SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
|X| Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1997 or
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|_| Transition report pursuant to 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.
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(Exact name of registrant as specified in its charter)
Colorado 14-1623047
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2901 South Tejon Street,
Englewood, CO 80110
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (303) 783-9499
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Shares, par value $0.001 per share
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(Title of class)
- --------------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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
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As of March 20, 1998, 9,123,555 shares of the Company's Common Stock were
outstanding and the aggregate market value of Common Stock held by
non-affiliates of the Registrant, computed by reference to the last trade of the
Common Stock on that date, was approximately $6,399,990.
Documents incorporated by reference. Portions of the Company's definitive Proxy
Statement to be mailed to stockholders in connection with the Annual Meeting of
Stockholders of the Registrant to be held on May 29, 1998 (the "1998 Definitive
Proxy Statement"), which will be filed with the Commission not later than 120
days after the end of the fiscal year to which this report relates, are
incorporated by reference in Part III hereof.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not 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-K or any amendment to this Form 10-K. |X|
PART I
Item 1. Business.
Background. On May 1, 1997, OraLabs, Inc., a privately held company, became
a wholly-owned subsidiary of SSI Capital Corp. (the predecessor of the Company).
The name of the Company was changed from SSI Capital Corp. to OraLabs Holding
Corp. soon thereafter. As a result of these transactions, which have been
previously reported upon by the Company, the Company is the sole stockholder of
OraLabs, Inc.
At the time that OraLabs, Inc. became a subsidiary of the Company, the
Company was only engaged in seeking a suitable business to be the subject of an
acquisition or merger transaction. The Company was not then engaged in any
operating business and had not been engaged in an operating business for at
least five (5) years. The business in which the Company had been involved was
totally unrelated to that of the Company's subsidiary.
The following discussion, insofar as it is for time periods prior to May 1,
1997, will, in effect, be about the business of OraLabs, Inc. (which may be
referred to as the "Subsidiary"), as SSI Capital Corp. was not then engaging in
any substantive business. The term "Company" or "OraLabs" will mean OraLabs
Holding Corp., successor to SSI Capital Corp.
General Development of Business. The Subsidiary was formed in 1990 by its
current CEO and President, for the purposes of manufacturing and distributing
its tooth-whitening products under the brand name of Amazing White, as well as
under the names of private label brands. The private label brands were sold via
infomercials on television, and eventually those brands and the Amazing White
brand began to be distributed through retail outlets.
The name of the Subsidiary was originally AmWhite Labs, Incorporated, which
was changed in April 1994 to OraLabs, Inc., after the sale of the Amazing White
product line. In 1992 the OraLabs flagship product, Ice Drops (R), a breath drop
product sold in a small plastic bottle, was introduced as an alternative to
breath sprays and candy breath mints. In 1995 the Company introduced its brand
of breath sprays under the Ice Drops(R) name. This low-priced product was
distributed substantially under the same distribution network established for
the Ice Drops(R) breath drops. The Subsidiary sought to have both products
displayed at checkout counters and in convenience stores to be positioned as
consumer impulse purchases.
In 1996 the Subsidiary introduced a line of lip balms sold in a patent
pending mini-size package, in furtherance of the Subsidiary's consumer impulse
marketing strategy. In addition, three new SPF-30 sun block lip balms were
introduced.
In 1997 OraLabs introduced its extreme sour drops, which are a line of
liquid sour candy drops packaged in the same small bottle as the traditional Ice
Drops(R). The product was developed to capitalize upon what the Subsidiary
believed was a growing market for sour, tart, hard candies being purchased by
pre-teens and teenagers. In 1997 the Company also introduced a line of sore
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throat sprays and zinc sprays under the brand name Zinc-7(TM). The goal of the
Company was to create a pocket size sore throat spray that could be carried with
the consumer all day long, as opposed to relatively bulky, larger containers
that were on the market. The zinc spray was introduced as an alternative to zinc
lozenges, which became popular in recent years as a possible way to reduce the
duration of the common cold.
In 1998 the Company begins its distribution of VitaSpray brand spray
vitamins. The product line is intended to include both adult and child
multi-vitamin spray as well as other vitamin sprays. The strategy behind these
products is to provide convenience for taking vitamins as well as to provide an
alternative for those people who are adverse to swallowing pills.
The Company's marketing strategy has been to develop and sell products
which the Company believes are niche products that can be differentiated from
products of its competitors. The marketing strategy includes capitalizing on the
distribution network of nearly 50,000 retail stores that currently carry one or
more of the Company's products, and building upon the business relationships
that have been established.
All of the Company's products and packaging have been conceptualized and
developed in-house. The Company's products are all packaged at its manufacturing
facility in Englewood, Colorado. Most packaging, filling and automated
manufacturing equipment has been designed, built and maintained by the Company's
own staff. This allows the Company to rapidly introduce and manufacture new
products, reducing lengthy lead 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.
OraLabs recently entered the private label category. The Company's initial
private label contracts include lip balm products for Rite-Aid (including
Thrifty and Payless), and Sally's Beauty Supply. The Company also does some
contract packaging for its breath spray products. These contracts have helped
establish the Company as a private label manufacturer, which gives it an entry
with these customers to pursue other accounts.
The Company does business in approximately 25 international markets and the
Company is actively seeking to expand its international distribution. The
Company is currently supplying numerous airlines and hotels with its products,
including a specially packaged mouthwash, as part of those businesses' amenity
programs.
Narrative Description of Business.
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Principal Products and Their Markets. As discussed above, the general
business done by the Company is to produce and sell consumer products relating
to health, beauty care and vitamins. 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
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Company can be categorized into four groups: breath fresheners, including liquid
drops under the brand name Ice Drops(R), as well as sour drops; lip balm
products under the name Ice Drops(R) as well as under private label names; cold
and cough products, including sore throat sprays and zinc sprays; and a line of
vitamin sprays to be introduced under the name VitaSpray.
The following table sets forth for each of the last three fiscal
years, the percentage of total revenue (in excess of 15%) contributed by the
three groups of products then sold by the Company.
Approximate Approximate Approximate
Percentage of Percentage of Percentage of
Company's Company's Company's
Product Group 1997 Revenues 1996 Revenues 1995 Revenues
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Breath Fresheners 57% 82% 100%
Lip Balm 28% 18% --
Cough and Cold 15% -- --
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Status of New Product. Of the above list of products, the only product
in the preliminary stages is the line of spray vitamins which is in the process
of being introduced for sale in the second quarter of fiscal 1998. All
anticipated expenses of introducing the new line of products, including
advertising budgets, have not yet been completed by the Company. It is possible
that the introduction of this product line could require the investment of a
material amount of the assets of the Company. However, the Company believes that
its expenditures could be gradually increased if and when sales increase, rather
than the Company being required to expend substantially all of its investment in
advance of shipping the products.
Sources and Availability of Raw Materials. In general, the sources and
availability of materials used by the Company in its business are fairly
widespread, and the Company believes that it could obtain secondary sources of
raw materials to the extent that an existing business relationship terminates.
