UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(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, 2005
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 2, 2006 as reported by the NASDAQ Capital Market on that
date: $2,353,657 For purposes of this disclosure, the Registrant has assumed
that all directors, officers, and beneficial owners of 5% or more of the
Registrant's common stock are affiliates of the Registrant.
Number of shares of the Registrant's common stock outstanding as
of March 2, 2006:
5,849,316 shares common stock, $0.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates information from portions of the
Registrant's Definitive Proxy Statement for the Annual Meeting of Shareholders
which was held on June 15, 2006, and was filed within 120 days of December 31,
2005
Forward-looking Statements:
Certain statements contained in this Annual Report on Form 10-K/A,
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/Amendment:
As disclosed in our Form 8-K filed with the United States Securities and
Exchange Commission on August 14, 2006, in this Form 10-K/A we are restating our
financial statements as of December 31, 2005 and 2004 and the years then ended.
The substantive changes to be reflected in this amendment are (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. These matters
are more fully discussed in Note 12 - Restatements, to the Consolidated
Financial Statements.
We have also included restated amounts in Item 6 - "Selected Financial
Data" and Item 7 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations". 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(R) and other
trademarks within the United States of America and Canada. In addition, we
produce private label formulations of many of our products for various customers
as well as provide custom blending and packaging services of these and other
products.
Products:
Set forth below is a general description of the products that we
manufacture and market:
Marine: Our Marine line consists of polishes, cleaners, protectants and
waxes of various formulations under the Star brite(R) brand name as well as
private label formulations of these and other products. The motor oils line also
includes various vinyl protectants, cleaners, teak cleaners, teak oils, bilge
cleaners, hull cleaners, silicone sealants, polyurethane sealants, polysulfide
sealants, gasket materials, lubricants, antifouling additives and anti-freeze
coolants. In addition, we manufacture a line of brushes, poles and tie-downs and
other related marine accessories.
2
Automotive: We manufacture a line of automotive products under the Star
brite(R) brand name including brake and transmission fluids, hydraulic, gear and
motor oils, and related items. In addition, anti-freeze and windshield washes
are produced in varying formulations both under the Star brite(R) brand as well
as under private labels for customers. We also produce a line of automotive
polishes, cleaners and associated appearance items.
Recreational vehicle: Our recreational vehicle products are made up of
cleaners, polishes, detergents, fabric cleaners and protectors, silicone
sealants, waterproofers, gasket materials, degreasers, vinyl cleaners,
protectors, toilet treatment fluids and anti-freeze coolants.
Aircraft: Our Aircraft product line consists primarily of polishes and
cleaners. Although the above products are utilized for different types of
vehicles, boats, aircrafts and household purposes, it is management's view that
they all constitute one industry segment.
Manufacturing: We manufacture the majority of our products at our
manufacturing facility in Montgomery, Alabama. In addition, we contract with
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 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, 2005.
Sales to our five largest customers for the year ended December 31, 2005
amounted to approximately 43% of consolidated gross revenues and outstanding
balances due us at year-end from our five largest customers aggregated
approximately 26% 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: We had no significant backlog of
orders as of December 31, 2005. 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(R) 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,
2005 2004 2003
United States: ---- ---- ----
Northeast $ 3,585,000 $ 4,455,000 $ 4,054,000
Southeast 5,468,000 6,832,000 6,218,000
Central 5,655,000 7,015,000 6,384,000
West Coast 4,148,000 5,197,000 4,730,000
----------- ----------- ------------
15,856,000 23,499,000 21,386,000
Canada (US Dollars) 850,000 862,000 792,000
----------- ----------- -----------
$19,706,000 $24,361,000 $22,178,000
=========== =========== ===========
4
Personnel: We employ approximately 21 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, 2005:
Full-time
Location Description Employees
Fort Lauderdale, Florida Administrative 21
Fort Lauderdale, Florida Manufacturing and distribution 7
Montgomery, Alabama Manufacturing and distribution 80
---
108
===
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 43%,
55% and 55% of consolidated gross revenues for the years ended December 31,
2005, 2004 and 2003; and 26% and 77% of consolidated accounts receivable at
December 31, 2005 and 2004, 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.
As disclosed in our Form 10-Q for the quarter ended March 31, 2005, our
largest customer, West Marine, publicly announced their adoption of a policy to
reduce their overall inventory levels. This has resulted in an approximate
$4,294,000 decrease in sales to them for the year ended December 31, 2005
compared to 2004.
Concentration of cash - At various times of the year and at December 31,
2005, 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.
Operating losses at Alabama subsidiary - A major component of the losses
sustained during the year ended December 31, 2005 is the operations at our
manufacturing subsidiary, Kinpak Inc. Corporate management has enhanced its
analysis, supervision and overall involvement with our manufacturing facility.
We have identified several areas that require improvement and through increased
on-site management presence, major personnel changes, adoption of certain
strategic enhancements to our manufacturing process, and a renewed commitment
from personnel in Alabama to strive for improved efficiency and cost savings, we
believe that we will achieve a material reduction in manufacturing cost thereby
improving product margins and operating profits (losses) during 2006.
Item 2. Properties
Our executive offices and warehouse located in Fort Lauderdale, Florida are
held under a lease with an entity fifty percent each owned by Messrs. Peter G.
Dornau and Jeffrey J. Tieger, our President and Vice President-Advertising,
respectively. The lease covers approximately 12,700 square feet of office and
warehouse space. On May 1, 1998, we renewed our lease agreement for a term of
ten years. The lease required an initial annual rental of $94,800 and provides
for a maximum increase of 2% per annum on the annual anniversary of the lease
for the term thereof. Additionally, the landlord is entitled to collect from us
its pro-rata share of all taxes, assessments, insurance premiums, operating
charges, maintenance charges and any other expenses which normally arise from
ownership. Rent charged to operations during the years ended December 31, 2005,
2004 and 2003 amounted to approximately $100,500 each year.
5
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, 2005.
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 2005. Shareholders voted at the Annual Meeting held during June, 2006
to elect members of the Board of Directors, ratify the engagement of the
Company's Independent Certified Public Accountants, and other matter presented
at such meeting. The results of such voting was disclosed in our Form 10-Q for
the quarter ended June 30, 2006.
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
A. Our common stock was sold to the public initially on March 26, 1981. The
common stock of the Company is traded on the NASDAQ Capital Market System under
the symbol OBCI. A summary of the trading ranges during each quarter of 2005 and
2004 is presented below.
