U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|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.)
2901 South Tejon Street, Englewood, Colorado 80110
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(Address of principal executive offices) (Zip Code)
(Issuer's telephone number: (303) 783-9499
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Securities to be 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 to be registered under Section 12(g) of the Act:
Common Shares, par value $0.001 per share
(Title of class)
(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. {x}
State issuer's revenues for its most recent fiscal year: $14,149,099
As of March 31, 2003, 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 $1,138,879.
(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 31, 2003, there were 9,160,755 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 29, 2003 (the "2003 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
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PART I
Item 1. Description of Business.
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 area 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) 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.
The nutritional supplement brands continue to contribute less than 10 % of the
Company's revenues. The Company is not planning any material changes to this
part of the business.
In addition, the Company 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 more than 50,000 domestic retail outlets as well as more than
35 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), as well as Sour Zone(TM) brand sour drops and sour
sprays; lip balm products under the names Ice Drops(R), Lip Rageous(R), Chap
Ice(R), Lip Naturals(TM), Lip Rageous Glitters(TM) and Essential Lip
Moisture(TM) as well as private label names; nutritional supplement and related
products consisting of, 5-HTP, Glucosamine + MSM, Breast Plus(TM), and Cheat &
Lean(TM).
In general, the Company's distribution still covers the same markets that it
always has. Sales to large retailers increased in year 2002, which were
responsible for the majority of the revenues as well as the majority of the
increase in promotional expenses incurred during the year. 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 82% 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 Company believes that nutritional supplement sales will remain less than 10%
part of its overall revenue.
The sales of breath freshener have declined. However, this market remains very
important and viable to the future of the Company. The Company's vast
distribution network provides continual opportunities for sales of its breath
freshening products.
Page 1
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 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 Englewood, Colorado.
Most packaging, filling and automated manufacturing equipment has been designed,
built and maintained by the Company's own staff. However, the Company has
purchased some high speed filling and labeling equipment in order to help with
capacities for well established products. 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.
Products Launched in 2002. The Company did not add any new brands in the year
2002. However, there were brand extensions with different types of innovative,
creative packaging.
Competitive Business Conditions. Competition for all of the Company's products
is very significant. 2002 brought an even higher level of competition from major
branded competitors in the mass retail segment as well as competition in private
label and contract manufacturing.
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 by 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.
With respect to nutrition products, competition in this industry is very broad
based. Manufacturers and marketers include tiny start-ups, major drug
manufacturers and Fortune 100 companies. The vast size makes it possible for
many niche marketers as well as the major manufacturers to be successful,
although there appears to be some consolidation within the industry. The retail
environment is made up of mass retail customers and health food industry
retailers. In addition, there are many multi-level marketers and direct sellers
supplying nutritional supplements. The competition in this field has grown
increasingly competitive as manufacturers are positioning for shelf space. Many
retailers have cut back on product selection and on space allocated to
nutritional supplements and vitamins due to slow sales. 2002 has brought about
continued slower sales and more competition. 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).
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. The price/value positioning and niche marketing opportunities are
where the Company is focused.
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.
Page 2
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 $1,800,000 and approximately $1,600,000 respectively, or 13%
and 11%of net sales for the year 2002. The Company is always at risk of its
customers filing for bankruptcy or liquidation. 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.
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 will 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 a two to three week period. The Company generally extends
credit on purchases for a term of 30-90 days after shipment. The Company does
not 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 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.
Managing Growth. Growth in customer orders resulted in the Company experiencing
shipping delays and loss of orders in certain cases. The Company has taken steps
to handle orders more timely on a short-term basis by improving its systems and
infrastructure. However, without larger facilities it is very doubtful the
Company will see any growth in sales revenues or in net income. The Company
continued to improve on its manufacturing and assembly processes through new
automation and additional inventory controls; however, space considerations have
curtailed certain inventory tracking improvements. The Company has expanded its
utilization of vendors who provided local warehousing for raw materials heavily
used by the Company, as well as used creative storage facilities such as
trailers. The Company believes it is has reached a point of full capacity based
on its current facilities and resources. The Company has restructured the
procedures and administration of handling customer charge backs to its accounts
receivable, giving management a more systematic approach to evaluating the
profitability of its revenues. However, these systems still need improvement.
