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, 2006
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 0-11102
OCEAN BIO-CHEM, INC.
(Exact name of Registrant as specified in its charter)
Florida 59-1564329
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
4041 SW 47 Avenue
Fort Lauderdale, FL 33314-4023
(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 is a well seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes No |X|
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes No |X|
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. Yes |X| No
Indicate by check mark whether the Registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
one)
Large accelerated filer
Accelerated filer
Non-accelerated filer |X|
Indicated by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act. 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 01, 2007 as reported by the NASDAQ Capital Market on that
date: $6,683,420 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 and non-affiliates
held 2,370,007 shares on March 1, 2007.
Number of shares of the Registrant's common stock outstanding as of
March 01, 2007: 7,621,316 shares common stock, $0.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates information from portions of our
Definitive Proxy Statement , which will be filed within 120 days of December 31,
2006 covering our Annual Meeting of Shareholders which will be held on or about
June 14, 2007.
Forward-looking Statements:
Certain statements contained in this Annual Report on Form 10-K, including
without limitation expectations as to future sales and operating results,
constitute forward-looking statements pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. For this purpose, any
statements contained in this report that are not statements of historical fact
may be deemed forward-looking statements. Without limiting the generality of the
foregoing, words such as "believe", "may", "will', "expect", "anticipate",
"intend", "could" including the negative or other variations thereof or
comparable terminology are intended to identify forward-looking statements.
These statements involve known and unknown risks, uncertainties and other
factors which may cause our actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Factors, which may
affect these results include, but are not limited to, the highly competitive
nature of our industry; reliance on certain key customers; consumer demand for
marine recreational vehicle and automotive products; advertising and promotional
efforts; and other factors.
Explanatory note - Restatements:
As more fully disclosed in our Form 8-K filed with the United States
Securities and Exchange Commission on August 14, 2006, our Form 10-K was
restated for the financial statements as of December 31, 2005 and 2004 and the
years then ended. The substantive changes reflected were (a) the recognition of
the compensation cost associated with stock options of which certain terms were
modified during the year ended December 31, 2004 and (b) the reclassification
between debt and additional paid-in capital of certain of the proceeds from the
Revolving Subordinated Obligation to our President and CEO, Peter G. Dornau
received during the year ended December 31, 2005. Neither of these items had an
impact on our previously reported cash flows. These matters are more fully
discussed in Note 12 - Restatements, to the Consolidated Financial Statements.
We have also included the aforementioned restated amounts in Item 6 -
"Selected Financial Data" and Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for those years. Along with the
foregoing, we have updated our Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 presented as Exhibits 31.1 and 31.2 to conform with
the current language requirements.
Part I
Item 1. Business
General: We were organized on November 13, 1973 under the laws of the state
of Florida. We are principally engaged in the manufacturing, marketing and
distribution of a broad line of appearance and maintenance products for boats,
recreational vehicles, automobile and aircraft under the Star brite and other
trademarks within the United States of America and Canada. In addition, we
produce private label formulations of many of our products for various customers
as well as provide custom blending and packaging services of these and other
products.
Products:
Set forth below is a general description of the products that we
manufacture and market:
Marine: Our Marine line consists of polishes, cleaners, protectants and
waxes of various formulations under the Star brite brand name as well as private
label formulations of these and other products. The line also includes motor
oils ,various vinyl protectants, cleaners, teak cleaners, teak oils, bilge
cleaners, hull cleaners, silicone sealants, polyurethane sealants, polysulfide
sealants, gasket materials, lubricants, antifouling additives and anti-freeze
coolants. In addition, we manufacture a line of brushes, poles and tie-downs and
other related marine accessories.
Automotive: We manufacture a line of automotive products under the Star
brite brand name including StarTron enzyme fuel treatment for both diesel and
gas engines, 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 under private
labels for customers. We also produce a line of automotive polishes, cleaners
and associated appearance items.
2
Recreational vehicle: Our recreational vehicle products are made up of
cleaners, polishes, detergents, fabric cleaners and protectors, silicone
sealants, waterproofers, gasket materials, degreasers, vinyl cleaners,
protectors, toilet treatment fluids and anti-freeze coolants.
Contract filling and blow molded bottles: We blend and package a variety of
chemical formulations to our customers' specifications. In addition, we
manufacture for sale to various customers assorted styles of both PVC and HDPE
blow molded bottles.
Although the above products are utilized for different types of vehicles,
boats, aircrafts and household purposes, it is management's view that they all
constitute one industry segment.
Manufacturing: We produce the majority of our products at our manufacturing
facility in Montgomery, Alabama. In addition, we contract with various unrelated
companies located in the northeastern and mid-western areas of the country to
package other products, which are manufactured to our specifications, using our
provided formulas. Each third party packager enters into a confidentiality
agreement with us.
We purchase raw materials from a wide variety of suppliers, none of which
is significant to our operations and all raw materials used in manufacturing are
readily available. We design our own packaging and supply our outside
manufacturers with the appropriate design and packaging. We believe that our
internal manufacturing capacity and our arrangements with our current outside
manufacturers are adequate for our present needs.
In the event that these arrangements are discontinued with any
manufacturer, we believe that substitute facilities can be found without
substantial adverse effect on our manufacturing and distribution.
Our in-house manufacturing is primarily performed by our wholly owned
subsidiary, Kinpak Inc, an Alabama corporation ("Kinpak"). On February 27, 1996,
we acquired certain assets of Kinpak, Inc., and assumed two (2) leases of land
and facilities leased by Kinpak from the Industrial Development Board of the
City of Montgomery, Alabama and the Alabama State Docks Department. On December
20, 1996, we entered into a new agreement with the Industrial Development Board
of the City of Montgomery, Alabama to issue Industrial Development Bonds in the
amount of $4,990,000 to repay certain financial costs and to expand the capacity
of the Alabama facility. The underlying premises, at that time, consisted of a
manufacturing and distribution facility containing approximately 110,000 square
feet located on approximately 20 acres of real property and a docking facility
located on the Alabama River. In addition, we purchased the machinery, equipment
and inventory located on the leased premises. Subsequent to the acquisition, we
changed the name of our subsidiary to Kinpak Inc.
During July 2002, we completed an additional $3.5 million Industrial
Development Bond financing through the City of Montgomery, Alabama. Such
transaction funded an approximate 70,000 square foot addition to the
manufacturing facility as well as the requisite machinery and equipment
additions required therein. Such project was substantially completed during the
year ended December 31, 2003.
Marketing: Our marine and recreational vehicle products are sold through
national mass merchandisers such as Wal-mart and Home Depot and through
specialized marine retailers such as West Marine and Boater's World. We also
sell to national and regional distributors who in turn sell our products to
specialized retail outlets for that specific market. Currently we have one
customer (West Marine, Inc., which is an unrelated entity) to whom sales
exceeded 10% of consolidated revenues for the year ended December 31, 2006.
Sales to our five largest customers for the year ended December 31, 2006
amounted to approximately 59% of consolidated gross revenues and outstanding
balances due us at December 31, 2006 from our five largest customers aggregated
approximately 57% of consolidated trade receivables. We market our products
through internal salesmen and approximately 250 sales representatives who work
on an independent contractor-commission basis. Our officers also participate in
sales presentations and trade shows. In addition, we aid marketing through
advertising campaigns in national magazines related to specific marketplaces.
Our products are distributed primarily from our manufacturing and distribution
facility in Alabama.
Backlog, seasonality, and selling terms: At December 31, 2006 our backlog
included initial stocking orders for StarTron at Wal-Mart. Adjusting for the
StarTron, Wal-Mart orders, we had no other significant backlog of orders as of
December 31, 2006. We do not give customers the absolute right to return
product. The majority of our products are non-seasonal and are sold throughout
the year. Normal trade terms offered to credit customers range from 30 to 60
days. However, at times special dating and/or discount arrangements are offered
as purchasing incentives to customers. Such programs do not materially distort
normal margins.
3
Competition:
Marine: We have several national and regional competitors in the marine
marketplace. The principal elements of competition are brand recognition, price,
service and the ability to deliver products on a timely basis. In the opinion of
management no one or few competitors holds a dominant market share. We believe
that we can increase or maintain our market share through our present methods of
advertising and distribution.
Automotive: The automotive marketplace into which the Company began selling
various products over the past five years is the largest in which we operate.
There are many entities, both national and regional, which represent competition
to us. Many are more established and have greater financial resources than we
do. However, the market is so large that even a minimal market share could be
significant to us. The principal elements of competition are brand recognition,
price, service and the ability to deliver products on a timely basis. We believe
that we can establish a reasonable market share through our present methods of
advertising and distribution.
Recreational Vehicle: Our recreational vehicle appearance and maintenance
market is parallel to that of the marine marketplace. In this market we compete
with national and regional competitors, none of which singly or as a few have a
dominant market share. The principal elements of competition are brand
recognition, price, service and the ability to deliver products on a timely
basis. Management is of the opinion that it can increase or maintain our market
share by utilizing similar methods as those employed in the marine market.
Trademarks: We have obtained registered trademarks for Star brite and other
trade names used on our products. We view our trademarks as significant assets
because they provide product recognition. We believe that our intellectual
property is significantly protected, but there are no assurances that these
rights can be successfully asserted in the future or will not be invalidated,
circumvented or challenged.
Patents: We hold two patents which we believe are valuable in limited
product lines, but not material to our success or competitiveness in general.
New Product Development: We continue to develop specialized products for
the marine, automotive, and recreational vehicle marketplace. We believe that
our current operations and working capital financing arrangement are sufficient
to meet development expenditures without securing external funding. The amounts
expended toward this effort in any fiscal period have not been significant and
are charged to operations in the year incurred.
Environmental Costs: We adhere to a policy of compliance with applicable
regulatory mandates on environmental issues. Amounts expended in this regard
have not been significant and management is not aware of any instances of
material non-compliance.
Financial Information Relating to Approximate Domestic and Canadian Gross Sales:
Year ended December 31,
2006 2005 2004
United States: ---- ---- ----
Northeast $ 4,240,000 $ 3,585,000 $ 4,455,000
Southeast 6,296,000 5,468,000 6,832,000
Central 6,158,000 5,655,000 7,015,000
West Coast 4,950,000 4,148,000 5,197,000
----------- ----------- -----------
21,644,000 18,856,000 23,499,000
Canada (US Dollars) 694,000 850,000 862,000
----------- ----------- -----------
$22,338,000 $19,706,000 $24,361,000
=========== =========== ===========
4
Personnel: We employ approximately 23 full time employees at our corporate
office in Fort Lauderdale, Florida. These employees are engaged in
administration, clerical and accounting functions. In addition, we employ
manufacturing and fabrication personnel in both Florida and Alabama.
The following is a tabulation of the total number of personnel working for
the Company and/or its subsidiaries as of December 31, 2006:
Full-time
Location Description Employees
------------------------ ------------------------------ ---------
Fort Lauderdale, Florida Administrative 23
Fort Lauderdale, Florida Manufacturing and distribution 8
Montgomery, Alabama Manufacturing and distribution 59
--
90
==
Item 1A. Risk factors
Concentration of credit risk - Financial instruments that potentially
subject the Company to concentration of credit risk consist primarily of
accounts receivable. Our five largest customers represented approximately 59%,
43% and 55% of consolidated gross revenues for the years ended December 31,
2006, 2005 and 2004; and 57% and 26% of consolidated accounts receivable at
December 31, 2006 and 2005 respectively. We have had a longstanding relationship
with each of these entities and have always collected open receivable balances.
However, the loss of any of these customers could have an adverse impact on our
operations.
Concentration of cash - At various times of the year, and at December 31,
2006, we had a concentration of cash in one bank in excess of prevailing
insurance offered through the Federal Deposit Insurance Corporation at such
institution. Management does not consider the excess deposits to be a
significant risk.
Item 2. Properties
Our executive offices and warehouse located in Fort Lauderdale, Florida are
held under a lease with an entity fifty percent each owned by Messrs. Peter G.
Dornau and Jeffrey J. Tieger, our President and former Vice
President-Advertising, respectively. The lease covers approximately 12,700
square feet of office and warehouse space. On May 1, 1998, we renewed our lease
agreement for a term of ten years. The lease required an initial annual rental
of $94,800 and provides for a maximum increase of 2% per annum on the annual
anniversary of the lease for the term thereof which has been waived through
December 31, 2006. Additionally, the landlord is entitled to collect from us its
pro-rata share of all taxes, assessments, insurance premiums, operating charges,
maintenance charges and any other expenses, which normally arise from ownership.
Rent charged to operations during the years ended December 31, 2006, 2005 and
2004 amounted to approximately $100,500 each year.
Our Alabama facility currently contains approximately 180,000 square feet
of office, plant and warehouse space located on 20 acres of land (the "Plant")
and also includes a leased 1.5 acre docking facility on the Alabama River
located approximately eleven miles from the Plant. This facility has undergone
two separate expansions of 60,000 and 70,000 square feet in 1998 and 2002,
respectively. We financed the facility's enhancements and related equipment
needs with Industrial Development Bonds issued through the city of Montgomery,
AL. Our manufacturing facility is subject to a priority first mortgage; and our
manufacturing equipment serves as collateral to a financial institution, which
issued letters of credit to secure the bonds.