However, at this stage the Company is purchasing all of its raw materials for
the line of spray vitamins from a single supplier. In the event that
relationship were to terminate, the Company would be required to obtain another
supplier in order to continue the production of its spray vitamins, and the
Company does not believe that alternate suppliers are readily available.
Patents, Trademarks, Licenses, Franchises and Concessions. Although
there can be no assurance of proprietary protection respecting pending 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
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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 Company believes that its sore throat spray and zinc
spray, as well as its vitamin-C spray in the process of introduction, all fall
into the cough and cold category of consumer products. The Company believes that
cough and cold products as well as moisturizing lip balms typically enjoy
greater sales from September through February of each year.
Practices of the Company in the Industry. The Company's typical
practices with respect to all of its products is to keep adequate inventory on
hand for shipments within a two to three week period, and the Company generally
extends credit on purchases for a term of 30 days after shipment. The Company
does not formally provide a right of customers to return merchandise. 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.
Dependence Upon a Single Customer. The Company does not believe that
its business with respect to any particular product or products would be
eliminated by the loss of any one of its customers. However, the Company did
sell to one customer, Rite-Aid Corporation, an amount comprising in excess of
10% of fiscal 1997 revenues. The Company had over 1,500 purchasing customers in
fiscal 1997 and believes that the loss of a customer, even one as large as
Rite-Aid, would gradually be replaced.
Backlog Orders. As of December 31, 1997, the Company carried
approximately $470,000 of orders with future ship dates. Orders are not booked
as sales until product is shipped. The Company has no reason to expect that any
orders with future ship dates will not be fulfilled.
Government Contracts. Not applicable.
Competitive Conditions. Competition for all of the Company's products
is very significant. With respect to the Company's breath freshening products,
direct competitors who manufacture liquid or spray breath products consist of
less than five. The Company believes that its primary competitors for those
products are Binaca(R) and Sweet Breath(R). However, if one considers candy
breath mints as competition for the same group of products, the Company believes
that there are more than 50 competitors.
With respect to the Company's lip balm products, the Company believes
that approximately 80% of the market is controlled by three dominant competitors
(who sell Chapstick(R), Blistex(R) and Carmex), and the balance of the market
consists of more than 50 different companies. With respect to the Company's
cough and cold related products, the Company's market share is insignificant and
there is a large number of strong competitors. Sales of vitamin products is also
highly competitive but the Company does not believe that any single competitor
totally dominates the market.
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The Company has sought to anticipate competition by the distinguishing
size and packaging of its products, as well as by competing with respect to
pricing. The Company believes that for some of its products, its smaller size
and lower price than that of its competitors is an advantage to the Company.
However, other factors such as a competitor's greater brand recognition or
preferable product placement at retail locations with respect to competitive
products may nullify or reduce whatever competitive advantage the Company's
products have.
Research and Development Expenses. The Company has not expended a
material amount of its resources on research and development activities.
However, as noted above, a material amount of the Company's assets may be
expended in connection with the introduction of the Company's new line of
vitamin products.
Costsand 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 1998.
Number of Employees. The approximate number of employees hired by the
Company as of the end of fiscal year 1997 was 65.
Item 2. Properties.
The Company's headquarters are located in an office-warehouse building
of approximately 16,000 square feet located in Englewood, Colorado, which
the Company leases from the Company's President. The property includes the
executive offices of the Company, as well as the Company's manufacturing
facilities and a portion of its warehouse facilities. The Company's lease
expires in the year 2000, and the Company believes that its rental rate is
comparable to that which would be charged by an unaffiliated landlord.
The Company also subleases an additional approximate 6,000 square feet
of warehouse space from an unaffiliated landlord in a building located near
the Company's headquarters. The sublease expires in 1999.
The Company does not believe that it would be difficult to locate
comparable space for its business operations at such time as either of the
leases expires.
Item 3. Legal Proceedings.
The Company is not a party to any material pending legal proceedings
to which either it or its subsidiary is a party or of which any of its
property is subject.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders.
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PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
(a) (i)Market Price of and Dividends on the Company's Common Stock.
For many years prior to closing the transaction by which the Company
acquired its wholly-owned subsidiary, OraLabs, Inc., there was no
established public trading market for the Company's common stock.
Commencing approximately in September 1997, the common stock of the Company
began to be traded on the OTC Bulletin Board.
The following sets forth the range of high and low bid information for
the Company's common stock for the third and fourth quarters of fiscal year
1997. The source of such information is an OTC Bulletin Board Quarterly
Quote Summary prepared by NASDAQ Trading and Market Services.
Reported High Bid Reported Low Bid
Third quarter, fiscal 1997 $3.00 $2.50
Fourth quarter, fiscal 1997 $4.50 $2.75
The above over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
present actual transactions.
(ii) Recent Sales of Unregistered Securities. In June 1997, the
Company completed a private placement of its Common Stock by which 325,000
shares of the Common Stock were sold at a price of $1.00 per share to
accredited investors only. The Company did not use the services of any
underwriters in that transaction. The private placement was exempt from the
registration requirements of the Securities Act of 1933, as amended,
pursuant to Sections 4(6), 4(2), and 3(b), as well as pursuant to
Regulation D promulgated under that Act. All of the certificates
representing shares sold in the private placement contain a legend
denominating the shares as "restricted securities".
A total of 340,000 shares of Common Stock were issued to two employees
of the Company pursuant to the terms of written employment agreements
between them and the Company. The stock was issued pursuant to employment
agreements covering the period of January 1, 1997 through December 31,
1997. These transactions were exempt from the registration requirements of
the Act under Sections 4(6) and 4(2) as being private transactions to
accredited investors. The certificates for the shares issued to the
employees contain the legend denominating the shares as "restricted
securities" under the Act.
In October 1997, the Company issued 20,000 options to a newly
appointed member of the board of directors of the Company. The transaction
was exempt from the registration requirements of the Act pursuant to
Sections 4(6) and 4(2) of the Act. The options vest in five equal
installments over a period of five years, with each option having an
exercise price of $1.00 per share.
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(b) As of February 16, 1998, there were approximately 964 record
holders of the common stock of the Company.
(c) The Company has not paid any cash dividends and it is not intended
that any cash dividends will be paid in the foreseeable future.
Item 6. Selected Financial Data.
The following table shows a five year comparison of selected financial
data. The information presented is in thousands of dollars, except for the
per share amounts. All of the information except for fiscal year 1993, and
except for the total assets and stockholders' equity presented for fiscal
year 1994, are derived from the Company's audited financial statements for
December 31, 1997, 1996 and 1995, as well as the Company's audited
financial statements for December 31, 1995 and 1994.
Year Ended December 31
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1997 1996 1995 1994 1993
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Sales 6,762 4,985 5,447 3,606 452
Cost of Sales 3,028 2,385 1,910 1,708 269
Gross Profit 3,734 2,600 3,537 1,898 183
Total Operating Expenses 2,119 1,461 1,074 773 135
Net Operating Income 1,616 1,139 2,463 1,125 48
Net Income Per Common Share $0.13 $0.16 $0.30 $1,357 $52
Weighted Average Shares Outstanding 8,707 7,459 7,459 0.999 0.999
Total Assets 2,083 1,141 1,451 1,100 126
Stockholders' Equity (1) 2,007 768 1,159 949 8
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(1) The Company has not paid cash dividends on its common stock.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
Results of Operations. For the period ending December 31, 1997 as compared
with the periods ending December 31, 1996 and December 31, 1995.