Market Range of
Common Stock Bid: 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
2005 High $3.11 $2.04 $1.63 $1.35
Low $1.07 $1.45 $1.14 $ .76
2004 High $1.89 $1.85 $1.49 $1.40
Low $1.53 $1.31 $1.13 $ .93
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, 2005. 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.
6
D. Securities authorized for issuance at December 31, 2005 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) 733,500 $1.23 466,500
Non plan stock options granted (2) 231,000 .76 -
Equity compensation plans
not approved by security holders:
Stock options and restricted
stock awards - - -
Total equity compensation plans
approved and not approved by ------- ----- -------
security holders 964,500 $1.12 466,500
======= ===== =======
(1) Includes 290,000 options granted under the 2002 Qualified Incentive
Stock Option Plan, 115,000 options under the 2002 Non-Qualified Stock Option
Plan, 174,500 options under the 1994 Non-Qualified Stock Option Plan and 154,000
options under the 1992 Qualified Incentive Stock Option Plan.
(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)During the quarter ended December 31, 2005, we finalized a revolving
credit facility with our president and CEO, Peter G. Dornau. In connection with
his offering to loan a maximum of $1.5 million to the Company in order to
bolster working capital, 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
addition, he has 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. Potential shares to be issued pursuant to this arrangement are not
reflected in the foregoing tabulation.
(4) During April 2005 we issued 122,000 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
$1.53 each. Shares were awarded as follows:
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, Vice President 15,000 shares
-------
105,000 shares
Other employees, as a group (7 individuals) 17,000 shares
-------
Total restricted shares awarded 122,000 shares
=======
7
Item 6. Selected Financial Data
As more fully discussed in Note 12 - Restatements, to the Consolidated
Financial Statements, we are filing this amended Form 10-K/A including these
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.
The following tables set forth selected financial data as of, and for the
years ended December 31,
2005 2004 2003 2002 2001
(Restated) (Restated)
Operations
Gross sales $19,706,469 $24,361,056 $22,178,352 $22,712,991 $19,876,095
Net sales $17,651,905 $21,657,083 $19,997,702 $20,585,898 $18,013,393
Net income (loss) ($1,813,193) $ 17,222 $ 345,071 $ 134,518 $ 106,384
Earnings (loss) per
common share ($ .32) $ - $ .07 $ .03 $ .03
Balance Sheet
Working capital $ 2,713,123 $ 3,464,574 $ 2,869,172 $ 2,212,872 $ 1,385,016
Total assets $16,903,022 $19,398,344 $18,303,184 $18,650,237 $15,030,206
Long-term
obligations $ 5,950,958 $ 5,840,250 $ 5,883,302 $ 6,745,232 $ 3,843,515
Total liabilities $12,240,427 $13,448,849 $12,899,189 $13,727,315 $10,268,884
Shareholders'
equity $ 4,662,595 $ 5,949,495 $ 5,403,995 $ 4,922,922 $ 4,761,322
Cash dividends declared
per share of common stock $ - $ - $ - $ - $ -
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with our
consolidated financial statements contained herein as Item 15.
As more fully discussed in Note 12 - Restatements, to the Consolidated
Financial Statements, we are filing this amended Form 10-K/A including these
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.
8
Overview:
We are a leading manufacturer and distributor of chemical formulations
serving the appearance and functional categories of the marine, automotive,
recreational vehicle and home care markets. We were founded in 1973 and have
conducted operations within the aforementioned categories since then. During
1984, we changed our corporate name to Ocean Bio-Chem, Inc. (the parent company)
from our former name, Star brite Corporation. Our operations were conducted as a
privately owned company through March, 1981 when we completed our initial public
offering of common stock.
Critical accounting policies and estimates:
Principles of consolidation - Our consolidated financial statements include
the accounts of the parent company and its wholly owned subsidiaries. All
significant inter-company accounts and transactions are eliminated in
consolidation.
Revenue recognition - Revenue from product sales is recognized when
persuasive evidence of an arrangement exists, delivery to customer has occurred,
the sales price is fixed and determinable, and collectibility of the related
receivable is probable.
Inventories - Inventories are primarily composed of raw materials and
finished goods and are stated at the lower of cost, using the first-in,
first-out method, or market.
Prepaid advertising and promotion - In any given year we introduce certain
new products to our customers. In connection therewith, we produce new
promotional items to be distributed over a period of time. We follow the policy
of amortizing these costs over a one-year basis.
Property, plant and equipment - Property, plant and equipment are stated at
cost. Depreciation is provided over the estimated useful lives of the related
assets using the straight-line method.
Stock based compensation - We follow the provisions of APB Opinion No. 25,
Accounting for Stock Issued to Employees, to record compensation costs. Opinion
No. 25 requires that compensation cost be based on the difference, if any,
between the quoted market price of the stock and the price the employee must pay
to acquire the stock depending on the terms of the award. For the years ended
December 31, 2005, 2004 and 2003, we have not adopted Statement of Financial
Accounting Standards No. 123 to record such compensation costs.
Concentration of credit risk - Financial instruments that potentially
subject the Company to concentration of credit risk consist primarily of
accounts receivable. Our five largest customers represented approximately 43%,
55% and 55% of consolidated gross revenues for the years ended December 31,
2005, 2004 and 2003; and 26% and 77% of consolidated accounts receivable at
December 31, 2005 and 2004, 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,
2005, 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 only temporary differences
included therein are attributable to differing methods of reflecting
depreciation for financial statement and income tax purposes.
9
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.
Liquidity and Capital Resources:
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, 2006, bears interest at the 30 Day LIBOR
plus 275 basis points (approximately 7.14% at December 31, 2005) 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, 2005,
we were obligated under this arrangement in the amount of $4,000,000.
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
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, 2006, 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, 2005 such bonds carried interest
ranging between 1.8% and 3.3% 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, 2005
were approximately $ 433,300 and prime plus 2.5% per annum, respectively)
through maturity on April 15, 2010.
During the quarter ended December 31, 2005, we finalized a revolving credit
facility with our president and CEO, Peter G. Dornau. In connection with his
offering to loan a maximum of $1.5 million to the Company in order to bolster
working capital, 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
10
closing bid of our stock plus ten (10) percent on each date of grant. In
addition, he has 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. At December 31, 2005, $1,150,000 was outstanding pursuant to this
obligation which is due in October 2010 along with accrued interest at the rate
of prime plus 2%. Such obligation is subordinate to all borrowings from Regions
Bank.
