SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10K
/s/ Annual Report Pursuant to Section 13 or 15(d) of the
SECURITIES EXCHANGE ACT OF 1934 (fee required)
For the Fiscal Year Ended December 31, 2002
Commission File 2-70197
OCEAN BIO-CHEM, INC.
(Exact Name of Registrant as specified in its charter)
Florida 59-1531532
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4041 S. W. 47 Avenue, Fort Lauderdale, Florida 33314
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (954) 587-6280
Securities registered pursuant to Section 12(g) of the Act
Common Stock, Par Value $.01
(Title of Class)
Indicate by check mark whether the Registrant (x) 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 filed (as
defined in Exchange Act Rule 12b-2.
Yes |_| No |X|
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant computed by reference by reference to the price
at which the common stock was last sold, or the average bid and asked prices of
such stock, as of the last business day of the Registrant's most recently
completed second fiscal quarter.
$3,260,682 as of March 1, 2003
Indicate the number of shares outstanding of Registrant's common stock as
of March 1, 2003.
4,805,843 shares of common stock, par value $.01 per share
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement to be filed within 120 days of December 31, 2002.
PART 1
Item 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, automotive 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 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. 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, the
Company manufactures a line of brushes, poles and tie-downs.
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, antifreeze 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 and
anti-freeze coolants.
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.
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.
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.
2
On February 27, 1996, the Registrant, through a wholly-owned operating
subsidiary, Kinbright, Inc. (an Alabama corporation), 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
consist 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, Kinbright, Inc. to Kinpak Inc. (an Alabama corporation).
During July, 2002, the Registrant completed a $3.5 million Industrial
Development Bond financing through the City of Montgomery, Alabama. Such
transaction will fund an approximate 70,000 square foot addition to the
manufacturing facility as well as the requisite machinery and equipment
additions required therein.
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 Boat America
Corporation. The Company also uses distributors who in turn sell its products to
specialized retail outlets for that specific market. Currently the Company has
one customer (West Marine, Inc.) to which sales exceed 10% of consolidated
revenues. The Company markets its products through internal salesmen and
approximately 250 independent sales representatives who work on an independent
contractor-commission basis. The Officers of the Company also participate in
sales. 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 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 recreation vehicle appearance and maintenance
market is parallel to that of the marine market. In this market the Company
competes with national and regional competitors. None of these singly or as a
few have a dominant market share. 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 23 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
- -------- ----------- ---------
Montgomery, Alabama Manufacturing and distribution 80
Fort Lauderdale, Florida Manufacturing and distribution 37
---
117
===
New Product Development: The Company continues to develop specialized products
for the marine, automotive, and recreational vehicle trade. During fiscal 2001,
the Registrant launched a line of automotive oils, fluids and related products.
During late 2001 and early 2002 the Company started production and shipment of a
line of marine engine oils. 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 of
non-compliance.
Financial Information Relating to Approximate Domestic and Canadian Gross Sales:
Year ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
United States:
Northeast $ 4,258,000 $ 3,709,000 $ 3,429,000
Southeast 6,242,000 5,520,000 4,863,000
Central 6,454,000 5,684,000 5,075,000
West Coast 4,960,000 4,354,000 3,929,000
----------- ----------- -----------
21,915,000 19,267,000 17,296,000
Canada (US Dollars) 798,000 609,000 777,000
----------- ----------- -----------
$22,713,000 $19,876,000 $18,073,000
=========== =========== ===========
4
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 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
Item 2, Properties
The Registrant's executive offices and warehouse are located in Fort Lauderdale,
Florida and 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 calls for an initial annual rental of $94,800
increasing by 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 changes,
maintenance charges and any other expenses which arise from ownership. Rent
charged to operations during the years ended December 31, 2002, 2001 and 2000
amounted to approximately $ 100,500, $100,500 and $100,000, respectively.
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, 2003.
Rent charged to operations during the year ended December 31, 2002 amounted to
approximately $92,800.
The Montgomery, Alabama facility contains approximately 110,000 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. The Registrant financed the facility and its
improvements with an Industrial Revenue Bond in the amount of $4,900,000.
During July, 2002, the Registrant completed a $3.5 million Industrial
Development Bond financing through the City of Montgomery, Alabama. Such
transaction will fund 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, 2002, approximately $1,161,200 was
held in trust to pay for equipping future equipment required at the facility.
Item 3. Legal Proceedings
During the year ended December 31, 2002 the Company was a party to litigation
associated with a patent it holds on one of its products. (North American Oil
Company, Inc. v. Star brite Distributing,
5
Inc., Case No. 01-1575-1576, pending in the United States Court of Appeals for
the Federal Circuit (on appeal from the United States District Court for the
Northern District of Georgia, Atlanta Division, Civil Action No.