These systems have required more time and resources than originally anticipated.
The Company expects to have a material cost during 2003 in order to locate and
facilitate a move to a larger facility. The ultimate expectation is that the
Company will be in a better position to handle growth, in one facility, instead
of the two that it currently occupies.
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.
Page 3
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
is accepting public comments on the proposed CGMPs until June 11, 2003; final
CGMPs will be promulgated after the FDA has reviewed the public comments. 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.
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 2003.
Number of Employees. The approximate number of employees hired by the Company as
of the end of fiscal year 2002 was 164.
Page 4
Item 2. Description of Property.
The Company's headquarters are located in an office-warehouse building of
approximately 16,000 square feet located in Englewood, Colorado, which the
Company leases from the Company's President. The property includes the executive
offices of the Company, as well as the Company's manufacturing facilities and a
portion of its warehouse facilities. The Company's lease expires in August 2005,
and the Company believes that its rental rate is comparable to that which would
be charged by an unaffiliated landlord. The Company also leases an additional
approximate 22,800 square feet of warehouse space in a building located near the
Company's headquarters, which is leased from an entity solely owned by the
Company's President. The lease expires in June 2003, and the Company believes
that its rental rate is comparable to that which would be charged by an
unaffiliated landlord. (See "Certain Relationships and Related Transactions"
incorporated by reference to the 2002 Definitive Proxy Statement.)
The Company is planning to move its facilities to a single location during the
year 2003.
Item 3. Legal Proceedings.
There are no material legal proceedings involving the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fourth quarter of the fiscal year covered by
this report to a vote of security holders.
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 2001 and 2002. The source of such
information is as reported by NASDAQ.
Reported High Bid Reported Low Bid
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First quarter, fiscal 2001 $1.63 $0.56
Second quarter, fiscal 2001 $2.79 $1.15
Third quarter, fiscal 2001 $1.85 $0.90
Fourth quarter, fiscal 2001 $1.70 $0.75
First quarter, fiscal 2002 $1.25 $1.01
Second quarter, fiscal 2002 $1.28 $0.97
Third quarter, fiscal 2002 $1.06 $0.51
Fourth quarter, fiscal 2002 $0.75 $0.46
The quotations reflect inter-dealer prices, without adjustment for retail
mark-up, markdown or commission and may not necessarily present actual
transactions.
(ii) Recent Sales of Unregistered Securities. In May 2002, the Company issued
5,000 options to the three non-employee members of the board of directors of the
Company, under the Company's 1997 Non-Employee Directors' Option Plan. The
transactions were exempt from the registration requirements of the Act pursuant
to Sections 4(6) and 4(2) of the Act. The options vest in four equal
installments over a period of four years, each with an exercise price of $1.23
per share.
(b) As of March 31, 2003, there were approximately 895 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 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, 2002 as compared with
the period ending December 31, 2001.
Product sales decreased $1,263,136 or 8%. Sales of lip balm tins and combination
packaged items grew significantly during 2002. Additionally, net sales increased
due to decreases in stocking fees paid to major customers related to decreases
in sales to these customers. These increases were offset by decreases in sales
of remaining products primarily due to increased competition. The Company was
also impacted by lower international sales due to unstable economic conditions
abroad.
Cost of goods sold increased $411,525 and gross profit decreased $1,674,661 or
27%. As a percentage of sales, gross profit decreased from 40% to 32%, which was
principally caused by increases of approximately $200,000 in materials and
approximately $290,000 in cost of labor as product sales decreased. The higher
costs reflect a change in product mix that resulted in increases in both the
cost of materials and amount of labor associated with these products.
Engineering decreased $13,322 or 8%, reflecting a decrease in engineering
salaries.