Item 3. Legal Proceedings
We were not involved in any significant litigation at December 31, 2006.
5
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 2006.
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Our common stock was sold to the public initially on March 26, 1981. The
common stock of the Company is traded on the NASDAQ Capital Market System under
the symbol OBCI. A summary of the trading ranges during each quarter of 2006 and
2005 is presented below.
Market Range of
Common Stock Bid:
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
2006 High $1.21 $1.85 $1.75 $4.03
Low $ .90 $1.00 $ .85 $ .80
2005 High $3.11 $2.04 $1.63 $1.35
Low $1.07 $1.45 $1.14 $ .76
A. The quotations reflect inter-dealer prices without retail mark-up,
markdown or commission and may not represent actual transactions.
B. The number of record holders of our Common Stock owners was
approximately 200 at December 31, 2006. In addition, we believe that there are
approximately 600 beneficial holders based on information obtained from our
Transfer Agent and Registrar and indications from broker dealers of shares held
by them as nominee for actual shareholders.
C. We have not paid any cash dividends since it has been organized.
However, during the years ended December 31, 2002 and 2000, the Company declared
and distributed a 10% and a 5% stock dividend, respectively. The Company has no
other dividend policy except as stated herein.
D. Securities authorized for issuance at December 31, 2006 under equity
compensation plans:
Number of securities
Number of securities Weighted average remaining available
to be issued upon exercise price of for future issuance
exercise of outstanding outstanding options, under equity com-
options, warrants & rights warrants & rights pensation plans
Equity compensation plans
approved by security holders:
Plan stock options granted (1) 714,500 $1.23 45,000
Non plan stock options granted (2) 231,000 .76 -
Warrants (3) 1,000,000 .88 -
--------- ----- ------
Total equity compensation plans
approved and not approved by
security holders 1,945,500 $1.02 45,000
========= ===== ======
6
(1) Includes 400,000 options granted under the 2002 Qualified Incentive
Stock Option Plan, 155,000 options under the 2002 Non-Qualified Stock Option
Plan and 159,500 options under the 1994 Non-Qualified Stock Option Plan (this
plan has expired and no further awards can be made under its provisions).
(2) Includes 231,000 options granted to Messrs. Peter G. Dornau and Jeffrey
J. Tieger in conjunction with a loan made to the Company by an entity 50% owned
by each of them.
(3) On November 10, 2006, Mr. Dornau notified the Company that he was
exercising his rights to convert a $1.5 million loan made to the Company into
1.5 million shares of the Company's common stock. The transaction was approved
unanimously by the members of our Board of Directors (with Mr. Dornau abstaining
from the vote). In connection with this borrowing facility, we issued warrants
to Mr. Dornau to purchase a maximum of 1 million shares of our common stock.
Such warrants are exercisable 500,000 shares at $1.13 and 500,000 shares at
$.863. The exercise prices were determined by the closing bid of our stock plus
ten (10) percent on each date of grant.
Item 6. Selected Financial Data
As more fully disclosed in our Form 8-K filed with the United States
Securities and Exchange Commission on August 14, 2006, our Form 10-K was
restated for the financial statements as of December 31, 2005 and 2004 and the
years then ended. The substantive changes reflected were (a) the recognition of
the compensation cost associated with stock options of which certain terms were
modified during the year ended December 31, 2004 and (b) the reclassification
between debt and additional paid-in capital of certain of the proceeds from the
Revolving Subordinated Obligation to our President and CEO, Peter G. Dornau
received during the year ended December 31, 2005. Neither of these items had an
impact on our previously reported cash flows. These matters are more fully
discussed in Note 12 - Restatements, to the Consolidated Financial Statements.
The following tables set forth selected financial data as of, and for the
years ended December 31,
2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
(Restated) (Restated)
Operations:
Gross sales $22,338,500 $19,706,469 $24,361,056 $22,178,352 $22,712,991
Net sales $20,427,132 $17,651,905 $21,657,083 $19,997,702 $20,585,898
Net income (loss) $ 392,051 ($1,813,193) $ 17,222 $ 345,071 $ 134,518
Earnings (loss) per
common share $ .06 ($ .32) $ - $ .03 $ .03
Balance Sheet:
Working capital $ 3,920,398 $ 2,713,123 $ 3,464,574 $ 2,869,172 $ 2,212,872
Total assets $15,529,359 $16,903,022 $19,398,344 $18,303,184 $18,650,237
Long-term
obligations $ 4,550,190 $ 5,950,958 $ 5,840,250 $ 5,883,302 $ 6,745,232
Total liabilities $ 8,593,826 $12,240,427 $13,448,849 $12,899,189 $13,727,315
Shareholders'
equity $ 6,935,533 $ 4,662,595 $ 5,949,495 $ 5,403,995 $ 4,922,922
Cash dividends declared
per share of common stock $ - $ - $ - $ - $ -
7
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with our
consolidated financial statements contained herein as Item 15.
As more fully disclosed in our Form 8-K filed with the United States
Securities and Exchange Commission on August 14, 2006, our Form 10-K was
restated for the financial statements as of December 31, 2005 and 2004 and the
years then ended. The substantive changes reflected were (a) the recognition of
the compensation cost associated with stock options of which certain terms were
modified during the year ended December 31, 2004 and (b) the reclassification
between debt and additional paid-in capital of certain of the proceeds from the
Revolving Subordinated Obligation to our President and CEO, Peter G. Dornau
received during the year ended December 31, 2005. Neither of these items had an
impact on our previously reported cash flows. These matters are more fully
discussed in Note 12 - Restatements, to the Consolidated Financial Statements.
Overview:
We are a leading manufacturer and distributor of chemical formulations
serving the appearance and functional categories of the marine, automotive,
recreational vehicle and home care markets. We were founded in 1973 and have
conducted operations within the aforementioned categories since then. During
1984, we changed our corporate name to Ocean Bio-Chem, Inc. (the parent company)
from our former name, Star brite Corporation. Our operations were conducted as a
privately owned company through March, 1981 when we completed our initial public
offering of common stock.
Critical accounting policies and estimates:
Principles of consolidation - Our consolidated financial statements include
the accounts of the parent company and its wholly owned subsidiaries. All
significant inter-company accounts and transactions are eliminated in
consolidation.
Collectibility of accounts receivable - Included in the consolidated
balance sheets as of December 31, 2006 and 2005 are allowances for doubtful
accounts aggregating approximately $192,700 and $131,000, respectively. Such
amounts are based on management's estimates of the creditworthiness of its
customers, current economic conditions and other historical information.
Consolidated bad debt expense charged against operations for the years ended
December 31, 2006, 2005 and 2004 aggregated approximately $71,000, $32,000 and
$66,000, respectively.
Revenue recognition - Revenue from product sales is recognized when
persuasive evidence of an arrangement exists, delivery to customer has occurred,
the sales price is fixed and determinable, and collectibility of the related
receivable is probable.
Inventories - Inventories are primarily composed of raw materials and
finished goods and are stated at the lower of cost, using the first-in,
first-out method, or market.
Prepaid expenses - In any given year we introduce certain new products to
our customers. In connection therewith, we produce new collatral materials to be
distributed over a period of time. We follow the policy of amortizing these
costs over a one-year basis.
Property, plant and equipment - Property, plant and equipment are stated at
cost. Depreciation is provided over the estimated useful lives of the related
assets using the straight-line method.
Stock based compensation - At December 31, 2006, the Company had options
outstanding under three stock-based compensation plans, which are described
below. On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), share-based payment ("SFAS No.123R"), which
requires the measurement and recognition of compensation cost for all
8
share-based payment awards made to employees and directors based on estimated
fair values. Prior to the adoption of SFAS No. 123R, the Company accounted for
its stock-based employee compensation related to stock options under the
intrinsic value recognition and measurement principles of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25') and
the disclosure alternative prescribed by SFAS No. 123, "Accounting for
Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." Accordingly, The Company
presents pro- forma information for the periods prior to the adoption of SFAS
No. 123R and no employee compensation cost was recognized for the stock-based
compensation plans other than the grant date intrinsic value, if any, for the
options granted prior to January 1, 2006.
Concentration of credit risk - Financial instruments that potentially
subject the Company to concentration of credit risk consist primarily of
accounts receivable. Our five largest customers represented approximately 59%,
43% and 55% of consolidated gross revenues for the years ended December 31,
2006, 2005 and 2004; and 29% and 57% of consolidated accounts receivable at
December 31, 2006 and 2005 respectively. We have had a longstanding relationship
with each of these entities and have always collected open receivable balances.
However, the loss of any of these customers could have an adverse impact on our
operations.
Concentration of cash - At various times of the year and at December 31,
2006, we had a concentration of cash in one bank in excess of prevailing
insurance offered through the Federal Deposit Insurance Corporation at such
institution. Management does not consider the excess deposits to be a
significant risk.
Fair value of financial instruments - The carrying amount of cash
approximates its fair value. The fair value of long-term debt is based on
current rates at which we could borrow funds with similar remaining maturities,
and the carrying amount approximates fair value.
Income taxes - We file consolidated federal and state income tax returns.
We have adopted Statement of Financial Accounting Standards No. 109 in the
accompanying consolidated financial statements. The temporary differences
included therein are attributable to differing methods of reflecting
depreciation and stock based compensation for financial statement and income tax
purposes.
Trademarks, trade names and patents - The Star brite trade name and
trademark were purchased in 1980 for $880,000. The cost of such intangible
assets was amortized on a straight-line basis over an estimated useful life of
40 years through December 31, 2001. Effective January 1, 2002 and pursuant to
Statement of Financial Accounting Standards No. 142, we have determined that the
carrying value of such intangible assets relating to its Star brite brand does
not require further amortization. In addition, we own two patents that we
believe are valuable in limited product lines, but not material to our success
or competitiveness in general. There are no capitalized costs of these two
patents.
Translation of Canadian currency - The accounts of our Canadian subsidiary
are translated in accordance with Statement of Financial Accounting Standards
No. 52, which requires that foreign currency assets and liabilities be
translated using the exchange rates in effect at the balance sheet date. Results
of operations are translated using the average exchange rate prevailing
throughout the period. The effects of unrealized exchange rate fluctuations on
translating foreign currency assets and liabilities into U.S. dollars are
accumulated as the translation adjustment in shareholders' equity. Realized
gains and losses from foreign currency transactions, if any, are included in net
earnings of the period.
Performance Comparisons
The following chart compares our Annual Shareholder Return for the five
years ended December 31, 2006 to the cumulative total shareholder return of (a)
the NASDAQ market US stocks, and (b) an Industry Index, the NASDAQ Non-Financial
Stocks index. This graph will not be deemed to be incorporated by reference into
any filing under the Securities Act of 1933 or under the Securities Act of 1934,
except to the extent that we specifically incorporate it by reference, and will
not otherwise be deemed to be soliciting material or to be filed under such
Acts.
We believe that no single peer index or peer company is totally comparable
to our business. The peer indices used to compare total shareholder return
include companies which supply to diverse markets. Some of our direct
competitors are divisions that represent small portions of companies and are not
included in the peer comparisons since information is not available to us to
show those divisions separately from the parent.
9
A five year Performance Graph depicted by the following figures was
included our Annual Report to Shareholders.
2001 2002 2003 2004 2005 2006
------- ------- ------- ------- ------- -------
Ocean Bio-Chem, Inc. 100.00% 101.38% 117.24% 76.86% 70.34% 144.83%
NASDAQ US 100.00% 69.13% 103.36% 112.49% 114.88% 126.22%
NASDAQ Non financial
entities 100.00% 65.33% 100.01% 107.86% 110.30% 120.97%
10
Liquidity and Capital Resources:
The amount of short term borrowings outstanding at December 31, 2006 was
$2.15 million dollars. This is a reduction of $1.85 million from the December
31, 2005, balance of $4.0 million dollars.
During the year ended December 31, 2006 the Company focused on programs to
more effectively manage working capital. Accounts receivable at December 31,
2006 and 2005 aggregated approximately $2.0 million dollars. However in 2006,
net sales increased $2.7 million or 15.7% without a comparative increase in
accounts receivable.
In addition inventory levels decreased, from $6.3 million dollars to $5.7
million dollars, comparing December 31, 2006 and 2005, a decrease of
approximately $613,000 on a 15.7% increase in sales.
The Company also reduced its accounts payable at December 31, 2006 to $944
thousand dollars from $ 1.3 million dollars, a decrease of 25% or $312 thousand
dollars, in addition to reducing short term borrowings, discussed above.
As a result of the above, the Company improved its current ratio, to 2:1 at
December 31, 2006, compared to 1.4:1 at December 31, 2005.
As of December 31, 2006 the Company was in compliance with its debt
covenants.
