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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
/X/ Annual report under section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1999
/ / 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
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
2901 SOUTH TEJON STREET, ENGLEWOOD, COLORADO 80110
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(Issuer's telephone number: (303) 783-9499
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE
Securities to be registered under Section 12(g) of the Act:
COMMON SHARES, PAR VALUE $0.001 PER SHARE
- --------------------------------------------------------------------------------
(Title of class)
- --------------------------------------------------------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. /X/
State issuer's revenues for its most recent fiscal year: $9,048,548
As of March 23, 2000, 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 $2,256,082.
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS) Check
whether the issuer has filed all documents and reports required to be filed
by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No
(APPLICABLE ONLY TO CORPORATE REGISTRANTS) State the number of shares
outstanding of each of the issuer's classes of common equity, as of the
latest practicable date. AS OF MARCH 23, 2000, THERE WERE 9,160,755 SHARES OF
COMMON STOCK OUTSTANDING
DOCUMENTS INCORPORATED BY REFERENCE. Portions of the Company's definitive
Proxy Statement to be mailed to stockholders in connection with the Annual
Meeting of Stockholders of the Company to be held on May 25, 2000 (the "1999
Definitive Proxy Statement"), which will be filed with the Commission not
later than 120 days after the end of the fiscal year to which this report
relates, are incorporated by reference in Part III hereof.
Transitional Small Business Disclosure
Format (Check one):
Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
BUSINESS DEVELOPMENT. On May 1, 1997, OraLabs, Inc., a privately held
company, became a wholly-owned subsidiary of SSI Capital Corp. (the
predecessor of the Company). SSI Capital Corp. subsequently merged with
OraLabs Holding Corp., with OraLabs Holding Corp. becoming the surviving
company. As a result of these transactions, the Company is the sole
stockholder of OraLabs, Inc.
At the time that OraLabs, Inc. became a subsidiary of the Company, the
Company was only engaged in seeking a suitable business to be the subject of
an acquisition or merger transaction. The Company was not then engaged in any
operating business and had not been engaged in an operating business for at
least five (5) years. The business in which the Company had been involved was
totally unrelated to that of the Company's subsidiary.
The following discussion, insofar as it is for time periods prior to May
1, 1997, will, in effect, be about the business of OraLabs, Inc. (which may
be referred to as the "Subsidiary"), as SSI Capital Corp. was not then
engaging in any substantive business. The term "Company" or "OraLabs" will
mean OraLabs Holding Corp., successor to SSI Capital Corp.
The Subsidiary was formed in 1990 for the purposes of manufacturing and
distributing tooth-whitening products. The name of the Subsidiary was
originally AmWhite Labs, Incorporated, which was changed in April 1994 to
OraLabs, Inc. In 1992 the Subsidiary's flagship product, Ice Drops-Registered
Trademark-, a breath drop product sold in a small plastic bottle, was
introduced as an alternative to breath sprays and candy breath mints. Since
that time the Company has expanded its product line to include breath sprays,
lip balm and nutritional supplements. The Company sells its lip balm both in
traditional twist-up stick containers and in its patented mini push-up
container.
In 1999 the Company introduced its own brands of lip balm in traditional
twist stick containers. The brands include Liprageous-TM-, Chap Ice-TM- and
Lip Naturals-TM-. These brands are sold in both traditional containers as
well as the Company's patented mini-container. The Company's private label
and contract packaging lip balm business grew in 1999.
The nutritional supplement line of products initially introduced in
1998, grew to include Cholesterx-TM- and Breast Plus-TM-.
The Company has expanded its international business to more than 30
markets. The international business of the Company continues to be an area of
focus and success. The Company
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is currently supplying numerous airlines and hotels with its products,
including a specially packaged mouthwash, lip balm and breath drops, as part
of those businesses' amenity programs.
BUSINESS OF THE COMPANY.
PRINCIPAL PRODUCTS, THEIR MARKETS AND DISTRIBUTION. The general
business done by the Company is to produce and sell consumer products
relating to oral care, lip care and to distribute nutritional supplements.
The Company's products are currently sold in more than 50,000 domestic retail
outlets as well as more than 30 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 under the brand name Ice Drops-Registered
Trademark-, as well as sour drops; lip balm products under the names Ice
Drops-Registered Trademark-, Liprageous-TM-, Chap Ice-TM-, and Lip
Naturals-TM-, as well as under private label names; and a line of nutritional
supplements and related products consisting of MSM, 5-HTP, Glucosamine+MSM,
Healthy Bears-TM-, Cholesterx-TM-, and Breast Plus-TM-. In general, the
Company's distribution still covers the same markets that it always has.
However, 1999 brought about some significant sales increases to large
retailers which were responsible for the major growth in the Company's top
line revenues. The Company has made a shift in its dominant product line.
While the Company is still best known for its flagship products (Ice
Drops-Registered Trademark- Breath Freshener), approximately 55% of its
revenue was derived from sales of lip balm. This is a category that the
Company believes can achieve continued growth based on the success it has
achieved. The Company also believes that its nutritional supplement sales
will continue to be a part of its overall revenue growth. While the sales of
breath freshener are not growing as fast as other product lines, it is one
that is very important and is very stable for the Company. We expect to see
add-on sales of breath freshener as we are able to expand sales in some
faster growing categories.
The sales of sour drops for the Company are expected to grow but at a
slower pace than its lip balm and supplement 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 which the
Company believes are niche products that can be differentiated from products
of its competitors. The 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. With respect to the nutritional supplements, the Company's
marketing strategy is to identify and market cutting edge products with broad
consumer appeal. It is the intention of the Company to sell its supplement
brands both to the mass market as well as to the health markets.
The Company's products and packaging have been conceptualized and
developed in-house. The Company's breath freshener and lip balm products are
marketed from and packaged at the Company's manufacturing facility in
Englewood, Colorado. Most packaging, filling and automated manufacturing
equipment has been designed, built and maintained by the Company's own staff.
This allows the Company to rapidly introduce and manufacture new products,
reducing lengthy lead
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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. Although the
Company has ordered some new high-speed filling equipment to replace some of
its older fillers and labelers, the Company expects to offset the equipment
costs by labor cost savings associated with these products. The Company
added three new lip balm filling and labeling lines during 1999.
Sales of 5-HTP still have not met the Company's expectations, and as a
result the Company has $391,997 worth of inventory comprised of $200,000 of
raw materials and $191,997 in finished goods for this product. The Company
has sold some of the raw material to other wholesalers and will continue to
pursue this strategy. The Company has taken a write-down on its 5-HTP
inventory to better reflect the market (see, "Management's Discussion and
Analysis").
PRODUCTS LAUNCHED IN 1999. The Company introduced two new
supplement products in 1999, Cholesterx-TM- and Breast Plus-TM-. Neither
product achieved a material level of sales through the end of the year.
The Company also introduced Lip Naturals-TM-, Liprageous-TM- and
Chap Ice-TM- lip balm brands. All of these brands were met with a positive
response, however Liprageous-TM- is the only one that had a material effect
on revenues for 1999. The Company expects Lip Naturals-TM- and Chap Ice-TM-
to both have material effects on its future revenues.
The only products of significance that were discontinued in 1999
were the sore throat sprays.
OTHER BUSINESS. In April 1998, OraLabs, Inc. entered into a
Contract for Services with Top Form Brands, Inc. ("Top Form"), a corporation
owned solely by the Company's President. Under the contract, OraLabs provided
warehousing, shipping and accounting services for products sold on a
wholesale basis by Top Form. The Company had the personnel and warehousing
capacity necessary to handle the services required by Top Form without an
increase in the Company's fixed costs. The Company was paid a fixed price per
case of product warehoused and shipped by the Company, and the Company
believes that the price was fair to the Company. Revenue under the Contract
consisted of approximately 7.6% and 1.2% respectively of the Company's 1998
and 1999 revenues (see "Certain Relationships and Related Transactions" in
the Company's 1999 Definitive Proxy Statement). The Contract for Services
with Top Form Brands terminated as of June 30, 1999.
TRANSACTION FEE. During 1999 the Company was a party to a
transaction in which it was paid a fee of $500,000 and a minority stock
ownership position in an unaffiliated entity, of which 25% (after expenses)
was paid to Creative Business, LLC ("CBS"), a company owned by a board
member, Allen Goldstone, in consideration for brokerage services performed by
CBS. After its split and expenses, the Company received approximately
$190,000 in income after taxes. The stock ownership included a 5% preferred
and 5% common stock position in the unaffiliated
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company, of which the Company is obligated to give CBS a 25% share (i.e.,
1.25%) of any distributions.
CHARGES AGAINST THE COMPANY'S PRESIDENT. In December 1999, charges
were filed against the Company's President relating to the sale of
pseudoephedrine, the product being sold by Top Form Brands, Inc. (see, "Other
Business" above and "Involvement in Certain Legal Proceedings" in the
Company's 1999 Definitive Proxy Statement). During the approximate one month
period from the bringing of the charges to their dismissal in January 2000,
the Company was required to direct attention and resources to evaluating the
filing of the charges as well as to events which resulted from that filing,
including that trading in the Company's common stock on NASDAQ was halted
until January 14, 2000. The efforts of the Company included dealing with the
authorities who filed the charges (although no charges or allegations of any
misconduct were made against the Company), responding to inquiries from the
media and the Company's shareholders, responding from inquiries of
representatives of NASDAQ and providing information to NASDAQ so that
resumption of trading could be achieved, and retaining special counsel to
investigate potential liability to the Company arising from the charges
against Mr. Schlatter. The Company incurred approximately $32,000 in legal
expense relating to these circumstances, about half of which was incurred in
1999.
