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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 2-70197
OCEAN BIO-CHEM, INC.
(Exact name of Registrant as specified in its charter)
Florida 59-1564329
------- ----------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
4041 SW 47 Avenue
Fort Lauderdale, FL 33314-4023
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(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 7, 2005 as reported by the NASDAQ Small Cap Market on that
date: $3,989,754. 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
February 28, 2005: 5,567,816 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 1, 2005, which will be filed within
120 days of December 31, 2004 are incorporated by reference to Part III of this
Form 10-K.
Forward-looking Statements:
- ---------------------------
Certain statements contained in this Annual Report on Form 10-K, 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 our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Factors, which may affect these
results include, but are not limited to, the highly competitive nature of our
industry; reliance on certain key customers; consumer demand for marine
recreational vehicle and automotive products; advertising and promotional
efforts; and other factors.
Part I
Item 1. Business
- -----------------
General: We were organized on November 13, 1973 under the laws of the state of
Florida. We are 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(R) and other
trademarks within the United States of America and Canada. In addition, we
produce private label formulations of many of our products for various customers
as well as provide custom blending and packaging services of these and other
products.
Products:
- ---------
Set forth below is a general description of the products that we manufacture and
market:
Marine: Our Marine line consists of polishes, cleaners, protectants and waxes of
various formulations under the Star brite(R) brand name as well as private label
customers. 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. In addition, we manufacture a
line of brushes, poles and tie-downs and other related marine accessories.
Automotive: We manufacture a line of automotive products under the Star brite(R)
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(R) brand as well as
private labels for customers. We also produce a line of automotive polishes,
cleaners and associated appearance items.
Recreational vehicle: Our recreational vehicle products are made up of cleaners,
polishes, detergents, fabric cleaners and protectors, silicone sealants,
waterproofers, gasket materials, degreasers, vinyl cleaners, protectors, toilet
treatment fluids and anti-freeze coolants.
Aircraft: Our Aircraft product line consists primarily of polishes and cleaners.
Although the above products are utilized for different types of vehicles, boats,
aircrafts and household purposes, it is management's view that they all
constitute one industry segment.
Manufacturing: We manufacture the majority of our products at our manufacturing
facility in Montgomery, Alabama. In addition, we contract with two unrelated
companies located in northeastern and mid-western areas of the country to
package other products, which are manufactured to our specifications, using ouR
provided formulas. Each third party packager enters into a confidentiality
agreement with us.
We purchase raw materials from a wide variety of suppliers, none of which are
significant to operations and all raw materials used in manufacturing are
readily available. We design our own packaging and supply our outside
manufacturers with the appropriate design and packaging. We believe that our
internal manufacturing capacity as well as the arrangements with our present
outside manufacturers is adequate for our present needs.
2
In the event that these arrangements are discontinued with any manufacturer, we
believe that substitute facilities can be found without substantial adverse
effect on manufacturing and distribution.
Our in-house manufacturing is primarily performed by our wholly owned
subsidiary, Kinpak Inc, an Alabama corporation ("Kinpak"). On February 27, 1996,
we acquired certain assets of Kinpak, Inc., 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, we 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, we purchased the machinery, equipment
and inventory located on the leased premises. Subsequent to the acquisition, we
changed the name of our subsidiary to Kinpak Inc. (an Alabama corporation).
During July 2002, we 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 as well
as the requisite machinery and equipment additions required therein. Such
project was substantially completed during the year ended December 31, 2003.
Marketing: Our 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. We also
sell to national and regional distributors who in turn sell our products to
specialized retail outlets for that specific market. Currently we have one
customer (West Marine, Inc., which is an unrelated entity) to whom sales
exceeded 10% of consolidated revenues for the year ended December 31, 2004.
Sales to our five largest customers for the year ended December 31, 2004
amounted to approximately 55% of consolidated gross revenues and outstanding
balances due us at year-end from these customers aggregated approximately 77% of
consolidated trade receivables. We market our products through internal salesmen
and approximately 250 sales representatives who work on an independent
contractor-commission basis. Our officers also participate in sales
presentations and trade shows. In addition, we aid marketing through advertising
campaigns in national magazines related to specific marketplaces. The products
are distributed primarily from our manufacturing and distribution facility in
Alabama.
Backlog and Seasonality: We have no significant backlog of orders as of December
31, 2004. We do not give customers the absolute right to return product. The
majority of our 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: We have 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. We believe
that we can increase or maintain our market share through our 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 we operate. There are many
entities, both national and regional, which represent competition to us. Many
are more established and have greater financial resources than we do. However,
the market is so large that even a minimal market share could be significant to
us. The principal elements of competition are brand recognition, price, service
and the ability to deliver products on a timely basis. We believe that we can
establish a reasonable market share through our present methods of advertising
and distribution.
Recreational Vehicle: Our recreational vehicle appearance and maintenance market
is parallel to that of the marine marketplace. In this market we compete with
national and regional competitors, none of which 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 our market
share by utilizing similar methods as those employed in the marine market.
Trademarks: We have obtained registered trademarks for Star brite(R) and other
tradenames used on our products. We view our trademarks as significant assets
because they provide product recognition. We believe
3
that our intellectual property is significantly protected, but there are no
assurances that these rights can be successfully asserted in the future or will
not be invalidated, circumvented or challenged.
Patents: We hold two patents which we believe are valuable in limited product
lines, but not material to our success or competitiveness in general.
New Product Development: We continue to develop specialized products for the
marine, automotive, and recreational vehicle trade. We believe that our 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: We adhere 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 of
material non-compliance.
Financial Information Relating to Approximate Domestic and Canadian Gross Sales:
- --------------------------------------------------------------------------------
Year ended December 31,
-------------------------------------------------------
2004 2003 2002
----------- ----------- -----------
United States:
Northeast $ 4,455,000 $ 4,054,000 $ 4,258,000
Southeast 6,832,000 6,218,000 6,242,000
Central 7,015,000 6,384,000 6,454,000
West Coast 5,197,000 4,730,000 4,960,000
----------- ----------- -----------
23,499,000 21,386,000 21,915,000
Canada (US Dollars) 862,000 792,000 798,000
----------- ----------- -----------
$24,361,000 $22,178,000 $22,713,000
=========== =========== ===========
Personnel: We employ approximately 24 full time employees at our corporate
office in Fort Lauderdale, Florida. These employees are engaged in
administration, clerical and accounting functions. In addition, we employ
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 as of December 31, 2004:
Full-time
Location Description Employees
- -------- ----------- ---------
Fort Lauderdale, Florida Administrative 24
Fort Lauderdale, Florida Manufacturing and distribution 9
Montgomery, Alabama Manufacturing and distribution 81
---
114
===
Item 2. Properties
- -------------------
Our executive offices and warehouse located in Fort Lauderdale, Florida are held
under a lease with an entity fifty percent each owned by Messrs. Peter G. Dornau
and Jeffrey J. Tieger, our President and Vice President-Advertising,
respectively. The lease covers approximately 12,700 square feet of office and
warehouse space. On May 1, 1998, we renewed our 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 us
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, 2004,
2003 and 2002 amounted to approximately $100,500 each year.