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 of December 31, 2005 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. Our operations
during the year ended December 31, 2005 have been adversely impacted by four
significant challenges; an increasingly unstable commodity market causing
increased cost for petroleum related products, the announcement by our largest
customer that they have adopted a policy of reducing their inventory levels, our
immediate geographic area sustaining three separate major hurricanes, and a
decrease in our manufacturing efficiency resulting in higher product costs. As a
result of the foregoing, we have sustained material losses during the year ended
December 31, 2005. Management has analyzed the foregoing and has adopted a
necessary, but flexible strategy to provide the required working capital to
cover these losses, maintain a pricing model that more closely follows the
commodity fluctuations that we are exposed to, and address those areas of our
operations that can be improved.
As disclosed in our Form 10-Q for the quarter ended March 31, 2005, our
largest customer, West Marine, publicly announced their adoption of a policy to
reduce their overall inventory levels. This has resulted in an approximate
$4,294,000 decrease in sales to them for the year ended December 31, 2005
compared to 2004. Our products have historically sold well at their retail
stores and they have indicated to us that such is the case during 2005.
Accordingly, it appears that they are approaching their inventory goals as they
relate to our products and we expect that our historical recurring sales levels
to them will resume during 2006.
Fortunately this season's hurricanes caused only minimal direct damages to
our facilities and operations, principally power outages and the related
down-time. However, the devastation sustained in the geographic areas that were
impacted were significant and contributed to a reduction in sales to our retail
and distribution customers both in that region and nationally. In addition, the
cost of petroleum related products, major components in many of our products,
which were already in an increasing cost spiral, became even more unstable. The
practical dynamics of our business do not afford us the same pricing flexibility
available to our suppliers, i.e. a major petroleum supplier tells us the new
price, however we cannot as immediately pass along the increase to our national
retailers and distributors. Aside from our previously reported sales price
increase to our customers, we have recently announced another sales price
increase which become 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.
11
Corporate management has enhanced its analysis, supervision and overall
involvement with our manufacturing facility. We have identified several areas
that require improvement and through increased on-site management presence,
major personnel changes, adoption of certain strategic enhancements to our
manufacturing process, and a renewed commitment from our team in Alabama to
strive for improved efficiency and cost savings, we believe that we will achieve
a material reduction in manufacturing cost thereby improving product margins and
operating profits during 2006.
Results of Operations:
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.
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 $122,000 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.
12
Years ended December 31, 2004 and 2003:
Sales and earnings varied when comparing the year ended December 31, 2004
to 2003 principally due to the factors enumerated below.
Gross sales increased 9% to approximately $24,361,000 for the year ended
December 31, 2004 compared to $22,178,000 for the year ended December 31, 2003.
Management attributes this increase in sales to gains made during the third
quarter of the current year as well as increased sales promotions and the
related increase in revenues during the fourth quarter of 2004.
Cost of goods sold increased to 77% of net sales for the year ended
December 31, 2004 compared to 75.7% of net sales in the year ended December 31,
2003. This change resulted from various factors, some of which negatively
impacted margins and others, which mitigated these factors. Specifically,
petroleum product costs are higher than those experienced in prior years and
currently represent a higher portion of our manufacturing expenses. In addition,
a price increase was passed along on certain of our products during the first
and second quarters of 2004. In addition, margins were favorably impacted by
spreading the fixed elements of overhead over an increased revenue base.
Advertising and promotion expenses increased approximately $201,000 for the
2004 period when compared to expenses in the same time period in the previous
year. This increase resulted primarily from increased co-op advertising
associated with increased sales to certain customers and the timing of various
advertising programs in 2004.
Selling and administrative expenses, as restated, increased by
approximately $277,300 or 8% in the year ended December 31, 2004 compared to the
year ended December 31, 2003. Such change was primarily due to increased
personnel costs, compensation cost associated with the modification of certain
stock options, and other normal recurring increases in operating expenses.
Interest expense for the year ended December 31, 2004 increased
approximately $17,000 when compared to the same twelve-month period of 2003.
This change was primarily due to the impact of higher interest rates and
increased borrowings.
Contractual obligations:
The following table reflects our contractual obligations for the years
ended December 31,:
Total 2006 2007-09 2010 Thereafter
---------- -------- ----------- ----------- ----------
Long-term debt obligations $6,786,448 $559,996 $ 1,679,992 $1,643,352 $2,903,108
Capital leases 56,264 20,856 35,408 - -
Operating leases 319,833 104,507 215,326 - -
Purchase obligations - - - - -
Other - - - - -
---------- -------- ----------- ----------- ----------
Total $7,162,545 $685,359 $ 1,930,726 $1,643,352 $2,903,108
========== ======== =========== ========== ==========
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 1.8% and 3.3% during the year ended
December 31, 2005.
13
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 discussed in Note 12 - Restatements, to the Consolidated
Financial Statements, we are filing this amended Form 10-K/A including these
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.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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, 2005, 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, 2005.
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.
14
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.
NAME OFFICE AGE
Peter G. Dornau President, Chief Executive Officer, and 66
Director since 1973
Edward Anchel Vice President-Finance, Chief Financial 59
Officer since 1999 and Director since 1998
Jeffrey J. Tieger Vice President-Advertising and Marketing,
Secretary and Director since 1977 62
William W. Dudman Vice President-Operations since 2004 41
Gregor M. Dornau Vice President-Sales since 2005 37
James M. Kolisch Director since 1998 54
Laz L. Schneider Director since 1998 66
John B. Turner Director since 2000 58
Sonia B. Beard Director since 2002 35
Peter G. Dornau is our co-founder and has served as our President, CEO and
Chairman of Board of Directors since 1973.
Edward Anchel joined our company as Vice President-Finance and Chief
Financial Officer in March 1999. For the five years immediately preceding his
employment, he was an officer of a privately owned manufacturing company and in
private practice as a Certified Public Accountant. He was initially elected to
serve as an outside Director of the Company in May 1998.
Jeffrey J. Tieger joined our company in June 1977 as our Vice
President-Advertising and has served in that position through the present date.
William W. Dudman joined our company in February 2004 as our Vice
President-Operations. For the five years immediately preceding his employment he
had held various management positions within the marine industry, most recently
with West Marine, Inc., our largest customer.
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.
15
John B. Turner joined our Board of Directors in June 2002. During the past
five years, Mr. Turner has been retired. Prior to his retirement, he was an
insurance executive. In addition to his insurance credentials, Mr. Turner holds
a Series 7 stock brokerage license. His professional experience in the
aforementioned areas spans in excess of twenty-five years. Mr. Turner serves on
the Board of Directors' Audit Committee.