The primary sources of our liquidity are our operations and short-term
borrowings from Regions Bank pursuant to a revolving line of credit aggregating
$6 million. Such line matures May 31, 2007, bears interest at the 30 Day LIBOR
plus 275 basis points (approximately 8.10% at December 31, 2006) and is secured
by our trade receivables, inventory and intangible assets. We are required to
maintain a minimum working capital of $1.5 million and meet certain other
financial covenants during the term of the agreement. As of December 31, 2006,
we were obligated under this arrangement in the amount of $2,150,000.
In connection with the purchase and expansion of the Alabama facility, we
closed on Industrial Development Bonds during 1997. The proceeds were utilized
for both the repayment of certain advances used to purchase the Alabama facility
and to expand such facility for our future needs. During July 2002, we completed
a second Industrial Development Bond financing aggregating $3.5 million through
the City of Montgomery, Alabama. Such transaction funded an approximate 70,000
square foot addition to the manufacturing facility as well as the remaining
machinery and equipment additions required therein. This project was
substantially completed during 2003.
In order to market the Industrial Development Bonds at favorable rates, we
obtained a substitute irrevocable letter of credit for the 1997 issue and a new
irrevocable letter of credit for the 2002 issue. Under such letters of credit
agreements maturing on July 31, 2007, we are required to maintain a stipulated
level of working capital, a designated maximum debt to tangible ratio, and a
required debt service coverage ratio. Such letters of credit are secured by a
first priority mortgage on the underlying Alabama facility and equipment.
The bonds are marketed weekly at the prevailing rates for such tax-exempt
instruments. During the year ended December 31, 2006 such bonds carried interest
ranging between 3.08% and 4.24% annually. Interest and principal are payable
quarterly. We believe current operations are sufficient to meet these
obligations.
On April 12, 2005 we entered into a financing obligation with Regions Bank
whereby they advanced us $500,000 to finance equipment acquisitions at our
Kinpak facility. Such obligation is due in monthly installments of principal
aggregating approximately $8,300 plus interest at prevailing rates. The
outstanding balance and interest rate on this obligation at December 31, 2006
was approximately $333,340 and the prime rate plus 2.5% per annum (or 10.75%).
Such obligation matures on April 15, 2010.
11
On November 10, 2006, our President and CEO, Peter G. Dornau indicated that
he was exercising his right to convert our indebtedness to him into common stock
pursuant to the terms of the Subordinated Revolving Line of Credit he entered
into with the Company. Our total long-term debt was reduced and shareholders'
equity was increased by approximately $1,241,000, respectively. Net income and
related earnings per share for the year ended December 31, 2006 was not
materially impacted by this event.
We are involved in making sales in the Canadian market and must deal with
the currency fluctuations of the Canadian currency. We do not engage in currency
hedging and deal with such currency risk as a pricing issue.
During the past few years, we have introduced various new products to our
customers. At times this has required us to carry greater amounts of overall
inventory and has resulted in lower inventory turnover rates. The effects of
such inventory turnover have not been material to our overall operations. We
believe that all required capital to maintain such increases can continue to be
provided by operations and current financing arrangements.
Many of the raw materials that we use in the manufacturing process are
commodities that are subject to fluctuating prices. We react to long-term
increases by passing along all or a portion of such increases to our customers
as it is deemed appropriate.
As of December 31, 2006 and through the date hereof, we did not and do not
have any material commitments for capital expenditures, nor do we have any other
present commitment that is likely to result in our liquidity increasing or
decreasing in any material way. In addition, except for our need for additional
capital to finance inventory purchases, we know of no trend, additional demand,
event or uncertainty that will result in, or that is reasonably likely to result
in, our liquidity increasing or decreasing in any material way.
The cost of petroleum and related products, major components in many of our
products, which were already in an increasing cost spiral, became even more
unstable in 2006. The practical dynamics of our business do not afford us the
same pricing flexibility with our customers, available to our suppliers. We
cannot as immediately as our suppliers pass along the price increases to our
national retailers and distributors. We effectuated a sales price increase which
became effective during the fourth quarter of 2005. In addition, we have alerted
customers who purchase products, which are heavily dependent on this petroleum
related issue, that we will be more responsive to commodity pricing and they
must be receptive to short-term price swings or accept our refusal to ship at
previously established pricing.
Results of Operations:
Years ended December 31, 2006 and 2005:
For the year ended December 31, 2006, compared to December 31, 2005 both
revenue and profits increased principally due to the factors enumerated below.
Net Sales increased to $20.4 million from $17.7 million, an increase of
$2.7 million or 15.7 %. This was primarily due to an increase in sales volume to
a major customer - West Marine, partially offset by a decrease in sales to other
customers. In certain instances the Company was able to pass along price
increases to customers reflecting higher material costs incurred during the
year. Net sales for the year also benefited from a reduction of sales allowance
programs offered to customers. As a result, sales allowances decreased from
10.4% to 8.6% of gross sales.
12
Cost of Sales and Gross Margins - For the year, gross profit increased
approximately $2.7 million or 90 %, increasing from approximately $3.0 million
in 2005, to approximately $5.7 million in 2006. Cost of sales decreased as a
percentage of sales as a result of management actions taken during 2006.
Specifically, management was more proactive in passing on cost increases to
customers where possible resulting from higher raw material costs from
suppliers. In addition, newly initiated manufacturing efficiencies and the
increased volume produced at the Kinpak plant significantly contributed to the
improved gross margins. Corporate management continues its oversight relating to
both our procurement cost of raw materials as well as the overall management of
our manufacturing facility. We believe that these management actions have had a
major impact in the improvement of our gross margins in 2006.
Operating Expenses: For the year, operating expenses aggregated
approximately $5.3 million dollars, a decrease of $51,000 from 2005. The primary
decrease was in the selling and administrative expenses decreasing $265,000. The
decrease reflects a reduction in staff and other cost control programs
implemented during the year. In addition advertising expenses decreased as a
percent of sales from 6.3% of net sales in 2005 to 5.6% of net sales in 2006,
reflecting management's decision to be more selective in approving advertising
programs, where it was believed the Company would receive a higher benefit.
These expenses were partially offset by higher interest costs of approximately
$181,000, increasing to $681,000 from approximately $499,000. The higher
interest cost reflects the higher level of interest rates during the year
compared to 2005.
Operating Profit. Operating profits increased to $373,000 in 2006 from an
operating loss of approximately $2.4 million in 2005, an increase of $2.8
million.
Net Income increased to approximately $392,000 in 2006, from a net loss of
approximately $ 1.8 million in 2005.
Years ended December 31, 2005 and 2004:
Sales and earnings varied when comparing the year ended December 31, 2005
to 2004 principally due to the factors enumerated below.
Net sales decreased 18.5% to approximately $17,652,000 for the year ended
December 31, 2005 compared to approximately $21,657,100 for the year ended
December 31, 2004. Management attributes such decrease significantly to our
largest customer adopting a policy of reducing their inventory levels, the
unusually cold weather earlier in the year in various regions of our country
resulting in a delay in the start of the 2005 recreational boating season, and
the hurricanes experienced during the third and fourth quarters of this year.
Cost of goods sold increased to 82.9% of net sales for the year ended
December 31, 2005 compared to 77.0% of net sales for the year ended December 31,
2004. Such increase is attributed to increasing raw material costs and the
impact of spreading fixed overhead items to a reduced level of sales.
Advertising and promotion expenses increased approximately $167,300 or
17.7% for the 2005 period when compared to comparable expenses in the same time
period in the previous year. This resulted primarily from planned increases in
media and co-op advertising programs for the current year.
Selling and administrative expenses, as restated, increased by
approximately $168,600 or 5% for the year ended December 31, 2005 compared to
the year ended December 31, 2004. Such change was primarily due to increased
personnel costs and other normal recurring increases in operating expenses
offset by the recognition compensation cost associated with the modification of
certain stock options during 2004 with no comparable item in 2005.
13
Interest expense for the year ended December 31, 2005 increased
approximately $191,600 when compared to 2004. This resulted from increasing
interest rates and higher levels of borrowing under our working capital line of
credit and other financing obligations.
Our loss before income taxes was approximately $2,347,700 for the year
ended December 31, 2005 compared to a pre-tax profit, as restated of
approximately $124,000 for the year ended December 31, 2004.
Our estimated benefit from income taxes amounted to approximately $534,500
for the year ended December 31, 2005, and reflects available tax net loss
carry-back provisions based on the operations of the Company as well as the
reversal of deferred income tax liabilities attributable to timing differences
between our book and income tax methods of accounting that are anticipated to
reverse during the available carryover period.
As a result of the foregoing, our net loss amounted to approximately
$1,813,200 for the year ended December 31, 2005 compared to a net income, as
restated of approximately $17,200 for the year ended December 31, 2004.
Contractual obligations:
The following table reflects our contractual obligations for the years
ended December 31,:
2012 and
Total 2007 2008-2010 2011 thereafter
----------- ----------- ----------- -----------
Long-term debt obligations $ 7,226,412 $ 2,709,960 $ 1,613,344 $ 460,000 $2,443,108
Capital leases 59,839 26,100 33,739 - -
Operating leases 211,104 104,507 106,597 - -
Purchase obligations - - - - -
Other - - - - -
----------- ----------- ----------- ----------- ----------
Total $ 7,497,355 $ 2,840,567 $ 1,753,680 $ 460,000 $2,443,108
=========== =========== =========== =========== ==========
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
We do not engage in derivative transactions. We become exposed to foreign
currency transactions as a result of our operations in Canada and we do not
hedge such exposure. Our exposure to market risk for changes in interest rates
relates primarily to the interest rate on our bonds. The interest rates on our
bonds adjusted weekly and ranged between 3.2% and 4.3% during the year ended
December 31, 2006.
Item 8. Financial Statements and Supplementary Data
The audited financial statements of the Company required pursuant to this
Item 8 are included in this Annual Report on Form 10-K, as a separate section
commencing on page F-1 and are incorporated herein by reference.
As more fully disclosed in our Form 8-K filed with the United States
Securities and Exchange Commission on August 14, 2006, our Form 10-K was
restated for the financial statements as of December 31, 2005 and 2004 and the
years then ended. The substantive changes reflected were (a) the recognition of
the compensation cost associated with stock options of which certain terms were
modified during the year ended December 31, 2004 and (b) the reclassification
between debt and additional paid-in capital of certain of the proceeds from the
Revolving Subordinated Obligation to our President and CEO, Peter G. Dornau
received during the year ended December 31, 2005. Neither of these items had an
impact on our previously reported cash flows. These matters are more fully
discussed in Note 12 - Restatements, to the Consolidated Financial Statements.
Neither of these items have an impact on our previously reported cash
flows.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
14
Item 9A. Controls and Procedures:
Evaluation of Disclosure Controls and Procedures. The Company has carried
out an evaluation under the supervision of management, including the President
and Chief Executive Officer ("CEO") and the Vice President - Finance and Chief
Financial Officer ("CFO"), of the effectiveness of the design and operation of
its disclosure controls and procedures. Based on that evaluation, our CEO and
CFO have concluded that, as of December 31, 2006, our disclosure controls and
procedures were effective to ensure that information required to be disclosed by
the Company in the reports filed or submitted by it under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the SEC,
and include controls and procedures designed to ensure that information required
to be disclosed by us in such reports is accumulated and communicated to
management, including the CEO and CFO, as appropriate to allow timely decisions
regarding required disclosures.
Changes in Internal Controls. Since the evaluation date by the Company's
management of its internal controls over financial reporting, there have not
been any changes in our internal controls over financial reporting that have
materially affected, or are reasonably likely to materially affect our internal
controls over financial reporting.
Limitations on the Effectiveness of Controls. The Company's management,
including the CEO and CFO, does not expect that our disclosure or internal
controls will prevent all errors or fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in a cost-effective control system, misstatements due
to error or fraud may occur and not be detected. Despite these limitations, the
Company's CEO and CFO have concluded that our disclosure controls and procedures
(1) are designed to provide reasonable assurance of achieving their objectives
and (2) do provide reasonable assurance of achieving their objectives.
Part III
Item 10. Executive Officers and Directors of the Registrant
The following tables set forth the name and ages of our elected directors
and officers, as of December 31, 2006.
All directors will serve until the next annual meeting of directors or
until their successors are duly elected and qualified. Each officer serves at
the discretion of the board of directors.
There are no arrangements or understandings between any of the officers or
directors of our Company and the Company or any other persons pursuant to which
any officer or director was or is to be selected as a director or officer.
15
NAME OFFICER/DIRECTOR AGE
------------------ -------------------------------------------------- ---
Peter G. Dornau President, Chief Executive Officer, and 67
Director since 1973
Edward Anchel Vice President-Finance, Chief Financial 60
Officer since 1999 and Director since 1998
Jeffrey J. Tieger Vice President-Advertising and Marketing,
Secretary and Director from 1977 through
January 25, 2007 63
William W. Dudman Vice President-Operations since 2004 42
Gregor M. Dornau Vice President-Sales since 2005 38
James M. Kolisch Director since 1998 55
Laz L. Schneider Director since 1998 67
John B. Turner Director since 2000 59
Sonia B. Beard Director since 2002 36
Peter G. Dornau is our co-founder and has served as our President, CEO and
Chairman of Board of Directors since 1973.