4
Our 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 in 1998 and 2002, respectively. We financed the
facility's enhancements and related equipment needs with Industrial Development
Bonds issued through the city of Montgomery, AL. Our manufacturing facility is
subject to a priority first mortgage; and our manufacturing equipment serves as
collateral to a financial institution, which issued letters of credit to secure
the bonds. .
Item 3. Legal Proceedings
- --------------------------
We were not involved in any significant litigation at December 31, 2004.
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
2004. Shareholders will vote at the Annual Meeting to be held during June, 2005
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. Our 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
2004 and 2003 is presented below.
Market Range of
Common Stock Bid: 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------- -------- -------- --------
2004 High $1.89 $1.85 $1.49 $1.40
Low $1.53 $1.31 $1.13 $. 93
2003 High $2.00 $1.20 $1.69 $1.98
Low $1.30 $0.90 $0.97 $1.30
A. The quotations reflect inter-dealer prices without retail mark-up, markdown
or commission and may not represent actual transactions.
B. The number of record holders of our Common Stock owners was approximately 200
at December 31, 2004. In addition, we believe that there are approximately 600
beneficial holders based on information obtained from our Transfer Agent and
Registrar and indications from broker dealers of shares held by them as nominee
for actual shareholders.
C. We have 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 at December 31, 2004 under equity
compensation plans:
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
Equity compensation plans
approved by security holders:
Stock options granted (1) 600,000 $1.29 165,000
Equity compensation plans
not approved by security holders:
Stock options and restricted
stock awards (2), (3) and (4) 723,500 $0.95 --
--------- ----- -------
Total equity compensation plans
approved and not approved by
security holders 1,323,500 $1.10 165,000
========= ===== =======
- ----------
(1) Includes 320,000 options granted under the 2002 Qualified Incentive Stock
Option Plan, 115,000 options under the 2002 Non-Qualified Stock Option Plan
and 165,000 options under the 1992 Qualified Incentive Stock Option Plan.
(2) Includes 352,000 options granted under the 1994 Non-Qualified Stock Option
Plan.
(3) Includes 231,000 options granted to Messrs. Peter G. Dornau and Jeffrey J.
Tieger in conjunction with a loan made to the Company by and entity 50%
owned by each of them.
(4) Includes140,500 shares of restricted common stock awarded to officers and
other employees outside of our stock option plans.
During April 2004 we issued 140,500 shares of our common stock bearing a
restricted legend to certain officers and other key employees as a component of
their compensation. At the date of grant the shares had a market value of $1.25
each. Shares were awarded as follows:
Officers:
Peter G. Dornau, President and CEO 35,000 shares
Edward Anchel, Vice President and CFO 35,000 shares
Jeffrey J. Tieger, Vice President and Secretary 20,000 shares
William Dudman, Vice President 16,000 shares
-------
106,000 shares
Other employees, as a group (7 individuals) 34,500 shares
-------
Total restricted shares awarded 140,500 shares
=======
6
Item 6. Selected Financial Data
- --------------------------------
The following tables set forth selected financial data as of, and for
the years ended December 31,
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
Operations
- ----------
Gross sales $24,361,056 $22,178,352 $22,712,991 $19,876,095 $18,072,784
Net sales $21,657,083 $19,997,702 $20,585,898 $18,013,393 $16,139,256
Net income (loss) $ 134,554 $ 345,071 $ 134,518 $ 106,384 ($ 244,823)
Earnings (loss) per
common share $ .03 $ .07 $ .03 $ .03 ($ .06)
Balance Sheet
- -------------
Working capital $ 3,403,574 $ 2,869,172 $ 2,212,872 $ 1,385,016 $ 1,724,043
Total assets $19,398,344 $18,303,184 $18,650,237 $15,030,206 $15,410,264
Long-term
obligations $ 5,840,250 $ 5,883,302 $ 6,745,232 $ 3,843,515 $ 3,963,145
Total liabilities $13,509,849 $12,899,189 $13,727,315 $10,268,884 $10,737,972
Shareholders'
equity $ 5,888,495 $ 5,403,995 $ 4,922,922 $ 4,761,322 $ 4,672,292
Cash dividends declared
per share of common stock $ -- $ -- $ -- $ -- $ --
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations
---------------------
The following discussion should be read in conjunction with our consolidated
financial statements contained herein as Item 15.
Overview:
- ---------
We are a leading manufacturer and distributor of chemical formulations
serving the appearance and functional categories of the marine,
automotive, recreational vehicle and home care markets. We were founded
in 1973 and have conducted operations within the aforementioned
categories since then. During 1984, we changed our corporate name to
Ocean Bio-Chem, Inc. (the parent company) from our former name, Star
brite Corporation. Our operations were conducted as a privately owned
company through March, 1981 when we completed our initial public
offering of common stock.
Critical accounting policies and estimates:
Principles of consolidation - Our consolidated financial statements
include the accounts of the parent company and its wholly owned
subsidiaries. All significant inter-company accounts and transactions
are eliminated in consolidation.
Revenue recognition - Revenue from product sales is recognized when
persuasive evidence of an arrangement exists, delivery to customer has
occurred, the sales price is fixed and determinable, and collectibility
of the related receivable is probable.
7
Inventories - Inventories are primarily composed of raw materials and
finished goods and are stated at the lower of cost, using the first-in,
first-out method, or market.
Prepaid advertising and promotion - In any given year we introduce
certain new products to our customers. In connection therewith, we
produce new promotional items to be distributed over a period of time.
We follow the policy of amortizing these costs over a one-year basis.
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 - We follow 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. For the years ended December 31, 2004, 2003 and
2002, we have not adopted Statement of Financial Accounting Standards
No. 123 to record such compensation costs.
Concentration of credit risk - Financial instruments that potentially
subject the Company to concentration of credit risk consist primarily
of accounts receivable. Our five largest customers represented
approximately 55%, 55% and 42% of consolidated gross revenues for the
years ended December 31, 2004, 2003 and 2002; and 77% and 76% of
consolidated accounts receivable at December 31, 2004 and 2003,
respectively. We have had a longstanding relationship with each of
these entities and have always collected open receivable balances.