Sonia B. Beard is a Florida Certified Public Accountant working for Walt
Disney World since 1997. She currently holds the position as the Manager of
Concept Development for the Revenue Lines of Business of Walt Disney World. Ms.
Beard has in excess of twelve years financial experience. She is an outside
director and serves as the Chairperson and Financial Expert of the Board of
Directors' Audit Committee.
Audit Committee
We have an Audit Committee, which consists of Sonia B. Beard, John B.
Turner and James M. Kolisch as of December 31, 2005. 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.
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 information required for this item is incorporated by reference to our
Definitive Proxy Statement to be filed in conjunction with the annual
shareholders' meeting that shall be filed with the United States Securities and
Exchange Commission and sent out to shareholders prior to 120 days past our
year-end of December 31, 2005.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information at December 31, 2005 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 3,982,868 (1) 54.0%
Common Edward Anchel, Vice President-Finance,
CFO, Director
Boynton Beach, FL 33437 272,951 (2) 3.7%
Common Jeffrey J. Tieger, Vice President-Advertising,
Secretary, Director
Plantation, FL 33314 379,280 (3) 5.14%
16
Common William W. Dudman, Vice President-Operations
Plantation, FL 33317 37,300 (4) .51%
Common Gregor M. Dornau, Vice President-Sales
Fort Lauderdale, FL 33315 238,380 (5) 3.23%
Common James M. Kolisch, Director
Coral Gables, FL 33114 46,167 (6) .63%
Common Laz L. Schneider, Director
Fort Lauderdale, FL 33305 30,000 (7) .41%
Common John B. Turner, Director
Miami, FL 33186 59,463 (8) .81%
Common Sonia B. Beard, Director
Merritt Island, FL 32952 20,000 (9) .27%
-------------- --------
Common All directors and officers as a group
9 individuals 5,066,409 (10) 68.71%
============== ========
(1) Includes 1,162,500 shares that are issuable upon the exercise of stock
options and/or warrants within 60 days of December 31, 2005.
(2) Includes 47,000 shares that are issuable upon the exercise of stock
options within 60 days of December 31, 2005.
(3) Includes 162,500 shares that are issuable upon the exercise of stock
options within 60 days of December 31, 2005.
(4) Includes 3,000 shares that are issuable upon the exercise of stock
options within 60 days of December 31, 2005.
(5) Includes 39,600 shares that are issuable upon the exercise of stock
options within 60 days of December 31, 2005.
(6) Includes 30,000 shares that are issuable upon the exercise of stock
options within 60 days of December 31, 2005.
(7) Includes 30,000 shares that are issuable upon the exercise of stock
options within 60 days of December 31, 2005.
(8) Includes 30,000 shares that are issuable upon the exercise of stock
options within 60 days of December 31, 2005.
(9) Includes 20,000 shares that are issuable upon the exercise of stock
options within 60 days of December 31, 2005.
(10) Includes 1,524,600 shares that are issuable upon the exercise of stock
options and/or warrants within 60 days of December 31, 2005.
17
Item 13. Certain Relationships and Related Transactions
On May 1, 1998, we entered into a ten-year lease for approximately 12,700
square feet of office and warehouse facilities in Fort Lauderdale, Florida from
an entity fifty percent owned each by Messrs. Peter G. Dornau and Jeffrey J.
Tieger, our President and Vice President-Advertising, respectively. The lease
required a minimum rental of $94,800 the first year and provides for a maximum
2% increase on the anniversary of the lease throughout the term. Additionally,
the landlord is entitled to collect from us its pro-rata share of all taxes,
assessments, insurance premiums, operating charges, maintenance charges and any
other expenses, which normally arise from ownership. We believe that the terms
of this lease are comparable to those of similar properties in the same
geographic area of the Company available from unrelated third parties. Rent
charged to operations during the years ended December 31, 2005, 2004 and 2003
amounted to approximately $100,500 each year.
We acquired the rights to the Star brite(R) trademark and related products
for the United States and Canada in conjunction with our original public
offering during March 1981. Peter G. Dornau, our president is the direct or
beneficial owner of three companies that market Star brite(R) products outside
the United States and Canada. These companies serve as distributors of our
products and the terms of payment are the same as for our other customers. At
December 31, 2005 and 2004, we had amounts due from affiliated companies, which
are directly or beneficially owned by our president aggregating approximately
$29,022 and $408,500, respectively.
Sales of Star brite products to such affiliates aggregated approximately
$826,898, $616,800 and $373,600 during the years ended December 31, 2005, 2004
and 2003, respectively.
A subsidiary of ours currently uses the services of an entity that is owned
by our president to conduct product research and development. Such entity
received $30,000 per year during the years ended December 31, 2005, 2004 and
2003 under such relationship.
Item 14. Principal Accounting Fees and Services
The information required for this item is incorporated by reference to our
Definitive Proxy Statement to be filed in conjunction with the annual
shareholders' meeting which shall be filed with the United States Securities and
Exchange Commission and sent out to shareholders prior to 120 days past our
year-end of December 31, 2005.
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 are filing this amended Form 10-K/A including these
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, 2005 and 2004.
(ii) Consolidated statements of operations for each of the three years
ended December 31, 2005, 2004 and 2003.
(iii) Consolidated statement of shareholders' equity for each of the three
years ended December 31, 2005, 2004 and 2003.
(iv) Consolidated statements of cash flows for each of the three years
ended December 31, 2005, 2004 and 2003.
(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.
18
(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*.
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).
19
10.13 Ocean Bio-Chem, Inc. 2002 Incentive Stock Option Plan (incorporated
by reference to an exhibit contained in the Company's proxy statement filed with
the United States Securities and Exchange Commission on April 28, 2003).
10.14 Lease dated May 1, 1998 between the Star Brite Distributing, Inc. and
PEJE, Inc.*
14.1 Code of Ethics (incorporated by reference to an exhibit contained in
the Company's proxy statement filed with the United States Securities and
Exchange Commission on April 13, 2004).
21. List of Subsidiaries **
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.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized.
OCEAN BIO-CHEM, INC.