1-98-cv-1589-RWS). The U.S. District Court issued an Order granting North
American Oil Company, Inc.'s motion for a partial summary judgement finding
against the Company during March, 2001. On September 17, 2002, such Order was
reversed by the Federal Circuit Court of Appeals. During February, 2003, both
parties agreed to settle this protracted and costly litigation. Costs incurred
during 2003 in settling this matter, principally accrued and reimbursed legal
fees, are reflected as a fourth quarter adjustment in the accompanying financial
statements. During the years ended December 31, 2002, 2001, and 2000, the
Company incurred approximately $356,000, $255,500, and $621,400, respectively,
in legal costs substantially attributable to this matter which were charged to
operations.
Item 4. Submission of Matters to a Vote of Security Holders
Shareholders will vote at the Annual Meeting to be held during June, 2003
to ratify adoption of a qualified incentive stock option plan and a
non-qualified stock option plan covering 400,000 and 200,000 shares of the
Registrant's common stock, respectively. Such plans were approved by the
Registrant's Board of Directors on October 22, 2002.
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 National Market
System under the symbol OBCI. A summary of the trading ranges during each
quarter of 2001 and 2000 is presented below.
Market Range of
Common Stock Bid: 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------- -------- -------- --------
2002 High $1.77 $1.65 $1.70 $1.90
Low $1.31 $1.31 $1.35 $1.10
2001 High $1.00 $1.00 $1.88 $1.82
Low $.62 $.53 $.84 $1.11
A. The quotations reflect inter-dealer prices without retail mark-up, mark-down
or commission and may not represent actual transactions.
B. The approximate number of Common Stock owners was 800 at December 31, 2002.
The aforementioned number was calculated from a list provided by the 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.
6
D. Securities authorized for issuance under equity compensation plans:
Number of Number of securities
securities to be weighted average remaining available
issued upon exercise exercise price of for future issuance
of outstanding options, outstanding options, under equity
warrants & rights warrants & rights compensation plans
Equity compensation plans
approved by security holders:
1991 Plan 161,700 $ .758 --
1992 Plan 204,875 $ .970 --
1994 Plan 294,635 $ .620 105,365
Equity compensation plans not
approved by security holders:
2002 Qualified Plan 155,000 $1.260 245,000
2002 Non-qualified Plan 35,000 $1.260 165,000
The Ocean Bio-Chem, Inc. 2002 Incentive Stock Option Plan adopted October 22,
2002 has not yet been approved by the Shareholders. The Plan, by its terms, is
contingent upon approval by the Shareholders and will be submitted for vote by
the Shareholders at the Annual Meeting for 2003. The Plan will be attached in
its entirety with Proxy material to be filed within one hundred twenty (120)
days of the end of Registrant's Fiscal Year Ended December 31, 2002 and is
incorporated herein by reference.
The Ocean Bio-Chem, Inc. 2002 Non-Qualified Stock Option Plan adopted October
22, 2002 has not yet been approved by the Shareholders. The Plan, by its terms,
is contingent upon approval by the Shareholders and will be submitted for vote
by the Shareholders at the Annual Meeting for 2003. The Plan will be attached in
its entirety with Proxy material to be filed within one hundred twenty (120)
days of the end of Registrant's Fiscal Year Ended December 31, 2002 and is
incorporated herein by reference.
During the years ended December 31, 2002, 2001 and 2000 the Company awarded
129,000, 134,000, and 88,000 shares, respectively to certain executives, key
employees and others as a component of annual compensation. Charges to
operations aggregated approximately $67,700, $36,200, and $ 49,000 for each of
such periods, respectively.
7
Item 6. Selected Financial Data
The following tables set forth selected financial data as of, and for the
years ending December 31,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Operations
Gross sales $22,712,991 $19,876,095 $ 18,072,784 $15,952,165 $14,077,993
Net sales $20,585,898 $18,013,393 $ 16,139,256 $14,317,485 $12,705,473
Net income (loss) $ 134,518 $ 106,384 ($ 244,823) $ 431,484 $ 83,059
Earnings (loss) per
common share $ .03 $ .03 ($ .06) $ .11 $ .02
Balance sheet
Working capital $ 2,212,872 $ 1,385,016 $ 1,724,043 $ 2,797,708 $ 1,956,647
Total assets $18,650,237 $15,030,206 $ 15,410,264 $13,547,452 $12,846,794
Long term
obligations $ 6,745,232 $ 3,843,515 $ 3,963,145 $ 4,152,332 $ 4,070,000
Total liabilities $13,727,315 $10,268,884 $ 10,737,972 $ 8,629,991 $ 8,390,036
Shareholders'
equity $ 4,922,922 $ 4,761,322 $ 4,672,292 $ 4,917,461 $ 4,456,758
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, 2003 and bears interest
at 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 other financial covenants during the term of the agreement. As of December
31, 2002 the Company was not in compliance with certain of such covenants. The
bank has agreed to waive such non compliance. As of December 31, 2002, the
Company was obligated under this arrangement in the amount of $4,250,000.