In addition to the above activities, and to avoid even an appearance of
impropriety, Mr. Schlatter asked the disinterested board members to take a
more active role in major financial decisions made by the Company, and as a
result it was agreed that approval by disinterested board members for certain
significant transactions would be required on a going forward, interim basis.
These transactions include those that are other than in the ordinary course
of business and which have a value of over $100,000 or which involve a
commitment by the Company of incentives to a single customer of more than
that amount; obtaining new governmental licenses other than renewals or
extensions; incurring Company debt; certain employment decisions involving
management and key personnel; execution of new leases or lease renewals of
real property; acquisitions of capital equipment in excess of $50,000; and
launching of new product lines not already in development.
COMPETITIVE BUSINESS CONDITIONS. Competition for all of the Company's
products is very significant. With respect to the Company's breath freshening
products, direct competitors who manufacture liquid or spray breath products
consist of less than five. The Company believes that its primary competitive
products are Binaca-Registered Trademark- and Sweet Breath-Registered
Trademark-. However, if one considers candy breath mints as competition for
the same group of products, the Company believes that there are more than 50
competitors. Most candy breath mint companies have introduced what are known
as "power mints." This has hurt the sales of Ice Drops-Registered Trademark-
Breath Freshener. Most of these mint brands now offer a breath freshener as
powerful as Ice Drops-Registered Trademark-. Where the strength of candy
mints previously did not favorably compare to Ice Drops-Registered
Trademark-, they are now considered true 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-Registered Trademark-, Blistex-Registered
Trademark- and Carmex), and the balance of the market consists of more than
50 different brands. It is estimated that there are ten to twenty viable
competitors from a manufacturing standpoint.
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With respect to nutrition products, competition in this industry is very
broad based. Manufacturers and marketers include tiny start-ups to Fortune
100 companies. The vast size makes it possible for many niche marketers as
well as the major manufacturers to be successful although there appears to be
some consolidation within the industry. The retail environment is made up of
mass retail customers and the health food industry retailers. In addition,
there are many multi-level marketers and direct sellers supplying nutritional
supplements. The competition in this field has grown increasingly competitive
as many are positioning for shelf space. More and more large companies are
getting in this business and there has also been a flurry of consolidation to
help strengthen competitive positions.
The Company has sought to anticipate competition for its breath
freshener and lip balm products by the distinguishing size and packaging of
its products, as well as by competing with respect to pricing. The Company
has been allowed a utility patent and a design patent for the container for
its Ice Drops-Registered Trademark- brand lip balms. The Company believes
that for some of its products, its smaller size and lower price than that of
its competitors is an advantage to the Company. However, other factors such
as a competitor's greater brand recognition or preferable product placement
of a competitor's products at retail locations may nullify or reduce whatever
competitive advantage the Company's products have. Strong national brands are
very difficult to displace. The niche marketing opportunities are where the
Company is focused.
SOURCES AND AVAILABILITY OF RAW MATERIALS. In general, the sources and
availability of materials used by the Company in its business are fairly
widespread, and the Company believes that it could obtain secondary sources
of raw materials 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.
PATENTS, TRADEMARKS, LICENSES, FRANCHISES AND CONCESSIONS. Although the
Company will vigorously seek to enforce its proprietary rights, there can be
no assurance of proprietary protection respecting the patents and trademarks
held by the Company (see, "Cautionary Statement Regarding Forward-Looking
Statements, No Assurance of Proprietary Protection").
SEASONALITY. The demand for the Company's lip balm products tends to
increase during the cold, dry weather months, but the inclusion of sun block
in some of the lip balm products may tend to even out sales during the year.
Even though the sun block products will help, lip balm is still considered to
be approximately 70% seasonal.
PRACTICES OF THE COMPANY IN THE INDUSTRY. The Company's typical
practices with respect to all of its products is to keep adequate inventory
on hand for shipments within a two to three week period, and the Company
generally extends credit on purchases for a term of 30 days after shipment.
The Company does not formally provide a right of customers to return
merchandise.
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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.
GOVERNMENT REGULATION. The Company's breath freshener and lip balm
(non-SPF) products are not subject to burdensome governmental regulation (see
Cautionary Statement on Governmental Regulation below). However, the
manufacturing, packaging, labeling, advertising, distribution and sale of the
Company's nutritional supplements 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 thereunder.
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 with respect to dietary supplements, most recently by
the Nutrition Labeling and Education Act of 1990 ("NLEA") and the Dietary
Supplement Health and Education Act of 1994 ("DSHEA"). The Company's SPF lip
balm products are regulated by the FDA.
The DSHEA provides certain regulatory benefits for the nutritional
supplement industry. Prior to its passage, some supplements had been
classified as food additives which could subject them to a review process by
the FDA prior to approval for sale. Now, 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 drugs unless claims are made that a product may heal,
mitigate, cure or prevent an illness, disease or malady. On January 6, 2000,
FDA published a Rule (effective 30 days after publication) which defined 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. Any product that is marketed for the first time after
publication and any new claims made for an existing product for the first
time after publication are required to comply with the Rule. The Company does
not expect the new Rule to have any material effect on its existing products
and the Company will comply with the provisions of the Rule for any new
products.
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, will require at least some of the quality control provisions
contained in the CGMPs for drugs.
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On November 18, 1998, the FTC issued its "Dietary Supplements: An
Advertising Guide for Industry." Such guide provides an application of FTC
law to dietary supplement advertising and includes examples of how principles
of advertisement interpretation and substantiation apply in the context of
dietary supplement advertising. The Guide provides additional explanation but
does not substantively change the FTC's existing policy that all supplement
marketers have an obligation to ensure that claims are presented truthfully
and to verify the adequacy of the support behind such claims.
The FTC, which exercises jurisdiction over the advertising of
nutritional and dietary supplements under the Federal Trade Commission Act,
has in the past several years instituted enforcement actions against several
nutritional supplement companies alleging false and misleading advertising of
certain products. These enforcement actions have resulted in the payment of
fines and/or consent decrees by certain of the companies involved. The FTC
continues to monitor advertising with respect to nutritional and dietary
supplements. The Company has not been the subject of any FTC inquiries or
actions.
RESEARCH AND DEVELOPMENT EXPENSES. The Company has not expended a
material amount of its resources on research and development activities.
COSTS AND EXPENSES OF COMPLIANCE WITH ENVIRONMENTAL LAWS. The Company
does not have any material amount of cost related to environmental
regulations and the Company does not expect to incur material expenses for
that purpose in fiscal year 2000.
NUMBER OF EMPLOYEES. The approximate number of employees hired by the
Company as of the end of fiscal year 1999 was 115.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's headquarters are located in an office-warehouse building
of approximately 16,000 square feet located in Englewood, Colorado, which the
Company leases from the Company's President. The property includes the
executive offices of the Company, as well as the Company's manufacturing
facilities and a portion of its warehouse facilities. The Company's lease
expires in September 2000, and the Company believes that its rental rate is
comparable to that which would be charged by an unaffiliated landlord. An
extension of the lease is intended to be negotiated prior to lease
termination, at a fair market rental rate at that time. The Company also
leases an additional approximate 18,000 square feet of warehouse space in a
building located near the Company's headquarters, which is leased from an
entity solely owned by the Company's President. The lease expires in June
2003, and the Company believes that its rental rate is comparable to that
which would be charged by an unaffiliated landlord. (See "Certain
Relationships and Related Transactions" incorporated by reference to the 1999
Definitive Proxy Statement.)
The Company does not believe that it would be difficult to locate
comparable space for its business operations at such time as either of the
leases expires.
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ITEM 3. LEGAL PROCEEDINGS.
On January 22, 1999, a proceeding was commenced in the District Court
for Arapahoe County, Colorado by Bryan Simmons against the Company, its
operating subsidiary and the Company's President. The suit arises from Mr.
Simmons' former status as an independent contractor and, later, an employee
of OraLabs Inc. In the lawsuit Mr. Simmons claims commissions based upon
sales of certain products of the Company and he also appears to assert claims
for finder's fees with respect to transactions that have not occurred. Trial
is set for September 2000. The Company believes that the claims are without
merit, that the likelihood of an unfavorable outcome to the Company is small,
and the Company intends to contest the case vigorously. Except for that
lawsuit, the Company is not a party to any material pending legal proceedings
to which either it or its subsidiary is a party or of which any of its
property is subject.
See "Charges Against the Company's President" above and "Involvement in
Certain Legal Proceedings" in the Company's 1999 Definitive Proxy Statement
for a discussion of criminal charges brought in December 1999 and dismissed
in January 2000 against the Company's President, Gary Schlatter. No charges
were brought against the Company, no misconduct by the Company was alleged,
and the Company has not been informed that any charges against the Company
are forthcoming.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders.
