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, 2004
|_| Transition report under section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _________to
Commission File Number: 000-23039
ORALABS HOLDING CORP.
(Name of small business issuer in its charter)
Colorado 14-1623047
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18685 East Plaza Drive, Parker, Colorado 80134
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(Address of principal executive offices) (Zip Code)
(Issuer's telephone number: (303) 783-9499
Securities registered under Section 12(b) of the Act:
Title of each class Name of each exchange
None on which registered
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Securities registered under Section 12(g) of the Act:
Common Shares, par value $0.001 per share
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes X
No___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. ___
State issuer's revenues for its most recent fiscal year: $13,130,579
As of April 4, 2005, 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 $2,586,317.
(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 April 4, 2005, there were 4,668,615 shares of common
stock outstanding.
Transitional Small Business Disclosure Format (Check one):
Yes ___ No X
PART I
Business Development. On May 1, 1997, OraLabs, Inc., a privately held company,
became a wholly owned subsidiary of SSI Capital Corp. (the predecessor of the
Company). SSI Capital Corp. subsequently merged with OraLabs Holding Corp., with
OraLabs Holding Corp. becoming the surviving company. As a result of these
transactions, the Company is the sole stockholder of OraLabs, Inc. The term
"Company" or "OraLabs" will mean OraLabs Holding Corp., successor to SSI Capital
Corp., and except where otherwise indicated, all discussions of the business of
the Company includes the business of OraLabs, Inc. (the "Subsidiary").
The Subsidiary was formed in 1990 for the purposes of manufacturing and
distributing tooth-whitening products. In 1992, in order to expand the product
line, the Subsidiary's developed what became known as its flagship product, Ice
Drops(R). Ice Drops are breath drop product sold in a small plastic bottle and
introduced as an alternative to breath sprays and candy breath mints.
In 1999, the Company introduced its own brands of lip balm in traditional twist
stick containers. The brands currently being marketed consist of Essential Lip
Moisture, Lip Naturals(R), Chap Ice(R), Soothe & Shine(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.
In 2003, the Company acquired certain assets of Symbiosis, Inc. These assets
included, but were not limited to, intellectual property consisting of trade
names Leashables(R) and Chapgrip(R) and a patent for a lip balm holder.
The nutritional supplement brands contribute less than 5 % of the Company's
revenues. The Company is not planning any material changes to this part of the
business.
In addition, the Company has engaged in negotiations with other businesses and
from time to time contacts persons involved in corporate finance matters to
determine if there are businesses interested in a merger or other acquisition of
or combination with the Company.
As previously announced by the Company in its Form 8-K filed on February 23,
2005, OraLabs entered into a Definitive Agreement with NVC Lighting Investment
Holdings Limited under which OraLabs will acquire NVC and convey its ownership
of OraLabs, Inc. to OraLabs' President, Gary H. Schlatter. Control of the
Company would change from Mr. Schlatter to the owners of NVC. Closing under the
Definitive Agreement is conditioned upon many requirements and there can be no
assurance that the closing will occur. If the parties do not otherwise terminate
the Definitive Agreement, then OraLabs, in anticipation of a meeting of its
shareholders called to approve the transactions, will file with the Securities
and Exchange Commission a Proxy Statement that will include more detailed
information about the Definitive Agreement and the proposed transactions.
Business of the Company.
------------------------
Principal Products, Their Markets and Distribution. The general business of the
Company is to produce and sell consumer products relating to oral care and lip
care and to distribute nutritional supplements. The Company's products are
currently sold in the USA nationally as well as numerous foreign countries. The
products are sold through wholesale distributors as well as by direct sale to
mass retailers, grocery stores, convenience stores and drug stores. The
principal products produced by the Company can be categorized into three groups:
breath fresheners, including liquid drops and sprays under the brand name Ice
Drops((R)) and Sour Zone((TM)M) brand sour drops and sour sprays; lip balm
products under the names Lip Rageous((R)), Chap Ice((R)), Lip Naturals((R)), Lip
Rageous Glitters(TM), Essential Lip Moisture and Soothe & Shine((R)), as well as
private label names, promotional products under the name Leashables (R),and
nutritional supplement products consisting of 5-HTP and Cheat & Lean(R).
In general, the Company's distribution still covers the same markets that it
always has, although 2004 saw an increase in the promotional products markets.
As has been the case in recent years, sales and promotional expenses were
predominantly to large retailers. The Company believes that the lip balm
category will continue to be the Company's primary business. The Company has
established itself as a viable competitor in the lip balm business, deriving
approximately 80% of its revenue from this category. This is a category that the
Company believes can grow in sales. However, it is possible that competitive
pressures could further erode margins and increase promotional costs and selling
expenses for the Company.
The sales of breath freshener and sour candies remained stable in year 2004.
Convenience store and vending distribution has stayed somewhat stable, while
dollar store distribution has varied significantly from year to year. This
market remains very important and viable to the future of the Company. The
Company's distribution network provides continual opportunities for sales of its
breath freshening and sour candies products.
The Company's strategy for its breath freshener and lip balm products has been
to establish name brands and to develop and sell products that fill niches. The
price/value marketing strategy includes capitalizing on the distribution network
that currently carries one or more of the Company's products, and building upon
the business relationships that have been established.
The Company believes that nutritional supplement sales will remain less than 5%
part of its overall revenue. The Company is not planning any material changes to
its nutritional supplement marketing plan.
The Company's products and packaging continue to be conceptualized and developed
in-house. The Company's breath freshener and lip balm products are marketed from
and packaged at the Company's manufacturing facility in Parker, Colorado. Most
packaging, filling and automated manufacturing equipment has been designed,
built and maintained by the Company's own staff. This allows the Company to
rapidly introduce and manufacture new products, reducing lengthy lead times and
some of the cost of capital expenditures associated with some new product
introductions. It also allows the Company to test new products before committing
capital to full-scale manufacturing endeavors. However, the Company has
purchased some high speed filling and labeling equipment in order to help with
capacities for well established products.
Products Launched in 2004. The Company did not add any material new products.
However, brand extensions with different types of innovative, creative packaging
were added.
Page 1
Competitive Business Conditions. Competition from major branded competitors in
the mass retail segment as well as private label manufacturing continues to be
very significant.
With respect to the Company's breath freshening products, direct competitors who
manufacture liquid or spray breath products consist of less than five. Breath
mints and breath strips are a significant competitive force and continue to
dominate shelf space in retail storefronts. The Company believes that there are
more than 50 competitors in the category. The breath freshening category is
always filled with numerous new product introductions from large competitors.
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 a finite amount of space, so getting new
slots in retail stores is a challenge.
The Company has sought to distinguish itself by size and packaging of its
products, as well as by competing with respect to pricing. The Company believes
that for some of its products, its smaller size and lower price than that of its
competitors is an advantage to the Company. However, other factors such as a
competitor's greater brand recognition or preferable product placement of a
competitor's products at retail locations may nullify or reduce whatever
competitive advantage the Company's products have. Strong national brands are
very difficult to displace and compete against. The price/value positioning and
niche marketing opportunities are where the Company is focused.
With respect to nutritional supplement products, competition in this industry is
very broad based. The Company has followed its strategy of maintaining a very
narrowly focused effort for the products that it has determined to be
financially viable. The Company determined that a broad base in this category is
not a part of its plan at this time. It is also the Company's expectation that
there will also be more and tighter regulation by the government in the future,
making it more expensive to do business in this segment (see "Government
Regulation" below).
Sources and Availability of Raw Materials. In general, the sources and
availability of materials used by the Company in its business are fairly
widespread, and the Company believes that it could obtain secondary sources of
raw materials at comparable prices to the extent that an existing business
relationship terminates.
Dependence upon a Single Customer. The Company does not believe that its
business with respect to any particular product or products is dependent upon
any single customer. However, the Company had two major customers that accounted
for approximately $1,950,000 and $1,400,000 respectively, or 15% and 11% of net
sales for the year 2004. The Company is always at risk of its customers filing
for bankruptcy or liquidation or being dropped by a major customer. This has
happened in the past and could happen again in the future.
Patents, Trademarks, Licenses, Franchises and Concessions. Although there can be
no assurance of proprietary protection respecting pending patents, patents and
trademarks held by the Company (see, "Cautionary Statement Regarding
Forward-Looking Statements, No Assurance of Proprietary Protection"), and
although the Company intends to vigorously seek to enforce and protect its
proprietary rights, the Company does not believe that the loss of any such
proprietary right would in and of itself, adversely affect the Company in a
material manner.
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 help to offset some of the seasonality. Even though
the sun block products help, sales of lip balm are still considered to be 50-70%
seasonal.
Practices of the Company in the Industry. The Company's typical plans with
respect to all of its products are to keep adequate inventory on hand for
shipments within the required time frame to meet orders. The Company generally
extends credit on purchases for a term of 30-90 days after shipment. The Company
does not typically formally provide a right of customers to return merchandise.
However, the Company believes that it is a common practice in the industry, and
the Company subscribes to such practice on a case-by-case basis, to permit a
retailer who has not sold all of the goods it has purchased within a reasonable
time, to ask the Company to accept a return of the unsold merchandise. The
Company estimates and records a reserve for returns upon sale. The Company also
expects, as it is common practice in the industry, for retailers to take
deductions for "un-saleable product", which are its products that have either
been returned by a customer to the retailer or for which the packaging has
somehow become un-saleable in the retailer's sole discretion.
Page 2
Managing Manufacturing Requirements. The Company has done several things to
position itself for stability in 2005. In positioning for stability and
profitability, the Company has made changes to management, customer service,
manufacturing, and sales and administrative personnel. These changes have come
at costs that have put the Company in an unprofitable position for the year. The
Company has been in its new facility since February of 2004. The extra space has
helped to allow the Company to more efficiently process its orders. However the
associated costs with the new facility have not yet been offset by increased
revenues. The Company plans to reduce its product offerings in order that it
will be able to lower its cost to produce fewer product offerings. The Company
hopes to be able to return to a state of profitability , however there are no
assurances that it will happen. See Trends section in Management Discussion and
Analysis.
