10-Q 1 oceanbio-10q.txt QUARTERLY REPORT U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 Commission File No. 2-70197 OCEAN BIO-CHEM, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Florida 59-1564329 -------------------------------------------------------------------------------- (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Registrant's telephone number, including area code - (954) 587-6280 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. $.01 Par Value Common Stock, 10,000,000 shares authorized. 5,417,813 issued and outstanding at June 30, 2004 OCEAN BIO-CHEM, INC. AND SUBSIDIARIES INDEX Description Page ----------- ---- Part I: Item 1. - Financial Statements: Consolidated balance sheets as of June 30, 2004 and December 31, 2003 3 Consolidated statements of operations for the three and six months ended June 30, 2004 and 2003 4 Consolidated statements of changes in shareholders' equity for the six months ended June 30, 2004 and 2003 5 Consolidated statements of cash flows for the six months ended June 30, 2004 and 2003 6 Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations 7-8 Item 3. - Quantitative and Qualitative Disclosures about Market Risk 9 Item 4. - Controls and Procedures 9 Part II: Item 1. - Legal Proceedings 10 Item 2. - Changes in Securities 10 Item 3. - Defaults upon Senior Securities 10 Item 4. - Submission of Matters to Vote by Security Holders 10 Item 5. - Other Matters 10 Item 6. - Exhibits and Reports on Form 8-K 10 Signatures 11 Exhibits 2 PART I - Financial Information Item l. Financial Statements OCEAN BIO-CHEM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS JUNE 30, DECEMBER 31, 2004 2003 ------------ ------------ (Unaudited) Current assets: Cash $ 218,441 $ 42,923 Trade accounts receivable net of allowances for doubtful accounts of approximately $133,100 and $206,000 at June 30, 2004 and December 31, 2003, respectively 4,434,675 4,333,023 Inventories 6,346,546 5,315,741 Prepaid expenses and other current assets 167,906 193,372 ------------ ------------ Total current assets 11,167,568 9,885,059 ------------ ------------ Property, plant and equipment, net 7,452,723 7,506,586 ------------ ------------ Other assets: Funds held in escrow for equipment 1,900 126,295 Trademarks, trade names and patents, net of accumulated amortization 330,439 330,439 Due from affiliated companies, net 356,238 172,925 Deposits and other assets 260,932 281,880 ------------ ------------ Total other assets 949,509 911,539 ------------ ------------ Total assets $ 19,569,800 $ 18,303,184 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable - trade $ 2,028,445 $ 1,305,484 Note payable - bank 5,325,000 4,550,000 Current portion of long-term debt 484,825 898,964 Income taxes and accrued expenses payable 133,662 261,439 ------------ ------------ Total current liabilities 7,971,932 7,015,887 ------------ ------------ Deferred income taxes payable 223,610 205,610 ------------ ------------ Long-term debt, less current portion 5,808,172 5,677,692 ------------ ------------ Shareholders' equity: Common stock - $.01 par value 10,000,000 shares authorized, 5,417,813 and 4,960,843 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively 54,178 49,608 Additional paid-in capital 4,722,746 4,409,829 Foreign currency translation adjustment (249,344) (237,323) Retained earnings 1,046,701 1,190,076 ------------ ------------ 5,574,281 5,412,190 Less cost of common stock in treasury, 7,519 shares at June 30, 2004 and December 31, 2003, respectively (8,195) (8,195) ------------ ------------ 5,566,086 5,403,995 ------------ ------------ Total liabilities and shareholders' equity $ 19,569,800 $ 18,303,184 ============ ============
3 OCEAN BIO-CHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Gross sales $ 6,295,436 $ 5,462,282 $ 10,199,380 $ 8,688,052 Allowances 849,875 351,531 1,316,233 706,534 ------------ ------------ ------------ ------------ Net sales 5,445,561 5,110,751 8,883,147 7,981,518 Cost of goods sold 4,052.441 3,630,147 6,743,078 6,175,783 ------------ ------------ ------------ ------------ Gross profit 1,393,120 1,480,604 2,140,069 1,805,735 ------------ ------------ ------------ ------------ Costs and expenses: Advertising and promotion 333,174 189,775 467,430 327,324 Selling and administrative 864,748 805,967 1,722,151 1,607,907 Interest expense 73,639 77,583 140,942 147,691 ------------ ------------ ------------ ------------ Total cost and expenses 1,271,561 1,073,325 2,330,523 2,082,922 ------------ ------------ ------------ ------------ Income (loss) from