U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
|X| Annual report under section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31,2003
|_| Transition report under section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from _________to
Commission File Number: 000-23039
ORALABS HOLDING CORP.
(Name of small business issuer in its charter)
Colorado 14-1623047
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18685 East Plaza Drive, Parker, Colorado 80134
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(Address of principal executive offices) (Zip Code)
(Issuer's telephone number: (303) 783-9499
Securities registered under Section 12(b) of the Act:
Title of each class Name of each exchange
None on which registered
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Securities registered under Section 12(g) of the Act:
Common Shares, par value $0.001 per share
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 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
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. ___
State issuer's revenues for its most recent fiscal year: $14,068,220
As of March 23, 2004, the aggregate market value of common stock held by
non-affiliates of the Registrant, computed by reference to the last trade of the
common stock on that date was approximately $1,466,148.
(Issuers involved in bankruptcy proceedings during the past five years) Check
whether the issuer has filed all documents and reports required to be filed by
Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court. Yes ___ No ___
(Applicable only to corporate registrants) State the number of shares
outstanding of each of the issuer's classes of common equity, as of the latest
practicable date. As of March 23, 2004, there were 4,580,615 shares of common
stock outstanding.
Documents incorporated by reference. Portions of the Company's definitive Proxy
Statement to be mailed to stockholders in connection with the Annual Meeting of
Stockholders of the Company to be held on May 25, 2004 (the "2004 Definitive
Proxy Statement"), which will be filed with the Commission not later than 120
days after the end of the fiscal year to which this report relates, are
incorporated by reference in Part III hereof.
Transitional Small Business Disclosure Format (Check one):
Yes ___ No X
NOTE: THE COMPANY IS FILING THIS AMENDMENT TO ITS ANNUAL REPORT SOLELY FOR THE
PURPOSE OF REVISING THE TEXT OF THE CERTIFICATIONS ATTACHED AS EXHIBIT 31.1 AND
31.2.
PART I
Business Development. On May 1, 1997, OraLabs, Inc., a privately held company,
became a wholly owned subsidiary of SSI Capital Corp. (the predecessor of the
Company). SSI Capital Corp. subsequently merged with OraLabs Holding Corp., with
OraLabs Holding Corp. becoming the surviving company. As a result of these
transactions, the Company is the sole stockholder of OraLabs, Inc. The term
"Company" or "OraLabs" will mean OraLabs Holding Corp., successor to SSI Capital
Corp., and except where otherwise indicated, all discussions of the business of
the Company includes the business of OraLabs, Inc. (the "Subsidiary").
The Subsidiary was formed in 1990 for the purposes of manufacturing and
distributing tooth-whitening products. In 1992, in order to expand the product
line, the Subsidiary's developed what became known as its flagship product, Ice
Drops(R). Ice Drops are breath drop product sold in a small plastic bottle and
introduced as an alternative to breath sprays and candy breath mints.
In 1999 the Company introduced its own brands of lip balm in traditional twist
stick containers. The brands currently being marketed consist of Essential Lip
Moisture(TM), Lip Naturals(TM), Chap Ice(R), Soothe & Shine(TM), and Lip Rageous
(R). These brands are sold in traditional twist up containers and the Company's
patented mini-container, which was introduced in 1996. The Company also sells
lip balms and glosses in unique new containers and hopes to be able to continue
to distinguish itself from competition by innovative packaging.
In 2003 the Company acquired certain assets of Symbiosis, Inc. These assets
included, but were not limited to, intellectual property consisting of trade
names Leashables(TM) and Chapgrip(R) and a patent for a lip balm holder.
The nutritional supplement brands contribute less than 5 % of the Company's
revenues. The Company is not planning any material changes to this part of the
business.
In addition, the Company has engaged in negotiations with other businesses and
from time to time contacts persons involved in corporate finance matters to
determine if there are businesses interested in a merger or other acquisition of
or combination with the Company.
Business of the Company.
------------------------
Principal Products, Their Markets and Distribution. The general business of the
Company is to produce and sell consumer products relating to oral care and lip
care and to distribute nutritional supplements. The Company's products are
currently sold in the USA nationally as well as numerous foreign countries. The
products are sold through wholesale distributors as well as by direct sale to
mass retailers, grocery stores, convenience stores and drug stores. The
principal products produced by the Company can be categorized into three groups:
breath fresheners, including liquid drops and sprays under the brand name Ice
Drops(R) and Sour Zone(TM) brand sour drops and sour sprays; lip balm products
under the names Lip Rageous(R), Chap Ice(R), Lip Naturals(TM), Lip Rageous
Glitters(TM), Essential Lip Moisture(TM) and Soothe & Shine(TM), as well as
private label names; nutritional supplement and related products consisting of
5-HTP and Cheat & Lean(TM).
In general, the Company's distribution still covers the same markets that it
always has. As has been the case in recent years, sales and promotional expenses
were predominantly to large retailers. The Company believes that the lip balm
category will continue to be the Company's primary business. The Company has
established itself as a viable competitor in the lip balm business, deriving 80%
of its revenue from this category. This is a category that the Company believes
can resume a growth in sales. However, it is possible that competitive pressures
could further erode margins and increase promotional costs and selling expenses
for the Company.
The sales of breath freshener and sour candies increased in year 2003.
Convenience store and vending distribution has stayed somewhat stable, while
dollar store distribution has varied significantly from year to year. This
market remains very important and viable to the future of the Company. The
Company's distribution network provides continual opportunities for sales of its
breath freshening and sour candies products.
The Company's strategy for its breath freshener and lip balm products has been
to establish name brands and to develop and sell products that fill niches. The
price/value marketing strategy includes capitalizing on the distribution network
that currently carries one or more of the Company's products, and building upon
the business relationships that have been established.
The Company believes that nutritional supplement sales will remain less than 5%
part of its overall revenue. The Company is not planning any material changes to
its nutritional supplement marketing plan.
The Company's products and packaging continue to be conceptualized and developed
in-house. The Company's breath freshener and lip balm products are marketed from
and packaged at the Company's manufacturing facility in Parker, Colorado. Most
packaging, filling and automated manufacturing equipment has been designed,
built and maintained by the Company's own staff. This allows the Company to
rapidly introduce and manufacture new products, reducing lengthy lead times and
some of the cost of capital expenditures associated with some new product
introductions. It also allows the Company to test new products before committing
capital to full-scale manufacturing endeavors. However, the Company has
purchased some high speed filling and labeling equipment in order to help with
capacities for well established products.
Products Launched in 2003. The Company added a new lip balm brand, Soothe &
Shine(TM). Also, brand extensions with different types of innovative, creative
packaging were added.
Page 1
Competitive Business Conditions. Competition from major branded competitors in
the mass retail segment as well as private label manufacturing continues to be
very significant.
With respect to the Company's breath freshening products, direct competitors who
manufacture liquid or spray breath products consist of less than five. The
Company believes that its primary competitive products are Binaca(R) and Sweet
Breath(R). However, if one considers candy breath mints as competition for the
same group of products, the Company believes that there are more than 50
competitors. Most candy breath mint companies have introduced what are known as
"power mints." This has hurt the sales of Ice Drops(R) Breath Freshener. Most of
these mint brands now offer a breath freshener as powerful as Ice Drops(R). The
newest entry in the breath freshening business is a breath strip, introduced by
Listerine and Wrigley. In some cases this has displaced many more traditional
breath fresheners, including Ice Drops(R). The category appears to be growing so
the Company expects that the field will become even more competitive.
With respect to the Company's lip balm products, the Company believes that
approximately 70% of the market is controlled by three dominant competitors (who
sell Chapstick(R), Blistex(R) and Carmex(R), and the balance of the market
consists of more than 50 different brands. It is estimated that there are only
ten to twenty viable competitors from a manufacturing standpoint. Most of the
competitors are also trying to introduce new products as a means of growth and
market share. The retail stores have (for the most part) a finite amount of
space, so getting new slots in retail stores can be a challenge.
The Company has sought to anticipate competition for its breath freshener and
lip balm products by the distinguishing size and packaging of its products, as
well as by competing with respect to pricing. The Company believes that for some
of its products, its smaller size and lower price than that of its competitors
is an advantage to the Company. However, other factors such as a competitor's
greater brand recognition or preferable product placement of a competitor's
products at retail locations may nullify or reduce whatever competitive
advantage the Company's products have. Strong national brands are very difficult
to displace and compete against. The price/value positioning and niche marketing
opportunities are where the Company is focused.
With respect to nutritional supplement products, competition in this industry is
very broad based. The Company has followed its strategy of maintaining a very
narrowly focused effort for the products that it has determined to be
financially viable. The Company determined that a broad base in this category is
not a part of its plan at this time. It is also the Company's expectation that
there will also be more and tighter regulation by the government in the future,
making it more expensive to do business in this segment (see "Government
Regulation" below).
Sources and Availability of Raw Materials. In general, the sources and
availability of materials used by the Company in its business are fairly
widespread, and the Company believes that it could obtain secondary sources of
raw materials at comparable prices to the extent that an existing business
relationship terminates.
Dependence upon a Single Customer. The Company does not believe that its
business with respect to any particular product or products is dependent upon
any single customer. However, the Company had two major customers that accounted
for approximately $ 1,644,000 approximately $ 1,199,000 respectively, or 12% and
8% of net sales for the year 2003. The Company is always at risk of its
customers filing for bankruptcy or liquidation or being dropped by a major
customer. This has happened in the past and could happen again in the future.