In connection with the purchase and expansion of the Alabama facility, the
Registrant closed on Industrial Revenue Bonds during 1997 which were utilized
for 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 a $3.5 million Industrial Revenue Bond financing
through the City of Montgomery, Alabama. Such transaction will fund 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, 2002, approximately $1,161,200 was held in trust to pay for equipping future
equipment required at the facility.
8
In order to market its Alabama Industrial Revenue 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 agreement 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.
At December 31, 2002, the Registrant was a party to litigation which commenced
in 1998 and was associated with a patent it holds on one of its products. The
U.S. District Court issued a partial Summary Judgement Order against the Company
during March, 2001. On September 17, 2002, such Order was reversed by the
Federal Circuit Court of Appeals. During March, 2003, both parties agreed to
settle this litigation. Costs incurred during 2003 in settling this matter,
principally accrued and reimbursed legal fees, are reflected as a fourth quarter
adjustment in the accompanying financial statements. During the years ended
December 31, 2002, 2001, and 2000, the Company incurred approximately $356,000,
$255,500, and $621,400, respectively in legal costs substantially attributable
to this matter which were charged to operations.
Results of Operations:
Fourth Quarter ended December 31, 2002:
Comparing the quarters ended December 31, 2002 and 2001, net sales increased
approximately $926,300 or 20%. This was primarily due to increased sales of
antifreeze, oils, automotive fluids, and private label products. Although there
is no significant seasonality associated with a typical fourth quarter's
revenues or costs, certain noteworthy factors influenced the current year's
quarter. Specifically, the quarter ended December 31, 2002 was impacted by
increasing cost of petroleum related raw materials, a larger than normal skewing
towards lower margin contracting sales, year end inventory and trade receivable
adjustments, and costs associated with settling outstanding litigation.
As a result of the foregoing, cost of goods sold increased to 80.1% for the
three months ended December 31, 2002 as compared to 73.8% for the comparable
period in 2001, and total costs and expenses increased approximately $387,700 or
33% comparing these two periods.
9
Years ended December 31, 2002 and 2001:
Sales and earnings varied when comparing the year ended December 31, 2002 to
2001 principally due to the factors enumerated below.
Net sales - Net sales increased 14.3% or approximately $ 2,572,500 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, anti-freeze,
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 to 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.
Advertising and promotion - Advertising expense increased approximately $105,400
or 15.9% when comparing 2002 to 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 or11.4% 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.
Years ended December 31, 2001 and 2000:
Sales and earnings varied when comparing the year ended December 31, 2001 to
2000 principally due to the factors enumerated below.
Net sales - Net sales increased 11.6% or approximately $ 1,874,000 comparing the
year ended December 31, 2001 with the 2000 period. This was primarily due to
increased sales of anti-freeze, private label products, automotive fluids, and
marine items.
Cost of goods sold - Cost of goods sold increased from 73.4% to 76.3 % as a
percentage of net sales when comparing 2001 to 2000. This was primarily
attributable to a differing product mix which was impacted by introductory
pricing of the Company's new automotive fluids and an increase in private
packaging revenues which typically yield lower margins.
Advertising and promotion - Advertising expense decreased approximately $ 30,800
or 4.4% when comparing 2001 to 2000. 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 decreased approximately $ 470,000 or 13.8 % when comparing 2001 to
2000. The most significant single item reflected therein was a decrease in legal
fees. Increased personnel costs and anticipated increases in other
administrative expenses also affected the change for the year.
Interest expense - Interest expense incurred during 2001 decreased by
approximately $ 62,600 over 2000. The decrease was primarily due to recently
announced reductions in prevailing interest rates.
10
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 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, 2002.
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 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 63
Director since 1973
Jeffrey Tieger Vice President, Secretary and Director 59
since 1977
Edward Anchel Vice President-Finance, Chief Financial 56
Officer since 1999 and Director since 1998
James Kolisch Director since 1998 51
Laz Schneider Director since 1998 63
John B. Turner Director since 2000 55
Peter G. Dornau, a founder of the Company, has been President and a Director
since 1973.