Registrant
By:/s/ Peter G. Dornau
PETER G. DORNAU
Chairman of the Board of Directors
and Chief Executive Officer
August 31, 2006
By:/s/ Edward Anchel
EDWARD ANCHEL
Chief Financial Officer
August 31, 2006
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 August 31, 2006
Peter G. Dornau Officer and Director
/s/ Edward Anchel Vice President Finance, Chief August 31, 2006
Edward Anchel Financial Officer, Director
/s/ Jeffrey J. Tieger Vice President, Secretary August 31, 2006
Jeffrey J. Tieger and Director
/s/ James M. Kolisch Director August 31, 2006
James M. Kolisch
/s/ Laz L. Schneider Director August 31, 2006
Laz Schneider
/s/ John B. Turner Director August 31, 2006
John B. Turner
/s/ Sonia B. Beard Director August 31, 2006
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.
21
EXHIBIT 21
The following is a list of the Registrant's subsidiaries:
Name: Ownership %
Star brite Distributing, Inc. 100
Star brite Distributing Canada, Inc. 100
D & S Advertising Services, Inc. 100
Star brite Staput, Inc. 100
Star brite Service Centers, Inc. 100
Star brite Automotive, Inc. 100
Kinpak Inc. 100
22
EXHIBIT 32.1/2
CERTIFICATION
Pursuant to 18U.S.C. Section 1350, the undersigned officers of Ocean
Bio-Chem, Inc. (the "Company"), hereby certify that the Company's Annual Report
on Form 10-K for the year ended December 31, 2005 (the "Report") fully complies
with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934 and that the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operation of the Company.
Dated: August 31, 2006
/s/ Peter G. Dornau
Peter G. Dornau
Chairman of the Board of
Directors and Chief
Executive Officer
/s/ Edward Anchel
Edward Anchel
Chief Financial
Officer
23
Exhibit 31.1
CERTIFICATION
I, Peter G. Dornau certify that:
1. I have reviewed this Form 10-K/A of Ocean Bio-Chem, Inc. as of and for
the period ended December 31, 2005;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Dated: August 31, 2006 /s/ Peter G. Dornau
Peter G. Dornau
Chairman of the Board and
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Edward Anchel certify that:
1. I have reviewed this Form 10-K/A of Ocean Bio-Chem, Inc. as of and for
the period ended December 31, 2005;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Dated: August 31, 2006 /s/ Edward Anchel
Edward Anchel
Chief Financial Officer
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
Page
Reports of independent registered public accounting firms F-2-F-3
Consolidated balance sheets F-4
Consolidated statements of operations F-5
Consolidated statement of shareholders' equity F-6
Consolidated statements of cash flows F-7
Notes to consolidated financial statements F-8-F-16
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
2004, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the years 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 audits. The financial
statements of Ocean Bio-Chem, Inc for the year ending December 31, 2003, were
audited by other auditors whose report thereon, dated March 25, 2004, expressed
an unqualified opinion.
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 2004 and the consolidated
results of its operations and its consolidated cash flows for the years then
ended, 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-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Ocean Bio-Chem, Inc. and its Subsidiaries
Fort Lauderdale, Florida
We have audited the consolidated statements of operations, shareholders'
equity, and cash flows for Ocean Bio-Chem, Inc. (the "Company") and its
subsidiaries for the year ended December 31, 2003. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our 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 results of operations and cash flows
of Ocean Bio-Chem, Inc. and Subsidiaries for the year ended December 31, 2003,
in conformity with accounting principles generally accepted in the United States
of America.
Berkovits, Lago & Company, LLP
Fort Lauderdale, Florida
March 25, 2004
F-3
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
ASSETS
2005 2004
----------- -----------
(Restated) (Restated)
Current Assets
Cash $ 204,543 $ 988,106
Trade accounts receivable net of allowance for
doubtful accounts of approximately $131,000
and $201,000, respectively 2,027,162 4,652,144
Inventories 6,260,813 5,218,431
Refundable income taxes 274,500 -
Prepaid expenses and other current assets 235,574 214,492
----------- -----------
Total current assets 9,002,592 11,073,173
----------- -----------
Property, plant and equipment, net 7,310,640 7,337,600
----------- -----------
Other assets:
Funds held in escrow for equipment - 1,853
Trademarks, trade names, and patents 330,439 330,439
Due from affiliated companies 29,022 408,476
Deposits and other assets 230,329 246,803
----------- -----------
Total other assets 589,790 987,571
----------- -----------
Total assets $16,903,022 $19,398,344
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable trade $ 1,256,640 $ 2,251,287
Note payable bank 4,000,000 4,500,000
Current portion of long-term debt 580,852 483,112
Accrued expenses payable 451,977 374,200
----------- ------------
Total current liabilities 6,289,469 7,608,599
----------- ------------
Deferred income taxes payable - 260,000
----------- ------------
Long-term debt less current portion 5,950,958 5,580,250
----------- ------------
Commitments and contingencies - -
Shareholders' equity:
Common stock - $.01 par value, 10,000,000 shares
authorized, 5,849,316 and 5,417,813 shares
issued and outstanding at December 31,
2005 and 2004, respectively 58,493 54,178
Additional paid-in capital 5,397,845 4,901,078
Foreign currency translation adjustment ( 179,653) ( 204,864)
Retained earnings (deficit) ( 605,895) 1,207,298
------------ ------------
4,670,790 5,957,690
Less treasury stock 7,519 shares, at cost ( 8,195) ( 8,195)
------------ ------------
Total shareholders' equity 4,662,595 5,949,495
------------ ------------
Total liabilities and shareholders' equity $16,903,022 $19,398,344
============ ============
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, 2005, 2004, AND 2003
2005 2004 2003
----------- ----------- -----------
(Restated)
Gross Sales $19,706,469 $24,361,056 $22,178,352
Less discounts, returns and allowances 2,054,564 2,703,973 2,180,650
------------ ----------- -----------
Net sales 17,651,905 21,657,083 19,997,702
Cost of goods sold 14,640,883 16,675,780 15,131,775
------------ ----------- -----------
Gross profit 3,011,022 4,981,303 4,865,927
------------ ----------- -----------
Operating expenses:
Advertising and promotion 1,110,258 942,991 742,167
Selling and administrative 3,775,848 3,607,205 3,329,904
Interest 499,433 307,840 290,856
------------ ----------- -----------
Total operating expenses 5,385,539 4,858,036 4,362,927
------------ ----------- -----------
Operating profit (loss) ( 2,374,517) 123,267 503,000
Interest and other income 26,824 955 19,871
------------ ----------- -----------
Income (loss) before provision (benefit)
for income taxes ( 2,347,693) 124,222 522,871
Provision (benefit) for income taxes ( 534,500) 107,000 177,800
------------ ----------- -----------
Net income (loss) ( 1,813,193) 17,222 345,071
Other comprehensive income:
Foreign currency translation,
net of taxes 25,211 32,459 66,252
------------ ----------- -----------
Comprehensive income (loss) ($1,787,982) $ 49,681 $ 411,323
============ =========== ===========
Earnings (loss) per share:
Basic ($ .32) $ - $ .07
============ =========== ===========
Diluted ($ .32) $ - $ .07
============ =========== ===========
The accompanying notes are an integral part of these financial statements.