Sales increased from 1996 to 1997 by 35.7% and from 1995 to 1997 by 24.1%.
The Company attributes this growth in part to the introduction of our lip balm
product, which occurred in July 1996, and in part to expanded international
distribution and an increased volume of sales. Prices for the Company's products
have remained relatively stable.
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Gross profit increased from 1996 to 1997 by 43.6% and from 1995 to 1997 by
5.6%. The Company attributes the increase in gross profit in part to volume
discounts from material suppliers and in part to increased automation reducing
cost of labor. Gross profit significantly decreased from 1995 to 1996 primarily
as a result of the Company's shift from selling bulk goods to blister-carded
goods which require both higher labor and materials costs.
Salaries increased from 1996 to 1997 by 79.5% and from 1995 to 1997 by
190.8%. This was the result of an increase to additional staffing in sales and
engineering.
Bad Debts decreased from 1996 to 1997 by 40.4% and from 1995 to 1997 by
49.6%. This was the result of improved pre-qualifying of new customers and
implementation of a progressive internal collection process.
Stock Issued for Services in 1997 was to two employees of the Subsidiary
for services in the amount of $340,000 and is a non-recurring item. The
employees' services were in the areas of human resources and investor relations,
which the Subsidiary was required to address as part of preparing for its entry
into the public marketplace.
Gain(Loss) on Sale of Securities was zero in 1997. This was a result of the
Company's distributing substantially all of its securities held for investment
prior to year end 1996 and maintaining cash in liquid money markets in 1997.
The Company was an S Corporation through April 30, 1997, with net income
passing through to the owner's personal income. Effective May 1, 1997. the
Company converted to a C Corporation The $522,694 of income taxes reflects the
accrual of eight months of income taxes through December 31, 1997.
Liquidity and Capital Resources. Balance Sheet as of December 31, 1997
Compared to December 31, 1996
Cash increased $903,199. This is due to the creation of the
parent-subsidiary relationship upon closing of the merger, as approximately
$189,000 was then held by the parent, approximately $325,000 was added from
closing a private placement, and the balance was primarily additional cash from
operations. The Company believes that its cash holdings will be sufficient to
meet the Company's operating expenses and capital requirements for at least the
next twelve months.
Inventory increased by approximately 32.9%. This is a result of expanded
product lines creating a need for a broader based raw materials inventory.
Deferred Income tax for December 31, 1997 in the amount of $67,816 relates
to the tax benefit of the provision for returns and allowances of approximately
$199,460, which is not deductible from taxable income until incurred.
9
Accounts payable and accrued expenses increased by approximately 49.2%.
This is a result of inventories being higher as of December 31, 1997 than on
December 31, 1996.
Income Taxes Payable for December 31, 1997 in the amount of $119,586
reflects the current provision for federal and state income taxes of $590,510
since May 1, 1997 computed at statutory rates.
Additional paid-in capital increased $996,970. This is a result of
reorganization/additional paid in capital of $160,849, common stock issued for
cash of $324,675; reclassification of undistributed S Corporation earnings of
$171,786; and stock issued for services of $339,660.
Retained earnings increased $241,257 (approximately 38.7%). This is a
result of reclassification of undistributed S Corporation earnings ($171,786),
dividends paid ($714,610) ); and net income of $1,127,653.
Trends. The Company has been broadening its product base by capitalizing on
management's research and development abilities, while utilizing existing
packaging components and manufacturing technology of the Company. This broadened
product base has given the Company more stability in the marketplace by making
the Company less reliant on any individual product. The broadened product base
has expanded the Company's customer base and helped to increase business with
existing customers. In addition to a broadened product base, the Company has
established new markets for its products, such as mass retailers and drug
stores, rather than focusing on convenience stores. The Company expects this
trend to continue, although sales to convenience stores remain an important part
of the Company's sales strategy.
As the Company has historically developed and produced its manufacturing
equipment, and has historically committed funds to new products as sales have
warranted, the Company does not foresee any material commitment for capital
expenditures during the 1998 fiscal year.
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 in part because the bulk
of the Company's current products are primarily very low cost, impulse items
(under $0.99 to consumers).
Year 2000. The Company does not use a computer system or program developed
specifically for the business of the Company. Rather, the Company uses software
programs and computer systems developed by third parties and readily available
for sale to end users. Although the Company has not yet made an assessment of
its year 2000 issues, and, therefore, has not determined whether it has material
year 2000 issues, the Company has been advised by its third party vendors that
year 2000 compliance has been or will be achieved. Even if it is determined that
any year 2000 problem will not pose significant operational problems for the
Company's computer systems, the Company has not determined the extent to which
the Company may be impacted by third parties' systems which may not be year 2000
compliant. Accordingly, the year 2000 computer issue may create risk for the
Company from third parties with whom the Company deals. There can be no
assurance that the systems of other companies with whom the Company deals will
be timely converted, or that any such failure to convert by another company
could not have an adverse effect on the Company.
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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-K in order to do so. All statements in this Form 10-K
that are not historical facts, including without limitation statements about
management's expectations for any period beyond the fiscal year ended December
31, 1997, are forward-looking statements and involve various risks and
uncertainties, many of which are beyond the control of the Company, and any one
of which, or a combination of which, could materially reflect the results of the
Company's operations and whether forward-looking statements made by the Company
ultimately prove to be accurate.
The following discussion outlines certain risk factors that in the future
could affect the Company's results and cause them to differ materially from
those that may be set forth in any forward-looking statement made by or on
behalf of the Company. The Company cautions the reader, however, that this list
of risk factors and others discussed elsewhere in this report may not be
exhaustive.
Competition. The businesses in which the Company is engaged are highly
competitive and are engaged in to a large extent by companies which are
substantially larger and have significantly greater resources than the Company.
Although the Company believes that its Ice Drops(R) brand of liquid breath
freshener drops has 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. The industries in which the Company
competes experience consolidations of competitors from time to time and the
Company's business could be adversely affected by such activities. There can be
no assurance that the Company will be able to compete successfully in the
future.
Limited Operating History. Although the Company reported net income for the
past several year, the Company's subsidiary (OraLabs, Inc.) was only organized
in 1990 and therefore has a limited operating history upon which investors may
evaluate its performance. There can be no assurance that future operations of
the Company will be profitable. The likelihood of the Company's success must be
considered relative to the problems, difficulties and delays frequently
encountered in connection with the development and operation of a relatively new
business and the competitive environment in which the Company operates.
Unproven Markets for Certain of the Company's Products. The Company only
began selling its sore throat spray and its zinc spray products in 1997. In
addition, the Company is preparing to introduce a new line of spray vitamins
which is completely unproven. While the Company believes that there is a market
for such products, it has no prior history with spray vitamins and therefore
11
cannot be assured that those products will be accepted in the marketplace, or
that if accepted, the Company will be profitable in that part of the Company's
business.