operations 121,559 407,279 (190,454) (277,187) Interest income 107 825 579 3,233 ------------ ------------ ------------ ------------ Income (loss) before income taxes 121,666 408,104 (189,875) (273,954) Provision (benefit) for income taxes 59,500 -- (46,500) -- ------------ ------------ ------------ ------------ Net income (loss) 62,164 408,104 (143,375) (273,954) Other comprehensive income (loss) net of income taxes: Foreign currency translation Adjustment (16,559) 28,205 (12,021) 49,712 ------------ ------------ ------------ ------------ Comprehensive income (loss) $ 45,607 $ 436,309 $ (155,396) $ (224,242) ============ ============ ============ ============ Earnings (loss) per common share $ .01 $ .08 $ (.03) $ (.06) ============ ============ ============ ============
Earnings per share were calculated on the basis of 5,294,818 and 4,823,549 weighted average shares of common stock outstanding for the six months and three months ended June 30, 2004 and 2003, respectively. The Company has adopted Statement of Financial Accounting Standards No. 130 which requires items of comprehensive income to be stated as part of the basic financial statements. The only items of comprehensive income of the registrant which are reflected in the accompanying financial statements are foreign currency translation adjustments. 4 OCEAN BIO-CHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
Foreign Common stock Additional currency Retained Treasury Shares Amount paid-in capital adjustment earnings stock Total ----------- ----------- ----------- ----------- ----------- ----------- ----------- January 1, 2004 4,960,843 $ 49,608 $ 4,409,829 ($ 237,323) $ 1,190,076 ($ 8,195) $ 5,403,995 Net loss -- -- -- -- (143,375) -- (143,375) Common stock issuances 456,970 4,570 312,917 -- -- -- 317,487 Foreign currency translation adjustment -- -- -- (12,021) -- -- (12,021) ----------- ----------- ----------- ----------- ----------- ----------- ----------- June 30, 2004 5,417,813 $ 54,178 $ 4,722,746 ($ 249,344) $ 1,046,701 ($ 8,195) $ 5,566,086 =========== =========== =========== =========== =========== =========== =========== January 1, 2003 4,805,843 $ 48,058 $ 4,341,629 ($ 303,575) $ 845,005 ($ 8,195) $ 4,922,922 Net (loss) -- -- -- -- (273,954) -- (273,954) Issuances of stock 155,000 1,550 68,200 -- -- -- 69,750 Foreign currency translation adjustment -- -- -- -- -- 49,712 49,712 ----------- ----------- ----------- ----------- ----------- ----------- ----------- June 30, 2003 4,960,843 $ 49,608 $ 4,409,829 ($ 253,863) $ 571,051 ($ 8,195) $ 4,768,430 =========== =========== =========== =========== =========== =========== ===========
5 OCEAN BIO-CHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, (Unaudited)
2004 2003 ----------- ----------- Cash flow provided by operating activities: Net income (loss) $ (143,375) $ (273,954) Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 357,224 314,924 Changes in assets and liabilities: Decrease (increase) in accounts receivable (101,652) (527,352) (Increase) in inventory (1,030,805) (1,392,917) (Increase) decrease in prepaid expenses and other current assets 25,465 223,291 (Decrease) in accounts payable, accrued expenses and other 634,133 176,442 ----------- ----------- Net cash provided (used) by operating activities (259,010) (1,479,566) ----------- ----------- Cash flows from financing activities: Net increases under line of credit 775,000 350,000 Reduction (increases) in due from affiliates (183,313) 305,130 Payments on debts, net (283,659) (301,909) Common stock transactions 317,487 69,750 ----------- ----------- Net cash provided (used) by financing activities 625,515 422,971 ----------- ----------- Cash flows from investing activities: Purchases of property, plant, equipment, net of funds held in escrow (178,966) (33,654) ----------- ----------- Net cash (used) by investing activities (178,966) (33,654) ----------- ----------- Increase (decrease) in cash prior to effect of foreign currency translation adjustment 187,539 (1,090,249) Effect of foreign currency translation adjustment on cash (12,021) 49,712 ----------- ----------- Net increase (decrease) in cash 175,518 (1,040,537) Cash at beginning of period 42,923 1,093,826 ----------- ----------- Cash at end of period $ 218,441 $ 53,289 =========== =========== Supplemental information: Cash used for payment of interest during period $ 140,942 $ 147,691 =========== =========== Cash used for payment of income taxes during period $ 32,000 $ -- =========== =========== The company had no cash equivalents at June 30, 2004 and 2003.
