trade $ 1,305,484 $ 1,833,895
Note payable bank 4,550,000 4,250,000
Current portion of long-term debt 898,964 601,766
Income taxes payable - current 80,000 -
Accrued expenses payable 181,439 296,422
------------ ------------
Total current liabilities 7,015,887 6,982,083
------------ ------------
Deferred income taxes payable 205,610 183,139
------------ ------------
Long-term debt less current portion 5,677,692 6,562,093
------------ =-----------
Commitments and contingencies
- -
Shareholders' equity:
Common stock - $.01 par value, 10,000,000 shares
authorized, 4,960,843 and 4,805,843 shares
issued and outstanding at December 31,2003 and
2002, respectively 49,608 48,058
Additional paid-in capital 4,409,829 4,341,629
Foreign currency translation adjustment ( 237,323) ( 303,575)
Retained earnings 1,190,076 845,005
------------ ------------
5,412,190 4,931,117
Less treasury stock 7,519 shares, at cost ( 8,195) ( 8,195)
------------ ------------
Total shareholders' equity 5,403,995 4,922,922
------------ ------------
Total liabilities and shareholders' equity $18,303,184 $18,650,237
============ ============
The accompanying notes are an integral part of these financial statements.
2
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
2003 2002 2001
---- ---- ----
Gross Sales $22,178,352 $22,712,991 $19,876,095
Less discounts, returns and allowances 2,180,650 2,127,093 1,862,702
----------- ----------- -----------
Net sales 19,997,702 20,585,898 18,013,393
Cost of goods sold 15,131,775 15,961,692 13,744,703
----------- ----------- -----------
Gross profit 4,865,927 4,624,206 ,268,690
----------- ----------- -----------
Operating expenses:
Advertising and promotion 742,167 769,275 663,922
Selling and administrative 3,329,904 3,284,652 2,947,489
Interest 511,292 290,856 86,109
----------- ----------- -----------
Total operating expenses 4,362,927 4,440,036 4,122,703
----------- ----------- -----------
Operating profit 503,000 184,170 145,987
Interest income 19,871 8,848 897
----------- ----------- -----------
Income before provision
for income taxes 522,871 193,018 146,884
Provision for income taxes 177,800 58,500 40,500
----------- ----------- -----------
Net income 345,071 134,518 106,384
Other comprehensive income:
Foreign currency translation,
net of taxes 66,252 ( 40,642) ( 53,535)
----------- ----------- -----------
Comprehensive income $ 411,323 $ 93,876 $ 52,849
=========== =========== ===========
Earnings per share:
Basic $ .07 $ .03 $ .03
=========== =========== ===========
Diluted $ .07 $ .03 $ .03
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
3
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
ENDED DECEMBER 31, 2003, 2002 AND 2001
Foreign
Common stock Additional currency Retained Treasury
Shares Amount paid-in capital adjustment earnings stock Total
------------------ --------------- ---------- ---------- ---------- ----------
January 1, 4,105,889 $41,060 $3,720,377 ($209,398) $1,128,448 ($ 8,195) $4,672,292
2001
Net income 106,384 106,384
Issuances of
stock 134,000 1,339 34,842 36,181
Foreign currency
translation
adjustment ( 53,535) ( 53,535)
--------- ------- ---------- ---------- ---------- ---------- -----------
December 31,
2001 4,239,889 42,399 3,755,219 ( 262,933) 1,234,832 ( 8,195) 4,761,322
Net income 134,518 134,518
Issuances of
stock 565,954 5,659 586,410 ( 524,345) 67,724
Foreign currency
translation
adjustment ( 40,642) ( 40,642)
--------- ------- ---------- ---------- ---------- ---------- -----------
December 31,
2002 4,805,843 48,058 4,341,629 ( 303,575) 845,005 ( 8,195) 4,922,922
Net income 345,071 345,071
Issuances of
stock 155,000 1,550 68,200 69,750
Foreign currency
translation
adjustment 66,252 66,252
--------- ------- ---------- --------- ---------- ---------- ----------
December 31,
2003 4,960,843 $49,608 $4,409,829 ($237,323) $1,190,076 ($ 8,195) $5,403,995
========= ======= ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
4
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
2003 2002 2001
------ ------ ------ -
Cash flows from operating activities:
Net income $ 345,071 $ 134,518 $ 106,384
Adjustments to reconcile net income
to net cash provided (used) by operations:
Depreciation and amortization 674,955 601,064 494,901
Issuance of common stock to employees 69,750 67,724 36,181
Changes in assets and liabilities:
(Increase) decrease in accounts receivable ( 1,142,666) 96,491 130,979
(Increase) decrease in inventory 774,591) ( 244,967) 210,804
(Increase) decrease in prepaid expenses and other 268,740 ( 44,517) 265,737
(Decrease) in accounts payable and
accrued taxes and other ( 540,922) ( 339,698) 172,931
