U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|X| Annual report under section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year
ended December 31, 2005
|_| 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
incorporation or organization) Identification No.)
18685 East Plaza Drive, Parker, Colorado 80134
-------------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
(Issuer's telephone number: (303) 783-9499
Securities registered under Section 12(b) of the Act:
Title of each class Name of each exchange
None on which registered
--------------------------------------------
Securities registered under Section 12(g) of the Act:
Common Shares, par value $0.001 per share
(Title of class)
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. [_]
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_
Indicate by checkmark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act). Yes___ No_X_
State issuer's revenues for its most recent fiscal year: $13,585,165
State the aggregate market value of voting and non-voting common equity held by
non-affiliates , computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. $1,771,514 as of March 31, 2006.
(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 ___ (not applicable)
(Applicable only to corporate registrants) State the number of shares
outstanding of each of the issuer's classes of common equity, as of the latest
practicable date. As of April 1, 2006, there were 4,693,015 shares of common
stock outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
Yes ___ No _X_
PART I
SUPPLEMENTAL EVENT AND EXPLANATORY NOTE: As disclosed in a Form 8-K filed by
OraLabs Holding Corp. ("Company") on April 6, 2006, the Company entered into a
Stock Exchange Agreement (the "Agreement") dated as of March 31, 2006 with
Partner Success Holdings Limited ("PSHL") under which all of the issued and
outstanding shares of PSHL are to be acquired by the Company in consideration
for the issuance to the owners of PSHL of common stock representing a 94%
ownership interest in the Company, after giving effect to a redemption by the
Company of 3,629,350 shares of its outstanding common stock owned individually
by its President, Gary H. Schlatter. The redemption is to be in consideration
for the transfer to Mr. Schlatter of all of the Company's outstanding common
stock of its wholly-owned operating subsidiary, OraLabs, Inc. The 94% ownership
interest in the Company is to be determined on a fully-diluted basis that will
take into account the issuance of 300,000 shares to the non-employee directors
of the Company prior to closing and after receiving shareholder approval, and
any options that may be exercised by employees prior to the closing. If the
closing of the Agreement occurs, PSHL will become a wholly-owned subsidiary of
the Company. The closing of the Agreement is conditioned upon, among other
things, customary closing conditions, including the satisfaction of both the
Company and PSHL with their due diligence investigations of the other party and
the receipt by the Board of Directors of the Company of a fairness opinion.
There can be no assurance that closing of the transactions described in the
Agreement will occur. The execution of the Agreement occurred after the period
ended December 31, 2005. Except as may otherwise be expressly stated by
reference to a date after December 31, 2005, none of the other disclosures in
this Form 10-KSB have been updated to reflect events occurring after December
31, 2005 or to modify or update disclosures in this Form 10-KSB that have been
effected by events occurring after December 31, 2005. Accordingly, except as
otherwise expressly stated, this Form 10-KSB continues to describe conditions as
of the period ended December 31, 2005.
Business Development. On May 1, 1997, OraLabs, Inc., a privately held company,
became a wholly owned subsidiary of SSI Capital Corp. (the predecessor of the
Company). SSI Capital Corp. subsequently merged with OraLabs Holding Corp., with
OraLabs Holding Corp. becoming the surviving company. As a result of these
transactions, the Company is the sole stockholder of OraLabs, Inc. The term
"Company" or "OraLabs" will mean OraLabs Holding Corp., successor to SSI Capital
Corp., and except where otherwise indicated, all discussions of the business of
the Company includes the business of OraLabs, Inc. (the "Subsidiary").
The Subsidiary was formed in 1990 for the purposes of manufacturing and
distributing tooth-whitening products. In 1992, in order to expand the product
line, the Subsidiary developed what became known as its flagship product, Ice
Drops(R). Ice Drops are a breath drop product sold in a small plastic bottle and
introduced as an alternative to breath sprays and candy breath mints.
In 1999, the Company introduced its own brands of lip balm in traditional twist
stick containers. The brands currently being marketed consist of Extra Lip
Moisture, Lip Naturals(R), Chap Ice(R), Soothe & Shine(R), and Lip Rageous (R).
These brands are sold in traditional twist up containers and the Company's
patented mini-container, which was introduced in 1996. The Company also sells
lip balms and glosses in unique new containers and hopes to be able to continue
to distinguish itself from competition by innovative packaging.
In 2003, the Company acquired certain assets of Symbiosis, Inc. These assets
included, but were not limited to, intellectual property consisting of trade
names Leashables(R) and Chapgrip(R) and a patent for a lip balm holder.
In 2005, the Company introduced into the market Sanell (TM) hand sanitizer and
Eyelieve (TM) sterile eye products.
In addition, the Company has engaged in negotiations with other businesses and
from time to time contacts persons involved in corporate finance matters to
determine if there are businesses interested in a merger or other acquisition of
or combination with the Company.
Page 1
BUSINESS OF THE COMPANY.
Principal Products, Their Markets and Distribution. The general business of the
Company is to produce and sell consumer products relating to oral care and lip
care and to distribute nutritional supplements. The Company's products are
currently sold in the USA nationally as well as numerous foreign countries. The
products are sold through wholesale distributors as well as by direct sale to
mass retailers, grocery stores, convenience stores and drug stores. The
principal products produced by the Company can be categorized into three groups:
breath fresheners, including liquid drops and sprays under the brand name Ice
Drops((R)) and Sour Zone((TM) brand sour drops and sour sprays; lip balm
products under the names Lip Rageous((R)), Chap Ice((R)), Lip Naturals((R)), Lip
Rageous Glitters(TM), Extra Lip Moisture and Soothe & Shine((R)), as well as
private label names, promotional products under the name Leashables (R),and
5-HTP, a nutritional supplement product.
In general, the Company's distribution still covers the same markets that it
always has, although 2005 saw an increase in the promotional products markets
for the second year in a row. As has been the case in recent years, sales and
promotional expenses were predominantly to large retailers. The Company believes
that the lip balm category will continue to be the Company's primary business.
The Company has established itself as a viable competitor in the lip balm
business, deriving approximately 80% of its revenue from this category. This is
a category that the Company believes can grow in sales. However, it is possible
that competitive pressures could further erode margins and increase promotional
costs and selling expenses for the Company.
The sales of breath freshener and sour candies decreased approximately 19% in
2005. Convenience store and vending distribution has stayed somewhat stable,
while dollar store distribution has varied significantly from year to year. This
market remains very important and viable to the future of the Company. The
Company's distribution network provides continual opportunities for sales of its
breath freshening and sour candies products, although the Company is uncertain
about whether there will be opportunities to increase sales of this product line
for current products in this category. In addition, the Company has developed
breath mint products and anticipates additional new revenue in 2006.
The Company's strategy for its breath freshener and lip balm products has been
to establish name brands and to develop and sell products that fill niches. The
price/value marketing strategy includes capitalizing on the distribution network
that currently carries one or more of the Company's products, and building upon
the business relationships that have been established.
The Company believes that nutritional supplement sales will remain less than 2%
part of its overall revenue. The Company is not planning any material changes to
its nutritional supplement marketing plan.
The Company's products and packaging continue to be conceptualized and developed
in-house. The Company's breath freshener and lip balm products are marketed from
and packaged at the Company's manufacturing facility in Parker, Colorado. Most
packaging, filling and automated manufacturing equipment has been designed,
built and maintained by the Company's own staff. This allows the Company to
rapidly introduce and manufacture new products, reducing lengthy lead times and
some of the cost of capital expenditures associated with some new product
introductions. It also allows the Company to test new products before committing
capital to full-scale manufacturing endeavors. However, the Company has
purchased some high speed filling and labeling equipment in order to help with
capacities for well established products. The Company has continued to invest in
automation as a strategic method to lower its cost of manufacturing.
In 2005, The Company introduced into the market Sanell (TM) hand sanitizer and
Eyelieve (TM) sterile eye products Brand extensions with different types of
innovative, creative packaging were added. The Company developed additional
private label products in anticipation of new sales opportunities.
Page 2
Competitive Business Conditions. Competition from major branded competitors in
the mass retail segment as well as private label manufacturing continues to be
very significant.
With respect to the Company's breath freshening products, direct competitors who
manufacture liquid or spray breath products consist of less than five. Breath
mints and breath strips are a significant competitive force and continue to
dominate shelf space in retail storefronts. The Company believes that there are
more than 50 competitors in the category. The breath freshening category is
always filled with numerous new product introductions from large competitors.
With respect to the Company's lip balm products, the Company believes that
approximately 70% of the market is controlled by three dominant competitors (who
sell Chapstick(R), Blistex(R) and Carmex(R), and the balance of the market
consists of more than 50 different brands. It is estimated that there are only
ten to twenty viable competitors from a manufacturing standpoint. However, it
appears that there are new small suppliers that keep appearing in the market,
which forces continued pricing pressures. Most of the competitors are also
trying to introduce new products as a means of growth and market share. The
retail stores have a finite amount of space, so getting new slots in retail
stores is a challenge.
The Company has sought to distinguish itself by size and packaging of its
products, as well as by competing with respect to pricing. The Company believes
that for some of its products, its smaller size and lower price than that of its
competitors is an advantage to the Company. However, other factors such as a
competitor's greater brand recognition or preferable product placement of a
competitor's products at retail locations may nullify or reduce whatever
competitive advantage the Company's products have. Strong national brands are
very difficult to displace and compete against. The price/value positioning and
niche marketing opportunities are where the Company is focused.
With respect to nutritional supplement products, competition in this industry is
very broad based. The Company is currently selling only one nutritional
supplement product. It is the Company's expectation that there will also be more
and tighter regulation by the government in the future, making it more expensive
to do business in this segment (see "Government Regulation" below).
Sources and Availability of Raw Materials. In general, the sources and
availability of materials used by the Company in its business are fairly
widespread, and the Company believes that it could obtain secondary sources of
raw materials at comparable prices to the extent that an existing business
relationship terminates.
Dependence upon a Single Customer. The Company does not believe that its
business with respect to any particular product or products is dependent upon
any single customer. However, the Company had two major customers that accounted
for approximately $2,400,000 and $1,600,000 respectively, or 17% and 12% of net
sales for the year 2005. The Company is always at risk of its customers filing
for bankruptcy or liquidation or of being dropped by a major customer. This has
happened in the past and could happen again.
Patents, Trademarks, Licenses, Franchises and Concessions. Although there can be
no assurance of proprietary protection respecting pending patents, patents and
trademarks held by the Company (see, "Cautionary Statement Regarding
Forward-Looking Statements, No Assurance of Proprietary Protection"), and
although the Company intends to vigorously seek to enforce and protect its
proprietary rights, the Company does not believe that the loss of any such
proprietary right would in and of itself, adversely affect the Company in a
material manner.