Jeffrey Tieger joined the Company in June 1977 as Vice President-Advertising.
Edward Anchel joined the Company in March 1999 as Vice President-Finance. 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 elected to serve as an outside Director of the Company
during May, 1998.
James Kolisch is engaged in the insurance industry and was elected to serve as
an outside Director of the Company during May, 1998. Mr. Kolisch provides
services to the Company in the capacity of insurance agent.
Laz Schneider is 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.
11
John B. Turner is a retired insurance executive and 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.
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.
Item 11. Management Remuneration and Transactions
The information required by this section has been incorporated by reference to
the Registrant's proxy statement in conjunction to the annual shareholders'
meeting which shall be sent out to shareholders prior to 120 days past the
Registrant's year end of December 31, 2002.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information at December 31, 2002 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 2,852,588 * 54.9%
4041 S. W. 47 Avenue
Ft. Lauderdale, FL 33314
Common All directors and officers as a group
6 individuals 3,397,964 * 65.4%
* Includes 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 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, 2002, pursuant to the Company's various stock option plans,
Mr. Dornau has options to acquire 126,200 shares of the Company's common stock
of which 44,220 shares are exercisable within 60 days of the issuance of the
Registrant's December 31, 2002 financial statements.
As of December 31, 2002, pursuant to the Company's various stock option plans,
the Company's directors and officers, as a group, have options to acquire
437,475 shares of the Company's common stock of which 161,535 shares are
exercisable within 60 days of the issuance of the Registrant's December 31, 2002
financial statements.
12
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 officers of the Registrant. The lease required a
minimum rental of $94,800 the first year increasing by 2% 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
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, 2002, 2001 and 2000 amounted to
approximately $ 100,500, $100,500 and $100,000, respectively.
The Registrant acquired the rights to the "Star brite" name and products only
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 which market Star brite products outside the United
States. The Registrant has advanced monies to assist in such foreign marketing
in order to establish an international trademark. At December 31, 2002 and 2001,
the Company had amounts due from affiliated companies which are directly or
beneficially owned by the Company's president aggregating approximately $612,275
and $563,700, 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.
Subsequent to December 31, 2002, such affiliates repaid $425,000 to the Company.
Effective January, 2003, payments of open receivables to such affiliates will
approximate those terms offered to the Company's larger non-affiliated customers
and, accordingly, will not bear interest, unless they are delinquent.
Sales of Star brite products to such affiliates aggregated approximately
$317,100 and $344,600 during the years ended December 31, 2002 and 2001,
respectively.
A subsidiary of the Registrant currently uses the services of an entity which is
owned by its President to conduct product research and development. Such entity
received $30,000 per year during the years ended December 31, 2002, 2001 and
2000 under such relationship.
Item 14. 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 which 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.
13
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, December 31, 2002 and 2001.
(ii) Consolidated statements of operations for each of the three
years ended December 31, 2002, 2001 and 2000.
(iii) Consolidated statement of shareholders' equity for each of the
three years ended December 31, 2002, 2001 and 2000.
(iv) Consolidated statements of cash flows for each of the three
years ended December 31, 2002, 2001 and 2000.
(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 8K
On March 14, 2003, the Registrant filed a Form 8K disclosing
as item 5, Other Items, the settlement of longstanding legal
actions between the Registrant and North American Oil Company,
Inc.
14
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 27, 2003
By: /s/ Edward Anchel
-------------------
EDWARD ANCHEL
Chief Financial Officer
March 27, 2003
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 27, 2003
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 proxy for its yearly security-holders' meeting. Copies of such shall
be sent to the SEC pursuant to the current requirements.