Patents, Trademarks, Licenses, Franchises and Concessions. Although there can be
no assurance of proprietary protection respecting pending patents, patents and
trademarks held by the Company (see, "Cautionary Statement Regarding
Forward-Looking Statements, No Assurance of Proprietary Protection"), and
although the Company intends to vigorously seek to enforce and protect its
proprietary rights, the Company does not believe that the loss of any such
proprietary right would in and of itself, adversely affect the Company in a
material manner. Oralabs, Inc. is a plaintiff in litigation it commenced to
assert a violation of some of its intellectual property (see Item 3, "Legal
Proceedings").
Seasonality. The demand for the Company's lip balm products tends to increase
during the cold, dry weather months, but the inclusion of sun block in some of
the lip balm products may tend to even out sales during the year. Even though
the sun block products help, sales of lip balm are still considered to be 50-70%
seasonal.
Practices of the Company in the Industry. The Company's typical practices with
respect to all of its products are to keep adequate inventory on hand for
shipments within the required time frame to meet orders. The Company generally
extends credit on purchases for a term of 30-90 days after shipment. The Company
does not typically formally provide a right of customers to return merchandise.
However, the Company believes that it is a common practice in the industry, and
the Company subscribes to such practice on a case-by-case basis, to permit a
retailer who has not sold all of the goods it has purchased within a reasonable
time, to ask the Company to accept a return of the unsold merchandise. The
Company estimates and records a reserve for returns upon sale. The Company also
expects, as it is common practice in the industry, for retailers to take
deductions for "un-saleable product", which are its products that have either
been returned by a customer to the retailer or for which the packaging has
somehow become un-saleable in the retailer's sole discretion. These deductions
are usually more expensive to try to resolve than to simply accept the
deduction, even if the Company does not agree.
Page 2
Managing Manufacturing and Growth. The Company has done several things to
position itself for growth in 2004 and for years to follow. In positioning for
growth the Company has made changes to management, customer service,
manufacturing, and sales and administrative personnel. The Company previously
conducted its business from two separate facilities, but now the Company has
moved into a single facility that will more than double its space. The Company
believes that this will permit it to obtain efficiencies in its production but
it will be at a substantially increased facilities cost. That additional
overhead could negatively impact the Company's ability to earn a profit or cause
it to lose money, which was a partial contributor to the decrease in income in
2003. See Trends section in Management Discussion and Analysis.
Government Regulation. The manufacturing, packaging, processing, formulation,
labeling, advertising, distribution and sale of some of the Company's products
are subject to regulation by one or more governmental agencies, the most active
of which is the Food and Drug Administration ("FDA"), which regulates those
products under the Federal Food, Drug, and Cosmetic Act ("FDCA") and regulations
promulgated there under. These products are also subject to regulation by the
Federal Trade Commission ("FTC"), the Consumer Product Safety Commission
("CPSC"), the United States Department of Agriculture ("USDA") and the
Environmental Protection Agency ("EPA"). The Company's activities are also
regulated by various agencies of the states, localities and foreign countries to
which the Company distributes its products and in which the Company's products
are sold. The FDCA has been amended several times, including by the Nutrition
Labeling and Education Act of 1990 ("NLEA") and the Dietary Supplement Health
and Education Act of 1994 ("DSHEA"). The NLEA established a requirement for the
nutrition labeling of most foods including dietary supplements. The DSHEA
introduced a new statutory framework governing the composition and labeling of
dietary supplements.
The DSHEA provides a regulatory framework to ensure safe, quality, dietary
supplements and to foster the dissemination of accurate information about such
products. The DSHEA provides, in the Company's judgment, certain regulatory
benefits for the nutritional supplement industry. Products defined as dietary
supplements under the DSHEA are regulated similarly to food; so much of the
special regulatory clearance is eliminated. In addition, claims about how a
supplement affects the structure or function of the body may be made (although
any statement made must also state that the product is not intended to diagnose,
treat, cure or prevent any disease). Under DSHEA, the FDA is generally
prohibited from regulating the active ingredients in dietary supplements as food
additives or drugs unless product claims are made that a product may diagnose,
mitigate, treat, cure or prevent an illness, disease or malady, in which event
the FDA may attach drug status to a product. An FDA Rule effective February 7,
2001 defines the types of statements that can be made concerning the effect of a
dietary supplement on the structure or function of the body pursuant to DSHEA.
The Rule establishes criteria for determining when a statement is a claim to
diagnose, cure, mitigate, treat or prevent disease thereby making the product an
unapproved new drug. That Rule has not had any material effect on the Company's
existing products and the Company will comply with the provisions of the Rule
for any new products.
As part of its regulatory authority, the FDA may periodically conduct audits of
the physical facilities, machinery, processes and procedures that the Company
uses to manufacture products. The FDA may perform these audits at any time
without advance notice. As a result of these audits, the FDA may order the
Company to make certain changes in its manufacturing facilities and processes.
The Company may be required to make additional expenditures to comply with these
orders or possibly discontinue selling certain products until it complies with
these orders. As a result, the Company's business could be adversely affected.
In February 1997, the FDA issued a Proposed Rule entitled, "CGMP in
Manufacturing, Packing, or Holding Dietary Supplements," which proposes current,
good manufacturing practices (i.e., "CGMPs") specific to dietary supplements and
dietary supplement ingredients. This Proposed Rule, if finalized, would have
required some of the quality control provisions contained in the CGMPs for
drugs. On March 13, 2003, the FDA published a proposed rule in the Federal
Register which proposes comprehensive CGMPs for the manufacturing, packing and
holding of dietary supplements, to help reduce risks seen by the FDA that are
associated with adulterated or misbranded dietary supplement products. The FDA
accepted public comments on the proposed CGMPs until August 11, 2003; but the
FDA has not promulgated final CGMPs. The minimum standards include requirements
for the design and construction of physical plants that are intended to
facilitate maintenance, cleaning, and proper manufacturing operations, for
quality control procedures, for testing final product or incoming and in-process
materials, for handling consumer complaints, and for maintaining records.
On November 18, 1998, the FTC issued its "Dietary Supplements: An Advertising
Guide for Industry." Such guide provides an application of FTC law to dietary
supplement advertising and includes examples of how principles of advertisement
interpretation and substantiation apply in the context of dietary supplement
advertising. The Guide provides additional explanation but does not
substantively change the FTC's existing policy that all supplement marketers
have an obligation to ensure that claims are presented truthfully and to verify
the adequacy of the support behind such claims.
Page 3
The FTC, which exercises jurisdiction over the advertising of nutritional and
dietary supplements under the Federal Trade Commission Act, has in the past
several years instituted enforcement actions against several nutritional
supplement companies alleging false and misleading advertising of certain
products. These enforcement actions have resulted in the payment of fines and/or
consent decrees by certain of the companies involved. The FTC continues to
monitor advertising with respect to nutritional and dietary supplements. The
Company has not been the subject of any FTC inquiries or actions.
Research and Development Expenses. The Company has not expended a material
amount of its resources on research and development activities.
Costs and Expenses of Compliance with Environmental Laws. The Company does not
have any material amount of cost related to environmental regulations and the
Company does not expect to incur material expenses for that purpose in fiscal
year 2004.
Number of Employees. The approximate number of employees working for the company
as of the end of fiscal year 2003 was 153.
Item 2. Description of Property.
The Company's headquarters are located in an office-warehouse building of
approximately 88,000 square feet located in Parker, Colorado, which the Company
leases from an affiliate of the Company's President. The property includes the
executive offices of the Company, as well as the Company's manufacturing and
warehouse facilities. The Company's lease expires in September 30, 2006, and the
Company believes that its rental rate is comparable to that which would be
charged by an unaffiliated landlord. The Company was in the process of
relocating from its previous facilities at year end 2003, and as of the date of
this report, the relocation has been substantially completed. (See "Certain
Relationships and Related Transactions" incorporated by reference to the 2004
Definitive Proxy Statement.)
Item 3. Legal Proceedings.
Oralabs, Inc. is a party to a legal proceeding that was brought in the Circuit
Court of the First Judicial District of Heinz County, Mississippi that was
served on the Company on February 26, 2004. The litigation was brought by
individuals who allege that a five-year-old child ingested a portion of a bottle
that allegedly was manufactured by Oralabs, Inc. for one of its products. The
product was not specified in the complaint. The complaint alleges that the minor
child suffered permanent injuries and damages as a result of the ingestion of
the portion of the bottle, and the plaintiffs claim compensatory damages in an
unstated amount and punitive damages in the amount of $1,925,000. Oralabs,
Inc.'s insurance company is tendering a defense, although punitive damages would
not be covered by the insurance policy. Oralabs, Inc. intends to vigorously
defend the suit and believes that it has no liability to the plaintiffs. If a
significant uninsured judgement is awarded against Oralabs, Inc., it could put
an extreme financial strain upon it.