Seasonality. The demand for the Company's lip balm products tends to increase
during the cold, dry weather months, but the inclusion of sun block in some of
the lip balm products may help to offset some of the seasonality. Even though
the sun block products help, sales of lip balm are still considered to be 50-70%
seasonal.
Practices of the Company in the Industry. The Company's typical plans with
respect to all of its products are to keep adequate inventory on hand for
shipments within the required time frame to meet orders. The Company generally
extends credit on purchases for a term of 30-90 days after shipment. The Company
does not typically provide a formal right of customers to return merchandise.
However, the Company believes that it is a common practice in the industry, and
the Company subscribes to such practice on a case-by-case basis, to permit a
retailer who has not sold all of the goods it has purchased within a reasonable
time, to ask the Company to accept a return of the unsold merchandise. The
Company estimates and records a reserve for returns upon sale. The Company also
expects, as it is common practice in the industry, for retailers to take
deductions for "un-saleable product", which are its products that have either
been returned by a customer to the retailer or for which the packaging has
somehow become un-saleable in the retailer's sole discretion.
Page 3
Managing Manufacturing Requirements. The Company has done several things to
position itself for stability in 2006 as it did in 2005. The Company has
furthered its positioning for stability and profitability, the Company has made
numerous changes in personnel from all departments. These changes have created
additional costs that the Company hopes to be able to recoup in the long term.
The Company was able to achieve a very slight profit for the year, an
improvement from the loss recorded in 2004. The Company has been in its new
facility since February of 2004. The extra space has helped to allow the Company
to more efficiently process its orders. However the associated costs with the
new facility have not yet been offset by increased revenues. The Company plans
to refine its product offerings, by reducing and consolidating where it sees
appropriate and adding new products where it sees opportunities. The Company
hopes to be able to return to a state of sustained profitability as a result of
its manufacturing changes, however there are no assurances that it will happen.
See Trends section in Management Discussion and Analysis.
Government Regulation. The manufacturing, packaging, processing, formulation,
labeling, advertising, distribution and sale of some of the Company's products
are subject to regulation by one or more governmental agencies, the most active
of which is the Food and Drug Administration ("FDA"), which regulates those
products under the Federal Food, Drug, and Cosmetic Act ("FDCA") and regulations
promulgated there under. These products are also subject to regulation by the
Federal Trade Commission ("FTC"), the Consumer Product Safety Commission
("CPSC"), the United States Department of Agriculture ("USDA") and the
Environmental Protection Agency ("EPA"). The Company's activities are also
regulated by various agencies of the states, localities and foreign countries to
which the Company distributes its products and in which the Company's products
are sold. The FDCA has been amended several times, including by the Nutrition
Labeling and Education Act of 1990 ("NLEA") and the Dietary Supplement Health
and Education Act of 1994 ("DSHEA"). The NLEA established a requirement for the
nutrition labeling of most foods including dietary supplements. The DSHEA
introduced a new statutory framework governing the composition and labeling of
dietary supplements.
The DSHEA provides a regulatory framework to ensure safe, quality, dietary
supplements and to foster the dissemination of accurate information about such
products. The DSHEA provides, in the Company's judgment, certain regulatory
benefits for the nutritional supplement industry. Products defined as dietary
supplements under the DSHEA are regulated similarly to food; so much of the
special regulatory clearance is eliminated. In addition, claims about how a
supplement affects the structure or function of the body may be made (although
any statement made must also state that the product is not intended to diagnose,
treat, cure or prevent any disease). Under DSHEA, the FDA is generally
prohibited from regulating the active ingredients in dietary supplements as food
additives or drugs unless product claims are made that a product may diagnose,
mitigate, treat, cure or prevent an illness, disease or malady, in which event
the FDA may attach drug status to a product. An FDA Rule effective February 7,
2001 defines the types of statements that can be made concerning the effect of a
dietary supplement on the structure or function of the body pursuant to DSHEA.
The Rule establishes criteria for determining when a statement is a claim to
diagnose, cure, mitigate, treat or prevent disease thereby making the product an
unapproved new drug. That Rule has not had any material effect on the Company's
existing products and the Company will comply with the provisions of the Rule
for any new products.
As part of its regulatory authority, the FDA may periodically conduct audits of
the physical facilities, machinery, processes and procedures that the Company
uses to manufacture products. The FDA may perform these audits at any time
without advance notice. As a result of these audits, the FDA may order the
Company to make certain changes in its manufacturing facilities and processes.
The Company may be required to make additional expenditures to comply with these
orders or possibly discontinue selling certain products until it complies with
these orders. As a result, the Company's business could be adversely affected.
In February 1997, the FDA issued a Proposed Rule entitled, "CGMP in
Manufacturing, Packing, or Holding Dietary Supplements," which proposes current,
good manufacturing practices (i.e., "CGMPs") specific to dietary supplements and
dietary supplement ingredients. This Proposed Rule, if finalized, would have
required some of the quality control provisions contained in the CGMPs for
drugs. On March 13, 2003, the FDA published a proposed rule in the Federal
Register which proposes comprehensive CGMPs for the manufacturing, packing and
holding of dietary supplements, to help reduce risks seen by the FDA that are
associated with adulterated or misbranded dietary supplement products. The FDA
accepted public comments on the proposed CGMPs until August 11, 2003; but the
FDA has not promulgated final CGMPs. The minimum standards include requirements
for the design and construction of physical plants that are intended to
facilitate maintenance, cleaning, and proper manufacturing operations, for
quality control procedures, for testing final product or incoming and in-process
materials, for handling consumer complaints, and for maintaining records.
On November 18, 1998, the FTC issued its "Dietary Supplements: An Advertising
Guide for Industry." Such guide provides an application of FTC law to dietary
supplement advertising and includes examples of how principles of advertisement
interpretation and substantiation apply in the context of dietary supplement
advertising. The Guide provides additional explanation but does not
substantively change the FTC's existing policy that all supplement marketers
have an obligation to ensure that claims are presented truthfully and to verify
the adequacy of the support behind such claims.
Page 4
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 2006.
Number of Employees. The approximate number of employees working for the Company
as of the end of fiscal year 2005 was 153.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's headquarters are located in an office-warehouse building of
approximately 88,000 square feet located in Parker, Colorado, which the Company
leases from an affiliate of the Company's President. The property includes the
executive offices of the Company, as well as the Company's manufacturing and
warehouse facilities. The Company's lease expires in September 30, 2006, and the
Company believes that its rental rate is comparable to that which would be
charged by an unaffiliated landlord. (See "Certain Relationships and Related
Transactions")
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material pending legal proceedings, and to the
best of its knowledge, no such proceedings by or against the Company have been
threatened.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 21, 2005, the Annual Meeting of stockholders of the Company was held
at the Company's headquarters in Parker, Colorado. The matters voted upon at the
meeting were the election of directors and the ratification of the appointment
of the Company's auditors. With respect to the election of directors, all four
of the then incumbent directors were reelected. The voting was as follows:
For Against Abstain
--------------------------------------------------------------------------------
Gary H. Schlatter 4,422,347 4,874 0
--------------------------------------------------------------------------------
Allan R. Goldstone 4,427,037 184 0
--------------------------------------------------------------------------------
Michael I. Friess 4,422,201 5,020 0
--------------------------------------------------------------------------------
Robert C. Gust 4,426,886 335 0
--------------------------------------------------------------------------------
With respect to the ratification of the selection of the Company's auditors for
fiscal year ending December 31, 2005, there were 4,427,206 votes in favor, none
against and 15 abstentions. There were no broker non-votes. Mr. Goldstone
resigned as a director on February 14, 2006.
Page 5
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) (i) Market Price of and Dividends on the Company's Common Stock. The common
stock of the Company trades on the NASDAQ Capital 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 2004 and 2005. The source of such
information is as reported by NASDAQ.
Reported High Bid Reported Low Bid
----------------- ----------------
First quarter, fiscal 2004 $2.80 $1.50
Second quarter, fiscal 2004 $2.28 $1.47
Third quarter, fiscal 2004 $2.03 $1.36
Fourth quarter, fiscal 2004 $5.20 $1.03
First quarter, fiscal 2005 $3.70 $1.96
Second quarter, fiscal 2005 $4.53 $1.25
Third quarter, fiscal 2005 $3.19 $2.00
Fourth quarter, fiscal 2005 $4.02 $1.49
The quotations reflect inter-dealer prices, without adjustment for retail
mark-up, markdown or commission and may not necessarily present actual
transactions.
(ii) Disclosure of Equity Compensation Plans. The Company maintains the 1997
Stock Plan (the "ISOP Plan"), pursuant to which the Company may grant up to
250,000 stock options to employees. The Company also maintains the 1997
Non-Employee Directors' Option Plan ("Director Plan") under which the Company
makes an initial grant of 10,000 options and annual grants thereafter of 2,500
options to its non-employee directors, subject to the provisions of the plan.
Number of securities
to be issued upon Weighted-average Number of securities
Plan Category exercise of exercise price of remaining available
outstanding outstanding for future issuance
options, warrants options, warrants under equity
and rights (#) and rights ($) compensation plans
-------------------- ------------------- --------------------
Equity
compensation 131,500 $2.15 118,500
plans approved
by shareholders
Equity
compensation
plans not 37,500 $2.41 62,500
approved by
shareholders
Total 169,000 $2.21 181,000
(b) As of April 1, 2006, there were approximately 868 record holders of the
common stock of the Company.
(c) The Company has not paid any cash dividends and it is not intended that any
cash dividends will be paid in the foreseeable future.
Page 6
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and any associated
risks related to these policies on our business operations is discussed
throughout Management's Discussion and Analysis of Financial Condition and
Results of Operations where such policies affect our reported and expected
financial results.
In the ordinary course of business, we have made a number of estimates and
assumptions relating to the reporting of results of operations and financial
condition in the preparation of our financial statements in conformity with
accounting principles generally accepted in the United States of America. Actual
results could differ significantly from these estimates under different
assumptions and conditions. We believe that the following discussion addresses
our most critical accounting policies, which are those that are most important
to the portrayal of our financial condition and results of operations and
require our most difficult, subjective, and complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Although the Company believes that it has strict credit policies, it is not
unusual, in the normal course of business, for a customer to file for bankruptcy
or not pay for product purchased from the Company. The Company has estimated an
allowance based upon current balances and historical information which is
considered an operating expense. This estimate is subject to judgment and could
vary based on the customer mix in the future.
ALLOWANCE FOR RETURNS
Product is returned by customers for various reasons and the Company has
estimated an allowance based upon the historical rates of these returns. The
sales are recorded net of this allowance. This estimate is subject to judgment
as the historical mix of products sold could vary from the future mix of
products sold. In addition, the customer mix may change in the future.
