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| OBCI > SEC Filings for OBCI > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
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 Litigations 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 the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Factors that may affect the Company's results include, but are not limited to, the highly competitive nature of the Company's industry; reliance on certain key customers; consumer demand for marine recreational vehicle and automotive products; advertising and promotional efforts, and other factors. The Company will not undertake and specifically declines any obligation to update or correct any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
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:
See Note 1 "Summary of Accounting Policies" in the Notes to the Unaudited Condensed Consolidated Financial Statements for a discussion of recent accounting pronouncements and their effect, if any, on the Company.
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, 2011, bears interest at the 30 Day LIBOR plus 250 basis points (approximately 6.2% at September 30, 2008) and is secured by our trade receivables, inventory and intangible assets. As of each year-end, December 31, 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 September 30, 2008, we were obligated under this arrangement in the amount of $2,650,000.
In connection with the purchase and expansion of the Alabama facility, we closed on Industrial Development Bonds during 1997 aggregating approximately $5 million. The proceeds were utilized for both the repayment of certain advances used to purchase the Alabama facility and to expand such facility. During July 2002, we completed a second Industrial Development Bond financing aggregating $3.5 million through the City of Montgomery, Alabama. Such transaction funded an approximate 70,000 square foot addition to the manufacturing facility as well as the remaining machinery and equipment additions required therein. This project was substantially completed during 2003.
In order to market the Industrial Development Bonds at favorable rates, we obtained a substitute irrevocable letter of credit for the 1997 issue and an irrevocable letter of credit for the 2002 issue. Under such letters of credit agreements, maturing on July 31, 2009, 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 nine months ended September 30, 2008 such bonds carried interest ranging between 1.5% and 8.6%. Interest and principal are payable quarterly. We believe current operations are sufficient to meet these obligations.
On September 26th and October 6th, 2008 the Company was notified by Regions
Bank that both the 1997 and 2002 series bonds respectively were being tendered.
There has been no default on these bonds by the Company. It is the understanding
of the Company that due to the tight credit markets, these bonds were tendered.
As a result the Company will be obligated to Regions Bank (as these bonds were
backed by a letter of credit by Regions Bank) until which time the credit
markets improve to remarket these bonds. The interest rate on the term loans is
prime rate plus 2% or 7% at September 30, 2008.
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 on this obligation at September 30, 2008 were
approximately $158,300. The maturity on this obligation is April 15, 2010.
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 September 30, 2008 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.
For the Three Months Ended September 30, 2008 compared to the Three Months ended September 30, 2007
Net sales were approximately $8,221,000 for the three months ended September 30, 2008 compared to $6,951,000 for the comparative quarter 2007, an increase of $1,270,000 or 18%. The Company had higher shipments of its winterizing products including antifreeze comparing the quarters. The Company had increased sales of other marine products including the Company's fuel treatment products - StarTron, in addition to other boat maintenance products.
Cost of goods sold as a percentage of sales increased to 71.8% of sales compared to 67.9% for the comparative 2007 quarter. This increase in the cost of goods sold percentage of 3.9 % was a result of the unprecedented increase in oil prices and the resulting increase in the company's raw material costs that could not be fully passed on to our customers. In addition the Company had a higher sales mix of lower margin antifreeze products in the quarter compared to comparative prior year.
Advertising and promotion expenses were approximately $409,000 compared to $572,000 for the comparative third quarters. Management has taken initiatives to reduce spending for advertising and promotions for the balance of 2008. Selling and administrative expenses decreased approximately $89,000 to $877,000 when comparing the quarters ended September 30, 2008 compared to $966,000 for comparative 2007quarter. Management continues to monitor all expenses to reduce spending. Cost savings were realized in the quarter for non cash compensation expense and computer consulting services.
Interest expense increased by approximately $28,000 for the quarter ended September 30, 2008 compared to the corresponding quarter in 2007. The higher interest expense in 2008 is associated with the financing of higher levels of working capital items in connection with our seasonal ant-freeze business in 2008 compared to 2007.
Operating income increased to approximately $968,000 from $665,000 an increase of $303,000 or 45.6%. This is a result of higher sales volume in the quarter in addition to lower operating expenses.
Net profit for the quarter ended September 30, 2008 was approximately $601,000 compared to $665,000 for the comparable period in 2007. The Company had a tax expense for the quarter of $367,000, as a result of the Company being in a tax paying position, as compared to the comparative quarter 2007 in which the Company was utilizing a loss tax carry-forward.
For the Nine Months Ended September 30, 2008 compared to the Nine Months Ended September 30, 2007
Net sales were approximately $16,957,000 for the nine month period ending September 30, 2008 compared to $16,407,000 for the 2007 comparative period, an increase of $550,000 or 3%. The increase in sales for the nine month period as discussed above in the current quarter MD&A narrative is primarily higher sales of our winterizing products, antifreeze being the largest product in this group. In addition the Company is increasing its sales of the fuel additive StarTron that helps eliminate the E- 10 (ethanol) gasoline problems. The Company also increased the sales of other marine products.
Cost of goods sold as a percentage of sales increased to 71.1% of sales compared to 66.1 % for the comparative 2007 nine month period. The cost of goods sold percentage increased 5.0 %. This was a result of the unprecedented increase in oil prices and the resulting increase in the company's raw material costs that could not be fully passed on to our customers. In addition, due to the higher sales mix of antifreeze which is at lower gross margin, it increased the overall cost of goods percentage of sales.
Advertising and promotion expenses were approximately $1,079,000 for the nine month period compared to $1,246,000 for the comparative nine month period of 2007. Management has reduced the placement of ads in trade magazines to partially offset the increase in cost of goods sold.
Selling and administrative expenses decreased to approximately $2,954,000 for the nine months ended September 30, 2008 compared to $3,191,000 for the nine months ended September 30, 2007, a decrease of $237,000 or 7%. The significant decrease was reduced general and administrative, non cash compensation expenses and computer service expenses.
Interest expense for the 2008 period decreased approximately $16,000 when compared to the same nine month period of 2007. This principally resulted from reduced average borrowings on the Company's credit facility and lower interest rates than for the comparative nine month period.
The net income was approximately $377,000 for the nine months ended September 30, 2008 compared to a net income of approximately $896,000 for the nine months ended September 30, 2007 a decrease of $519,000. The decrease resulted from a combination of higher costs of goods as a result of the impact of higher material cost due to higher oil prices. In addition the Company had fully utilized its tax carry forward and had an income tax provision of $271,000 in 2008, compared to no income tax provision in 2007.
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