Government Regulation. The manufacturing, packaging, processing, formulation,
labeling, advertising, distribution and sale of some of the Company's products
are subject to regulation by one or more governmental agencies, the most active
of which is the Food and Drug Administration ("FDA"), which regulates those
products under the Federal Food, Drug, and Cosmetic Act ("FDCA") and regulations
promulgated there under. These products are also subject to regulation by the
Federal Trade Commission ("FTC"), the Consumer Product Safety Commission
("CPSC"), the United States Department of Agriculture ("USDA") and the
Environmental Protection Agency ("EPA"). The Company's activities are also
regulated by various agencies of the states, localities and foreign countries to
which the Company distributes its products and in which the Company's products
are sold. The FDCA has been amended several times, including by the Nutrition
Labeling and Education Act of 1990 ("NLEA") and the Dietary Supplement Health
and Education Act of 1994 ("DSHEA"). The NLEA established a requirement for the
nutrition labeling of most foods including dietary supplements. The DSHEA
introduced a new statutory framework governing the composition and labeling of
dietary supplements.
The DSHEA provides a regulatory framework to ensure safe, quality, dietary
supplements and to foster the dissemination of accurate information about such
products. The DSHEA provides, in the Company's judgment, certain regulatory
benefits for the nutritional supplement industry. Products defined as dietary
supplements under the DSHEA are regulated similarly to food; so much of the
special regulatory clearance is eliminated. In addition, claims about how a
supplement affects the structure or function of the body may be made (although
any statement made must also state that the product is not intended to diagnose,
treat, cure or prevent any disease). Under DSHEA, the FDA is generally
prohibited from regulating the active ingredients in dietary supplements as food
additives or drugs unless product claims are made that a product may diagnose,
mitigate, treat, cure or prevent an illness, disease or malady, in which event
the FDA may attach drug status to a product. An FDA Rule effective February 7,
2001 defines the types of statements that can be made concerning the effect of a
dietary supplement on the structure or function of the body pursuant to DSHEA.
The Rule establishes criteria for determining when a statement is a claim to
diagnose, cure, mitigate, treat or prevent disease thereby making the product an
unapproved new drug. That Rule has not had any material effect on the Company's
existing products and the Company will comply with the provisions of the Rule
for any new products.
As part of its regulatory authority, the FDA may periodically conduct audits of
the physical facilities, machinery, processes and procedures that the Company
uses to manufacture products. The FDA may perform these audits at any time
without advance notice. As a result of these audits, the FDA may order the
Company to make certain changes in its manufacturing facilities and processes.
The Company may be required to make additional expenditures to comply with these
orders or possibly discontinue selling certain products until it complies with
these orders. As a result, the Company's business could be adversely affected.
In February 1997, the FDA issued a Proposed Rule entitled, "CGMP in
Manufacturing, Packing, or Holding Dietary Supplements," which proposes current,
good manufacturing practices (i.e., "CGMPs") specific to dietary supplements and
dietary supplement ingredients. This Proposed Rule, if finalized, would have
required some of the quality control provisions contained in the CGMPs for
drugs. On March 13, 2003, the FDA published a proposed rule in the Federal
Register which proposes comprehensive CGMPs for the manufacturing, packing and
holding of dietary supplements, to help reduce risks seen by the FDA that are
associated with adulterated or misbranded dietary supplement products. The FDA
accepted public comments on the proposed CGMPs until August 11, 2003; but the
FDA has not promulgated final CGMPs. The minimum standards include requirements
for the design and construction of physical plants that are intended to
facilitate maintenance, cleaning, and proper manufacturing operations, for
quality control procedures, for testing final product or incoming and in-process
materials, for handling consumer complaints, and for maintaining records.
On November 18, 1998, the FTC issued its "Dietary Supplements: An Advertising
Guide for Industry." Such guide provides an application of FTC law to dietary
supplement advertising and includes examples of how principles of advertisement
interpretation and substantiation apply in the context of dietary supplement
advertising. The Guide provides additional explanation but does not
substantively change the FTC's existing policy that all supplement marketers
have an obligation to ensure that claims are presented truthfully and to verify
the adequacy of the support behind such claims.
Page 3
The FTC, which exercises jurisdiction over the advertising of nutritional and
dietary supplements under the Federal Trade Commission Act, has in the past
several years instituted enforcement actions against several nutritional
supplement companies alleging false and misleading advertising of certain
products. These enforcement actions have resulted in the payment of fines and/or
consent decrees by certain of the companies involved. The FTC continues to
monitor advertising with respect to nutritional and dietary supplements. The
Company has not been the subject of any FTC inquiries or actions.
Research and Development Expenses. The Company has not expended a material
amount of its resources on research and development activities.
Costs and Expenses of Compliance with Environmental Laws. The Company does not
have any material amount of cost related to environmental regulations and the
Company does not expect to incur material expenses for that purpose in fiscal
year 2005.
Number of Employees. The approximate number of employees working for the Company
as of the end of fiscal year 2004 was 153.
Item 2. Description of Property.
The Company's headquarters are located in an office-warehouse building of
approximately 88,000 square feet located in Parker, Colorado, which the Company
leases from an affiliate of the Company's President. The property includes the
executive offices of the Company, as well as the Company's manufacturing and
warehouse facilities. The Company's lease expires in September 30, 2006, and the
Company believes that its rental rate is comparable to that which would be
charged by an unaffiliated landlord. (See "Certain Relationships and Related
Transactions")
Item 3. Legal Proceedings.
OraLabs, Inc. is a party to a legal proceeding that was brought in the Circuit
Court of the First Judicial District of Heinz County, Mississippi that was
served on the Company on February 26, 2004. The litigation was brought by
individuals who allege that a five-year-old child ingested a portion of a bottle
that allegedly was manufactured by OraLabs, Inc. for one of its products. The
product was not specified in the complaint. The complaint alleges that the minor
child suffered permanent injuries and damages as a result of the ingestion of
the portion of the bottle, and the plaintiffs claim compensatory damages in an
unstated amount and punitive damages in the amount of $1,925,000. OraLabs,
Inc.'s insurance company is tendering a defense. Punitive damages, however, are
not covered by the insurance policy. OraLabs, Inc. intends to vigorously defend
the suit and believes that it has no liability to the plaintiffs. OraLabs
further believes that even if liability is assessed against it, any compensatory
damages assessed will be covered by its insurance policy. The Company believes
that the possibility of any award of punitive damages against it is very remote.
However, if a significant uninsured judgment is awarded against OraLabs, Inc.,
it could put an extreme financial strain upon it.
The litigation commenced by OraLabs, Inc. against Molded Container Corp. dba The
Humphrey Line, previously disclosed by the Company, was amicably resolved by a
settlement agreement entered into by the parties. The claims of the parties
against each other were dismissed without prejudice and the dismissal will
automatically convert to a dismissal with prejudice upon compliance with certain
matters described in the settlement agreement. As part of the settlement,
OraLabs gave Molded Container Corporation a non-exclusive license under the
OraLabs' patents that were a subject of the litigation.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during the fourth quarter
of fiscal year 2004.
Page 4
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
(a) (i) Market Price of and Dividends on the Company's Common Stock. The common
stock of the Company trades on the NASDAQ Small Cap Market under the symbol
OLAB. The following sets forth the range of high and low bid information for the
Company's common stock for fiscal years 2003 and 2004. The source of such
information is as reported by NASDAQ. All of the following prices and numbers of
shares have been adjusted to give effect to the one-for-two reverse stock split
adopted by the Company on December 16, 2003.
Reported High Bid Reported Low Bid
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First quarter, fiscal 2003 $1.76 $1.16
Second quarter, fiscal 2003 $1.56 $1.04
Third quarter, fiscal 2003 $1.98 $1.06
Fourth quarter, fiscal 2003 $1.96 $1.50
First quarter, fiscal 2004 $2.80 $1.50
Second quarter, fiscal 2004 $2.28 $1.47
Third quarter, fiscal 2004 $2.03 $1.36
Fourth quarter, fiscal 2004 $5.20 $1.03
The quotations reflect inter-dealer prices, without adjustment for retail
mark-up, markdown or commission and may not necessarily present actual
transactions.
(ii) Disclosure of Equity Compensation Plans. The Company maintains the 1997
Stock Plan (the "ISOP Plan"), pursuant to which the Company granted 250,000
stock options to employees in 1997. The Company also maintains the 1997
Non-Employee Directors' Option Plan ("Director Plan") under which the Company
makes an initial grant of 10,000 options and annual grants thereafter of 2,500
options to its non-employee directors, subject to the provisions of the plan.
Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available
Plan Category exercise of outstanding for future issuance
outstanding options, warrants under equity
options, warrants and rights ($) compensation plans
and rights (#)
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Equity
compensation 105,400 $2.00 144,600
plans approved
by shareholders
Equity
compensation
plans not 42,500 $2.97 57,500
approved by
shareholders
Total 147,900 $2.15 202,100
(b) As of April 4, 2005, there were approximately 879 record holders of the
common stock of the Company.
(c) The Company has not paid any cash dividends and it is not intended that any
cash dividends will be paid in the foreseeable future.
Page 5
Item 6. Management's Discussion and Analysis or Plan of Operation.
Critical Accounting Policies
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and any associated
risks related to these policies on our business operations is discussed
throughout Management's Discussion and Analysis of Financial Condition and
Results of Operations where such policies affect our reported and expected
financial results.
In the ordinary course of business, we have made a number of estimates and
assumptions relating to the reporting of results of operations and financial
condition in the preparation of our financial statements in conformity with
accounting principles generally accepted in the United States of America. Actual
results could differ significantly from these estimates under different
assumptions and conditions. We believe that the following discussion addresses
our most critical accounting policies, which are those that are most important
to the portrayal of our financial condition and results of operations and
require our most difficult, subjective, and complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain.