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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. For
many years prior to closing the transaction by which the Company acquired its
wholly-owned subsidiary, OraLabs, Inc., there was no established public
trading market for the Company's common stock. Approximately in September
1997, the common stock of the Company began to be traded on the OTC Bulletin
Board. Since April 28, 1998, the common stock of the Company has traded on
the NASDAQ SmallCap 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 1998 and 1999. The source of such
information for the period of January 1998 through April 27, 1998 (the last
day the stock traded on the OTC Bulletin Board) is an OTC Bulletin Board
Quarterly Quote Summary prepared by NASDAQ Trading and Market Services, while
the source of the information for the balance of the table is as reported by
NASDAQ.
<TABLE>
<CAPTION>
Reported High Bid Reported Low Bid
<S> <C> <C>
First quarter, fiscal 1998 $ 4.75 $ 4.125
Second quarter, fiscal 1998 $ 4.875 $ 4.25
Third quarter, fiscal 1998 $ 4.688 $ 2.00
Fourth quarter, fiscal 1998 $ 3.50 $ 1.25
First quarter, fiscal 1999 $ 3.75 $ 1.93
Second quarter, fiscal 1999 $ 3.00 $ 2.12
Third quarter, fiscal 1999 $ 2.15 $ 1.21
Fourth quarter, fiscal 1999 $ 1.87 $ 0.93
</TABLE>
The quotations reflect inter-dealer prices, without adjustment for retail
mark-up, mark-down or commission and may not necessarily present actual
transactions.
(ii) RECENT SALES OF UNREGISTERED SECURITIES. Pursuant to the terms of a
Consulting Compensation Agreement with an independent party, the Company
issued 8,336 shares of common stock to that party in consideration for its
consulting services. The shares were issued in equal monthly installments
commencing in January 1999. The issuance of the shares was exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Act") pursuant to Section 4(2) thereof, and the certificates for the issued
shares contain the legend denominating the shares as "restricted securities"
under the Act.
In June 1999, the Company issued 5,000 options to each of two,
non-employee members of the board of directors of the Company under the
Company's 1997 Non-Employee Directors' Option Plan. The transactions were
exempt from the registration requirements of the Act
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pursuant to Sections 4(6) and 4(2) of the Act. The options vest in four equal
installments over a period of four years, with each option having an exercise
price of $2.50 per share.
(b) As of March 27, 2000, there were approximately 915 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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
RESULTS OF OPERATIONS. FOR THE PERIOD ENDING DECEMBER 31, 1999 AS
COMPARED WITH THE PERIOD ENDING DECEMBER 31, 1998.
Product sales increased $2,495,217 or 38%. The increase was
substantially due to continued growth in lip balm sales. The Company's
returns and allowances decreased $227,801. The Company recorded $689,761 in
returns and allowances for 1998, substantially from discontinued cough and
cold product returns. The Company adjusted its reserve for returns and
allowances to 3.5% from 2% of net sales to align with 1999 activity.
Services income decreased $424,199 from $536,685 in 1998 to $112,486 in
1999. The agreement for Service income was terminated as of July 1, 1999,
therefore, no revenue was earned in the second half of 1999.
Gross profit increased $234,960 (excluding Services income, which is
eliminated to properly reflect the relationship between product sales and
cost of sales). As a percentage of product sales gross profit decreased from
41% to 32%, or $824,493. This decrease can be attributed to (1) increased
reserve for returns and allowances of approximately $140,000; (2) the write
down of slow moving 5-HTP nutritional supplement inventory, $159,244; and (3)
an inventory adjustment of $480,000. The inventory adjustment can be
attributed to scrap and defective product created by modifications to our
then existing four lip balm lines and the start up of three new lip balm
lines. The mixing, filling and labeling processes were all improved in 1999.
Engineering increased $69,730 as a result of additional staffing to
support the building of the three additional lip balm lines and modifications
to the existing four lip balm lines.
Selling and marketing increased $417,350. Sales and marketing
commissions increased as it related to product sales, which showed $2,495,215
in growth.
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General and administrative expenses increased approximately $72,290.
This increase can substantially be attributed to bonuses and board member
compensation paid in 1999.
Other Income increased $295,894. This was substantially due to a
transaction fee in which the Company received a one-time cash payment and a
small minority interest in a company that acquired ownership of Pecos
Pharmaceuticals, a vendor of nutritional supplements.
Net income decreased by $272,462 as explained by the above activities.
LIQUIDITY AND CAPITAL RESOURCES. BALANCE SHEET AS OF DECEMBER 31, 1999
COMPARED TO DECEMBER 31, 1998.
Cash increased $297,356 substantially as a net effect of the following
activities.
Accounts receivable increased approximately $404,406. The increase is
due primarily to the growth in sales, which was $2,495,217 or 38%.
Inventory decreased $202,845 due primarily to the write off of
discontinued sore throat sprays of $133,999 and the write down of 5-HTP, a
nutritional supplement, of $159,244. Although 5-HTP was written down it still
encompasses $391,997, or 22% of the inventory. Sales of 5-HTP in the last
three quarters of 1999 were $25,164, $25,289 and $28,986 respectively.
Quarter one, 2000 sales are tracking ahead of Quarter four, 1999.
Accrued liabilities increased $217,533, primarily due in to the increase
in reserves for commissions of $129,148 from $31,961 in 1998 to $161,109 in
1999. The reserve is for commissions against accounts receivable, which are
adjusted by customer receipts. The balance of the increase can be attributed
to payroll taxes and workmen's compensation accruals.
Reserve for returns increased $187,039 (from $137,758 in 1998 to
$324,797 in 1999) due to adjusting the accrual from 2% of net sales in 1998
to 3.5% in 1999. This change was done to align with 1999 activity.
Retained earnings increased $546,097 as a result of net income.
TRENDS. In 1999, the Company showed continued growth in the lip balm
products, particularly to mass-retail accounts. Lip balm revenues grew
from $2,175,367 in 1998 as compared to $5,030,165 in 1999, or a 131%
increase. The Company expects continued growth through expanded placement
with major retailers in the year 2000.
The sour drops and breath fresheners did not show any significant
changes, as the combined revenues were $3,790,048 in 1998 as compared to
$3,508,607 in 1999. However, these products continue to make a solid
contribution to the overall revenues of OraLabs Holding Corp.
12
<PAGE>
The nutritional supplements, on a relatively smaller scale, showed
significant growth. Revenues were $497,986 in 1998 as compared to $726,431 in
1999, or a 46% increase. Sales have been good on our 5-HTP, HealthyBears-TM-,
and Glucosamine+ MSM products. Cholesterx-TM- was a new product in 1999 that
contributed to the growth.
The Company continues to experience revenue growth internationally, with
distribution to 33 countries reflected in sales $1,557,931 for 1999 as
compared to $1,087,622 for 1998, a 43% increase.
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 (8% of revenues)
in a category that is on a growth trend and could be negatively impacted by
inflation.
YEAR 2000. Many computer systems were written using two digits rather
than four to define the applicable year. As a result, those computer programs
have time sensitive software that recognizes a date using "00" as the year
1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company utilizes software vendors for its computer program
applications. The installation of a year 2000 compliant version of the
Company's financial, inventory, and production software was completed as of
the fourth quarter of 1999. The Company also completed an assessment of its
internal personal computer network, which is year 2000 compliant. Updating of
telephones, facsimile machines, voice mail system and manufacturing equipment
was completed as well.
The Company's cost of becoming year 2000 compliant was not material to
the financial condition of the Company. The Company incurred minor expenses,
primarily for assessment of the year 2000 issue, development of a
modification plan, and the installation of a year 2000 compliant version of
its financial, inventory, and production software. The Company does not
anticipate any future expenditures concerning year 2000 issues to be material.
To our knowledge, our suppliers and customers have not had any year 2000
compliance issues which will affect the Company, so the Company does not
believe there will be any material impact on the Company's business from
future year 2000 issues.
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
13
<PAGE>
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, 1999, are forward-looking statements and
involve various risks and uncertainties, many of which are beyond the control
of the Company, and any one of which, or a combination of which, could
materially reflect the results of the Company's operations and whether
forward-looking statements made by the Company ultimately prove to be
accurate.
The following discussion outlines certain risk factors that in the
future could affect the Company's results and cause them to differ materially
from those that may be set forth in any forward-looking statement made by or
on behalf of the Company. The Company cautions the reader, however, that this
list of risk factors and others discussed elsewhere in this report may not be
exhaustive.
COMPETITION. The businesses in which the Company is engaged are highly
competitive and are engaged in to a large extent by companies which are
substantially larger and have significantly greater resources than the
Company. Although the Company believes that its branded products have
achieved some measure of name recognition, to a large extent the Company does
not have the capital resources, marketing and distribution networks,
manufacturing facilities, personnel, product name recognition or advertising
budget of the larger companies. If the Company were to be forced out of the
large mass retailers by larger, better financed competitors, it would be
reliant on smaller niche markets that the larger, better financed competitors
are not interested in. The same situation applies to international business,
where there are larger more dominant competitors that the Company must always
deal with. The industries in which the Company competes 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. 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.