INVENTORY OBSOLESCENCE
As product mix shifts, the Company must identify any slow-moving and obsolete
inventory it may have on hand. This inventory is reduced to its net realizable
value based upon recent sales and similar transactions occurring in the open
market. This inventory value is an estimate that is subject to changes in the
open market such as demand and availability of product.
Results of Operations. For the period ending December 31, 2005 as compared with
the period ending December 31, 2004.
Product sales increased $454,586. Please refer to the Trends section for a
detailed explanation.
Gross profit increased $902,904. As a percentage of sales, gross profit
increased by 6%. A greater concentration of sales were to higher margin
customers. The Company's capital investment in automation continues to make a
positive impact on labor costs. The Company anticipates continued improvements
in costs of operations, which will be a positive factor in managing gross
profit. However, lower selling prices and higher product packaging costs in 2006
will likely keep margins in the same range as 2005.
Engineering decreased $101,819 or 32 %. Modifications to manufacturing equipment
to operate in the new facility and introduction of additional automation in 2004
required additional labor costs. The Company anticipates similar costs in year
2006 to that of year 2005.
Selling and marketing decreased $1,287 or less than 1%. Selling and marketing
expenses increased approximately $106,000 due to an increase in sales
commissions. These costs may decrease in the first quarter of 2006 should the
Company move forward with a plan to restructure in-house sales compensation.
This increase was offset by a decrease in bad debt expense of approximately
$104,000, the result of better collection efforts and improved credit approval
policies.
DEFERRED TAXES
At December 31, 2005, the Company does not have a valuation allowance recorded
against its deferred tax assets as the amount recorded has been determined to be
more likely than not to be realized. The Company's decision was based on the
financial results of 2005 and the estimated budget financial results for 2006.
If future taxable income is less than the amount that has been assumed in
determining the deferred tax asset, an increase in the valuation allowance will
be required with a corresponding charge against income. If future taxable income
exceeds the level that has been assumed in calculating the deferred tax asset,
the valuation allowance could be reduced with a corresponding credit to income.
STOCK-BASED COMPENSATION
The Company accounts for employee stock-based compensation using Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25). Accordingly, no compensation expense has been recognized for options
granted to employees at fair market value. In December 2004, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 123(R), Share-Based Payment,
which addresses the accounting for share-based compensation transactions. SFAS
No. 123(R) eliminates the ability to account for share-based compensation
transactions using APB 25, and generally requires instead that such transactions
be accounted and recognized in the statement of operations based on their fair
value. SFAS No. 123(R) will be effective for the Company beginning January 1,
2006. The Company is currently evaluating the methods of adoption available
under SFAS 123(R). The implementation of this standard could have a material
impact on the Company's financial position and results of operations.
Page 7
General and administrative expenses decreased $11,113 or less than 1%. During
2004 the Company had expenses of approximately $260,000 related to patent
protection litigation, while in 2005 there were costs of approximately $145,000
associated with an executed stock exchange agreement that terminated in November
2005. Other offsetting increases occurred in labor and insurance costs. The
Company anticipates general and administrative costs to remain stable for 2006.
Other operating expenses increased by $17,579, or 55%, which was primarily
caused by filing related fees associated with the terminated stock exchange
agreement. The amount of other expenses is expected to remain consistent going
forward.
Interest and other income decreased $42,348. The decrease was due to a decrease
in royalty income. The Company anticipates royalty income to remain stable in
2006 from 2005.
Other expenses decreased by $35,359 to zero in 2005, as in 2004, the Company
incurred a small loss on a disposition of a fixed asset, and royalty expense.
The Company does not anticipate any changes in 2006.
The Company has income tax expense of $62,887 in 2005 compared to an income tax
benefit of $270,568 in 2004. The effective tax rate increased from 32% to 40%.
For the year ended December 31, 2005, the Company had fewer reserves than in
2004 when the Company recognized a tax benefit related to greater reserves.
The Company had an after tax profit of $93,992 in 2005 compared to a loss of
$565,108 for 2004, as explained by the above activities.
Liquidity and Capital Resources. Balance Sheet as of December 31, 2005 compared
to December 31, 2004
At December 31, 2005, the Company had $1,834,144 of cash and a current ratio of
approximately 3 to 1. The Company believes its current capital resources are
sufficient to fund operations for the next twelve months.
Net cash provided by operating activities was $1,677,115 in 2005 and consisting
of the following items:
Accounts Receivable, net of Allowance for doubtful accounts, increased $520,077.
While A/R increased by $261,539, the allowance for doubtful accounts decreased
by $258,538. The Company reduced past due receivables (those over 30 days
outstanding) by over $400,000 from December 31, 2004 to December 31, 2005 and
has completed comprehensive customer account reconciliations to reduce the
amount of allowances against open past due balances. Receivables increased
$261,539 due primarily to increased sales in 2005. The Company believes there
are adequate allowances given improved collection efforts as well as improved
controls over customer credit approval. (See, "Allowance for Doubtful Accounts"
above).
Inventory decreased $323,121 as the Company scaled back its inventory using more
efficient planning and ordering of raw materials. The Company carried $277,248
less raw material inventory as a result of improved efficiencies. The Company
anticipates inventory levels to remain similar to year-end numbers.
Income tax receivable decreased $329,648 due to refunds received in 2005 of the
entire outstanding receivable amount. In 2005, the Company received refunds
amounting to $637,372. The additional $307,724 received in 2005 was recorded as
a current deferred tax liability in 2005 as the Company determines the status of
2001 through 2004 tax filings.
Deferred tax liability and asset decreased $373,177; deferred tax liability
long-term decreased $1,526; deferred tax asset long-term increased $218,138;
deferred tax asset - current decreased $285,117, and deferred tax
liability-current increased $307,724. This is attributed to timing differences
in the treatment of deductions for book verses tax income and net operating
losses that will be carried forward and taken against future taxable income.
Deferred revenue was booked for the first time in 2005 for $630,000. The Company
received a large deposit in 2005 for product that will ship in the first quarter
of 2006.
Reserve for returns decreased $261,531. The reserve for returns is calculated as
a percentage of sales with a consideration of historical returns. The reserve
was decreased following an evaluation of historical returns as well as an
analysis of current outstanding accounts receivable and future return estimates.
The rate of returns decreased during 2005. It is expected to continue improving
into 2006.
Net cash used in investing activities was $746,672 consisting of investments in
property and equipment. During 2005, the Company invested in many capital
projects to increase automation in the plant.
Financing activities consisted of payment of long-term debt, which decreased
$11,531, and stock options exercised creating an increase of $48,800.
Page 8
Trends. Revenues from sales of lip balm, the Company's major product line, were
$11,335,304 in 2005 compared to $10,569,614 for the same period in 2004, or an
7% increase. This increase in revenue was primarily a result of increased sales
to major customers, as well as a large sale to a new customer. The Company
believes that 2006 will bring a higher level of sales due to the Company's
promotional products business trending upwards, with continued progress in
increasing its lip balm business, and with the addition and expansion of new
product lines.
The sour drops and breath fresheners revenues were $1,759,828 in year 2005
compared to $2,166,262 in year 2004, or a 19% decrease. The Company had a
significant customer discontinue buying and selling of breath fresheners in
2005. The Company is uncertain about whether there will be opportunities to
increase sales of this product line for current products in this category.
Sales of EYELIEVE (TM), $278,518 in 2005 constitute 2% of the overall revenue,
but the Company anticipates a material impact on its future business, as it has
made a determination to move forward with this product category. A capital
investment of approximately $200,000 will be made to purchase equipment and
plant and equipment modification is also planned in 2006.
The nutritional supplement revenues, on a relatively smaller scale, were down to
$202,969 in 2005 as compared to $414,594 in 2004, or a 51% decrease. The Company
has been unable to develop additional customers for its product. The Company has
discontinued the product line Cheat & Lean(TM). Revenues for the remaining
product are expected to remain stable.
The following table shows aggregated information about contractual obligations
as of December 31, 2005:
Payments Due by Period
--------------------------------------------------------------------------------
Total Less Than 1 Year 1-3 Years 4-5 Years After 5 Years
---------------------------------------------------------------------------------------------------------
Long-Term Debt $ 13,125 $ 6,300 $ 6,825
Building Lease $335,000 $335,000
Vehicle Lease $ 39,000 $ 8,700 $ 26,000 $ 4,300
---------------------------------------------------------------------------------------------------------
Total $387,125 $350,000 $ 32,825 $ 4,300
=========================================================================================================
Other than the above, OraLabs does not know of any other demands, commitments,
uncertainties, or trends that will result in or that are reasonably likely to
result in its liquidity increasing or decreasing in any material way.
Impact of Hurricane Katrina: There has been a significant increase in cost of
all petroleum based products as a result of Katrina. The Company has faced added
fuel surcharges on all freight costs both inbound and outbound. In addition,
many of the raw materials that the Company uses in its packaging and containers
are made from petroleum based products, thereby piling on price increases from
most of our suppliers.
Impact of Inflation. The Company's financial condition has not been affected by
the modest inflation of the recent past. The Company believes that revenues will
not be materially affected by inflation. The Company's lip care and oral care
products are primarily very low retail price points and impulse items. The
nutritional supplements are a small part (approximately 1.5%) of revenues in a
category that is on a downward trend and could be negatively impacted by
inflation.
Agreement with PSHL. The future operations of the Company will be significantly
affected by and changed if closing occurs under the Stock Exchange Agreement
entered into between the Company and Partner Success Holdings Limited, that is
described in the opening paragraph of Part I of this Form 10-KSB. There can be
no assurance that the transactions contemplated by the Stock Exchange Agreement
will close.
Page 9
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS:
The provisions of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act") provide companies with a "safe harbor" when making forward-looking
statements. This "safe harbor" encourages companies to provide prospective
information about their companies without fear of litigation. The Company wishes
to take advantage of this "safe harbor" and is including this section in its
Annual Report on Form 10-KSB in order to do so. All statements in this Form
10-KSB that are not historical facts, including without limitation statements
about management's expectations for any period beyond the fiscal year ended
December 31, 2005, and statements concerning the Stock Exchange Agreement
entered into between the Company and Partner Success Holdings, Limited, as
described in Part 1 of this Form 10-KSB, 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.
NASDAQ Listing- As a result of the resignation of Mr. Goldstone as a director of
the Company on February 14, 2006, the Company does not have three independent
directors to serve on its audit committee as required by the provisions of
NASDAQ's Marketplace Rule 4350. On March 7, 2006, the Company received a letter
from the Listing Qualifications Department of the NASDAQ Stock Market concerning
that deficiency and advising the Company that consistent with NASDAQ's
Marketplace Rule 4350(d)(4), the Company has a cure period until the earlier of
the Company's next annual shareholders' meeting, or February 14, 2007, in order
to regain compliance and avoid delisting of the Company's stock. The Company
intends to appoint a replacement independent director to serve on the Board of
Directors and Audit Committee within the cure period. However, the Company can
give no assurance that it will continue to meet the requirements for continued
listing of its common stock on the NASDAQ Capital Market. The Company will lose
its listing on the NASDAQ Capital Market upon closing of the Stock Exchange
Agreement entered into between the Company and Partner Success Holdings Limited,
as described in the first paragraph of Part I of this Form 10-KSB, unless NASDAQ
approves a new listing application by the closing date. There can be no
assurance that the transactions contemplated by the Stock Exchange Agreement
will close.