Allowance for Doubtful Accounts
Although the Company believes that it has strict credit policies, it is not
unusual, in the normal course of business, for a customer to file for bankruptcy
or not pay for product purchased from the Company. The Company has estimated an
allowance based upon current balances and historical information which is
considered an operating expense. This estimate is subject to judgment and could
vary based on the customer mix in the future.
Allowance for Returns
Product is returned by customers for various reasons and the Company has
estimated an allowance based upon the historical rates of these returns. The
sales are recorded net of this allowance. This estimate is subject to judgment
as the historical mix of products sold could vary from the future mix of
products sold. In addition, the customer mix may change in the future.
Inventory obsolescence
As product mix shifts, the Company must identify any slow-moving and obsolete
inventory it may have on hand. This inventory is reduced to its net realizable
value based upon recent sales and similar transactions occurring in the open
market. This inventory value is an estimate that is subject to changes in the
open market such as demand and availability of product.
Results of Operations. For the period ending December 31, 2004 as compared with
the period ending December 31, 2003.
Product sales decreased $937,641. Please refer to the Trends section for a
detailed explanation.
Cost of goods sold decreased by $281,921. As a percentage of sales, gross profit
was 29.1% in 2004, a decrease of 2.7% from 2003. An increase in overhead of
$436,883 related to the new facility, an increase of freight costs of $162,133,
and an increase in labor of $135,000 were offset by a decrease in raw materials
costs of $1,025,433. The Company anticipates some efficiencies in manufacturing
due to improvements in automation and reduced labor costs in 2005.
Engineering increased $68,841 or 27 %. The increase is due to an increase in
costs related in large part to automation modifications for compatibility with
the new facility. The Company anticipates slightly lower costs in year 2005 to
that of year 2004.
Selling and marketing decreased $182,714 or 12%. Sales salaries increased by
$35,000 due to headcount addition. The Company expects sales compensation to
remain the same as a percentage of sales. Advertising increased by $74,000 as
the Company began advertising in trade publications to promote a new segment of
the business.. The Company plans to continue this approach. These increases were
offset by a decrease in bad debt expense. A portion of bad debts in year 2003,
in the amount of approximately $230,000, was related to receivables written off
in conjunction with the acquisition of assets.
Page 6
General and administrative expenses increased $470,372 or 18%. An increase in
salaries and related taxes and benefits of approximately $323,000 was largely
due to additional staffing. The Company anticipates a modest increase in
salaries in year 2005. Legal fees increased approximately $203,000 due in large
part to fees involving litigation issues and other corporate legal services. The
Company will have high legal fees in 2005 relating to the Definitive Agreement
discussed below in "Trends". Moving expenses decreased by $115,000 in 2004.
Other operating expenses decreased by $316,362, or 91%, which was primarily due
to approximately $308,000 loss on abandonment of leasehold improvements to the
two Englewood, CO facilities in 2003, one of which was vacated in 2003 and the
other vacated in February, 2004.
Interest and other income decreased $43,091. The decrease was due to state
income tax credits of approximately $108,000 received in year 2003 related to
prior periods. This was offset by a $87,000 increase in royalty income, and a
decrease in interest income of $22,596. The Company anticipates Interest and
other income will be significantly less in 2004 as royalty income and interest
income will decrease.
Other expenses decreased by $40,634 as approximately $69,000 was for costs
related to manufacturing, distribution and marketing in a foreign country in
2003. The Company does not anticipate significant Other expenses in year 2005,
but cannot guarantee against any unforeseen extraordinary events.
Net income decreased by $566,330 resulting in net loss of $565,108 for year 2004
as explained by the above activities.
Liquidity and Capital Resources.
At December 31, 2004, the Company had $866,431 of cash and a current ratio of
approximately 4 to 1. The Company believes its current capital resources are
sufficient to fund operations for the next twelve months.
Net cash used in operating activities was $653,378 consisting of the following
items:
Accounts Receivable, net of Allowance for doubtful accounts, decreased $620,852.
Receivables decreased $691,096 due to increased collections and write-offs of
uncollectible accounts, while allowances were decreased $70,244. The Company
believes there are adequate allowances given the more than 1,007 active
customers and only two customers with over 10% of the revenues, that being 15%
and 11%. (See, "Allowance for Doubtful Accounts" above).
Inventory increased $456,601 as the Company carried approximately $273,917 more
of work in process; approximately $107,626 more in cost of overhead due in large
part to expanded facilities; and approximately $114,209 for cost of labor
allocated to inventory. The Company anticipates inventory levels to remain near
year-end numbers.
Income tax receivable increased $86,660 due to $194,168 of current year loss
carried back against taxable income offset by other refunds received and
receivable.
Deferred tax liability and asset increased $303,772. Deferred tax liability
long-term increased $14,915; Deferred tax asset long-term increased $101,862;
and Deferred tax asset - current decreased $216,825. This is attributed to
timing differences in the treatment of deductions for book verses tax income and
net operating losses that will be carried forward and taken against future
taxable income.
Prepaid expenses and Deposits increased $161,866 substantially as the result of
a larger deposit on production materials being produced abroad specifically for
the Company by a third party manufacturer, as well as a prepaid expense for
payment and implementation of the companies new software. The Company
anticipates a drop in Prepaid expenses in 2005 when the software implementation
is capitalized.
Accounts payable decreased $195,109. This is due to more timely payment of
invoices as well as an improvement in raw material planning and purchasing
procedures eliminating excess inventory.
Reserve for returns decreased $34,077.consistent with the decrease in sales from
2003 to 2004. The reserve for returns is calculated as a percentage of sales
with consideration to historical returns. As sales were flat, and the additional
reserve notwithstanding, the reserve remained the same. Should the Company
experience growth in sales during year 2005 then this reserve will grow
proportionately. (See, "Allowance for Returns" above).
Net cash used in investing activities was $1,194,484 consisting of investments
in property and equipment of $1,191,079. During 2004, the Company invested in
many capital projects to increase automation in the plant.
Page 7
Trends. The lip balm category, which was approximately 80% of revenues in both
years 2004 and 2003, decreased in 2004. Revenues in 2004 were $10,569,614 as
compared to $11,274,552 in year 2003, a 6% decrease. Collectively the volume of
units sold and customer base decreased in 2004 primarily as the result of two
major customers buying at a significantly reduced level. We expect 2005 with
these customers to be in the range of 2004. In 2005, the Company will through
its normal sales process attempt to increase its lip balm business, however,
there are no assurances that any increase will happen. The Company hopes to
implement some cost cutting strategies to reduce its operating cost and to
increase its gross margins. This includes product line trimming and a narrower
focus on what the Company sells.
The sour drops and breath fresheners revenues were $2,166,262 in year 2004
compared to $2,211,111 in year 2003, or a 2% decrease. The decrease is not
significant and sales should remain stable through 2005.
The nutritional supplement revenues, on a relatively smaller scale, were down to
$414,594 in 2004 as compared to $582,557 in 2003, or a 29% decrease. The Company
has been unable to develop additional customers for these products. Therefore,
the Company anticipates these revenues will stay substantially the same.
The international business revenues were $918,104 in 2004 as compared to
$870,175 in 2003, a 6% increase. This compares favorably to the 30% decrease in
2003. Although this business represents less than 10% of the Company's revenues
it is still considered important to the overall success of the Company. Sales to
certain countries significantly decreased in 2004, but were favorably offset by
a spread of increased sales in numerous others. In 2004, the Company abandoned
its manufacturing plans in South America. In 2005, the Company anticipates
continued sales to its major international customers with hopes of expanding its
distribution to new markets.
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 3%) of revenues in a
category that is on a downward trend and could be negatively impacted by
inflation.
As previously announced by the Company in its Form 8-K filed on February 23,
2005, OraLabs entered into a Definitive Agreement with NVC Lighting Investment
Holdings Limited under which OraLabs will acquire NVC and convey its ownership
of OraLabs, Inc. to OraLabs' President, Gary H. Schlatter. Control of the
Company would change from Mr. Schlatter to the owners of NVC. Closing under the
Definitive Agreement is conditioned upon many requirements and there can be no
assurance that the closing will occur. If the parties do not otherwise terminate
the Definitive Agreement, then OraLabs, in anticipation of a meeting of its
shareholders called to approve the transactions, will file with the Securities
and Exchange Commission a Proxy Statement that will include more detailed
information about the Definitive Agreement and the proposed transactions.
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, 2004, are forward-looking statements and involve various risks and
uncertainties, many of which are beyond the control of the Company, and any one
of which, or a combination of which, could materially reflect the results of the
Company's operations and whether forward-looking statements made by the Company
ultimately prove to be accurate.
The following discussion outlines certain risk factors that in the future could
affect the Company's results and cause them to differ materially from those that
may be set forth in any forward-looking statement made by or on behalf of the
Company. The Company cautions the reader, however, that this list of risk
factors and others discussed elsewhere in this report may not be exhaustive.
Page 8
NASDAQ Listing. Although the Company believes that it has been in compliance
with requirements for continued listing since it enacted a 1 for 2 reverse stock
split in December, 2003, the Company can give no assurance that it will continue
to meet the requirements for continued listing of its common stock on the NASDAQ
SmallCap Market.
Competition. The businesses in which the Company is engaged are highly
competitive and are engaged in to a large extent by companies which are
substantially larger and have significantly greater resources than the Company.
Although the Company believes that its branded products have achieved some
measure of name recognition, to a large extent the Company does not have the
capital resources, marketing and distribution networks, manufacturing
facilities, personnel, product name recognition or advertising budget of the
larger companies. If the Company were to be forced out of the large mass
retailers by larger, better financed competitors, it would be reliant on smaller
niche markets that the larger, better financed competitors are not interested
in. The same situation applies to international business, where there are larger
more dominant competitors that the Company must always deal with. The industries
in which the Company competes in experience consolidations of competitors from
time to time and the Company's business could be adversely affected by such
activities. There can be no assurance that the Company will be able to compete
successfully in the future. To respond to competition the Company created added
value packaging for promotions that resulted in increased cost of goods sold.