Selling and marketing decreased $466,547 or 23%. Bad debt declined approximately
$270,000, primarily due to the large bad debt figure in 2001 from the Kmart
Corporation bankruptcy. Sales and marketing commissions decreased approximately
$90,000, as those costs related to the decline in product sales and gross
profit. Advertising in trade magazines decreased approximately $92,000 as a
result of a reduction in advertising vitamin supplements and lip balm
advertising. This was replaced by higher quality in-store printed displays.
General and administrative expenses decreased $214,683 or 9%. In year 2001 a
bonus of $350,000 was issued to the Company's President, and there was no bonus
given in 2002. The Company incurred additional insurance costs in 2002 of
approximately $70,000, as anticipated, as a result of higher rates throughout
the industry. There were modest increases in depreciation, administration
salaries, office expenses and research and development.
Page 6
Interest and other income decreased $55,015. An increase in royalty income of
approximately $19,000 from the sale of certain intellectual property and
distribution assets was offset by a decrease in interest income of approximately
$51,000 and the 2001 expense of writing off of an expired payable for
approximately $28,000 from the merger consolidation with SSI in May of 1997.
Gain on sale of investment decreased $746,435. In year 2001 the Company sold its
minority interest in a company that acquired ownership of Pecos Pharmaceuticals,
a vendor of nutritional supplements.
Net income decreased by $1,048,127, or 71% as explained by the above activities.
Additionally, as a percentage of sales, net operating income decreased from 11%
to 5% as explained by the above activities.
Liquidity and Capital Resources.
At December 31, 2002, the Company had $2,677,607 of cash and its current ratio
was 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 $554,102 consisting of the
following items:
Accounts Receivable decreased $144,588 as receivables increased approximately
$40,000 while allowances increased approximately $185,000 to allocate for
pending promotional credits.
Inventory increased $283,673 as the Company carried approximately $142,000 more
of raw materials being produced abroad; approximately $80,000 more in work in
process; and approximately $50,000 more in cost of overhead allocated to
inventory.
Deferred income tax asset increased $69,038. This is attributed to timing
differences in the treatment of deductions for book verses tax income.
Accounts payable decreased $237,866. This is due to timing differences where
trade payables were $237,865 higher at year end in 2001 than 2002 due to
increased inventory shipments at year end 2002.
Accrued liabilities decreased $72,930. Reserves for sales commissions decreased
approximately $39,000 as did payroll related accruals of approximately $34,000.
Reserve for returns increased $113,521. The Company booked an additional
approximately $150,000 for a first quarter 2003 anticipated return. Otherwise
lower sales would have reduced the allowance by approximately $36,000.
Income taxes payable increased $87,862. This is due to timing differences of
income tax payments made.
Net cash used in investing activities was $138,113 consisting of the following
items:
Deposits decreased $170,039 substantially as the result of a smaller deposit on
raw materials being produced abroad specifically for the Company.
Property and Equipment decreased $35,815. In year 2002 machinery and equipment
purchases were approximately $244,000; purchase of a Company vehicle for
$31,500; and leasehold improvements of approximately $115,000, which were offset
by depreciation on all machinery for approximately $309,000 and amortization of
leasehold improvements for approximately $118,000.
Trends. Year 2002 was the first year since the inception in 1996 of lip balm
products that the Company did not experience growth. The Company showed a
decrease of 2% as lip balm revenues slipped to $11,569,418 in year 2002 from
$11,799,540 in year 2001. Competition for retail shelf space in this category
increased in 2002 and should continue to challenge the Company in 2003. Added
value packaging for promotions in year 2002 will be augmented by more products
and progressive packaging in year 2003. The Company plans to more than double
its square footage for operations in third quarter of year 2003, which will
allow for improvements in warehousing, staging of product, and segregation and
movement of product through manufacturing processes. The Company expects growth
in revenues and operating profits in 2003.
Page 7
The sour drops and breath fresheners revenues were $1,995,759 in year 2002
compared to $2,617,693 in year 2001, or a 24% decrease, 40% in two years.
Despite improved packaging and manufacturing capacity for these items the
Company is reporting a significant decline in revenues for this category for the
second year in a row. The Company has a well established base of customers with
brand loyalty in this category, but with more marketing emphasis put on the much
larger lip balm category, the potential for less revenue is more likely in year
2003. The Company is considering other product introductions that could help
offset anticipated decreases. However it is uncertain that these product
introductions will occur.