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. Generally speaking, larger better financed competitors have
put pressure on retailers to add their new items resulting in difficulty for the
Company to find new sales opportunities in its primary business. The Company has
had to respond to less profitable opportunities for its new sales dollars. The
Company has been able to find success in other more obscure markets. 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 are experiencing consolidations of competitors from time to
time and the Company's business could be adversely affected by such activities.
There can be no assurance that the Company will be able to compete successfully
in the future. To respond to competition the Company created added value
packaging for promotions that resulted in increased cost of goods sold. There is
an increased effort by all competitors for shelf and counter space and the cost
of product placement is increasing. There is no assurance that the Company will
be able to maintain its shelf and counter presence in the future.
Managing Manufacturing Requirements. The Company has done several things to
position itself for stability in 2006, which the Company hopes will help it
return to long-term profitability. In positioning for stability and
profitability, the Company has made changes to management, customer service,
manufacturing, and sales and administrative personnel. The Company has been in
its new facility since February of 2004. The extra space has helped to allow the
company to more efficiently process its orders. However the associated costs
with the new facility have not yet been sufficiently offset by increased sales
or efficiencies. The Company plans to reduce its product offerings in order that
it will be able to lower its cost to produce fewer product offerings. The
Company hopes to be able to return to a state of long-term profitability.
However there are no assurances that it will.
The Company experienced a period of significant growth during fiscal years ended
December 31, 1996 and 1997. Significant growth did not occur in fiscal year
1998, but it occurred again in 1999, 2000, 2001. The Company did not experience
growth in 2002, 2003, 2004. The Company experienced nominal revenue growth of
$569,845 during 2005. The volume of manufacturing has been similar for the past
five years. The Company has had opportunities to grow its business but has not
done so, in part because of capacity issues in manufacturing. However the
Company has been faced with intense competition and profitable growth has been
difficult to come by. 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.
Page 10
Product Liability Insurance. Because the Company manufactures and sells certain
products designed to be ingested, it faces the risk that materials used for the
final products may be contaminated with substances that may cause sickness or
other injury to persons who have used the products. Although the Company
maintains standards designed to prevent such events, certain portions of the
process of product development, including the production, harvesting, storage
and transportation of raw materials, along with the handling, transportation and
storage of finished products delivered to consumers, are not within the control
of the Company. Furthermore, sickness or injury to persons may occur if products
manufactured by the Company are ingested in dosages which exceed the dosage
recommended on the product label or are otherwise misused. The Company cannot
control misuse of its products by consumers or the marketing, distribution and
resale of its products by its customers. With respect to product liability
claims in the United States, the Company generally maintains $2 million per
occurrence and $2 million in aggregate liability insurance. However, there can
be no assurance that such insurance will continue to be available, or if
available, will be adequate to cover potential liabilities. The Company
generally does not obtain contractual indemnification from parties supplying raw
materials or marketing its products and, in any event, any such indemnification
is limited by its terms and, as a practical matter, to the creditworthiness of
the indemnifying party.
Dependence on Key Personnel. The Company's future success depends in large part
on the continued service of its key personnel. In particular, the loss of the
services of Gary Schlatter, its President and Chief Executive Officer, could
have a material adverse effect on the operations of the Company. The Company's
subsidiary has an employment agreement with Mr. Schlatter which expires on April
30, 2006, but it is expected to be extended. The Company's future success and
growth also depends on its ability to continue to attract, motivate and retain
highly qualified employees. There can be no assurance that the Company will be
able to do so.
Government Regulation. The manufacturing, processing, formulation, packaging,
labeling and advertising of some of the Company's products are subject to
regulation by one or more federal agencies and under various laws (see
Description of Business-Government Regulation above). There can be no assurance
that the scope of such regulations will not change or otherwise cause an
increase in the expenses and resources of the Company which must be applied to
complying with such regulations. As an example, the Company's sun-block lip
balms are regulated by the FDA. If the FDA were to conclude that any of the
Company's products violate FDA rules or regulations, the FDA may seek to
restrict or remove such products from the market. Such action may be taken
against the Company and any entity which manufactures products for the Company.
As an additional example, regulations concerning good manufacturing practices
with respect to OTC drugs and nutritional supplements do have an adverse impact
upon the cost or methods of producing the products. It is anticipated that new
labeling laws currently pending will result in increased costs, in order to be
in compliance.
The Company's business is also regulated by various agencies of the states and
localities in which the Company's products are sold and governmental regulations
in foreign countries where the Company sells or may seek to commence sales. Such
regulations could prevent or delay entry into a market or prevent or delay the
introduction of Company products. For example, international sales are expected
to be slowed by the long process of registering new products.
The Company may be subject to additional laws or regulations administered by the
FDA or other federal, state or foreign regulatory authorities, the repeal or
amendment of laws or regulations or more stringent interpretations of current
laws or regulations, from time to time in the future. The Company is unable to
predict the nature of such future laws, regulations, interpretations or
applications, nor can it predict what effect additional governmental regulations
or administrative orders, when and if promulgated, would have on its business in
the future. They could, however: require reformulation of certain products to
meet new standards; recall or discontinue certain products not able to be
reformulated; impose additional record keeping requirements; require expanded
documentation of the properties of certain products; or require expanded or
differentiated labeling and scientific substantiation regarding ingredients,
product claims, safety or efficacy. Failure to comply with applicable FDA
requirements could result in sanctions being imposed on the Company or the
manufacturers of its products, including, warning letters, fines, product
recalls and seizures. Any or all such requirements could have a material adverse
effect on the Company's results of operations and financial condition.
Dependence upon Significant Distributors and Retailers. The Company had two
major customers that accounted for approximately $2,400,000 and $1,600,000
respectively, or 17% and 12% of net sales during the year ended December 31,
2005. The Company had over 1,500 purchasing customers in fiscal 2005 and
believes that the loss of revenues from any customer could gradually be
replaced, but there could be adverse effects upon the Company's business until
those revenues are replaced. The Company is always at risk for its customers
filing for bankruptcy or liquidation. This has happened in the past and could
happen again.
Dependence upon Third Party Suppliers. With respect to some of the Company's
products, the product itself is formulated and supplied to the Company by third
party vendors, and the Company then packages the products for sale. For other
products, the Company provides some or all of the raw materials and a third
party completes preparation of the product and/or its packaging. Should these
relationships terminate, or should these parties be otherwise unable to perform
their obligations on terms satisfactory to the Company, the Company would be
required to establish relationships with substitute parties. Although the
Company believes that it can do so and that raw materials are available at
comparable prices from several suppliers, there can be no assurance that this
will be the case, in which case there could be a material adverse effect upon
the Company.
Page 11
No Assurance of Proprietary Protection. The Company owns numerous patents. The
Company also holds several domestic and international trademarks and has several
applications pending. Certain aspects of the Company's business, although not
the subject of patents, include formulations and processes considered to be
proprietary in nature. There can be no assurance that any such "proprietary"
information will not be appropriated or that the Company's competitors will not
independently develop products that are substantially equivalent or superior to
the Company's. Even if the pending trademark registrations are issued to the
Company, there can be no assurance that the Company would be able to
successfully defend its patents or trademarks against claims from or use by
competitors, and there can be no assurance that the Company will be able to
obtain patent or trademark protection for any new products. In addition, in the
event that any of the Company's products are determined to infringe upon the
patents or proprietary rights of others, the Company could be required to modify
its products or obtain licenses for the manufacture or sale of the products, or
could be prohibited from selling the products.
No Assurance of Scientific Proof. The Company's nutritional supplement product
is intended to provide relief of certain symptoms or to otherwise aid in the
health of the consumers. If scientific data were to conclude that the products
do not do so, or if for any other reason the Company's products were not viewed
by the public as providing any meaningful benefit, there could be an adverse
effect upon the sales of the products. In addition, the nutritional supplement
industry has been known to experience radical ups and downs of certain product
sales in a short period of time which could adversely affect the Company's sales
or inventory positions. Sometimes these cycles are the result of studies or the
media creating a positive or negative impact on the industry and the public at
large.
Limited Distribution for Nutritional Supplement Products. The Company began
selling its nutritional supplement products in 1998. The nutritional supplement
industry is influenced by products that become popular due to changing consumer
tastes and media attention. The Company is competing against much larger and
better established manufacturers in this business than in the Company's primary
business. The Company does not expect its sales of nutritional products to
significantly change.
ITEM 7. FINANCIAL STATEMENTS.
Financial Statements meeting the requirements specified in Item 7 of Form 10-KSB
follow the signature page and are listed in Item 13 of this Annual Report on
Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On November 16, 2005, Ehrhardt Keefe Steiner & Hottman, P.C. ("EKS&H") notified
OraLabs Holding Corp. (the "Company") that it resigned as the Company's
independent registered public accounting firm effective immediately. On November
17, 2005, the Company appointed GHP Horwath, P.C. as the Company's new
independent registered public accounting firm. EKS&H's reports on the Company's
consolidated financial statements for the years ended December 31, 2004 and
December 31, 2003 did not contain an adverse opinion or a disclaimer of opinion
and were not qualified or modified as to uncertainty, audit scope or accounting
principles. The decision to retain GHP Horwath, P.C. was recommended and
approved by the Company's audit committee and Board of Directors.
During the years ended December 31, 2004 and 2003, and the subsequent interim
periods preceding EKS&H's resignation, there were no disagreements between the
Company and EKS&H on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of EKS&H, would have caused EKS&H to make reference
to the subject matter of the disagreement(s) in connection with their reports.
For the year ended December 31, 2003 management in consultation with EKS&H did
report that it had reportable conditions that related to accounts receivable
processing, inventory accounting, timely accounting reconciliations, lack of
qualified accounting personnel due to turnover and operational requirements. For
the year ended December 31, 2004 and subsequent interim periods in 2005, EKS&H
advised the Company of a material weakness relating to the controls over the
inventory process and reportable conditions relating to financial reporting and
lack of oversight over the accounting process. The Company authorized EKS&H to
respond fully to the inquiries of GHP Horwath, P.C. concerning the subject
matter of the material weakness and each reportable event.
The material weakness and other reportable conditions which existed in 2003,
2004 and subsequent interim periods of 2005 as discussed above, have been
addressed by management in Item 8A below.