F-5
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
ENDED DECEMBER 31, 2005, 2004 AND 2003
Foreign Retained
Common stock Additional currency earnings Treasury
Shares Amount paid-in capital adjustment (deficit) stock Total
--------- ------- --------------- ---------- ---------- -------- ----------
(Restated) (Restated) (Restated)
January 1, 4,805,843 $48,058 $4,341,629 ($ 303,575) $ 845,005 ($ 8,195) $4,922,922
2003
Net income 345,071 345,071
Issuances of
common stock 155,000 1,550 68,200 69,750
Foreign currency
translation
adjustment 66,252 66,252
--------- ------- ---------- ----------- ----------- --------- ----------
December 31,
2003 4,960,843 49,608 4,409,829 ( 237,323) 1,190,076 ( 8,195) 5,403,995
Net income 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 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 5,849,316 $58,493 $5,397,845 ($ 179,653) ($ 605,895) ($ 8,195) $4,662,595
========= ======= ========== =========== =========== ========= ==========
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, 2005, 2004, AND 2003
2005 2004 2003
----------- ----------- -----------
(Restated)
Cash flows from operating activities:
Net income (loss) ($1,813,193) $ 17,222 $ 345,071
Adjustments to reconcile net income (loss)
to net cash provided (used) by operations:
Depreciation and amortization 762,943 735,103 674,955
Issuance of common stock to employees 97,265 87,813 69,750
Compensation cost associated with stock
option modifications - 178,332 -
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 2,624,982 ( 319,121) ( 1,142,666)
(Increase) decrease in inventory ( 1,042,381) 97,310 ( 774,591)
(Increase) in recoverable income taxes ( 274,500) - -
(Increase) decrease in prepaid expenses ( 21,083) ( 21,120) 268,740
(Decrease) increase in accounts payable
and accrued taxes and other ( 1,160,393) 1,148,030 ( 540,922)
------------ ------------ ------------
Net cash provided (used) by operating activities ( 826,360) 1,923,569 ( 1,099,663)
------------ ------------ ------------
Cash flows from financing activities:
Net borrowings (reductions) under line of credit ( 500,000) ( 50,000) 300,000
(Increase)decrease in amounts due from affiliates 379,454 ( 235,551) 439,350
Increases in (reductions to) long-term debt, net ( 370,655) ( 513,293) ( 587,203)
Increase in notes payable - Peter Dornau and
affiliates 1,150,000 - -
Issuance of common stock from exercised
stock options 92,919 229,674 -
------------ ------------ ------------
Net cash provided (used) by financing activities 751,718 ( 569,170) 152,147
------------ ------------ ------------
Cash flows used by investing activities:
Purchases of property, plant and equipment ( 735,983) ( 566,117) ( 1,204,538)
Utilization of (additions to) trust funds for
equipment purchased, net 1,851 124,442 1,034,899
------------ ------------ ------------
Net cash used by investing activities ( 734,132) ( 441,675) ( 169,639)
------------ ------------ ------------
Increase (decrease) in cash prior to effect of
exchange rate on cash ( 808,774) 912,724 ( 1,117,155)
Effect of exchange rate on cash 25,211 32,459 66,252
------------ ------------ ------------
Net increase (decrease) in cash ( 783,563) 945,183 ( 1,050,903)
Cash at beginning of year 988,106 42,923 1,093,826
------------ ------------ ------------
Cash at end of year $ 204,543 $ 988,106 $ 42,923
============ ============ ============
Supplemental information
Cash paid for interest during year $ 499,433 $ 307,840 $ 290,856
============ ============ ============
Cash paid for income taxes during year $ - $ 149,000 $ 60,000
============ ============ ============
Non-cash transactions - compensation cost
associated with stock options and warrants $ 310,898 $ 178,332 $ -
============ ============ ============
The Company had no cash equivalents at December 31, 2005, 2004, and 2003.
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, 2005, 2004 AND 2003
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(R) 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 collectbility 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. The composition of inventories at December 31, 2005
and 2004 are as follows:
2005 2004
Raw materials $3,235,086 $3,111,394
Finished goods 3,025,727 2,107,038
---------- ----------
$6,260,813 $5,218,432
========== ==========
Prepaid advertising and promotion - During the years ended December 31,
2005, 2004 and 2003, the Company introduced certain new products to its
customers. In connection therewith, the Company produced new promotional items
to be distributed over a period of time and increased its catalog advertising.
The Company follows the policy of amortizing these costs over a one-year basis.
At December 31, 2005 and 2004, the accumulated cost of materials on hand and
other deferred promotional costs that were or will be charged against the
subsequent year's operations amounted to approximately $16,486 and $25,900,
respectively.
Property, plant and equipment - Property, plant and equipment are stated at
cost. Depreciation is provided over the estimated useful lives of the related
assets using the straight-line method.
Stock based compensation - The Company follows the provisions of APB
Opinion No. 25, Accounting for Stock Issued to Employees, to record compensation
costs. Opinion No. 25 requires that compensation cost be based on the
difference, if any, between the quoted market price of the stock and the price
the employee must pay to acquire the stock depending on the terms of the award.
For the years ended December 31, 2005, 2004 and 2003, the Company has not
adopted Statement of Financial Accounting Standards No. 123 to record such
compensation costs.
Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates that affect the reported amount of assets, liabilities, revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Concentration of credit risk - Financial instruments that potentially
subject the Company to concentration of credit risk consist primarily of
accounts receivable. The Company's five largest customers represented
approximately 43%, 55% and 55% of consolidated gross revenues for the years
ended December 31, 2005, 2004 and 2003; and 26% and 77% of consolidated accounts
receivable at December 31, 2005 and 2004, 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.
F-8
Concentration of cash - At various times of the year and at December 31,
2005, 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 only temporary differences included therein are attributable to
differing methods of reflecting depreciation for financial statement and income
tax purposes.