The nutritional supplements revenues were $536,941 in 2002 as compared to
$835,653 in 2001, or a 36% decrease. Year 2003 may see a continued downward
trend in this category.
The international business revenues were $1,298,565 in 2002 as compared to
$1,814,297 for 2001, a 28% decrease. As anticipated, tightened credit policies
and unstable conditions in international markets resulted in decreased revenues
in 2002. Although the Company has maintained and expanded relationships with
distributors in other countries through travel to international trade shows and
face to face meetings, the continued unstable conditions leave the Company
uncertain how this category will perform in year 2003.
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, 2002, 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.
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.
Page 8
Managing Growth. The Company experienced a period of significant growth during
fiscal years ended December 31, 1997 and 1996. Significant growth did not occur
in fiscal year 1998, but it occurred again in 1999, 2000, 2001 and could occur
in the future. Such growth has placed, and could continue to place, a strain on
the Company's management, customer service, manufacturing, sales and
administrative personnel and other resources. In fact, the Company believes that
the increase in its operating expenses and its lower gross margins, which both
occurred during 2002, were partially the result of growth pains that the Company
experienced. The Company experienced lower operating profit as a percentage of
sales during 2002 and it is possible that this could reoccur. Also, the Company
could be in a position where it grows and increases overhead, and then its sales
slow down. The Company is planning to move to a single facility that will more
than double its space, at a substantially increased overall cost. The excess
overhead could negatively impact the Company's ability to earn a profit or cause
it to lose money. The Company has experienced sales cycles that required it to
add and delete additional shifts for manufacturing. This is expected to occur
again in the future. The Company's ability to manage growth may require the
Company to expand its operating, management, information and financial systems,
all of which may increase its operating expenses or otherwise strain the
Company's resources. 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 $1 million per occurrence and $2
million in aggregate liability insurance. In addition, if claims should exceed
$2 million, the Company has excess umbrella liability insurance of up to an
additional $1 million. 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.
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, 2003, 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.
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.
Page 9
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 $1,800,000 and $1,600,000
respectively, or 13% and 11% of net sales during the year ended December 31,
2002. The Company had over 1,000 purchasing customers in fiscal 2002 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. The Company still continues to do business with
Kmart Corporation even though as of the date of this filing it remains in a
Chapter 11 status. According to industry publications it is anticipated that
Kmart Corporation should emerge from bankruptcy in April or May of 2003.
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 are 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.
No Assurance of Proprietary Protection. The Company has been allowed two
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.
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.
Unproven Markets for Certain of the Company's Products. The Company began
selling its nutritional supplement products in 1998 and lip balm in 1996. 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 manufactures in their primary
business, i.e. lip balm; it is possible that the Company could lose its position
in the marketplace. Although the Company believes that there is a market for its
products, it has limited knowledge and history with its products and therefore
cannot be assured that the products will be continued to be accepted or
competitive in the marketplace in the long term, or that if continually
accepted, that part of the Company's business will be profitable.
Page 10
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 14 of this Annual Report on
Form 10-KSB.
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure. None.
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
The balance of the information required for this Item is incorporated herein by
reference to the 2003 Definitive Proxy Statement.
Item 10. Executive Compensation.
The information required for this item is incorporated herein by reference to
the 2003 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 2003 Definitive Proxy Statement.
Item 12. Certain Relationships and Related Transactions.
The information required for this item is incorporated herein by reference to
the 2003 Definitive Proxy Statement.
Page 11
PART IV
Item 13. Controls and Procedures
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, 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. 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.
Item 14. 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, 2002
Consolidated Statements of Operations for the years
ended December 31, 2002 and December 31, 2001
Consolidated Statement of Stockholders' Equity from
December 31, 2000 through December 31, 2002
Consolidated Statements of Cash Flows for the years ended
December 31, 2002 and 2001
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.
10.9(7) Agreement (effective May 1, 2000, amending the Employment
Agreement listed above as Exhibit 10.3).