Edward Anchel joined our company as Vice President-Finance and Chief
Financial Officer in March 1999. For the five years immediately preceding his
employment, he was an officer of a privately owned manufacturing company and in
private practice as a Certified Public Accountant. He was initially elected to
serve as an outside Director of the Company in May 1998.
Jeffrey J. Tieger joined our company in June 1977 as our Vice
President-Advertising and Secretary, and has served in such positions through
January 25, 2007. Effective such date, he resigned these positions and as
disclosed our Form 8-K, as filed with the United States Securities Commission on
January 26, 2007, Mr. Tieger decided to retire and will no longer work for the
Company on a full-time basis.
William W. Dudman joined our company in February 2004 as our Vice
President-Operations. For the five years immediately preceding his employment he
had held various management positions within the marine industry, most recently
with West Marine, Inc., our largest customer.
Gregor M. Dornau is the son of Peter G. Dornau, our President and Chief
Executive Officer. He has been employed by the Company as a salesman since 1990
and during 2005 he was elected to serve as Vice President-Sales.
James M. Kolisch joined our Board of Directors as an outside director in
May 1998. During the past five years, Mr. Kolisch has been engaged in the
insurance industry and served as president of USI Florida an entity that sources
most of the our insurance needs. Mr. Kolisch serves on the Board of Directors'
Audit Committee.
Laz L. Schneider is, and has been for the past five years, an attorney in
private practice and was elected to serve as an outside Director of the Company
during May 1998. Mr. Schneider is a partner at Berger, Singerman, P.A., a law
firm that serves as our lead counsel in various corporate and litigation
matters.
John B. Turner joined our Board of Directors in June 2002. During the past
five years, Mr. Turner has been retired. Prior to his retirement, he was an
insurance executive. His professional experience in the aforementioned areas
spans in excess of twenty-five years. Mr. Turner serves on the Board of
Directors' Audit Committee.
Sonia B. Beard is a Florida Certified Public Accountant working for Walt
Disney World since 1997. She currently holds the position as the Manager of
Concept Development for the Revenue Lines of Business of Walt Disney World. Ms.
Beard has in excess of twelve years financial experience. She is an outside
director and serves as the Chairperson and Financial Expert of the Board of
Directors' Audit Committee.
16
Audit Committee
We have an Audit Committee, which consists of Sonia B. Beard, John B.
Turner and James M. Kolisch as of December 31, 2006. The Board has designated
Sonia B. Beard as the "audit committee financial expert," as defined by Item
401(h) of Regulation S-K of the Securities Exchange Act of 1934 and serves as
its chairperson. The Board has determined that Sonia B. Beard, John B. Turner
and James M. Kolisch are "independent directors" within the meaning of the
listing standards of the NASDAQ Capital Market.
Nominating Committee
We do not have a standing Nominating Committee of the Board of Directors.
During the past five years we have had to conduct only one search for a new
director and each member participated in that process. Accordingly, we have
reached the decision that, given the size of our Company and Board, all members
of the board will actively participate in prospective searches rather than
having this function performed by a few members.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics, which is applicable
to all directors, officers and employees of the company, including our principal
executive officer, our principal financial officer, our principal accounting
officer or controller or other persons performing similar functions. We filed
our Code of Ethics as Exhibit 14.1 to our Annual Report on Form 10-K for the
year ended December 31, 2004 and is incorporated herein by reference. The
Company will provide a copy of this Code of Ethics to any person on written
request to our principal financial officer.
Compliance with Section 16(a) of the Exchange Act
Based solely on reviews of Forms 3 and 4 furnished to us by the
aforementioned individuals, it was determined that no reporting person failed to
file a timely submission of ownership changes and that we were in compliance
with Rule 16(a)3(e) of the Exchange Act during our most recent fiscal year.
Item 11. Management Remuneration and Transactions
The following table sets forth the amount of compensation for the fiscal
years ended December 31, 2006, 2005, and 2004 for Peter G. Dornau and each of
our executive officers, whose aggregate compensation exceeded $100,000 on an
annual basis (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
Name and
Principal Position Annual compensation Long term compensation
Restricted
Stock Options/
Year Salary Bonus Awards SARs
---- -------- ------- ------- ------
Peter G. Dornau, CEO 2006 $105,249 $ - $27,540(1) 15,000
2005 $106,983 $11,500 $23,850(2) -
2004 $108,450 $13,000 $21,875(3) 50,000
Edward Anchel, CFO 2006 $ 96,384 $ - $27,540(1) 15,000
2005 $ 97,804 $11,500 $23,850(2) -
2004 $ 96,900 $13,000 $21,875(3) 50,000
Jeffrey J. Tieger,VP 2006 $ 62,691 $ - $13,770(1) 15,000
2005 $ 62,759 $ 7,000 $11,925(2) -
2004 $ 63,339 $ 8,500 $12,500(3) 50,000
William Dudman, VP 2006 $ 87,555 $ - $13,770(1) 22,000
2005 $ 88,777 $ 8,000 $11,925(2) -
Gregor M. Dornau, VP 2006 $ 94,790 $ - $13,770(1) 21,000
2005 $ 96,725 $ 8,000 $11,925(2) -
17
Messrs. William Dudman and Gregor Dornau are only reported for the years
ended December 31, 2006 and 2005 as they either did not reach the required
reporting threshold or were not officers in 2004.
(1) Represents the aggregate value on the date of grant of restricted stock
awards made during April, 2006 with respect to 30,000 shares of the Company's
common stock awarded to each of Messrs. Peter Dornau and Edward Anchel, and
15,000 shares of the Company's common stock awarded to each of Messrs. Jeffrey
J. Tieger, William W. Dudman and Gregor Dornau, based on the closing price of
the shares on the award date.
(2) Represents the aggregate value on the date of grant of restricted stock
awards made during April, 2005 with respect to 30,000 shares of the Company's
common stock awarded to each of Messrs. Peter Dornau and Edward Anchel, and
15,000 shares of the Company's common stock awarded to each of Messrs. Jeffrey
J. Tieger, William W. Dudman and Gregor Dornau, based on the closing price of
the shares on the award date.
(3) Represents the aggregate value on the date of grant of restricted stock
awards made during April, 2004 with respect to 35,000 shares of the Company's
common stock awarded to each of Messrs. Peter Dornau and Edward Anchel, and
20,000 shares of the Company's common stock awarded to each of Mr. Jeffrey J.
Tieger, based on the closing price of the shares on the award date.
Option Grants in Last Fiscal Year
On November 6, 2006 Incentive stock options were granted to our Named
Executive Officers as well as an additional ten (10) other employees. The total
awarded options aggregated 135,000 shares of which Messrs. Peter G. Dornau,
Edward Anchel and Jeffrey J. Tieger each received options representing 15,000
shares and Messrs. William W. Dudman and Gregor M. Dornau received 22,000 and
21,000 options, respectively.
Aggregate Option Exercises in Fiscal 2006 and Option Values
The following table sets forth information as to the exercise of stock
options during the fiscal year ended December 31, 2006, by our Named Executive
Officers and the fiscal year-end values of unexercised options.
Shares Number of options/SAR's/ Value of in-the-money options/
acquired Value Warrants at end of fiscal year SAR'S at end of fiscal year (1)
Name by exercise realized exercisable unexercisable exercisable unexercisable
----------- --------- ----------- ------------- ---------- -------------
Peter G. Dornau 27,000 $19,250 1,155,500 155,500 $1,260,545 $ 54,545
Edward Anchel 27,500 22,025 50,000 50,000 43,636 54,545
Jeffrey J. Tieger 27,500 22,025 40,000 6,000 169,636 54,545
William W. Dudman - - 50,000 24,000 6,545 26,182
Gregor M. Dornau 22,000 17,620 36,000 49,000 39,273 53,455
------- ------- --------- ------- ---------- --------
104,500 $80,920 1,393,000 223,000 $1,519,635 $243,272
======= ======= ========= ======= ========== ========
(1) The value of unexercised "in-the-money" options at December 31, 2006
was calculated by determining the difference between $2.10, the fair market
value of the underlying Common Stock at December 31, 2006 and the option price.
An option is "in-the-money" when the fair market value of the underlying Common
Stock exceeds the exercise price of the option.
Stock Option Plans
We have three stock options plans: our 1994, and 2002 Incentive Stock
Option Plans (the "1994 Plan", and "2002 Plan") and the 2002 Non-Qualified Stock
Option Plan. All of our employees are eligible to be selected to participate in
our 1994 and 2002 Qualified Plans and in our 2002 Non-Qualified Stock Option
Plan. The Plans are administered by the Board of Directors, which selects
individuals to be participants and determines the type and number of awards to
be granted.
18
The option price for stock options granted under all Plans is stipulated to
be not less than the fair market value of Common Stock on the date of grant and
the term of each option is fixed by the Committee. Options become exercisable as
determined by the Board of Directors.
Other Benefits
We provide our executive officers and employees with group health,
hospitalization and life insurance plans. We also maintain a SAR/SEP Savings
Plan and a 401(k) savings plan which are sponsored by two of our subsidiaries,
Star brite Distributing, Inc. and Kinpak Inc., respectively. Both plans are
non-contributory by us and are entirely funded by employee contributions.
Securities authorized for issuance at December 31, 2006 under equity
compensation plans:
Number of securities
Number of securities Weighted average remaining available
to be issued upon exercise price of for future issuance
exercise of outstanding outstanding options, under equity com-
options, warrants & rights warrants & rights pensation plans
Equity compensation plans
approved by security holders:
Plan stock options granted (1) 714,500 $1.23 45,000
Non plan stock options granted (2) 231,000 .76 -
Warrants (3) 1,000,000 .88 -
--------- ----- ------
Total equity compensation plans
approved and not approved by
security holders 1,945,500 $1.02 45,000
========= ===== ======
(1) Includes 400,000 options granted under the 2002 Qualified Incentive
Stock Option Plan, 155,000 options under the 2002 Non-Qualified Stock Option
Plan and 159,500 options under the 1994 Qualified Incentive Stock Option Plan
(this plan has expired and no further awards can be made under its provisions).
(2) Includes 231,000 options granted to Messrs. Peter G. Dornau and Jeffrey
J. Tieger in conjunction with a loan made to the Company by an entity 50% owned
by each of them.
(3) Includes 1,000,000 warrants issued to Peter G. Dornau in connection
with a $1.5 million Subordinated Revolving Line of Credit he extended to the
Company during 2005. Such warrants are exercisable 500,000 at $1.03 per share
and 500,000 exercisable at $.88 per share. The exercise price equals the fair
market value of the underlying security at date of issuance plus a 10% premium
factor.
Restricted Stock Awards as Compensation
During April 2006 we issued 129,000 shares of our common stock bearing a
restricted legend to certain officers and other key employees as a component of
their compensation. At the date of grant the shares had a market value of $1.08
each. Shares were awarded as follows:
19
Officers:
Peter G. Dornau, President and CEO 30,000 shares
Edward Anchel, Vice President and CFO 30,000 shares
Jeffrey J. Tieger, Vice President and Secretary 15,000 shares
William Dudman, Vice President 15,000 shares
Gregor M. Dornau 15,000 shares
-------
105,000 shares
Other employees, as a group (7 individuals) 24,000 shares
-------
Total restricted shares awarded 129,000 shares
=======
These restricted stock awards were approved by our shareholders at our
Annual Meeting of Shareholders held on June 15, 2006.
Compensation of Outside (Independent) Directors:
Our outside directors, those other than officers of the Company, receive
compensation only in the form of non-qualified common stock options. Such
options are generally awarded for a ten year period, with an exercise price
equal to the closing market price on the date of award. And are fully vested at
time of grant. The following table reflects awards made during the three years
ended December 31, 2006:
Number of options granted during the
year ended December 31,
Director 2006 2005 2004
------ ----- ------
Sonia B. Beard 10,000 shares - 10,000 shares
James M. Kolisch 10,000 shares - 10,000 shares
Laz L. Schneider 10,000 shares - 10,000 shares
John B. Turner 10,000 shares - 10,000 shares
------ ---- ------
40,000 shares - 40,000 shares
====== ==== ======
Compensation Committee
We do not have a standing Compensation Committee of the Board of Directors.
Our Company is controlled by one shareholder, our President and CEO, Peter G.
Dornau. Mr. Dornau is actively involved in the recurring operations and has
relied on setting compensation arrangements in consultation with other key
executives of the Company. All decisions reached by this group are disclosed in
various filings with the United States Securities and Exchange Commission and
are submitted to our shareholders as a component of our annual Proxy materials.
Accordingly, we have reached the decision that, given the size of our Company
and Board, not to have a standing committee for this purpose
Certain additional disclosures required under this section are incorporated
by reference to portions of our Definitive Proxy Statement, which will be filed
within 120 days of December 31, 2006 covering our Annual Meeting of Shareholders
which will be held on or about June 14, 2007.