Managing Growth. The Company has experienced a period of significant growth
during fiscal years ended December 31, 1997 and 1996 which has placed, and could
continue to place, a strain on the Company's management, customer service and
support operations, sales and administrative personnel and other resources. The
Company's ability to manage continued growth may require the Company to expand
its operating, management, information and financial systems, all of which may
increase its operating expenses or otherwise strain the Company's resources. If
the Company is unsuccessful in managing growth, if such growth should occur,
there could be a material adverse effect on the Company. In addition, the loss
of a significant number of customers, or a significant reduction in purchase
volume by or financial difficulty of such customers, for any reason, could have
a material adverse effect on the Company. Successful management of growth, if it
occurs, will require the Company to improve its financial controls, operating
procedures and management information systems, and to train, motivate and manage
its employees.
Dependence on Key Personnel. The Company's future success depends in large
part on the continued service of its key personnel. In particular, the loss of
the services of Gary Schlatter, its President and Chief Executive Officer, could
have a material adverse effect on the operations of the Company. The Company's
subsidiary has an employment agreement with Mr. Schlatter which expires on April
30, 2000. The Company's future success and growth also depends on its ability to
continue to attract, motivate and retain highly qualified employees. There can
be no assurance that the Company will be able to do so.
Government Regulation. The manufacturing, processing, formulation,
packaging, labeling and advertising of some of the Company's products are
subject to regulation by one or more federal agencies, including the United
States Food and Drug Administration ("FDA"), the Federal Trade Commission
("FTC"), the Bureau of Alcohol, Tobacco and Firearms ("BATF") and the Drug
Enforcement Administration ("DEA"). Although the Company does not believe that
such regulations are presently burdensome upon the Company, there can be no
assurance that the scope of such regulations will not change or otherwise cause
an increase in the expenses and resources of the Company which must be applied
to complying with such regulations. As an example, the Company's sun-block lip
balms are considered a "drug" by the FDA. If the FDA were to conclude that any
of the Company's products determined to be a "drug" violate FDA rules or
regulations, the FDA may seek to restrict or remove such products from the
market. Such action may be taken against the Company and any entity which
manufactures products for the Company. In addition, vitamin products have been
increasingly scrutinized by government agencies, including the area of labeling,
and increasing regulation could adversely affect the Company's vitamin business
which has just recently been introduced by the Company.
The Company's business is also regulated by various agencies of the states
and localities in which the Company's products are sold and governmental
regulations in foreign countries where the Company sells or may seek to commence
sales. Such regulations could prevent or delay entry into a market or prevent or
delay the introduction of Company products. For example, the growth of
international sales is expected to be slowed by the long process of registering
new products.
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Furthermore, the Company cannot predict whether new domestic or foreign
legislation regulating its activities will be enacted. Such new legislation
could have a material adverse effect on the Company. Failure to comply with any
applicable requirements can result in sanctions being imposed on the Company or
upon the manufacturers of its products.
Dependence Upon Significant Distributors and Retailers. Rite-Aid
Corporation accounted for more than ten percent (10%) of the Company's gross
revenues in 1997. The two next largest customers of the Company in fiscal years
1997 and 1996 were distributors who collectively accounted for approximately 10%
and 15% of gross revenues, respectively. A loss of these customers could have a
material adverse effect on the Company's revenues or operations.
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.
Should these relationships terminate, or should the vendors be otherwise unable
to supply the Company with an adequate supply of product, the Company would be
required to establish relationships with new suppliers. Although the Company
believes that a replacement supply would be readily available on comparable
terms, there can be no assurance that this will be the case, and the failure to
obtain supplies on comparable terms could have a material adverse effect upon
the Company.
No Assurance of Proprietary Protection. The Company has two patent
applications pending. The Company also holds several domestic and international
trade marks and has two 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
patents 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. Certain of the Company's products are
intended to provide various kinds of relief from colds or sore throats. If
scientific data were to conclude that the Company's products do not provide such
relief, or if for any other reason the Company's products were not viewed by the
public as providing such relief, there could be a material adverse effect upon
the sales of such products.
13
Seasonal Fluctuations. To the extent that some of the Company's products
are intended to provide relief for certain symptoms of common colds and chapped
lips, sales of such products may be seasonal. The Company believes that the
consumer market for such products occurs during the primary cold season from
September to March. As a result of such fluctuations, there can be no assurance
that the Company will maintain sufficient flexibility with respect to its
working capital needs and its ability to manufacture and supply products to be
able to minimize the adverse effects of an unanticipated shortfall in or greater
than expected demand for its products. Failure to predict accurately and to
respond to consumer demand may cause the Company to produce excess inventory.
Conversely, if the product achieves greater success than anticipated for any
given quarter, the Company may not have sufficient inventory to meet customer
demand.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
This Item is not applicable due to the Company's status as a small business
issuer as defined in applicable regulations of the 1933 Act.
Item 8. Financial Statements and Supplementary Data.
Financial statements meeting the requirements specified in Item 8 of Form
10-K follow the signature page and are listed in Item 14 of this Annual Report
on Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
The information required by this Item is not included as it has been
previously reported as that term is defined in the Rules promulgated under the
1934 Act.
14
PART III.
Item 10. Directors and Executive Officers of the Registrant.
The following table identifies each of the Company's directors and
executive officers, indicating the principal occupation or employment of each
such person and the name and principal business of any organization by which
such person is so employed:
Name of Director or Principal Occupation Name and Business
Individual Executive Officer or Employment of Employer
---------- ----------------- --------------------- ------------------
Gary H. Schlatter Director and Executive President of Company's OraLabs, Inc.
Officer Subsidiary
Suzan M. Schlatter Director Secretary of Company's OraLabs, Inc.
Subsidiary
Allen R. Goldstone Director Consultant Creative Business
Strategies, Inc.;
Business Consulting
Firm
Michael I. Friess Director Attorney Michael Friess
Emile Jordan Executive Officer Comptroller of Company's OraLabs, Inc.
Subsidiary
The balance of the information required for this Item is incorporated
herein by reference to the 1998 Definitive Proxy Statement.
Item 11. Executive Compensation.
The information required for this item is incorporated herein by reference
to the 1998 Definitive Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required for this item is incorporated herein by reference
to the 1998 Definitive Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required for this item is incorporated herein by reference
to the 1998 Definitive Proxy Statement.
15
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as a part of this Form 10-K
immediately following the signature pages:
1. Consolidated Financial Statements (OraLabs Holding Corp. and
Consolidated Subsidiaries):
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Income for the years ended
December 31, 1994 through December 31, 1997
Consolidated Statement of Changes in Stockholders' Equity
from December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ende
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Independent Auditor's Report
2. Financial Statements (SSI Capital Corp.):
Balance Sheet - December 31, 1996
Statement of Operations and Accumulated (Deficit)
Statement of Cash Flows for the month ended December 31, 1996
Independent Auditor's Report
3. Financial Statement Schedules:
All schedules have been omitted because of the absence of
conditions under which they would be required or because the
required information is included in the financial tatements or
the notes thereto.