Trademarks, trade names and patents - The Star brite trade name and
trademark were purchased in 1980 for $880,000. The cost of such intangible
assets was amortized on a straight-line basis over an estimated useful life of
40 years through December 31, 2001. Effective January 1, 2002 and pursuant to
Statement of Financial Accounting Standards No. 142, the Company has determined
that the carrying value of such intangible assets relating to its Star brite(R)
brand does not require further amortization. In addition, the Company owns two
patents that it believes are valuable in limited product lines, but not material
to its success or competitiveness in general. There are no capitalized costs of
these two patents. 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.
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, 2004 and 2003 have been
reclassified to conform with the 2005 presentation.
Note 2 - Property, plant and equipment:
The Company's property, plant and equipment consisted of the following:
December 31, 2005 2004
Land $ 278,325 $ 278,325
Building 4,390,894 4,390,894
Manufacturing and warehouse equipment 6,044,138 5,359,009
Office equipment and furniture 652,940 623,825
Construction in process 278,239 261,693
Leasehold improvement 145,505 151,976
----------- -----------
11,790,041 11,065,722
Less accumulated depreciation 4,479,401 3,728,122
----------- -----------
Total property, plant and equipment, net $ 7,310,640 $ 7,337,600
=========== ===========
Depreciation expense for the years ended December 31, 2005, 2004 and 2003,
which includes amortization of capitalized lease assets, amounted to
approximately $762,900, $735,100 and $675,100, respectively.
F-9
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,
2005 2004
----------- -----------
Land $ 278,325 $ 278,325
Building 4,390,894 4,390,894
Manufacturing and warehouse equipment 5,747,411 4,867,141
Construction in process 274,843 261,693
----------- -----------
10,691,473 9,798,053
Less accumulated depreciation 3,557,788 2,773,757
----------- -----------
Total $ 7,133,685 $7,024,296
=========== ===========
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.
Note 3 - Note payable, bank:
During 2002, the Company secured a revolving line of credit, which provided
a maximum of $5 million of working capital from the commercial bank providing
the financing for the expansion discussed in Note 2, above. The line carries
interest based on the 30 day LIBOR rate plus 275 basis points (approximately
7.14% at December 31, 2005) 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, 2005 the bank has waived
the Company's non-compliance with certain of its financial covenants. This
financing matures on May 31, 2006. As of December 31, 2005, the Company was
obligated to its commercial lender under this arrangement in the amount of
$4,000,000.
Note 4 - Long -Term debt:
Long-term debt at December 31, 2005 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, 2005, $2,125,000 and $3,080,000 were
outstanding attributable to the 1997 and 2002 series, respectively. During the
year ended December 31, 2005 interest rates ranged between 1.8% and 3.3%.
Principal and accrued interest retiring the underlying bonds are payable
quarterly through March, 2012 and July, 2017 for the 1997 and 2002 series,
F-10
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 2005 and 2004, 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 $56,300 at December 31, 2005, have varying maturities through 2009
and carry interest rates ranging from 7% to 12%.
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, 2005
were approximately $ 433,300 and prime plus 2.5% per annum, respectively)
through maturity on April 15, 2010.
During the quarter ended December 31, 2005, we finalized a $1.5 million
revolving credit facility with our president and CEO, Peter G. Dornau. At
December 31, 2005, $1,150,000 was outstanding pursuant to this obligation which
is due in October 2010 along with accrued interest at the rate of prime plus 2%.
Such obligation is subordinate to all borrowings from Regions Bank. In
connection with his offering to loan a maximum of $1.5 million to the Company in
order to bolster working capital, 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 addition, he has 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.
The composition of these obligations at December 31, 2005 and 2004 were as
follows:
Current Portion Long Term Portion
2005 2004 2005 2004
-------- -------- ---------- ----------
(Restated)
Industrial Development Bonds $460,000 $460,000 $4,745,000 $5,205,000
Notes payable 99,996 7,180 331,448 354,152
Capitalized equipment leases 20,856 15,932 35,408 21,098
Subordinated note payable-P. Dornau - - 1,150,000 -
-------- -------- ---------- ----------
580,852 483,112 6,261,856 5,580,250
- - 310,898 -
-------- -------- ---------- ----------
$580,852 $483,112 $5,950,958 $5,580,250
======== ======== ========== ==========
Required principal payment obligations attributable to the foregoing are
tabulated below:
Year ending December 31,
2006 $ 580,852
2007 579,279
2008 571,757
2009 564,360
2010 1,643,352
Thereafter 2,903,108
----------
Total $6,842,708
==========
Note 5 - Income taxes:
The Components of the Company's consolidated income tax provision are as
follows:
Year ended December 31,
2005 2004 2003
----------- ---------- --------
Income tax provision (benefit): (Restated)
Federal - current ($ 274,500) $ 46,600 $140,000
- deferred ( 260,000) 54,400 37,800
State - 6,000 -
----------- --------- --------
Total ($ 534,500) $ 107,000 $177,800
=========== ========= ========
F-11
The reconciliation of income tax provision at the statutory rate to the
reported income tax expense is as follows: Year ended December 31,
2005 2004 2003
---------- ---------- --------
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 11.2% - -
Other, principally deferred income
taxes attributable to depreciation - 16.0 -
---------- ---------- --------
Effective tax rate (22.8%) 55.5 % 34.0%
========== ========== ========
At December 31, 2005 the Company had available tax loss carryovers
available as offsets against future taxable income aggregating approximately
$776,800 and $2,315,700 for federal and Florida purposes, respectively expiring
in 2025. If fully utilizable, such carryovers would result in a deferred tax
asset of approximately $264,100 as of December 31, 2005. There is no assurance
that the Company will ever avail itself of all or a portion of such credits,
accordingly, a valuation allowance has been established against this deferred
asset. The Company's deferred tax asset and liability accounts consisted of the
following at December 31:
2005 2004
---------- ----------
Deferred tax asset $ 264,100 $ -
Less valuation allowance ( 264,100) -
Deferred Tax Liability - ( 260,000)
----------- ----------
Total ($ - ) ($260,000)
=========== ==========
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. At December 31, 2004
deferred income taxes payable aggregated $260,000 and is reflected on the
accompanying consolidated balance sheet.
Note 6 - Related party transactions:
At December 31, 2005 and 2004, 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
$29,000 and $408,500, respectively. Such amounts result from sales to the
affiliates, allocations of expenses incurred by the Company on the affiliates'
behalf and funds advanced to or from the Company.