Oralabs, Inc. is also party to a legal proceeding that it commenced as plaintiff
in the United States District Court for the District of Colorado against Molded
Container Corp. d/b/a The Humphrey Line, an Oregon corporation. The case was
filed on December 29, 2003 and claims that the defendant is infringing certain
intellectual property acquired by Oralabs, Inc. from a third party, and also
asserts claims under Colorado law for deceptive trade practices and
misappropriation of business values. In response, the defendant is seeking a
declaration that the patents are not infringed, are unenforceable and are
invalid, and in the event that the defendant prevails, Oralabs, Inc. likely will
be obligated to pay certain court approved costs of the defendant and may be
obligated to pay the attorneys fees involved in the litigation.
Item 4. Submission of Matters to a Vote of Security Holders.
A special meeting of the Company's stockholders was held on December 15, 2003,
at which time approval of a one-for-two reverse stock split was approved by a
vote of 7,258,700 shares in favor and none opposed.
Page 4
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
(a) (i) Market Price of and Dividends on the Company's Common Stock. The common
stock of the Company trades on the NASDAQ Small Cap Market under the symbol
OLAB. The following sets forth the range of high and low bid information for the
Company's common stock for fiscal years 2002and 2003. The source of such
information is as reported by NASDAQ. All of the following prices and numbers of
shares have been adjusted to give effect to the one-for-two reverse stock split
adopted by the Company on December 16, 2003.
Reported High Bid Reported Low Bid
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First quarter, fiscal 2002 $2.50 $2.02
Second quarter, fiscal 2002 $2.56 $1.94
Third quarter,fiscal 2002 $2.12 $1.02
Fourth quarter, fiscal 2002 $1.50 $0.92
First quarter, fiscal 2003 $1.76 $1.16
Second quarter, fiscal 2003 $1.56 $1.04
Third quarter, fiscal 2003 $1.98 $1.06
Fourth quarter, fiscal 2003 $1.96 $1.50
The quotations reflect inter-dealer prices, without adjustment for retail
mark-up, markdown or commission and may not necessarily present actual
transactions.
(ii) Disclosure of Equity Compensation Plans. The Company maintains the 1997
Stock Plan (the "ISOP Plan"), pursuant to which the Company granted 250,000
stock options to employees in 1997. The Company also maintains the 1997
Non-Employee Directors' Option Plan ("Director Plan") under which the Company
makes an initial grant of 10,000 options and annual grants thereafter of 2,500
options to its non-employee
Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available
Plan Category exercise of outstanding for future issuance
outstanding options, warrants under equity
options, warrants and rights ($) compensation plans
and rights (#)
-------------------- ------------------- --------------------
Equity
compensation 210,900 $2.00 0
plans approved
by shareholders
Equity
compensation
plans not 40,000 $2.97 60,000
approved by
shareholders
Total 250,900 $2.15 60,000
(b) As of March 23, 2004, there were approximately 897 record holders of the
common stock of the Company.
(c) The Company has not paid any cash dividends and it is not intended that any
cash dividends will be paid in the foreseeable future.
Page 5
Item 6. Management's Discussion and Analysis or Plan of Operation.
Critical Accounting Policies
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and any associated
risks related to these policies on our business operations is discussed
throughout Management's Discussion and Analysis of Financial Condition and
Results of Operations where such policies affect our reported and expected
financial results.
In the ordinary course of business, we have made a number of estimates and
assumptions relating to the reporting of results of operations and financial
condition in the preparation of our financial statements in conformity with
accounting principles generally accepted in the United States of America. Actual
results could differ significantly from these estimates under different
assumptions and conditions. We believe that the following discussion addresses
our most critical accounting policies, which are those that are most important
to the portrayal of our financial condition and results of operations and
require our most difficult, subjective, and complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain.
Allowance for Doubtful Accounts
Although the Company believes that it has strict credit policies, it is not
unusual, in the normal course of business, for the a customer to file for
bankruptcy or not pay for product purchased from the Company. The Company has
estimated an allowance based upon current balances and historical information
which is considered an operating expense. This estimate is subject to judgment
and could vary based on the customer mix in the future.
Allowance for Returns
Product is returned by customers for various reasons and the Company has
estimated an allowance based upon the historical rates of these returns. The
sales are recorded net of this allowance. This estimate is subject to judgment
as the historical mix of products sold could vary from the future mix of
products sold. In addition, the customer mix may change in the future.
Inventory obsolescence
As product mix shifts, the Company must identify any slow-moving and obsolete
inventory it may have on hand. This inventory is reduced to its net realizable
value based upon recent sales and similar transactions occurring in the open
market. This inventory value is an estimate that is subject to changes in the
open market such as demand and availability of product.
Results of Operations. For the period ending December 31, 2003 as compared with
the period ending December 31, 2002.
Product sales decreased $80,879. Please refer to the Trends section for a
detailed explanation.
Cost of goods sold decreased by $72,768. As a percentage of sales, gross profit
stabilized at 2002 levels of 32%. An increase in overhead of approximately
$140,000 related to the new facility, an increase of freight costs of
approximately $40,000, and an increase in regulatory product testing of
approximately $80,000 were offset by decreases in labor of approximately
$265,000, a decrease in raw materials costs of approximately $40,000, and a
decrease of approximately $30,000 in obsolete inventory written off during the
year. The Company anticipates some efficiencies in manufacturing due to reduced
labor costs; favorable selling prices from custom packaging that should see
growth in year 2004 and a larger concentration of lip balm sales going to value
priced brands to compete with more expensive, more advertised brands. These
efficiencies will be offset by costs to continue to provide retailers superior
quality and by increased overhead rates related to the new facility which will
cause gross profit to remain relatively close to 2002 and 2003 levels.
Engineering increased $96,278 or 62 %, the increase is due to an increase in
labor costs related in large part to modifications to lip balm filling lines to
make them able to operate in the new facility. The Company anticipates
comparable levels of costs in year 2004 to that of year 2003 as machinery
development will likely continue throughout the year.
Selling and marketing decreased $53,416 or 3%. Commissions to sales staff
decreased approximately $219,000 as compensation methodology was changed; the
Company expects sales compensation to remain the same as a percentage of sales.
Advertising decreased approximately $143,000 as the Company eliminated
advertising in trade publications in favor of focusing on point of sale
promotions and lower selling prices. The Company plans to continue this
approach. A portion of bad debts in year 2003, in the amount of approximately
$230,000, was related to receivables written off in conjunction with the
acquisition of assets of one of the Company's customers. The remainder of the
increase of Bad debts, approximately $100,000, was due primarily to a customer
who declared bankruptcy during 2003.
Page 6
General and administrative expenses increased $492,034 or 24%. An increase in
salaries of approximately $275,000 was largely due to additional staffing for
accounting and information technology and to a lesser extent to increased
salaries. The Company anticipates a modest increase in salaries in year 2004.
Legal fees increased approximately $68,000 due to in large part to fees
involving patent and trademark issues and other corporate legal services. The
Company anticipates comparable professional fees in year 2004. Moving expenses
of approximately $134,000 primarily consisted of rents for the new facility
prior to occupancy due to needing to secure a lease on the facility and other
minor costs related to the move.
Other operating expenses increased by $325,449, which was primarily due to
approximately $308,000 loss on abandonment of leasehold improvements to the two
Englewood, CO facilities, one of which is still being occupied and the other
vacated in February, 2004. In year 2004, the Company may declare obsolete and
replace machinery valued from $100,000 to $300,000 if it cannot be brought up to
operating requirements.
Interest and other income increased $72,008 or 88%. The increase was due to
state income tax credits of approximately $108,000 received in year 2003 related
to prior periods. This was offset by approximately $36,000 of decreases to
royalty income, interest income, other income, and capital gain on sale of
assets. The Company anticipates Interest and other income will be significantly
less in 2004 as the state income tax credits is not a recurring event.
Other expenses increased by $75,993 as approximately $69,000 was for costs
related to manufacturing, distribution and marketing in a foreign country. The
Company does not anticipate significant Other expenses in year 2004, but cannot
guarantee against any unforeseen extraordinary events.
Net income decreased by $430,709 or 100% resulting in net income of $1,222 for
year 2003 as explained by the above activities. Additionally, as a percentage of
sales, net operating income decreased from 5% in year 2002 to 1% in year 2003 as
explained by the above activities.
Liquidity and Capital Resources.
At December 31, 2003, the Company had $2,561,108 of cash and a current ratio of
approximately 5 to 1. The Company believes its current capital resources are
sufficient to fund operations for the next twelve months.
Net cash provided by operating activities was $282,706 consisting of the
following items:
Accounts Receivable, net of Allowance for doubtful accounts, increased $103,635.
Receivables increased $159,856 due to timing differences while allowances were
increased $56,221. The Company believes there are adequate allowances given the
more than 1,000 active customers and only one customer with over 10% of the
revenues, that being 12%. (See, "Allowance for Doubtful Accounts" above).
Inventory increased $418,610 as the Company carried approximately $267,536 more
of raw materials to increase stock levels of high usage items and reduced
exposure to potential timely vendor supply issues; approximately $21,000 more in
work in process; approximately $87,391 more in cost of overhead due in large
part to expanded facilities; and approximately $42,000 for cost of labor
allocated to inventory. The Company anticipates inventory levels to remain near
year-end numbers, but to increase work in process and finished goods while
reducing raw materials to capitalize on the warehousing capabilities in the new
facility and to be better equipped to ship customers with short lead times.