4. Exhibits required to be filed are listed below:
Certain of the following exhibits are hereby incorporated by
reference pursuant to Rule 12(b)-32 as promulgated under the
Securities and Exchange Act of 1934, as amended, from the
reports noted below:
Exhibit
No. Description
------- ------------
3.1(i)(1) Articles of Incorporation
3.1(ii)(2) Amended and Restated Bylaws
4(2) Specimen Certificate for Common Stock
10.1(2) 1997 Stock Plan
16
Exhibit
No. Description
------- ------------
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 to Michael Friess
10.5(2) Lease Agreement Between the Company's Subsidiary and
Gary Schlatter
10.6(2) Sublease Agreement Between the Company's Subsidiary
and Modern Plastics, Inc.
10.7(2) Employment Agreement Between the Company's Subsidiary
and Allen R. Goldstone, with accompanying
termination agreement
10.8(2) Employment Agreement Between the Company's Subsidiary
and Sanford Schwartz, with accompanying termination
agreement
10.9(4) Merger Agreement and Plan of Reorganization Between
the Company's Subsidiary, SSI Capital Corp.,
Oralmerge, Inc., et al.
10.10 No statement re: computation of per share earnings is
required since such computation can be clearly
determined from the material contained in this
Annual Report on Form 10-K.
212 List of Subsidiaries of the Company
23.1(2) Consent of Independent Accountants
27.1(2) Financial Data Schedule for OraLabs Holding Corp. and
Consolidated Subsidiaries
27.2(2) Financial Data Schedule for SSI Capital Corp.
(December 1996)
- ------------------
(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) Filed herewith.
(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 Exhibit A of the Form 8-K filed by the
Company's predecessor, SSI Capital Corp., on May 14, 1997.
(b) No reports on Form 8-K have been filed during the fourth quarter of
fiscal 1997.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ORALABS HOLDING CORP.
By: /s/ Gary H. Schlatter
------------------------------------
Gary H. Schlatter, President
By: /s/ Emile Jordan
-------------------------------------
Emile Jordan, Chief Financial Officer
Date: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Gary H. Schlatter Director, President, March 31, 1998
---------------------------------- Chief Executive Officer
Gary H. Schlatter
/s/ Allen R. Goldstone Director March 31, 1998
----------------------------------
Allen R. Goldstone
/s/ Michael I. Friess Director March 31, 1998
---------------------------------
Michael I. Friess
/s/ Suzan M. Schlatter Director March 31, 1998
----------------------------------
Suzan M. Schlatter
18
ORALABS HOLDING CORP. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
and
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
December 31, 1997, 1996 and 1995
F-1
ORALABS HOLDING CORP. AND CONSOLIDATED SUBSIDIARIES
---------------------------------------------------
Table of Contents
Page
----
Report of Independent Certified Public Accountants F-3
Consolidated Financial Statements:
Consolidated Balance Sheets F-4
Consolidated Statements of Income F-5
Consolidated Statement of Changes in
Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
The Board of Directors
Oralabs Holding Corp.
We have audited the consolidated balance sheets of Oralabs Holding Corp. and
Consolidated Subsidiaries as of December 31, 1997 and 1996 and related
statements of income, changes in stockholders' equity and cash flows for the
three years ended December 31, 1997, 1996 and 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Oralabs Holding
Corp. and Consolidated Subsidiaries as of December 31, 1997 and 1996 and the
results of its operations, its changes in stockholders' equity and its cash
flows for the three years ended December 31, 1997, 1996 and 1995 in conformity
with generally accepted accounting principles.
/s/ Schumacher & Associates, Inc.
----------------------------------
Schumacher & Associates, Inc.
Certified Public Accountants
12835 E. Arapahoe Road
Tower II, Suite 110
Englewood, CO 80112
February 24, 1998
F-3
ORALABS HOLDING CORP. AND CONSOLIDATED SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED BALANCE SHEETS
December 31,
1997 1996
---------- ----------
Current Assets
Cash in bank $1,023,598 $ 120,399
Accounts receivable, net of
allowance for doubtful accounts
of $33,770 (Note 8) 686,668 392,469
Inventory 599,270 450,984
Deferred income taxes (Note 11) 67,816 --
Prepaid expenses 91,863 19,128
---------- ----------
Total Current Assets 2,469,215 982,980
Property and equipment, net of accumulated
depreciation of $170,490 (Note 4) 214,732 157,822
---------- ----------
Total Assets $2,683,947 $1,140,802
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued
expenses $ 556,865 $ 373,199
Income taxes payable (Note 11) 119,586 --
---------- ----------
Total Current Liabilities 676,451 373,199
---------- ----------
Commitments (Notes 5,6,7,8,9,10,11 and 13) -- --
Stockholders' Equity:
Preferred stock - $.001 par value,
1,000,000 shares authorized,
None issued and outstanding -- --
Common stock - $.001 par value,
100,000,000 shares authorized,
9,123,555 shares issued and
outstanding 9,124 7,459
Additional paid-in capital 1,134,427 137,457
Retained earnings 863,945 622,688
---------- ----------
Total Stockholders' Equity 2,007,496 767,604
---------- ----------
Total Liabilities and Stockholders' Equity $2,683,947 $1,140,803
========== ==========
The accompanying notes are an integral part of the financial statements.
F-4
ORALABS HOLDING CORP. AND CONSOLIDATED SUBSIDIARIES
---------------------------------------------------
STATEMENTS OF INCOME
For the Years Ended December 31
1997 1996 1995
----------- ----------- -----------
Revenue:
Sales $ 6,762,361 $ 4,985,009 $ 5,447,498
Cost of sales 3,027,733 2,385,076 1,910,469
----------- ----------- -----------
Gross Profit 3,734,628 2,599,933 3,537,029
----------- ----------- -----------
Operating Expenses
Salaries and payroll
taxes 775,765 432,236 266,796
Bad debts 34,943 58,670 69,338
Rent 72,362 62,709 24,139
Commissions 247,449 201,730 316,273
Trade shows 83,666 90,542 65,175
Depreciation 52,757 47,466 32,840
Stock issued for services
(Note 12) 340,000 -- --
Other operating expenses 512,089 567,424 299,370
----------- ----------- -----------
Total Operating Expenses 2,119,031 1,460,777 1,073,931
----------- ----------- -----------
Net Operating Income 1,615,597 1,139,156 2,463,098
----------- ----------- -----------
Other Income (Expenses)
Interest and other income 34,750 72,273 70,595
Loss on sale of
securities -- (6,038) (316,560)
Interest expense -- (8,284) (9,965)
----------- ----------- -----------
Total Other 34,750 57,951 (255,930)
----------- ----------- -----------
Net Income Before Provision
for Income Taxes 1,650,347 1,197,107 2,207,168
----------- ----------- -----------
Provision for income taxes
(Note 11)
Current 590,510 -- --
Deferred (67,816)
----------- ------------ -----------
522,694
Net Income $ 1,127,653 $ 1,197,107 $ 2,207,168
=========== =========== ===========
Net Income per Common Share $ .13 $ .16 $ .30
=========== =========== ===========
Weighted Average Shares
Outstanding 8,707,362 7,458,784 7,458,784
=========== =========== ===========
The accompanying notes are an integral part of the financial statements.