Page 12
ITEM 8A. CONTROLS AND PROCEDURES.
Control deficiencies were identified by management in 2004 in consultation with
EKS&H, the Company's previous independent auditors. EKS&H advised the Company of
a material weakness relating to controls over the inventory process and
reportable conditions relating to financial reporting and lack of oversight in
the accounting process. The Company implemented new software at the end of 2004
along with training staff on the Company's new systems. However, the perpetual
inventory contained costing and lot tracking errors with the data conversion
from the previously used software, which was absent of immediate correction and
caused problems with processing of raw material usage and manufactured items. As
the Company worked through the associated auditing and processing issues
quarterly physical inventories were performed. The physical inventories were
internally audited for costing in detail to assure an accurate representation of
inventory and the related cost of materials in 2005. The Company's investment in
a widely used, mid-sized business accounting and inventory system along with
retention and ongoing training of its accounting staff has successfully
minimized processing and control deficiencies. The CEO and CFO have been and
remain actively involved in the daily operations of the business and analyze
financial data on a daily basis.
Evaluation of Disclosure Controls and Procedures. The Company's Chief Executive
Officer and its Chief Financial Officer, after evaluating the effectiveness of
the Company's disclosure controls and procedures (as defined in the Securities
Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c) as of a date within 90 days
of the filing date of this annual report on Form 10-KSB (the "Evaluation
Date")), have concluded that as of the Evaluation Date, the Company's disclosure
controls and procedures were adequate and effective to ensure that material
information relating to the Company and its consolidated subsidiaries would be
made known to them by others within those entities, particularly during the
period in which this annual report on Form 10-KSB was being prepared.
Our external auditors have not issued an attestation report on management's
assessment of the Company's internal control over financial reporting, as it is
not required for the Company at this time.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table identifies each of the Company's directors and executive
officers:
Year First
Elected to
Board of
Name Age Positions with the Company Directors
---- --- -------------------------- ---------
Gary H. Schlatter(2)....49 Chief Executive Officer, President, 1997
Treasurer, Director
Michael I. Friess.......56 Director(1), Secretary 1997
Robert C. Gust..........49 Director(1) 2000
Emile J. Jordan.........47 Chief Financial Officer
(1) Audit Committee member
(2) See "Certain Relationships and Related Transactions" below.
Mr. Schlatter was elected to his position in May 1997 upon consummation of the
transaction by which the Company's subsidiary, OraLabs, Inc., was acquired by
SSI Capital Corp. (the Company's predecessor). Mr. Friess was appointed as a
Director on September 8, 1997 and Mr. Gust was elected as a director on May 26,
2000. All directors serve as such until their successors are elected and
qualified. No family relationship exists among the Directors or between any of
such persons and the Executive Officers of the Company.
Gary H. Schlatter is the founder (in 1990) of the Company's subsidiary, OraLabs,
Inc., and has served as the President, Chief Executive Officer, Treasurer and
Secretary of the subsidiary since that time. He also serves in the positions
listed in the above table with respect to the Company. Mr. Schlatter holds his
offices (other than the position of director) pursuant to an employment
agreement (see, "Executive Compensation").
Michael Friess is a self-employed attorney licensed to practice law in the State
of Colorado. He was a partner from January 1983 to December 1993 in the New York
City law firm of Schulte, Roth & Zabel, where his practice emphasized taxation.
Page 13
Robert C. Gust is the co-founder (January 2002) and Partner of Apogee Group, a
business brokerage and consulting firm. From April 1997 to December 2001, Mr.
Gust was co-founder and Senior Vice-President of Business Development for
Protocol Communications, Inc., a Massachusetts company engaged in the business
of owning and operating integrated marketing services companies. From June 1993
until the formation of Protocol Communications, Inc., Mr. Gust was
Vice-President of Sales (North America) for Indigo America.
Emile J. Jordan has served as the Comptroller of the Company since May 1997. He
has served as Comptroller of the subsidiary, OraLabs, Inc. on a full time basis
since April 1, 1994. Mr. Jordan is the Chief Financial Officer of the Company.
Mr. Jordan was elected to his position by the Board of Directors of the Company
and holds his office at the discretion of the Board of Directors or until his
earlier death or resignation.
Allen R. Goldstone served as a director in 2005 and resigned on February 14,
2006.
Additional information with respect to the Board of Directors.
The Company has a standing Audit Committee consisting of Michael I. Friess and
Robert C. Gust. The Company's Audit Committee consisted of three members when
Mr. Goldstone was appointed to it in 2005, until Mr. Goldstone's resignation on
February 14, 2006. The Audit Committee reviews the consolidated financial
statements and independent auditors' report, including recommendations from the
independent auditors regarding internal controls and other matters. The Audit
Committee held one meeting during fiscal year 2005 to discuss the financial
statements to be part of the Company's Form 10-KSB for fiscal year 2004, and
held one meeting with the Company's independent auditors with respect to the
Company's Annual Report on Form 10-KSB for fiscal year 2005. The meetings were
held by telephone conference call. The Board of Directors adopted a revised
written charter for the Audit Committee in March 2004, which was attached as
Appendix A to the Company's Proxy Statement filed on April 20, 2004.
During the fiscal year ended December 31, 2005, the Board of Directors did not
meet in person but met six times by telephone conference, and each Director
participated in the meeting. The Board also took action on numerous occasions
without a formal meeting.
Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Securities and Exchange Commission requires our directors,
executive officers and holders of more than 10% of our common stock to file with
the Securities and Exchange Commission reports regarding their ownership and
changes in ownership of our securities. The Company believes that during fiscal
year 2005, its directors, executive officers and 10% owners complied with all
Section 16(a) filing requirements.
Code of Ethics. Our Board of Directors adopted a code of ethics that applies to
our Principal Executive Officer, Gary H. Schlatter, and our Principal Financial
Officer, Emile Jordan. Both of these individuals signed an acknowledgement of
his receipt of our code of ethics. We are filing a copy of our code of ethics
with the Securities and Exchange Commission by including it as Exhibit 14.1 to
this report.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information regarding compensation for services
rendered, in all capacities, awarded or paid to or earned by the Chief Executive
Officer of the Company during the last three fiscal years and earned by Emile
Jordan in fiscal years 2005 and 2004. No other executive officer of the Company
received a total annual salary and bonus in excess of $100,000 during any of the
last three fiscal years.
Summary Compensation Table
Annual Compensation Long Term Compensation
------------------- ----------------------
Name and Shares Under-
Principal Position Year Salary ($) Bonuses ($) Other ($) Other lying Options
------------------ ---- ---------- ----------- --------- ----- -------------
Gary H. Schlatter, CEO 2005 411,673(1) 0 18,000(2) 0 30,500(1)
2004 393,105(1) 0 22,699(2) 0 30,500(1)
2003 370,346(1) 0 22,339(2) 0 30,500(1)
Emile Jordan, CFO 2005 102,000 15,000 0 0 38,125
2004 109,400 0 0 0 25,500
(1) Includes 30,500 shares underlying 30,500 options granted in the fiscal year
ended December 31, 1997 to Mr. Schlatter's spouse, an employee of the Company,
under the Company's 1997 Stock Plan and a $10,000 annual salary to the spouse.
Beneficial ownership of such securities and spouse's salary is disclaimed by Mr.
Schlatter.
(2) Includes expenses for automobiles and related insurance and other automobile
expenses.
Page 14
STANDARD COMPENSATION ARRANGEMENTS FOR DIRECTORS
The directors other than Mr. Schlatter are compensated monthly for services
provided as directors. Currently, non-employee directors receive $2,000 monthly
as director's fees. The Company may modify those arrangements at any time. There
were no other arrangements pursuant to which any director of the Company was
compensated during the past fiscal year for any service provided as a director.
However, the Company has a Non-Employee Director Stock Option Plan under which
directors who are not employees are granted (at the time of initial election or
appointment to the Board) 10,000 options to purchase common stock and are
thereafter granted 2,500 options annually so long as they continue to serve as
non-employee directors. All of the options are exercisable at the market price
of the common stock at the time of grant and vest proportionately over a four
year period.
AGREEMENTS WITH EXECUTIVE OFFICERS
The only employment contract between the Company and any executive officer of
the Company who received total salary and bonus during fiscal year 2005 in
excess of $100,000 is an Amended and Restated Employment Agreement with Gary H.
Schlatter. Except for that Agreement as described below, the Company has not
entered into any compensatory arrangement pursuant to which any executive
officer of the Company will receive payment from the Company as a result of the
executive officer's resignation, retirement or termination of employment or as a
result of a change in control of the Company. There is no employment contract
between the Company and Emile J. Jordan. Effective May 1, 2003, the Company's
subsidiary, OraLabs, Inc., entered into an Amended and Restated Employment
Agreement ("Employment Agreement") with Gary Schlatter. The Employment Agreement
extended the term of Mr. Schlatter's employment through April 30, 2006, unless
terminated earlier pursuant to the provisions of the Employment Agreement. Under
the Employment Agreement, Mr. Schlatter agrees to devote such time and attention
to the business of OraLabs, Inc. as may be required to fulfill his duties, which
is expected to require a substantial amount of his working time.
Under the Employment Agreement, Mr. Schlatter is paid a base salary of $392,645
per year for the first twelve (12) months, $431,909 per year for the next twelve
(12) months, and $475,100 for the final twelve (12) months. Bonus compensation
is payable to Mr. Schlatter as may be determined by the Board of Directors in
its discretion. Mr. Schlatter also is paid or reimbursed for lease and insurance
expenses for automobile and cellular telephone expenses. Under the Employment
Agreement, Mr. Schlatter has agreed that during its term and for a period of one
(1) year thereafter, he will not participate in any business competitive to that
of the business of OraLabs, Inc., except with respect to limited passive
investments, and that he will never disclose or utilize any trade secrets or
proprietary information of OraLabs, Inc. except within the scope of his
employment. The Company expects to extend the term of the Employment Agreement
under terms to be negotiated with Mr. Schlatter.