15
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");
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 which 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 27, 2003 /s/ Peter 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 which 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 27, 2003 /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. 100
D & S Advertising Services, Inc. 100
Star brite Sta-Put, 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, 2002, 2001 AND 2000
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
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 6-14
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, 2002 and 2001, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2002. 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, 2002 and 2001, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
BERKOVITS, LAGO & COMPANY, LLP
Plantation, Florida
March 7, 2003
1
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
ASSETS
2002 2001
---- ----
Current Assets:
Cash $ 1,093,826 $ 82,000
Trade accounts receivable net of allowance for
doubtful accounts of approximately $200,700
and $152,500, respectively 3,190,357 3,286,848
Inventories 4,541,150 4,296,183
Prepaid expenses and other current assets 129,622 145,354
Recoverable income taxes 240,000 -
----------- -----------
Total current assets 9,194,955 7,810,385
----------- -----------
Property, plant and equipment, net 6,977,003 6,002,445
----------- -----------
Other assets:
Funds held in escrow for equipment 1,161,194 9,084
Trademarks, trade names, and patents, net
of accumulated amortization 330,439 330,439
Due from affiliated companies, net 612,275 563,731
Deposits and other assets 374,371 314,122
----------- -----------
Total other assets 2,478,279 1,217,376
----------- -----------
Total assets $18,650,237 $15,030,206
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable trade $ 1,833,895 $ 2,163,245
Note payable bank 4,250,000 3,665,860
Current portion of long-term debt 601,766 470,994
Accrued expenses payable 296,422 125,270
----------- -----------
Total current liabilities 6,982,083 6,425,369
----------- -----------
Deferred income taxes payable 183,139 124,639
----------- -----------
Long-term debt less current portion 6,562,093 3,718,876
----------- -----------
Commitments and contingencies
Shareholders' equity:
Common stock - $.01 par value, 10,000,000 shares
authorized, 4,805,843 and 4,239,889 shares
issued and outstanding at December 31, 2002
and 2001, respectively 48,058 42,399
Additional paid-in capital 4,341,629 3,755,219
Foreign currency translation adjustment (303,575) (262,933)
Retained earnings 845,005 1,234,832
----------- -----------
4,931,117 4,769,517
Less treasury stock 7,519 shares,
at cost (8,195) (8,195)
----------- -----------
Total shareholders' equity 4,922,922 4,761,322
----------- -----------
Total liabilities and shareholders' equity $18,650,237 $15,030,206
=========== ===========
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, 2002, 2001, AND 2000
2002 2001 2000
---- ---- ----
Gross sales $22,712,991 $19,876,095 $18,072,784
Less returns and allowances 2,127,093 1,862,702 1,933,528
----------- ----------- -----------
Net sales 20,585,898 18,013,393 16,139,256
Cost of goods sold 15,961,692 13,744,703 11,852,435
----------- ----------- -----------
Gross profit 4,624,206 4,268,690 4,286,821
----------- ----------- -----------
Operating expenses:
Advertising and promotion 769,275 663,922 694,729
Selling and administrative 3,284,652 2,947,489 3,417,378
Interest 386,109 511,292 573,882
----------- ----------- -----------
Total Operating Expenses 4,440,036 4,122,703 4,685,989
----------- ----------- -----------
Operating profit (loss) 184,170 145,987 (399,168)
Interest and other income 8,848 897 14,345
----------- ----------- -----------
Income (loss) before provision
(benefit) for income taxes 193,018 146,884 (384,823)
Provision (benefit) for income taxes 58,500 40,500 (140,000)
----------- ----------- -----------
Net income (loss) 134,518 106,384 (244,823)
Other comprehensive income:
Foreign currency translation,
net of taxes (40,642) (53,535) (48,526)
----------- ----------- -----------
Comprehensive Income (loss) $ 93,876 $ 52,849 ($ 293,349)
=========== =========== ===========
Earnings (loss) per share:
Basic $ .03 $ .03 ($ .06)
=========== =========== ===========
Diluted $ .03 $ .03 ($ .06)
=========== =========== ===========
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, 2002, 2001 AND 2000
Foreign
Common stock Additional currency Retained Treasury
Shares Amount paid-in capital adjustment earnings stock Total
------------------ --------------- ---------- -------- ----- -----
January 1, 2000 3,822,499 $ 38,225 $ 3,282,932 ($ 160,872) $ 1,764,051 ($ 6,875) $ 4,917,461
Net loss (244,823) -- (244,823)
Issuances of
stock 283,390 2,835 437,445 (390,780) 49,500
Acquisition of
treasury stock,
6,875 shares (1,320) (1,320)
Foreign currency
translation
adjustment (48,526) (48,526)
--------- -------- ----------- ---------- ----------- ---------- -----------
December 31, 2000 4,105,889 41,060 3,720,377 (209,398) 1,128,448 (8,195) 4,672,292
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
========= ======== =========== ========== =========== ========== ===========
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, 2002, 2001 AND 2000
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 134,518 $ 106,384 ($ 244,823)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operations:
Depreciation and amortization 601,064 494,901 410,855
Issuance of common stock to employees 67,725 36,181 49,500
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 96,491 130,979 (613,755)
(Increase) decrease in inventory (244,967) 210,804 (776,666)
(Increase) decrease in prepaid expense and other (44,517) 265,737 (169,797)
Increase (decrease) in accounts payable and
accrued taxes and other expenses (339,699) 172,931 976,921