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.
21(2) List of Subsidiaries of the Company
23.1(9) Consent of Independent Public Accountants (Ehrhardt Keefe Steiner
& Hottman P.C.)
99.1(9) 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
99.2(9) 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
------------------
Page 12
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 Incorporated herein by reference to the Company's Form 10-KSB filed for
fiscal year 1999.
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 Filed herewith.
(b) A Form 8-K was filed on October 18, 2002.
Page 13
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: April 15, 2003
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, April 15, 2003
----------------------------- Chief Executive Officer
Gary H. Schlatter
/s/ Michael I. Friess Director, Secretary April 15, 2003
-----------------------------
Michael I. Friess
/s/ Allen R. Goldstone Director April 15, 2003
-----------------------------
Allen R. Goldstone
/s/ Robert C. Gust Director April 15, 2003
-----------------------------
Robert C. Gust
Page 14
CERTIFICATIONS
I, Gary H. Schlatter certify that:
1. I have reviewed this annual report on Form 10-KSB of OraLabs Holding Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Acts Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 15, 2003 /s/ Gary H. Schlatter
President
Page 15
I, Emile Jordan certify that:
1. I have reviewed this annual report on Form 10-KSB of OraLabs Holding Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Acts Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 15, 2003 /s/ Emile Jordan
Chief Financial Officer
Page 16
Consolidated Financial Statements
and
Independent Auditors' Report
December 31, 2002
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
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Oralabs Holding Corp. and Subsidiaries
Englewood, Colorado
We have audited the accompanying consolidated balance sheet of Oralabs Holding
Corp. and Subsidiaries as of December 31, 2002, and the related consolidated
statements of income, stockholders' equity and cash flows for the years ended
December 31, 2002 and 2001. 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, 2002, and the results of their
operations and their cash flows for the years ended December 31, 2002 and 2001
in conformity with accounting principles generally accepted in the United States
of America.
Ehrhardt Keefe Steiner & Hottman PC
March 26, 2003
Denver, Colorado
1
ORALABS HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 2002
Assets
Current assets
Cash $ 2,677,607
Accounts receivable, net of allowance for doubtful accounts of $359,201 1,793,037
Inventories 2,003,543
Deferred tax asset 305,428
Prepaid expenses 143,068
Deposits 128,768
-------------------
Total current assets 7,051,451
-------------------
Non-current assets
Property and equipment, net 1,234,893
Deferred tax asset 32,383
-------------------
Total non-current assets 1,267,276
-------------------
Total assets $ 8,318,727
===================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable - trade $ 407,701
Accrued liabilities 305,190
Reserve for returns 539,118
Income taxes payable 270,089
Current portion of long-term debt 22,349
-------------------
Total current liabilities 1,544,447
-------------------
Non-current liabilities
Long term debt, less current portion 48,055
-------------------
Total non-current liabilities 48,055
-------------------
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; 9,160,755 issued and outstanding 9,160
Additional paid-in capital 1,216,905
Retained earnings 5,500,160
-------------------
Total stockholders' equity 6,726,225
-------------------
Total liabilities and stockholders' equity $ 8,318,727
===================
See notes to consolidated financial statements.