However, the loss of any of these customers could have an adverse
impact on our operations.
Concentration of cash - At various times of the year and at December
31, 2004, we had a concentration of cash in one bank in excess of
prevailing insurance offered through the Federal Deposit Insurance
Corporation at such institution. Management does not consider the
excess deposits to be a significant risk.
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 we could borrow funds with similar remaining
maturities, and the carrying amount approximates fair value.
Income taxes - We file consolidated federal and state income tax
returns. We haves 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.
Trademarks, trade names and patents - The Star brite trade name and
trademark were purchased in 1980 for $880,000. The cost of such
intangible assets was 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, we have determined that the carrying value of such
intangible assets relating to its Star brite brand does not require
further amortization. In addition, we own two patents that we believes
are valuable in limited product lines, but not material to our success
or competitiveness in general. There are no capitalized costs of these
two patents.
Translation of Canadian currency - The accounts of our 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, if any, are included in net
earnings of the period.
8
Liquidity and Capital Resources:
- --------------------------------
The primary sources of our liquidity are our operations and short-term
borrowings from a commercial bank pursuant to a revolving line of credit
aggregating $6 million. Such line matures May 31, 2005, bears interest at prime
plus .25% and is secured by our trade receivables and inventory. We are 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, 2004,
we were obligated under this arrangement in the amount of $4,500,000.
In connection with the purchase and expansion of the Alabama facility, we 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 our future needs. During July 2002, we 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. This project was substantially completed
during 2003.
In order to market its Alabama Industrial Development Bonds at favorable rates,
we obtained a substitute irrevocable letter of credit for the 1997 issue and a
new irrevocable letter of credit for the 2002 issue. Under such letters of
credit agreements maturing on July 31, 2005, we are 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 tax-exempt
instruments. During the year ended December 31, 2004 such bonds carried interest
ranging between 1.5% and 2.3% annually. Interest and principal are payable
quarterly. We believe current operations are sufficient to meet these
obligations.
We are involved in making sales in the Canadian market and must deal with the
currency fluctuations of the Canadian currency. We do not engage in currency
hedging and deals with such currency risk as a pricing issue.
During the past few years, we have introduced various new products to our
customers. At times this has required us 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 our overall operations. We
believe that all required capital to maintain such increases can continue to be
provided by operations and current financing arrangements.
Many of the raw materials that we use in the manufacturing process are
commodities that are subject to fluctuating prices. We react to long-term
increases by passing along all or a portion of such increases to our customers.
Results of Operations:
- ----------------------
Years ended December 31, 2004 and 2003:
- ---------------------------------------
Sales and earnings varied when comparing the year ended December 31, 2004 to
2003 principally due to the factors enumerated below.
Gross sales increased 9% to approximately $24,361,000 for the year ended
December 31, 2004 compared to $22,178,000 for the year ended December 31, 2003.
Management attributes this increase in sales to gains made during the third
quarter of the current year as well as increased sales promotions and the
related increase in revenues during the fourth quarter of 2004.
Cost of goods sold increased to 77% of net sales for the year ended December 31,
2004 compared to 75.7% of net sales in the year ended December 31, 2003. This
change resulted from various factors, some of which negatively impacted margins
and others, which mitigated these factors. Specifically, petroleum product costs
are higher than those experienced in prior years and currently represent a
higher portion of our manufacturing expenses. In addition, a price increase was
passed along on certain of our products during the first and second quarters of
2004. In addition, margins were favorably impacted by spreading the fixed
elements of overhead over an increased revenue base.
9
Advertising and promotion expenses increased approximately $201,000 for the 2004
period when compared to expenses in the same time period in the previous year.
This increase resulted primarily from increased co-op advertising associated
with increased sales to certain customers and the timing of various advertising
programs in 2004.
Selling and administrative expenses increased by approximately $100,000 or 3% in
the year ended December 31, 2004 compared to the year ended December 31, 2003.
Such change was primarily due to increased personnel costs and other normal
recurring increases in operating expenses.
Interest expense for the year ended December 31, 2004 increased approximately
$17,000 when compared to the same twelve-month period of 2003. This change was
primarily due to the impact of higher interest rates and increased borrowings.
Years ended December 31, 2003 and 2002:
- ---------------------------------------
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 our 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 our 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 costs of goods sold percentages were 75.7% and 77.7% for the periods
during 2003 and 2002, respectively. This change was primarily due to our
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 or 1% 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.
Contractual obligations:
The following table reflects our contractual obligations for the years ended
December 31,:
Total 2005 2006 - 08 2009 Thereafter
---------- -------- ---------- -------- ----------
Long-term debt obligations $6,026,332 $467,180 $1,402,360 $468,610 $3,688,182
Capital leases 37,030 15,932 21,098 -- --
Operating leases 422,292 102,458 319,834 -- --
Purchase obligations -- -- -- -- --
Other -- -- -- -- --
---------- -------- ---------- -------- ----------
Total $6,485,654 $585,570 $1,743,292 $468,610 $3,688,182
========== ======== ========== ======== ==========
10
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
- -------------------------------------------------------------------
We do not engage in derivative transactions. We become exposed to foreign
currency transactions as a result of our operations in Canada and we do not
hedge such exposure. Differences in the fair value of investment securities are
not material; therefore, the related market risk is not significant. Our
exposure to market risk for changes in interest rates relates primarily to the
interest rate on our bonds. The interest rates on our bonds adjusted weekly and
ranged between 1.5% and 2.3% during the year ended December 31, 2004.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The audited financial statements of the Company required pursuant to this Item 8
are included in this Annual Report on Form 10-K, as a separate section
commencing on page F-1 and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
--------------------
None.
Item 9A. Controls and Procedures:
- ----------------------------------
Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act) as of December 31, 2004. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that , as of December
31, 2004, our disclosure controls and procedures were (1) designed to ensure
that material information relating to our company, including our consolidated
subsidiaries made known to our Chief Executive Officer and Chief Financial
Officer by others within those entities, particularly during the period in which
this report was being prepared and (2) effective, in that they provide
reasonable assurance that information required to be disclosed by the our
company in the reports that we file or submit under the Securities Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
We did not have any change in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) which occurred
during the fiscal quarter ended December 31, 2004 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
Part III
Item 10. Executive Officers and Directors of the Registrant
- ------------------------------------------------------------
The following tables set forth the name and ages of our elected directors and
officers of the Company, as of December 31, 2004.