Income tax payable decreased $513,077 as Income taxes payable decreased $270,089
and Income taxes receivable increased $242,988 as it relates to income taxes
paid. The Company anticipates returning to a profitable position in year 2004
and applying the credit towards that net income.
Deferred tax liability and asset increased $224,470. Deferred tax liability
long-term increased $41,611; Deferred tax asset long-term increased $32,383; and
Deferred tax asset - current decreased $150,476. This is attributed to timing
differences in the treatment of deductions for book verses tax income.
Prepaid expenses and Deposits decreased $10,531 substantially as the result of a
smaller deposit on production materials being produced abroad specifically for
the Company by a third party manufacturer. The Company does not anticipate any
significant changes in Prepaid expenses or Deposits during year 2004.
Accounts payable increased $637,566. This is due to a change in timing of
disbursements to vendors. The Company had been paying substantial portions of
payables within ten days to take advantage of early pay discounts, but changed
to paying based on vendor invoice due dates because of a reduction in operating
cash balances. The Company will likely need to maintain this posture for the
better part of year 2004 as more investment in capital related to utilizing new
facility will be needed.
Accrued liabilities decreased $158,858. Reserve for sales commissions was
reduced by $141,606 as earned commissions in excess of draws paid out went from
$164,922 at 2002 year-end to $23,316 at 2003 year-end. The Company anticipates
that accruals will stay closer to the 146,332 year-end 2003 figures through year
2004.
Page 7
Reserve for returns decreased $142,699. The Company booked an additional
$150,000 in reserve for returns at year-end for 2002 to allow for an expected
return of a portion of a large promotion to a major customer. The reserve for
returns is calculated as a percentage of sales with consideration to historical
returns. As sales were flat, and the additional reserve notwithstanding, the
reserve remained the same. Should the Company experience growth in sales during
year 2004 then this reserve will grow proportionately. (See, "Allowance for
Returns" above).
Net cash used in investing activities was $376,330 consisting of investments in
property and equipment:
Property and Equipment decreased $369,466. During 2003 leasehold improvements
were written off in the amount of $302,753 as daily operations were ceased for
the two Englewood, CO facilities and moved to the Parker, Colorado facility. One
facility was vacated in November, 2003 and the other substantially vacated in
February, 2004. The Company anticipates investing between $200,000 and $400,000
in leasehold improvements and equipment during the year 2004.
Trends. The lip balm category, which was approximately 80% of revenues in both
years 2003 and 2002, saw little change. Revenues in 2003 were $11,274,552 as
compared to $11,569,418 in year 2002. Collectively the volume of units sold and
customer base did not see any significant change in year 2003. Year 2004
promises to be a challenging year as timely shipping of quality product will be
paramount to retailers looking to continue their movement towards short lead
times with store shelves always in stock. The Company's move mid first quarter
2004 to a larger, improved facility in Parker, Colorado together with a new scan
based inventory system and anticipated automation development of machinery
should position the Company to meet and exceed expectations as year 2004
unfolds. The move was delayed from the third quarter of 2003, as originally
disclosed in the 2002 10-KSB.
The sour drops and breath fresheners revenues were $2,211,111 in year 2003
compared to $1,995,759 in year 2002, or an 11% increase. The increase brings
revenues for this category closer to where they were in year 2001, which was
$2,617,693. Convenience store and vending distribution has stayed somewhat
stable, while dollar store distribution has varied significantly from year to
year. Because a large part of this product category is sold to dollar stores, we
cannot estimate what the sales will be for 2004.
The nutritional supplement revenues, on a relatively smaller scale, were up
slightly to $582,557 in 2003 as compared to $536,941 in 2002, or an 8% increase.
The Company has maintained consistent sales of the 5-HTP and Cheat & Lean(TM)
products, but has been unable to develop a wide distribution network for these
products. Therefore, the Company anticipates these revenues will stay
substantially the same.
The international business revenues were $870,175 in 2003 as compared to
$1,298,565 in 2002, a 33% decrease. This is the second year in a row of
decreased revenues in the 30% range. Although this business represents less than
10% of the Company's revenues it is still considered important to the overall
success of the Company. In 2004 the Company hopes to establish a manufacturing
venture in South America that the Company has been making efforts towards in
2003. This could help international revenues, but how quickly and to what extent
cannot be predicted at this time.
The Company's move to its new facility has created a higher rent expense while
more than doubling the square footage and consolidating to one facility from the
two prior facilities. This move gives the Company the opportunity to better
operate the business and handle any growth the Company may be able to achieve.
Impact of Inflation. The Company's financial condition has not been affected by
the modest inflation of the recent past. The Company believes that revenues will
not be materially affected by inflation. The Company's lip care and oral care
products are primarily very low retail price points and impulse items. The
nutritional supplements are a small part (approximately 4%) of revenues in a
category that is on a downward trend and could be negatively impacted by
inflation.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS:
The provisions of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act") provide companies with a "safe harbor" when making forward-looking
statements. This "safe harbor" encourages companies to provide prospective
information about their companies without fear of litigation. The Company wishes
to take advantage of this "safe harbor" and is including this section in its
Annual Report on Form 10-KSB in order to do so. All statements in this Form
10-KSB that are not historical facts, including without limitation statements
about management's expectations for any period beyond the fiscal year ended
December 31, 2003, are forward-looking statements and involve various risks and
uncertainties, many of which are beyond the control of the Company, and any one
of which, or a combination of which, could materially reflect the results of the
Company's operations and whether forward-looking statements made by the Company
ultimately prove to be accurate.
The following discussion outlines certain risk factors that in the future could
affect the Company's results and cause them to differ materially from those that
may be set forth in any forward-looking statement made by or on behalf of the
Company. The Company cautions the reader, however, that this list of risk
factors and others discussed elsewhere in this report may not be exhaustive.
Page 8
NASDAQ Listing. During 2002 and 2003, the staff of the NASDAQ SmallCap Stock
Market advised the Company that the listing of its common stock on the NASDAQ
SmallCap Market was subject to delisting as a result of the failure of the
Company to maintain compliance with one or more of the rules required for
continued inclusion on the NASDAQ SmallCap Market. The Company enacted a reverse
stock split in December 2003 to maintain compliance with the rule that requires
a minimum bid price of $1.00 for listed shares. Although the Company has been in
compliance with that requirement and the other requirements for continued
listing since that time, the Company can give no assurance that it will continue
to meet the requirements for continued listing on the NASDAQ SmallCap Market in
the future.
Competition. The businesses in which the Company is engaged are highly
competitive and are engaged in to a large extent by companies which are
substantially larger and have significantly greater resources than the Company.
Although the Company believes that its branded products have achieved some
measure of name recognition, to a large extent the Company does not have the
capital resources, marketing and distribution networks, manufacturing
facilities, personnel, product name recognition or advertising budget of the
larger companies. If the Company were to be forced out of the large mass
retailers by larger, better financed competitors, it would be reliant on smaller
niche markets that the larger, better financed competitors are not interested
in. The same situation applies to international business, where there are larger
more dominant competitors that the Company must always deal with. The industries
in which the Company competes in experience consolidations of competitors from
time to time and the Company's business could be adversely affected by such
activities. There can be no assurance that the Company will be able to compete
successfully in the future. To respond to competition the Company created added
value packaging for promotions that resulted in increased cost of goods sold.
There is an increased effort by all competitors for shelf and counter space and
the cost of product placement is increasing. There is no assurance that the
Company will be able to maintain its shelf and counter presence in the future.
Managing Manufacturing and Growth. The Company has done several things to
position itself for growth in 2004 and for years to follow. In positioning for
growth the Company has made changes to management, customer service,
manufacturing, and sales and administrative personnel. The Company previously
conducted its business from two separate facilities, but now the Company has
moved into a single facility that will more than double its space. The Company
believes that this will permit it to obtain efficiencies in its production but
it will be at a substantially increased facilities cost. That excess overhead
could negatively impact the Company's ability to earn a profit or cause it to
lose money, which was a partial contributor to the decrease in income in 2003.
The Company experienced a period of significant growth during fiscal years ended
December 31, 1996 and 1997. Significant growth did not occur in fiscal year
1998, but it occurred again in 1999, 2000, 2001. The Company did not experience
growth in 2002 or 2003. Although revenue decreased in 2002 and did not
significantly change in 2003, the volume of manufacturing was very close for the
past three years. The Company has had opportunities to grow the business but has
not done so because of capacity issues in manufacturing.
Although the Company feels it has positioned itself for growth, if the Company
is unsuccessful in managing growth, if such growth should occur, there could be
a material adverse effect on the Company. In addition, the loss of a significant
number of customers, or a significant reduction in purchase volume by or
financial difficulty of such customers, for any reason, could have a material
adverse effect on the Company. Successful management of growth, if it occurs,
will require the Company to improve its financial controls, operating procedures
and management information systems, and to train, motivate and manage its
employees.