UNPROVEN MARKETS FOR CERTAIN OF THE COMPANY'S PRODUCTS. The Company only
began selling its nutritional supplement products recently. The nutritional
supplement industry is influenced by products that become popular due to
changing consumer tastes and media attention. While the Company believes that
there is a market for its products, it has no prior history with these
supplements and therefore cannot be assured that the products will be
accepted or competitive in the marketplace in the long term, or that if
accepted, that part of the Company's business will be profitable.
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
14
<PAGE>
products delivered to consumers, are not within the control of the Company.
Furthermore, sickness or injury to persons may occur if products manufactured
by the Company are ingested in dosages which exceed the dosage recommended on
the product label or are otherwise misused. The Company cannot control misuse
of its products by consumers or the marketing, distribution and resale of its
products by its customers. With respect to product liability claims in the
United States, the Company has $1 million per occurrence and $2 million in
aggregate liability insurance. In addition, if claims should exceed $2
million, the Company has excess umbrella liability insurance of up to an
additional $1 million. However, there can be no assurance that such insurance
will continue to be available, or if available, will be adequate to cover
potential liabilities. The Company generally does not obtain contractual
indemnification from parties supplying raw materials or marketing its
products and, in any event, any such indemnification is limited by its terms
and, as a practical matter, to the creditworthiness of the indemnifying party.
DEPENDENCE ON KEY PERSONNEL. The Company's future success depends in
large part on the continued service of its key personnel. In particular, the
loss of the services of Gary Schlatter, its President and Chief Executive
Officer, could have a material adverse effect on the operations of the
Company. The Company's subsidiary has an employment agreement with Mr.
Schlatter which expires on April 30, 2000. 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 considered a "drug" by the FDA. If the FDA were to
conclude that any of the Company's products determined to be a "drug" 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
nutritional supplements could have an adverse impact upon the cost or methods
of producing the products.
The Company's business is also regulated by various agencies of the
states and localities in which the Company's products are sold and
governmental regulations in foreign countries where the Company sells or may
seek to commence sales. Such regulations could prevent or delay entry into a
market or prevent or delay the introduction of Company products. For example,
the growth of international sales is 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
15
<PAGE>
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.
MANAGING GROWTH. The Company experienced a period of significant growth
during fiscal years ended December 31, 1997 and 1996. Significant growth did
not occur in fiscal year 1998, but it occurred again in 1999 and could occur
in the future. Such growth has placed, and could continue to place, a strain
on the Company's management, customer service and support operations, sales
and administrative personnel and other resources. In fact, the Company
believes that the increase in its operating expenses and its lower gross
margins, which both occurred during 1999, are the result of growth pains that
the Company experienced. It is certainly possible that the Company could
continue to experience the same problem in the future. Also, the Company
could be in a position where it grows and increases overhead, and then its
sales slow down. The excess overhead could negatively impact the Company's
ability to earn a profit or cause it to lose money. The Company has
experienced sales cycles which required it to add and delete additional
shifts for manufacturing. This will in all likelihood occur again in the
future. The Company's ability to manage continued growth may require the
Company to expand its operating, management, information and financial
systems, all of which may increase its operating expenses or otherwise strain
the Company's resources. If the Company is unsuccessful in managing growth,
if such growth should occur, there could be a material adverse effect on the
Company. In addition, the loss of a significant number of customers, or a
significant reduction in purchase volume by or financial difficulty of such
customers, for any reason, could have a material adverse effect on the
Company. Successful management of growth, if it occurs, will require the
Company to improve its financial controls, operating procedures and
management information systems, and to train, motivate and manage its
employees.
DEPENDENCE UPON SIGNIFICANT DISTRIBUTORS AND RETAILERS. No customer
accounted for more than ten percent (10%) of the Company's gross revenues in
1999. The Company had over 2,000 purchasing customers in fiscal 1999 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.
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
16
<PAGE>
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, there can be no assurance that this will
be the case, in which case there could be a material adverse effect upon the
Company.
NO ASSURANCE OF PROPRIETARY PROTECTION. The Company has been allowed two
patents. The Company also holds several domestic and international trade
marks and has several applications pending. Certain aspects of the Company's
business, although not the subject of patents, include formulations and
processes considered to be proprietary in nature. There can be no assurance
that any such "proprietary" information will not be appropriated or that the
Company's competitors will not independently develop products that are
substantially equivalent or superior to the Company's. Even if the pending
trademark registrations are issued to the Company, there can be no assurance
that the Company would be able to successfully defend its patents or
trademarks against claims from or use by competitors, and there can be no
assurance that the Company will be able to obtain patent or trademark
protection for any new products. In addition, in the event that any of the
Company's products are determined to infringe upon the patents or proprietary
rights of others, the Company could be required to modify its products or
obtain licenses for the manufacture or sale of the products, or could be
prohibited from selling the products.
NO ASSURANCE OF SCIENTIFIC PROOF. The Company's nutritional supplement
products are intended to provide relief of certain symptoms or to otherwise
aid in the health of the consumers. If scientific data were to conclude that
the products do not do so, or if for any other reason the Company's products
were not viewed by the public as providing any meaningful benefit, there
could be a material adverse effect upon the sales of the products. In
addition, the nutritional supplement industry has been known to experience
radical ups and downs of certain product sales in a short period of time
which could adversely effect 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.
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.
Effective December 29, 1998, and upon the recommendation and approval of
the Company's board of directors, the firm of Ehrhardt Keefe Steiner &
Hottman P.C. was retained as the Company's independent auditors and the firm
of former auditors, Schumacher & Associates, Inc. was dismissed. Schumacher &
Associates did not render a report on the Company's financial statements
which contained an adverse opinion or disclaimer of opinion, its report was
not modified as to uncertainty, audit scope, or accounting principles, and
there were no disagreements between
17
<PAGE>
the Company and its former accountant on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT OF THE REGISTRANT.
The following table identifies each of the Company's directors and
executive officers, indicating the principal occupation or employment of each
such person and the name and principal business of any organization by which
such person is so employed:
<TABLE>
<CAPTION>
NAME OF DIRECTOR OR PRINCIPAL OCCUPATION NAME AND BUSINESS
INDIVIDUAL EXECUTIVE OFFICER OR EMPLOYMENT OF EMPLOYER
---------- ----------------- -------------------- -----------------
<S> <C> <C> <C>
Gary H. Schlatter Director and Executive President of Company Company
Officer
Suzan M. Schlatter(1) Director Secretary of Company OraLabs, Inc.
Allen R. Goldstone(2) Director Consultant Creative Business, LLC
Business Consulting
Firm
Michael I. Friess Director and Secretary Attorney Michael Friess
Emile Jordan Executive Officer Comptroller of Company Company
</TABLE>
(1) Suzan M. Schlatter, the spouse of Gary H. Schlatter, resigned as a
director and officer effective January 31, 2000.
(2) Allen R. Goldstone served as a director from January 1, 1999 to August
24, 1999, at which time he resigned. He was reappointed to the Board on December
30, 1999.
The balance of the information required for this Item is incorporated
herein by reference to the 1999 Definitive Proxy Statement.
ITEM 10. EXECUTIVE COMPENSATION.
The information required for this item is incorporated herein by reference
to the 1999 Definitive Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required for this item is incorporated herein by reference
to the 1999 Definitive Proxy Statement.
18
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required for this item is incorporated herein by reference
to the 1999 Definitive Proxy Statement.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Form 10-KSB
immediately following the signature pages:
1. Consolidated Financial Statements (OraLabs Holding Corp. and
Consolidated Subsidiaries):
Independent Auditors' Report
Consolidated Balance Sheet - December 31, 1999
Consolidated Statements of Operations for the years
ended December 31, 1999 and December 31, 1998
Consolidated Statement of Stockholders' Equity from December
31, 1997 through December 31, 1999
Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 1998
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:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------ -----------
<S> <C>
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) Initial Stock Option Grant to Michael Friess under 1997 Non-Employee
Directors' Option Plan
</TABLE>
19
<PAGE>
<TABLE>
<S> <C>
10.5(i)(2) Lease Agreement Between the Company's Subsidiary and Gary Schlatter
(September 1, 1995)
10.5(ii)(5) Business Lease Between the Company and 2780 South Raritan, LLC
modified July 1, 1999
10.6(5) Agreement between the Company, Creative Business LLC and Allen R.
Goldstone dated August 24, 1999, as amended
10.7(4) Contract for Services effective April 1, 1998 between OraLabs, Inc. and
Top Form Brands, Inc.
10.8(5) Letter Agreement terminating Contract for Services between OraLabs, Inc.
and Top Form Brands, Inc. dated April 28, 1999
11 No statement re: computation of per share earnings is required since such
computation can be clearly determined from the material contained in this
Annual Report on Form 10-KSB.
21(2) List of Subsidiaries of the Company
23.1(5) Consent of Independent Public Accountants (Ehrhardt Keefe Steiner &
Hottman P.C.)
27(5) Financial Data Schedule for OraLabs Holding Corp. and Consolidated
Subsidiaries
</TABLE>
- ------------------
(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-K filed for
fiscal year 1998.
(5) Filed herewith.
(b) A Form 8-K was filed on December 21, 1999, which reported upon criminal
charges (subsequently dismissed) filed against the Company's President.