All directors will serve until the next annual meeting of directors or until
their 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 our Company and the Company or any other persons pursuant to which
any officer or director was or is to be selected as a director or officer.
11
Name Office Age
---- ------ ---
Peter G. Dornau President, Chief Executive Officer, and 65
Director since 1973
Edward Anchel Vice President-Finance, Chief Financial 58
Officer since 1999 and Director since 1998
Jeffrey J. Tieger Vice President - Advertising and Marketing,
Secretary and Director since 1977 61
William W. Dudman Vice President-Operations since 2004 40
James M. Kolisch Director since 1998 53
Laz L. Schneider Director since 1998 65
John B. Turner Director since 2000 57
Sonia B. Beard Director since 2002 34
Peter G. Dornau is our co-founder and has served as our President, CEO and
Chairman of Board of Directors since 1973.
Edward Anchel joined our company as Vice President-Finance and Chief Financial
Officer in March 1999. 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 in May 1998.
Jeffrey J. Tieger joined our company in June 1977 as our Vice
President-Advertising and has served in that position through the present date.
William W. Dudman joined our company in February 2004 as our Vice
President-Operations. For the five years immediately preceding his employment he
had held various management positions within the marine industry, most recently
with West Marine, Inc., our largest customer.
James M. Kolisch joined our Board of Directors as an outside director in May
1998. During the past five years, Mr. Kolisch has been engaged in the insurance
industry and served as president of USI Florida an entity that sources most of
the our insurance needs. 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 at Berger, Singerman, P.A., a law
firm that serves as our lead counsel in various corporate and litigation
matters.
John B. Turner joined our Board of Directors in June 2002. During the past five
years, Mr. Turner has been retired. Prior to his retirement, he was an insurance
executive. 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. She currently holds the position as the Manager of Concept
Development for the Revenue Lines of Business of Walt Disney World. 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.
12
Audit Committee
- ---------------
We have an Audit Committee, which consists of Sonia B. Beard, John
B. Turner and James M. Kolisch as of December 31, 2004. The Board has designated
Sonia B. Beard as the "audit committee financial expert," as defined by Item
401(h) of Regulation S-K of the Securities Exchange Act of 1934. The Board has
determined that Sonia B. Beard, John B. Turner and James M. Kolisch are
"independent directors" within the meaning of the listing standards of the
Nasdaq Small Cap Market.
Code of Ethics
- --------------
We have adopted a Code of Business Conduct and Ethics, which is
applicable to all directors, officers and employees of the company, including
our principal executive officer, our principal financial officer, our principal
accounting officer or controller or other persons performing similar functions.
We filed our Code of Ethics as Exhibit 14.1 to this Annual Report on Form 10-K.
Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------
Based solely on reviews of Forms 3 and 4 furnished to us by the aforementioned
individuals, it was determined that no reporting person failed to file a timely
submission of ownership changes and that we were in compliance with Rule
16(a)3(e) of the Exchange Act during our most recent fiscal year.
Item 11. Management Remuneration and Transactions
- --------------------------------------------------
The information required for this item is incorporated by reference to our
Definitive Proxy Statement to be filed in conjunction with the annual
shareholders' meeting that shall be filed with the United States Securities and
Exchange Commission and sent out to shareholders prior to 120 days past our
year-end of December 31, 2004.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The following table sets forth information at December 31, 2004 with respect to
the beneficial ownership of our common stock by holders of more than 5% of such
stock and by all of our directors and officers 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, CEO,
Chairman Board of Directors
Fort Lauderdale, FL 33317 2,926,868 (1) 46.27%
Common Edward Anchel, Vice President-Finance,
CFO, Director
Boynton Beach, FL 33437 244,451 (2) 3.86%
Common Jeffrey J. Tieger,
Vice President-Advertising,
Secretary, Director
Plantation, FL 33314 365,780 (3) 5.78%
Common William W. Dudman, Vice President
Plantation, FL 33317 19,300 .31%
Common James M. Kolisch, Director
Coral Gables, FL 33114 18,167 (4) .73%
Common Laz L. Schneider, Director
Fort Lauderdale, FL 33305 30,000 (5) .47%
13
Title of Name and Address of Amount and Nature of Percent
Class Beneficial Owner Beneficial Ownership of Class
- -------- ------------------- -------------------- --------
Common John B. Turner, Director
Miami, FL 33186 47,463 (6) .31%
Common Sonia B. Beard, Director
Merritt Island, FL 32952 20,000 (7) .75%
Common All directors and officers as a group
8 individuals 3,700,029 (8) 58.49%
- ----------
(1) Includes 164,000 shares that are issuable upon the exercise of stock options
within 60 days of December 31, 2004.
(2) Includes 48,500 shares that are issuable upon the exercise of stock options
within 60 days of December 31, 2004.
(3) Includes 164,000 shares that are issuable upon the exercise of stock options
within 60 days of December 31, 2004.
(4) Includes 30,000 shares that are issuable upon the exercise of stock options
within 60 days of December 31, 2004.
(5) Includes 30,000 shares that are issuable upon the exercise of stock options
within 60 days of December 31, 2004.
(6) Includes 30,000 shares that are issuable upon the exercise of stock options
within 60 days of December 31, 2004.
(7) Includes 20,000 shares that are issuable upon the exercise of stock options
within 60 days of December 31, 2004.
(8) Includes 486,500 shares that are issuable upon the exercise of stock options
within 60 days of December 31, 2004.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
On May 1, 1998, we entered into a ten-year lease for approximately 12,700 square
feet of office and warehouse facilities in Fort Lauderdale, Florida from an
entity fifty percent owned each by Messrs. Peter G. Dornau and Jeffrey J.
Tieger, our President and Vice President-Advertising, respectively. 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 us its pro-rata share of all taxes,
assessments, insurance premiums, operating charges, maintenance charges and any
other expenses, which normally arise from ownership. We believe 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, 2004, 2003 and 2002
amounted to approximately $100,500 each year.
We acquired the rights to the Star brite(R) trademark and related products for
the United States and Canada in conjunction with our original public offering
during March 1981. Peter G. Dornau, our president is the direct or beneficial
owner of three companies that market Star brite(R) products outside the United
States and Canada. These companies serve as distributors of our products and the
terms of payment are the same as for our other customers. At December 31, 2004
and 2003, we had amounts due from affiliated companies, which are directly or
beneficially owned by our president aggregating approximately $408,500 and
$172,900, respectively.