20
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information at December 31, 2006 with
respect to the beneficial ownership of our common stock by holders of more than
5% of such stock and by all of our directors and officers as a group:
Title of Name and Address of Amount and Nature of Percent
Class Beneficial Owner Beneficial Ownership of Class
----------- -------------------------------------------- -------------------- --------
Common Peter G. Dornau, President, CEO,
Chairman Board of Directors
Fort Lauderdale, FL 33317 5,533,368 (1) 60.4%
Common Edward Anchel, Vice President-Finance,
CFO, Director
Boynton Beach, FL 33437 323,451 (2) 3.5%
Common Jeffrey J. Tieger, former Vice President-
Advertising, Secretary, Director
Plantation, FL 33314 414,780 (3) 4.5%
Common William W. Dudman, Vice President-Operations 55,300 (4) .6%
Common Gregor M. Dornau, Vice President-Sales
Fort Lauderdale, FL 33315 271,780 (5) 3.0%
Common James M. Kolisch, Director
Coral Gables, FL 33114 56,167 (6) .6%
Common Laz L. Schneider, Director
Fort Lauderdale, FL 33305 40,000 (7) .4%
Common John B. Turner, Director
Miami, FL 33186 69,463 (8) .8%
Common Sonia B. Beard, Director
Merritt Island, FL 32952 30,000 (9) .4%
Common All directors and officers as a group
8 individuals 6,794,309 (10) 74.1%
(1) Includes 1,155,500 shares that are issuable upon the exercise of stock
options and/or warrants within 60 days of December 31, 2006.
(2) Includes 40,000 shares that are issuable upon the exercise of stock
options within 60 days of December 31, 2006.
(3) Includes 155,500 shares that are issuable upon the exercise of stock
options within 60 days of December 31, 2006.
(4) Includes 6,000 shares that are issuable upon the exercise of stock
options within 60 days of December 31, 2006.
(5) Includes 36,000 shares that are issuable upon the exercise of stock
options within 60 days of December 31, 2006.
(6) Includes 18,000 shares that are issuable upon the exercise of stock
options within 60 days of December 31, 2006.
21
(7) Includes 40,000 shares that are issuable upon the exercise of stock
options within 60 days of December 31, 2006.
(8) Includes 40,000 shares that are issuable upon the exercise of stock
options within 60 days of December 31, 2006.
(9) Includes 30,000 shares that are issuable upon the exercise of stock
options within 60 days of December 31, 2006.
(10) Includes 1,543,000 shares that are issuable upon the exercise of stock
options and/or warrants within 60 days of December 31, 2006.
(11) Effective December 10, 2006 the Voting Proxy granted by Gregor M.
Dornau to his father, Peter G. Dornau, our President and CEO was terminated. As
of such date Gregor M. Dornau has sole voting power over the shares he owns.
Item 13. Certain Relationships and Related Transactions
During 2005 Mr. Dornau loaned the Company $1.5 million in order to bolster
working capital. In connection with the loan, we issued warrants to Mr. Dornau
to purchase a maximum of 1 million shares of our common stock. Such warrants are
exercisable 500,000 shares at $1.13 and 500,000 shares at $.863. The exercise
prices were determined by the closing bid of our stock plus ten (10) percent on
each date of grant. In adition, he had the right, at his sole discretion, to
convert such debt into a maximum of 1.5 million shares of our common stock at
the rate of $1.00 per share. On November 10, 2006, Mr. Dornau notified the
Company that he was exercising his right to convert the $1.5 million loan into
1.5 million shares of our common stock. Such transaction was approved
unamimously by the members of our Board of Directors with Mr. Peter Dornau
abstaining from the vote.
On May 1, 1998, we entered into a ten-year lease for approximately 12,700
square feet of office and warehouse facilities in Fort Lauderdale, Florida from
an entity fifty percent owned each by Messrs. Peter G. Dornau and Jeffrey J.
Tieger, our President and former Vice President-Advertising, respectively. The
lease required a minimum rental of $94,800 the first year and provides for a
maximum 2% increase on the anniversary of the lease throughout the term, which
has been waived through December 31, 2006. Additionally, the landlord is
entitled to collect from us its pro-rata share of all taxes, assessments,
insurance premiums, operating charges, maintenance charges and any other
expenses, which normally arise from ownership. We believe that the terms of this
lease are comparable to those of similar properties in the same geographic area
of the Company available from unrelated third parties. Rent charged to
operations during the years ended December 31, 2006, 2005 and 2004 amounted to
approximately $100,500 each year.
We acquired the rights to the Star brite trademark and related products for
the United States and Canada in conjunction with our original public offering
during March 1981. Peter G. Dornau, our president is the direct or beneficial
owner of three companies that market Star brite products outside the United
States and Canada. These companies serve as distributors of our products and the
terms of payment are the same as for our other customers. At December 31, 2006
and 2005, we had amounts due from affiliated companies, which are directly or
beneficially owned by our president aggregating approximately $231,200 and
$29,000, respectively.
Sales to such affiliates were sold at cost of material and labor plus an
amount to cover manufacturing overhead costs. In addition, the affiliates are
charged for their allocable share of administrative expenses of the Company. The
sales to affiliates aggregated approximately $622,300, $826,900, and $616,800
during the years ended December 31, 2006, 2005, and 2004, respectively; and
allocable administrative fees aggregated $350,000, $300,000 and $300,000,
respectively for such periods.
A subsidiary of ours currently uses the services of an entity that is owned
by our president to conduct product research and development. Such entity
received $30,000 per year during the years ended December 31, 2006, 2005 and
2004 under such relationship.
22
Item 14. Principal Accounting Fees and Services
The information required for this item is incorporated by reference to our
Definitive Proxy Statement to be filed in conjunction with our upcoming annual
shareholders' meeting which shall be filed with the United States Securities and
Exchange Commission and sent out to shareholders prior to 120 days past our
year-end of December 31, 2006.
Item 15. Exhibits, Financial Statements, Schedules and Reports Filed on Form 8K
As more fully discussed in Note 12 - Restatements, to the Consolidated
Financial Statements, we filed an amended Form 10-K/A for the year ended
December 31, 2005 and 2004 including the following substantive changes: (a) the
recognition of the compensation cost associated with stock options of which
certain terms were modified during the year ended December 31, 2004 and (b) the
reclassification between debt and additional paid-in capital of certain of the
proceeds from the Revolving Subordinated Obligation to our President and CEO,
Peter G. Dornau received during the year ended December 31, 2005. Neither of
these items have an impact on our previously reported cash flows.
(A) Consolidated financial statements:
(i) Consolidated balance sheets as of December 31, 2006 and 2005.
(ii) Consolidated statements of operations for each of the three years
ended December 31, 2006, 2005 and 2004.
(iii) Consolidated statements of shareholders' equity for each of the three
years ended December 31, 2006, 2005 and 2004.
(iv) Consolidated statements of cash flows for each of the three years
ended December 31, 2006, 2005 and 2004.
(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.
(B) Exhibits
3.1 Articles of Incorporation (incorporated by reference to the Company's
Registration Statement on Form S-18 filed with the United States Securities and
Exchange Commission on March 26, 1981).
3.2 Bylaws (incorporated by reference to the Company's Registration
Statement on Form S-18 filed with the United States Securities and Exchange
Commission on March 26, 1981).
4.1 Form of Certificate for Series 1997 Bonds*
4.2 Form of Certificate for Series 2002 Bond*
4.3 Trust Indenture dated as of December 1, 1996 between the IDB Board and
Regions Bank, as Trustee and Registrar relating to the $4,000,000 1997 IDB
Bonds*
4.4 Supplement to Trust Indenture for 1997 Bonds dated March 1, 1997*.
23
4.5 Trust Indenture dated as of July 22, 2002 between the IDB Board and
Regions Bank, as Trustee and Registrar relating to the $3,500,000 Taxable IDB
Bonds Series 2002*
10.1 Restated Lease Agreement dated as of December 1, 1996 between The
Industrial Development Board of the City of Montgomery ("IDB Board") and Kinpak,
Inc.*
10.2 First Supplemental Lease dated as of March 1, 1997 between the IDB
Board and Kinpak, Inc.*
10.3 Second Supplemental Lease dated as of July 1, 2002 between the IDB
Board and Kinpak, Inc.*
10.4 Credit Agreement dated as of July 1, 2002 by and among the Company,
Star-Brite Distributing, Inc., Star Brite-Automotive, Inc., Star-Brite
Distributing (Canada), Inc., Kinpak Inc. and Regions Bank*
10.5 Amendment to Credit Agreement dated June 1, 2004 by and among the
Company, Star-Brite Distributing, Inc., Star-Brite Automotive, Inc., Star Brite
Distributing (Canada), Inc., Kinpak, Inc. and Regions Bank*
10.6 Mortgage, Assignment of Leases and Security Agreement dated as of July
1, 2002 between Kinpak, Inc. and Regions Bank.*
10.7 Security Agreement dated as of July 22, 2002 between Kinpak, Inc. and
Regions Bank.*
10.8 Irrevocable Letter of Credit dated July 22, 2002 issued by Regions
Bank to secure the Series 1991 Bonds*
10.9 Irrevocable Letter of Credit dated July 22, 2002 issued by Regions
Bank to secure the Series 2002 Bonds*
10.10 Extension to Credit Agreement dated March 31, 2003 by and among the
Company, Star-Brite Distributing, Inc., Star-Brite Automotive, Inc., Star Brite
Distributing (Canada), Inc., Kinpak, Inc. and Bank*
10.11 Ocean Bio-Chem, Inc. 1992 Incentive Stock Option Plan (incorporated
by reference to Form S-8 filed with the United States Securities and Exchange
Commission on June 24, 1994).
10.12 Ocean Bio-Chem, Inc. 1994 Non-Qualified Stock Option Plan
(incorporated by reference to Form S-8 filed with the United States Securities
and Exchange Commission on June 24, 1994).
10.13 Ocean Bio-Chem, Inc. 2002 Incentive Stock Option Plan (incorporated
by reference to an exhibit contained in the Company's proxy statement filed with
the United States Securities and Exchange Commission on April 28, 2003).
10.14 Lease dated May 1, 1998 between Star Brite Distributing, Inc. and
PEJE, Inc.*
14.1 Code of Ethics (incorporated by reference to an exhibit contained in
the Company's proxy statement filed with the United States Securities and
Exchange Commission on April 13, 2004).
21. List of Subsidiaries **
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
Sarbanes-Oxley **
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
Sarbanes-Oxley **
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
Sarbanes-Oxley **
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
Sarbanes-Oxley **
* Incorporated by reference to our Annual Report on Form 10-K for the year
ended December 31, 2004.
** Attached hereto.
24
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
of Directors and Chief
Executive Officer
March 29, 2007
By: /s/ Edward Anchel
----------------------
EDWARD ANCHEL
Chief Financial Officer
March 29, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Capacity Date
--------------------- ------------------------------- ---------------
/s/ Peter G. Dornau President, Chief Executive March 29, 2007
--------------------- Officer and Director
Peter G. Dornau
/s/ Edward Anchel Vice President Finance, Chief March 29, 2007
--------------------- Financial Officer, Director
Edward Anchel
/s/ James M. Kolisch Director March 29, 2007
---------------------
James M. Kolisch
/s/ Laz L. Schneider Director March 29, 2007
---------------------
Laz Schneider
/s/ John B. Turner Director March 29, 2007
---------------------
John B. Turner
/s/ Sonia B. Beard Director March 29, 2007
---------------------
Sonia B. Beard
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.
25
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
Page
--------
Reports of independent registered public accounting firms F-2-F-3
Consolidated balance sheets F-4
Consolidated statements of operations F-5
Consolidated statements of shareholders' equity F-6
Consolidated statements of cash flows F-7
Notes to consolidated financial statements F-8-F-17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Ocean Bio-Chem, Inc.
We have audited the accompanying consolidated balance sheet of Ocean
Bio-Chem, Inc. and Subsidiaries as of December 3 1, 2006, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Ocean Bio-Chem,
Inc. and Subsidiaries as of December 31, 2006 and the consolidated results of
its operations and its consolidated cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.
Berenfeld Spritzer Shechter & Sheer
Certified Public Accountants
March 21, 2007
Ft. Lauderdale, Florida
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Ocean Bio-Chem, Inc.
Ft. Lauderdale. Florida
We have audited the accompanying consolidated balance sheets of Ocean Bio-Chem,
Inc. (the "Company") and subsidiaries, as of December 31, 2005, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years then ended December 31, 2005 and 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our 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 subsidiaries as of December 31, 2005 and the consolidated results of
its operations and its consolidated cash flows for the years ended December
31,2005 and 2004, in conformity with accounting principles generally accepted in
the United States of America.
LEVI, CAHLIN & CO.