20
<PAGE>
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: March 30, 2000
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, March 30, 2000
------------------------------- Chief Executive Officer
Gary H. Schlatter
/S/ MICHAEL I. FRIESS Director, Secretary March 30, 2000
-----------------------------
Michael I. Friess
/S/ ALLEN R. GOLDSTONE Director March 30, 2000
------------------------------
Allen R. Goldstone
21
<PAGE>
ORALABS HOLDING CORP.
AND SUBSIDIARIES
FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
<PAGE>
ORALABS HOLDING CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report............................................F - 1
Consolidated Financial Statements
Consolidated Balance Sheet............................................F - 2
Consolidated Statements of Operations.................................F - 3
Consolidated Statement of Changes in Stockholders' Equity.............F - 4
Consolidated Statements of Cash Flows.................................F - 5
Notes to Consolidated Financial Statements..............................F - 6
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Oralabs Holding Corp. and Subsidiaries
Denver, Colorado
We have audited the accompanying consolidated balance sheet of Oralabs Holding
Corp. and Subsidiaries as of December 31, 1999, and the related consolidated
statements of income, stockholders' equity and cash flows for the years ended
December 31, 1999 and 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Oralabs Holding
Corp. and Subsidiaries as of December 31, 1999 and the results of their
operations and their cash flows for the years ended December 31, 1999 and 1998,
in conformity with generally accepted accounting principles.
Ehrhardt Keefe Steiner & Hottman PC
March 14, 2000
Denver, Colorado
<PAGE>
ORALABS HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Assets
<S> <C>
Current assets
Cash and cash equivalents $ 646,335
Accounts receivable, net of allowance for doubtful accounts of $71,004 1,529,831
Shareholder receivable 11,334
Inventory, net (Note 2) 1,759,292
Deferred income taxes (Note 9) 134,572
Prepaid expenses 124,723
Deposits (Note 5) 150,000
------------
Total current assets 4,356,087
Property and equipment at cost, net (Note 3) 549,809
------------
Total assets $ 4,905,896
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable - trade $ 752,082
Accrued liabilities 276,965
Reserve for returns 324,797
Income taxes payable (Note 9) 82,985
------------
Total current liabilities 1,436,829
Deferred tax liability (Note 9) 14,401
------------
Total liabilities 1,451,230
------------
Commitments and contingencies (Notes 4, 5, 8 and 12)
Stockholders' equity (Note 8)
Preferred stock, $.001 par value, 1,000,000 shares authorized;
none issued and outstanding --
Common stock, $.001 par value; 100,000,000 shares authorized; 9,160,755
issued and outstanding 9,160
Additional paid-in capital 1,216,905
Retained earnings 2,228,601
------------
Total stockholders' equity 3,454,666
------------
Total liabilities and stockholders' equity $ 4,905,896
============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
ORALABS HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenue
Product sales $ 9,048,548 $ 6,553,331
Services income - related party (Note 4) 112,486 536,685
Cost of sales 6,114,216 3,853,959
------------ ------------
Gross profit 3,046,818 3,236,057
------------ ------------
Operating expenses
Engineering 180,016 110,286
Selling and marketing 1,265,769 848,419
General and administrative 1,002,003 929,713
Other 51,233 76,344
------------ ------------
Total operating expenses 2,499,021 1,964,762
------------ ------------
Net operating income 547,797 1,271,295
Other income (Note 13)
Interest and other income 336,974 41,080
------------ ------------
Total other income 336,974 41,080
------------ ------------
Net income before provision for income taxes 884,771 1,312,375
Provision for income taxes (Note 9)
Current 418,726 473,211
Deferred (80,052) 20,605
------------ ------------
338,674 493,816
------------ ------------
Net income $ 546,097 $ 818,559
============ ============
Basic income per common share $ 0.06 $ 0.09
============ ============
Weighted average shares outstanding 9,158,245 9,126,621
============ ============
Diluted income per share $ 0.06 $ 0.09
============ ============
Diluted weighted average shares outstanding 9,395,997 9,486,436
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ORALABS HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED THROUGH DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
--------------------- ------------------------ PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ---------- --------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 -- $ -- 9,123,555 $ 9,124 $1,134,427 $ 863,945 $2,007,496
Common stock options exercised -- -- 2,200 2 2,198 -- 2,200
Common stock issued for services -- -- 16,664 16 42,684 -- 42,700
Net income -- -- -- -- -- 818,559 818,559
------ ---------- --------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 -- 9,142,419 9,142 1,179,309 1,682,504 2,870,955
Common stock options exercised 10,000 10 9,990 -- 10,000
Common stock issued for services 8,336 8 27,606 -- 27,614
Net income -- -- -- 546,097 546,097
------ ---------- --------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 -- $ -- 9,160,755 $ 9,160 $1,216,905 $2,228,601 $3,454,666
====== ========== ========= ========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
ORALABS HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income $ 546,097 $ 818,559
----------- -----------
Adjustments to reconcile net income to net
cash (used in) provided by
operating activities
Depreciation 139,303 86,943
Deferred taxes (80,052) 27,697
Stock issued for services 27,614 42,700
Changes in assets and liabilities
Other current assets (10,815) (33,379)
Accounts receivable (404,406) (438,757)
Inventory 202,845 (1,362,867)
Accounts payable (106,784) 550,941
Accrued expenses 217,533 9,952
Reserve for returns 187,039 (61,702)
Income taxes payable (23,309) (13,292)
----------- -----------
148,968 (1,191,764)
----------- -----------
Net cash provided by (used in) operating activities 695,065 (373,205)
----------- -----------
Cash flows from investing activities
Investment in property and equipment (257,709) (303,614)
Deposit (150,000) --
----------- -----------
Net cash (used in) investing activities (407,709) (303,614)
----------- -----------
Cash flows from financing activities
Proceeds from stock issuance 10,000 2,200
----------- -----------
Net cash provided by financing activities 10,000 2,200
----------- -----------
Net increase (decrease) in cash and cash equivalents 297,356 (674,619)
Cash and cash equivalents, beginning of period 348,979 1,023,598
----------- -----------
Cash and cash equivalents, end of period $ 646,335 $ 348,979
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for income taxes was $361,983 (1999) and $346,695 (1998).
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
ORALABS HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Oralabs Holding Corp. (the "Company") a Colorado corporation was formed during
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 a one
for two basis. All references to common stock in the Company's financial
statements have been retroactively adjusted for the merger and the one for two
reduction in shares outstanding.
Oralabs, Inc. (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 consolidated financial statements include the accounts of ORALABS and the
accounts of SSI since the date of the reverse acquisition and the accounts of OL
Sub Corp. (an inactive entity) since inception. All intercompany accounts and
transactions have been eliminated.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
short-term securities purchased with an original maturity of three months or
less to be cash equivalents. As of December 31, 1999, balances of cash and cash
equivalents at banking institutions exceeded federally insured limit by
approximately $595,000. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant credit risks on cash
and cash equivalents.
ADVERTISING COSTS
The Company expenses advertising expenses as incurred. Total advertising costs
of $94,863 and $77,120 for December 31, 1999 and 1998, respectively, were
expensed to operations.
INVENTORIES
Inventories consist of raw materials, work-in-process and finished goods which
are carried at the lower of average cost or market value. Cost is determined
using the average cost method.
RESEARCH AND DEVELOPMENT
Research and development costs related to new product lines are expensed as
incurred. Total research and development costs of $24,406 and $53,472 for
December 31, 1999 and 1998, respectively were expensed to operations.
F-6
<PAGE>
ORALABS HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided using the
straight-line method for financial reporting purposes at rates based on the
following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Machinery and equipment 5-7
Leasehold improvements 5
</TABLE>
REVENUE RECOGNITION
The Company recognized revenue in accordance with the criteria set forth in SFAS
48. Revenue is recognized as product is shipped net of estimated returns. The
Company allows returns for defective product and records an estimate of these
returns based upon historical operations and experience.
INCOME TAXES
The Company calculates and records the amount of taxes payable or refundable
currently or in future years for temporary differences between the consolidated
financial statement basis and income tax basis based on the current enacted tax
laws. Temporary differences are differences between the tax basis of assets and
liabilities and their reported amounts in the consolidated financial statements
that will result in taxable or deductible amounts in future years.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reporting amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash and cash
equivalents, receivables, prepaid expenses, accounts payable and accrued
expenses approximate their fair values as of December 31, 1999 because of the
relatively short maturity of these instruments.
F-7
<PAGE>
ORALABS HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company has elected to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options in the accompanying statements
of operations is measured as the excess, if any, of the fair market value of the
Company's stock at the measurement date over the amount the employee must pay to
acquire the stock.
EARNINGS PER SHARE
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standard No. 128. Basic earnings per share is computed
based on the weighted average number of common shares outstanding. Diluted
earnings per share is computed based on the weighted average number of common
shares plus potential dilutive common shares outstanding which includes common
stock options granted under the Company's stock option plans.