6 OCEAN BIO-CHEM, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. The information contained in this report is unaudited, but reflects all adjustments which are, in the opinion of the management, necessary for a fair statement of results of the interim periods, consisting only of normal recurring accruals. The results for such interim periods are not necessarily indicative of results to be expected for the full year. Certain financial statement items for the three and six months ended June 30, 2003 have been reclassified to conform with the 2004 presentation. Forward-looking Statements: --------------------------- Certain statements contained herein, including without limitation expectations as to future sales and operating results, constitute forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed forward-looking statements. Without limiting the generality of the foregoing, words such as "may", "will", "expect", "anticipate", "intend", "could" or the negative other variations thereof or comparable terminology are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements of Ocean Bio-Chem, Inc. (the "Company," `we" or "us") to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Factors which may affect our 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. We will not undertake and specifically declines any obligation to update or correct any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources ------------------------------- The primary sources of our liquidity is cash from operations, short-term borrowings under our revolving line of credit with Regions Bank, a commercial bank, other borrowings. We renewed our line of credit with Regions Bank in July 2004, in which we increased our credit line from $ 5 million to $6 million. This line of credit is secured by a security interest in our accounts receivable and inventory. The line of credit bears interest the lender's prime rate plus .25% and matures on May 31, 2005. The maximum amount of credit that can be extended under the agreement is $6 million. Under this line of credit, we are required to maintain certain financial ratios as of each fiscal year end. As of June 30, 2004, the amount outstanding pursuant to the working capital line of credit was $5,325,000. We have obtained financing under industrial development revenue bonds from the city of Montgomery, AL beginning in 1997. As of June 30, 2004, the amount outstanding under our industrial development bonds is $5,895,000. The interest rate on the bonds is a floating rate and as of June 30, 2004, the interest rate was approximately 1.3% RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THE ------------------------------------------------------------------------------ THREE MONTHS ENDED JUNE 30, 2003 -------------------------------- Gross sales increased 15% to approximately $6,295,400 for the three months ended June 30, 2004 compared to gross sales of approximately $5,462,300 for the three months ended June 30, 2003. Management attributes this increase primarily to sales of recently introduced new marine oil products and to the timing of certain customer orders. Cost of goods sold increased to 74.42% of net sales during the three months ended June 30, 2004 compared to 71.03% of net sales in the three months ended June 30, 2003. The increase in the cost of goods is attributed to increasing oil and other raw material costs announced during the second quarter and subsequent to previously promulgated sales price increases to certain of our customers. Management is currently evaluating the possibility of an another round of sales price increases to absorb these additional costs, but has deferred an additional increase in prices until it become clearer that these higher material costs will stabilize. Selling and administrative expenses increased approximately $58,800 or 7 % in the three months ended June 30, 2004 compared to the same period in the prior year. Such change was primarily due to increased personnel costs and other normal recurring increases in operating expenses. 7 Advertising and promotion increased approximately $143,400 or 76% in the three months ended June 30, 2004 compared to the same period in the prior year. This resulted primarily from increased co-op advertising associated with increased sales to certain customers and the timing of various advertising programs in 2004. Interest expense was substantially unchanged in the three months ended June 30, 2004 and 2003 and amounted to approximately $73,600 and $77,600, respectively. Our income from operations was approximately $121,600 in the three months ended June 30, 2004 compared to $407,300 during the three months ended June 30, 2003. Our net income was approximately $62,600 in the three months ended June 30, 2004 compared to $408,100 in the three months ended June 30, 2003. SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2003 ----------------------------------------------------------------------------- Gross Sales increased 17% to approximately $10,199,400 in the six months ended June 30, 2004 compared to $8,686,100 for the six months ended June 30, 2003. Management attributes this increase to mild weather in the northern states causing an early start of the boating season and thereby increased sales of marine products Cost of goods sold decreased to 75.91% of net sales for the six months ended June 30, 2004 compared to 77.38% of net sales in the six months ended June 30, 2003. This change resulted from various factors, some of which negatively impacted margins and others which mitigated these factors. Specifically, petroleum products have costs which are higher than those experienced in prior periods and currently represent a higher portion of manufacturing efforts. In addition, a price increase was passed along on certain products during the first quarter of 2004, and margins are favorably impacted by spreading fixed elements of overhead over increased revenues. Advertising