North Miami Beach, Florida
March 22, 2006, except as to note 12, as to which
the date is August 25, 2006
F-3
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2006 AND 2005
ASSETS
2006 2005
----------- -----------
Current Assets: (Restated)
Cash $ 71,080 $ 204,543
Trade accounts receivable net of allowance for
doubtful accounts of approximately $192,700
and $131,000, respectively 2,026,870 2,027,162
Inventories 5,647,933 6,260,813
Refundable income taxes 274,500
Prepaid expenses and other current assets 218,151 235,574
----------- -----------
Total current assets 7,964,034 9,002,592
----------- -----------
Property, plant and equipment, net 6,800,176 7,310,640
----------- -----------
Other assets:
Trademarks, trade names, and patents 330,439 330,439
Due from affiliated companies 231,200 29,022
Deposits and other assets 203,510 230,329
----------- -----------
Total other assets 765,149 589,790
----------- -----------
Total assets $15,529,359 $16,903,022
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable trade $ 943,907 $ 1,256,640
Note payable bank 2,150,000 4,000,000
Current portion of long-term debt 586,060 580,852
Accrued expenses payable 363,669 451,977
----------- -----------
Total current liabilities 4,043,636 6,289,469
----------- -----------
Long-term debt less current portion 4,550,190 5,950,958
----------- -----------
Commitments and contingencies -
-
Shareholders' equity:
Common stock - $.01 par value, 10,000,000 shares
authorized, 7,621,316 and 5,849,316 shares
issued and outstanding at December 31,
2006 and 2005, respectively 76,213 58,493
Additional paid-in capital 7,257,447 5,397,845
Foreign currency translation adjustment ( 176,094) ( 179,653)
Retained earnings (deficit) ( 213,838) ( 605,895)
------------ ------------
6,943,728 4,670,790
Less treasury stock 7,519 shares, at cost ( 8,195) ( 8,195)
------------ ------------
Total shareholders' equity 6,935,533 4,662,595
------------ ------------
Total liabilities and shareholders' equity $15,529,359 $16,903,022
============ ============
The accompanying notes are an integral part of these financial statements.
F-4
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
2006 2005 2004
----------- ----------- -----------
(Restated) (Restated)
Gross Sales $22,338,500 $19,706,469 $24,361,056
Less discounts, returns and allowances 1,911,368 2,054,564 2,703,973
----------- ----------- -----------
Net sales 20,427,132 17,651,905 21,657,083
Cost of goods sold 14,719,006 14,640,883 16,675,780
----------- ----------- -----------
Gross profit 5,708,126 3,011,022 4,981,303
----------- ----------- -----------
Operating expenses:
Advertising and promotion 1,143,420 1,110,258 942,991
Selling and administrative 3,510,715 3,775,848 3,607,205
Interest 680,572 499,433 307,840
----------- ----------- -----------
Total operating expenses 5,334,707 5,385,539 4,858,036
----------- ------------ -----------
Operating profit (loss) 373,419 ( 2,374,517) 123,267
Interest and other income 18,638 26,824 955
----------- ------------ -----------
Income (loss) before provision (benefit)
for income taxes 392,057 ( 2,347,693) 124,222
Provision (benefit) for income taxes - ( 534,500) 107,000
----------- ------------ -----------
Net income (loss) 392,057 ( 1,813,193) 17,222
Other comprehensive income:
Foreign currency translation,
net of taxes 3,559 25,211 32,459
----------- ------------ -----------
Comprehensive income (loss) $ 395,616 ($1,787,982) $ 49,681
=========== ============ ===========
Earnings (loss) per share:
Basic $ .06 ($ .32) $ .00
=========== ============ ===========
Diluted $ .05 ($ .32) $ .00
=========== ============ ===========
The accompanying notes are an integral part of these financial statements.
F-5
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
Foreign Retained
Common stock Additional currency earnings Treasury
Shares Amount paid-in capital adjustment (deficit) stock Total
-------- ------- ------------- ----------- ----------- --------- ----------
January 1, 4,960,843 $49,608 $4,409,829 ($ 237,323) $ 1,190,076 ($ 8,195) $5,403,995
2004
Net income 17,222 17,222
Issuances of
common stock 456,970 4,570 312,917 317,487
Compensation
cost associated stock
option modifications 178,332 178,332
Foreign currency
translation adjustment 32,459 32,459
--------- ------- ---------- ----------- ------------ ---------- -----------
December 31,
2004 (Restated) 5,417,813 54,178 4,901,078 ( 204,864) 1,207,298 ( 8,195) 5,949,495
Net (loss) ( 1,813,193) (1,813,193)
Issuances of
common stock 431,503 4,315 185,869 190,184
Compensation cost
associated with
warrants issued
pursuant to subordinated
revolving Note 310,898 310,898
Foreign currency
translation adjustment 25,211 25,211
--------- ------- ---------- ----------- ------------ ---------- -----------
December 31,
2005 (Restated) 5,849,316 58,493 5,397,845 ( 179,653) ( 605,895) ( 8,195) 4,662,595
Net income 392,057 392,057
Forgiveness of debt- affiliates 295,752 295,752
P Dornau con-
version of debt 1,500,000 15,000 1,225,920 1,240,920
Bonus shares to
employees 129,000 1,290 118,132 119,422
Exercise of stock
options 143,000 1,430 145,620 147,050
Compensation
cost associated
stock option 74,178 74,178
Foreign currency
translation
adjustment 3,559 3,559
--------- ------- ---------- ----------- ------------ ---------- -----------
December 31,
2006 7,621,316 $76,213 $7,257,447 ($ 176,094) ($ 213,838) ($ 8,195) $6,935,533
========= ======= ========== =========== ============ ========== ===========
The accompanying notes are an integral part of these financial statements.
F-6
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
2006 2005 2004
----------- ----------- -----------
(Restated) (Restated)
Cash flows from operating activities:
Net income (loss) $ 392,057 ($1,813,193) $ 17,222
Adjustments to reconcile net income (loss)
to net cash provided (used) by operations:
Depreciation and amortization 780,753 762,943 735,103
Equity based compensation 195,030 97,265 266,145
(Increase) decrease in accounts receivable -
allowance for doubtful accounts ( 61,408) ( 70,000) ( 5,000)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 61,700 2,694,982 ( 314,121)
(Increase) decrease in inventory 612,879 ( 1,042,381) 97,310
(Increase) in recoverable income taxes 274,500 ( 274,500) -
(Increase) decrease in prepaid expenses 44,242 ( 21,083) ( 21,120)
(Decrease) increase in accounts payable
and accrued taxes and other ( 401,041) ( 1,160,393) 1,148,030
------------ ------------ -----------
Net cash provided (used) by operating activities 1,898,712 ( 826,360) 1,923,569
------------ ------------ -----------
Cash flows used by investing activities:
Purchases of property, plant and equipment ( 270,289) ( 735,983) ( 566,117)
Utilization of (additions to) trust funds for
equipment purchased, net - 1,851 124,442
------------ ------------ -----------
Net cash used by investing activities ( 270,289) ( 734,132) ( 441,675)
------------ ------------ -----------
Cash flows from financing activities:
Borrowings line of credit 2,800,000 4,338,177 2,075,000
Principle payments - line of credit ( 4,650,000) ( 4,838,177) (2,125,000)
(Increase) decrease in amounts due from affiliates ( 202,178) 379,454 ( 235,551)
Increase (decrease) in long-term debt 135,904 ( 370,655) ( 513,293)
Increase in notes payable - Peter Dornau and affiliates - 1,150,000 -
Common stock transactions 145,620 92,919 229,674
------------ ------------ -----------
Net cash provided (used) by financing activities ( 1,765,446) 751,718 ( 569,170)
------------ ------------ -----------
Increase (decrease) in cash prior to effect of
exchange rate on cash ( 137,022) ( 808,774) 912,724
Effect of exchange rate on cash 3,559 25,211 32,459
------------ ------------ -----------
Net increase (decrease) in cash ( 133,463) ( 783,563) 945,183
Cash at beginning of year 204,543 988,106 42,923
------------ ------------ -----------
Cash at end of year $ 71,080 $ 204,543 $ 988,106
============ ============ ===========
Supplemental information - disclosure of cash transactions:
Cash paid for interest during year $ 680,572 $ 499,433 $ 307,840
============ ============ ===========
Cash paid for income taxes during year - - $ 149,000
============ ============ ===========
Supplemental information - disclosure of non - cash transactions:
Compensation cost associated with stock options and warrants $ 74,178 $ 310,898 $ 178,332
============ ============ ===========
Conversion of the Company's indebtedness to P. Dornau to equity $ 1,241,000 $ - $ -
============ ============ ===========
Foregiveness of indebtedness to an affiliate $ 295,752 $ - $ -
============ ============ ===========
The Company had no cash equivalents at December 31, 2006, 2005, and 2004.
The accompanying notes are an integral part of these financial statements.
F-7
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
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 principally under the Star brite brand to the marine, automotive and
recreational vehicle aftermarkets.
Principles of consolidation - The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All significant
inter-company accounts and transactions have been eliminated in consolidation.
Revenue recognition - Revenue from product sales is recognized when
persuasive evidence of an arrangement exists, delivery to customer has occurred,
the sales price is fixed and determinable, and collectibility of the related
receivable is probable.
Collectibility of accounts receivable - Included in the consolidated
balance sheets as of December 31, 2006 and 2005 are allowances for doubtful
accounts aggregating approximately $192,700 and $131,000, respectively. Such
amounts are based on management's estimates of the creditworthiness of its
customers, current economic conditions and other historical information.
Consolidated bad debt expense charged against operations for the years ended
December 31, 2006, 2005 and 2004 aggregated approximately $71,000, $32,000 and
$66,000, respectively.
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. The composition of inventories at December 31, 2006
and 2005 are as follows:
2006 2005
---- ----
Raw materials $3,423,030 $3,235,086
Finished goods 2,224,903 3,025,727
---------- ----------
$5,647,933 $6,260,813
========== ==========
At December 31, 2006 and for the year then ended, $20,000 is reflected in the
accompanying consolidated financial statements as a reserve for slow moving
inventory.
Prepaid expenses - During the years ended December 31, 2006, 2005 and 2004,
the Company introduced certain new products to its customers. In connection
therewith, the Company produced new product collateral materials to be
distributed over a period of time of approximately one year. Accordingly the
Company follows the policy of amortizing these costs over a one-year basis. At
December 31, 2006 and 2005, the accumulated cost of collateral materials on hand
and other deferred promotional costs that were or will be charged against the
subsequent year's operations amounted to approximately $15,400 and $16,500,
respectively.
Property, plant and equipment - Property, plant and equipment are stated at
cost. Depreciation is provided over the estimated useful lives of the related
assets using the straight-line method.
Stock based compensation - The Company adopted Statement of Financial
Accounting Standards No. 123 (revised 2004), "Shared Based Payment" ("SFAS No.
123R"), which requires the measurement and recognition of compensation cost for
all share-based payment awards made to employees and directors based on
estimated fair values. Prior to the adoption of SFAS No. 123R, The Company
accounted for its stock-based employee compensation related to stock options
under the intrinsic value recognition and measurement principles of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and the disclosure alternative prescribed by SFAS No. 123,
"Accounting for Stock-Based Compensation," as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure."
Accordingly, The Company presents pro- forma information for the periods prior
to the adoption of SFAS No. 123R and no employee compensation cost was
recognized for the stock-based compensation plans other than the grant date
intrinsic value, if any, for the options granted prior to January 1, 2006.
Use of estimates - The preparation of financial statements in conformity
with U.S.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.
F-8
Concentration of credit risk - Financial instruments that potentially
subject the Company to concentration of credit risk consist primarily of
accounts receivable. The Company's five largest customers represented
approximately 59%, 43% and 55% of consolidated gross revenues for the years
ended December 31, 2006, 2005 and 2004; and 57% and 26% of consolidated accounts
receivable at December 31, 2006 and 2005, respectively. The Company has a
longstanding relationship with each of these entities and has always collected
open receivable balances. However, the loss of any of these customers could have
an adverse impact on the Company's operations.
Concentration of cash - At various times of the year and at December 31,
2006, the Company had a concentration of cash in one bank in excess of
prevailing insurance offered through the Federal Deposit Insurance Corporation
at such institution. Management does not consider the excess deposits to be a
significant risk.
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 primary temporary differences included therein are attributable
to differing methods of reflecting depreciation for financial statement and
income tax purposes.
Trademarks, trade names and patents - The Star brite trade name and
trademark were purchased in 1980 for $880,000. The cost of such intangible
assets was amortized on a straight-line basis over an estimated useful life of
40 years through December 31, 2001. Effective January 1, 2002 and pursuant to
Statement of Financial Accounting Standards No. 142, the Company has determined
that the carrying value of such intangible assets relating to its Star brite
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. Management has considered the impact of the loss sustained
for the year ended December 31, 2005 in order to determine if a permanent
impairment of value of these assets has been experienced. The underlying reasons
for the loss are not viewed as permanent in nature and, management does not
believe that a permanent impairment has been realized.
Translation of Canadian currency - The accounts of the Company's Canadian
subsidiary are translated in accordance with Statement of Financial Accounting
Standards No. 52, which requires that foreign currency assets and liabilities be
translated using the exchange rates in effect at the balance sheet date. Results
of operations are translated using the average exchange rate prevailing
throughout the period. The effects of unrealized exchange rate fluctuations on
translating foreign currency assets and liabilities into U.S. dollars are
accumulated as the translation adjustment in shareholders' equity. Realized
gains and losses from foreign currency transactions, if any, are included in net
earnings of the period.