Under specified circumstances involving a change in control, Mr. Schlatter may
terminate the Employment Agreement and receive a lump sum payment equal to all
of the compensation to which he otherwise would have been entitled had the
Employment Agreement remained in effect for its entire term.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of April 1, 2006, information regarding the
beneficial ownership of Common Stock (i) by each Director,(ii) by each Executive
Officer listed in the Summary Compensation table below, (iii) by all Directors
and current Executive Officers as a group (five persons), and (iv) by each
person or group known by the Company to own beneficially in excess of five
percent (5%) of the Common Stock:
Name and Address Amount and Nature of
of Beneficial Owner(5) Beneficial Ownership Percent of Class
---------------------- -------------------- ----------------
Gary H. Schlatter 3,729,350 shares (1) 79.47%(1)
18685 East Plaza Drive
Parker, Colorado 80134
Michael I. Friess 12,500 shares (2) *
5353 Manhattan Circle
Suite 101
Boulder, Colorado 80303
Robert C. Gust 23,500 shares (3) *
7N551 Cloverfield Circle
St. Charles, IL 60175
Emile Jordan
18685 East Plaza Drive
Parker, CO 80134 38,125 shares (4) *
Page 15
All directors and executive
officers as a group (five persons) 3,803,475 shares (1), (2), (3), (4),79.97%
* Less than one percent
------------------
(1) Includes 100,000 shares held by The Schlatter Family Partnership, of which
Gary H. Schlatter and his spouse are the general partners. Mr. Schlatter's
spouse may be deemed the beneficial owner of some or all of the shares. Does not
include 30,500 shares that Mr. Schlatter's spouse, an employee of the Company,
has the right to acquire on April 1, 2006, or within sixty (60) days thereafter,
pursuant to outstanding options.
(2) Includes 12,500 shares that he has the right to acquire on April 1, 2006 or
within sixty (60) days thereafter, pursuant to outstanding options.
(3) Includes 12,500 shares that he has the right to acquire on April 1, 2006 or
within sixty (60) days thereafter, pursuant to outstanding options.
(4) Includes 38,125 shares that he has the right to acquire on April 1, 2006 or
within sixty (60) days thereafter, pursuant to outstanding options(.)
(5) Unless otherwise noted, the stockholders identified in this table have sole
voting and investment power. The sole person known to the Company to be the
beneficial owner of more than five percent (5%) of the class of outstanding
stock is Gary H. Schlatter, whose address is c/o OraLabs Holding Corp., 18685
East Plaza Drive, Parker, Colorado 80134.
CHANGE IN CONTROL.
In the event that a closing occurs under the Stock Exchange Agreement described
in the opening paragraph of Part I of this Form 10-KSB, control of the Company
will change from that of Gary H. Schlatter to the principals of PSHL or their
designees. There can be no assurance that closing will occur under that
Agreement. Otherwise, the Company does not know of any arrangements, including a
pledge by any person of securities of the Company, the operation of which at a
subsequent date may result in a change in control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Gary H. Schlatter, through an affiliated entity, is the owner of the property
leased by OraLabs (the Company's subsidiary) that serves as the Company's
headquarters, manufacturing facility and warehouse facility. The lease expires
on September 30, 2006 and the Company expects that the lease will be renewed on
terms negotiated between Mr. Schlatter and the Company. Rent paid in 2005 to Mr.
Schlatter's affiliated entity was $446,088. The Company believes that its
rental rate is comparable to that which would be paid to unaffiliated parties,
and the Company believes that if the leases were not to be renewed, the Company
could obtain alternative space.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Form 10-KSB immediately
following the signature pages:
1. Consolidated Financial Statements (OraLabs Holding Corp. and Consolidated
Subsidiaries): Independent Auditors' Report Consolidated Balance Sheet -
December 31, 2005 Consolidated Statements of Operations for the years ended
December 31, 2005 and December 31, 2004 Consolidated Statement of Stockholders'
Equity from December 31, 2003 through December 31, 2005 Consolidated Statements
of Cash Flows for the years ended December 31, 2005 and 2004 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:
Page 16
Exhibit
No. Description
--- -----------
3.1(i)(1) Articles of Incorporation
3.1(ii)(2) Amended and Restated Bylaws
3.1(ii)(4) Second Amended and Restated Bylaws
4(2) Specimen Certificate for Common Stock
10.1(2) 1997 Stock Plan
10.2(2) 1997 Non-Employee Directors' Option Plan <
10.3(3) Amended and Restated Employment Agreement Between the
Company's Subsidiary and Gary Schlatter
10.4(2) Stock Option Grant under 1997 Non-Employee
Directors' Option Plan
10.5(i)(5) Business Lease between the Company's Subsidiary and Gary
Schlatter (September 1, 2000)
10.5(iii)(8) Amended Business Lease between the Company's Subsidiary and 2780
South Raritan, LLC effective October 15, 2000.
10.5(iv)(9) Lease between the Company's Subsidiary and 18501 East Plaza
Drive, LLC dated September 4, 2003
10.9(7) Agreement (effective May 1, 2000, amending the Employment
Agreement listed above as Exhibit 10.3).
10.10(10) Amended and Restated Employment Agreement between the Company's
Subsidiary and Gary Schlatter dated May 1, 2003
10.11(11) Stock Exchange Agreement entered into between the Company and
Partner Success Holdings Limited as of March 31, 2006.
11 No statement re: computation of per share earnings is required
since such earnings computation can be clearly determined from
the material contained in this Annual Report on Form 10-KSB.
14.1(12) Code of Ethics
21(2) List of Subsidiaries of the Company
23.1(12) Consent of Independent Registered Public Accounting firm (GHP
Horwath, P.C.)
23.2(12) Consent of Independent Public Accountants (Ehrhardt Keefe
Steiner & Hottman P.C.)
31.1(12) Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002
31.2(12) Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002
32.1(12) Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002
32.2(12) Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002
(1) Incorporated herein by reference to Exhibit C of the Definitive Information
Statement filed by the Company's predecessor, SSI Capital Corp., on July 24,
1997.
(2) Incorporated herein by reference to the Company's Form 10-K filed for fiscal
year 1997.
(3) Incorporated herein by reference to Exhibit B of the Form 8-K filed by the
Company's predecessor, SSI Capital Corp., on May 14, 1997.
(4) Incorporated herein by reference to the Company's Form 10-KSB filed for
fiscal year 1998.
(5) Incorporated herein by reference to the Company's Form 10-QSB filed for the
quarter ended September 30, 2000.
(6) N/A
(7) Incorporated herein by reference to the Company's Form 10-QSB filed for the
quarter ended March 31, 2000.
(8) Incorporated herein by reference to the Company's Form 10-KSB filed for
fiscal year 2000.
Page 17
(9) Incorporated herein by reference to the Company's Form 10-QSB filed for the
quarter ended September 30, 2003.
(10) Incorporated herein by reference to the Company's Form 10-QSB filed for the
quarter ended June 30, 2003.
(11) Incorporated by reference to the Company's Form 8-K filed on April 6, 2006.
(12) Filed herewith.
Forms 8-K were filed by the Company during the fourth quarter of 2005 on
November 10, 2005 (concerning the termination of a material definitive
agreement), November 18, 2005 (concerning changes in the Company's certifying
accountant) and on December 21, 2005 and December 29, 2005 (amendments to the
Form 8-K filed on November 18, 2005).
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Ehrhardt Keefe Steiner & Hottman P.C. resigned in 2005 and OraLabs retained the
services of GHP Horwath, P.C. to audit our annual financial statements for the
year ended December 31, 2005. The following table presents fees billed and
expected to be billed for professional audit services rendered by Ehrhardt Keefe
Steiner & Hottman P.C. ("EKS&H") as well as GHP Horwath, P.C. ("GHP") for the
audit of our annual financial statements for the years ended December 31, 2005
and December 31, 2004, and the reviews of the financial statements included in
each of our quarterly reports on Form 10-QSB during the fiscal years ended
December 31, 2005 and 2004:
2005 2004
Audit Fees- EKS&H $86,460 $65,500
Audit Fees- GHP Horwath, P.C. $56,235 $0
Audit-Related Fees $0 $0
Tax Fees $0 $0
All Other Fees $0 $0
Audit Fees are fees incurred in connection with the audit of the Company's
consolidated annual financial statements and the review of financial statements
in the Company's quarterly reports on Form 10-QSB. All Other Fees are incurred
for services other than those described above. The Audit Committee will
pre-approve the performance by GHP of any services other than those relating to
the audit or review of the Company's financial statements, but no other services
are anticipated at this time.
Page 18
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ORALABS HOLDING CORP.
BY: /S/ GARY H. SCHLATTER
---------------------------------------
GARY H. SCHLATTER, PRESIDENT
BY: /S/ EMILE JORDAN
---------------------------------------
EMILE JORDAN, CHIEF FINANCIAL OFFICER
DATE: APRIL 17, 2006
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ GARY H. SCHLATTER DIRECTOR, PRESIDENT, APRIL 17, 2006
----------------------------- CHIEF EXECUTIVE OFFICER
GARY H. SCHLATTER
/S/ MICHAEL I. FRIESS DIRECTOR, SECRETARY APRIL 17, 2006
-----------------------------
MICHAEL I. FRIESS
/S/ ROBERT C. GUST DIRECTOR APRIL 17, 2006
-----------------------------
ROBERT C. GUST
Page 19
Consolidated Financial Statements And Independent Auditors' Report
December 31, 2005
ORALABS HOLDING CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
Report of Independent Registered Public Accounting Firm - GHP Horwath, P.C. 1
Report of Independent Registered Public Accounting Firm -
Ehrhardt Keefe Steiner & Hottman P.C.....................................2
Consolidated Financial Statements
Consolidated Balance Sheet...............................................3
Consolidated Statements of Operations....................................4
Consolidated Statements of Changes in Stockholders' Equity...............5
Consolidated Statements of Cash Flows....................................6
Notes to Consolidated Financial Statements.................................7-15
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
OraLabs Holding Corp.
We have audited the accompanying consolidated balance sheet of OraLabs Holding
Corp. and subsidiaries (the "Company") as of December 31, 2005, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended. 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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, 2005, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
/S/ GHP HORWATH, P.C.
Denver, Colorado
April 12, 2006
Page 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders OraLabs Holding Corp. Parker,
Colorado
We have audited the consolidated balance sheet of OraLabs Holding Corp. and
Subsidiaries as of December 31, 2004 and 2003. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial condition of OraLabs Holding
Corp. and Subsidiaries, as of December 31, 2004, and the results of their
operations and their cash flows for the years ended December 31, 2004 and 2003,
in conformity with accounting principles generally accepted in the United States
of America.
EHRHARDT KEEFE STEINER & HOTTMAN PC
April 8, 2005
Denver, Colorado
Page 2
ORALABS HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 2005
Assets
Current assets
Cash $ 1,834,144
Accounts receivable-trade, net of allowance for doubtful
accounts of $86,639 1,795,898
Inventories 2,555,634
Prepaid expenses 173,533
Deposits and other assets 257,949
-------------------
Total current assets 6,617,158
-------------------
Deferred tax assets, net 179,000
Property and equipment, net 1,858,754
-------------------
Total non-current assets 2,037,754
-------------------
Total assets $ 8,654,912
===================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable - trade $ 1,021,153
Deferred revenue 630,000
Accrued liabilities 121,321
Reserve for returns 100,810
Current portion of long-term debt 6,300
Deferred tax liability 221,724
-------------------
Total current liabilities 2,101,308
-------------------
Long-term debt, less current portion 6,825
-------------------
Total non-current liabilities 6,825
-------------------
Commitments and contingencies
Stockholders' equity
Preferred stock, $.001 par value, 1,000,000 authorized;
none issued and outstanding -
Common stock, $.001 par value; 25,000,000 shares
authorized; 4,693,015 issued and outstanding
(2005) and 4,668,615 issued and outstanding (2004) 4,693
Additional paid-in capital 1,511,820
Retained earnings 5,030,266
-------------------
Total stockholders' equity 6,546,779
-------------------
Total liabilities and stockholders' equity $ 8,654,912
===================
See notes to consolidated financial statements.