------------ ----------- ---------
Net cash provided (used) by operating activities ( 1,099,663) 270,615 1,417,917
------------ ----------- ---------
Cash flows from financing activities:
Net borrowings (reductions) under line of credit 300,000 584,140 ( 584,140)
Repayment of amounts due from advances to affiliates, net 439,350 ( 48,544) 34,506
Increases in (payments on) long-term debt, net ( 587,203) 2,973,989 ( 57,881)
------------ ----------- ----------
Net cash provided (used) by financing activities 152,147 3,509,585 ( 607,515)
------------ ----------- ----------
Cash flows used by investing activities:
Purchases of property, plant and equipment ( 1,204,538) (1,575,622) ( 830,804)
Utilization of (additions to) trust funds for
equipment purchased, net 1,034,899 (1,152,110) 34,422
----------- ----------
Net cash used by investing activities ( 169,639) (2,727,732) ( 798,382)
------------ ----------- ----------
Increase (decrease) in cash prior to effect of
exchange rate on cash ( 1,117,155) 1,052,468 12,020
Effect of exchange rate on cash 66,252 ( 40,642) ( 53,535)
- ----------------- ------------ -----------
Net increase (decrease) in cash ( 1,050,903) 1,011,826 ( 41,515)
Cash at beginning of year 1,093,826 82,000 123,515
------------ ----------- ----------
Cash at end of year $ 42,923 $1,093,826 $ 82,000
============ =========== ==========
Supplemental information
Cash used for interest during period $ 290,856 $ 434,869 $ 511,292
=========== ========== =========
Cash used for income taxes during period $ 60,000 $ 240,000 $ -
=========== ========== =========
The Company had no cash equivalents at December 31, 2003, 2002, and 2001.
The accompanying notes are an integral part of these financial statements.
5
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Note 1 - Organization and summary of significant accounting policies:
Organization - The Company was incorporated during November, 1973 under the
laws of the state of Florida and operates as a manufacturer and distributor of
products to the marine, automotive and recreational vehicle aftermarkets. During
1984, the Company changed its corporate name to Ocean Bio-Chem, Inc. (the parent
company) from its former name, Star brite Corporation.
Principles of consolidation - The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All significant
inter-company accounts and transactions have been eliminated in consolidation.
Inventories - Inventories are primarily composed of raw materials and
finished goods are stated at the lower of cost, using the first-in, first-out
method, or market.
Prepaid advertising and promotion - During the years ended December 31,
2003, 2002 and 2001, the Company introduced certain new products in the marine,
automotive and recreational vehicle aftermarket industries. In connection
therewith, the Company produced new promotional items to be distributed over a
period of time and increased its catalog advertising. The Company follows the
policy of amortizing these costs over a one-year basis. At December 31, 2003 and
2002, the accumulated cost of materials on hand and other deferred promotional
costs that were or will be charged against the subsequent year's operations
amounted to approximately $43,500 and $53,400, respectively.
Property, plant and equipment - Property, plant and equipment are stated at
cost. Depreciation is provided over the estimated useful lives of the related
assets using the straight-line method.
Stock based compensation - The Company follows the provisions of APB
Opinion No. 25, Accounting for Stock Issued to Employees, to record compensation
costs. Opinion No. 25 requires that compensation cost be based on the
difference, if any, between the quoted market price of the stock and the price
the employee must pay to acquire the stock depending on the terms of the award.
The Company has not adopted Statement of Financial Accounting Standards No. 123
to record such compensation costs.
Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates that affect the reported amount of assets, liabilities, revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Concentration of credit risk - Financial instruments that potentially
subject the Company to concentration of credit risk consist primarily of
accounts receivable. The Company's five largest customers represent
approximately 55% of 2003 consolidated revenues and 76% of consolidated accounts
receivable at December 31, 2003. The Company has a longstanding relationship
with each of these entities and has always collected open receivable balances.
Company management believes that the credit worthiness of these customers is
excellent.