Product Liability Insurance. Because the Company manufactures and sells certain
products designed to be ingested, it faces the risk that materials used for the
final products may be contaminated with substances that may cause sickness or
other injury to persons who have used the products. Although the Company
maintains standards designed to prevent such events, certain portions of the
process of product development, including the production, harvesting, storage
and transportation of raw materials, along with the handling, transportation and
storage of finished products delivered to consumers, are not within the control
of the Company. Furthermore, sickness or injury to persons may occur if products
manufactured by the Company are ingested in dosages which exceed the dosage
recommended on the product label or are otherwise misused. The Company cannot
control misuse of its products by consumers or the marketing, distribution and
resale of its products by its customers. With respect to product liability
claims in the United States, the Company has $2 million per occurrence and $2
million in aggregate liability insurance. However, there can be no assurance
that such insurance will continue to be available, or if available, will be
adequate to cover potential liabilities. The Company generally does not obtain
contractual indemnification from parties supplying raw materials or marketing
its products and, in any event, any such indemnification is limited by its terms
and, as a practical matter, to the creditworthiness of the indemnifying party.
Page 9
Dependence on Key Personnel. The Company's future success depends in large part
on the continued service of its key personnel. In particular, the loss of the
services of Gary Schlatter, its President and Chief Executive Officer, could
have a material adverse effect on the operations of the Company. The Company's
subsidiary has an employment agreement with Mr. Schlatter which expires on April
30, 2006, but it is expected to be extended. The Company's future success and
growth also depends on its ability to continue to attract, motivate and retain
highly qualified employees. There can be no assurance that the Company will be
able to do so.
Government Regulation. The manufacturing, processing, formulation, packaging,
labeling and advertising of some of the Company's products are subject to
regulation by one or more federal agencies and under various laws (see
Description of Business-Government Regulation above). There can be no assurance
that the scope of such regulations will not change or otherwise cause an
increase in the expenses and resources of the Company which must be applied to
complying with such regulations. As an example, the Company's sun-block lip
balms are regulated by the FDA. If the FDA were to conclude that any of the
Company's products violate FDA rules or regulations, the FDA may seek to
restrict or remove such products from the market. Such action may be taken
against the Company and any entity which manufactures products for the Company.
As an additional example, regulations concerning good manufacturing practices
with respect to OTC drugs and nutritional supplements do have an adverse impact
upon the cost or methods of producing the products. It is anticipated that new
labeling laws, expected to be in effect in 2005, will result in increased costs,
in order to be in compliance .
The Company's business is also regulated by various agencies of the states and
localities in which the Company's products are sold and governmental regulations
in foreign countries where the Company sells or may seek to commence sales. Such
regulations could prevent or delay entry into a market or prevent or delay the
introduction of Company products. For example, international sales are expected
to be slowed by the long process of registering new products.
The Company may be subject to additional laws or regulations administered by the
FDA or other federal, state or foreign regulatory authorities, the repeal or
amendment of laws or regulations or more stringent interpretations of current
laws or regulations, from time to time in the future. The Company is unable to
predict the nature of such future laws, regulations, interpretations or
applications, nor can it predict what effect additional governmental regulations
or administrative orders, when and if promulgated, would have on its business in
the future. They could, however, require reformulation of certain products to
meet new standards, recall or discontinuance of certain products not able to be
reformulated, imposition of additional record keeping requirements, expanded
documentation of the properties of certain products, expanded or different
labeling and scientific substantiation regarding ingredients, product claims,
safety or efficacy. Failure to comply with applicable FDA requirements could
result in sanctions being imposed on the Company or the manufacturers of its
products, including, warning letters, fines, product recalls and seizures. Any
or all such requirements could have a material adverse effect on the Company's
results of operations and financial condition.
Dependence upon Significant Distributors and Retailers. The Company had two
major customers that accounted for approximately $1,644,000 and $1,199,000
respectively, or 12% and 8% of net sales during the year ended December 31,
2003. The Company had over 1,000 purchasing customers in fiscal 2003 and
believes that the loss of revenues from any customer could gradually be
replaced, but there could be adverse effects upon the Company's business until
those revenues are replaced. The Company is always at risk for its customers
filing for bankruptcy or liquidation. This has happened in the past and could
happen again in the future.
Dependence upon Third Party Suppliers. With respect to some of the Company's
products, the product itself is formulated and supplied to the Company by third
party vendors, and the Company then packages the products for sale. For other
products, the Company provides some or all of the raw materials and a third
party completes preparation of the product and/or its packaging. Should these
relationships terminate, or should these parties be otherwise unable to perform
their obligations on terms satisfactory to the Company, the Company would be
required to establish relationships with substitute parties. Although the
Company believes that it can do so and that raw materials are available at
comparable prices from several suppliers, there can be no assurance that this
will be the case, in which case there could be a material adverse effect upon
the Company.
Page 10
No Assurance of Proprietary Protection. The Company owns numerous patents. The
Company also holds several domestic and international trademarks and has several
applications pending. Certain aspects of the Company's business, although not
the subject of patents, include formulations and processes considered to be
proprietary in nature. There can be no assurance that any such "proprietary"
information will not be appropriated or that the Company's competitors will not
independently develop products that are substantially equivalent or superior to
the Company's. Even if the pending trademark registrations are issued to the
Company, there can be no assurance that the Company would be able to
successfully defend its patents or trademarks against claims from or use by
competitors, and there can be no assurance that the Company will be able to
obtain patent or trademark protection for any new products. In addition, in the
event that any of the Company's products are determined to infringe upon the
patents or proprietary rights of others, the Company could be required to modify
its products or obtain licenses for the manufacture or sale of the products, or
could be prohibited from selling the products. (Oralabs, Inc. is a plaintiff in
litigation it commenced to assert a violation of some of its intellectual
property. See Item 3, "Legal Proceedings").
No Assurance of Scientific Proof. The Company's nutritional supplement products
are intended to provide relief of certain symptoms or to otherwise aid in the
health of the consumers. If scientific data were to conclude that the products
do not do so, or if for any other reason the Company's products were not viewed
by the public as providing any meaningful benefit, there could be a material
adverse effect upon the sales of the products. In addition, the nutritional
supplement industry has been known to experience radical ups and downs of
certain product sales in a short period of time which could adversely affect the
Company's sales or inventory positions. Sometimes these cycles are the result of
studies or the media creating a positive or negative impact on the industry and
the public at large.
Limited Distribution for Nutritional Supplement Products. The Company began
selling its nutritional supplement products in 1998. The nutritional supplement
industry is influenced by products that become popular due to changing consumer
tastes and media attention. The Company is competing against much larger and
better established manufacturers in this business than in the Company's primary
business. The Company does not expect its sales of nutritional products to
significantly change.
Item 7. Financial Statements.
Financial Statements meeting the requirements specified in Item 7 of Form 10-KSB
follow the signature page and are listed in Item 13 of this Annual Report on
Form 10-KSB.
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure. None.
Item 8A. Controls and Procedures. Control deficiencies have been identified by
management in consultation with Ehrhardt Keefe Steiner & Hottman PC, the
Company's independent auditors. Certain matters involving internal control
deficiencies considered to be reportable conditions under standards established
by the American Institute of Certified Public Accountants have been reported to
the audit committee of the board of directors. The reportable conditions include
conditions surrounding the following: accounts receivable processing, inventory
accounting; timely accounting reconciliations; lack of qualified accounting
personnel due to turnover and operational requirements. Management is actively
working to correct the internal control deficiencies identified and such efforts
include: instituting new controls; enforcing existing policies and providing
oversight with respect to inventory valuation and accounts receivable
processing; and timely accounting reconciliations; actively interviewing
candidates with the intention of expeditiously filling such vacancies and
providing necessary resources to meet operational demands.
Evaluation of Disclosure Controls and Procedures. The Company's Chief Executive
Officer and its Chief Financial Officer, after evaluating the effectiveness of
the Company's disclosure controls and procedures (as defined in the Securities
Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c) as of a date within 90 days
of the filing date of this annual report on Form 10-KSB (the "Evaluation
Date")), have concluded that as of the Evaluation Date, and except as provided
above, the Company's disclosure controls and procedures were adequate and
effective to ensure that material information relating to the Company and its
consolidated subsidiaries would be made known to them by others within those
entities, particularly during the period in which this annual report on Form
10-KSB was being prepared.
Changes in Internal Controls. Except as provided above there were no significant
changes in the Company's internal controls or in other factors that could
significantly affect the Company's disclosure controls and procedures subsequent
to the Evaluation Date, nor any significant deficiencies or material weaknesses
in such disclosure controls and procedures requiring corrective actions. As a
result, no corrective actions were taken.
Our external auditors have not issued an attestation report on management's
assessment of the Company's internal control over financial reporting, as it is
not required for the Company at this time.
Page 11
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act of the Registrant.
The following table identifies each of the Company's directors and executive
officers, indicating the principal occupation or employment of each such person
and the name and principal business of any organization by which such person is
so employed:
Name of Director or Principal Occupation Name and Business
Individual Executive Officer or Employment of Employer
---------- ----------------- --------------------- -----------------
Gary H. Schlatter Director and Executive President of Company Company
Officer
Allen R. Goldstone Director Consultant Creative Business, LLC
Business Consulting Firm
Michael I. Friess Director and Secretary Attorney Michael Friess
Robert C. Gust Director Partner Apogee Group LLC.
Emile Jordan Executive Officer Chief Financial Officer Company
Code of Ethics. Our Board of Directors adopted a code of ethics that applies to
our Principal Executive Officer, Gary H. Schlatter, and our Principal Financial
Officer, Emile Jordan. Both of these individuals signed an acknowledgement of
his receipt of our code of ethics. We are filing a copy of our code of ethics
with the Securities and Exchange Commission by including it as Exhibit 14.1 to
this report.