Sales to such affiliates aggregated approximately $826,900, $616,800, and
$373,600 during the years ended December 31, 2005, 2004, and 2003, respectively.
Subseqent to the balance sheet date, on March 10, 2006, an affiliate
offered to forgive the Company's indebtedness to such entity in the approximate
amount of $295,000. Accordingly, during the first quarter of 2006, the Company
will reflect this transaction.
F-12
Note 7 - Commitments and subsequent event:
On May 1, 1998, the Company entered into a ten year lease for approximately
12,700 square feet of office and warehouse facilities in Fort Lauderdale,
Florida from an entity owned by certain officers of the Company. The lease
required a minimum rental of $94,800 for the first year and provides for a
maximum 2% increase on the anniversary of the lease throughout the term.
Additionally, the landlord is entitled to its pro-rata share of all taxes,
assessments, and any other expenses that arise from ownership. Rent charged to
operations during the years ended December 31, 2005, 2004, and 2003 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 $336,900
at December 31, 2005 is primarily secured by the real estate leased to the
Company.
The following is a schedule of minimum future rentals on the non-cancelable
operating leases.
Year ending December 31,
2006 $ 104,507
2007 106,597
2008 108,729
2009-10 -
Thereafter -
----------
Total $ 319,833
==========
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. During 2002, the Company adopted a qualified employee incentive stock
option plan and a non-qualified stock option plan covering 400,000 and 200,000
shares of its common stock, respectively.
The following schedule reflects the status of outstanding options under the
Company's four stock option plans as of December 31, 2005, as adjusted for the
Company's stock dividend distributions of 2000 and 2002.
Weighted
Date Options Exercisable Exercise Expiration Average
Plan granted outstanding options price date remaining life
---- -------- ----------- ----------- ---------- ---------- --------------
1992 12/20/01 154,000 123,200 $1.009 12/19/06 1.00
1994 10/26/04 174,500 34,900 $1.050 10/25/09 3.83
2002 10/22/02 135,000 81,000 $1.260 10/21/07 1.75
2002 03/02/04 155,000 31,000 $1.620 03/01/09 3.25
2002 10/22/02 35,000 35,000 $1.260 10/21/07 1.75
2002 06/20/03 40,000 40,000 $1.030 06/19/08 2.50
2002 05/25/04 40,000 40,000 $1.460 05/04/09 3.50
--------- ------- ----
733,000 385,100 2.54
========= ======= ====
F-13
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.
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.
2005 2004 2003
---------- ---------- ----------
(Restated)
Net (loss) income As reported ($1,813,193) $ 17,222 $ 345,071
Pro forma ($1,858,710) ($ 18,604) $ 301,887
Earnings (loss) per share As reported ($ .32) $ - $ .07
Pro forma ($ .32) $ - $ .06
A summary of the Company's stock options as of December 31, 2005, 2004 and
2003, and changes during the years ending on these dates, is presented below:
2005 2004 2003
------------- --------------- -----------------
Weighted Weighted Weighted
Optioned average Optioned average Optioned average
Shares exercise price shares exercise price shares exercise price
Options outstanding
at beginning of year 1,183,000 $1.12 1,106,210 $ .95 1,082,210 $1.03
Granted - 412,500 40,000
Expired ( 59,000) ( 19,240) ( 16,000)
Exercised ( 159,500) ( 316,470) -
---------- ----- ----------- ----- ----------- -----
Options outstanding at
end of year 964,500 $1.12 1,183,000 $1.12 1,106,210 $ .95
========== ===== ========= ===== =========== =====
Stock options are granted annually to selective executives, key employees,
directors and others pursuant to the terms of the Company's various plans. Such
grants are made at the discretion of the Board of Directors. Options typically
have a five-year life with vesting occurring at 20% per year on a cumulative
basis with forfeiture at the end of the option, if not exercised.
The fair value of each option grant was estimated using the Black-Scholes
option pricing model with the following assumptions for the years 2005, 2004 and
2003; risk free rate 6.5%, no dividend yield for all years, expected life of
five years and volatility of 31.6%.
During the quarter ended December 31, 2005, we finalized a $1.5 million
revolving credit facility with our president and CEO, Peter G. Dornau. In
connection with his offering to loan such funds to the Company, 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 addition, he has 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. The potential shares
issuable under this arrangement are not reflected in the foregoing tabulations.
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, 2005,
2004, and 2003. Sales to this customer represented approximately 26%, 39% and
36% of consolidated gross revenues for such periods, respectively.
F-14
The Company's top five customers represented approximately 43%, 55%, and
55% of consolidated revenues and 26%,77% and 76% of consolidated trade
receivables for the years ended December 31, 2005, 2004, and 2003, and at the
balance sheet date for the years then ended, respectively. The Company enjoys
good relations with these customers. However, the loss of any of these customers
could have an adverse impact on the Company's operations.
Note 10 - Earnings per share:
Earnings per share are reported pursuant to the provisions of Statement of
Financial Standards No. 128. Accordingly, basic earnings per share reflects the
weighted average number of shares outstanding during the year, and diluted
shares adjusts that figure by the additional hypothetical shares that would be
outstanding if all exercisable outstanding common stock equivalents with an
exercise price below the current market value of the underlying stock were
exercised. Common stock equivalents consist of stock options and warrants. The
following tabulation reflects the number of shares utilized to determine basic
and diluted earnings per share for the years ended December 31, 2005, 2004, and
2003:
2005 2004 2003
--------- --------- ---------
Basic 5,700,774 5,356,316 4,888,133
Diluted 5,844,750 5,500,113 5,338,015
Note 11 - Shareholders' equity:
During the years ended December 31, 2005, 2004 and 2003 the Company awarded
122,000, 140,500 and 155,000 shares of restricted common stock, respectively to
certain executives, key employees and others as a component of annual
compensation. Charges to operations attributable to such awards aggregated
approximately $97,300, $87,800 and $67,500 for each period, respectively.
During August 2005, certain employees of the Company exercised stock
options scheduled to expire during 2005 covering 159,500 shares of its common
stock. The aggregate exercise price of such transaction amounted to
approximately $92,900 and is reflected in the accompanying financial statements
as additional paid-in capital.
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 8 - Stock
options. 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-15
ear 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) $.03 $.02
Adjustment for "compensation cost" - - (.03) ( .02)
------ ------ ----- ------
As restated ($.32) ($.31) $ - $ -
====== ====== ===== =======
F-16