Fair value of financial instruments - The carrying amount of cash
approximates its fair value. The fair value of long-term debt is based on
current rates at which the Company could borrow funds with similar remaining
maturities, and the carrying amount approximates fair value.
Income taxes - The Company and its subsidiaries file consolidated federal
and state income tax returns. The Company has adopted Statement of Financial
Accounting Standards No. 109 in the accompanying consolidated financial
statements. The only temporary differences included therein are attributable to
differing methods of reflecting depreciation for financial statement and income
tax purposes.
6
Trademarks, trade names and patents - The Star brite trade name and
trademark were purchased in 1980 for $880,000. The cost of trademarks and trade
names were amortized on a straight-line basis over an estimated useful life of
40 years through December 31, 2001. Effective January 1, 2002 and pursuant to
Statement of Financial Accounting Standards No. 142, the Company has determined
that the carrying value of such intangible assets relating to its Star brite
brand does not require further amortization. In addition, the Company owns two
patents that it believes are valuable in limited product lines, but not material
to its success or competitiveness in general. There are no capitalized costs of
these two patents.
Translation of Canadian currency - The accounts of the Company's Canadian
subsidiary are translated in accordance with Statement of Financial Accounting
Standards No. 52, which requires that foreign currency assets and liabilities be
translated using the exchange rates in effect at the balance sheet date. Results
of operations are translated using the average exchange rate prevailing
throughout the period. The effects of unrealized exchange rate fluctuations on
translating foreign currency assets and liabilities into U.S. dollars are
accumulated as the translation adjustment in shareholders' equity. Realized
gains and losses from foreign currency transactions are included in net earnings
or the period.
Reclassifications - Certain items in the accompanying consolidated
financial statements for the years ended December 31, 2002 and 2001 have been
reclassified to conform with the 2003 presentation.
Note 2 - Property, plant and equipment:
The Company's property, plant and equipment consisted of the following:
December 31,
2003 2002
Land $ 278,325 $ 278,325
Building 4,390,894 2,936,543
Manufacturing and warehouse equipment 4,750,972 4,356,336
Office equipment and furniture 591,024 583,049
Construction in process 400,800 1,079,779
Leasehold improvement 141,826 141,375
----------- ----------
10,553,841 9,375,407
Less accumulated depreciation 3,047,255 2,398,404
----------- ----------
Total property, plant and equipment, net $ 7,506,586 $6,977,003
=========== ==========
Depreciation expense for the years ended December 31, 2003, 2002 and 2001
amounted to approximately $675,000, $601,100 and $471,900, respectively.
Depreciation expense includes the amortization of capitalized lease assets.
Included in property, plant and equipment are the following assets held
under capitalized leases:
2003 2002
Land $ 278,325 $ 278,325
Building 4,390,894 2,936,543
Manufacturing and warehouse equipment 4,304,271 3,885,571
Construction in process 331,469 1,079,779
----------- ----------
9,304,959 8,180,218
Less accumulated amortization 2,447,100 1,583,811
----------- ----------
Total $ 6,857,859 $6,596,407
=========== ==========
During February 1996, the Company purchased the assets of Kinpak Inc. In
order to finance the expansion contemplated by the purchase, the Company entered
into an agreement with the City of Montgomery to issue Industrial Development
Bonds. The Alabama facility expansion consisted of an additional building, which
was completed during October 1997, bringing the facility, at that time, to
approximately 110,000 square feet. Such facility serves as the Company's primary
manufacturing and distribution center.
7
In addition to the Kinpak facility, the Company has routinely leased
additional warehouse space in Alabama to store certain manufacturing raw
materials and inventory component items. Consolidating such space to the Kinpak
campus improves material logistics and manufacturing efficiency. Also, the
prevailing level of interest rates offered an opportunity to reduce overall cash
flow attributable to this space. Accordingly, during the year ended December 31,
2002, the Company entered into an agreement with the City of Montgomery to issue
an additional series Industrial Development Bonds aggregating $3,500,000 to
construct an additional 70,000 square feet of warehousing and manufacturing
space.
Obligations for future payments attributable to this capitalized lease are
discussed in Note 4.
