10-K 1 form10k-1203.txt FORM 10K 12-31-03 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark one) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------- ------------- Commission file number 2-70197 OCEAN BIO-CHEM, INC. (Exact name of Registrant as specified in its charter) Florida 59-1564329 ------- ---------- (State of other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 4041 SW 47 Avenue Fort Lauderdale, FL 33314-4023 ------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (954) 587-6280 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common stock, $0.01 par value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes No |X| Aggregate market value of Registrant's common stock held by non-affiliates of the Registrant, based upon the closing price of a share of the Registrant's common stock on March 10, 2004 as reported by the NASDAQ Small Cap Market on that date: $3,621,927. For purposes of this disclosure, the Registrant has assumed that all directors, officers, and beneficial owners of 5% or more of the Registrant's common stock are affiliates of the Registrant. Number of shares of the Registrant's common stock outstanding as of March 10, 2004: 5,277,313 shares Common stock, $0.01 par value. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on June 3, 2004 which will be filed within 120 days of December 31, 2003 are incorporated by reference to Part III of this Form 10-K. Forward-looking Statements: Certain statements contained herein, including without limitation expectations as to future sales and operating results, constitute forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed forward-looking statements. Without limiting the generality of the foregoing, words such as "believe", "may", "will", "expect", "anticipate", "intend", "could" or the negative other variations thereof or comparable terminology are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements of the Company and any such results may be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Factors, which may affect the Company's results include, but are not limited to, the highly competitive nature of the Company's industry; reliance on certain key customers; consumer demand for marine recreational vehicle and automotive products; advertising and promotional efforts; and other factors. The Company will not undertake and specifically declines any obligation to update or correct any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Part I 1. Business General: The Company was organized on November 13, 1973 under the laws of the state of Florida. The Company is principally engaged in the manufacturing, marketing and distribution of a broad line of appearance and maintenance products for boats, recreational vehicles, automobile and aircraft under the "Star brite" name within the United States of America and Canada. In addition, the Company produces private label formulations of many of its products for various customers as well as provides custom blending and packaging services of these and other products to customer specifications. The Registrant's trade name has been trademarked and the Registrant has had no incidents of infringement. In the event of such infringement, the Registrant would defend its trade name vigorously. The Registrant holds two patents which it believes are valuable in limited product lines, but not material to its success or competitiveness in general. Products of the Company: Set forth below is a general description of the products which the Company manufactures and markets: Marine: The Marine line consists of polishes, cleaners, protectants and waxes of various formulations under the Star brite brand name as well as the Company's customers' private label. The line also includes various vinyl protectants, cleaners, teak cleaners, teak oils, bilge cleaners, hull cleaners, silicone sealants, polyurethane sealants, polysulfide sealants, gasket materials, lubricants, antifouling additives and anti-freeze coolants. Many of these products include Teflon(R) pursuant to an exclusive licensing agreement with E.I. Dupont De Nemours and Company. Teflon(R) is a trademark of Dupon and is used under license to the Company.In addition, the Company manufactures a line of brushes, poles and tie-downs and other related marine accessories. Automotive: The Company manufactures a line of automotive products under the Star brite brand name including brake and transmission fluids, hydraulic, gear and motor oils, and related items. In addition, anti-freeze and windshield washes are produced in varying formulations both under the Star brite brand as well as private labeled for customers. The Company also has a line of automotive polishes, cleaners and associated appearance items. Recreational vehicle: The recreational vehicle products are made up of cleaners, polishes, detergents, fabric cleaners and protectors, silicone sealants, waterproofers, gasket materials, degreasers, vinyl cleaners, protectors, toliet treatment fluids, and anti-freeze coolants. Many of these products include Teflon(R) pursuant to an exclusive licensing agreement with E.I. Dupont De Nemours and Company. Teflon(R) is a trademark of Dupon and is used under license to the Company. Aircraft: The Aircraft product line consists primarily of polishes and cleaners. Although the above products are utilized for different types of vehicles, boats and household purposes, it is management's view that they all constitute one industry segment. 2 Manufacturing: The Company manufactures the majority of its products as well as contracts with unrelated companies to package other products which are manufactured to the Company's specifications, using Company provided formulas. The Company purchases its raw materials from a wide variety of suppliers, none of which are significant to the Registrant's operations and all raw materials used in manufacturing are readily available. Each third party packager enters into a confidentiality agreement with the Company. The Company has patent protection on two of its products. The Company designs its own packaging and supplies the external manufacturers with the appropriate design and packaging. Manufacturing is primarily performed by the Company and two independent entities located in the northeastern and mid-western areas of the country. The Company believes that its internal manufacturing capacity as well as the arrangements with the present outside manufacturers are adequate for its present needs. In the event that these arrangements are discontinued with any manufacturer, the Company believes that substitute facilities can be found without substantial adverse effect on manufacturing and distribution. On February 27, 1996, the Registrant acquired certain assets of Kinpak, Inc., (a Georgia corporation) ("Kinpak"), and assumed two (2) leases of land and facilities leased by Kinpak from the Industrial Development Board of the City of Montgomery, Alabama and the Alabama State Docks Department. On December 20, 1996, the Registrant entered a new agreement with the Industrial Development Board of the City of Montgomery, Alabama to issue Industrial Development Bonds in the amount of $4,990,000 to repay certain financial costs and to expand the capacity of the Alabama facility. The underlying premises, at that time, consisted of a manufacturing and distribution facility containing approximately 110,000 square feet located on approximately 20 acres of real property and a docking facility located on the Alabama River. In addition, Registrant purchased the machinery, equipment and inventory located on the leased premises. Subsequent to the acquisition, the Registrant changed the name of its subsidiary to Kinpak Inc. (an Alabama corporation). During July 2002, the Registrant completed an additional $3.5 million Industrial Development Bond financing through the City of Montgomery, Alabama. Such transaction funded an approximate 70,000 square foot addition to the manufacturing facility and continues to fund the requisite machinery and equipment additions required therein as well. Marketing: The Company's marine products and recreational vehicle products are sold through national mass merchandisers such as Wal-mart and Home Depot and through specialized marine retailers such as West Marine and Boater's World. The Company also sells to national and regional distributors who in turn sell its products to specialized retail outlets for that specific market. Currently the Company has one customer (West Marine, Inc., which is an unrelated entity) to whom sales exceeded 10% of consolidated revenues for the year ended December 31, 2003. Sales to the Company's five largest customers for the year ended December 31, 2003 amounted to approximately 55% of consolidated gross revenues and outstanding balances due the Company at year-end from these customers aggregated approximately 76% of consolidated trade receivables. The Company markets its products through internal salesmen and approximately 250 sales representatives who work on an independent contractor-commission basis. The Officers of the Company also participate in sales presentations and trade shows. The Company also aids marketing through advertising campaigns in national magazines related to specific marketplaces. The products are distributed primarily from the Company's manufacturing and distribution facility in Alabama. As of this date, the Company has no significant backlog of orders. The Registrant does not give customers the absolute