There is an increased effort by all competitors for shelf and counter space and
the cost of product placement is increasing. There is no assurance that the
Company will be able to maintain its shelf and counter presence in the future.
Managing Manufacturing Requirements. The Company has done several things to
position itself for stability in 2005, which the Company hopes will help it
return to profitability. In positioning for stability and profitability, the
Company has made changes to management, customer service, manufacturing, and
sales and administrative personnel. These changes have come at costs that have
put the Company in an unprofitable position for 2004.The Company has been in its
new facility since February of 2004. The extra space has helped to allow the
company to more efficiently process its orders. However the associated costs
with the new facility have not yet been offset by increased sales or
efficiencies. The Company plans to reduce its product offerings in order that it
will be able to lower its cost to produce fewer product offerings. The Company
hopes to be able to return to a state of profitability. However there are no
assurances that it will. The added overhead from the new facility was a partial
contributor to the loss in 2004.
The Company experienced a period of significant growth during fiscal years ended
December 31, 1996 and 1997. Significant growth did not occur in fiscal year
1998, but it occurred again in 1999, 2000, 2001. The Company did not experience
growth in 2002, 2003 or 2004. The volume of manufacturing has been similar for
the past four years. The Company has had opportunities to grow its business but
has not done so, in part, because of capacity issues in manufacturing. In
addition, the loss of a significant number of customers, or a significant
reduction in purchase volume by or financial difficulty of such customers, for
any reason, could have a material adverse effect on the Company. Successful
management of growth, if it occurs, will require the Company to improve its
financial controls, operating procedures and management information systems, and
to train, motivate and manage its employees.
Product Liability Insurance. Because the Company manufactures and sells certain
products designed to be ingested, it faces the risk that materials used for the
final products may be contaminated with substances that may cause sickness or
other injury to persons who have used the products. Although the Company
maintains standards designed to prevent such events, certain portions of the
process of product development, including the production, harvesting, storage
and transportation of raw materials, along with the handling, transportation and
storage of finished products delivered to consumers, are not within the control
of the Company. Furthermore, sickness or injury to persons may occur if products
manufactured by the Company are ingested in dosages which exceed the dosage
recommended on the product label or are otherwise misused. The Company cannot
control misuse of its products by consumers or the marketing, distribution and
resale of its products by its customers. With respect to product liability
claims in the United States, the Company has $2 million per occurrence and $2
million in aggregate liability insurance. However, there can be no assurance
that such insurance will continue to be available, or if available, will be
adequate to cover potential liabilities. The Company generally does not obtain
contractual indemnification from parties supplying raw materials or marketing
its products and, in any event, any such indemnification is limited by its terms
and, as a practical matter, to the creditworthiness of the indemnifying party.
Page 9
Dependence on Key Personnel. The Company's future success depends in large part
on the continued service of its key personnel. In particular, the loss of the
services of Gary Schlatter, its President and Chief Executive Officer, could
have a material adverse effect on the operations of the Company. The Company's
subsidiary has an employment agreement with Mr. Schlatter which expires on April
30, 2006, but it is expected to be extended. The Company's future success and
growth also depends on its ability to continue to attract, motivate and retain
highly qualified employees. There can be no assurance that the Company will be
able to do so.
Government Regulation. The manufacturing, processing, formulation, packaging,
labeling and advertising of some of the Company's products are subject to
regulation by one or more federal agencies and under various laws (see
Description of Business-Government Regulation above). There can be no assurance
that the scope of such regulations will not change or otherwise cause an
increase in the expenses and resources of the Company which must be applied to
complying with such regulations. As an example, the Company's sun-block lip
balms are regulated by the FDA. If the FDA were to conclude that any of the
Company's products violate FDA rules or regulations, the FDA may seek to
restrict or remove such products from the market. Such action may be taken
against the Company and any entity which manufactures products for the Company.
As an additional example, regulations concerning good manufacturing practices
with respect to OTC drugs and nutritional supplements do have an adverse impact
upon the cost or methods of producing the products. It is anticipated that new
labeling laws currently pending will result in increased costs, in order to be
in compliance.
The Company's business is also regulated by various agencies of the states and
localities in which the Company's products are sold and governmental regulations
in foreign countries where the Company sells or may seek to commence sales. Such
regulations could prevent or delay entry into a market or prevent or delay the
introduction of Company products. For example, international sales are expected
to be slowed by the long process of registering new products.
The Company may be subject to additional laws or regulations administered by the
FDA or other federal, state or foreign regulatory authorities, the repeal or
amendment of laws or regulations or more stringent interpretations of current
laws or regulations, from time to time in the future. The Company is unable to
predict the nature of such future laws, regulations, interpretations or
applications, nor can it predict what effect additional governmental regulations
or administrative orders, when and if promulgated, would have on its business in
the future. They could, however, require reformulation of certain products to
meet new standards, recall or discontinuance of certain products not able to be
reformulated, imposition of additional record keeping requirements, expanded
documentation of the properties of certain products, expanded or different
labeling and scientific substantiation regarding ingredients, product claims,
safety or efficacy. Failure to comply with applicable FDA requirements could
result in sanctions being imposed on the Company or the manufacturers of its
products, including, warning letters, fines, product recalls and seizures. Any
or all such requirements could have a material adverse effect on the Company's
results of operations and financial condition.
Dependence upon Significant Distributors and Retailers. The Company had two
major customers that accounted for approximately $1,950,000 and $1,400,000
respectively, or 15% and 11% of net sales during the year ended December 31,
2004. The Company had over 1,000 purchasing customers in fiscal 2004 and
believes that the loss of revenues from any customer could gradually be
replaced, but there could be adverse effects upon the Company's business until
those revenues are replaced. The Company is always at risk for its customers
filing for bankruptcy or liquidation. This has happened in the past and could
happen again in the future.
Dependence upon Third Party Suppliers. With respect to some of the Company's
products, the product itself is formulated and supplied to the Company by third
party vendors, and the Company then packages the products for sale. For other
products, the Company provides some or all of the raw materials and a third
party completes preparation of the product and/or its packaging. Should these
relationships terminate, or should these parties be otherwise unable to perform
their obligations on terms satisfactory to the Company, the Company would be
required to establish relationships with substitute parties. Although the
Company believes that it can do so and that raw materials are available at
comparable prices from several suppliers, there can be no assurance that this
will be the case, in which case there could be a material adverse effect upon
the Company.
Page 10
No Assurance of Proprietary Protection. The Company owns numerous patents. The
Company also holds several domestic and international trademarks and has several
applications pending. Certain aspects of the Company's business, although not
the subject of patents, include formulations and processes considered to be
proprietary in nature. There can be no assurance that any such "proprietary"
information will not be appropriated or that the Company's competitors will not
independently develop products that are substantially equivalent or superior to
the Company's. Even if the pending trademark registrations are issued to the
Company, there can be no assurance that the Company would be able to
successfully defend its patents or trademarks against claims from or use by
competitors, and there can be no assurance that the Company will be able to
obtain patent or trademark protection for any new products. In addition, in the
event that any of the Company's products are determined to infringe upon the
patents or proprietary rights of others, the Company could be required to modify
its products or obtain licenses for the manufacture or sale of the products, or
could be prohibited from selling the products.
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 an adverse
effect upon the sales of the products. In addition, the nutritional supplement
industry has been known to experience radical ups and downs of certain product
sales in a short period of time which could adversely affect the Company's sales
or inventory positions. Sometimes these cycles are the result of studies or the
media creating a positive or negative impact on the industry and the public at
large.
Limited Distribution for Nutritional Supplement Products. The Company began
selling its nutritional supplement products in 1998. The nutritional supplement
industry is influenced by products that become popular due to changing consumer
tastes and media attention. The Company is competing against much larger and
better established manufacturers in this business than in the Company's primary
business. The Company does not expect its sales of nutritional products to
significantly change.
Item 7. Financial Statements.
Financial Statements meeting the requirements specified in Item 7 of Form 10-KSB
follow the signature page and are listed in Item 13 of this Annual Report on
Form 10-KSB.
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure. None.
Item 8A. Controls and Procedures. Control deficiencies have been identified by
management in consultation with Ehrhardt Keefe Steiner & Hottman PC, the
Company's independent auditors. Certain matters involving internal control
deficiencies considered to be a material weakness and reportable conditions
under standards established by the American Institute of Certified Public
Accountants have been reported to the audit committee of the board of directors.
The material weakness relates to adjustments made by the auditors in order for
inventory to be properly stated. The reportable conditions include conditions
surrounding the following: financial reporting, and lack of oversight over the
accounting processes.
The Company has hired a CPA with experience in the manufacturing industry and
implemented a widely used, mid-sized business accounting and inventory system to
address its control deficiencies. The benefits of implementation of the new
software along with training staff on the Company's new systems had not been
fully realized at the end of 2004. As a result some of the Companies
deficiencies were still present at the end of 2004. Management believes that the
aforementioned deficiencies will be corrected during 2005.
Evaluation of Disclosure Controls and Procedures. The Company's Chief Executive
Officer and its Chief Financial Officer, after evaluating the effectiveness of
the Company's disclosure controls and procedures (as defined in the Securities
Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c) as of a date within 90 days
of the filing date of this annual report on Form 10-KSB (the "Evaluation
Date")), have concluded that as of the Evaluation Date, and except as provided
above, the Company's disclosure controls and procedures were adequate and
effective to ensure that material information relating to the Company and its
consolidated subsidiaries would be made known to them by others within those
entities, particularly during the period in which this annual report on Form
10-KSB was being prepared.
Our external auditors have not issued an attestation report on management's
assessment of the Company's internal control over financial reporting, as it is
not required for the Company at this time.