CONCENTRATION OF BUSINESS AND CREDIT RISK
The Company is engaged primarily in the manufacture and sale of lip balm, 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 business is
principally in one area, this concentration of operations results in an
associated risk and uncertainty. 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 - INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
Raw materials $ 1,748,946
Work-in-process and finished goods 303,346
Reserve for slow moving inventory (293,000)
-----------
$ 1,759,292
===========
</TABLE>
F-8
<PAGE>
ORALABS HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
Machinery and equipment $ 785,268
Leasehold improvements 161,278
---------
946,546
Less accumulated depreciation (396,737)
---------
$ 549,809
=========
</TABLE>
NOTE 4 - TRANSACTION WITH RELATED PARTY
The Company leases office and warehouse space owned by the Company's president.
In April 1998, Oralabs Holding Corp. entered into a management agreement with a
company owned by Oralabs Holding Corp.'s President. Oralabs Holding Corp.
receive a fee for providing certain receiving, shipping and accounting services.
Revenue is recognized as product is shipped. At December 31, 1999 and 1998,
Oralabs Holding Corp. recognized revenue of $112,486 and $536,685 under this
agreement and amount due from the related party was $0 and $27,664,
respectively. The agreement for service income was terminated as of July 1,
1999.
NOTE 5 - COMMITMENTS
OPERATING LEASE
The Company leases office and manufacturing facilities under separate operating
leases for buildings owned by the Company's president. The Company also leases
two vehicles under operating lease agreements. Total rent payments on all leases
total approximately $15,359 per month.
Future minimum lease payments at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ -------------
<S> <C>
2000 $ 155,047
2001 111,047
2002 104,355
2003 52,626
2004 3,126
-------------
$ 426,201
=============
</TABLE>
F-9
<PAGE>
ORALABS HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - COMMITMENTS (CONTINUED)
Rent expense under these operating leases totaled $168,771 and $122,652 during
the years ended December 31, 1999 and 1998, respectively.
DEPOSIT
At December 31, 1999, the Company had a deposit of $150,000 for an order of
production equipment. It is the intent of the Company to take out a lease on the
equipment of approximately $375,000 at which time the Company would be
reimbursed for the $150,000 deposit by the leasing company.
NOTE 6 - SIGNIFICANT SUPPLIERS
For the year ended December 31, 1998, the Company had purchases of $675,000 and
$571,066 from two suppliers accounting for 18% and 15% of total purchases. The
Company had accounts receivable of $261,176 and $115,604 from two customers
representing 23% and 10% of accounts receivable at December 31, 1998.
NOTE 7 - LINE-OF-CREDIT
The Company entered into a line-of-credit agreement with a bank in the amount of
$750,000 which expires May 2000. As of December 31, 1999, the Company had
available the entire $750,000 unused line-of-credit. The interest rate at
December 31, 1999 was 7.5% per annum to be adjusted periodically based on 1.0%
under the banks prime rate. The line-of-credit is collateralized by a first lien
on all of the Company's business assets.
NOTE 8 - STOCK OPTIONS
In 1997, the Company adopted an incentive stock option plan for employees. Under
this plan, the board approved a program to grant certain employees the right to
purchase common stock of the Company for $1.00 per share. The options vest on an
annual basis. As of December 31, 1999, the Company had 487,800 incentive options
outstanding under this plan, each with exercise price of $1.00 per share.
In September 1997, the Company adopted a Non-Employee Directors' Option Plan.
The Board approved a program to grant certain directors the right to purchase
common stock of the Company. The options vest on an annual basis. As of December
31, 1999, the Company had 40,000 options outstanding under this plan, of which
20,000 options may be exercised at the price of $1.00 per share, 10,000 may be
exercised at the price of $4.25 per share and 10,000 may be exercised at the
price of $2.50 per share.
F-10
<PAGE>
ORALABS HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - STOCK OPTIONS (CONTINUED)
The following is a summary of options and warrants granted:
<TABLE>
<CAPTION>
EXERCISE PRICE
OPTIONS PER SHARE
------- ------------
<S> <C> <C>
Outstanding December 31, 1997 520,000 1.00
Options granted 10,000 4.25
Options exercised (2,200) 1.00
------- ------------
Outstanding December 31, 1998 527,800 1.00 - 4.25
Options granted 10,000 2.50
Options exercised (10,000) 1.00
------- ------------
Outstanding December 31, 1999 527,800 $1.00 - 4.25
======= ============
</TABLE>
The Company has the following stock options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
NON-
OPTIONS EXERCISE EXPIRATION EXERCISABLE EXERCISABLE
OUTSTANDING PRICE DATE OPTIONS OPTIONS
- ----------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
20,000 $ 1.00 September 2002 10,000 10,000
10,000 4.25 June 2003 7,500 2,500
10,000 2.50 June 2004 10,000 --
176,000 1.00 April 2007 -- 176,000
51,000 1.00 June 2007 30,600 20,400
260,800 1.00 August 2007 157,800 103,000
- ------- ------- ------- -------
527,800 215,900 311,900
======= ======= =======
Weighted average
information $ 1.09 87.0 months
=======
</TABLE>
F-11
<PAGE>
ORALABS HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - STOCK OPTIONS (CONTINUED)
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation".
Accordingly, no compensation cost has been recognized using the fair value
approach for stock options and warrants granted pursuant to employee plans. Had
compensation cost for the Company's stock options and warrants been determined
based on the fair value at the grant date for awards in 1998 consistent with the
provisions of SFAS No. 123, the Company's net earnings and earnings per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------
1999 1998
------- -------
<S> <C> <C>
Net income - as reported 546,097 818,559
Net income - pro forma 531,578 796,469
Earnings per share - as reported .06 .09
Earnings per share - pro forma .06 .08
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants: dividend yield of 0%; expected volatility of 62%;
discount rate of 5.50% and 5.45%; and expected lives of 5 and 4 years for 1999
and 1998, respectively.
NOTE 9 - INCOME TAXES
Deferred tax liabilities and assets are determined based on the difference
between the financial statement assets and liabilities and tax basis assets and
liabilities using the tax rates in effect for the year in which the differences
occur. The measurement of deferred tax assets is reduced, if necessary, by the
amount of any tax benefits that based on available evidence, are not expected to
be realized.
The components of the provision for income tax expense are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
--------- --------
<S> <C> <C>
Current $ 418,726 $473,211
Deferred (80,052) 20,605
--------- --------
$ 338,674 $493,816
========= ========
</TABLE>
F-12
<PAGE>
ORALABS HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES (CONTINUED)
The deferred income tax assets and liabilities result primarily from differing
depreciation and amortization periods of certain assets, provision for doubtful
accounts, provision for product returns and allowances, and the recognition of
certain expenses for financial statement purposes and not for tax purposes.
The net current and long-term deferred tax liabilities in the accompanying
balance sheet include the following items:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
Current deferred tax asset $134,572
Current deferred tax liability --
--------
$134,572
========
Long-term deferred tax asset $ --
Long-term deferred tax liability 14,401
--------
$ 14,401
========
</TABLE>
RATE RECONCILIATION
The reconciliation of income tax expense by applying the Federal Statutory rates
to the Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1999 1998
---- ----
<S> <C> <C>
Federal statutory rate 34.0% 34.0%
State tax on income, net of federal income tax benefit 5.0 5.0
Nondeductible expenses .3 .4
Other (1.0) (1.8)
---- ----
38.3% 37.6%
==== ====
</TABLE>
F-13
<PAGE>
ORALABS HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share (EPS) computations:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR)
----------- ------------- -------------
<S> <C> <C> <C>
Net income $ 818,559
Basic EPS
Weighted average beginning shares outstanding
-- 9,123,555
Weighted average option shares issued -- 669
Weighted average shares issued for services -- 2,397
---------- ----------
Income available to common stockholders 818,559 9,126,621 $ .09
=============
Effect of Dilutive Common Stock
Options 359,815
Diluted EPS
Income available to common stockholders
plus assumed conversions $ 818,559 9,486,436 $ .09
========== ========== =============
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
------------------------------------------
<S> <C> <C> <C>
Net income $ 546,097
Basic EPS
Weighted average beginning shares outstanding -- 9,142,419
Weighted average option shares issued -- 8,383
Weighted average shares issued for services -- 7,443
---------- ----------
Income available to common stockholders 546,097 9,158,245 $ .06
=============
Effect of Dilutive Common Stock
Options -- 237,752
Diluted EPS
Income available to common stockholders
plus assumed conversions $ 546,097 9,395,997 $ .06
========== ========= =============
</TABLE>
F-14
<PAGE>
ORALABS HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - EXPORT SALES
All of the Company's business is transacted in U.S. dollars and the Company had
no foreign currency translation adjustments. Export sales for the years ended
December 31, 1999 and 1998 were $1,557,949 or 17% and $1,087,622 or 17% of
product sales, respectively.
NOTE 12 - CONTINGENCIES
LITIGATION
The Company is the defendant in a civil suit by a former employee of the
Company. The civil suit asserts claims for commissions based upon sales of
certain Oralabs Holding Corp. products and a finders fee with respect to
acquisition transactions that have not occurred. It also asserts claims for
fraud and outrageous conduct. On July 27, 1999, the court granted Oralabs
Holding Corp. a motion to dismiss the fraud and outrageous conduct claims.
A trial is set to begin on September 18, 2000. In the opinion of management and
supported by advice from counsel, the likelihood of a material adverse effect on
the financial position of the Company is small.