Page 3
ORALABS HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
December 31,
2005 2004
-------------------- -------------------
Product sales $ 13,585,165 $ 13,130,579
Cost of goods sold 8,867,622 9,315,940
-------------------- -------------------
Gross profit 4,717,543 3,814,639
-------------------- -------------------
Operating expenses
Engineering 218,009 319,828
Selling and marketing 1,324,648 1,325,935
General and administrative 3,036,827 3,047,940
Other 49,797 32,218
-------------------- -------------------
Total operating expenses 4,629,281 4,725,921
-------------------- -------------------
Income (loss) from operations 88,262 (911,282)
-------------------- -------------------
Other income (expense)
Interest and other income 68,617 110,965
Other expense (35,359)
-------------------- -------------------
Total other income (expense) 68,617 75,606
-------------------- -------------------
Income (loss) before income taxes 156,879 (835,676)
-------------------- -------------------
Income tax (expense) benefit
Current 194,648
Deferred (62,887) 75,920
-------------------- -------------------
Total income tax (expense) benefit (62,887) 270,568
-------------------- -------------------
Net income (loss) $ 93,992 $ (565,108)
==================== ===================
Basic weighted average common shares
outstanding 4,681,116 4,668,615
==================== ===================
Basic income (loss) per common share $ 0.02 $ (0.12)
==================== ===================
Diluted weighted average common shares
outstanding 4,702,820 4,668,615
==================== ===================
Diluted income (loss) per common share $ 0.02 $ (0.12)
==================== ===================
See notes to consolidated financial statements.
Page 4
ORALABS HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 2005 and 2004
Additional Total
Common Stock Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
----------- ----------- ----------- ----------- -----------
Balance - December 31, 2003 4,580,615 $ 4,581 $ 1,221,484 $ 5,501,382 $ 6,727,447
Stock options exercised, net
of tax benefit 88,000 88 241,560 241,648
Net loss - - - (565,108) (565,108)
----------- ----------- ----------- ----------- -----------
Balance - December 31, 2004 4,668,615 $ 4,669 $ 1,463,044 $ 4,936,274 $ 6,403,987
Stock options exercised, net
of tax benefit 24,400 24 48,776 48,800
Net Income - - - 93,992 93,992
----------- ----------- ----------- ----------- -----------
Balance - December 31, 2005 4,693,015 $ 4,693 $ 1,511,820 $ 5,030,266 $ 6,546,779
=========== =========== =========== =========== ===========
See notes to consolidated financial statements.
Page 5
ORALABS HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
December 31,
2005 2004
------------ ------------
Cash flows from operating activities
Net income (loss) $ 93,992 $ (565,108)
------------ ------------
Adjustments to reconcile net income (loss)
to net cash provided by operating activities
Depreciation 556,592 380,022
Allowance for doubtful accounts (258,538) (70,244)
Deferred tax liability and asset 373,177 (151,464)
Loss on sale of assets 11,211
Changes in assets and liabilities
Accounts receivable - trade (261,539) 691,096
Income taxes receivable 329,648 (194,168)
Inventories 323,121 (456,601)
Prepaid expenses and deposits (8,311) (161,866)
Accounts payable - trade 170,994 (195,108)
Deferred revenue 630,000
Accrued liabilities (10,490) (14,519)
Reserve for returns (261,531) (34,077)
Income taxes receivable (payable) 107,508
------------ ------------
1,583,123 (88,210)
------------ ------------
Net cash provided by (used in) operating
activities 1,677,115 (653,318)
------------ ------------
Cash flows from investing activities
Purchase of property and equipment (746,672) (1,194,484)
------------ ------------
Net cash used in investing activities (746,672) (1,194,484)
------------ ------------
Cash flows from financing activities
Payments of principal on long-term debt (11,531) (22,874)
Stock options exercised 48,800 176,000
------------ ------------
Net cash provided by financing activities 37,269 153,126
------------ ------------
Net increase (decrease) in cash and cash equivalents 967,712 (1,694,676)
Cash and cash equivalents - beginning of year 866,432 2,561,108
------------ ------------
Cash and cash equivalents - end of year $ 1,834,144 $ 866,432
============ ============
Supplemental disclosure of non-cash transactions:
During 2005 and 2004, the Company received a tax benefit of $12,777 and $65,448,
respectively related to the exercise of options.
See notes to consolidated financial statements
Page 6
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OraLabs Holding Corp. and Subsidiaries, (the Company), was formed in June 1997.
SSI Capital Corp. (SSI) a New York Corporation was incorporated on January 30,
1981. Effective August 22, 1997, SSI was merged into the Company and the
outstanding shares of SSI were converted to shares of the Company on one-for-two
basis. In December, 2003, the Company effected a one-for-two reverse stock
split. All references to common stock in the Company's financial statements have
been retroactively adjusted for the merger and the two separate one-for-two
reductions in shares outstanding.
OraLabs 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 accompanying consolidated financial statements include the accounts of
ORALABS and the accounts of SSI since the date of the reverse acquisition and
the accounts of OL Sub Corp. (an inactive entity) since inception. The Company
established a 90% owned subsidiary of OraLabs, Inc. in Brazil during 2003, with
no business activity during that year. The activity during the 2004 year was
minimal and therefore immaterial to the overall business. There was no activity
during 2005 and the Company did not follow through with its plans to close the
subsidiary by the end of the second quarter 2005. Plans for 2006 are under
consideration.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash equivalents. The Company continually
monitors its positions with, and the credit quality of, the financial
institutions it invests with. As of the balance sheet date, and periodically
during the year, the Company has maintained balances in various operating
accounts in excess of federally insured limits.
ACCOUNTS RECEIVABLE
Accounts receivable represents receivables from customers for product purchased.
Such amounts are recorded gross of any discounts. Promotional discounts and bad
debts are estimated and accounted for in the allowance for doubtful accounts.
Management continually monitors and periodically adjusts the allowances
associated with these receivables based upon its loss history and aging
analysis. After all attempts to collect a receivable have failed, the receivable
is written off against the allowance.
INVENTORIES
Inventories consist of raw materials, work-in-process and finished goods, and
are stated at the lower of cost or market, determined using the lower of cost or
market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided utilizing the
straight-line method over the estimated useful lives for owned assets, ranging
from 5 to 7 years, and the related lease terms for leasehold improvements.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with the criteria set forth in
Statement of Financial Accounting Standards ("SFAS") No. 48 "Revenue Recognition
When right of Return Exists". Revenue is recognized as product is shipped, net
of estimated returns. The Company allows for returns for defective product and
records an estimate of these returns based on historical operations and
experience. Occasionally the Company receives deposits in advance of delivering
the product. Deposits are recorded as deferred revenue until the product is
shipped and title has passed to the customer.
INCOME TAXES
The Company recognizes deferred tax liabilities and assets based on the
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements that will result in taxable or deductible
amounts in future years.
Page 7
ADVERTISING COSTS
The Company expenses advertising costs as incurred.
Advertising expenses were as follows:
For the Year Ended December 31,
2005 $ 69,065
2004 $ 79,883
RESEARCH AND DEVELOPMENT COSTS
Expenditures made for research and development are charged to expense as
incurred. Total research and development costs of $27,329 and $16,946 for
December 31, 2005 and 2004, respectively, were expensed in operations.
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
For the years ended December 31, 2005 and 2004, The Company had 169,000
and 147,900 stock options outstanding, respectively. In 2004, these options were
not included in the computation of (loss) per share because their effect was
anti-dilutive; however, in 2005, the stock options have a dilutive effect and
were therefore included in the computation of diluted earnings per share using
the treasury stock method.
STOCK-BASED COMPENSATION
The Company has determined the value of stock-based compensation arrangements
under the provisions of Accounting Principles Board No. 25 "Accounting for Stock
Issued to Employees" (APB No. 25); and makes pro forma disclosures required
under SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123
permits the use of either a fair value based method of the method defined in APB
No. 25 which requires the disclosure of pro forma net income (loss) and earnings
per share that would have resulted from the use of the fair value based method.
For the Year Ended
December 31,
2005 2004
----------------- ----------------
Net income (loss) available to common shareholders-as reported $ 93,992 $ (565,108)
Total stock-based employee compensation expense determined under
fair market value method for an award (107,098) (7,581)
----------------- ----------------
Net loss available to common shareholders-pro forma $ (13,106) $ (572,689)
Basic and diluted income (loss) per common share- as reported $ 0.02 $ (0.12)
Basic and diluted income (loss) per common share- pro forma $ * $ (0.12)
* Amount is less than $(0.01) per share
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. All options are granted with an exercise
price equivalent to market price on the date of the grant. No options have been
re-priced or had their maturities extended during 2005. In terms of the
provisions of our Incentive Option Plan, employees, with vested options, who
leave the employment of the Company, are required to exercise or forfeit their
options within 90 days after leaving employment regardless of the exercise
period of the initial grant.
The following are the weighted-average assumptions used at December 31, 2005 and
2004 for all Black-Scholes calculations in the financial statements:
For the Year Ended
December 31,
2005 2004
----------- -----------
Approximate risk free rate 6.00% 3.74%
Average expected life 5 years 5 years
Dividend yield 0% 0%
Volatility 80% 73%
Page 8
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
123R "Share-Based Payment," a revision to FASB No 123. SFAS 123R replaces
existing requirements under SFAS No. 123 and APB No. 25, and requires public
companies to recognize a compensation expense an amount equal to the fair value
of share-based payments granted, such as employee stock options. This is based
on the grant-date fair value of those instruments. SFAS 123R also affects the
pattern in which compensation cost is recognized, the accounting for employee
share purchase plans, and the accounting for income tax effects of share-based
payment transactions. For small-business filers, SFAS 123R will be effective for
interim periods beginning after December 15, 2005. The Company is currently
determining what impact the proposed statement would have on its results of
operations and financial position. The impact will largely be due to the
selection of either the Black-Scholes or the binominal lattice model for valuing
options, which may be material.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of
ARB No. 43. This statement requires that certain abnormal costs associated with
the manufacturing, freight, and handling costs associated with inventory be
charged to current operations in the period in which they are incurred. The
adoption of this statement did not have a material effect on the Company's
results of operations, cash flows or financial position.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and long-term debt
approximated fair value as of December 31, 2005 because of the relatively short
maturity of these instruments.