F-5
ORALABS HOLDING CORP. AND CONSOLIDATED SUBSIDIARIES
---------------------------------------------------
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
From December 31, 1994 through December 31, 1997
Preferred Stock Common Stock Additional
------------------ -------------------- Paid-in Retained
Shares Amount Shares Amount Capital Earnings Total
------ ------ ------- ------ ------- -------- -----
Balance at December 31, 1994 - - 7,458,784 $ 7,459 $ 135,212 $ 822,029 $ 964,700
Distributions - - - - - (2,013,255) (2,013,255)
Net income for the year
ended December 31, 1995 - - - - - 2,207,168 2,207,168
-------- -------- ---------- --------- ---------- ----------- ----------
Balance at December 31, 1995 - - 7,458,784 7,459 135,212 1,015,942 1,158,613
Cash contributed - - - - 2,245 - 2,245
Distributions - - - - - (1,590,361) (1,590,361)
Net income for the year
ended December 31, 1996 - - - - - 1,197,107 1,197,107
-------- -------- ---------- --------- ---------- ----------- -----------
Balance at December 31, 1996 - - 7,458,784 7,459 137,457 622,688 767,604
Reorganization/additional
paid-in capital - - 999,771 1,000 160,849 - 161,849
Common stock issued for cash - - 325,000 325 324,675 - 325,000
Reclassification of
undistributed S Corporation - - - - 171,786 (171,786) -
earnings
Stock issued for services - - 340,000 340 339,660 - 340,000
Distributions - - - - - (714,610) (714,610)
Net income for the year
ended December 31, 1997 - - - - - 1,127,653 1,127,653
-------- -------- ---------- --------- ---------- ----------- -----------
Balance at December 31, 1997 - $ - 9,123,555 $ 9,124 $1,134,427 $ 863,945 $ 2,007,496
======== ======== ========== ========= ========== =========== ===========
The accompanying notes are an integral part of the financial statements.
F-6
ORALABS HOLDING CORP. AND CONSOLIDATED SUBSIDIARIES
---------------------------------------------------
STATEMENTS OF CASH FLOWS
For the Years Ended December 31
1997 1996 1995
---------- ----------- -----------
Cash Flows from Operating Activities:
Net income $ 1,127,653 $ 1,197,107 $ 2,207,168
Adjustments to reconcile net
income to net cash used
in operating activities
Depreciation 52,757 47,466 32,840
Increase (decrease) in
accounts payable and
accrued expenses 183,666 210,463 (2,041)
Decrease (Increase) in
accounts receivable (294,199) 56,045 (257,826)
Increase in income taxes
payable 51,770 -- --
Decrease in notes
receivable -- -- 67,026
(Increase) in inventory (148,286) (173,459) (189,242)
Stock issued for services 340,000 -- --
Other, net (72,634) 685 (17,564)
----------- ----------- -----------
Net Cash Provided by
Operating Activities 1,240,727 1,338,307 1,840,361
----------- ----------- -----------
Cash Flows from Investing Activities:
Investments in securities -- 175,500 (175,500)
Margin account payable -- (129,556) 129,556
Investment in property and
equipment (109,767) (134,480) (57,514)
----------- ----------- -----------
Net Cash (Used in) Investing
Activities (109,767) (88,536) (103,458)
----------- ----------- -----------
Cash Flows from Financing Activities:
Stock issued and additional
paid-in capital 486,849 2,245 23,000
Distributions (714,610) (1,590,361) (2,013,255)
----------- ----------- -----------
Net Cash (Used in)
Financing Activities (227,761) (1,588,116) (1,990,255)
----------- ----------- -----------
Increase (Decrease) in Cash 903,199 (338,345) (253,352)
Cash, Beginning of Period 120,399 458,744 712,096
----------- ----------- -----------
Cash, End of Year $ 1,023,598 $ 120,399 $ 458,744
=========== =========== ===========
Interest Paid $ -- $ 8,284 $ 9,965
=========== =========== ===========
Income Taxes Paid $ 470,924 $ -- $ --
=========== =========== ===========
The accompanying notes are an integral part of the financial statements.
F-7
ORALABS HOLDING CORP. AND CONSOLIDATED SUBSIDIARIES
---------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies
------------------------------------------
This summary of significant accounting policies of Oralabs Holding Corp.
and Consolidated Subsidiaries, (the Company) is presented to assist in
understanding the Company's financial statements. The financial statements
and notes are representations of the Company's management who is
responsible for their integrity and objectivity. These accounting policies
conform to generally accepted accounting principles and have been
consistently applied in the preparation of the financial statements.
(a) Organization and Nature of Operations
-------------------------------------
Oralabs Holding Corp. (OHC) a Colorado corporation was formed during
June 1997. SSI Capital Corp. (SSI) a New York corporation was
incorporated on January 30, 1981. SSI originally had a November 30
year end but has recently changed to a December 31 year end. Effective
August 22, 1997, SSI was merged into Oralabs Holding Corp. and the
outstanding shares of SSI were converted to shares of Oralabs Holding
Corp. on a one for two basis. All references to common stock in the
Company's financial statements have been retroactively adjusted for
the merger and the one for two reduction in shares outstanding.
Oralabs, Inc. (ORALABS), a Colorado corporation was incorporated on
August 10, 1990. ORALABS is in the business of manufacturing and
distributing lip balm, fresh breath and other products. ORALABS has
selected December 31 as its fiscal year end. ORALABS is a wholly-owned
subsidiary of OHC.
OL Sub Corp, a Colorado corporation was incorporated on October 23,
1997. As of December 31, 1997 this corporation was inactive.
The consolidated financial statements include the accounts of ORALABS
and the accounts of SSI since the date of the reverse acquisition and
the accounts of OL Sub Corp. since inception (see Note 12). All
intercompany accounts and transactions have been eliminated.
F-8
ORALABS HOLDING CORP. AND CONSOLIDATED SUBSIDIARIES
---------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies, Continued
------------------------------------------------------
(b) Cash and Cash Equivalents
-------------------------
For purposes of the statement of cash flows, the Company considers all
short-term securities purchased with a maturity of three months or
less to be cash equivalents.
(c) Inventories
-----------
Inventories consist of raw materials and finished goods which are
carried at the lower of average cost or market value.
(d) Property and Equipment
----------------------
Property and equipment are carried at cost. Depreciation of property
and equipment is provided using the straight-line method for financial
reporting purposes at rates based on the following estimated useful
lives:
Years
-----
Machinery and equipment 5 - 7
Leasehold improvements 5
For federal income tax purposes, depreciation is computed using the
accelerated cost recovery system and the modified accelerated cost
recovery system. Expenditures for major renewals and betterments that
extend the useful lives of property and equipment are capitalized.
Expenditures for maintenance and repairs are charged to expense as
incurred.