right to return product. The majority of the Company's products are non-seasonal and are sold throughout the year. Normal trade terms offered to credit customers range from 30 to 60 days. However, at times special dating and/or discount arrangements are offered as purchasing incentives to customers. Such programs do not materially distort normal margins. Competition: Marine: The Company has several national and regional competitors in the marine marketplace. The principal elements of competition are brand recognition, price, service and the ability to deliver products on a timely basis. In the opinion of management no one or few competitors holds a dominant market share. Management believes that it can increase or maintain its market share through its present methods of advertising and distribution. Automotive: The automotive marketplace into which the Company began selling various products during 2001 is the largest in which the Company operates. There are many entities, both national and regional, which represent competition to the Company. Many are more established and have greater financial resources than the Company. However, the market is so large that even a minimal market share could be significant to the Company. The principal elements of competition are brand recognition, price, service and the ability to deliver products on a timely basis. Management believes that it can establish a reasonable market share through its present methods of advertising and distribution. 3 Recreational Vehicle: The recreational vehicle appearance and maintenance market is parallel to that of the marine marketplace. In this market the Company competes with national and regional competitors. None of these singly or as a few have a dominant market share. The principal elements of competition are brand recognition, price, service and the ability to deliver products on a timely basis. Management is of the opinion that it can increase or maintain the Company's market share by utilizing similar methods as those employed in the marine market. Personnel: The Company employs approximately 25 full time employees at its corporate office in Fort Lauderdale, Florida. These employees are engaged in administration, clerical and accounting functions. In addition, the Company has manufacturing and fabrication personnel in both Florida and Alabama. The following is a tabulation of the total number of personnel working for the Company and/or its subsidiaries:
Full-time Location Description Employees -------- ----------- --------- Fort Lauderdale, Florida Administrative 25 Fort Lauderdale, Florida Manufacturing and distribution 17 Montgomery, Alabama Manufacturing and distribution 80 --------- 122 =========
New Product Development: The Company continues to develop specialized products for the marine, automotive, and recreational vehicle trade. The Company believes that its current operations and working capital financing arrangement are sufficient to meet development expenditures without securing external funding. The amounts expended toward this effort in any fiscal period have not been significant and are charged to operations in the year incurred. Environmental Costs: The Registrant adheres to a policy of compliance with applicable regulatory mandates on environmental issues. Amounts expended in this regard have not been significant and management is not aware of any instances on non-compliance. Financial Information Relating to Approximate Domestic and Canadian Gross Sales:
Year ended December 31, 2003 2002 2001 ---- ---- ---- United States: Northeast $ 4,054,000 $ 4,258,000 $ 3,709,000 Southeast 6,218,000 6,242,000 5,520,000 Central 6,384,000 6,454,000 5,684,000 West Coast 4,730,000 4,960,000 4,354,000 ----------- ----------- ----------- 21,386,000 21,915,000 19,267,000 Canada (US Dollars) 792,000 798,000 609,000 ----------- ----------- ----------- $22,178,000 $22,713,000 $19,876,000 =========== =========== ===========
Item 2. Properties The Registrant's executive offices and warehouse located in Fort Lauderdale, Florida are held under a lease with an entity owned by certain officers of the Company. The lease covers approximately 12,700 square feet of office and warehouse space. On May 1, 1998, the Registrant renewed its lease agreement for a term of ten years. The lease required an initial annual rental of $94,800 and provides for a maximum increase of 2% per annum on the annual anniversary of the lease for the term thereof. Additionally, the landlord is entitled to collect from the Company its pro-rata share of all taxes, assessments, insurance premiums, operating charges, maintenance charges and any other expenses which normally arise from ownership. Rent charged to operations during the years ended December 31, 2003, 2002 and 2001 amounted to approximately $100,500 each year. 4 During November 1994, the Company leased an approximately 10,000 square foot building in Fort Lauderdale, Florida for manufacturing, warehousing and office space from an unrelated third party. Such lease terminates on October 31, 2004. Rent charged to operations during the year ended December 31, 2003 amounted to approximately $95,500. The Company's Alabama facility currently contains approximately 180,000 square feet of office, plant and warehouse space located on 20 acres of land (the "Plant") and also includes a leased 1.5 acre docking facility on the Alabama River located eleven miles from the Plant. This facility has undergone two separate expansions of 60,000 and 70,000 square feet, respectively. The Registrant financed the facility enhancements and related equipment needs with Industrial Development Bonds issued through the city of Montgomery, AL. During July 2002, the Registrant completed a $3.5 million Industrial Development Bond financing through the City of Montgomery, Alabama. Such transaction funded an approximate 70,000 square foot addition to the manufacturing facility as well as the requisite machinery and equipment additions required therein. At December 31, 2003 the construction was complete and approximately $126,300 was held in trust to be utilized for equipping future equipment additions at the facility. Item 3. Legal Proceedings The Company was not involved in any significant litigation at December 31, 2003. Item 4. Submission of Matters to a Vote of Security Holders: No matter was submitted for a vote of shareholders during the fourth quarter of 2003. Shareholders will vote at the Annual Meeting to be held during June, 2004 to elect members of the Board of Directors, ratify the engagement of the Company's Independent Certified Public Accountants, and any other matter presented at such meeting. Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters A. The Registrant's common stock was sold to the public initially on March 26, 1981. The common stock of the Company is traded on the NASDAQ Small Cap Market System under the symbol OBCI. A summary of the trading ranges during each quarter of 2003 and 2002 is presented below.
Market Range of Common Stock Bid: 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. -------- -------- -------- -------- 2003 High $2.00 $1.20 $1.69 $1.98 Low $1.30 $0.90 $0.97 $1.30 2002 High $1.77 $1.65 $1.70 $1.90 Low $1.31 $1.31 $1.35 $1.10
A. The quotations reflect inter-dealer prices without retail mark-up, markdown or commission and may not represent actual transactions. B. The approximate number of Common Stock owners was 800 at December 31, 2003. The aforementioned number was calculated from data provided by the Company's Transfer Agent and Registrar and indications from broker dealers of shares held by them as nominee for actual shareholders. C. The Registrant has not paid any cash dividends since it has been organized. However, during the years ended December 31, 2002 and 2000, the Company declared and distributed a 10% and a 5% stock dividend, respectively. The Company has no other dividend policy except as stated herein. 5 D. Securities authorized for issuance under equity compensation plans:
Equity compensation plans approved by security holders: Number of securities Number of securities Weighted average remaining available to be issued upon exercise price of for future issuance exercise of outstanding outstanding options, under equity com- options, warrants & rights warrants & rights pensation plans 1991 Plan 161,700 $ .758 - 1992 Plan 193,875 $1.039 6,125 1994 Plan 294,635 $ .624 105,365 2002 Plan - Qualified 150,000 $1.260 250,000 2002 Plan - Non-qualified 75,000 $1.137 125,000
In addition to the above stock options, during the years ended December 31, 2003, 2002, and 2001 the Company awarded 155,000, 129,000, and 134,000 shares of restricted common stock, respectively to certain executives, key employees and others as a component of annual compensation. Charges to operations attributable to such awards aggregated approximately, $67,500, $67,700, and $36,200 for each of such periods, respectively. Item 6. Selected Financial Data The following tables set forth selected financial data as of, and for the years ended December 31,
2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- Operations: Gross sales $22,178,352 $22,712,991 $19,876,095 $18,072,784 $15,952,165 Net sales $19,997,702 $20,585,898 $18,013,393 $16,139,256 $14.317,485 Net income (loss) $ 345,071 $ 134,518 $ 106,384 ($ 244,823) $ 431,484 Earnings (loss) per Common share $ .07 $ .03 $ .03 ($ .06 ) $ .11 Balance Sheet: Working capital $ 2,869,172 $ 2,212,872 $ 1,385,016 $ ,724,043 $ 2,797,708 Total assets $18,303,184 $18,650,237 $15,030,206 $15,410,264 $13,547,452 Long-term obligations $ 5,883,302 $ 6,745,232 $ 3,843,515 $ 3,963,145 $ 4,152,332 Total liabilities $12,899,189 $13,727,315 $10,268,884 $10,737,972 $ 8,629,991 Shareholders' equity $ 5,403,995 $ 4,922,922 $ 4,761,322 $ 4,672,292 $ 4,917,461 Cash dividends declared per share of common stock $ - $ - $ - $ - $ -