----------- ----------- -----------
Net cash provided (used) by operating activities 270,615 1,417,917 (367,765)
----------- ----------- -----------
Cash flows from financing activities:
Net borrowings (reductions) under line of credit 584,140 (584,140) 1,350,000
Repayment of amounts due from advances to affiliates, net (48,544) 34,506 248,743
Increases in (payments on) long term debt, net 2,973,989 (57,881) (218,940)
----------- ----------- -----------
Net cash provided (used) by financing activities 3,509,585 (607,515) 1,379,803
----------- ----------- -----------
Cash flows used by investing activities:
Purchase of property, plant and equipment (1,575,622) (830,804) (1,516,108)
Purchases of treasury shares of common stock -- -- (1,320)
Utilization of (additions to) trust funds for
equipment purchased, net (1,152,110) 32,422 243,659
----------- ----------- -----------
Net cash used by investing activities (2,727,732) (798,382) (1,273,769)
----------- ----------- -----------
Increase (decrease) in cash prior to effect of
exchange rate on cash 1,052,468 12,020 (261,731)
Effect of exchange rate on cash (40,642) (53,535) (48,526)
----------- ----------- -----------
Net increase (decrease) in cash 1,011,826 (41,515) (310,257)
Cash at beginning of year 82,000 123,515 433,772
----------- ----------- -----------
Cash at end of year $ 1,093,826 $ 82,000 $ 123,515
=========== =========== ===========
Supplemental information
Cash used for interest during period $ 434,869 $ 511,292 $ 573,882
=========== =========== ===========
Cash used for income taxes during period $ 240,000 $ -- $ 123,447
=========== =========== ===========
The Company had no cash equivalents at December 31, 2002, 2001 and 2000.
The accompanying notes are an integral part of these financial statements.
5
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 1 - Organization and summary of significant accounting policies:
Organization - The company was organized 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 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,
2002 and 2001, the Company introduced certain new products in the marine
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,
2002 and 2001, the accumulated cost of materials on hand and other
deferred promotional costs which will be charged against the subsequent
year's operations amounted to approximately $53,400 and $24,800,
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 amounts 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. Concentrations of credit with respect to accounts
receivable are limited because the majority of the accounts receivable are
with large retail and commercial customers. The single largest customer's
receivable represents approximately 21.5% of the consolidated balance at
December 31, 2002.
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.
6
Income taxes - The Company and its subsidiaries file consolidated 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 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 which it believes
are valuable in limited product lines, but not material to its success or
competitiveness in general. There are no capitalized costs for 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 cumulative
translation adjustment in shareholders' equity. Realized gains and losses
from foreign currency transactions are included in net earnings or the
period. Fluctuations arising from inter-company transactions that are of a
long term in nature are accumulated as cumulative translation adjustments.
Reclassifications - Certain items in the accompanying consolidated
financial statements for the years ended December 31, 2001 and 2000 have
been reclassified to conform with the 2002 presentation.
Note 2 - Property, plant and equipment:
The Company's property, plant and equipment consisted of the following:
December 31,
--------------------------
2002 2001
---- ----
Land $ 278,325 $ 278,325
Building 2,936,543 2,936,543
Manufacturing and warehouse equipment 4,356,336 3,888,467
Office equipment and furniture 583,049 577,681
Construction in process 1,079,779 76,831
Leasehold improvement 141,375 141,375
---------- ----------
9,375,407 7,899,222
Less accumulated depreciation 2,398,404 1,896,777
---------- ----------
Total property, plant and equipment, net $6,977,003 $6,002,445
========== ==========
Depreciation expense for the years ended December 31, 2002, 2001 and 2000
amounted to $601,064, $471,909 and $387,864, respectively. Depreciation
expense includes the amortization of capitalized lease assets.
7
Included in property, plant and equipment are the following assets held under
capitalized leases:
2002 2001
---- ----
Land $ 278,325 $ 278,325
Building 2,936,543 2,936,543
Manufacturing and warehouse equipment 3,885,571 3,565,056
Construction in process 1,079,779 76,831
---------- ----------
8,180,218 6,856,755
Less accumulated amortization 1,583,811 1,124,264
---------- ----------
Total $6,596,407 $5,732,491
========== ==========
During February, 1996, the Company purchased the assets of Kinpak, Inc. a
subsidiary of Kinark, 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 Revenue Bonds. The Alabama facility
expansion consisted of an additional building, which was completed during
October, 1997, bringing the facility to approximately 110,000 square feet.
Such facility serves as the Company's primary manufacturing and
distribution center.
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.
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 Revenue Bonds
aggregating $3,500,000.
This financing reimbursed the Company $1,000,000 for manufacturing
equipment purchased during the eighteen (18) months preceding its closing
and will also fund a 70,000 square foot addition to the current facility
and the related requisite equipment. Unexpended funds available pursuant
to this financing are being held in an income bearing trust account and
amounted to $1,161,194 at December 31, 2002.