The balance of the information required for this Item is incorporated herein by
reference to the 2004 Definitive Proxy Statement.
Item 10. Executive Compensation.
The information required for this item is incorporated herein by reference to
the 2004 Definitive Proxy Statement.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information required for this item is incorporated herein by reference to
the 2004 Definitive Proxy Statement.
Item 12. Certain Relationships and Related Transactions.
The information required for this item is incorporated herein by reference to
the 2004 Definitive Proxy Statement.
Page 12
PART IV
Item 13. Exhibits and Reports on Form 8-K.
(a) The following documents are filed as a part of this Form 10-KSB immediately
following the signature pages:
1. Consolidated Financial Statements (OraLabs Holding Corp. and Consolidated
Subsidiaries):
Independent Auditors' Report
Consolidated Balance Sheet - December 31, 2003
Consolidated Statements of Operations for the years
ended December 31, 2003 and December 31, 2002
Consolidated Statement of Stockholders' Equity from
December 31, 2001 through December 31, 2003
Consolidated Statements of Cash Flows for the years
ended December 31, 2003 and 2002
Notes to Consolidated Financial Statements
2. Exhibits required to be filed are listed below:
Certain of the following exhibits are hereby incorporated
by reference pursuant to Rule 12(b)-32 as promulgated under
the Securities and Exchange Act of 1934, as amended, from
the reports noted below:
Exhibit
No. Description
--- -----------
3.1(i)(1) Articles of Incorporation
3.1(ii)(2) Amended and Restated Bylaws
3.1(ii)(4) Second Amended and Restated Bylaws
4(2) Specimen Certificate for Common Stock
10.1(2) 1997 Stock Plan
10.2(2) 1997 Non-Employee Directors' Option Plan
10.3(3) Amended and Restated Employment Agreement Between the
Company's Subsidiary and Gary Schlatter
10.4(2) Stock Option Grant under 1997 Non-Employee Directors' Option Plan
10.5(i)(5) Business Lease Between the Company's Subsidiary and Gary
Schlatter (September 1, 2000)
10.5(iii)(8) Amended Business Lease between the Company's Subsidiary
and 2780 South Raritan, LLC effective October 15, 2000.
10.5(iv)(9) Lease Between the Company's Subsidiary and 18501 East Plaza Drive,
LLC dated September 4, 2003
10.9(7) Agreement (effective May 1, 2000, amending the Employment
Agreement listed above as Exhibit 10.3).
10.10(10) Amended and Restated Employment Agreement Between the
Company's Subsidiary and Gary Schlatter dated May 1, 2003
11 No statement re: computation of per share earnings is
computation can be clearly
determined from the material contained in this Annual Report on
Form 10-KSB.
14.1(11) Code of Ethics
21(2) List of Subsidiaries of the Company
23.1(11) Consent of Independent Public Accountants (Ehrhardt Keefe Steiner &
Hottman P.C.)
31.1(11) Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002
31.2(11) Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002
32.1(11) Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002
32.2(11) Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002
Page 13
1 Incorporated herein by reference to Exhibit C of the Definitive Information
Statement filed by the Company's predecessor, SSI Capital Corp., on July 24,
1997.
2 Incorporated herein by reference to the Company's Form 10-K filed for fiscal
year 1997.
3 Incorporated herein by reference to Exhibit B of the Form 8-K filed by the
Company's predecessor, SSI Capital Corp., on May 14, 1997.
4 Incorporated herein by reference to the Company's Form 10-KSB filed for fiscal
year 1998.
5 Incorporated herein by reference to the Company's Form 10-QSB filed for the
quarter ended September 30, 2000.
6 N/A
7 Incorporated herein by reference to the Company's Form 10-QSB filed for the
quarter ended March 31, 2000.
8 Incorporated herein by reference to the Company's Form 10-KSB filed for fiscal
year 2000.
9 Incorporated herein by reference to the Company's Form 10-QSB filed for the
quarter ended September 30, 2003.
10 Incorporated herein by reference to the Company's Form 10-QSB filed for the
quarter ended June 30, 2003.
11 Filed herewith.
(b) Forms 8-K were filed by the Company during the 4th Quarter of 2003 on
November 24, 2003 (reporting that the Company was notified that it failed to
comply with the minimum bid price requirement for continued listing on the
NASDAQ SmallCap Market), on December 4, 2003 (reporting that the Company's Board
of Directors authorized a reverse stock split subject to shareholder approval at
a meeting to be held on December 16, 2003), and on December 22, 2003) reporting
that the 1-for-2 reverse stock split was approved by the stockholders and became
effective on December 16, 2003).
Item 14. Principal Accountant Fees and Services.
The information required for this item is incorporated herein by reference to
the 2004 Definitive Proxy Statement.
Page 14
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ORALABS HOLDING CORP.
By: /s/ Gary H. Schlatter
---------------------------------------
Gary H. Schlatter, President
By: /s/ Emile Jordan
---------------------------------------
Emile Jordan, Chief Financial Officer
Date: May 26, 2004
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Gary H. Schlatter Director, President, May 26, 2004
----------------------------- Chief Executive Officer
Gary H. Schlatter
/s/ Michael I. Friess Director, Secretary May 26, 2004
-----------------------------
Michael I. Friess
/s/ Allen R. Goldstone Director May 26, 2004
-----------------------------
Allen R. Goldstone
/s/ Robert C. Gust Director May 26, 2004
-----------------------------
Robert C. Gust
Page 15
Consolidated Financial Statements And Independent Auditors' Report
December 31, 2003
ORALABS HOLDING CORP. AND SUBSIDIARIES
Table of Contents
Page
----
Independent Auditors' Report..................................................1
Consolidated Financial Statements
Consolidated Balance Sheet...............................................2
Consolidated Statements of Income........................................3
Consolidated Statement of Changes in Stockholders' Equity................4
Consolidated Statements of Cash Flows....................................5
Notes to Consolidated Financial Statements.................................6-14
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders OraLabs Holding Corp. and
Subsidiaries Parker, Colorado
We have audited the accompanying consolidated balance sheet of OraLabs Holding
Corp. and Subsidiaries as of December 31, 2003, and the related consolidated
statements of income, stockholders' equity and cash flows for the years ended
December 31, 2003 and 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of OraLabs Holding
Corp. and Subsidiaries as of December 31, 2003, and the results of their
operations and their cash flows for the years ended December 31, 2003 and 2002
in conformity with accounting principles generally accepted in the United States
of America.
Ehrhardt Keefe Steiner & Hottman PC
April 9, 2004
Denver, Colorado
1
ORALABS HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 2003
Assets
Current assets
Cash $ 2,561,108
Accounts receivable, net of allowance for doubtful
accounts of $415,422 1,896,672
Inventories 2,422,153
Deferred tax asset - current 154,952
Income taxes receivable 242,988
Prepaid expenses 143,635
Deposits 117,670
-------------------
Total current assets 7,539,178
-------------------
Non-current assets
Property and equipment, net 865,427
-------------------
Total non-current assets 865,427
-------------------
Total assets $ 8,404,605
===================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable - trade $ 1,045,267
Accrued liabilities 146,332
Reserve for returns 396,419
Current portion of long-term debt 22,874
-------------------
Total current liabilities 1,610,892
-------------------
Non-current liabilities
Long-term debt, less current portion 24,655
Deferred tax liability long-term 41,611
-------------------
Total non-current liabilities 66,266
-------------------
Commitments and contingencies
Stockholders' equity
Preferred stock, $.001 par value, 1,000,000 authorized;
none issued and outstanding -
Common stock, $.001 par value; 100,000,000 shares
authorized; 4,580,615 issued and outstanding 4,581
Additional paid-in capital 1,221,484
Retained earnings 5,501,382
-------------------
Total stockholders' equity 6,727,447
-------------------
Total liabilities and stockholders' equity $ 8,404,605
===================
See notes to consolidated financial statements.
2
ORALABS HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended
December 31,
2003 2002
-------------------- -------------------
Product sales $ 14,068,220 $ 14,149,099
Cost of goods sold 9,597,861 9,670,629
-------------------- -------------------
Gross profit 4,470,359 4,478,470
-------------------- -------------------
Operating expenses
Engineering 250,987 154,709
Selling and marketing 1,508,649 1,562,065
General and administrative 2,577,568 2,085,534
Other 348,580 23,131
-------------------- -------------------
Total operating expenses 4,685,784 3,825,439
-------------------- -------------------
Income from operations (loss) (215,425) 653,031
-------------------- -------------------
Other (expense) income
Interest and other income 154,056 82,048
Other expense (75,993) 0
-------------------- -------------------
Total other income 78,063 82,048
(Loss) Income before income taxes (137,362) 735,079
Income tax benefit (expense)
Current 72,245 (395,966)
Deferred 66,339 92,818
-------------------- -------------------
Total income tax benefit (expense) 138,584 (303,148)
-------------------- -------------------
Net income $ 1,222 $ 431,931
==================== ===================
Basic weighted average common shares
outstanding 4,580,615 4,580,615
==================== ===================
Basic income per common share $ 0.00 $ 0.09
==================== ===================
Diluted weighted average common shares
outstanding 4,580,615 4,580,615
==================== ===================
Diluted income per common share $ 0.00 $ 0.09
==================== ===================
See notes to consolidated financial statements.