2
ORALABS HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended
December 31,
2002 2001
-------------------- -------------------
Product sales $ 14,149,099 $ 15,412,235
Cost of goods sold 9,670,629 9,259,104
-------------------- -------------------
Gross profit 4,478,470 6,153,131
-------------------- -------------------
Operating expenses
Engineering 144,421 157,743
Selling and marketing 1,571,359 2,037,906
General and administrative 2,086,528 2,301,211
Other 23,131 17,738
-------------------- -------------------
Total operating expenses 3,825,439 4,514,598
-------------------- -------------------
Income from operations 653,031 1,638,533
-------------------- -------------------
Other income
Interest and other income 76,548 131,563
Gain on sale of investment and other 5,500 751,935
-------------------- -------------------
Total other income 82,048 883,498
-------------------- -------------------
Income before income taxes 735,079 2,522,031
-------------------- -------------------
Income tax (expense) benefit
Current (395,966) (1,101,230)
Deferred 92,818 59,257
-------------------- -------------------
Total income tax (expense) benefit (303,148) (1,041,973)
-------------------- -------------------
Net income $ 431,931 $ 1,480,058
==================== ===================
Basic weighted average common shares outstanding 9,160,755 9,160,755
==================== ===================
Basic income per common share $ 0.05 $ 0.16
==================== ===================
Diluted weighted average common shares outstanding 9,160,755 9,286,650
==================== ===================
Diluted income per common share $ 0.05 $ 0.16
==================== ===================
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, 2002 and 2001
Additional Total
Common Stock Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
--------- -------- ----------- ----------- -----------
Balance - December 31, 2000 9,160,755 $ 9,160 $ 1,216,905 $ 3,588,171 $ 4,814,236
Net income - - - 1,480,058 1,480,058
--------- -------- ----------- ----------- -----------
Balance - December 31, 2001 9,160,755 9,160 1,216,905 5,068,229 6,294,294
Net income - - - 431,931 431,931
--------- -------- ----------- ----------- -----------
Balance - December 31, 2002 9,160,755 $ 9,160 $ 1,216,905 $ 5,500,160 $ 6,726,225
========= ======== =========== =========== ===========
See notes to consolidated financial statements.
4
ORALABS HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended
December 31,
2002 2001
----------- ------------
Cash flows from operating activities
Net income $ 431,931 $ 1,480,058
----------- ------------
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation 426,591 334,915
Deferred tax asset (69,038) (59,257)
Loss on sale of assets - 12,689
Gain on sale of investment and other - (763,000)
Changes in assets and liabilities
Accounts receivable - trade 144,588 529,589
Inventories (283,673) 55,361
Prepaid expenses 13,116 68,472
Accounts payable - trade (237,866) (1,010,277)
Accrued liabilities (72,930) (45,262)
Reserve for returns 113,521 (48,142)
Income taxes payable 87,862 (272,245)
----------- ------------
122,171 (1,197,157)
----------- ------------
Net cash provided by operating activities 554,102 282,901
----------- ------------
Cash flows from investing activities
Purchase of property and equipment (308,152) (714,477)
Proceeds from sale of property and equipment - 11,350
Deposits 170,039 (167,808)
Proceeds from sale of investment - 1,025,000
Broker commissions paid on sale of investment - (262,000)
----------- ------------
Net cash used in investing activities (138,113) (107,935)
----------- ------------
Cash flows from financing activities
Payments of principal on long-term debt (12,220) -
----------- ------------
Net cash used in financing activities (12,220) -
----------- ------------
Net increase in cash 403,769 174,966
Cash - beginning of year 2,273,838 2,098,872
----------- ------------
Cash - end of year $ 2,677,607 $ 2,273,838
=========== ============
Supplemental disclosure of cash flow information:
Cash paid for: Income taxes
-------------- ------------
2002 $ 277,500
2001 $ 1,373,475
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. All references to common stock in the Company's financial statements have
been retroactively adjusted for the merger and the one-for-two reduction 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
intercompany 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, balances of cash and
cash equivalents exceeded the federally insured limit by approximately
$2,793,000.
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 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.
Reclassifications
Certain amounts in the 2001 consolidated financial statements have been
reclassified to conform to the 2002 presentation.
Advertising Costs
The Company expenses advertising costs as incurred.
Advertising expenses were as follows:
For the Year Ended December 31,
2002 $ 56,819
2001 $ 116,690
Research and Development Costs
Expenditures made for research and development are charged to expense as
incurred. Total research and development costs of $40,722 and $26,321 for
December 31, 2002 and 2001, 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 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.
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 superseded.