Page 11
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
The following table identifies each of the Company's directors and executive
officers:
Year First
Elected to
Board of
Name Age Positions with the Company Directors
---- ---- -------------------------- ---------
Gary H. Schlatter(2)........48 Chief Executive Officer, President, 1997
Treasurer, Director
Allen R. Goldstone..........52 Director 1997
Michael I. Friess...........55 Director(1), Secretary 1997
Robert C. Gust..............48 Director(1) 2000
Emile J. Jordan.............46 Chief Financial Officer
__________________
(1) Audit Committee member
(2) See "Certain Relationships and Related Transactions" below.
Mr. Schlatter and Mr. Goldstone were elected to their positions in May 1997
upon consummation of the transaction by which the Company's subsidiary, OraLabs,
Inc., was acquired by SSI Capital Corp. (the Company's predecessor). Mr. Friess
was appointed as a Director on September 8, 1997 and Mr. Gust was elected as a
director on May 26, 2000. All directors serve as such until their successors are
elected and qualified. No family relationship exists among the Directors or
between any of such persons and the Executive Officers of the Company. Mr.
Goldstone resigned from the Board on August 24, 1999 and was reappointed to the
Board on December 30, 1999.
Gary H. Schlatter is the founder (in 1990) of the Company's subsidiary,
OraLabs, Inc., and has served as the President, Chief Executive Officer,
Treasurer and Secretary of the subsidiary since that time. He also serves in the
positions listed in the above table with respect to the Company. Mr. Schlatter
holds his offices (other than the position of director) pursuant to an
employment agreement (see, "Executive Compensation").
Michael Friess is a self-employed attorney licensed to practice law in the
State of Colorado. He was a partner from January 1983 to December 1993 in the
New York City law firm of Schulte, Roth & Zabel, where his practice emphasized
taxation.
Allen R. Goldstone is the managing member of Creative Business, LLC, a
company that is engaged in business consultation, and he has held that position
since 1998 (and prior thereto he was and still serves as president of Creative
Business Strategies, Inc., another business consulting firm). Mr. Goldstone has
also served as a management consultant since 1988. For calendar year 1997, Mr.
Goldstone was an employee of the Company's subsidiary, in which capacity he was
in charge of investor relations.
Robert C. Gust is the co-founder (January 2002) and Partner of Apogee
Group, a business brokerage and consulting firm. From April 1997 to December
2001, Mr. Gust was co-founder and Senior Vice-President of Business Development
for Protocol Communications, Inc., a Massachusetts company engaged in the
business of owning and operating integrated marketing services companies. From
June 1993 until the formation of Protocol Communications, Inc., Mr. Gust was
Vice-President of Sales (North America) for Indigo America.
Emile J. Jordan has served as the Comptroller of the Company since May
1997. He has served as Comptroller of the subsidiary, OraLabs, Inc. on a full
time basis since April 1, 1994. Mr. Jordan is the Chief Financial Officer of the
Company. Mr. Jordan was elected to his position by the Board of Directors of the
Company and holds his office at the discretion of the Board of Directors or
until his earlier death or resignation.
Additional information with respect to the Board of Directors.
The Company has a standing Audit Committee consisting of Michael I. Friess and
Robert C. Gust. The Audit Committee reviews the consolidated financial
statements and independent auditors' report, including recommendations from the
independent auditors regarding internal controls and other matters. The Audit
Committee held one meeting during fiscal year 2004 to discuss the financial
statements to be part of the Company's Form 10-KSB for fiscal year 2003, and
held one meeting with the Company's independent auditors with respect to the
Company's Annual Report on Form 10-KSB for fiscal year 2004. The meetings were
held by telephone conference call.
Page 12
The Board of Directors adopted a revised written charter for the Audit Committee
in March 2004, which was attached as Appendix A to the Company's Proxy Statement
filed on April 20, 2004.
During the fiscal year ended December 31, 2004, the Board of Directors did not
meet in person but met three times by telephone conference, and each Director
participated in the meeting. The Board also took action on numerous occasions
without a formal meeting.
Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Securities and Exchange Commission requires our directors,
executive officers and holders of more than 10% of our common stock to file with
the Securities and Exchange Commission reports regarding their ownership and
changes in ownership of our securities. The Company believes that during fiscal
year 2004, its directors, executive officers and 10% owners complied with all
Section 16(a) filing requirements with the following exceptions: directors
Friess, Goldstone and Gust each filed a late report with respect to options
awarded to each of them in June 2004 under the Company's 1997 Non-employee
Directors Option Plan.
Code of Ethics. Our Board of Directors adopted a code of ethics that applies to
our Principal Executive Officer, Gary H. Schlatter, and our Principal Financial
Officer, Emile Jordan. Both of these individuals signed an acknowledgement of
his receipt of our code of ethics. We are filing a copy of our code of ethics
with the Securities and Exchange Commission by including it as Exhibit 14.1 to
this report.
Item 10. Executive Compensation.
The following table sets forth information regarding compensation for services
rendered, in all capacities, awarded or paid to or earned by the Chief Executive
Officer of the Company during the last three fiscal years and earned by Emile
Jordan in fiscal year 2004. No other executive officer of the Company received a
total annual salary and bonus in excess of $100,000 during any of the last three
fiscal years.
Summary Compensation Table
Annual Compensation Long Term Compensation
Name and ------------------- ----------------------
Principal Position Year Salary ($) Bonuses ($) Other ($) Other Shares Underlying Options
------------------ ------ ----------- ------------ ---------- --------- -------------------------
Gary H. Schlatter, CEO 2004 393,105(1) 0 22,699(3) 0 30,500(1)
2003 370,346(1) 0 22,339(3) 0 30,500(1)
2002 335,468(1) 0 27,009(2) 0 30,500(1)
Emile Jordan, CFO 2004 109,400 0 0 0 25,500
(1) Includes 30,500 shares underlying 30,500 options granted in the fiscal year
ended December 31, 1997 to Mr. Schlatter's spouse, an employee of the
Company, under the Company's 1997 Stock Plan and a $10,000 annual salary to
the spouse. Beneficial ownership of such securities and spouse's salary is
disclaimed by Mr. Schlatter.
(2) Includes expenses for automobiles and related insurance and other
automobile expenses, as well as payments made to a company owned by Mr.
Schlatter for computer equipment and furniture.
(3) Includes expenses for automobiles and related insurance and other
automobile expenses.
Standard Compensation Arrangements for Directors
The directors other than Mr. Schlatter are compensated monthly for services
provided as directors. Currently, all three non-employee directors receive
$2,000 monthly as director's fees. The Company may modify those arrangements at
any time. There were no other arrangements pursuant to which any director of the
Company was compensated during the past fiscal year for any service provided as
a director. However, the Company has a Non-Employee Director Stock Option Plan
under which directors who are not employees are granted (at the time of initial
election or appointment to the Board) 10,000 options to purchase common stock
and are thereafter granted 2,500 options annually so long as they continue to
serve as non-employee directors. All of the options are exercisable at the
market price of the common stock at the time of grant and vest proportionately
over a four year period.
Agreements with Executive Officers
The only employment contract between the Company and any executive officer of
the Company who received total salary and bonus during fiscal year 2004 in
excess of $100,000 is an Amended and Restated Employment Agreement with Gary H.
Schlatter. Except for that Agreement as described below, the Company has not
entered into any compensatory arrangement pursuant to which any executive
officer of the Company will receive payment from the Company as a result of the
executive officer's resignation, retirement or termination of employment or as a
result of a change in control of the Company. There is no employment contract
between the Company and Emile J. Jordan.
Page 13
Effective May 1, 2003, the Company's subsidiary, OraLabs, Inc., entered into an
Amended and Restated Employment Agreement ("Employment Agreement") with Gary
Schlatter. The Employment Agreement extended the term of Mr. Schlatter's
employment through April 30, 2006, unless terminated earlier pursuant to the
provisions of the Employment Agreement. Under the Employment Agreement, Mr.
Schlatter agrees to devote such time and attention to the business of OraLabs,
Inc. as may be required to fulfill his duties, which is expected to require a
substantial amount of his working time.
Under the Employment Agreement, Mr. Schlatter is paid a base salary of $392,645
per year for the first twelve (12) months, $431,909 per year for the next twelve
(12) months, and $475,100 for the final twelve (12) months. Bonus compensation
is payable to Mr. Schlatter as may be determined by the Board of Directors in
its discretion. Mr. Schlatter also is paid or reimbursed for lease and insurance
expenses for automobile and cellular telephone expenses. Under the Employment
Agreement, Mr. Schlatter has agreed that during its term and for a period of one
(1) year thereafter, he will not participate in any business competitive to that
of the business of OraLabs, Inc., except with respect to limited passive
investments, and that he will never disclose or utilize any trade secrets or
proprietary information of OraLabs, Inc. except within the scope of his
employment.
Under specified circumstances involving a change in control, Mr. Schlatter may
terminate the Employment Agreement and receive a lump sum payment equal to all
of the compensation to which he otherwise would have been entitled had the
Employment Agreement remained in effect for its entire term.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of April 4, 2005, information regarding
the beneficial ownership of Common Stock (i) by each Director,(ii) by each
Executive Officer listed in the Summary Compensation table below, (iii) by all
Directors and current Executive Officers as a group (five persons), and (iv) by
each person or group known by the Company to own beneficially in excess of five
percent (5%) of the Common Stock):
Name and Address Amount and Nature of
of Beneficial Owner(6) Beneficial Ownership Percent of Class
---------------------- -------------------- ----------------
Gary H. Schlatter 3,729,350 shares(1) 78.21%(1)
18685 East Plaza Drive
Parker, Colorado 80134
Allen R. Goldstone 36,250 shares(2) *
5353 Manhattan Circle
Suite 101
Boulder, Colorado 80303
Michael I. Friess 8,750 shares(3) *
5353 Manhattan Circle
Suite 101
Boulder, Colorado 80303
Robert C. Gust 24,750 shares(4) *
7N551 Cloverfield Circle
St. Charles, IL 60175
Emile Jordan 25,500 shares(5) *
18685 East Plaza Drive
Parker, CO 80134
All directors and executive 3,824,600 shares(1),(2),(3),(4),(5) 79.26%
officers as a group
(five persons)
* Less than one percent
__________________
(1) Includes 100,000 shares held by The Schlatter Family Partnership, of which
Gary H. Schlatter and his spouse are the general partners. Mr. Schlatter's
spouse may be deemed the beneficial owner of some or all of the shares.