NOTE 13 - OTHER INCOME
During 1999, the Company was a party to a transaction in which it was paid a
fee of $500,000 and a minority stock ownership position in an unaffiliated
entity, of which 25% (after expenses) was paid to Creative Business, LLC
("CBS"), a company owned by a board member, in consideration for brokerage
services performed by CBS. After its split and expenses, the Company received
approximately $340,000. The stock ownership included 5% preferred and 5%
common stock position in the unaffiliated company, of which the Company is
obligated to give CBS a 25% share (i.e., 1.25%) of any distributions. No
value was attributable to the small minority interest due to the uncertainty
of future realization.
NOTE 14 - SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
In the fourth quarter for the year ended December 31, 1999, the Company made the
following adjustments to the financial statements:
The Company recorded a physical inventory adjustment of approximately
$480,000. The difference was attributed to scrap, defective product,
shrinkage, samples and obsolescence. The Company also recorded an
adjustment to reserve for slow moving inventory of approximately $160,000.
F-15
<PAGE>
ORALABS HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - SIGNIFICANT FOURTH QUARTER ADJUSTMENTS (CONTINUED)
The Company recorded approximately $120,000 of commissions expense relating
to revenue earned in 1999.
Finally, the Company made a decision to increase its allowance for returns
by $138,000.
F-16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
10.5(ii) Business Lease Between the Company and 2780 South Raritan, LLC
modified July 1, 1999
10.6 Agreement between the Company, Creative Business LLC and Allen R.
Goldstone dated August 24, 1999, as amended
10.8 Letter Agreement terminating Contract for Services between
OraLabs, Inc. and Top Form Brands, Inc. dated April 28, 1999
23.1 Consent of Independent Public Accountants (Ehrhardt Keefe
Steiner & Hottman P.C.)
27 Financial Data Schedule for OraLabs Holding Corp. and
Consolidated Subsidiaries
</TABLE>
<PAGE>
BUSINESS LEASE
This lease, dated July 1, 1998, is between 2780 SOUTH RARITAN, LLC, as
Landlord, and ORALABS, INC., as Tenant.
In consideration of the payment of the rent and the performance of the
covenants and agreements by the Tenant set forth herein, the Landlord does
hereby lease to the Tenant the following described premises situate in Arapahoe
County, in the State of Colorado; the address of which is 2780 S. Raritan
Street, Englewood, Colorado.
Said premises, with all the appurtenances, are leased to the Tenant from
the date of July 1, 1998, until the date of June 30, 2003 at and for a rental
for the full term of $495,000.00, payable in monthly installments of $8,250.00,
(based upon $5.50 per square foot per annum for the premises consisting of
18,000 square feet) [modified July 1, 1999 to not include office space at
northwest side. Reduction of $486 per month, $5,500 per year] in advance, on the
1st day of each calendar month during the term of this lease, payable at 2901 S.
Tejon St., Englewood, Colorado 80110, without notice.
THE TENANT, IN CONSIDERATION OF THE LEASING OF THE PREMISES AGREES AS
FOLLOWS:
1. To pay the rent for the premises above-described.
2. To keep the improvements upon the premises, including sewer connections,
plumbing, wiring and glass in good repair, all at Tenant's expense, and at the
expiration of this lease to surrender the premises in as good a condition as
when the Tenant entered the premises, loss by fire, inevitable accident, and
ordinary wear excepted. To keep all sidewalks on and around the premises free
and clear of ice and snow, and to keep the entire exterior premises free from
all litter, dirt, debris and obstructions; to keep the premises in a clean and
sanitary condition as required by the ordinances of the city and county in which
the property is situate.
3. To sublet no part of the premises, and not to assign the lease or any
interest therein without the written consent of the Landlord, which consent
shall not be unreasonably withheld.
4. To use the premises only as manufacturing and warehouse and to use the
premises for no purposes prohibited by the laws of the United States or the
State of Colorado, or of the ordinances of the city or town in which said
premises are located, and for no improper or questionable purposes whatsoever,
and to neither permit nor suffer any disorderly conduct, noise or nuisance
having a tendency to annoy or disturb any persons occupying adjacent premises.
5. To neither hold nor attempt to hold the Landlord liable for any injury
or damage, either proximate or remote, occurring through or caused by the
repairs, alterations, injury or accident on or to the premises, or adjacent
premises, or other parts of the above premises not herein demised, or by reason
of the negligence or default of the owners or occupants thereof or any other
person, nor to hold the Landlord liable for any injury or damage occasioned by
defective electric wiring, or the breakage or stoppage of plumbing or sewerage
upon said premises or upon adjacent premises, whether breakage or stoppage
results from freezing or otherwise; to neither permit nor suffer said premises,
or the walls or floors thereof, to be endangered by overloading, nor said
premises to be used for any purpose which would render the insurance thereon
void or the insurance risk more hazardous, nor make any alterations in or
changes in, upon, or about said premises without first obtaining the written
consent of the Landlord therefor, but to permit
<PAGE>
the Landlord to place a "For Rent" sign upon the leased premises at any time
after sixty (60) days before the end of this lease.
6. To allow the Landlord to enter upon the premises at any reasonable hour.
IT IS EXPRESSLY UNDERSTOOD AND AGREED BETWEEN LANDLORD AND TENANT AS
FOLLOWS:
7. All charges for water and water rents are to be paid by Tenant. All
charges for heating and lighting are to be paid by Tenant. Janitorial services
are to be paid by Tenant. Tenant pays all expenses. Tenant pays all taxes and
all costs relating to ownership of the building.
8. No assent, express or implied, to any breach of any one or more of the
agreements hereof shall be deemed or taken to be a waiver of any succeeding or
other breach.
9. If, after the expiration of this lease, the Tenant shall remain in
possession of the premises and continue to pay rent without a written agreement
as to such possession, then such tenancy shall be regarded as a month-to-month
tenancy, at a monthly rental, payable in advance, equivalent to the last month's
rent paid under this lease, and subject to all the terms and conditions of this
lease.
10. If the premises are left vacant and any part of the rent reserved
hereunder is not paid, then the Landlord may, without being obligated to do so,
and without terminating this lease, retake possession of the said premises and
rent the same for such rent, and upon such conditions as the Landlord may think
best, making such changes and repairs as may be required, giving credit for the
amount of rent so received less all expenses of such changes and repairs, and
the Tenant shall be liable for the balance of the rent herein reserved until the
expiration of the term of this lease.
11. The Landlord acknowledges receipt of a deposit in the amount of $(none)
to be held by the Landlord for the faithful performance of all of the terms,
conditions and covenants of this lease. The Landlord may apply the deposit to
cure any default under the terms of this lease and shall account to the Tenant
for the balance. The Tenant may not apply the deposit hereunder to the payment
of the rent reserved hereunder or the performance of other obligations.
12. At the Landlord's option, it shall be deemed a breach of this lease if
the Tenant defaults (a) in the payment of the rent or any other monetary
obligation herein; or (b) in the performance of any other term or condition of
this lease. The Landlord may elect to cure such default and any expenses of
curing may be added to the rent and shall become immediately due and payable. In
the event that the Landlord elects to declare a breach of this lease, the
Landlord shall have the right to give the Tenant three (3) days written notice
requiring payment of the rent or compliance with other terms or provisions of
the lease, or delivery of the possession of the premises. In the event any
default remains uncorrected after three (3) days written notice, the Landlord,
at Landlord's option, may declare the term ended, repossess the premises, expel
the Tenant and those claiming through or under the Tenant and remove the effects
of the Tenant, all without being deemed guilty in trespass or of a forcible
entry and detainer and without prejudice to any other remedies to which the
Landlord may be entitled. If at any time this lease is terminated under this
paragraph, the Tenant agrees to peacefully surrender the premises to the
Landlord immediately upon termination, and if the Tenant remains in possession
of the premises, the Tenant shall be deemed guilty of unlawful detention of the
premises. The Landlord shall be entitled to recover from the Tenant all damages
by reason of the Tenant's default, including but not limited to the cost to
recover and repossess the premises, the expenses of reletting, necessary
renovation and alteration expenses, commissions and the rent for the balance of
the term of this lease.
2
<PAGE>
13. In the event the premises shall become untenantable on account of
damage by fire, flood or act of God, this lease may be thereupon terminated and
the rent apportioned to the date of the occurrence of such damage.
14. In the event of any dispute arising under the terms of this lease, or
in the event of non-payment of any sums arising under this lease and in the
event the matter is turned over to an attorney, the party prevailing in such
dispute shall be entitled, in addition to other damages or costs, to receive
reasonable attorneys' fees from the other party.
15. In the event any payment required hereunder is not made within (10)
days after the payment is due, a late charge in the amount of five percent (5%)
of the payment will be paid by the Tenant.
16. In the event of a condemnation or other taking by any governmental
agency, all proceeds shall be paid to the Landlord hereunder, the Tenant waiving
all right to any such payments.
17. This lease is made with the express understanding and agreement that in
the event the Tenant becomes insolvent, the Landlord may declare this lease
ended, and all rights of the Tenant hereunder shall terminate and cease.
18. The Landlord and the Tenant further agree
SHOULD ANY PROVISION of this lease violate any federal, state or local law
or ordinance, that provision shall be deemed amended to so comply with such law
or ordinance, and shall be construed in a manner so as to comply. This lease
shall be binding on the parties, their personal representatives, successors and
assigns. When used herein, the singular shall include the plural, and the use of
any gender shall apply to both genders.