14
Sales of Star brite products to such affiliates aggregated approximately
$616,800, $373,600 and $317,100 during the years ended December 31, 2004, 2003
and 2002, respectively.
A subsidiary of ours currently uses the services of an entity that is owned by
our president to conduct product research and development. Such entity received
$30,000 per year during the years ended December 31, 2004, 2003 and 2002 under
such relationship.
Item 14. Principal Accounting Fees and Services
- -----------------------------------------------
The information required for this item is incorporated by reference to our
Definitive Proxy Statement to be filed in conjunction with the annual
shareholders' meeting which shall be filed with the United States Securities and
Exchange Commission and sent out to shareholders prior to 120 days past our
year-end of December 31, 2004.
Item 15. Exhibits, Financial Statements, Schedules and Reports Filed on Form 8K
- --------------------------------------------------------------------------------
(A) Consolidated financial statements:
(i) Consolidated balance sheets as of December 31, 2004
and 2003.
(ii) Consolidated statements of operations for each of the
three years ended December 31, 2004, 2003 and 2002.
(iii) Consolidated statement of shareholders' equity for each
of the three years ended December 31, 2004, 2003
and 2002.
(iv) Consolidated statements of cash flows for each of the
three years ended December 31, 2004, 2003 and 2002.
(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:
(B) Exhibits
3.1 Articles of Incorporation (incorporated by
reference to the Company's Registration Statement
on Form S-18 filed with the United States
Securities and Exchange Commission on March 26,
1981).
3.2 Bylaws (incorporated by reference to the Company's
Registration Statement on Form S-18 filed with the
United States Securities and Exchange Commission
on March 26, 1981).
4.1 Form of Certificate for Series 1997 Bonds*
4.2 Form of Certificate for Series 2002 Bond*
4.3 Trust Indenture dated as of December 1, 1996
between the IDB Board and Regions Bank, as Trustee
and Registrar relating to the $4,000,000 1997 IDB
Bonds
4.4 Supplement to Trust Indenture for 1997 Bonds dated
March 1, 1997*
15
4.5 Trust Indenture dated as of July 22, 2002 between
the IDB Board and Regions Bank, as Trustee and
Registrar relating to the $3,500,000 IDB Bonds
Series 2002*
10.1 Restated Lease Agreement dated as of December 1,
1996 between The Industrial Development Board of
the City of Montgomery ("IDB Board") and Kinpak,
Inc.*
10.2 First Supplemental Lease dated as of March 1, 1997
between the IDB Board and Kinpak, Inc.*
10.3 Second Supplemental Lease dated as of July 1, 2002
between the IDB Board and Kinpak, Inc.*
10.4 Credit Agreement dated as of July 1, 2002 by and
among the Company, Star-Brite Distributing, Inc.,
Star-Brite Automotive, Inc., Star Brite
Distributing (Canada), Inc., Kinpak, Inc. and
Regions Bank*
10.5 Amendment to Credit Agreement dated June 1, 2004
by and among the Company, Star-Brite Distributing,
Inc., Star-Brite Automotive, Inc., Star Brite
Distributing (Canada), Inc., Kinpak, Inc. and
Regions Bank*
10.6 Mortgage, Assignment of Leases and Security
Agreement dated as of July 1, 2002 between Kinpak,
Inc. and Regions Bank.*
10.7 Security Agreement dated as of July 22, 2002
between Kinpak, Inc. and Regions Bank.*
10.8 Irrevocable Letter of Credit dated July 22, 2002
issued by Regions Bank to secure the Series 1991
Bonds*
10.9 Irrevocable Letter of Credit dated July 22, 2002
issued by Regions Bank to secure the Series 2002
Bonds*
10.10 Extension to Credit Agreement dated march 31, 2003
by and among the Company, Star-Brite Distributing,
Inc., Star-Brite Automotive, Inc., Star Brite
Distributing (Canada), Inc., Kinpak, Inc. and
Regions Bank*
10.11 Ocean Bio-Chem, Inc. 1992 Incentive Stock Option
Plan (incorporated by reference to Form S-8 filed
with the United States Securities and Exchange
Commission on June 24, 1994).
10.12 Ocean Bio-Chem, Inc. 1994 Non-Qualified Stock
Option Plan (incorporated by reference to Form S-8
filed with the United States Securities and
Exchange Commission on June 24, 1994).
10.13 Ocean Bio-Chem, Inc. 2002 Incentive Stock Option
Plan (incorporated by reference to an exhibit
contained in the Company's proxy statement filed
with the United States Securities and Exchange
Commission on April 28, 2003).
10.14 Lease dated May 1, 1998 between the Star Brite
Distributing, Inc. and PEJE, Inc.*
14.1 Code of Ethics (incorporated by reference to an exhibit
contained in the Company's proxy statement filed
with the United States Securities and Exchange
Commission on April 13, 2004)
21. List of Subsidiaries*
23.1 Consent of Levi, Cahlin & Co.*
23.2 Consent of Berkovits, Lago & Company, LLP*
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of Sarbanes-Oxley*
16
31.2 Certification of Chief Financial Officer pursuant to Section
302 of Sarbanes-Oxley*
32.1 Certification of Chief Executive Officer pursuant to Section
906 of Sarbanes-Oxley*
32.2 Certification of Chief Financial Officer pursuant to Section
906 of Sarbanes-Oxley*
- ----------
*Attached hereto.
17
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 30, 2005
By: /s/ Edward Anchel
-------------------------------------
EDWARD ANCHEL
Chief Financial Officer
March 30, 2005
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.
Signature Capacity Date
- --------- -------- ----
/s/ Peter G. Dornau President, Chief Executive March 30, 2005
- ---------------------- Officer and Director
Peter G. Dornau
/s/ Edward Anchel Vice President Finance, Chief March 30, 2005
- ---------------------- Financial Officer, Director
Edward Anchel
/s/ Jeffrey J. Tieger Vice President, Secretary March 30, 2005
- ---------------------- and Director
Jeffrey J. Tieger
/s/ James M. Kolisch Director March 30, 2005
- ----------------------
James M. Kolisch
/s/ Laz L. Schneider Director March 30, 2005
- ----------------------
Laz Schneider
/s/ John B. Turner Director March 30, 2005
- ----------------------
John B. Turner
/s/ Sonia B. Beard Director March 30, 2005
- ----------------------
Sonia B. Beard
18
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.