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 is currently evaluating what effect the adoption of this
statement will have the Company's financial statements. 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, 2002 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, 2002:
Raw materials $ 1,481,074
Work in process and finished goods 522,469
-------------------
$ 2,003,543
Property and equipment consist of the following at December 31, 2002:
Machinery and equipment $ 1,788,900
Leasehold improvements 710,963
-------------------
2,499,863
Less accumulated depreciation (1,264,970)
-------------------
$ 1,234,893
Note 3 - Line-of-Credit
The Company entered into a line-of-credit agreement with a bank in the amount of
$1,000,000, which expires May 2003. As of December 31, 2002, the Company had
available the entire $1,000,000 unused line-of-credit. The interest rate at
December 31, 2002 was 6.5% per annum to be adjusted periodically. The
line-of-credit is collateralized by a first lien on all of the Company's
business assets.
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.
The net current and long-term deferred tax assets and liabilities in the
accompanying balance sheet include the following at December 31, 2002:
Current deferred tax asset $ 305,428
Current deferred tax liability -
------------------
Net current deferred tax asset $ 305,428
===================
Long-term deferred tax asset $ 32,383
Long-term deferred tax liability -
------------------
Net long-term deferred tax asset $ 32,383
===================
Temporary differences giving rise to a significant portion of deferred tax
assets are as follows at December 31, 2002:
Reserve for returns $ 122,128
Allowance for doubtful accounts 183,300
Differences related to depreciation 32,383
-------------------
$ 337,811
===================
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,
2002 2001
------------ ------------
Income tax expense at the statutory rate $ 249,927 $ 857,491
Change resulting from:
State and local income taxes, net of federal income tax 45,278 121,686
Non deductible expenses 3,523 1,836
Other 4,420 60,960
------------ ------------
$ 303,148 $ 1,041,973
============ ============
Note 5 - Long-Term Debt
Long-term debt consists of at December 31, 2002:
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 an automobile of the Company. $ 38,904
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 an automobile of the Company. 31,500
----------
70,404
Less current portion (22,349)
----------
$ 48,055
==========
Maturities of long-term obligations are as follows:
Year Ending December 31,
------------------------
2003 $ 22,349
2004 22,874
2005 12,056
2006 6,300
2007 6,300
Thereafter 525
-------------------
$ 70,404
===================
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. These
leases expire between 2003 and 2005. At December 31, 2002 total rent payments on
all leases were approximately $20,000 per month.
The Company also has one operating lease outstanding for a vehicle. This lease
expires in 2005 with a monthly payment of approximately $250 per month.
Rent expense for these leases was:
Year Ending December 31,
2002 $ 229,600
2001 $ 229,800
Related Party Operating Leases (continued)
Future minimum lease payments under these leases are approximately as follows:
Year Ending December 31,
------------------------
2003 $ 166,300
2004 102,400
2005 65,000
----------
$ 333,700
==========
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, 2002, the Company had deposits of approximately $129,000 for
orders of production equipment.
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 $1.00 per share. The options vest on an
annual basis. As of December 31, 2002, the Company had 436,800 incentive options
outstanding under this plan, each with an exercise price of $1.00 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, 2002, the Company had 75,000 options outstanding under this plan with
exercise prices ranging from $1.16 to $4.25.