Reclassifications - Certain items in the accompanying consolidated
financial statements for the years ended December 31, 2005 and 2004 have been
reclassified to conform with the 2006 presentation.
F-9
Note 2 - Property, plant and equipment:
The Company;s property, plant and equipment consisted of the following:
Estimated
Useful Life - Years
------------------- December 31,
2006 2005
---- ----
Land $ 278,325 $ 278,325
Building 30 years 4,389,155 4,390,894
Manufacturing and warehouse equipment 6-20 years 6,521,010 6,044,138
Office equipment 3-5 years 678,537 652,940
Construction in process 47,798 278,239
Leasehold improvement 10-15 years 145,505 145,505
---------- ----------
12,060,330 11,790,041
Less accumulated depreciation 5,260,154 4,479,401
---------- ----------
Total property, plant and equipment, net $6,800,176 $7,310,640
========== ==========
Depreciation expense for the years ended December 31, 2006, 2005 and 2004,
which includes amortization of capitalized lease assets, amounted to
approximately $780,800, $762,900 and $735,100, respectively.
Included in property, plant and equipment are the following assets at the
Company's Alabama subsidiary and which are substantially held under capitalized
leases securing certain City of Montgomery, AL Industrial Development Bonds:
December 31,
2006 2005
---- ----
Land $ 278,325 $ 278,325
Building 4,389,154 4,390,894
Manufacturing and warehouse equipment 6,564,504 5,747,411
Construction in process 23,391 274,843
---------- ----------
11,255,374 10,691,473
Less accumulated depreciation 4,598,825 3,557,788
---------- ----------
Total $6,656,549 $7,133,685
========== ==========
During February 1996, the Company purchased the assets of Kinpak, Inc. In
order to finance the expansion contemplated by the purchase, the Company entered
into an agreement with the City of Montgomery to issue Industrial Development
Bonds. The Alabama facility expansion consisted of an additional building, which
was completed during October 1997, bringing the facility, at that time, to
approximately 110,000 square feet. Such facility serves as the Company's primary
manufacturing and distribution center.
During the year ended December 31, 2002, the Company entered into an
agreement with the City of Montgomery to issue an additional series Industrial
Development Bonds aggregating $3,500,000 to finance the construction of an
additional 70,000 square feet of warehousing and manufacturing space and the
related equipment requirements. Such project was substantially completed during
2003.
Management has considered the impact of the loss sustained for the year
ended December 31, 2005 in order to determine if a permanent impairment of value
of these assets has been experienced. The underlying reasons for the loss are
not viewed as permanent in nature and, management does not believe that a
permanent impairment has been realized. Accordingly, no adjustment has been
made.
Obligations for future payments attributable to these capitalized leases
are discussed in Note 4, below.
F-10
Note 3 - Note payable, bank:
During 2002, the Company secured a revolving line of credit, which provided
a maximum of $6 million of working capital from the commercial bank providing
the financing for the expansion discussed in Note 2, above. The line carries
interest based on the 30 day LIBOR rate plus 275 basis points (approximately
8.10% and 7.14% at December 31, 2006 and 2005 respectively) payable monthly and
is collateralized by the Company's inventory, trade receivables, and intangible
assets. During May, 2004, the Company and its commercial bank agreed to increase
the maximum allowed borrowing under the line to $6 million. The remaining terms
including required financial covenants relating to maintaining minimum working
capital levels, maintaining stipulated debt to tangible net worth and adhering
to debt coverage ratios were substantially unchanged. At December 31, 2006 the
Company was in compliance with all financial covenants of the loan agreement. At
December 31, 2005 the bank had waived the Company's non-compliance with certain
of its financial covenants. This financing matures on May 31, 2007.
As of December 31, 2006 and 2005 the Company was obligated to its
commercial lender under this arrangement in the amounts of $2,150,000 and
$4,000,000 respectively. The average outstanding loan balances and interest
incurred for the years ended December 31, 2006 and 2005 were approximately
$4,081,000, $4,552,000 and $321,500 and $283,000, respectively.
Note 4 - Long-term debt:
Long-term debt at December 31, 2006 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, 2006, $1,783,108 and $2,960,000 were
outstanding attributable to the 1997 and 2002 series, respectively. At December
31, 2006 and 2005, $2,125,000 and $3,080,000 were outstanding, respectively.
During the year ended December 31, 2005 interest rates ranged between 1.8% and
3.3%. During the year ended December 31, 2006 interest rates ranged between
3.08% and 4.24%. Interest expense for 2006 and 2005 was approximately $188,200
and $156,600, respectively. 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. During 2006 and 2005, the Company, through its
subsidiary, Kinpak Inc., was obligated pursuant to various capital lease
agreements covering equipment utilized in the Company's Alabama plant. Such
obligations, aggregating approximately $57,300 and $56,300, at December 31,
2006, and 2005 respectively, have varying maturities through 2010 and carry
interest rates ranging from 7% to 12% for both years. Interest expense for 2006
and 2005 was approximately $5,200 and $3,700 respectively.
On April 12, 2005 we entered into a financing obligation with Regions Bank
whereby the bank advanced us $500,000 to finance equipment acquisitions at our
Kinpak facility. Such obligation is due in monthly installments of principal
aggregating approximately $8,300 plus interest at prevailing rates (the
outstanding balance and interest rate on this obligation at December 31, 2006
and 2005 were approximately $ 333,300 and 433,300, respectively. The interest
rate is calculated at prime plus 2.5% per annum, respectively or 10.75% at
December 31, 2006. Such obligation matures on April 15, 2010. Interest incurred
for 2006 and 2005 was approximately $29,100 and $22,000, respectively.
In 2005 Mr. Dornau loaned of the Company $1.5 million in order to bolster
working capital. In connection with such loan, the Company issued warrants to
Mr. Dornau to purchase a maximum of 1 million shares of our common stock. Such
warrants were exercisable 500,000 shares at $1.13 and 500,000 shares at $.863.
The exercise prices were determined by the closing bid of our stock plus ten
(10) percent on each date of grant. In addition, he had the right, at his sole
discretion, to convert such debt into a maximum of 1.5 million shares of our
common stock at the rate of $1.00 per share. On November 10, 2006, Mr. Dornau
F-11
notified the Company that he was exercising his rights to convert the $1.5
million loan made to the Company into 1.5 million shares. Such transaction was
approved unanimously by the members of our Board of Directors (with Mr. Dornau
abstaining from the vote).
The composition of these obligations at December 31, 2006 and 2005 were as
follows:
Current Portion Long Term Portion
2006 2005 2006 2005
---------- ---------- ---------- ----------
(Restated) (Restated)
Industrial Development Bonds $ 460,000 $ 460,000 $4,283,107 $4,745,000
Notes payable 99,996 99,996 233,344 331,448
Capitalized equipment leases 26,064 20,856 33,739 35,408
Subordinated note payable-P. Dornau - - - 1,150,000-
---------- ---------- ---------- ----------
586,060 580,852 4,550,190 6,261,856
Less imputed interest - - - 310,898
---------- ---------- ---------- ----------
$ 586,060 $ 580,852 $4,550,190 $5,950,958
========== ========== ========== ==========
Required principal payment obligations attributable to the foregoing are
tabulated below:
Year ending December 31,
2007 $ 586,060
2008 579,490
2009 572,051
2010 495,540
2011 460,000
Thereafter 2,443,109
----------
Total $5,136,250
==========
Note 5 - Income taxes:
The Components of the Company's consolidated income tax provision are as
follows:
2006 2005 2004
---------- ---------- ----------
Income tax provision (benefit): (Restated) (Restated)
Federal - current $ - ( $274,500) $ 47,600
- deferred - ( 260,000) 54,400
State - - 5,000
---------- ----------- ----------
Total $ - ($ 534,500) $107,000
========== =========== ==========
The reconciliation of income tax provision at the statutory rate to the
reported income tax expense is as follows: Year ended December 31,
2006 2005 2004
---------- ---------- ----------
Computed at statutory rate 34.0% ( 34.0%) 34.0%
State tax, net of federal benefit 5.5%
Not being able to utilize entire tax benefit
as a carry-back* ( 34.0) 11.2% -
Other, principally deferred income
taxes attributable to depreciation - 46.7
---------- ----------- ----------
Effective tax rate - ( 22.8%) 86.2%
========== =========== ==========
* The reduction from the statutory rate for the year ended December 31, 2006
represents the Income Tax effect of operating loss carryovers to offset the
current year's Taxable Income.
At December 31, 2006 the Company had available tax loss carryovers
available as offsets against future taxable income aggregating approximately
$265,800 and $1,923,600 for federal and Florida purposes, respectively expiring
in 2025. If fully utilizable, such carryovers would result in a deferred tax
asset of approximately $90,400 and $264,100 as of December 31, 2006 and 2005,
respectively. There is no assurance that the Company will ever avail itself of
all or a portion of such carryovers, accordingly, a valuation allowance has been
established against this deferred asset.
F-12
The Company's deferred tax asset and liability accounts consisted of the
following at December 31:
2006 2005
---------- ----------
Deferred tax asset $ 90,400 $ 264,100
Less valuation allowance ( 90,400) ( 264,100)
Deferred Tax Liability - -
---------- -----------
Total $ - $ -
========== ===========
During the year ended December 31, 2005, we reversed deferred income taxes
payable aggregating $260,000 as the underlying reason for such deferral was the
timing differences between our financial statement and income tax treatment of
depreciation expense and such differences are anticipated to reverse during the
available time of existing income tax loss carryovers.
Note 6 - Related party transactions:
At December 31, 2006 and 2005, the Company had amounts receivable from and
payable to affiliated companies, which are directly or beneficially owned by the
Company's president, aggregating on a net basis to a receivable of approximately
$231,200 and $29,000, respectively. Such amounts result from sales to the
affiliates, allocations of management fees incurred by the Company on the
affiliates' behalf, and funds advanced to or from the Company.
Sales to such affiliates were sold at cost of material and labor plus an
amount to cover manufacturing overhead costs. In addition, the affiliates are
charged for their allocable share of administrative expenses of the Company. The
sales to affiliates aggregated approximately $622,300, $826,900, and $616,800
during the years ended December 31, 2006, 2005, and 2004, respectively; and
allocable administrative fees aggregated $350,000, $300,000 and $300,000,
respectively for such periods.
Such transactions were made in the ordinary course of business but were not
made on substantially the same terms and conditions as those prevailing at the
same time for comparable transactions with other customers. Management believes
that the sales transactions did not involve more than normal credit risk or
present other unfavorable features.
On March 25, 1999, the Company entered into a loan arrangement with an
entity owned 50% each by our President and former Vice President - Advertising,
Messrs. Peter G. Dornau and Jeffrey J. Tieger, respectively whereby we borrowed
$400,000 to be repaid in monthly installments of $3,357 plus prevailing interest
at prime plus 1%. During March 2006 when the principal balance outstanding
amounted to $295,752, the Company received notification from the shareholders of
said entity that they were forgiving this obligation and, accordingly, the
Company had no further obligation associated with this debt. The Company
recognized additional paid-in capital attributable to this transaction in the
amount of $295,752.
Note 7 - 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, which
has been waived through December 31, 2006. Additionally, the landlord is
entitled to its pro-rata share of all taxes, assessments, and any other expenses
that arise from ownership. Rent charged to operations during the years ended
December 31, 2006, 2005, and 2004 amounted to approximately $100,500 each year.
The Company has entered into a corporate guaranty of a mortgage note
obligation of such affiliate. The obligation aggregating approximately $306,000
and $336,800 at December 31, 2006 and 2005, respectively, is primarily secured
by the real estate leased to the Company.
F-13
The following is a schedule of minimum future rentals on the non-cancelable
operating leases:
Year ending December 31,
2007 $ 106,597
2008 108,729
Thereafter -
----------
Total $ 215,326
==========
In conjunction with an agreement with an investment banker to provide
financial advisory and other services, we issued warrants to purchase 275,000
shares of the Company's common stock at an exercise price of $1.27 per share.
The covered shares and the exercise price were adjusted for stock dividends
distributed during the year ended December 31, 2002. This agreement was
terminated during 2004. During February 2005, the Company issued 150,003 shares
of its common stock to its former investment banker pursuant to a cashless
exercise of warrants granted during 2002.
Note 8 - Stock options:
During 1992, the Company adopted an incentive stock option plan covering
200,000 shares of its common stock.
During 1994, the Company adopted a non-qualified employee stock option plan
covering 400,000 shares of its common stock (this plan has expired and no
further awards can be made under its provisions). During 2002, the Company
adopted a qualified employee incentive stock option plan and a non-qualified
stock option plan covering 400,000 and 200,000 shares of its common stock,
respectively.
The following schedule reflects the status of outstanding options under the
Company's three stock option plans as of December 31, 2006, as adjusted for the
Company's stock dividend distributions of 2000 and 2002.