/s/ Gary Schlatter
-------------------------------------------
Gary Schlatter, Mgr 2780 South Raritan LLC
LANDLORD
ORALABS, INC.
/s/ Gary Schlatter
-------------------------------------------
Gary Schlatter for TENANT, ORALABS, INC.
3
<PAGE>
AGREEMENT
This Agreement is dated for reference purposes only August 24, 1999, and is
by and between OraLabs Holding Corp., a Colorado corporation (the "Company") and
Creative Business LLC, a Colorado limited liability company ("CBS") and Allen R.
Goldstone ("Goldstone").
WHEREAS, the Company recently closed a transaction (the "Transaction")
between it and Pecos Acquisition Company ("Pecos") pursuant to which the Company
was paid a fee represented by $500,000 in cash as well as securities
representing a five percent (5%) ownership interest in Pecos (consisting of
631.579 shares of preferred stock (the "Preferred Stock") and 50 shares of
common stock (the "Common Stock") of Pecos (the 631.579 shares of Preferred
Stock and 50 shares of Common Stock are collectively referred to as the
"Shares"); and
WHEREAS, throughout the negotiations of the transaction, CBS, which is
solely owned by Goldstone, provided consulting and brokerage services to the
Company which consisted of services separate and apart from those provided by
Goldstone to the Company in his capacity as a director; and
WHEREAS, the parties have agreed upon the compensation payable to CBS in
consideration for the performance of its services; and
WHEREAS, Goldstone wishes to resign as a member of the Board of Directors
of the Company and the Company wishes to accept his resignation; and
WHEREAS, the board of directors of the Company has determined that the
payment of the compensation described herein is reasonable and is fair to the
Company.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the adequacy and sufficiency of which is acknowledged,
the parties agree as follows:
1. By no later than September 1, 1999, the Company shall compute its out of
pocket expenses incurred in connection with the Transaction and a copy of such
computations shall be delivered to Goldstone. Promptly thereafter, the Company
shall pay to CBS a cash payment equal to 25% of the number obtained by
subtracting the expenses from the figure of $500,000.
2. The Company hereby grants CBS, solely in CBS's capacity as an assignee
of distributions, a beneficial interest in 25% of all distributions which may
hereafter be made to the Company by Pecos with respect to the Shares (CBS
acknowledges that the five percent (5%) share may be diluted by Pecos and in
such event the 25% interest of CBS shall thereafter apply to the Company's
diluted interest). Such beneficial interest of CBS shall be applicable as well
to any securities issued to the Company with respect to the Shares such as by
means of a stock dividend or stock split. Upon receipt of any distributions from
Pecos respecting the Shares, the Company shall promptly pay CBS an amount equal
to 25% of any such distribution. In no event shall this paragraph
1
<PAGE>
be construed to require the Company to make any payment to CBS except to the
extent of and from 25% of proceeds actually received by the Company with respect
to the Shares. Within a reasonable time after the Company receives any report
from Pecos which relates to distributions payable to the Company arising out of
the Company's ownership of the Shares, the Company shall send a copy thereof to
Goldstone. Goldstone agrees to maintain the confidentiality of such reports and
the Company has the right to redact provisions of any such reports which do not
relate to the amount of any distributions owing to the Company by Pecos.
3. Notwithstanding any provision of Agreement to the contrary, all voting
rights and all other rights of the Company as a shareholder of Pecos shall be
exercisable solely by the Company and CBS shall have no right to participate
therein. In addition, CBS shall have no right to participate in any other
transactions which the Company in the exercise of its sole discretion may desire
to enter into with or otherwise relating to Pecos.
4. CBS and Goldstone each agree that the payments which may be made to CBS
pursuant to this Agreement represent fair compensation for the services provided
by CBS. Goldstone and CBS, together and separately and for the benefit of their
affiliates and themselves, their heirs, successors and assigns (collectively,
the "Releasing Party"), hereby release OraLabs Holding Corp. and its
subsidiaries, each of its officers and directors, and all of their respective
successors and assigns (collectively, the "Released Party"), from any and all
claims and causes of action which the Releasing Party or any of them has or may
have in the future against any one or more of the Released Parties arising out
of any facts or circumstances whatever. As an illustration of the foregoing but
not as a limitation of the generality thereof, the Releasing Party agrees that
it is not entitled to any other compensation from the Released Party for any
matter whatsoever. The provisions of this release have been agreed upon by
Goldstone and CBS knowingly, with advice of counsel as they deem appropriate,
and the execution of this release has been voluntarily made.
5. In order to avoid any confusion about compensation which may be owing to
Goldstone or CBS in consideration for services they may render with respect to
any subsequent transactions by the Company, Goldstone and CBS agree that they
shall not be entitled to any claim for compensation unless and until the parties
execute a written agreement concerning such compensation on terms acceptable to
all of the parties in the exercise of their respective sole discretions. No
course of conduct or alleged oral agreement by the parties may be relied upon by
any party in support of a claim for compensation.
6. The law firm of Waldbaum, Corn, Koff & Berger, P.C. has acted as the
Company's counsel in connection with the negotiation and execution of this
Agreement. Goldstone and CBS have been advised to obtain the advice of their own
separate legal counsel and other advisors as they deem appropriate. Goldstone
and CBS are separately responsible for obtaining advice about the tax
consequences, if any, of entering into this Agreement.
7. Goldstone hereby tenders his resignation as a director and from all
officer positions held by him with the Company and its subsidiaries and the
Company hereby accepts such
2
<PAGE>
resignations, effective immediately upon mutual execution of this instrument. In
connection with such resignation, Goldstone agrees that he is not resigning
because of a disagreement with the Company on any matter related to the
Company's operations, policies or practices.
8. This Agreement may be executed in counterparts and facsimile signatures
shall be accepted as originals.
IN WITNESS WHEREOF, the parties have executed this Agreement on the dates
specified below.
ORALABS HOLDING CORP., a Colorado
corporation
By: /s/ Gary H. Schlatter
----------------------------------
Gary H. Schlatter, President
Date:8/24/99
--------------------------------
CREATIVE BUSINESS LLC, a
Colorado limited liability company
By: /s/ Allen R. Goldstone
----------------------------------
Allen R. Goldstone, Managing
Member
Date:8/25/99
--------------------------------
/s/ Allen R. Goldstone
-------------------------------------
Allen R. Goldstone, individually
Date: 8/25/99
--------------------------------
3
<PAGE>
ADDENDUM TO AUGUST 24, 1999 AGREEMENT
This document is an addendum to the agreement dated August 24, 1999 between
OraLabs Holding Corp. (OL) and Allen Goldstone (Goldstone) and Creative
Business, LLC (CBS), collectively (GCBS).
GCBS hereby agrees to indemnify OL for any fees and expenses that OL pays
to Larry Kaplan and his affiliates (LK) resulting from a claim that LK is due a
fee for his participation in the acquisition by OL of a minority interest in
Pecos Pharmaceutical.
If LK asserts a claim against OL, GCBS will either settle the claim or
defend the claim at its expense with legal counsel satisfactory to OL. In the
event of any litigation between OL and GCBS concerning this agreement the
prevailing party shall be awarded its cost and attorneys fees incurred
therewith.
To the extent any claim is made by LK against OL, relating to this
transaction, then funds otherwise payable to CBS under this Agreement may be
withheld and offset against those payments due GCBS until the claim is resolved.
ORALABS HOLDING CORP.
By: /s/ Gary H. Schlatter
---------------------------------------
Gary H. Schlatter, President
Date: 9/17/99
-------------------------------------
/s/ Allen R. Goldstone
------------------------------------------
Allen R. Goldstone, individually
Date 9/17/99
-------------------------------------
CREATIVE BUSINESS LLC
/s/ Allen R. Goldstone
------------------------------------------
Allen R. Goldstone, President
Date: 9/17/99
-------------------------------------
<PAGE>
ORALABS, INC.
2901 South Tejon Street
Englewood, Colorado 80110
Telephone: Facsimile:
(303)783-9499 (303)783-5759
April 28, 1999
Mr. Gary H. Schlatter
4835 South Gaylord Street
Englewood, CO 80110
Dear Mr. Schlatter:
This letter confirms the agreement between the parties that the contract
between OraLabs, Inc. and Top Form Brands, Inc. effective April 1, 1998 shall
terminate as of June 30, 1999.
Very truly yours,
/s/ Allen R. Goldstone
Allen R. Goldstone,
Authorized Director
APPROVED:
TOP FORM BRANDS, INC.
By: /s/ Gary H. Schlatter
----------------------------
Gary H. Schlatter, Authorized Officer
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference of our report on Oralabs
Holding Corp. dated March 14, 2000 in the Registration Statement on Form S-8 as
included in the Oralabs Holding Corp.'s Form 10-KSB for the year ended December
31, 1999, and to all references to our firm included in such Registration
Statement.
Ehrhardt Keefe Steiner & Hottman PC
March 28, 2000
Denver, Colorado
<TABLE> <S> <C>
<PAGE>
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<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 646,335 348,979
<SECURITIES> 0 0
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