Note 3 - Note payable, bank:
During 2000, the Company secured a revolving line of credit with a maximum
of $5 million from a commercial bank carrying an annual interest rate at the
lender's prime rate. This line was collateralized by the Company's inventory,
trade receivables, and intangible assets. On July 1, 2002, the Company replaced
such line with another offered by the commercial bank financing the expansion
discussed in Notes 2 and 4. The new line aggregates $5 million, matures on May
31, 2004, bears an adjustable interest rate approximating prime, and is secured
by the Company's trade receivables and inventory. Pursuant to such agreement,
the Company is required to maintain minimum working capital levels, maintain
stipulated debt to tangible net worth and debt coverage ratios. As of December
31, 2003, the Company was not in compliance with the current ratio requirement
of maintaining a ratio of at least 1.5:1. The bank has waived such
non-compliance. As of December 31, 2003, the Company was obligated under this
arrangement in the amount of $4,550,000.
Note 4 - Long -Term debt:
Long-term debt at December 31, 2003 consisted of the following:
The Company is obligated pursuant to capital leases financed through
Industrial Development Bonds. Such obligations were incurred during 1997 and
2002 in connection with building and equipment expansion at the Company's
Alabama manufacturing and distribution facility. Both bear interest at tax-free
rates that adjust weekly. At December 31, 2003, $ 2,800,000 and $3,320,000 were
outstanding attributable to the 1997 and 2002 series, respectively. During the
year ended December 31, 2003 interest rates ranged between 1.2% and 1.45%.
Principal and accrued interest retiring the underlying bonds are payable
quarterly through March, 2012 and July, 2017 for the 1997 and 2002 series,
respectively. Repayment of the bonds is guaranteed by a Letter of Credit issued
by the Company's primary commercial bank. Security for the Letter of Credit is a
priority first mortgage on the Kinpak facility and manufacturing equipment.
The Company is obligated to an affiliated entity owned by certain officers
of the Company pursuant to a note payable aggregating $368,457 at December 31,
2003. Such obligation requires monthly installments of $4,357 including
principal and interest at 5.25% through April 1, 2004 when a balloon payment
will be due. The terms of this obligation are identical to that of an underlying
obligation of the affiliated entity to a financial institution. Accordingly, the
entire balance is reflected as a current liability. Subsequent to year-end, the
affiliate obtained a commitment to refinance the underlying obligation and once
such transaction is completed, the repayment terms of the Company's debt to the
affiliate will be revised to conform with the refinanced obligation.
During 2003 and 2002, the Company, through certain subsidiaries, entered
into various capital lease agreements covering equipment utilized in the
Company's Alabama plant and its corporate offices. Such obligations, aggregating
approximately $29,000 at December 31, 2003, have varying maturities through 2006
and carry interest rates ranging from 7% to 12%.
During 2001, the Company financed the acquisition of approximately $484,000
of equipment through a financial institution. The obligation requires monthly
installments of $11,097 including principal and interest at 8.4% per annum
through maturity in May 2004. The obligation is secured by the underlying
equipment purchased. At December 31, 2003, approximately $54,300 was
outstanding.
8
The composition of these obligations at December 31, 2003 and 2002 were as
follows:
Current Portion Long Term Portion
--------------- -----------------
2003 2002 2003 2002
---- ---- ---- ----
Industrial Development Bonds $455,000 $440,000 $5,665,000 $6,120,000
Notes payable 427,238 132,927 - 22,952
Capitalized equipment leases 16,726 28,839 12,692 9,141
-------- --------- ---------- ----------
$898,964 $601,766 $5,677,692 $6,562,093
======== ========= ========== ==========
Required principal payment obligations attributable to the foregoing are
tabulated below:
Year ending December 31,
2004 $ 898,964
2005 469,772
2006 462,920
2007 460,000
2008 460,000
Thereafter 3,825,000
----------
Total $6,576,656
==========
Note 5 - Income taxes:
The Components of the Company's consolidated income tax provision are as
follows:
Year ended December 31,
2003 2002 2001
---- ---- ----
Income tax provision (benefit):
Federal - current $140,000 $ - $ -
- deferred 37,800 58,000 40,500
State - - - -
-------- ------- -------
Total $177,800 $58,500 $40,500
======== ======= =======
The reconciliation of income tax provision at the statutory rate to the
reported income tax expense is as follows:
Year Ended December 31,
2003 2002 2001
---- ---- ----
Computed at statutory rate 34.0% 34.0% 34.0%
State tax, net of federal benefit - - -
Other, net - ( 3.7%) ( 6.4%)
-------- -------- --------
Effective tax rate 34.0% 30.3% 27.6%
======== ======== ========
At December 31, 2003 and 2002 deferred income taxes payable aggregating
$205,610 and $183,139, respectively are reflected on the accompanying
consolidated balance sheets. Such amounts are attributable to the timing
differences between financial statement and income tax treatment of
depreciation.