and promotion expenses increased approximately $140,100 or 43% for the 2004 period when compared to expenses in the same time period in the previous year. This increase resulted primarily from increased co-op advertising associated with increased sales to certain customers and the timing of various advertising programs in 2004. Selling and administrative expenses increased by approximately $114,200 or 7% in the six months ended June 30, 2004 compared to the six months ended June 30, 2003. Such change was primarily due to increased personnel costs and other normal recurring increases in operating expenses. Interest expense for the 2004 period decreased approximately $6,700 or 4.6% when compared to the same six month period of 2003. This change was primarily due to the impact of lower interest rates. Our loss before income taxes was $189,875 in the six months ended June 30, 2004 compared to a net loss before income taxes of $273,954 in the six months ended June 30, 2003. Our benefit for income taxes amounted to $46,500 for the six months ended June 30, 2004 and reflected based on available tax net loss carry-back provisions. We did not have any benefit for income taxes in the six months ended June 30, 2003. As a result of the foregoing, our net loss from amounted to approximately $143,400 for the six months ended June 30, 2004 compared to a net loss of approximately $274,000 for the six months ended June 30, 2003. 8 Item 3. Quantitative and Qualitative Disclosures about Market Risk Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in financial and commodity market prices and interest rates. We are exposed to market risk in the areas of changes in borrowing rates in the United States and changes in foreign currency exchange rates Historically and as of June 30, 2004, we have not used derivative instruments or engaged in hedging activities to minimize market risk. INTEREST RATE RISK As or June 30, 2004, we had floating interest rates on our industrial development revenue bonds and our credit facility. As of June 30, 2004, the interest rate on our $5,895,000 outstanding balance of industrial revenue bonds was 1.3% per annum and the interest rate on our credit facility approximated 4.75% which is prime plus .25%. We do not expect any changes in the interest rate to have a significant impact on our operations during fiscal 2004. FOREIGN CURRENCY RISK We sell products in Canada, based on the Canadian dollar. Thereby, we have exposure to changes in exchange rates. Changes in the Canadian dollar/U.S. dollar exchange rates may positively or negatively affect our gross margins, operating income and retained earnings. We do not believe that near-term changes in the exchange rates, if any, will result in a material effect on our future earnings, fair values or cash flows, and therefore, we have chosen not to enter into foreign currency hedging transactions. We cannot assure you that this approach will be successful, especially in the event of a significant and sudden change in the value of the Canadian dollar. CONCENTRATION AND CREDIT RISK We maintain cash balances at several financial institutions which are insured by the Federal Deposit Insurance Corporation up to $100,000. At times, the cash balances may exceed federally insured limits. We have not experienced any losses in such accounts and we believe the risk related to these deposits is minimal. At June 30, 2004, approximately 18% of the Company's cash was subject to such risk. Item 4. Controls and Procedures Within 90 days prior to the date of this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. In addition, we reviewed our internal controls, and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of their last evaluation. 9 PART II: OTHER INFORMATION Item l - Legal Proceedings: See our Form 10-K for the year ended December 31, 2003. Item 2 - Changes in Securities: On April 7, 2004, we granted an aggregate of 140,500 shares of our common stock to certain officers, directors and employees as bonus shares. We issued these shares in reliance upon Section 4(2) of the Securities Act of 1933, because each person who received the shares was knowledgeable, sophisticated and had access to comprehensive information about us. We placed legends on the certificates stating that the securities were not registered under the Securities Act and set forth the restrictions on their transferability and sale. Item 3 - Defaults Upon Senior Securities: Not applicable Item 4 - Submission of Matters to Vote of Security Holders: On June 3, 2004, at our annual meeting of shareholders, seven directors; Peter G. Dornau, Edward Anchel, Jeffrey Tieger, Laz L. Schneider, James M. Kolisch, John B. Turner, and Sonia B. Beard were elected. Shareholders also approved Berkovits, Lago & Co., LLP, Certified Public Accountants, as independent auditors for the year ending December 31, 2004. The tabulation of voting for the foregoing was as follows: For Against Abstain --- ------- ------- Peter G. Dornau 3,717,028 668 1,100 Edward Anchel 3,717,028 668 1,100 Jeffrey Tieger 3,717,028 668 1,100 Laz L. Schneider 3,717,028 1,778 1,100 James M. Kolisch 3,717,028 668 1,100 John B. Turner 3,717,028 668 1,100 Sonia B. Beard 3,717,028 1,778 1,100 Berkovits, Lago & Co.,LLP, CPA's 3,710,526 1,778 7,602 Item 5 - Other Matters: Not applicable Item 6 - Exhibits: (A) Exhibits 31.1 Certification of CEO pursuant to Section 302 of Sarbanes Oxley Act of 2002 31.2 Certification of CFO pursuant to Section 302 of Sarbanes Oxley Act of 2002 32.1 Certification of CEO and CFO pursuant to USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 906 (B) Reports on Form 8-K - Not applicable 10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OCEAN BIO-CHEM, INC. Date: August 11, 2004 /s/ Peter Dornau -------------------------- Peter G. Dornau Chairman of the Board and Chief Executive Officer /s/ Edward Anchel -------------------------- Edward Anchel Chief Financial Officer 11