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, 2003, bears an adjustable
interest rate approximating prime , and is secured by the Company's trade
receivables and inventory. Pursuant to such agreements, the Company was
and is required to maintain minimum working capital levels, maintain
stipulated debt to tangible net worth and debt coverage ratios. At
December 31, 2002, the Company was not in compliance with certain of such
covenants. The bank has agreed to waive such non compliance.
8
Note 4 - Long-Term debt:
Long term debt at December 31, 2002 consisted of the following:
The Company is obligated pursuant to two capital leases financed through
Industrial Revenue 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 which adjust weekly. At December 31, 2002, $3,120,000 and
$3,440,000 were outstanding attributable to the 1997 and 2002 series,
respectively. During the year ended December 31,2002 interest rates ranged
between 1.2 %and 1.6%. 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 $378,570 at December
31, 2002. Such obligation requires monthly installments of $3,357
including principal and interest at 5.25% through April 1, 2004 when a
projected balloon payment of $366,750 will be due.
During 2002 and 2001, 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 $48,000 at December 31, 2002, have varying
maturities through 2005 and carry interest rates ranging from 7% to 12%.
During the 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, 2002, $177,308 was
outstanding.
The composition of these obligations at December 31, 2002 and 2001 were as
follows:
Current Portion Long Term portion
----------------- -----------------
2002 2001 2002 2001
---- ---- ---- ----
Industrial Revenue Bonds $440,000 $ 320,000 $6,120,000 $3,120,000
Notes payable 132,927 118,996 422,952 555,831
Capitalized equipment leases 28,839 31,998 19,141 43,045
-------- ---------- ---------- ----------
$601,766 $ 470,994 $6,562,093 $3,718,876
======== ========== ========== ==========
Required principal payment obligations attributable to the foregoing are
tabulated below:
Year ending December 31,
2003 $601,766
2004 891,702
2005 465,391
2006 460,000
2007 460,000
Thereafter 4,285,000
----------
Total $7,163,859
9
Note 5 - Income taxes:
The Components of the Company's consolidated income tax provision
(benefit) are as follows:
Year ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Income tax provision (benefit):
Federal - current $ -- $ -- ($164,000)
- deferred 58,500 40,500 24,000
State -- -- --
------- ------- ---------
Total $58,500 $40,500 ($140,000)
======= ======= =========
The reconciliation of income tax provision (benefit) at the statutory rate
to the reported income tax expense is as follows:
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Computed at statutory rate 34.0% 34.0% (34.0%)
State tax, net of federal benefit -- -- --
Other, net (3.7%) (6.4%) (2.4%)
----- ----- -----
Effective tax rate 30.3% 27.6% (36.4%)
===== ===== =====
At December 31, 2002 and 2001, deferred income taxes payable aggregating
$183,189 and $124,639, 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 - Litigation and subsequent event:
At December 31, 2002, the Company was a party to litigation which
commenced in 1998 and was associated with a patent it holds on one of its
products. The U.S. District Court issued a partial Summary Judgement Order
against the Company during March, 2001. On September 17, 2002, such Order
was reversed by the Federal Circuit Court of Appeals. During February,
2003, the Company entered into a settlement agreement to terminate this
protracted and costly litigation. Costs incurred during 2003 in settling
this matter, principally accrued and reimbursed legal fees, are reflected
as a fourth quarter adjustment in the accompanying financial statements.
During the years ended December 31, 2002, 2001, and 2000, the Company
incurred approximately $356,000, $255,500, and $621,400, respectively in
legal costs substantially attributable to this matter which were charged
to operations.
Note 7 - Related party transactions:
At December 31, 2002 and 2001, the Company had amounts due from affiliated
companies which are directly or beneficially owned by the Company's
president aggregating approximately $612,300 and $563,700, 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.
Subsequent to the balance sheet date, such affiliates repaid $425,000 to
the Company. Effective January, 2003, payments of open receivables to such
affiliates will approximate those terms offered to the Company's larger
non-affiliated customers and, accordingly, will not bear interest, unless
they are delinquent.
10
Sales of Star brite products to such affiliates aggregated approximately
$317,100 and $344,600 during the years ended December 31, 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
increasing by 2% 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, 2002, 2001 and 2000
amounted to approximately $ 100,500, $100,500 and $100,000, respectively.
The Company has entered into a corporate guaranty of the mortgage note
obligations of such affiliate. The obligations 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, 2003. Rent charged to operations under this lease during the
year ended December 31, 2002, 2001 and 2000 amounted to approximately
$92,800, $90,800 and $90,200, respectively.