Does not include 30,500 shares that Mr. Schlatter's spouse, an employee of
the Company, has the right to acquire on April 4, 2005, or within sixty
(60) days thereafter, pursuant to outstanding options.
(2) Includes 3,750 shares that he has the right to acquire on April 4, 2005, or
within sixty (60) days thereafter, pursuant to outstanding options.
(3) Includes 6,250 shares that he has the right to acquire on April 4, 2005 or
within sixty (60) days thereafter, pursuant to outstanding options.
(4) Includes 13,750 shares that he has the right to acquire on April 4, 2005 or
within sixty (60) days thereafter, pursuant to outstanding options.
(5) Includes 25,500 shares that he has the right to acquire on April 4, 2005 or
within sixty (60) days thereafter, pursuant to outstanding options.
(6) Unless otherwise noted, the stockholders identified in this table have sole
voting and investment power. The sole person known to the Company to be the
beneficial owner of more than five percent (5%) of the class of outstanding
stock is Gary H. Schlatter, whose address is c/o OraLabs Holding Corp.,
18685 East Plaza Drive, Parker, Colorado 80134.
Page 14
Change in Control.
As previously announced by the Company in its Form 8-K filed on February 23,
2005, OraLabs entered into a Definitive Agreement with NVC Lighting Investment
Holdings Limited under which OraLabs will acquire NVC and convey its ownership
of OraLabs, Inc. to OraLabs' President, Gary H. Schlatter. Control of the
Company would change from Mr. Schlatter to the owners of NVC. Closing under the
Definitive Agreement is conditioned upon many requirements and there can be no
assurance that the closing will occur. If the parties do not otherwise terminate
the Definitive Agreement, then OraLabs, in anticipation of a meeting of its
shareholders called to approve the transactions, will file with the Securities
and Exchange Commission a Proxy Statement that will include more detailed
information about the Definitive Agreement and the proposed transactions.
Item 12. Certain Relationships and Related Transactions.
Gary H. Schlatter, through an affiliated entity, is the owner of the property
leased by OraLabs (the Company's subsidiary) that serves as the Company's
headquarters, manufacturing facility and warehouse facility. The lease expires
on September 30, 2006. Prior to the Company's relocation in 2004, Mr. Schlatter
individually and an affiliated entity respectively leased the two facilities
from which the Company conducted its business. Total rent paid by the Company
for rent of those facilities in 2004 was $83,690. Rent paid to Mr. Schlatter's
affiliated entity in 2004 after the relocation was $446,088. The Company
believes that its rental rate is comparable to that which would be paid to
unaffiliated parties, and the Company believes that if the leases were not to be
renewed, the Company could obtain alternative space.
Item 13. Exhibits and Reports on Form 8-K.
(a) The following documents are filed as a part of this Form 10-KSB immediately
following the signature pages:
1. Consolidated Financial Statements (OraLabs Holding Corp. and Consolidated
Subsidiaries):
Independent Auditors' Report
Consolidated Balance Sheet - December 31, 2004
Consolidated Statements of Operations for the years
ended December 31, 2004 and December 31, 2003
Consolidated Statement of Stockholders' Equity from
December 31, 2002 through December 31, 2004
Consolidated Statements of Cash Flows for the years
ended December 31, 2004 and 2003
Notes to Consolidated Financial Statements
2. Exhibits required to be filed are listed below:
Certain of the following exhibits are hereby incorporated by reference pursuant
to Rule 12(b)-32 as promulgated under the Securities and Exchange Act of 1934,
as amended, from the reports noted below:
Exhibit
No. Description
--- -----------
3.1(i)(1) Articles of Incorporation
3.1(ii)(2) Amended and Restated Bylaws
3.1(ii)(4) Second Amended and Restated Bylaws
4(2) Specimen Certificate for Common Stock
10.1(2) 1997 Stock Plan
10.2(2) 1997 Non-Employee Directors' Option Plan
10.3(3) Amended and Restated Employment Agreement Between the
Company's Subsidiary and Gary Schlatter
10.4(2) Stock Option Grant under 1997 Non-Employee Directors' Option Plan
10.5(i)(5) Business Lease Between the Company's Subsidiary and Gary
Schlatter (September 1, 2000)
10.5(iii)(8) Amended Business Lease between the Company's Subsidiary
and 2780 South Raritan, LLC effective October 15, 2000.
10.5(iv)(9) Lease Between the Company's Subsidiary and 18501 East Plaza Drive,
LLC dated September 4, 2003
10.9(7) Agreement (effective May 1, 2000, amending the Employment
Agreement listed above as Exhibit 10.3).
10.10(10) Amended and Restated Employment Agreement Between the
Company's Subsidiary and Gary Schlatter dated May 1, 2003
10.11(11) Stock Exchange Agreement between the Company, NVC Lighting
Investment Holdings Limited and others dated February 23, 2005
11 No statement re: computation of per share earnings is
computation can be clearly
determined from the material contained in this Annual Report on
Form 10-KSB.
14.1(12) Code of Ethics
21(2) List of Subsidiaries of the Company
23.1(12) Consent of Independent Public Accountants (Ehrhardt Keefe Steiner &
Hottman P.C.)
31.1(12) Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002
31.2(12) Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002
32.1(12) Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002
32.2(12) Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002
Page 15
(1) Incorporated herein by reference to Exhibit C of the Definitive Information
Statement filed by the Company's predecessor, SSI Capital Corp., on July
24, 1997.
(2) Incorporated herein by reference to the Company's Form 10-K filed for
fiscal year 1997.
(3) Incorporated herein by reference to Exhibit B of the Form 8-K filed by the
Company's predecessor, SSI Capital Corp., on May 14, 1997.
(4) Incorporated herein by reference to the Company's Form 10-KSB filed for
fiscal year 1998.
(5) Incorporated herein by reference to the Company's Form 10-QSB filed for the
quarter ended September 30, 2000.
(6) N/A
(7) Incorporated herein by reference to the Company's Form 10-QSB filed for the
quarter ended March 31, 2000.
(8) Incorporated herein by reference to the Company's Form 10-KSB filed for
fiscal year 2000.
(9) Incorporated herein by reference to the Company's Form 10-QSB filed for the
quarter ended September 30, 2003.
(10) Incorporated herein by reference to the Company's Form 10-QSB filed for the
quarter ended June 30, 2003.
(11) Incorporated herein by reference to the Company's Form 8-K filed February
24, 2005.
(12) Filed herewith.
Item 14. Principal Accountant Fees and Services.
The following table presents fees for professional audit services rendered by
Ehrhardt Keefe Steiner & Hottman P.C. ("EKS&H") for the audit of our annual
financial statements for the years ended December 31, 2004 and December 31,
2003, and the reviews of the financial statements included in each of our
quarterly reports on Form 10-QSB during the fiscal years ended December 31, 2004
and 2003:
2004 2003
Audit Fees $65,500 $62,000
Audit-Related Fees $0 $0
Tax Fees $0 $0
All Other Fees $0 $0
Audit Fees are fees incurred in connection with the audit of the Company's
consolidated annual financial statements and the review of financial statements
in the Company's quarterly reports on Form 10-QSB. All Other Fees are incurred
for services other than those described above. The Audit Committee will
pre-approve the performance by EKS&H of any services other than those relating
to the audit or review of the Company's financial statements, but no other
services are anticipated at this time.
Page 16
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, 2005
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, 2005
------------------------ Chief Executive Officer
Gary H. Schlatter
/s/ Michael I. Friess Director, Secretary April 15, 2005
------------------------
Michael I. Friess
/s/ Allen R. Goldstone Director April 15, 2005
------------------------
Allen R. Goldstone
/s/ Robert C. Gust Director April 15, 2005
------------------------
Robert C. Gust
Page 17
Consolidated Financial Statements And Independent Auditors' Report
December 31, 2004
ORALABS HOLDING CORP. AND SUBSIDIARIES
Table of Contents
Page
----
Report of Independent Registered Public Accounting Firm.......................1
Consolidated Financial Statements
Consolidated Balance Sheet................................................2
Consolidated Statements of Income.........................................3
Consolidated Statement of Changes in Stockholders' Equity.................4
Consolidated Statements of Cash Flows.....................................5
Notes to Consolidated Financial Statements.................................6-14
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
OraLabs Holding Corp.
Parker, Colorado
We have audited the consolidated balance sheets of Company, Inc. and
Subsidiaries as of December 31, 2004 and the consolidated statements of
operations, changes in stockholders' equity and cash flows for the years ended
December 31, 2004 and 2003. 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 standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
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 condition of OraLabs Holding
Corp. and Subsidiaries, as of December 31, 2004 and the results of their
operations and their cash flows for the years ended December 31, 2004 and 2003,
in conformity with accounting principles generally accepted in the United States
of America.