Weighted
Date Options Exercisable Exercise Expiration average
Plan granted outstanding options price date remaining life
1994 10/26/04 159,500 63,800 $1.050 10/25/09 2.83
2002 10/22/02 125,000 100,000 $1.260 10/21/07 .75
2002 03/02/04 140,000 56,000 $1.620 03/01/09 2.25
2002 11/09/06 135,000 - $0.930 11/08/11 4.83
2002 NQ 10/22/02 35,000 35,000 $1.260 10/21/12 5.75
2002 NQ 06/20/03 40,000 40,000 $1.030 06/19/13 6.50
2002 NQ 05/25/04 40,000 40,000 $1.460 05/04/14 7.50
2002 NQ 04/03/06 40,000 - $1.090 04/02/16 9.50
------- ------- ------ ----
714,500 478,000 3.86
======= ======= ====
In addition to the foregoing, 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 a loan to the Company in the amount of $400,000 from
an affiliated company in which they are each 50% co-shareholders. During 2004,
the underlying loan was modified to extend the maturity date and, accordingly,
the options were extended for an additional five years expiring March 25, 2009.
Prior to January 1, 2006, the Company accounted for its stock based
compensation plans as permitted by SFAS No. 123 (R), using the intrinsic value
method prescribed by APB No. 25 and made pro-forma disclosures required by SFAS
148 for the years ended December 31, 2005 and 2004. All options granted under
the Company's various stock option plans had exercise prices equal to the fair
market value of the underlying common stock on the dates of grants. Statement of
Financial Accounting Standards No. 123 requires that companies that continue to
account for employer stock options under APB No. 25 disclose pro forma net
income and earnings per share as if such Statement had been applied. The
following table is presented pursuant to such requirement.
F-14
Year ended December 31,
2005 2004
------------ ----------
(Restated) (Restated)
Net (loss) income As reported ($1,813,193) $ 17,222
Pro forma ($1,858,710) ($18,604)
Earnings (loss) per share As reported ($ .32) $ -
Pro forma ($ .32) $ -
A summary of the Company's stock options as of December 31, 2006, 2005 and
2004, and changes during the years ending on these dates, is presented below:
2006 2005 2004
--------------- ---------------- ------------------
Weighted Weighted Weighted
Optioned average Optioned average Optioned average
Shares exercise price shares exercise price shares exercise price
---------- -------------- ----------- -------------- ----------
Options outstanding
at beginning of year 964,500 $1.12 1,183,000 $1.12 1,106,210 $ .95
Granted 175,000 - 412,500
Expired ( 51,000) ( 59,000) ( 19,240)
Exercised ( 143,500) ( 159,500) ( 316,470)
-------------- ----- ---------- ----- ---------- ------
Options outstanding at
end of year 945,500 $1.11 964,500 $1.12 1,183,000 $ 1.12
============== ===== ========== ===== ========== ======
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. Compensation
cost recognized during the year ended December 31, 2006 attributable to stock
options amounted to $74,178.
The fair value of each option grant was estimated using the Black-Scholes
option pricing model with the following assumptions for the years 2006, 2005 and
2004; risk free rate ranging from 4.35% to 4.84%, no dividend yield for all
years, expected life from five years to ten years and volatility of
approximately 35.2% to 48.8%.
As of December 31, 2006 there was approximately $156,200 of unrecognized
compensation cost related to un-vested share based compensation arrangements.
That cost will be charged against operations as the respective options vest
through December, 2012.
Note 9 - Major customers:
The Company has one major customer, West Marine, Inc., with sales in excess
of 10% of consolidated gross revenue for the years ended December 31, 2006,
2005, and 2004. Sales to this customer represented approximately 43%, 26% and
39% of consolidated gross revenues for such periods, respectively.
The Companys top five customers represented approximately 59%, 43%, and 55%
of consolidated revenues and 57% and 26% of consolidated trade receivables for
the years ended December 31, 2006, 2005, and 2004, and at the balance sheet date
for the years then ended, respectively. The Company enjoys good relations with
these customers. However, the loss of any of these customers could have an
adverse impact on the Company's operations.
Note 10 - Earnings per share:
Earnings per share are reported pursuant to the provisions of Statement of
Financial Standards No. 128. Accordingly, basic earnings per share reflects the
weighted average number of shares outstanding during the year, and diluted
shares adjusts that figure by the additional hypothetical shares that would be
outstanding if all exercisable outstanding common stock equivalents with an
F-15
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, 2006, 2005, and
2004:
2006 2005 2004
--------- --------- ---------
Basic 6,207,983 5,700,774 5,356,316
Diluted 7,214,326 5,700,774 5,500,113
In 2005, the Company's potentially issuable shares of common stock pursuant
to outstanding stock options and warrants are excluded from the Company's
diluted computation, as their effect would be anti-dilutive.
Note 11- Shareholders' equity:
During the years ended December 31, 2006, 2005 and 2004 the Company awarded
129,000, 122,000 and 140,500 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 $119,400, $97,300 and $87,800 for each period, respectively.
During December 2006 and August 2005, certain employees of the Company
exercised stock options scheduled to expire during the respective current year
covering 143,500 and 159,500 shares of its common stock respectively. The
aggregate exercise price of such transactions amounted to approximately $147,000
and $92,900 and is reflected in the accompanying financial statements as
additional paid-in capital.
On March 25, 1999, the Company entered into a loan arrangement with an
entity owned 50% each by our President and former Vice President - Advertising,
Messrs. Peter G. Dornau and Jeffrey J. Tieger, respectively whereby we borrowed
$400,000 to be repaid in monthly installments of $3,357 plus prevailing interest
at prime plus 1%. During March 2006 when the principal balance outstanding
amounted to $295,752, the Company received notification from the shareholders of
said entity that they were forgiving this obligation and, accordingly, the
Company had no further obligation associated with this debt. The Company
recognized additional paid-in capital attributable to this transaction in the
amount of $295,752.
On November 10, 2006, Mr. Dornau notified the Company that he was
exercising his rights to convert the $1.5 million loan made to the Company into
1.5 million shares of the Company's common stock. Such transaction was approved
unanimously by the members of our Board of Directors (with Mr. Dornau abstaining
from the vote). Mr. Dornau loaned the Company $1.5 million in order to bolster
working capital. In connection with such loan, we issued warrants to Mr. Dornau
to purchase a maximum of 1 million shares of our common stock. Such warrants
were exercisable 500,000 shares at $1.13 and 500,000 shares at $.863. The
exercise prices were determined by the closing bid of our stock plus ten (10)
percent on each date of grant. The Company recognized additional paid-in capital
attributable to this transaction in the amount of $1,240,940.
Note 12 - Restatements:
Year ended December 31, 2005:
During the fourth quarter of 2005, we finalized a financing arrangement
with our President and Chief Executive Officer, Peter G. Dornau. The terms of
such financing are disclosed above in Note 4 - Long-term debt and Note 11 -
Shareholders' Equity. In our original Form 10-K filing we treated all of the
proceeds we received from draws against this revolving loan as debt. At that
time we did not compute the fair value of the warrants issued to Mr. Dornau and
reclassify such amount as additional paid-in capital along with a related
"compensation cost" or imputed interest to be amortized over the five year life
of the obligation. Utilizing a Black-Scholes pricing model, the allocation that
should have been made during December 2005 aggregates $310,898. This
reclassification, incorporated herein, did not impact our previously reported
cash flows or operating results for the year ended December 31, 2005. However,
had the reclassification been made on a timely basis, long-term obligations
would have been reduced and shareholders' equity would have been increased by
the $310,898 at December 31, 2005.
F-16
Year ended December 31, 2004:
During March 1999, the Company granted two officers five-year stock options
covering115,500 shares each, in consideration of a loan made to the Company in
the amount of $400,000 from an affiliated company in which they are each 50%
co-shareholders. During March 2004, the underlying loan was modified to extend
the maturity date and, accordingly, the options were also extended for an
additional five years expiring March 25, 2009. As the options were granted at
fair market value on the original date of grant, there was no "compensation
cost" to be recognized. However, at the date of modification, the market value
of our stock exceeded the options' exercise price. Accordingly, there was an
"intrinsic value" aggregating $178,332 that should have been recorded as a
charge against operations during the year ended December 31, 2004. This
adjustment, incorporated herein, did not impact our previously reported cash
flows ended December 31, 2004.
The effect of the foregoing on our consolidated balance sheet and the
consolidated statement of operations as of December 31, 2005 and 2004 and the
years then ended is as follows:
Consolidated Balance Sheet at December 31, 2005 and 2004:
Long- term debt Shareholders' equity
2005 2004 2005 2004
----------- ---------- ---------- ----------
As originally reported $6,261,856 $5,580,250 $4,290,697 $5,888,495
Reclassification of imputed interest associated
with warrants issued pursuant to Subordinated
Revolving Note Payable ( 310,898) - 310,898 -
Recognition of compensation cost associated with
stock options granted to Messrs. Dornau and
Tieger as to which certain terms were modified - - 61,000 61,000
---------- ---------- ---------- ----------
As restated $5,950,958 $5,580,250 $4,662,595 $5,949,495
========== ========== ========== ==========
Consolidated Statement of Operations for year ended December 31, 2005 and
2004:
2005 2004
--------- -------------
Income (loss) before provision for income taxes,
as originally reported ($2,347,693) $ 302,554
Recognition of compensation cost associated with
stock options granted to Messrs. Dornau and Tieger
as to which certain terms were modified - 178,332
------------ ----------
Income (loss) before provision for income taxes,
as restated ( 2,347,693) 124,222
Provision (benefit) for Income Taxes, as originally
reported ($ 534,500) $ 168,000
Reduction in provision for Income Taxes attributable
to the foregoing - ( 534,500) ( 61,000) 107,000
---------- ------------ ----------- ----------
Net income (loss), as restated ($1,813,193) $ 17,222
============ ==========
Earnings (loss) per share:
Basic Diluted Basic Diluted
---------- ----------- ---------- ----------
As originally reported ($ .32) ($ .32) $ .00 $ .00
Adjustment for "compensation cost" - - ( .00) ( .00)
---------- ----------- ----------- -----------
As restated ($ .32) ($ .32) $ - $ -
=========== =========== =========== ===========
F-17
Note -13 Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. SFAS No.159 permits entities to
choose to measure eligible financial instruments at fair value. The unrealized
gains and losses on items for which the fair value option has been elected
should be reported in earnings. The decision to elect the fair value options is
determined on an instrument-by-instrument basis, it should be applied to an
entire instrument, and it is irrevocable. Assets and liabilities measured at
fair value pursuant to the fair value option should be reported separately in
the balance sheet from those instruments measured using another measurement
attribute. SFAS No. 159 is effective as of the beginning of the first fiscal
year that begins after November 15, 2007. The Company is currently analyzing the
potential impact of adoption of SFAS No.159 to its consolidated financial
statements.
In September 2006, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements . SAB 108 provides guidance on the consideration of effects of the
prior year misstatements in quantifying current year misstatements for the
purpose of a materiality assessment. The SEC staff believes registrants must
quantify errors using both a balance sheet and income statement approach and
evaluate whether either approach results in quantifying a misstatement that,
when all relevant quantitative and qualitative factors are considered, is
material. SAB 108 was effective for the first annual period ending after
November 15, 2006 with early application encouraged. The Company adopted the
provisions of SAB 108 on December 31, 2006 and the impact of adoption was not
material to its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years. The Company does not anticipate adoption of this
standard will have a material impact on its consolidated financial statements.
In June 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes-an interpretation of SFAS 109, ("FIN 48"). FIN 48
provides interpretive guidance for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN
48 is effective for fiscal years beginning after December 15, 2006. The Company
is reviewing the impact of adopting FIN No. 48 but does not anticipate that the
impact will be material to its consolidated financial statements.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets, which will be effective for fiscal years that begin after
December 15, 2006. This statement amends SFAS 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, a replacement
of FASB Statement 125, or SFAS 140 , regarding (1) the circumstances under which
a servicing asset or servicing liability must be recognized, (2) the initial and
subsequent measurement of recognized servicing assets and liabilities, and (3)
information required to be disclosed relating to servicing assets and
liabilities. The Company does not anticipate adoption of this standard will have
a material impact on its consolidated financial statements.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain
Hybrid Financial Instruments, or SFAS 155, which will be effective for fiscal
years that begin after December 15, 2006. This statement amends SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, to narrow the
scope exception for interest-only and principal-only strips on debt instruments
to include only such strips representing rights to receive a specified portion
of the contractual interest or principal cash flows. SFAS 155 also amends SFAS
140 to allow qualifying special-purpose entities to hold a passive derivative
financial instrument pertaining to beneficial interests that itself is a
derivative financial instrument. The Company does not anticipate adoption of
this standard will have a material impact on its consolidated financial
statements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, which was adopted effective January 1, 2006. This statement
addresses the retrospective application of such changes and corrections and will
be followed if and when necessary. Adoption of this standard did not have a
material impact on the Company's consolidated financial statements.
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