19
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
Page
----
Reports of independent auditors F-2 - F-3
Consolidated balance sheets F-4
Consolidated statements of operations F-5
Consolidated statement of shareholders' equity F-6
Consolidated statements of cash flows F-7
Notes to consolidated financial statements F-8 - 15
F-1
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheet of Ocean Bio-Chem,
Inc. (the "Company") and its Subsidiaries, as of December 31, 2004, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the year then ended. 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 audit. The financial statements of Ocean
Bio-Chem, Inc for the years ending December 31, 2003 and 2002, were audited by
other auditors whose report thereon, dated March 25, 2004, expressed an
unqualified opinion.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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. as of December 31, 2004 and their results of their consolidated operations
and its cash flows for the year ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Levi, Cahlin & Co.
Levi, Cahlin & Co.
March 8, 2005
F-2
[Letter Head of Berkovits, Lago & Company, LLP]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall 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.
/s/ Berkovits, Lago & Company, LLP
Fort Lauderdale, Florida
March 25, 2004
F-3
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
ASSETS
Current Assets 2004 2003
------------ ------------
Cash $ 988,106 $ 42,923
Trade accounts receivable net of allowance for
doubtful accounts of approximately $201,000
and $206,000, respectively 4,652,144 4,333,023
Inventories 5,218,431 5,315,741
Prepaid expenses and other current assets 214,492 193,372
------------ ------------
Total current assets 11,073,173 9,885,059
------------ ------------
Property, plant and equipment, net 7,337,600 7,506,586
------------ ------------
Other assets:
Funds held in escrow for equipment 1,853 126,295
Trademarks, trade names, and patents 330,439 330,439
Due from affiliated companies 408,476 172,925
Deposits and other assets 246,803 281,880
------------ ------------
Total other assets 987,571 911,539
------------ ------------
Total assets $ 19,398,344 $ 18,303,184
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable trade $ 2,251,287 $ 1,305,484
Note payable bank 4,500,000 4,550,000
Current portion of long-term debt 483,112 898,964
Income taxes payable-current 44,600 80,000
Accrued expenses payable 390,600 181,439
------------ ------------
Total current liabilities 7,669,599 7,015,887
------------ ------------
Deferred income taxes payable 260,000 205,610
------------ ------------
Long-term debt less current portion 5,580,250 5,677,692
------------ ------------
Commitments and contingencies -- --
Shareholders' equity:
Common stock - $.01 par value, 10,000,000 shares authorized,
5,417,813 and 4,960,843 shares issued and outstanding at
December 31, 2004 and 2003, respectively 54,178 49,608
Additional paid-in capital 4,722,746 4,409,829
Foreign currency translation adjustment (204,864) (237,323)
Retained earnings 1,324,630 1,190,076
------------ ------------
5,896,690 5,412,190
Less treasury stock 7,519 shares, at cost (8,195) (8,195)
------------ ------------
Total shareholders' equity 5,888,495 5,403,995
------------ ------------
Total liabilities and shareholders' equity $ 19,398,344 $ 18,303,184
============ ============
The accompanying notes are an integral part of these financial statements.
F-4
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
2004 2003 2002
------------ ------------ ------------
Gross Sales $ 24,361,056 $ 22,178,352 $ 22,712,991
Less discounts, returns and allowances 2,703,973 2,180,650 2,127,093
------------ ------------ ------------
Net sales 21,657,083 19,997,702 20,585,898
Cost of goods sold 16,675,780 15,131,775 15,961,692
------------ ------------ ------------
Gross profit 4,981,303 4,865,927 4,624,206
------------ ------------ ------------
Operating expenses:
Advertising and promotion 942,991 742,167 769,275
Selling and administrative 3,428,873 3,329,904 3,284,652
Interest 307,840 290,856 386,109
------------ ------------ ------------
Total operating expenses 4,679,704 4,362,927 4,440,036
------------ ------------ ------------
Operating profit 301,599 503,000 184,170
Interest income 955 19,871 8,848
------------ ------------ ------------
Income before provision
for income taxes 302,554 522,871 193,018
Provision for income taxes 168,000 177,800 58,500
------------ ------------ ------------
Net income 134,554 345,071 134,518
Other comprehensive income:
Foreign currency translation,
net of taxes 32,459 66,252 (40,642)
------------ ------------ ------------
Comprehensive income $ 167,013 $ 411,323 $ 93,876
============ ============ ============
Earnings per share:
Basic $ .03 $ .07 $ .03
============ ============ ============
Diluted $ .02 $ .07 $ .03
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-5
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
ENDED DECEMBER 31, 2004, 2003 AND 2002
Common stock Foreign
-------------------- Additional currency Retained Treasury
Shares Amount paid-in capital adjustment earnings stock Total
--------- ------- --------------- ---------- ---------- -------- ----------
January 1, 4,239,889 $42,399 $3,755,219 ($262,933) $1,234,832 ($8,195) $4,761,322
2002
Net income 134,518 134,518
Issuances of
common stock 565,954 5,659 586,410 (524,345) 67,724
Foreign currency
translation
adjustment (40,642) (40,642)
--------- ------- ---------- --------- ---------- ------- ----------
December 31,
2002 4,805,893 48,058 4,341,629 (303,575) 845,005 (8,195) 4,922,922
Net income 345,071 345,071
Issuances of
common 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
Net income 134,554 134,554
Issuances of
common stock 456,970 4,570 312,917 317,487
Foreign currency
translation
adjustment 32,459 32,459
--------- ------- ---------- --------- ---------- ------- ----------
December 31,
2004 5,417,813 $54,178 $4,722,746 ($204,864) $1,324,630 ($8,195) $5,888,495
========= ======= ========== ========= ========== ======= ==========
The accompanying notes are an integral part of these financial statements.