(e) Income Taxes
------------
No provision for income tax has been provided in the financial
statements for 1996 and 1995 since the Company had elected to be taxed
under Subchapter S of the Internal Revenue Code, whereby all income or
losses flow through to the stockholder for income tax reporting
purposes. Effective May 1, 1997, the S Corporation election was
terminated. See Note 11.
F-9
ORALABS HOLDING CORP. AND CONSOLIDATED SUBSIDIARIES
---------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies, Continued
-----------------------------------------------------
(f) Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(g) Marketable Securities
--------------------
The Company's former investments in marketable securities were
considered trading securities since they were bought and held for the
purpose of selling them in the near term. Unrealized holding gains and
losses for trading securities have been included in the statement of
operations with realized gains and losses. See Note 2.
(2) Marketable Securities
---------------------
During the year ended December 31, 1996 the Company's marketable trading
securities had been distributed to the Company's shareholders. As of
December 31, 1996 the Company had a margin account payable related to these
securities totalling $80 shown as a liability in the financial statements.
During 1996 the Company incurred $8,284 of interest expense on this margin
account.
(3) Inventories
-----------
At December 31, 1997 and 1996 inventories consisted of the following:
1997 1996
--------- -------
Raw materials $ 599,270 $ 402,778
Finished goods - 48,206
--------- ---------
$ 599,270 $ 450,984
========= =========
Inventories are stated at the lower of cost or market. Cost is determined
by the average cost method.
(4) Property and Equipment
----------------------
Property and equipment at December 31, 1996 are summarized as follows:
1997 1996
--------- --------
Machinery and equipment $ 324,269 $ 214,501
Leasehold improvements 60,954 60,954
--------- ----------
385,223 275,455
Less accumulated
depreciation (133,276) (117,633)
--------- ----------
$ 251,947 $ 157,822
========= ==========
F-10
ORALABS HOLDING CORP. AND CONSOLIDATED SUBSIDIARIES
---------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1997, 1996 and 1995
(5) Transaction with Related Party
------------------------------
The Company pays the monthly lease payments and all operating expenses for
two vehicles used by the Company's president and his spouse who is also an
officer of the Company. Lease payments for these two vehicles total
approximately $1,150 per month.
(6) Operating Lease
---------------
The Company leases its office and manufacturing facilities under an
operating lease for a building owned by the Company's President. The lease
commenced September 1, 1995 with monthly payments of $4,000. Effective July
1, 1996 the payment was increased to $5,500 per month based upon additional
space being used by the Company. The lease expires September 1, 2000. This
lease is a net lease whereby the Company pays all expenses. The Company has
incurred $60,954 of leasehold improvements related to this property, which
are being amortized on a straight-line basis over the five year term of the
lease.
The following is a schedule by years of future minimum rental payments
required under the operating lease as of December 31, 1997:
Year Ending
December 31, Amount
------------ ----------
1998 $ 66,000
1999 66,000
2000 44,000
----------
Total minimum payments required $ 176,000
==========
(7) Concentration of Business and Credit Risk
-----------------------------------------
The Company is engaged primarily in the manufacture and sale of lip balm,
breath and other products throughout North America and internationally. The
potential for severe financial impact can result from negative effects of
economic conditions within the market or geographic area. Since the
Company's business is principally in one area, this concentration of
operations results in an associated risk and uncertainty. Since the
Company's products are inexpensive, the potential negative effect of
changes in economic conditions are less than would be expected for higher
priced products of other industries.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments and trade accounts receivables. Concentrations of credit with
respect to trade receivables are limited due to the large number of
F-11
ORALABS HOLDING CORP. AND CONSOLIDATED SUBSIDIARIES
---------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1997, 1996 and 1995
(7) Concentration of Business and Credit Risk, Continued
----------------------------------------------------
customers comprising the Company's customer base and their dispersion
across different industries and geographic locations. As of December 31,
1997, the Company had no significant concentrations of credit risk, other
than the Company had $1,029,846 invested in a mutual fund. While the
underlying investment securities of the fund are guaranteed by the U.S.
government, the shares of the fund are not guaranteed and therefore are
considered to be a concentration of credit risk.
(8) Major Customers
---------------
The Company currently has one customer with net purchases of $890,430
during the year ended December 31, 1997. During the years ended December
31, 1996 and 1995 one customer had net purchases from the Company of
$433,353 and $615,937, respectively. These purchases represent
approximately 13%, 9% and 11% respectively of gross sales revenue.
(9) Line of Credit
--------------
The Company entered into a line of credit agreement with a bank in the
amount of $750,000 which expires May 13, 1998. As of December 31, 1997 the
company had available the entire $750,000 unused line of credit. The
initial interest rate was 7.5% per annum to be adjusted periodically based
on 1.0% under the banks index rate. The line of credit is collateralized by
a first lien on all of the Company's business assets.
(10) Terminated Agreement
--------------------
The Company had an agreement with an employee whereby compensation paid to
the employee equaled 2% of sales. In addition, according to the agreement,
the employee would receive 2% of the sales price of the Company if the
Company is sold. The agreement had a provision that allowed for its
termination by written notice during a thirty day period each year prior to
September 1. On April 30, 1997, the agreement was terminated and the
Company granted 186,000 stock options to this employee at $1.00 per share.
The option terminates on April 1, 2007. This option grant vests one third
immediately and the balance over future years.
F-12
ORALABS HOLDING CORP. AND CONSOLIDATED SUBSIDIARIES
---------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1997, 1996 and 1995
(11) Income Taxes
------------
Prior to completion of the business combination, ORALABS had elected to be
taxed under Subchapter S of the Internal Revenue Service Code. The election
was automatically terminated effective May 1, 1997. No provision for income
taxes was recorded prior to May 1, 1997 since shareholders of ORALABS
included the net income from the Company on their personal returns and were
responsible for the payment of the related income taxes. ORALABS had
$171,786 of undistributed earnings on May 1, 1997 which has been
reclassified in the financial statements from retained earnings to
additional paid-in capital. This treatment assumes a constructive
distribution to the owners followed by a contribution to the capital of the
Company.
Income taxes payable at December 31, 1997 totalling approximately $119,586
and the current provision for income taxes of $590,510 relate to Federal
and State income taxes on taxable income since May 1, 1997 computed at
statutory rates. The deferred income tax receivable and credit for
provision for deferred income taxes of $67,816 relate to the tax benefit of
the provision for returns and allowances of approximately $199,460, which
is not deductible from taxable income until incurred.
(12) Business Combination
--------------------
Effective May 1, 1997, SSI and ORALABS completed a business combination
whereby ORALABS became a wholly-owned subsidiary of SSI. Prior to the
business combination, SSI had 874,771 shares of common stock outstanding.
An additional 125,000 shares were issued to the two largest shareholders of
SSI and one additional individual upon closing the business combination.
Effective January 1, 1997 ORALABS issued shares of its common stock to two
individuals for services which were exchanged for 340,000 shares of SSI on
May 1, 1997. Also on May 1, 1997, 7,458,784 shares of SSI were issued for
the ownership of ORALABS. As a result of these transactions, ORALABS became
a wholly-owned subsidiary of SSI. Since the former controlling shareholders
of ORALABS owned approximately 85% of SSI after the business combination,
the transaction has been accounted for as a reverse acquisition. The net
monetary assets of SSI at the time of the reverse acquisition of
approximately $161,849 have been accounted for as issuance of stock and
additional paid-in capital. See Note 1 for merger of SSI into Oralabs
Holding Corp.