6 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the Company's consolidated financial statements contained herein as Item 15. Liquidity and Capital Resources: The primary sources of the Registrant's liquidity are its operations and short-term borrowings from a commercial bank pursuant to a revolving line of credit aggregating $5 million. Such line matures May 31, 2004, bears interest at approximately prime and is secured by the Registrant's trade receivables and inventory. The Registrant is required to maintain a minimum working capital of $1.5 million and meet certain other financial covenants during the term of the agreement. As of December 31, 2003, the Company was not in compliance with the requirement of maintaining a current ratio of at least 1.5:1 The bank has waived such non-compliance. As of December 31, 2003, the Company was obligated under this arrangement in the amount of $4,550,000. The Registrant has conducted discussions with its lender related to renewal of the line of credit and extending the maximum borrowings to $6 million. It is anticipated that these discussions will be finalized during April, 2004. During March, 2004, certain employees of the Registrant exercised stock options scheduled to expire during 2004 covering 316,470 shares of its common stock. Such transaction resulted in an approximate $229,700 of additional paid-in capital. In connection with the purchase and expansion of the Alabama facility, the Registrant closed on Industrial Development Bonds during 1997. The proceeds were utilized for both the repayment of certain advances used to purchase the Alabama facility and to expand such facility for the Registrant's future needs. During July 2002, the Registrant completed another $3.5 million Industrial Development Bond financing through the City of Montgomery, Alabama. Such transaction funded an approximate 70,000 square foot addition to the manufacturing facility as well as the remaining machinery and equipment additions required therein. At December 31, 2003, approximately $126,300 was held in trust to pay for remaining equipment required at the facility. In order to market its Alabama Industrial Development Bonds at favorable rates, the Registrant obtained a substitute irrevocable letter of credit for its 1997 issue and a new irrevocable letter of credit for the 2002 issue. Under such letters of credit agreements maturing on July 31, 2005, the Company is required to maintain a stipulated level of working capital, a designated maximum debt to tangible ratio, and a required debt service coverage ratio. Such letters of credit are secured by a first priority mortgage on the underlying Alabama facility and equipment. The bonds are marketed weekly at the prevailing rates for such instruments. Currently such bonds carry interest ranging between 1.2% and 1.5% annually. Interest and principal are payable quarterly. The Registrant believes that current operations are sufficient to meet these obligations. The Registrant is involved in making sales in the Canadian market and must deal with the currency fluctuations of the Canadian currency. The Registrant does not engage in currency hedging and deals with such currency risk as a pricing issue. During the past few years, the Registrant has introduced various new products to the marketplace. This has required the Registrant to carry greater amounts of overall inventory and has resulted in lower inventory turnover rates. The effects of such inventory turnover have not been material to the overall operations of the Registrant. The Registrant believes that all required capital to maintain such increases can continue to be provided by operations and current financing arrangements. Many of the raw materials used by the Registrant in the manufacturing process are commodities that are subject to fluctuating prices. The Registrant reacts to long-term increases by passing along all or a portion of such increases to its customers. 7 Contractual obligations:
Less than One - three Three - five More than Total one year years years five years ---------- ---------- ---------- ---------- ---------- Long-term debt obligations $6,547,608 $ 882,238 $1,380,370 $ 920,000 $3,365,000 Capital leases 29,048 16,726 12,322 - - Operating leases 860,050 185,672 313,685 219,717 140,976 Purchase obligations - - - - - Other - - - - - ---------- ---------- ---------- ----------- ---------- Total $7,436,706 $ 1084,636 $1,706,377 $1,139,717 $3,505,976 ========== ========== ========== =========== ==========
Results of Operations: Sales and earnings varied when comparing the year ended December 31, 2003 to 2002 principally due to the factors enumerated below. Net sales - Net sales decreased approximately $588,000 or 3 % comparing the year ended December 31, 2003 with the 2002 period. This was primarily due to decreased sales of the Company's marine anti-freeze and certain automotive products. The anti-freeze decrease was attributed to commodity pricing of raw materials and related freight issues, and the automotive decrease resulted from initial customer reaction to the Company's strategic decision to achieve higher margins on these products. Cost of goods sold - Gross margins improved and cost of goods sold decreased as a percentage of net sales when comparing the years ended December 31, 2003 and 2002. The cost of goods sold percentages were 75.7% and 77.5% for the periods during 2003 and 2002, respectively. This change was primarily due to management's on-going initiatives towards improving operating margins including a general sales price increase, utilization of cash discounts offered by suppliers, and product pricing in response to current commodity costs. Advertising and promotion - Advertising expense decreased approximately $27,000 or 4% when comparing 2003 to 2002. This was primarily due to planned decreases in media advertising expenditures and lower customer co-op advertising. Selling, general and administrative - Selling, general and administrative expenses increased approximately $45,000 or1% when comparing 2003 to 2002. Interest expense - Interest expense incurred during 2003 decreased by approximately $95,000 compared to 2002. The decrease was primarily due to prevailing interest rates. Years ended December 31, 2002 and 2001: Sales and earnings varied when comparing the year ended December 31, 2002 and 2001 principally due to the factors enumerated below. Net sales - Net sales increased approximately $2,572,500 or 14% comparing the year ended December 31, 2002 with the 2001 period. This was primarily due to increased sales of Star brite and private labeled marine products, antifreeze, automotive fluids and other contract packaging. Cost of goods sold - Cost of goods sold increased from 76.3% to 77.5% as a percentage of net sales when comparing 2002 and 2001. This was primarily attributable to a differing product mix which was impacted by the increasing cost of petroleum related raw materials and an increase in private label and contract packaging revenues which typically yield lower margins. 8 Advertising and promotion - Advertising expense increased approximately $105,400 or 16% when comparing 2002 and 2001. This was primarily due to planned increases in media advertising expenditures and lower customer co-op advertising. Selling, general and administrative - Selling, general and administrative expenses increased approximately $337,200 or 11.4% when comparing 2002 to 2001. The most significant single item reflected therein was an increase in legal fees and costs associated with settling outstanding litigation. Increased personnel costs and other administrative expenses in line with increased overall revenues also affected the change for the year. Interest expense - Interest expense incurred during 2002 decreased by approximately $125,200 compared to 2001. The decrease was primarily due to reductions in prevailing interest rates. Item 8. Financial Statements and Supplementary Data See consolidated financial statements as set forth in Item 15. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None Item 9a. Controls and Procedures Management of the Registrant has conducted a review of the Company's disclosure controls and procedures and has determined that they are adequate to produce periodic reports that present financial condition and results of operations free of material misstatements. In addition, there have been no significant changes in the Registrant's underlying internal controls during the period covered by this report. Part III Item 10. Executive Officers and Directors of the Registrant The following tables set forth the name and ages of all elected directors and officers of the Registrant, as of December 31, 2003. All directors will serve until the next annual meeting of directors or untiltheir successors are duly elected and qualified. Each officer serves at the discretion of the board of directors. There are no arrangements or understandings between any of the officers or directors of the Company and the Company and any other persons pursuant to which any officer or director was or is to be selected as a director or officer.