3
ORALABS HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
For the Years Ended December 31, 2003 and 2002
Additional Total
Common Stock Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
--------- -------- ----------- ----------- -----------
Balance - December 31, 2001 4,580,615 $ 4,581 $ 1,221,484 $ 5,068,229 $ 6,294,294
Net income - - - 431,931 431,931
--------- -------- ----------- ----------- -----------
Balance - December 31, 2002 4,580,615 4,581 1,221,484 5,500,160 6,726,225
Net income - - - 1,222 1,222
--------- -------- ----------- ----------- -----------
Balance - December 31, 2003 4,580,615 $ 4,581 $ 1,221,484 $ 5,501,382 $ 6,727,447
========= ======== =========== =========== ===========
See notes to consolidated financial statements.
4
ORALABS HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended
December 31,
2003 2002
----------- ------------
Cash flows from operating activities
Net income $ 1,222 $ 431,931
----------- ------------
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 436,938 426,591
Allowance for doubtful accounts 56,221 184,852
Deferred tax liability and asset 224,470 (69,038)
Loss on sale of assets 308,858 -
Changes in assets and liabilities
Accounts receivable - trade (159,856) (40,264)
Inventories (418,610) (283,673)
Prepaid expenses and deposits 10,531 183,155
Accounts payable - trade 637,566 (237,866)
Accrued liabilities (158,858) (72,930)
Reserve for returns (142,699) 113,521
Income taxes payable (513,077) 87,862
----------- ------------
281,484 292,210
----------- ------------
Net cash provided by operating
activities 282,706 724,141
----------- ------------
Cash flows from investing activities
Purchase of property and equipment (376,330) (308,152)
----------- ------------
Net cash used in investing activities (376,330) (308,152)
----------- ------------
Cash flows from financing activities
Payments of principal on long-term debt (22,875) (12,220)
----------- ------------
Net cash used in financing activities (22,875) (12,220)
----------- ------------
Net (decrease) increase in cash (116,499) 403,769
Cash - beginning of year 2,677,607 2,273,838
----------- ------------
Cash - end of year $2,561,108 $2,677,607
=========== ============
Supplemental disclosure of cash flow information:
Cash paid for: Income taxes
-------------- ------------
2003 $ 150,000
2002 $ 277,500
Supplemental disclosure of non-cash activity:
During 2002, the Company entered into $82,624 of notes payable for the purchase
of property and equipment.
See notes to consolidated financial statements
5
Note 1 - Description of Business and Summary of Significant Accounting Policies
OraLabs Holding Corp. and Subsidiaries, (the Company), was formed in June 1997.
SSI Capital Corp. (SSI) a New York Corporation was incorporated on January 30,
1981. Effective August 22, 1997, SSI was merged into the Company and the
outstanding shares of SSI were converted to shares of the Company on one-for-two
basis. In December, 2003, the Company effected a one-for-two reverse stock
split. All references to common stock in the Company's financial statements have
been retroactively adjusted for the merger and the two separate one-for-two
reductions in shares outstanding.
OraLabs Holding Corp. and Subsidiaries (ORALABS), a Colorado corporation was
incorporated on August 10, 1990. ORALABS is in the business of manufacturing and
distributing lip balm, fresh breath and other products. ORALABS is a wholly
owned subsidiary of the Company.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
ORALABS and the accounts of SSI since the date of the reverse acquisition and
the accounts of OL Sub Corp. (an inactive entity) since inception. All
inter-company accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash equivalents. The Company continually
monitors its positions with, and the credit quality of, the financial
institutions it invests with. As of the balance sheet date, and periodically
during the year, the Company has maintained balances in various operating
accounts in excess of federally insured limits.
Accounts Receivable
Accounts receivable represents receivables from customers for product purchased.
Such amounts are recorded gross of any discounts. Promotional discounts and bad
debts are estimated and accounted for in the allowance for doubtful accounts.
Management continually monitors and periodically adjusts the allowances
associated with these receivables.
Inventories
Inventories consist of raw materials, work-in-process and finished goods, and
are stated at the lower of cost or market, determined using the average cost
method.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided utilizing the
straight-line method over the estimated useful lives for owned assets, ranging
from 5 to 7 years, and the related lease terms for leasehold improvements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue in accordance with the criteria set forth in SFAS
48. Revenue is recognized as product is shipped net of estimated returns. The
Company allows for returns for defective product and records an estimate of
these returns based on historical operations and experience.
Income Taxes
The Company recognizes deferred tax liabilities and assets based on the
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements that will result in taxable or deductible
amounts in future years.
6
Reclassifications
Certain amounts in the 2002 consolidated financial statements have been
reclassified to conform to the 2003 presentation.
Advertising Costs
The Company expenses advertising costs as incurred.
Advertising expenses were as follows:
For the Year Ended December 31,
2003 $ 1,769
2002 $144,842
Research and Development Costs
Expenditures made for research and development are charged to expense as
incurred. Total research and development costs of $37,172 and $40,722 for
December 31, 2003 and 2002, respectively, were expensed in operations.
Basic and Diluted Earnings Per Common Share
In accordance with FAS 128, basic earnings per share are computed by dividing
net income by the number of weighted average common shares outstanding during
the year. Diluted earnings per share are computed by dividing net income by the
number of weighted average common shares outstanding during the year, including
potential common shares, which consisted of stock options.
Recently Issued Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," an interpretation of ARB 51 (FIN No. 46). The
primary objectives of FIN 46 are to provide guidance on the identification of
entities for which control is achieved through means other than through voting
rights (Variable Interest Entities or "VIEs") and to determine when and which
business enterprise should consolidate the VIE. This new model for consolidation
applies to an entity which either (1) the equity investors (if any) do not have
a controlling financial interest or (2) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. The disclosure requirements
of FIN No. 46 became effective for financial statements issued after January 31,
2003. The adoption of this standard did not have an impact on the Company's
financial statements.
In April 2003, FASB issued SFAS No. 149, "Accounting for Derivative Instruments
and Hedging Activities," which is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003. This statement amends and clarifies financial accounting and reporting
for derivative instruments including certain instruments embedded in other
contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The adoption of this standard is
not expected to have a material impact on the Company's financial statements.
In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity," which is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. SFAS No. 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. The adoption of this standard is
not expected to have a material impact on the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation- Transition and Disclosure." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation" to provide alternative methods of
transition for an entity that voluntarily changes to the fair value method of
accounting for stock-based compensation. In addition, SFAS 148 amends the
disclosure provision of SFAS 123 to require more prominent disclosure about the
effects of an entity's accounting policy decisions with respect to stock-based
employee compensation on reported net income. The effective date for this
Statement is for fiscal years ended after December 15, 2002. Adoption of this
statement had no impact on the Company's financial statements.
7
In November 2002, the FASB published interpretation No, 45 "Guarantor's
Accounting and Disclosure requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." The Interpretation expands on the
accounting guidance of Statements No. 5, 57, and 107 and incorporates without
change the provisions of FASB Interpretation No. 34, which is being superceded.
The Interpretation elaborates on the existing disclosure requirements for most
guarantees, including loan guarantees such as standby letters of credit. It also
clarifies that at the time a company issues a guarantee, that company must
recognize an initial liability for the fair value, or market value, of the
obligations it assumes under that guarantee and must disclose that information
in its interim and annual financial statements. The initial recognition and
initial measurement provisions apply on a prospective basis to guarantees issued
or modified after December 31, 2002, regardless of the guarantor's fiscal
year-end. The disclosure requirements in the Interpretation are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company does not expect the adoption of this statement to have a
material effect on the Company's financial statements.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash and cash
equivalents, receivables, prepaids, accounts payable and accrued expenses
approximated fair value as of December 31, 2003 because of the relatively short
maturity of these instruments.
Concentration of Business and Credit Risk
The Company is engaged primarily in the manufacture and sale of lip balm, fresh
breath and other products throughout North America and Internationally. The
potential for severe financial impact can result from negative effects of
economic conditions within the market or geographic area. Since the Company's
products are inexpensive, the potential negative effect of changes in economic
conditions are less than would be expected for higher priced products of other
industries.
Stock-Based Compensation
The Company has elected to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options in the accompanying statements
of operations is measured as the excess, if any, of the fair market value of the
Company's stock at the measurement date over the amount the employee must pay to
acquire the stock.
Note 2 - Balance Sheet Disclosures
Inventories are summarized as follows at December 31, 2003:
Raw materials $ 1,748,610
Work in process and finished goods 673,543
-------------------
$ 2,422,153
===================
Property and equipment consist of the following at December 31, 2003:
Machinery and equipment $ 1,971,311
Leasehold improvements 143,462
-------------------
2,114,773
Less accumulated depreciation (1,249,346)
-------------------
$ 865,427
===================
Note 3 - Line-of-Credit
The Company has a $2,000,000 line-of-credit with a bank which matures in April
2004, which the Company expects to renew. Interest is at a variable rate tied to
LIBOR and is periodically adjusted. As of December 31, 2003 the Company had no
outstanding balance on this line-of-credit.