F-13
ORALABS HOLDING CORP. AND CONSOLIDATED SUBSIDIARIES
---------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1997, 1996 and 1995
(13) Stock Options
-------------
The Company has adopted an incentive stock option plan for employees. The
option terms are for ten years at $1.00 per share. As of December 31, 1997
the Company had outstanding 500,000 incentive options including the 186,000
described in Note 10. These options vest on an annual percentage basis over
the future terms of employment.
F-14
SSI CAPITAL CORP.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
and
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
December 31, 1996
F-1
SSI CAPITAL CORP.
-----------------
(A DEVELOPMENT STAGE COMPANY)
Table of Contents
Page
----
Report of Independent Certified Public Accountants F-3
Financial Statements:
Balance Sheet F-4
Statement of Operations and Accumulated (Deficit) F-5
Statement of Cash Flows F-6
Notes to Financial Statements F-7
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
SSI Capital Corp.
We have audited the balance sheet of SSI Capital Corp. as of December 31, 1996
and related statements of operations and accumulated (deficit) and cash flows
for the one month period ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an 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 financial statements referred to above present fairly, in
all material respects, the financial position of SSI Capital Corp. as of
December 31, 1996 and the results of its operations, changes in accumulated
(deficit) and its cash flows for the one month period ended December 31, 1996 in
conformity with generally accepted accounting principles.
/s/ Schumacher & Associates, Inc.
----------------------------------
Schumacher & Associates, Inc.
Certified Public Accountants
12835 E. Arapahoe Road
Tower II, Suite 110
Englewood, CO 80112
March 12, 1998
F-3
SSI CAPITAL CORP.
-----------------
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1996
Current Assets
Cash in bank $ 192,146
---------
Total Assets $ 192,146
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities
Accrued expenses $ 27,760
---------
Total Current Liabilities 27,760
---------
Commitments (Note 2) --
Stockholders' Equity:
Preferred stock - $.01 par value
1,000,000 shares authorized
none issued and outstanding --
Common stock - $.001 par value,
100,000 shares authorized;
1,749,541 shares issued and
outstanding 1,749
Additional paid-in capital 182,066
Accumulated (deficit) (19,429)
---------
Total Stockholders' Equity 164,386
Total Liabilities and Stockholders' Equity $ 192,146
=========
The accompanying notes are an integral part of the financial statements.
F-4
SSI CAPITAL CORP.
-----------------
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS AND ACCUMULATED (DEFICIT)
For the One
Month Ended
December 31,
1996
-----------
Revenue:
Interest income $ 651
-----------
Operating Expenses
Legal and professional 731
Transfer fees 142
Storage 667
Miscellaneous 26
Other 117
-----------
Total Expenses 1,683
-----------
Net Loss $ (1,032)
===========
Loss per Share $ nil
===========
Weighted Average Shares Outstanding 1,749,541
===========
Accumulated (Deficit), Beginning of Period $ (18,397)
Net Loss (1,032)
-----------
Accumulated (Deficit), End of Period $ (19,429)
===========
The accompanying notes are an integral part of the financial statements.
F-5
SSI CAPITAL CORP.
-----------------
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the One
Month Ended
December 31,
1996
------------
Cash Flows from Operating Activities:
Net loss $ (1,032)
Changes in operating liabilities 176
---------
Net Cash (Used by) Operating Activities (856)
Cash, Beginning of Period 193,002
---------
Cash, End of Year $ 192,146
=========
The accompanying notes are an integral part of the financial statements.
F-6
SSI CAPITAL CORP.
-----------------
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(1) Summary of Significant Accounting Policies.
-------------------------------------------
This summary of significant accounting policies of SSI Capital, Inc, (SSI)
is presented to assist in understanding the Company's financial statements.
The financial statements and notes are representations of the Company's
management who is responsible for their integrity and objectivity. These
accounting policies conform to generally accepted accounting principles and
have been consistently applied in the preparation of the financial
statements.
(a) Nature of Operations
--------------------
SSI Capital Corp. (SSI) a New York corporation, was incorporated on
January 30, 1981. SSI originally had a November 30 year end and has
changed its year end to December 31. This financial statement has been
prepared for the one month transition period related to the change in
fiscal year end. As of December 31, 1996 the Company was inactive
other than it was attempting to locate a business combination
candidate (see Note 2).
(b) Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(2) Subsequent Event - Business Combination
---------------------------------------
Effective May 1, 1997 SSI and Oralabs, Inc. (ORALABS) completed a business
combination whereby ORALABS became a wholly-owned subsidiary of SSI. Prior
to the business combination, SSI had 1,749,541 shares of common stock
outstanding. An additional 250,000 shares were issued to the two largest
shareholders of SSI and one additional individual upon closing the business
combination. Effective January 1, 1997 ORALABS issued shares of its common
stock to two individuals for services which were exchanged for 680,000
F-7
SSI CAPITAL CORP.
-----------------
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(2) Subsequent Event - Business Combination, Continued
--------------------------------------------------
shares of SSI on May 1, 1997. Also on May 1, 1997, 14,917,399 shares of SSI
were issued for the ownership of ORALABS. As a result of those
transactions, ORALABS became a wholly-owned subsidiary of SSI. Since the
former controlling shareholders of ORALABS own approximately 85% of SSI
after the business combination, the transaction has been accounted for as a
reverse acquisition. The net monetary assets of SSI at the time of the
reverse acquisition of approximately $161,849 have been accounted for as
issuance of stock and additional paid-in capital.
F-8
EXHIBIT LIST
Exhibit
No. Description
--- -----------
3.1 (i)(1) Articles of Incorporation
3.1(ii)(2) 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 to Michael Friess
10.5(2) Lease Agreement Between the Company's Subsidiary and Gary
Schlatter
10.6(2) Sublease Agreement Between the Company's Subsidiary and Modern
Plastics, Inc.
10.7(2) Employment Agreement Between the Company's Subsidiary and Allen
R. Goldstone, with accompanying termination agreement
10.8(2) Employment Agreement Between the Company's Subsidiary and Sanford
Schwartz, with accompanying termination agreement
10.9(4) Merger Agreement and Plan of Reorganization Between the Company's
Subsidiary, SSI Capital Corp., Oralmerge, Inc., et al.
10.10 No statement re: computation of per share earnings is required
since such computation can be clearly determined from the
material contained in this Annual Report on Form 10-K.
21(2) List of subsidiaries of the Company
23.1(2) Consent of Independent Accountants
27.1(2) Financial Data Schedule for OraLabs Holding Corp. and
Consolidated Subsidiaries
27.2(2) Financial Data Schedule for SSI Capital Corp. (December 1996)
- --------------
(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) Filed herewith.
(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 Exhibit A of the Form 8-K filed by the
Company's predecessor, SSI Capital Corp., on May 14, 1997.