NAME OFFICE AGE ---- ------ --- Peter G. Dornau President, Chief Executive Officer, and 64 Director since 1973 Edward Anchel Vice President-Finance, Chief Financial 57 Officer since 1999 and Director since 1998 Jeffrey Tieger Vice President, Secretary and Director 60 Since 1977 James Kolisch Director since 1998 52 Laz L. Schneider Director since 1998 64 John B. Turner Director since 2000 56 Sonia B. Beard Director since 2002 33
9 Peter G. Dornau, a founder of the Company, has been President, Chief Executive Officer and a Director since 1973. Edward Anchel joined the Company in March 1999 as Vice President-Finance and Chief Financial Officer. For the five years immediately preceding his employment, he was an officer of a privately owned manufacturing company and in private practice as a Certified Public Accountant. He was initially elected to serve as an outside Director of the Company during May 1998. Jeffrey Tieger joined the Company in June 1977 as Vice President-Advertising and has served in that office since 1977. James Kolisch is engaged in the insurance industry and serves as president of USI Florida an entity that sources most of the Registrant's insurance needs. Mr. Kolisch was elected to serve as an outside Director of the Company during May 1998. Mr. Kolisch serves on the Board of Directors' Audit Committee. Laz L. Schneider is, and has for the past five years, been an attorney in private practice and was elected to serve as an outside Director of the Company during May 1998. Mr. Schneider is a partner in the law firm that serves as the Company's lead counsel in various corporate and litigation matters. John B. Turner has for the past five years been retired. Prior to his retirement, he was an insurance executive. He was elected to serve as an outside Director of the Company during June 2000. In addition to his insurance credentials, Mr. Turner holds a Series 7 stock brokerage license. His professional experience in the aforementioned areas spans in excess of twenty-five years. Mr. Turner serves on the Board of Directors' Audit Committee. Sonia B. Beard is a Florida Certified Public Accountant working for Walt Disney World since 1997. Her current position is their Domestic Programs Manager. Ms. Beard has in excess of twelve years financial experience. She is an outside director and serves as the Chairperson and Financial Expert of the Board of Directors' Audit Committee. Based solely on reviews of Forms 3 and 4 furnished to the Registrant by the aforementioned individuals, it was determined that no reporting person failed to file a timely submission of ownership changes and that the Registrant was in compliance with Rule 16(a)3(e) of the Exchange Act during its most recent fiscal year. The Company has adopted a Code of Ethics and the information required by Item 406 of Regulation SK is incorporated by reference to the Registrant's Definitive Proxy Statement, which will be filed with the United States Securities and Exchange Commission within 120 days of December 31, 2003 Item 11. Management Remuneration and Transactions The information required for this item is incorporated by reference to the Registrant's Definitive Proxy Statement to be filed with the United States Securities and Exchange Commission in conjunction with the Annual Shareholders' Meeting that shall be sent out to shareholders prior to 120 days past the Registrant's year-end of December 31, 2003. Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth information at December 31, 2003 with respect to the beneficial ownership of the Registrant's common stock by holders of more than 5% of such stock and by all directors and officers of the Registrant as a group:
Title of Name and Address of Amount and Nature of Percent Class Beneficial Owner Beneficial Ownership* of Class -------- ---------------------------------------- --------------------- -------- Common Peter G. Dornau, President, Director 2,969,568* 52.3% Fort Lauderdale, FL 33317 Common Edward Anchel, Vice President - Finance, Director Boynton Beach, FL 33437 316,026* 5.6% 10 Title of Name and Address of Amount and Nature of Percent Class Beneficial Owner Beneficial Ownership* of Class -------- ---------------------------------------- --------------------- -------- Common Jeffrey Tieger, Vice President, Secretary, Director Plantation, FL 33314 423,480* 7.5% Common James Kolisch, Director Coral Gables, FL 33114 36,167* .6% Common Laz L. Schneider, Director Fort Lauderdale, FL 33305 20,000* .4% Common John B. Turner, Director Miami, FL 33186 28,663* .5% Common Sonia B. Beard, Director Merritt Island, FL 32952 10,000* .2% Common All directors and officers as a group 7 individuals 3,803,904* 67.1%
*Includes all outstanding options to purchase shares of the Company's common stock as follows: On March 25, 1999, the Company granted Messrs. Dornau and Tieger a five-year option for 115,500 shares each, as adjusted for the Company's stock dividend distributions of 2000 and 2002, at an exercise price of $.758 per share representing the market price at the time of grant. Such grants were awarded in consideration of their making a loan to the Company in the amount of $400,000 from an affiliated company in which they are each 50% co-shareholders. As of December 31, 2003, pursuant to the Company's various stock option plans, and other, Mr. Dornau has options to acquire 241,700 shares of the Company's common stock of which 194,200 shares are exercisable at prices ranging between $.57 and $1.39 within 60 days of the issuance of the Registrant's December 31, 2003 financial statements. As of December 31, 2003, pursuant to the Company's various stock option plans, and other, the Company's directors and officers as a group, have options to acquire 708,475 shares of the Company's common stock of which 501,975 shares are exercisable at prices ranging between $.57 and $1.39 per share within 60 days of the issuance of the Registrant's December 31, 2003 financial statements. Item 13. Certain Relationships and Related Transactions On May 1, 1998, the Company entered into a ten year lease for approximately 12,700 square feet of office and warehouse facilities in Fort Lauderdale, Florida from an entity owned by certain officers of the Registrant. The lease required a minimum rental of $94,800 the first year and provides for a maximum 2% increase on the anniversary of the lease throughout the term. Additionally, the landlord is entitled to collect from the Company its pro-rata share of all taxes, assessments, insurance premiums, operating charges, maintenance charges and any other expenses, which normally arise from ownership. The Registrant believes that the terms of this lease are comparable to those of similar properties in the same geographic area of the Company available from unrelated third parties. Rent charged to operations during the years ended December 31, 2003, 2002 and 2001 amounted to approximately $100,500 each year. The Registrant acquired the rights to the "Star brite" name and related products for the United States and Canada in conjunction with its original public offering during March 1981. The president of the Registrant is the beneficial owner of three companies that market Star brite products outside the United States and Canada. The Registrant has advanced monies to assist in such foreign marketing in order to establish an international trademark. At December 31, 2003 and 2002, the Company had amounts due from affiliated companies, which are directly or beneficially owned by the Company's president aggregating approximately $172,900 and $612,300, respectively. Such advances were made primarily to international affiliates that are in the process of expanding sales of Star brite products in Europe, Asia and South America. These amounts had been advanced by the Company on open account and, through December 31, 2002, carried interest at the same rate charged to the Company on its line of credit. 