8
Note 4 - Income Taxes
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax liabilities and assets are determined
based on the differences between the financial statement and tax basis of assets
and liabilities using the enacted tax rates in effect for the year in which the
differences are expected to reverse. The measurement of deferred tax assets is
reduced, if necessary, by the amount of any tax benefits that based on available
evidence, are not expected to be realized. As of December 31, 2003, the Company
had a net operating loss ("NOL") carry forward of $584,000 that will expire in
2024.
The net current and long-term deferred tax assets and liabilities in the
accompanying balance sheet include the following at December 31, 2003:
Current deferred tax asset $ 154,952
Current deferred tax liability -
------------------
Net current deferred tax asset $ 154,952
===================
Long-term deferred tax asset $ 218,143
Long-term deferred tax liability (259,754)
------------------
Net long-term deferred tax asset $ (41,611)
===================
Temporary differences giving rise to
a significant portion of deferred tax
Assets (liabilities) are as follows
at December 31, 2003:
Allowance for doubtful accounts 154,952
Net operating loss 218,143
-------------------
Total deferred tax asset $ 373,095
===================
Property and equipment $ (84,020)
Foreign tax items and other (175,734)
-------------------
Total deferred tax liability $ (259,754)
===================
Net deferred tax asset $ 113,341
==================
The following is a reconciliation of the statutory federal income tax rate
applied to pre-tax accounting net income compared to the income taxes in the
consolidated statements of income:
For the Years Ended
December 31,
2003 2002
------------ ------------
Income tax (benefit) expense at the
statutory rate $ (51,510) $ 249,927
Change resulting from:
State and local income taxes, net of
federal income tax - 45,278
Non deductible expenses 638 3,523
Foreign tax credits and income
exclusions (87,712) 4,420
------------ ------------
$ (138,584) $ 303,148
============ ============
9
Note 5 - Long-Term Debt
At December 31, 2003 long-term debt consists of:
Note payable to a financing company with interest
at 0%. The note calls for monthly principal
payments of $1,381 and matures May 2005. Collateralized
by a vehicle. $ 22,329
Note payable to a financing company with interest at 0%.
The note calls for monthly principal payments of $525
and matures January 2008. Collateralized by vehicle. 25,200
----------
47,529
Less current portion (22,874)
----------
$ 24,655
==========
Maturities of long-term obligations are as follows:
Year Ending December 31,
------------------------
2004 $ 22,874
2005 12,055
2006 6,300
2007 6,300
-------------------
$ 47,529
===================
10
Note 6 - Commitments and Contingencies
Related Party Operating Leases
The Company leases office and manufacturing facilities under separate operating
leases for buildings owned or controlled by the Company's president.
The Company also has one operating lease outstanding for a vehicle.
Rent expense for these leases was:
Year Ending December 31,
2003 $ 280,438
2002 $ 229,600
Related Party Operating Leases (continued)
Future minimum lease payments under these leases are approximately as follows:
Year Ending December 31,
------------------------
2004 $ 490,000
2005 440,000
2006 330,000
----------
$1,260,000
==========
During 2003, the Company abandoned certain leasehold improvements located within
the two Englewood, Colorado facilities leased from the Company's President and
majority stockholder or his affiliate. The loss on abandonment was approximately
$308,000 and is included in other operating expenses.
Litigation
In the normal course of business, the Company is party to litigation from time
to time. The Company believes that resolution of such litigation will not have a
material adverse effect on the Company.
Deposit
At December 31, 2003, the Company had deposits of approximately $117,670 for
orders of production materials.
Note 7 - Stockholders' Equity
Stock Options
In 1997, the Company adopted an incentive stock option plan for employees. Under
this plan, the board approved a program to grant certain employees the right to
purchase common stock of the Company for $2.00 per share. The options vest on an
annual basis. As of December 31, 2003, the Company had 210,900 incentive options
outstanding under this plan, each with an exercise price of $2.00 per share.
In September 1997, the Company adopted a Non-Employee Directors' Option Plan.
The Board approved a program to grant certain directors the right to purchase
common stock of the Company. The options vest on an annual basis. As of December
31, 2003, the Company had 40,000 options outstanding under this plan with
exercise prices ranging from $1.32 to$5.00.
All of the following prices and numbers of shares have been adjusted to give
effect to the one-for-two reverse stock split adopted by the Company on December
16, 2003.
11
The following table presents the activity for options outstanding:
Incentive Non-qualified Average
Stock Stock Exercise
Options Options Price
---------- ------------- --------
Outstanding - December 31, 2001 218,400 40,000 $ 2.28
Granted - 7,500 2.46
Forfeited/canceled (10,000) 2.00
Exercised - - -
-------- ------- -------
Outstanding - December 31, 2002 218,400 37,500 2.30
Granted - 7,500 1.23
Forfeited/canceled (7,500) (5,000) 2.00
Exercised - - -
-------- ------- -------
Outstanding - December 31, 2003 210,900 40,000 $ 2.15
======== ======= =======
The following table presents the composition of options outstanding and
exercisable:
Options Outstanding Options Exercisable
Range of Exercise Prices Number Price* Life* Number Price*
---------------------------------- ---------------- ---------------- ---------------- ---------------- -----------
$1.32 7,500 $ 1.32 4.50 - $ -
$2.00 210,900 2.00 3.50 210,900 2.00
$2.01 - $3.00 20,000 2.42 2.17 11,250 2.42
$3.01 - $5.00 12,500 4.85 1.65 8,750 4.89
---------------- ---------------- ---------------- ---------------- ----------------
Total - December 31, 2003 250,900 $ 2.15 3.33 230,900 $ 2.13
================ ================ ================ ================ ================
* Price and life reflect the weighted average exercise price and weighted
average remaining contractual life, respectively.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost for the Company's option plans been determined
based on the fair value at the grant date for awards consistent with the
provisions of SFAS No. 123, the Corporation's net income and basic income per
common share would have been changed to the pro forma amounts indicated below:
For the Years Ended
December 31,
2003 2002
---------- ------------
Net income - as reported $ 1,222 $ 431,931
Net (loss)income - pro forma $ (4,876) $ 420,953
Basic income per common share - as reported $ 0.00 $ 0.09
Basic (loss) income per common share - pro forma $ 0.00 $ 0.09
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used:
12
For the Years Ended
December 31,
2003 2002
---------- ------------
Approximate risk free rate 4.00% 5.00%
Average expected life 5 years 5 years
Dividend yield 0% 0%
Volatility 73% 65%
Estimated fair value of total options granted $6,098 $10,978
Note 8 - Income Per Share
The following table sets forth the computation for basic and diluted earnings
per share:
For the Years Ended
December 31,
2003 2002
-------------- ------------
Numerator for basic earnings per share $ 1,222 $ 431,931
============= =============
Numerator for diluted income per common share $ 1,222 $ 431,931
============= =============
Denominator for basic earnings per share -
weighted average shares 4,580,615 4,580,615
Effect of dilutive securities - options -
------------- -------------
Denominator for diluted earnings per share -
adjusted weighted average shares 4,580,615 4,580,615
============= =============
Diluted income per common share $ 0.00 $ 0.09
============= =============
Where the inclusion of potential common shares is anti-dilutive, such shares are
excluded from the computation.
Note 9 - Acquisitions and expansion
During 2003, the Company entered into an agreement with a Company to purchase
substantially all the intellectual property (patent's and trademarks) of a
former customer. The Company agreed to pay out over the next 10 years, certain
amounts contingent upon the sales of products related to the patent's and
trademarks acquired. As of December 31, 2003, there was no value assigned to the
property acquired. Additionally, during 2003, the Company expensed approximately
$230,000 of receivables from this Company that were deemed to be uncollectible.
During 2003, the Company began to pursue certain opportunities in South America.
As of December 31, 2003, the Company expensed approximately $67,000 of legal and
other costs related to these opportunities.
13
Note 10 - Major Customers
The Company had two major customers that accounted for net sales of
approximately $1,644,000 and $1,199,000, respectively, of which $594,000 was due
from these customers and included in accounts receivable at year end. For the
year ended December 31, 2002, one customer accounted for net sales of
approximately $1,816,000.
Note 11 - Export Sales
During the year ended December 31, 2003 and 2002, the Company had export sales
of approximately $870,000 and $1,298,000, or 6% and 9% of product sales,
respectively. All of the Company's export business is transacted in U.S. dollars
and the Company had no foreign currency translation adjustments
Note 12 - Significant Fourth Quarter Adjustments
In the fourth quarter for the year ended December 31, 2003, the Company made the
following adjustments to the financial statements:
The Company made the decision to write off approximately $230,000 of receivables
from a company from which the Company acquired substantially all of its
intellectual property.
The Company wrote off approximately $737,000 of leasehold improvements related
to the Company's prior leases that were abandoned by the Company late in 2003
and early 2004. These leasehold improvements had a net book value of
approximately $308,000.
The Company expensed approximately $65,000 related to expansion opportunities in
South America.
14
EXHIBIT INDEX
Exhibit
No. Description
--------------------
14.1 Code of Ethics
23.1 Consent of Independent Public Accountants (Ehrhardt Keefe Steiner &
Hottman P.C.)
31.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant
To Section 302 Of The Sarbanes-Oxley Act Of 2002
31.2 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant
To Section 302 Of The Sarbanes-Oxley Act Of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by
Emile Jordan
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by
Gary H Schlatter