The following is a schedule of minimum future rentals on the
noncancellable operating leases:
Year ending December 31,
2003 205,436
2004 102,498
2005 104,548
2006 106,639
2007 108,771
Thereafter 254,922
---------
Total $ 882,814
=========
During January, 2002, the Company entered into an agreement with a
financial institution to provide financial advisory and investment banking
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.
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, subject to shareholder approval, 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.
11
The following schedule shows the status of outstanding options under the
Company's stock option plans as of December 31, 2002, 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 97,020 $ .758 11/11/04 1.83
1992 03/01/99 28,875 28,875 $ .727 02/28/04 1.17
1992 12/20/01 176,000 35,200 $1.009 12/20/06 3.92
1994 05/04/99 135,135 81,081 $ .684 05/03/04 1.33
1994 12/20/00 159,500 63,800 $ .573 12/19/05 2.92
2002 10/22/02 155,000 -- $1.260 10/21/07 4.83
2002 10/22/02 35,000 -- $1.260 10/21/07 4.83
------- ------- --------
851,210 305,976 2.65 yrs
======= ======= ========
On March 25, 1999, the Company granted two officers 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 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.
2002 2001 2000
---- ---- ----
Net income (loss) As reported $177,718 $106,384 ($ 244,823)
Pro forma $145,125 $ 94,981 (278,734)
Earnings (loss) per share As reported $ .04 $ .03 ($ .06)
Pro forma $ .03 $ .02 ($ .06)
A summary of the Company's stock options as of December 31, 2002, 2001 and
2000, and changes during the years ending on those dates, is presented
below:
2002 2001 2000
-------------------------- ------------------------- --------------------------
Weighted Weighted Weighted
Optioned average Optioned average Optioned average
shares exercise price shares exercise price shares exercise price
-------- -------------- -------- -------------- -------- --------------
Options Outstanding
at beginning of year 794,000 $ .89 730,500 $ .92 655,500 $1.10
Granted 190,000 1.26 160,000 1.11 145,000 .63
Expired (7,500) .68 (96,500) (1.73) (70,000) (2.00)
Exercises -- -- -- -- -- --
Adjustment for stock
dividend distributions 105,710 -- -- -- -- --
---------- ----- -------- ----- -------- -----
Outstanding at
end of year 1,082,210 $1.03 794,000 $ .89 730,500 $ .92
========== ===== ======== ===== ======== =====
12
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 ended
2002, 2001 and 2000; 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,
2002. Sales to this customer represent approximately 22.5% of consolidated
revenues. Subsequent to December 31, 2002, West Marine purchased another
customer of the Company whose sales aggregated 3.4% of the Company's
consolidated revenues.
The Company's top five customers represent approximately 42% of
consolidated revenues and 44% 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 (loss) per share are reported pursuant to the provisions of
Statement of Financial Standards No. 128. Accordingly, basic earnings
(loss) 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 (loss) per share for the years ended December
31, 2002, 2001, and 2000:
2002 2001 2000
--------- --------- ---------
Basic 4,438,207 4,169,870 4,058,657
Diluted 4,760,487 4,169,870 4,058,657
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, 2002, 2001 and 2000 the Company
awarded 129,000, 134,000, and 88,000 shares, respectively to certain
executives, key employees and others as a component of annual
compensation. Charges to operations aggregated approximately $67,700,
$36,200, and $ 49,000 for each of such periods, respectively.
13
Note 13 - Subsequent events and fourth quarter results of operations:
The Company reports its quarterly results of operations through its
periodic reporting to its shareholders and the U.S. Securities and
Exchange Commission. However, the fourth quarter is not reported
separately and its results are incorporated within the year end financial
statements. Although there is no significant seasonality associated with a
typical fourth quarter's revenues or costs, certain noteworthy factors
influenced the current year's quarter.
The quarter ended December 31, 2002 was impacted by increasing cost of
petroleum related raw materials, a larger than normal skewing towards
lower margin contracting sales, year end inventory adjustments, and costs
associated with settling outstanding litigation and trade receivable
collectibility.
Subsequent to year end certain events occurred which impacted operations
and required reflection in the accompanying financial statements.
Specifically, the litigation discussed in Note 6 above, and resolution of
questionable trade receivables. During March, 2003, a certain customer's
Chapter II proceeding was finalized and the ultimate amount to be realized
by the Company attributable to its obligation became ascertainable. Such
amount is lower than representations made to the Company prior thereto.
The effect of the foregoing adjustments aggregated approximately $308,000
and was charged against operations of the quarter ended December 31, 2002.
14