11 Sales of Star brite products to such affiliates aggregated approximately $373,600, $317,100 and $344,600 during the years ended December 31, 2003, 2002 and 2001, respectively. A subsidiary of the Registrant currently uses the services of an entity that is owned by its President to conduct product research and development. Such entity received $30,000 per year during the years ended December 31, 2003, 2002 and 2001 under such relationship. Item 14. Principal Accounting Fees and Services The information required for this item is incorporated by reference to the Registrant's Definitive Proxy Statement to be filed with the United States Securities and Exchange Commission in conjunction with the annual shareholders' meeting that shall be sent out to shareholders prior to 120 days past the Registrant's year-end of December 31, 2003. Item 15. Exhibits, Financial Statements, Schedules and Reports Filed on Form 8K The following documents are filed as part of this report: (A) Consolidated financial statements: (i) Consolidated balance sheets as of December 31, 2003 and 2002. (ii) Consolidated statements of operations for each of the three years ended December 31, 2003, 2002 and 2001. (iii) Consolidated statement of shareholders' equity for each of the three years ended December 31, 2003, 2002 and 2001. (iv) Consolidated statements of cash flows for each of the three years ended December 31, 2003, 2002 and 2001. (v) Notes to consolidated financial statements. (a) All schedules are omitted because either they are not applicable or the required information is shown in the consolidated financial statement or the notes thereto. Exhibits: (3) Articles of Incorporation and By-laws are incorporated by reference to the Company's Registration Statement on Form S-18 filed on March 26, 1981. (22) Subsidiaries of the Registrant. (B) Reports Filed on Form 8-K On December 29, 2003, the Registrant filed a Form 8-K with the United States Securities and Exchange Commission disclosing that it had entered into a Letter of Intent to purchase certain assets of Clear Cote Corporation of St.Petersburg, FL. On February 19, 2004 the Registrant filed a Form 8-K with the United States Securities and Exchange Commission disclosing that it had terminated the Letter of Intent and contemplated asset purchase with Clear Cote Corporation of St. Petersburg,FL without reaching a successful completion. 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. OCEAN BIO-CHEM, INC. ------------------------------ Registrant By:/s/ Peter G. Dornau -------------------------------- PETER G. DORNAU Chairman of the Board of Directors and Chief Executive Officer March 29, 2004 By:/s/ Edward Anchel ________________________________ EDWARD ANCHEL Chief Financial Officer March 29, 2004 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By:/s/ Jeffrey Tieger -------------------------------- JEFFREY TIEGER Director March 29, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has not sent an annual report or proxy material to security-holders as of this date. Subsequent to this filing the Registrant will produce an annual report and definitive proxy materials for its Annual Meeting of Shareholders. Copies of such shall be filed with the United States Securities and Exchange Commission pursuant to the current requirements. 13 CERTIFICATIONS I, Peter Dornau certify that: 1. I have reviewed this annual report on Form 10-K of Ocean Bio-Chem, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operation and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a - 14 and 15d - 14) for the Registrant and we have: a) Designed such disclosure controls and procedures to ensure material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluations as of the Evaluation Date; 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the Audit Committee or Registrant's Board of Directors (or persons performing the equivalent function); a) All significant deficiencies in the design or operation of internal controls that could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weakness in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. OCEAN BIO-CHEM, INC. Date: March 29, 2004 /s/ Peter G. Dornau -------------------------------- Peter G. Dornau Chairman of the Board of Directors and Chief Executive Officer CERTIFICATIONS I, Edward Anchel certify that: 1. I have reviewed this annual report on Form 10-K of Ocean Bio-Chem, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operation and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a - 14 and 15d - 14) for the Registrant and we have: a) Designed such disclosure controls and procedures to ensure material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluations as of the Evaluation Date; 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the Audit Committee or Registrant's Board of Directors (or persons performing the equivalent function); a) All significant deficiencies in the design or operation of internal controls that could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weakness in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. OCEAN BIO-CHEM, INC. Date: March 29, 2004 /s/ Edward Anchel -------------------------------- Edward Anchel Chief Financial Officer EXHIBIT (See 22) The following is a list of the Registrant's subsidiaries: Name: Ownership % Star brite Distributing, Inc. 100 Star brite Distributing Canada, Inc. 1000 D & S Advertising Services, Inc. 100 Star brite Staput, Inc. 100 Star brite Service Centers, Inc. 100 Star brite Automotive, Inc. 100 Kinpak, Inc. 100 OCEAN BIO-CHEM, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 OCEAN BIO-CHEM, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 Page Report of independent auditors 1 Consolidated balance sheets 2 Consolidated statements of operations 3 Consolidated statement of shareholders' equity 4 Consolidated statements of cash flows 5 Notes to consolidated financial statements 6-12 1 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders Ocean Bio-Chem, Inc. and its Subsidiaries Ft. Lauderdale, Florida We have audited the consolidated balance sheets of Ocean Bio-Chem, Inc. (the "Company") and its Subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ocean Bio-Chem, Inc. and its Subsidiaries at December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. BERKOVITS, LAGO & COMPANY, LLP Fort Lauderdale, Florida March 25, 2004 OCEAN BIO-CHEM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2003 AND 2002 ASSETS
Current Assets 2003 2002 --------- --------- Cash $ 42,923 $ 1,093,826 Trade accounts receivable net of allowance for doubtful accounts of approximately $206,000 and $200,700, respectively 4,333,023 3,190,357 Inventories 5,315,741 4,541,150 Prepaid expenses and other current assets 193,372 129,622 Recoverable income taxes - 240,000 ------------ ------------ Total current assets 9,885,059 9,194,955 ------------ ------------ Property, plant and equipment, net 7,506,586 6,977,003 ------------ ------------ Other assets: Funds held in escrow for equipment 126,295 1,161,194 Trademarks, trade names, and patents 330,439 330,439 Due from affiliated companies 172,925 612,275 Deposits and other assets 281,880 374,371 ------------ ------------ Total other assets 911,539 2,478,279 ------------ ------------ Total assets $18,303,184 $18,650,237 ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable trade $ 1,305,484 $ 1,833,895 Note payable bank 4,550,000 4,250,000 Current portion of long-term debt 898,964 601,766 Income taxes payable - current 80,000 - Accrued expenses payable 181,439 296,422 ------------ ------------ Total current liabilities 7,015,887 6,982,083 ------------ ------------ Deferred income taxes payable 205,610 183,139 ------------ ------------ Long-term debt less current portion 5,677,692 6,562,093 ------------ =----------- Commitments and contingencies - - Shareholders' equity: Common stock - $.01 par value, 10,000,000 shares authorized, 4,960,843 and 4,805,843 shares issued and outstanding at December 31,2003 and 2002, respectively 49,608 48,058 Additional paid-in capital 4,409,829 4,341,629 Foreign currency translation adjustment ( 237,323) ( 303,575) Retained earnings 1,190,076 845,005 ------------ ------------ 5,412,190 4,931,117 Less treasury stock 7,519 shares, at cost ( 8,195) ( 8,195) ------------ ------------ Total shareholders' equity 5,403,995 4,922,922 ------------ ------------ Total liabilities and shareholders' equity $18,303,184 $18,650,237 ============ ============
The accompanying notes are an integral part of these financial statements. 2 OCEAN BIO-CHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
2003 2002 2001 ---- ---- ---- Gross Sales $22,178,352 $22,712,991 $19,876,095 Less discounts, returns and allowances 2,180,650 2,127,093 1,862,702 ----------- ----------- ----------- Net sales 19,997,702 20,585,898 18,013,393 Cost of goods sold 15,131,775 15,961,692 13,744,703 ----------- ----------- ----------- Gross profit 4,865,927 4,624,206 ,268,690 ----------- ----------- ----------- Operating expenses: Advertising and promotion 742,167 769,275 663,922 Selling and administrative 3,329,904 3,284,652 2,947,489 Interest 511,292 290,856 86,109 ----------- ----------- ----------- Total operating expenses 4,362,927 4,440,036 4,122,703 ----------- ----------- ----------- Operating profit 503,000 184,170 145,987 Interest income 19,871 8,848 897 ----------- ----------- ----------- Income before provision for income taxes 522,871 193,018 146,884 Provision for income taxes 177,800 58,500 40,500 ----------- ----------- ----------- Net income 345,071 134,518 106,384 Other comprehensive income: Foreign currency translation, net of taxes 66,252 ( 40,642) ( 53,535) ----------- ----------- ----------- Comprehensive income $ 411,323 $ 93,876 $ 52,849 =========== =========== =========== Earnings per share: Basic $ .07 $ .03 $ .03 =========== =========== =========== Diluted $ .07 $ .03 $ .03 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 3 OCEAN BIO-CHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY ENDED DECEMBER 31, 2003, 2002 AND 2001