The following table presents the activity for options outstanding:
Weighted
Incentive Non-qualified Average
Stock Stock Exercise
Options Options Price
---------- ------------- --------
Outstanding - December 31, 2000 487,800 65,000 $ 1.09
Granted - 15,000 2.38
Forfeited/canceled (51,000) - 1.00
Exercised - - -
-------- ------- -------
Outstanding - December 31, 2001 436,800 80,000 1.14
Granted - 15,000 1.23
Forfeited/canceled - (20,000) 1.00
Exercised - - -
-------- ------- -------
Outstanding - December 31, 2002 436,800 75,000 $ 1.15
======== ======= =======
The following table presents the composition of options outstanding and
exercisable:
Options Outstanding Options Exercisable
Range of Exercise Prices Number Price* Life* Number Price*
---------------------------------- ---------------- ---------------- ---------------- ---------------- -----------
$1.00 436,800 $ 1.00 4.60 436,800 $ 1.00
$1.01 - $2.00 40,000 1.21 3.20 12,500 1.20
$2.01 - $3.00 25,000 2.43 2.20 11,250 2.46
$4.25 10,000 4.25 0.50 10,000 4.25
---------------- ---------------- ---------------- ---------------- ----------------
Total - December 31, 2002 511,800 $ 1.15 4.30 470,550 $ 1.11
================ ================ ================ ================ ================
* 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,
2002 2001
---------- ------------
Net income - as reported $ 431,931 $ 1,480,058
Net income - pro forma $ 420,953 $ 1,456,049
Basic income per common share - as reported $ 0.05 $ 0.16
Basic income per common share - pro forma $ 0.05 $ 0.16
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:
For the Years Ended
December 31,
2002 2001
---------- ------------
Approximate risk free rate 5% 5.00%
Average expected life 5 years 5 years
Dividend yield 0% 0%
Volatility 65% 92%
Estimated fair value of total options granted $10,978 $24,009
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,
2002 2001
-------------- ------------
Numerator for basic earnings per share $ 431,931 $ 1,480,058
============= =============
Numerator for diluted income per common share $ 431,931 $ 1,480,058
============= =============
Denominator for basic earnings per share - weighted average shares $ 9,160,755 $ 9,160,755
Effect of dilutive securities - options - 125,895
------------- -------------
Denominator for diluted earnings per share - adjusted weighted average
shares 9,160,755 9,286,650
============= =============
Diluted income per common share $ 0.05 $ 0.16
============= =============
Where the inclusion of potential common shares is anti-dilutive, such shares are
excluded from the computation.
Note 9 - Major Customers
The Company had two major customers that accounted for net sales of
approximately $1,570,000 and $1,816,000, respectively during the year ended
December 31, 2002. Approximately $413,000 was due from these two customers at
December 31, 2002. One customer accounted for net sales of approximately
$1,600,000, during the year ended December 31, 2001.
Note 10 - Export Sales
All of the Company's business is transacted in U.S. dollars and the Company had
no foreign currency translation adjustments. Export sales for the years ended
December 31, 2002 and 2001 were approximately $1,298,000 and $1,814,000 or 9%
and 12% of product sales, respectively.
Note 11 - Significant Fourth Quarter Adjustments
In the fourth quarter for the year ended December 31, 2002, the Company made the
following adjustments to the financial statements:
The Company made a decision to increase its allowance for returns by
approximately $150,000. This increase was related to product that was returned
in the early part of fiscal year 2003 from one of its customers.
The Company also recorded an adjustment to adjust their perpetual inventory
balance to match the year-end physical inventory count by approximately
$100,000.
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
23.1 Consent of Independent Public Accountants (Ehrhardt Keefe Steiner &
Hottman P.C.)
99.1 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
99.2 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
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference of our report on OraLabs
Holding Corp. dated March 26, 2003 in the two Registration Statements on Form
S-8 (originally filed in July 1997 and January 2002, respectively) as included
in the OraLabs Holding Corp.'s Form 10-KSB for the year ended December 31, 2002,
and to all references to our firm included in such Registration Statements
/s/ Ehrhardt Keefe Steiner & Hottman PC
-----------------------------------
Ehrhardt Keefe Steiner & Hottman PC
April 15, 2003
Denver, Colorado
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of OraLabs Holding Corp. (the "Company") on
Form 10-KSB for the period ending December 31, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the "Report") I, Gary H. Schlatter,
Chief Executive Officer of the Company, certify, pursuant to 18 USC SS. 1350, as
adopted pursuant to SS. 906 of the Sarbanes-Oxley Act of 2002, that to the best
of my knowledge and belief:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Gary H. Schlatter
------------------------------------------
Gary H. Schlatter, Chief Executive Officer
Dated 4/15/03
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of OraLabs Holding Corp. (the "Company") on
Form 10-KSB for the period ending December 31, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the "Report") I, Emile Jordan, Chief
Financial Officer of the Company, certify, pursuant to 18 USC SS. 1350, as
adopted pursuant to SS. 906 of the Sarbanes-Oxley Act of 2002, that to the best
of my knowledge and belief:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Emile Jordan
----------------------------------------
Emile Jordan, Chief Financial Officer
Dated 4/15/03