CONCENTRATION OF BUSINESS AND CREDIT RISK
The Company is engaged primarily in the manufacture and sale of lip balm, fresh
breath and other products throughout North America and Internationally. The
potential for severe financial impact can result from negative effects of
economic conditions within the market or geographic area. Since the Company's
products are inexpensive, the potential negative effect of changes in economic
conditions are less than would be expected for higher priced products of other
industries.
NOTE 2 - BALANCE SHEET DISCLOSURES
Inventories are summarized as follows at December 31, 2005:
Raw materials $ 1,432,211
Work in process and finished goods 1,123,423
-------------------
$ 2,555,634
===================
Property and equipment consist of the following at December 31, 2005:
Machinery and equipment $ 3,906,315
Leasehold improvements 146,211
-------------------
4,052,526
Less accumulated depreciation (2,193,772)
-------------------
$ 1,858,754
===================
Page 9
NOTE 3 - LINE-OF-CREDIT
The Company has a $2,000,000 line-of-credit with a bank secured by substantially
all of the Company's assets. The line matures in September 2006. Interest is at
a variable rate tied to LIBOR and is periodically adjusted. As of December 31,
2005 the Company had no outstanding balance on this line-of-credit.
NOTE 4 - INCOME TAXES
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax liabilities and assets are determined
based on the differences between the financial statement and tax basis of assets
and liabilities using the enacted tax rates in effect for the year in which the
differences are expected to reverse. The measurement of deferred tax assets is
reduced, if necessary, by the amount of any tax benefits that based on available
evidence, are not expected to be realized. As of December 31, 2005, the Company
had a Federal net operating loss ("NOL") carry forward of approximately $585,000
that will expire in 2024 and 2025 and state net operating loss carry forwards of
approximately $1,362,000 that will expire between 2023 and 2025.
The net current and long-term deferred tax assets and liabilities in the
accompanying balance sheet include the following at December 31, 2005:
Current deferred tax assets $ 86,000
Current deferred tax liability (307,724)
-------------------
Net current deferred tax liability $ (221,724)
===================
Long-term deferred tax assets $ 234,000
Long-term deferred tax liability (55,000)
-------------------
Net long-term deferred tax assets $ 179,000
===================
Temporary differences giving rise to a significant portion of deferred tax
assets (liabilities) are as follows at December 31, 2005:
Deferred tax assets:
Reserves for returns and other $ 52,000
Net operating loss carryforward 228,000
Allowance for doubtful accounts 34,000
Contributions carried forward 6,000
--------------------
Total deferred tax assets $ 320,000
Deferred tax liabilities:
Property and equipment (55,000)
Prior year refunds received and deferred (307,724)
-------------------
Net deferred tax liability $ (42,724)
===================
Page 10
The deferred tax liability of $307,724 relates to refunds received in 2005 in
excess of expected amounts. The amount received was recorded as a liability in
2005 as the Company determines the final status of its tax filings for 2001
through 2004.
The following is a reconciliation of the statutory federal income tax rate
applied to pre-tax accounting net income compared to the income taxes in the
consolidated statements of income:
For the Years Ended
December 31,
2005 2004
------------ -----------
Income tax expense (benefit) at the
statutory rate $ 53,339 $ (284,129)
Change resulting from:
State and local income taxes, net of
federal income tax 5,177 (27,516)
Non-deductible expenses 920 713
Foreign tax credits and income
Exclusions - (22,739)
Other 3,451 63,103
------------ -----------
$ 62,887 $ (270,568)
============ ===========
NOTE 5 - LONG-TERM DEBT
At December 31, 2005 long-term debt consists of:
Note payable to a financing company with interest at 0%.
The note calls for monthly principal payments of $525
and matures December 2007. Collateralized by vehicle. $ 13,125
----------
13,125
Less current portion ( 6,300)
----------
$ 6,825
==========
Maturities of long-term obligations are as follows:
Year Ending December 31,
------------------------
2006 $ 6,300
2007 6,825
-------------------
$ 13,125
===================
Page 11
NOTE 6 - COMMITMENTS AND CONTINGENCIES
RELATED PARTY OPERATING LEASES
The Company leases office and manufacturing facilities under an operating lease
for property controlled by the Company's President, which expires in September
2006. Rent expense recorded in 2005 was 446,088 under this related party lease.
OTHER
The Company also has one operating lease for a vehicle, which expires in June
2010. Payments under this lease are $723 per month.
Expense for these leases was:
Year Ending December 31,
2005 $ 454,769
2004 $ 529,859
LITIGATION
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse impact either
individually or in the aggregate on consolidated results of operations,
financial position or cash flows of the Company
DEPOSITS
At December 31, 2005 and 2004, the Company had deposits of approximately
$257,949 and $158,720, respectively for orders of production materials.
NOTE 7 - STOCKHOLDERS' EQUITY
STOCK OPTIONS
In 1997, the Company adopted an incentive stock option plan for employees
concerning a maximum of 250,000 shares. The options vest on an annual basis. As
of December 31, 2005, the Company had 131,500 incentive options outstanding
under this plan, with exercise prices ranging from $2.00 to $2.40 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, 2005, the Company had 37,500 options outstanding under this plan with
exercise prices ranging from $1.32 to $5.00 per share.
Page 12
The following table presents the activity for options outstanding:
Incentive Non-qualified Average
Stock Stock Exercise
Options Options Price
------------- ------------- -------------
Outstanding - December 31, 2003 210,900 40,000 $ 2.15
Granted - 7,500 1.79
Forfeited/canceled (17,500) (5,000) 2.22
Exercised (88,000) - 2.00
------------- ------------- -------------
Outstanding - December 31, 2004 105,400 42,500 $ 2.15
Granted 50,500 7,500 2.23
Forfeited/canceled - (12,500) 2.44
Exercised (24,400) - 2.00
------------- ------------- -------------
Outstanding - December 31, 2005 131,500 37,500 $ 2.18
============= ============= =============
The following table presents the composition of options outstanding and
exercisable:
Options Outstanding Options Exercisable
Range of Exercise Prices Number Price* Life* Number Price*
---------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
$1.32 - $1.79 22,500 $ 1.62 2.00 5,625 $ 1.48
$2.00 81,000 2.00 1.11 81,000 2.00
$2.01 - $3.00 58,000 2.32 8.45 56,125 2.32
$3.01 - $5.00 7,500 4.75 0.42 7,500 4.75
---------------- ---------------- ---------------- ---------------- ----------------
Total - December 31, 2005 169,000 $ 2.18 3.72 150,250 $ 2.26
================ ================ ================ ================ ================
o Price and life reflect the weighted average exercise price and weighted
average remaining contractual life, respectively.
Page 13
NOTE 8 - INCOME PER SHARE
The following table sets forth the computation for basic and diluted earnings
per share:
For the Years Ended
December 31,
2005 2004
------------- ------------
Numerator for basic income (loss) per share $ 93,992 $ (565,108)
============= =============
Numerator for diluted income (loss) per
common share $ 93,992 $ (565,108)
============= =============
Denominator for basic earnings per share -
weighted average shares outstanding 4,681,116 4,668,615
Effect of dilutive securities - options 21,704 -
------------- -------------
Denominator for diluted income (loss) per share -
adjusted weighted average shares outstanding 4,702,820 4,668,615
============= =============
Diluted income (loss) per common share $ 0.02 $ (0.12)
============= =============
Where the inclusion of potential common shares is anti-dilutive, such shares are
excluded from the computation.
NOTE 9 - STOCK EXCHANGE AGREEMENT
The Company entered into a Stock Exchange Agreement (the "Agreement") dated as
of March 31, 2006 with Partner Success Holdings Limited ("PSHL") under which all
of the issued and outstanding shares of PSHL are to be acquired by the Company
in consideration for the issuance to the owners of PSHL of common stock
representing a 94% ownership interest in the Company, after giving effect to a
redemption by the Company of 3,629,350 shares of its outstanding common stock
owned individually by its President, Gary H. Schlatter. The redemption is to be
in consideration for the transfer to Mr. Schlatter of all of the Company's
outstanding common stock of its wholly-owned operating subsidiary, OraLabs, Inc.
The 94% ownership interest in the Company is to be determined on a fully-diluted
basis that will take into account the issuance of 300,000 shares to the
non-employee directors of the Company prior to closing and after receiving
shareholder approval, and any options that may be exercised by employees prior
to the closing. If the closing of the Agreement occurs, PSHL will become a
wholly-owned subsidiary of the Company. The closing of the Agreement is
conditioned upon, among other things, customary closing conditions, including
the satisfaction of both the Company and PSHL with their due diligence
investigations of the other party and the receipt by the Board of Directors of
the Company of a fairness opinion. There can be no assurance that closing of the
transactions described in the Agreement will occur.
Page 14
NOTE 10 - MAJOR CUSTOMERS
The Company had two major customers that accounted for net sales of
approximately $2,400,000 and $1,600,000, respectively, of which $406,578 was due
from these customers and included in accounts receivable at year end. For the
year ended December 31, 2004, two customers accounted for net sales of
approximately $1,950,000 and $1,400,000, respectively, of which $174,805 was due
from those customers and included in accounts receivable at December 31, 2004.
NOTE 11 - EXPORT SALES
During the year ended December 31, 2005 and 2004, the Company had export sales
of approximately $1,055,397 and $918,000, or 8% and 7% of product sales,
respectively. All of the Company's export business is transacted in U.S. dollars
and the Company had no foreign currency translation adjustments.
NOTE 12 - SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
In the fourth quarter for the year ended December 31, 2005, the Company adjusted
its reserves related to promotional expenses and returns and allowances as a
result of changes in estimates based on management evaluation and historical
sales analysis. The adjustment increased income by approximately $273,000.
NOTE 13- 401K PLAN
During 2005, the Company began to offer a 401(k) retirement plan (the "Plan")
which covers all employees. Employees are eligible to participate after one year
of service. Employees may contribute amounts based on the limits established by
the Internal Revenue Service. Employer discretionary payments, as well as
certain matching contributions, may be made as determined by the Board of
Directors. The discretionary and matching contributions vest immediately. During
2005, the Company contributed approximately $44,979 to the Plan.
Page 15
EXHIBIT INDEX
Exhibit
No. Description
--------------------
14.1 Code of Ethics
23.1 Consent of Independent Registered Public Accounting Firm (GHP Horwath,
PC)
23.2 Consent of Independent Registered Public Accounting Firm (Ehrhardt
Keefe Steiner & Hottman P.C.)
31.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant
To Section 302 Of The Sarbanes-Oxley Act Of 2002
31.2 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant
To Section 302 Of The Sarbanes-Oxley Act Of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by
Emile Jordan
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by
Gary H. Schlatter