Foreign Common stock Additional currency Retained Treasury Shares Amount paid-in capital adjustment earnings stock Total ------------------ --------------- ---------- ---------- ---------- ---------- January 1, 4,105,889 $41,060 $3,720,377 ($209,398) $1,128,448 ($ 8,195) $4,672,292 2001 Net income 106,384 106,384 Issuances of stock 134,000 1,339 34,842 36,181 Foreign currency translation adjustment ( 53,535) ( 53,535) --------- ------- ---------- ---------- ---------- ---------- ----------- December 31, 2001 4,239,889 42,399 3,755,219 ( 262,933) 1,234,832 ( 8,195) 4,761,322 Net income 134,518 134,518 Issuances of stock 565,954 5,659 586,410 ( 524,345) 67,724 Foreign currency translation adjustment ( 40,642) ( 40,642) --------- ------- ---------- ---------- ---------- ---------- ----------- December 31, 2002 4,805,843 48,058 4,341,629 ( 303,575) 845,005 ( 8,195) 4,922,922 Net income 345,071 345,071 Issuances of stock 155,000 1,550 68,200 69,750 Foreign currency translation adjustment 66,252 66,252 --------- ------- ---------- --------- ---------- ---------- ---------- December 31, 2003 4,960,843 $49,608 $4,409,829 ($237,323) $1,190,076 ($ 8,195) $5,403,995 ========= ======= ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements. 4 OCEAN BIO-CHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
2003 2002 2001 ------ ------ ------ - Cash flows from operating activities: Net income $ 345,071 $ 134,518 $ 106,384 Adjustments to reconcile net income to net cash provided (used) by operations: Depreciation and amortization 674,955 601,064 494,901 Issuance of common stock to employees 69,750 67,724 36,181 Changes in assets and liabilities: (Increase) decrease in accounts receivable ( 1,142,666) 96,491 130,979 (Increase) decrease in inventory 774,591) ( 244,967) 210,804 (Increase) decrease in prepaid expenses and other 268,740 ( 44,517) 265,737 (Decrease) in accounts payable and accrued taxes and other ( 540,922) ( 339,698) 172,931 ------------ ----------- --------- Net cash provided (used) by operating activities ( 1,099,663) 270,615 1,417,917 ------------ ----------- --------- Cash flows from financing activities: Net borrowings (reductions) under line of credit 300,000 584,140 ( 584,140) Repayment of amounts due from advances to affiliates, net 439,350 ( 48,544) 34,506 Increases in (payments on) long-term debt, net ( 587,203) 2,973,989 ( 57,881) ------------ ----------- ---------- Net cash provided (used) by financing activities 152,147 3,509,585 ( 607,515) ------------ ----------- ---------- Cash flows used by investing activities: Purchases of property, plant and equipment ( 1,204,538) (1,575,622) ( 830,804) Utilization of (additions to) trust funds for equipment purchased, net 1,034,899 (1,152,110) 34,422 ----------- ---------- Net cash used by investing activities ( 169,639) (2,727,732) ( 798,382) ------------ ----------- ---------- Increase (decrease) in cash prior to effect of exchange rate on cash ( 1,117,155) 1,052,468 12,020 Effect of exchange rate on cash 66,252 ( 40,642) ( 53,535) ----------------- ------------ ----------- Net increase (decrease) in cash ( 1,050,903) 1,011,826 ( 41,515) Cash at beginning of year 1,093,826 82,000 123,515 ------------ ----------- ---------- Cash at end of year $ 42,923 $1,093,826 $ 82,000 ============ =========== ========== Supplemental information Cash used for interest during period $ 290,856 $ 434,869 $ 511,292 =========== ========== ========= Cash used for income taxes during period $ 60,000 $ 240,000 $ - =========== ========== =========
The Company had no cash equivalents at December 31, 2003, 2002, and 2001. The accompanying notes are an integral part of these financial statements. 5 OCEAN BIO-CHEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 Note 1 - Organization and summary of significant accounting policies: Organization - The Company was incorporated during November, 1973 under the laws of the state of Florida and operates as a manufacturer and distributor of products to the marine, automotive and recreational vehicle aftermarkets. During 1984, the Company changed its corporate name to Ocean Bio-Chem, Inc. (the parent company) from its former name, Star brite Corporation. Principles of consolidation - The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. Inventories - Inventories are primarily composed of raw materials and finished goods are stated at the lower of cost, using the first-in, first-out method, or market. Prepaid advertising and promotion - During the years ended December 31, 2003, 2002 and 2001, the Company introduced certain new products in the marine, automotive and recreational vehicle aftermarket industries. In connection therewith, the Company produced new promotional items to be distributed over a period of time and increased its catalog advertising. The Company follows the policy of amortizing these costs over a one-year basis. At December 31, 2003 and 2002, the accumulated cost of materials on hand and other deferred promotional costs that were or will be charged against the subsequent year's operations amounted to approximately $43,500 and $53,400, respectively. Property, plant and equipment - Property, plant and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method. Stock based compensation - The Company follows the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, to record compensation costs. Opinion No. 25 requires that compensation cost be based on the difference, if any, between the quoted market price of the stock and the price the employee must pay to acquire the stock depending on the terms of the award. The Company has not adopted Statement of Financial Accounting Standards No. 123 to record such compensation costs. Use of estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates that affect the reported amount of assets, liabilities, revenues and expenses during the reporting period. Actual results could differ from those estimates. Concentration of credit risk - Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of accounts receivable. The Company's five largest customers represent approximately 55% of 2003 consolidated revenues and 76% of consolidated accounts receivable at December 31, 2003. The Company has a longstanding relationship with each of these entities and has always collected open receivable balances. Company management believes that the credit worthiness of these customers is excellent. Fair value of financial instruments - The carrying amount of cash approximates its fair value. The fair value of long-term debt is based on current rates at which the Company could borrow funds with similar remaining maturities, and the carrying amount approximates fair value. Income taxes - The Company and its subsidiaries file consolidated federal and state income tax returns. The Company has adopted Statement of Financial Accounting Standards No. 109 in the accompanying consolidated financial statements. The only temporary differences included therein are attributable to differing methods of reflecting depreciation for financial statement and income tax purposes. 6 Trademarks, trade names and patents - The Star brite trade name and trademark were purchased in 1980 for $880,000. The cost of trademarks and trade names were amortized on a straight-line basis over an estimated useful life of 40 years through December 31, 2001. Effective January 1, 2002 and pursuant to Statement of Financial Accounting Standards No. 142, the Company has determined that the carrying value of such intangible assets relating to its Star brite brand does not require further amortization. In addition, the Company owns two patents that it believes are valuable in limited product lines, but not material to its success or competitiveness in general. There are no capitalized costs of these two patents. Translation of Canadian currency - The accounts of the Company's Canadian subsidiary are translated in accordance with Statement of Financial Accounting Standards No. 52, which requires that foreign currency assets and liabilities be translated using the exchange rates in effect at the balance sheet date. Results of operations are translated using the average exchange rate prevailing throughout the period. The effects of unrealized exchange rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars are accumulated as the translation adjustment in shareholders' equity. Realized gains and losses from foreign currency transactions are included in net earnings or the period. Reclassifications - Certain items in the accompanying consolidated financial statements for the years ended December 31, 2002 and 2001 have been reclassified to conform with the 2003 presentation. Note 2 - Property, plant and equipment: The Company's property, plant and equipment consisted of the following:
December 31, 2003 2002 Land $ 278,325 $ 278,325 Building 4,390,894 2,936,543 Manufacturing and warehouse equipment 4,750,972 4,356,336 Office equipment and furniture 591,024 583,049 Construction in process 400,800 1,079,779 Leasehold improvement 141,826 141,375 ----------- ---------- 10,553,841 9,375,407 Less accumulated depreciation 3,047,255 2,398,404 ----------- ---------- Total property, plant and equipment, net $ 7,506,586 $6,977,003 =========== ==========
Depreciation expense for the years ended December 31, 2003, 2002 and 2001 amounted to approximately $675,000, $601,100 and $471,900, respectively. Depreciation expense includes the amortization of capitalized lease assets. Included in property, plant and equipment are the following assets held under capitalized leases:
2003 2002 Land $ 278,325 $ 278,325 Building 4,390,894 2,936,543 Manufacturing and warehouse equipment 4,304,271 3,885,571 Construction in process 331,469 1,079,779 ----------- ---------- 9,304,959 8,180,218 Less accumulated amortization 2,447,100 1,583,811 ----------- ---------- Total $ 6,857,859 $6,596,407 =========== ==========
During February 1996, the Company purchased the assets of Kinpak Inc. In order to finance the expansion contemplated by the purchase, the Company entered into an agreement with the City of Montgomery to issue Industrial Development Bonds. The Alabama facility expansion consisted of an additional building, which was completed during October 1997, bringing the facility, at that time, to approximately 110,000 square feet. Such facility serves as the Company's primary manufacturing and distribution center. 7 In addition to the Kinpak facility, the Company has routinely leased additional warehouse space in Alabama to store certain manufacturing raw materials and inventory component items. Consolidating such space to the Kinpak campus improves material logistics and manufacturing efficiency. Also, the prevailing level of interest rates offered an opportunity to reduce overall cash flow attributable to this space. Accordingly, during the year ended December 31, 2002, the Company entered into an agreement with the City of Montgomery to issue an additional series Industrial Development Bonds aggregating $3,500,000 to construct an additional 70,000 square feet of warehousing and manufacturing space. Obligations for future payments attributable to this capitalized lease are discussed in Note 4. Note 3 - Note payable, bank: During 2000, the Company secured a revolving line of credit with a maximum of $5 million from a commercial bank carrying an annual interest rate at the lender's prime rate. This line was collateralized by the Company's inventory, trade receivables, and intangible assets. On July 1, 2002, the Company replaced such line with another offered by the commercial bank financing the expansion discussed in Notes 2 and 4. The new line aggregates $5 million, matures on May 31, 2004, bears an adjustable interest rate approximating prime, and is secured by the Company's trade receivables and inventory. Pursuant to such agreement, the Company is required to maintain minimum working capital levels, maintain stipulated debt to tangible net worth and debt coverage ratios. As of December 31, 2003, the Company was not in compliance with the current ratio requirement of maintaining a ratio of at least 1.5:1. The bank has waived such non-compliance. As of December 31, 2003, the Company was obligated under this arrangement in the amount of $4,550,000. Note 4 - Long -Term debt: Long-term debt at December 31, 2003 consisted of the following: The Company is obligated pursuant to capital leases financed through Industrial Development Bonds. Such obligations were incurred during 1997 and 2002 in connection with building and equipment expansion at the Company's Alabama manufacturing and distribution facility. Both bear interest at tax-free rates that adjust weekly. At December 31, 2003, $ 2,800,000 and $3,320,000 were outstanding attributable to the 1997 and 2002 series, respectively. During the year ended December 31, 2003 interest rates ranged between 1.2% and 1.45%. Principal and accrued interest retiring the underlying bonds are payable quarterly through March, 2012 and July, 2017 for the 1997 and 2002 series, respectively. Repayment of the bonds is guaranteed by a Letter of Credit issued by the Company's primary commercial bank. Security for the Letter of Credit is a priority first mortgage on the Kinpak facility and manufacturing equipment. The Company is obligated to an affiliated entity owned by certain officers of the Company pursuant to a note payable aggregating $368,457 at December 31, 2003. Such obligation requires monthly installments of $4,357 including principal and interest at 5.25% through April 1, 2004 when a balloon payment will be due. The terms of this obligation are identical to that of an underlying obligation of the affiliated entity to a financial institution. Accordingly, the entire balance is reflected as a current liability. Subsequent to year-end, the affiliate obtained a commitment to refinance the underlying obligation and once such transaction is completed, the repayment terms of the Company's debt to the affiliate will be revised to conform with the refinanced obligation. During 2003 and 2002, the Company, through certain subsidiaries, entered into various capital lease agreements covering equipment utilized in the Company's Alabama plant and its corporate offices. Such obligations, aggregating approximately $29,000 at December 31, 2003, have varying maturities through 2006 and carry interest rates ranging from 7% to 12%. During 2001, the Company financed the acquisition of approximately $484,000 of equipment through a financial institution. The obligation requires monthly installments of $11,097 including principal and interest at 8.4% per annum through maturity in May 2004. The obligation is secured by the underlying equipment purchased. At December 31, 2003, approximately $54,300 was outstanding. 8 The composition of these obligations at December 31, 2003 and 2002 were as follows:
Current Portion Long Term Portion --------------- ----------------- 2003 2002 2003 2002 ---- ---- ---- ---- Industrial Development Bonds $455,000 $440,000 $5,665,000 $6,120,000 Notes payable 427,238 132,927 - 22,952 Capitalized equipment leases 16,726 28,839 12,692 9,141 -------- --------- ---------- ---------- $898,964 $601,766 $5,677,692 $6,562,093 ======== ========= ========== ==========
Required principal payment obligations attributable to the foregoing are tabulated below: Year ending December 31, 2004 $ 898,964 2005 469,772 2006 462,920 2007 460,000 2008 460,000 Thereafter 3,825,000 ---------- Total $6,576,656 ========== Note 5 - Income taxes: The Components of the Company's consolidated income tax provision are as follows:
Year ended December 31, 2003 2002 2001 ---- ---- ---- Income tax provision (benefit): Federal - current $140,000 $ - $ - - deferred 37,800 58,000 40,500 State - - - - -------- ------- ------- Total $177,800 $58,500 $40,500 ======== ======= =======
The reconciliation of income tax provision at the statutory rate to the reported income tax expense is as follows:
Year Ended December 31, 2003 2002 2001 ---- ---- ---- Computed at statutory rate 34.0% 34.0% 34.0% State tax, net of federal benefit - - - Other, net - ( 3.7%) ( 6.4%) -------- -------- -------- Effective tax rate 34.0% 30.3% 27.6% ======== ======== ========