Note 6 - Subsequent event:
During March 2004, the Company received approximately $229,700 in the
aggregate from the exercise of employee stock options scheduled to expire during
2004 covering 316,470 shares of common stock.
9
Note 7 - Related party transactions:
At December 31, 2003 and 2002, the Company had amounts due from affiliated
companies which are directly or beneficially owned by the Company's president
aggregating approximately $172,900 and $612,300, respectively. Such advances
were made primarily to international affiliates that are in the process of
expanding sales of Star brite products in Europe, Asia and South America. These
amounts have been advanced by the Company on open account and, through December
31, 2002, carried interest at the same rate charged to the Company on its line
of credit. Effective January 2003, repayment terms of these open receivables
were modified to those terms offered to the Company's larger non-affiliated
customers and, accordingly, no longer bear interest, unless they become
delinquent.
Sales of Star brite products to such affiliates aggregated approximately
$373,600, $317,100, and $344,600 during the years ended December 31, 2003, 2002,
and 2001, respectively.
Note 8 - Commitments:
On May 1, 1998, the Company entered into a ten year lease for approximately
12,700 square feet of office and warehouse facilities in Fort Lauderdale,
Florida from an entity owned by certain officers of the Company. The lease
required a minimum rental of $94,800 for the first year and provides for a
maximum 2% increase on the anniversary of the lease throughout the term.
Additionally, the landlord is entitled to its pro-rata share of all taxes,
assessments, insurance premiums, operating charges, maintenance charges and any
other expenses which arise from ownership. Rent charged to operations during the
years ended December 31, 2003, 2002, and 2001 amounted to approximately
$100,500 each year.
The Company has entered into a corporate guaranty of the mortgage note
obligations of such affiliate. The obligations aggregating approximately
$368,500 at December 31, 2003 are primarily secured by the real estate leased to
the Company.
In November, 1994, the Company leased an approximately 10,000 square foot
building in Fort Lauderdale, Florida for manufacturing, warehousing and office
space from an unrelated third party. Such lease terminates on October 31, 2004.
Rent charged to operations under this lease during the year ended December 31,
2003, 2002 and 2001 amounted to approximately $95,500, $92,800 and $90,800,
respectively.
The following is a schedule of minimum future rentals on the non-cancelable
operating leases.
Year ending December 31,
2004 $185,672
2005 102,498
2006 104,548
2007 106,639
2008 108,771
Thereafter 251,922
-------
Total $860,050
========
During January 2002, the Company entered into an agreement with an
investment banker to provide financial advisory and other services to the
Company for a one year period ending January, 2003. Such agreement required a
monthly retainer of $5,000, reimbursement of Company approved expenses and the
issuance of warrants to purchase 250,000 shares of the Company's common stock at
an exercise price of $1.40 per share. In addition to the foregoing, the Company
has agreed to compensate the investment banker based on completion of certain
financing arrangements and/or transactions. This agreement was renewed on a
month-to-month basis during February, 2003 with a revised monthly fee of $4,000
for the aforementioned services.
10
Note 9 - Stock options:
During 1991, the Company adopted a non-qualified employee stock option plan
covering 200,000 shares of its common stock. During 1992, the Company adopted an
incentive stock option plan covering 200,000 shares of its common stock. During
1994, the Company adopted a non-qualified employee stock option plan covering
400,000 shares of its common stock. During 2002, the Company adopted a qualified
employee incentive stock option plan and a non-qualified stock option plan
covering 400,000 and 200,000 shares of its common stock, respectively.
The following schedule shows the status of outstanding options under the
Company's stock option plans as of December 31, 2003, as adjusted for the
Company's stock dividend distributions of 2000 and 2002
Weighted
Date Options Exercisable Exercisable Expiration Average
Plan granted outstanding Options price date remaining life
---- -------- ----------- ------- ------ -------- --------------
1991 11/12/99 161,700 129,360 $ .758 11/11/04 .88
1992 03/01/99 28,875 28,875 $ .757 02/28/04 .17
1992 12/20/01 165,000 66,000 $1.009 12/20/06 3.00
1994 05/04/99 135,135 108,108 $ .684 05/03/04 .33
1994 12/20/00 159,500 95,700 $ .573 12/19/05 1.95
2002 10/22/02 150,000 30,000 $1.260 10/21/07 3.83
2002 10/22/02 35,000 7,000 $1.260 10/21/07 3.83
2002 06/20/03 40,000 - $1.030 06/19/08 4.46
------- ------- -----
875,210 465,043 2.15 yrs.