Ehrhardt Keefe Steiner & Hottman PC
April 8, 2005
Denver, Colorado
1
ORALABS HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 2004
Assets
Current assets
Cash $ 866,432
Accounts receivable, net of allowance for doubtful
accounts of $345,177 1,275,820
Inventories 2,878,755
Deferred tax asset - current 285,117
Income taxes receivable 329,648
Prepaid expenses 264,451
Deposits and other assets 158,720
------------
Total current assets 6,058,943
------------
Non-current assets
Deferred tax asset- long-term 101,862
Property and equipment, net 1,668,675
------------
Total non-current assets 1,770,537
------------
Total assets $ 7,829,480
============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable - trade $ 850,157
Accrued liabilities 131,812
Reserve for returns 362,342
Current portion of long-term debt 12,581
------------
Total current liabilities 1,356,892
------------
Non-current liabilities
Long-term debt, less current portion 12,075
Deferred tax liability long-term 56,526
------------
Total non-current liabilities 68,601
------------
Commitments and contingencies
Stockholders' equity
Preferred stock, $.001 par value, 1,000,000 authorized;
none issued and outstanding -
Common stock, $.001 par value; 25,000,000 shares
authorized; 4,668,615 issued and 4,580,615 outstanding (2004)
and 4,580,615 issued and outstanding (2003) 4,669
Additional paid-in capital 1,463,044
Retained earnings 4,936,274
------------
Total stockholders' equity 6,403,987
------------
Total liabilities and stockholders' equity $ 7,829,480
============
See notes to consolidated financial statements.
2
ORALABS HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended
December 31,
2004 2003
------------- -------------
Product sales $ 13,130,579 $ 14,068,220
Cost of goods sold 9,315,940 9,597,861
------------- -------------
Gross profit 3,814,639 4,470,359
------------- -------------
Operating expenses
Engineering 319,828 250,987
Selling and marketing 1,325,935 1,508,649
General and administrative 3,047,940 2,577,568
Other 32,218 348,580
------------- -------------
Total operating expenses 4,725,921 4,685,784
------------- -------------
Loss from operations (911,282) (215,425)
------------- -------------
Other (expense) income
Interest and other income 110,965 154,056
Other expense (35,359) (75,993)
------------- -------------
Total other income 75,606 78,063
(Loss) Income before income taxes (835,676) (137,362)
Income tax benefit (expense)
Current 194,648 72,245
Deferred 75,920 66,339
------------- -------------
Total income tax benefit 270,568 138,584
------------- -------------
Net (loss) income $ (565,108) $ 1,222
============= =============
Basic weighted average common shares
outstanding 4,668,615 4,580,615
============= =============
Basic (loss) income per common share $ (0.12) $ 0.00
============= =============
Diluted weighted average common shares
outstanding 4,668,615 4,580,615
============= =============
Diluted (loss) income per common share $ (0.12) $ 0.00
============= =============
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, 2004 and 2003
Additional Total
Common Stock Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
----------- -------- ------------ ------------ -------------
Balance - December 31, 2002 4,580,615 4,581 1,221,484 5,500,160 6,726,225
Net income - - - 1,222 1,222
----------- -------- ------------ ------------ -------------
Balance - December 31, 2003 4,580,615 $ 4,581 $ 1,221,484 $ 5,501,382 $ 6,727,447
Stock options exercised, net
of tax benefit 88,000 88 241,560 241,648
Net loss - - - (565,108) (565,108)
----------- -------- ------------ ------------ -------------
Balance - December 31, 2004 4,668,615 $ 4,669 $ 1,463,044 $ 4,936,274 $ 6,403,987
=========== ======== ============ ============ =============
See notes to consolidated financial statements.
4
ORALABS HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended
December 31,
2004 2003
------------- ------------
Cash flows from operating activities
Net (loss) income $ (565,108) $ 1,222
------------- ------------
Adjustments to reconcile net (loss) income to net
cash provided by operating activities
Depreciation 380,022 436,938
Allowance for doubtful accounts (70,244) 56,221
Deferred tax liability and asset (151,464) 224,470
Income tax receivable (194,168)
Loss on sale of assets 11,211 308,858
Changes in assets and liabilities
Accounts receivable - trade 691,096 (159,856)
Inventories (456,601) (418,610)
Prepaid expenses and deposits (161,866) 10,531
Accounts payable - trade (195,108) 637,566
Accrued liabilities (14,519) (158,858)
Reserve for returns (34,077) (142,699)
Income taxes receivable (payable) 107,508 (513,077)
------------- ------------
(88,212) 281,484
------------- ------------
Net cash (used in) provided by operating
activities (653,318) 282,706
------------- ------------
Cash flows from investing activities
Purchase of property and equipment (1,194,484) (376,330)
------------- ------------
Net cash used in investing activities (1,194,484) (376,330)
------------- ------------
Cash flows from financing activities
Payments of principal on long-term debt (22,874) (22,875)
Stock options exercised 176,000
------------- ------------
Net cash provided by (used in) financing
activities 153,126 (22,875)
------------- ------------
Net decrease in cash (1,694,676) (116,499)
Cash - beginning of year 2,561,108 2,677,607
------------- ------------
Cash - end of year $ 866,432 $ 2,561,108
============= ============
Supplemental disclosure of cash flow information:
Cash paid for: Income taxes
-------------- -------------
2004 $ -
2003 $ 150,000
Supplemental disclosure of non-cash transactions:
During 2004, the Company recieved a tax benefit of $65,448 related to the
exercise of options.
See notes to consolidated financial statements
5
Note 1 - Description of Business and Summary of Significant Accounting Policies
OraLabs Holding Corp. and Subsidiaries, (the Company), was formed in June 1997.
SSI Capital Corp. (SSI) a New York Corporation was incorporated on January 30,
1981. Effective August 22, 1997, SSI was merged into the Company and the
outstanding shares of SSI were converted to shares of the Company on one-for-two
basis. In December, 2003, the Company effected a one-for-two reverse stock
split. All references to common stock in the Company's financial statements have
been retroactively adjusted for the merger and the two separate one-for-two
reductions in shares outstanding.
OraLabs Holding Corp. and Subsidiaries (ORALABS), a Colorado corporation was
incorporated on August 10, 1990. ORALABS is in the business of manufacturing and
distributing lip balm, fresh breath and other products. ORALABS is a wholly
owned subsidiary of the Company.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
ORALABS and the accounts of SSI since the date of the reverse acquisition and
the accounts of OL Sub Corp. (an inactive entity) since inception. The Company
established a 90% owned subsidiary of OraLabs, Inc. in Brazil during 2003, with
no business activity during that year. The activity during the 2004 year was
minimal and therefore immaterial to the overall business. The Company is making
plans to close the subsidiary by the end 2nd quarter 2005. All inter-company
accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash equivalents. The Company continually
monitors its positions with, and the credit quality of, the financial
institutions it invests with. As of the balance sheet date, and periodically
during the year, the Company has maintained balances in various operating
accounts in excess of federally insured limits.
Accounts Receivable
Accounts receivable represents receivables from customers for product purchased.
Such amounts are recorded gross of any discounts. Promotional discounts and bad
debts are estimated and accounted for in the allowance for doubtful accounts.
Management continually monitors and periodically adjusts the allowances
associated with these receivables.
Inventories
Inventories consist of raw materials, work-in-process and finished goods, and
are stated at the lower of cost or market, determined using the average cost
method.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided utilizing the
straight-line method over the estimated useful lives for owned assets, ranging
from 5 to 7 years, and the related lease terms for leasehold improvements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue in accordance with the criteria set forth in SFAS
48. Revenue is recognized as product is shipped net of estimated returns. The
Company allows for returns for defective product and records an estimate of
these returns based on historical operations and experience.
Income Taxes
The Company recognizes deferred tax liabilities and assets based on the
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements that will result in taxable or deductible
amounts in future years.
6
Reclassifications
Certain amounts in the 2003 consolidated financial statements have been
reclassified to conform to the 2004 presentation.
Advertising Costs
The Company expenses advertising costs as incurred.
Advertising expenses were as follows:
For the Year Ended December 31,
2004 $ 79,883
2003 $ 1,769
Research and Development Costs
Expenditures made for research and development are charged to expense as
incurred. Total research and development costs of $16,946 and $37,172 for
December 31, 2004 and 2003, respectively, were expensed in operations.
Basic and Diluted Earnings (Loss) Per Common Share
Basic Loss Per Share
The Company applies the provisions of Financial Accounting Standard No. 128,
"Earnings Per Share" (FAS 128) For the years ended December 31, 2004 and 2003,
the Company had 147,900 and 250,900 stock options, respectively, that were not
included in the computation of earnings (loss) per share because their effect
was anti-dilutive; however, if the Company were to achieve profitable operations
in the future, they could potentially dilute such earnings. The Company's basic
and diluted loss per share is equivalent and accordingly only basic loss per
share has been presented. The Company has 147,900 stock options outstanding that
are potentially anti-dilutive.
Stock-Based Compensation
The Company has determined the value of stock-based compensation arrangements
under the provisions of APB Opinion No. 25 "Accounting for Stock Issued to
Employees"; and will make pro forma disclosures required under SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 permits the use of
either a fair value based method of the method defined in APB No. 25 are
required to disclose the pro forma net income (loss) and earnings per share that
would have resulted from the use of the fair value based method.
December 31
-----------
2004 2003
---- ----
Net (loss) income available to common shareholders-
as reported $ (565,108) $ 1,222
Total stock-based employee compensation expense
determined under fair market value method for an award (7,581) (6,098)
Net loss available to common shareholders-pro forma (572,689) 4,876
Basic loss per common share- as reported 0.00 0.00
Basic loss per common share- pro forma $ 0.00 $ 0.00
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. All option are granted at fair market value
on the date of the grant. No options have been re-priced or had their maturities
extended during 2004. In terms of the provisions of our Incentive Option Plan,
employees, with vested options, who leave the employment of the Company, are
required to exercise or forfeit their options within 90 days after leaving
employment regardless of the exercise period of the initial grant.