At December 31, 2003 and 2002 deferred income taxes payable aggregating $205,610 and $183,139, respectively are reflected on the accompanying consolidated balance sheets. Such amounts are attributable to the timing differences between financial statement and income tax treatment of depreciation. Note 6 - Subsequent event: During March 2004, the Company received approximately $229,700 in the aggregate from the exercise of employee stock options scheduled to expire during 2004 covering 316,470 shares of common stock. 9 Note 7 - Related party transactions: At December 31, 2003 and 2002, the Company had amounts due from affiliated companies which are directly or beneficially owned by the Company's president aggregating approximately $172,900 and $612,300, respectively. Such advances were made primarily to international affiliates that are in the process of expanding sales of Star brite products in Europe, Asia and South America. These amounts have been advanced by the Company on open account and, through December 31, 2002, carried interest at the same rate charged to the Company on its line of credit. Effective January 2003, repayment terms of these open receivables were modified to those terms offered to the Company's larger non-affiliated customers and, accordingly, no longer bear interest, unless they become delinquent. Sales of Star brite products to such affiliates aggregated approximately $373,600, $317,100, and $344,600 during the years ended December 31, 2003, 2002, and 2001, respectively. Note 8 - Commitments: On May 1, 1998, the Company entered into a ten year lease for approximately 12,700 square feet of office and warehouse facilities in Fort Lauderdale, Florida from an entity owned by certain officers of the Company. The lease required a minimum rental of $94,800 for the first year and provides for a maximum 2% increase on the anniversary of the lease throughout the term. Additionally, the landlord is entitled to its pro-rata share of all taxes, assessments, insurance premiums, operating charges, maintenance charges and any other expenses which arise from ownership. Rent charged to operations during the years ended December 31, 2003, 2002, and 2001 amounted to approximately $100,500 each year. The Company has entered into a corporate guaranty of the mortgage note obligations of such affiliate. The obligations aggregating approximately $368,500 at December 31, 2003 are primarily secured by the real estate leased to the Company. In November, 1994, the Company leased an approximately 10,000 square foot building in Fort Lauderdale, Florida for manufacturing, warehousing and office space from an unrelated third party. Such lease terminates on October 31, 2004. Rent charged to operations under this lease during the year ended December 31, 2003, 2002 and 2001 amounted to approximately $95,500, $92,800 and $90,800, respectively. The following is a schedule of minimum future rentals on the non-cancelable operating leases. Year ending December 31, 2004 $185,672 2005 102,498 2006 104,548 2007 106,639 2008 108,771 Thereafter 251,922 ------- Total $860,050 ======== During January 2002, the Company entered into an agreement with an investment banker to provide financial advisory and other services to the Company for a one year period ending January, 2003. Such agreement required a monthly retainer of $5,000, reimbursement of Company approved expenses and the issuance of warrants to purchase 250,000 shares of the Company's common stock at an exercise price of $1.40 per share. In addition to the foregoing, the Company has agreed to compensate the investment banker based on completion of certain financing arrangements and/or transactions. This agreement was renewed on a month-to-month basis during February, 2003 with a revised monthly fee of $4,000 for the aforementioned services. 10 Note 9 - Stock options: During 1991, the Company adopted a non-qualified employee stock option plan covering 200,000 shares of its common stock. During 1992, the Company adopted an incentive stock option plan covering 200,000 shares of its common stock. During 1994, the Company adopted a non-qualified employee stock option plan covering 400,000 shares of its common stock. During 2002, the Company adopted a qualified employee incentive stock option plan and a non-qualified stock option plan covering 400,000 and 200,000 shares of its common stock, respectively. The following schedule shows the status of outstanding options under the Company's stock option plans as of December 31, 2003, as adjusted for the Company's stock dividend distributions of 2000 and 2002
Weighted Date Options Exercisable Exercisable Expiration Average Plan granted outstanding Options price date remaining life ---- -------- ----------- ------- ------ -------- -------------- 1991 11/12/99 161,700 129,360 $ .758 11/11/04 .88 1992 03/01/99 28,875 28,875 $ .757 02/28/04 .17 1992 12/20/01 165,000 66,000 $1.009 12/20/06 3.00 1994 05/04/99 135,135 108,108 $ .684 05/03/04 .33 1994 12/20/00 159,500 95,700 $ .573 12/19/05 1.95 2002 10/22/02 150,000 30,000 $1.260 10/21/07 3.83 2002 10/22/02 35,000 7,000 $1.260 10/21/07 3.83 2002 06/20/03 40,000 - $1.030 06/19/08 4.46 ------- ------- ----- 875,210 465,043 2.15 yrs. ======= ======= =====
On March 25, 1999, the Company granted two officers a five-year option for 115,000 shares each, as adjusted for the Company's stock dividend distributions of 2000 and 2002, at an exercise price of $.758 representing the market price at the time of grant. Such grants were awarded in consideration of their making a loan to the Company in the amount of $400,000 from an affiliated company in which they are each 50% co-shareholders. Statement of Financial Accounting Standards No. 123 requires that companies that continue to account for employer stock options under APB No. 25 disclose pro forma net income and earnings per share as if such Statement had been applied. The following table is disclosed pursuant to such requirement.
2003 2002 2001 ---- ---- ---- Net income As reported $345,071 $ 134,518 $106,384 Pro forma $301,887 $ 101,925 94,981 Earnings per share As reported $ .07 $ .03 $ .03 Pro forma $ .06 $ .03 $ .02
A summary of the Company's stock options as of December 31, 2003, 2002 and 2001, and changes during the years ending on these dates, is presented below:
2003 2002 2001 ---------------------- --------------------- ------------------- 2001 Weighted Weighted Weighted Optioned average Optioned average Optioned average shares exercise price shares exercise price shares exercise price ------ -------------- ------ -------------- ------ -------------- Options outstanding at beginning of year 1,082,210 $1.03 794,000 $ .89 730,500 $ .92 Granted 40,000 1.03 190,000 1.26 160,000 1.11 Expired ( 16,000) (1.09) ( 7,500) ( .68) (96,500) ( 1.73) Exercised - - - - - - Adjustment for stock dividend distributions - - 105,710 - - - --------- ----- --------- ----- ------- ------ Options outstanding at end of year 1,106,210 $ .95 1,082,210 $1.03 794,000 $ .92 ========= ===== ========= ===== ======= ======
11 Stock options are granted annually to selective executives, key employees, directors and others pursuant to the terms of the Company's various plans. Such grants are made at the discretion of the Board of Directors. Options typically have a five year life with vesting occurring at 20% per year on a cumulative basis with forfeiture at the end of the option, if not exercised. The fair value of each option grant was estimated using the Black-Scholes option pricing model with the following assumptions for the years 2003, 2002 and 2001; risk free rate 6.5%, no dividend yield for all years, expected life of five years and volatility of 31.6%. Note 10 - Major customers: The Company has one major customer, West Marine, Inc., with sales in excess of 10% of consolidated revenue for the year ended December 31, 2003. Sales to this customer represent approximately 36% of consolidated revenues. The Company's top five customers represent approximately 55% of consolidated revenues and 76% of consolidated trade receivables. The Company enjoys good relations with these customers. However, the loss of any of these customers could have an adverse impact on the Company's operations. Note 11 - Earnings per share: Earnings per share are reported pursuant to the provisions of Statement of Financial Standards No. 128. Accordingly, basic earnings per share reflects the weighted average number of shares outstanding during the year, and diluted shares adjusts that figure by the additional hypothetical shares that would be outstanding if all exercisable outstanding common stock equivalents with an exercise price below the current market value of the underlying stock were exercised. Common stock equivalents consist of stock options and warrants. The following tabulation reflects the number of shares utilized to determine basic and diluted earnings per share for the years ended December 31, 2003, 2002, and 2001:
2003 2002 2001 --------- --------- -------- Basic 4,888,133 4,438,207 4,169,870 Diluted 5,338,015 4,760,487 4,169,870
Note 12 - Shareholders' equity: During the years ended December 31, 2002 and 2000 the Company declared and distributed stock dividends of 10% and 5%, respectively. During the years ended December 31, 2003, 2002 and 2001 the Company awarded 155,000, 129,000 and 134,000 shares of restricted common stock, respectively to certain executives, key employees and others as a component of annual compensation. Charges to operations attributable to such awards aggregated approximately $ 67,500, 67,700 and $36,200 for each period, respectively. During March, 2004, certain employees of the Registrant exercised stock options scheduled to expire during 2004 covering 316,470 shares of its common stock. Such transaction resulted in an approximate $229,700 of additional paid-in capital. 12