F-6
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
2004 2003 2002
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 134,554 $ 345,071 $ 134,518
Adjustments to reconcile net income
to net cash provided (used) by operations:
Depreciation and amortization 735,103 674,955 601,064
Issuance of common stock to employees 87,813 69,750 67,724
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (319,121) (1,142,666) 96,491
(Increase) decrease in inventory 97,310 (774,591) (244,967)
(Increase) decrease in prepaid expenses (21,120) 268,740 (44,517)
(Decrease) increase in accounts payable
and accrued taxes and other 1,209,030 (540,922) (339,698)
----------- ----------- -----------
Net cash provided (used) by operating activities 1,923,569 (1,099,663) 270,615
----------- ----------- -----------
Cash flows from financing activities:
Net borrowings (reductions) under line of credit (50,000) 300,000 584,140
(Increase) decrease in amounts due from affiliates (235,551) 439,350 (48,544)
Increases in (reductions to) long-term debt, net (513,293) (587,203) 2,973,989
Issuance of common stock from exercised
stock options 229,674 -- --
----------- ----------- -----------
Net cash provided (used) by financing activities (569,170) 152,147 3,509,585
----------- ----------- -----------
Cash flows used by investing activities:
Purchases of property, plant and equipment (566,117) (1,204,538) (1,575,622)
Utilization of (additions to) trust funds for
equipment purchased, net 124,442 1,034,899 (1,152,110)
----------- ----------- -----------
Net cash used by investing activities (441,675) (169,639) (2,727,732)
----------- ----------- -----------
Increase (decrease) in cash prior to effect of
exchange rate on cash 912,724 (1,117,155) 1,052,468
Effect of exchange rate on cash 32,459 66,252 (40,642)
----------- ----------- -----------
Net increase (decrease) in cash 945,183 (1,050,903) 1,011,826
Cash at beginning of year 42,923 1,093,826 82,000
----------- ----------- -----------
Cash at end of year $ 988,106 $ 42,923 $ 1,093,826
=========== =========== ===========
Supplemental information
Cash used for interest during period $ 307,840 $ 290,856 $ 434,869
=========== =========== ===========
Cash used for income taxes during $ 149,000 $ 60,000 $ 240,000
=========== =========== ===========
The Company had no cash equivalents at December 31, 2004, 2003, and 2002.
The accompanying notes are an integral part of these financial statements.
F-7
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
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.
Revenue recognition - Revenue from product sales is recognized when
persuasive evidence of an arrangement exists, delivery to customer has
occurred, the sales price is fixed and determinable, and collectibility
of the related receivable is probable.
Inventories - Inventories are primarily composed of raw materials and
finished goods and 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,
2004, 2003 and 2002, the Company introduced certain new products to its
customers. 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, 2004 and 2003, 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 $25,900 and $43,500, 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. For the years ended December 31,
2004, 2003 and 2002, 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
represented approximately 55%, 55% and 42% of consolidated gross
revenues for the years ended December 31, 2004, 2003 and 2002; and 77%
and 76% of consolidated accounts receivable at December 31, 2004 and
2003, respectively. The Company has a longstanding relationship with
each of these entities and has always collected open receivable
balances. However, the loss of any of these customers could have an
adverse impact on the Company's operations.
Concentration of cash - At various times of the year and at December
31, 2004, the Company had a concentration of cash in one bank in excess
of prevailing insurance offered through the Federal Deposit Insurance
Corporation at such institution. Management does not consider the
excess deposits to be a significant risk.
F-8
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.
Trademarks, trade names and patents - The Star brite trade name and
trademark were purchased in 1980 for $880,000. The cost of such
intangible assets was 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(R) 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, if any,
are included in net earnings of the period.
Reclassifications - Certain items in the accompanying consolidated
financial statements for the years ended December 31, 2003 and 2002
have been reclassified to conform with the 2004 presentation.
Note 2 - Property, plant and equipment:
- ------
The Company's property, plant and equipment consisted of the following:
December 31,
------------------------
2004 2003
----------- ----------
Land $ 278,325 $ 278,325
Building 4,390,894 4,390,894
Manufacturing and warehouse equipment 5,359,009 4,750,972
Office equipment and furniture 623,825 591,024
Construction in process 261,693 400,800
Leasehold improvement 151,976 141,826
----------- ----------
11,065,722 10,553,841
Less accumulated depreciation 3,728,122 3,047,255
----------- ----------
Total property, plant and equipment, net $ 7,337,600 $7,506,586
=========== ==========
Depreciation expense for the years ended December 31, 2004, 2003 and
2002, which includes amortization of capitalized lease assets, amounted
to approximately $735,100, $675,100 and $601,100, respectively.
Included in property, plant and equipment are the following assets at
the Company's Alabama subsidiary and which are substantially held under
capitalized leases securing certain City of Montgomery, AL Industrial
Development Bonds:
F-9
December 31,
--------------------------
2004 2003
---------- ----------
Land $ 278,325 $ 278,325
Building 4,390,894 4,390,894
Manufacturing and warehouse equipment 4,867,141 4,304,271
Construction in process 261,693 331,469
---------- ----------
9,798,053 9,304,959
Less accumulated depreciation 2,773,757 2,147,151
---------- ----------
Total $7,024,296 $7,157,809
========== ==========
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.
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 finance the
construction of an additional 70,000 square feet of warehousing and
manufacturing space and the related equipment requirements. Such
project was substantially completed during 2003.
Obligations for future payments attributable to these capitalized
leases are discussed in Note 4, below.
Note 3 - Note payable, bank:
- ------
During 2002, the Company secured a revolving line of credit, which
provided a maximum of $5 million of working capital from the commercial
bank providing the financing for the expansion discussed in Note 2,
above. The line carries interest at the lender's prime rate plus .25%
payable monthly and is collateralized by the Company's inventory, trade
receivables, and intangible assets. During May, 2004, the Company and
its commercial bank agreed to increase the maximum allowed borrowing
under the line to $6 million. The remaining terms including required
financial covenants relating to maintaining minimum working capital
levels, maintaining stipulated debt to tangible net worth and adhering
to debt coverage ratios were substantially unchanged. This financing
matures on May 31, 2005. As of December 31, 2004, the Company was
obligated to its commercial lender under this arrangement in the amount
of $4,500,000.
Note 4 - Long -Term debt:
- ------
Long-term debt at December 31, 2004 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,
2004, $2,465,000 and $3,200,000 were outstanding attributable to the
1997 and 2002 series, respectively. During the year ended December 31,
2004 interest rates ranged between 1.5% and 2.3%. 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.
F-10
The Company is obligated to an affiliated entity owned by certain
officers of the Company pursuant to a note payable aggregating $360,962
at December 31, 2004. Such obligation requires monthly installments of
$ 2,357 including principal and interest through maturity 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. During the year ended December 31, 2004, this
obligation and the underlying mortgage payable of the affiliate were
modified extending the maturity date to April 11, 2011 and the interest
rate to 6% per annum.
During 2004 and 2003, 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 $37,000 at December 31, 2004,
have varying maturities through 2008 and carry interest rates ranging
from 7% to 12%.