======= ======= =====
On March 25, 1999, the Company granted two officers a five-year option for
115,000 shares each, as adjusted for the Company's stock dividend distributions
of 2000 and 2002, at an exercise price of $.758 representing the market price at
the time of grant. Such grants were awarded in consideration of their making a
loan to the Company in the amount of $400,000 from an affiliated company in
which they are each 50% co-shareholders.
Statement of Financial Accounting Standards No. 123 requires that companies
that continue to account for employer stock options under APB No. 25 disclose
pro forma net income and earnings per share as if such Statement had been
applied. The following table is disclosed pursuant to such requirement.
2003 2002 2001
---- ---- ----
Net income As reported $345,071 $ 134,518 $106,384
Pro forma $301,887 $ 101,925 94,981
Earnings per share As reported $ .07 $ .03 $ .03
Pro forma $ .06 $ .03 $ .02
A summary of the Company's stock options as of December 31, 2003, 2002 and
2001, and changes during the years ending on these dates, is presented below:
2003 2002 2001
---------------------- --------------------- -------------------
2001
Weighted Weighted Weighted
Optioned average Optioned average Optioned average
shares exercise price shares exercise price shares exercise price
------ -------------- ------ -------------- ------ --------------
Options outstanding
at beginning of year 1,082,210 $1.03 794,000 $ .89 730,500 $ .92
Granted 40,000 1.03 190,000 1.26 160,000 1.11
Expired ( 16,000) (1.09) ( 7,500) ( .68) (96,500) ( 1.73)
Exercised - - - - - -
Adjustment for stock
dividend distributions - - 105,710 - - -
--------- ----- --------- ----- ------- ------
Options outstanding at
end of year 1,106,210 $ .95 1,082,210 $1.03 794,000 $ .92
========= ===== ========= ===== ======= ======
11
Stock options are granted annually to selective executives, key employees,
directors and others pursuant to the terms of the Company's various plans. Such
grants are made at the discretion of the Board of Directors. Options typically
have a five year life with vesting occurring at 20% per year on a cumulative
basis with forfeiture at the end of the option, if not exercised.
The fair value of each option grant was estimated using the Black-Scholes
option pricing model with the following assumptions for the years 2003, 2002 and
2001; risk free rate 6.5%, no dividend yield for all years, expected life of
five years and volatility of 31.6%.
Note 10 - Major customers:
The Company has one major customer, West Marine, Inc., with sales in excess
of 10% of consolidated revenue for the year ended December 31, 2003. Sales to
this customer represent approximately 36% of consolidated revenues.
The Company's top five customers represent approximately 55% of
consolidated revenues and 76% of consolidated trade receivables. The Company
enjoys good relations with these customers. However, the loss of any of these
customers could have an adverse impact on the Company's operations.
Note 11 - Earnings per share:
Earnings per share are reported pursuant to the provisions of Statement of
Financial Standards No. 128. Accordingly, basic earnings per share reflects the
weighted average number of shares outstanding during the year, and diluted
shares adjusts that figure by the additional hypothetical shares that would be
outstanding if all exercisable outstanding common stock equivalents with an
exercise price below the current market value of the underlying stock were
exercised. Common stock equivalents consist of stock options and warrants. The
following tabulation reflects the number of shares utilized to determine basic
and diluted earnings per share for the years ended December 31, 2003, 2002, and
2001:
2003 2002 2001
--------- --------- --------
Basic 4,888,133 4,438,207 4,169,870
Diluted 5,338,015 4,760,487 4,169,870
Note 12 - Shareholders' equity:
During the years ended December 31, 2002 and 2000 the Company declared and
distributed stock dividends of 10% and 5%, respectively.
During the years ended December 31, 2003, 2002 and 2001 the Company awarded
155,000, 129,000 and 134,000 shares of restricted common stock, respectively to
certain executives, key employees and others as a component of annual
compensation. Charges to operations attributable to such awards aggregated
approximately $ 67,500, 67,700 and $36,200 for each period, respectively.
During March, 2004, certain employees of the Registrant exercised stock
options scheduled to expire during 2004 covering 316,470 shares of its common
stock. Such transaction resulted in an approximate $229,700 of additional
paid-in capital.
12