The following are the weighted-average assumptions used at December 31, 2004 and
2003 for all Black-Scholes calculations in the financial statements:
December 31,
2004 2003
Approximate risk free rate 3.74% 4%
Average expected life 5 years 5 years
Dividend yield 0% 0%
Volatility 73% 73%
Recently Issued Accounting Pronouncements
In December 2004, the FASB issued SFAS 123R "share-Based Payment," a revision to
FASB No 123, SFAS 123R replaces existing requirements under SFAS No. 123 and APB
Opinion NO. 25, and requires public companies to recognize a compensation
expense an amount equal to the fair value of share-based payments granted, such
as employee stock options. This is based on the grant-date fair value of those
instruments. SFAS 123R also affects the pattern in which compensation cost is
recognized, the accounting for employee share purchase plans, and the accounting
for income tax effects of share-based payment transactions. For small-business
filers such as us, SFAS 123R will be effective for interim periods beginning
after December 15, 2005. The Company is currently determining what impact the
proposed statement would have on its results of operations and financial
position. The impact will largely be due to the selection of either the
Black-Scholes or the binominal lattice model for valuing options. The adoption
of this standard, in the first quarter of 2006, will have no impact on the
Company's cash flows.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of
ARB No. 43. This statement requires that certain abnormal costs associated with
the manufacturing, freight, and handling costs associated with inventory be
charged to current operations in the period in which they are incurred. The
Company believes the adoption of this statement will not have a material effect
on its results of operations, cash flows or financial position.
7
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, 2004 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.
Note 2 - Balance Sheet Disclosures
Inventories are summarized as follows at December 31, 2004:
Raw materials $ 1,709,459
Work in process and finished goods 1,169,296
------------
$ 2,878,755
============
Property and equipment consist of the following at December 31, 2004:
Machinery and equipment $ 3,179,035
Leasehold improvements 126,819
------------
3,305,854
Less accumulated depreciation (1,637,179)
------------
$ 1,668,675
============
Note 3 - Line-of-Credit
The Company has a $2,000,000 line-of-credit with a bank, secured by
substantially all of the Company's assets. The line matures in September 2005.
Interest is at a variable rate tied to LIBOR and is periodically adjusted. As of
December 31, 2004 the Company had no outstanding balance on this line-of-credit.
8
Note 4 - Income Taxes
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax liabilities and assets are determined
based on the differences between the financial statement and tax basis of assets
and liabilities using the enacted tax rates in effect for the year in which the
differences are expected to reverse. The measurement of deferred tax assets is
reduced, if necessary, by the amount of any tax benefits that based on available
evidence, are not expected to be realized. As of December 31, 2004, the Company
had a Federal net operating loss ("NOL") carry forward of $204,221 that will
expire in 2024 and state net operating loss carryforwards of $982,637 that will
expire between 2023 and 2024. For the year ended December 31, 2004 the Company
will carry $572,493 of losses against prior period taxable income.
The net current and long-term deferred tax assets and liabilities in the
accompanying balance sheet include the following at December 31, 2004:
Current deferred tax asset $ 285,117
Current deferred tax liability -
------------
Net current deferred tax asset $ 285,117
============
Long-term deferred tax asset $ 101,862
Long-term deferred tax liability (56,526)
------------
Net long-term deferred tax asset $ 45,336
============
Temporary differences giving rise to
a significant portion of deferred tax
Assets (liabilities) are as follows
at December 31, 2004:
Reserves for returns and other 151,144
Net operating loss 101,862
Allowance for doubtful accounts 128,751
Contributions carried forward 5,222
------------
Total deferred tax asset $ 386,979
============
Property and equipment $ (56,526)
------------
Total deferred tax liability $ (56,526)
============
Net deferred tax asset $ 330,453
============
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,
2004 2003
----------- -----------
Income benefit at the
statutory rate $ (284,129) $ (51,510)
Change resulting from:
State and local income taxes, net of
federal income tax (27,516) -
Non-deductible expenses 713 638
Foreign tax credits and income
exclusions (22,739) (87,712)
Other 63,103
----------- -----------
$ (270,568) $ (138,584)
=========== ===========
9
Note 5 - Long-Term Debt
At December 31, 2004 long-term debt consists of:
Note payable to a financing company with interest
at 0%. The note calls for monthly principal
payments of $1,381 and matures May 2005. Collateralized
by a vehicle. $ 5,756
Note payable to a financing company with interest at 0%.
The note calls for monthly principal payments of $525
and matures December 2007. Collateralized by vehicle. 18,900
------------
24,656
Less current portion (12,581)
------------
$ 12,075
============
Maturities of long-term obligations are as follows:
Year Ending December 31,
------------------------
2005 12,581
2006 6,300
2007 5,775
------------
$ 24,656
============
10
Note 6 - Commitments and Contingencies
Related Party Operating Leases
The Company leases office and manufacturing facilities under separate operating
leases for buildings owned or controlled by the Company's president.
The Company also has one operating lease outstanding for a vehicle.
Rent expense for these leases was:
Year Ending December 31,
2004 $ 529,859
2003 $ 280,438
Future minimum lease payments under these leases are approximately as follows:
Year Ending December 31,
------------------------
2005 451,000
2006 335,000
----------
$ 786,000
==========
During 2003, the Company abandoned certain leasehold improvements located within
the two Englewood, Colorado facilities leased from the Company's President and
majority stockholder or his affiliate. The loss on abandonment was approximately
$308,000 and is included in other operating expenses.
Litigation
In the normal course of business, the Company is party to litigation from time
to time. The Company believes that resolution of such litigation will not have a
material adverse effect on the Company.
Deposit
At December 31, 2004 and 2003, the Company had deposits of approximately
$158,720 and $117,620, respectively for orders of production materials.
Note 7 - Stockholders' Equity
Stock Options
In 1997, the Company adopted an incentive stock option plan for employees. Under
this plan, the board approved a program to grant certain employees the right to
purchase common stock of the Company for $2.00 per share. The options vest on an
annual basis. As of December 31, 2004, the Company had 105,400 incentive options
outstanding under this plan, each with an exercise price of $2.00 per share.
In September 1997, the Company adopted a Non-Employee Directors' Option Plan.
The Board approved a program to grant certain directors the right to purchase
common stock of the Company. The options vest on an annual basis. As of December
31, 2004, the Company had 42,500 options outstanding under this plan with
exercise prices ranging from $1.32 to $5.00.
All of the following prices and numbers of shares have been adjusted to give
effect to the one-for-two reverse stock split adopted by the Company on December
16, 2003.
11
The following table presents the activity for options outstanding:
Incentive Non-qualified Average
Stock Stock Exercise
Options Options Price
--------- ------------- --------
Outstanding - December 31, 2002 218,400 37,500 2.30
Granted - 7,500 1.23
Forfeited/canceled (7,500) (5,000) 2.00
Exercised - - -
--------- -------- -------
Outstanding - December 31, 2003 210,900 40,000 $ 2.15
Granted 7,500 1.79
Forfeited/canceled (17,500) (5,000) 2.22
Exercised (88,000) 2.00
--------- -------- -------
Outstanding - December 31, 2004 105,400 42,500 $ 2.15
========= ======== =======
The following table presents the composition of options outstanding and
exercisable:
Options Outstanding Options Exercisable
Range of Exercise Prices Number Price* Life* Number Price*
-------------------------- --------- ------- ------ --------- -------
$1.32 - $1.79 15,000 $ 1.56 4.00 1,875 $ 1.32
$2.00 105,400 2.00 2.63 105,400 2.00
$2.01 - $3.00 20,000 2.42 1.17 16,250 2.41
$3.01 - $5.00 7,500 4.75 1.42 5,625 4.75
--------- ------- ------ --------- -------
Total - December 31, 2004 147,900 $ 2.15 2.51 129,150 $ 2.15
========= ======= ====== ========= =======
* Price and life reflect the weighted average exercise price and weighted
average remaining contractual life, respectively.
12
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,
2004 2003
------------ ------------
Numerator for basic earnings per share $ (565,108) $ 1,222
============ ============
Numerator for diluted income per common share $ (565,108) $ 1,222
============ ============
Denominator for basic earnings per share -
weighted average shares 4,668,615 4,580,615
Effect of dilutive securities - options -
------------ ------------
Denominator for diluted earnings per share -
adjusted weighted average shares 4,668,615 4,580,615
============ ============
Diluted income per common share $ (0.12) $ 0.00
============ ============
Where the inclusion of potential common shares is anti-dilutive, such shares are
excluded from the computation.
Note 9 - Acquisitions and expansion
The Company entered into a definitive agreement with NVC Lighting Investment
Holdings Limited under which the Company will acquire NVC and convey its
ownership of OraLabs, Inc. to OraLabs' President. Closing would result in a
change in control of the Company and change of the Company's business. Closing
of the agreement is contingent upon the satisfaction of many conditions, and
there is no assurance that the agreement will close.
13
Note 10 - Major Customers
The Company had two major customers that accounted for net sales of
approximately $1,950,000 and $1,400,000, respectively, of which $174,805 was due
from these customers and included in accounts receivable at year end. For the
year ended December 31, 2003, two customers accounted for net sales of
approximately $1,644,000 and $1,199,000, respectively, of which $594,000 was due
from those customers and included in accounts receivable at 12/31/03.
Note 11 - Export Sales
During the year ended December 31, 2004 and 2003, the Company had export sales
of approximately $918,000 and $870,175, or 7% and 6% of product sales,
respectively. All of the Company's export business is transacted in U.S. dollars
and the Company had no foreign currency translation adjustments.
Note 12 - Significant Fourth Quarter Adjustments
In the fourth quarter for the year ended December 31, 2004, the Company made the
following adjustments to the financial statements:
The Company expensed $38,285 related to expansion opportunities in South
America.
The Company adjusted its inventory valuation as a result of its year-end
physical inventory and the audit of raw material costs. The audit adjustment
increased inventory valuation by $121,155.
14
EXHIBIT INDEX
Exhibit
No. Description
--------------------
14.1 Code of Ethics
23.1 Consent of Independent Registered Public Accounting Firm (Ehrhardt
Keefe Steiner & Hottman P.C.)
31.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant
To Section 302 Of The Sarbanes-Oxley Act Of 2002
31.2 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant
To Section 302 Of The Sarbanes-Oxley Act Of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by
Emile Jordan
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by
Gary H. Schlatter
15