The composition of these obligations at December 31, 2004 and 2003 were
as follows:
Current Portion Long Term Portion
---------------------- ----------------------------
2004 2003 2004 2003
-------- -------- ---------- ----------
Industrial Development Bonds $460,000 $455,000 $5,205,000 $5,665,000
Notes payable 7,180 427,238 354,152 ----
Capitalized equipment leases 15,932 16,726 21,098 12,692
-------- -------- ---------- ----------
$483,112 $898,964 $5,580,250 $5,677,692
======== ======== ========== ==========
Required principal payment obligations attributable to the foregoing
are tabulated below:
Year ending December 31,
2005 $483,113
2006 476,552
2007 475,152
2008 471,754
2009 468,610
Thereafter 3,688,182
----------
Total $6,063,363
==========
Note 5 - Income taxes:
- ------
The Components of the Company's consolidated income tax provision are
as follows:
Year ended December 31,
---------------------------------
2004 2003 2002
-------- -------- -------
Income tax provision (benefit):
Federal - current $ 97,600 $140,000 $ --
- deferred 54,400 37,800 58,000
State 16,000 -- --
-------- -------- -------
Total $168,000 $177,800 $58,500
======== ======== =======
F-11
The reconciliation of income tax provision at the statutory rate to the
reported income tax expense is as follows:
Year ended December 31,
--------------------------
2004 2003 2002
---- ---- ----
Computed at statutory rate 34.0% 34.0% 34.0%
State tax, net of federal benefit 5.5 -- --
Other, principally deferred income
taxes attributable to depreciation 16.0 -- (3.7%)
---- ---- ----
Effective tax rate 55.5% 34.0% 30.3%
==== ==== ====
At December 31, 2004 and 2003 deferred income taxes payable aggregating
$260,000 and $205,610, 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 expense.
Note 6 - Related party transactions:
- ------
At December 31, 2004 and 2003, the Company had amounts receivable from
affiliated companies, which are directly or beneficially owned by the
Company's president, aggregating approximately $408,500 and $172,900,
respectively. Such receivables result from sales to the affiliates as
well as an allocation of expenses incurred by the Company on the
affiliates' behalf. Sales to such affiliates aggregated approximately
$616,800, $373,600, and $317,100 during the years ended December 31,
2004, 2003, and 2002, respectively.
Note 7 - Commitments and subsequent event:
- ------
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, and any other expenses
that arise from ownership. Rent charged to operations during the years
ended December 31, 2004, 2003, and 2002 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 $365,500 at December 31, 2004 are primarily secured by
the real estate leased to the Company.
The following is a schedule of minimum future rentals on the
non-cancelable operating leases.
Year ending December 31,
2005 $102,458
2006 104,507
2007 106,597
2008 108,729
2009 --
Thereafter --
--------
Total $422,292
========
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 275,000
shares of the Company's common stock at an exercise
F-12
price of $1.27 per share. The covered shares and the exercise price
were adjusted for stock dividends distributed during the years ended
December 31, 2002 and 2000. This agreement was terminated during 2004.
During February 2005, the Company issued 150,003 shares of its
common stock to its former investment banker pursuant to a cashless
exercise of warrants granted during 2002.
Note 8 - Stock options:
- ------
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 reflects the status of outstanding options
under the Company's four stock option plans as of December 31, 2004,
as adjusted for the Company's stock dividend distributions of 2000
and 2002.
Weighted
Date Options Exercisable Exercise Expiration Average
Plan granted outstanding options price date remaining life
---- -------- ----------- ----------- -------- ---------- --------------
1992 12/20/01 165,000 99,000 $1.009 12/20/06 1.08
1994 12/20/00 159,500 127,600 $ .573 12/19/05 1.00
1994 10/26/04 192,500 -- $1.260 10/25/09 4.83
2002 10/22/02 150,000 60,000 $1.260 10/21/07 2.75
2002 03/02/04 170,000 -- $1.620 03/01/09 4.25
2002 10/22/02 35,000 35,000 $1.260 10/21/07 2.75
2002 06/20/03 40,000 40,000 $1.030 06/19/08 3.50
2002 05/25/04 40,000 40,000 $1.460 05/04/09 4.50
------- ------- ----
952,000 401,600 3.02 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 a loan to the Company in the amount
of $400,000 from an affiliated company in which they are each 50%
co-shareholders. During 2004, the underlying loan was modified to
extend the maturity date and, accordingly, the options were extended
for an additional five years expiring March 25, 2009.
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 presented
pursuant to such requirement.
2004 2003 2002
-------- -------- --------
Net income As reported $134,554 $345,071 $134,518
Pro forma $ 98,728 $301,887 $101,925
Earnings per share As reported $ .03 $ .07 $ .03
Pro forma $ .02 $ .06 $ .03
F-13
A summary of the Company's stock options as of December 31, 2004,
2003 and 2002, and changes during the years ending on these dates,
is presented below:
2004 2003 2002
--------------------- ------------------------- ----------------------------
Weighted Weighted Weighted
Optioned average Optioned average Optioned average
Shares exercise price shares exercise price shares exercise price
--------- -------------- --------- -------------- --------- --------------
Options outstanding
at beginning of year 1,106,210 $ .95 1,082,210 $1.03 794,000 $ .89
Granted 412,500 40,000 1.03 190,000 1.26
Expired 19,240 (16,000) (1.09) (7,500) (.68)
Exercised 316,470 -- -- --
Adjustment for stock
dividend distributions -- -- 105,710 --
--------- ----- --------- ----- --------- -----
Options outstanding at
end of year 1,183,000 $1.12 1,106,210 $ .95 1,082,210 $1.03
========= ===== ========= ===== ========= =====
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 2004, 2003 and 2002; risk free rate 6.5%, no dividend yield
for all years, expected life of five years and volatility of 31.6%.
Note 9 - Major customers:
- ------
The Company has one major customer, West Marine, Inc., with sales in
excess of 10% of consolidated gross revenue for the years ended
December 31, 2004, 2003, and 2002. Sales to this customer represented
approximately 39%, 36% and 23% of consolidated gross revenues for such
periods, respectively.
The Company's top five customers represented approximately 55%, 55%,
and 42% of consolidated revenues and 77%, 76% and 44% of consolidated
trade receivables for the years ended December 31, 2004, 2003, and
2002, and at the balance sheet date for the years then ended,
respectively. 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 10 - 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, 2004,
2003, and 2002:
2004 2003 2002
--------- --------- ---------
Basic 5,356,316 4,888,133 4,438,207
========= ========= =========
Diluted 5,500,113 5,338,015 4,760,487
========= ========= =========
F-14
Note 11 - 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, 2004, 2003 and 2002 the Company
awarded 140,500, 155,000 and 129,000 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 $87,800, $67,500 and $67,700 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. The aggregate exercise price of such transaction amounted
to approximately $229,700 and is reflected in the accompanying
financial statements as additional paid-in capital.
F-15