Item 1. Business
GENERAL
The Stephan Co.(the "Registrant" or the "Company"), founded in 1897 and incorporated in the State of Florida in 1952, is engaged in the manufacture, sale and distribution of hair care and personal care products on both a wholesale and retail level. The Registrant is comprised of The Stephan Co. ("Stephan") and its wholly-owned subsidiaries, Foxy Products, Inc., Old 97 Company, Williamsport Barber and Beauty Corp., Stephan & Co., Scientific Research Products, Inc. of Delaware, Trevor Sorbie of America, Inc. and Stephan Distributing, Inc. The Company considers itself to be in a single line of business for reporting purposes.
The Stephan Co.
Located in Fort Lauderdale, Florida, The Stephan Co. ("Stephan") is principally engaged in the manufacturing of hair care products for sale by two of its subsidiaries, Scientific Research Products, Inc. and Trevor Sorbie of America, Inc., in addition to manufacturing products marketed under the STEPHAN brand name. Stephan also markets and distributes hair and skin care products under various trade names through different divisions. Retail brands acquired from Colgate-Palmolive and The Mennen Co. in December, 1995 include product lines such as Cashmere Bouquet talc, Quinsana Medicated talc, Balm Barr and Stretch Mark creams and lotions and Protein 29 and Wildroot hair care products for men. These brands, manufactured by the Company's Tampa facility, accounted for approximately $5,100,000 of sales, or approximately 19% of consolidated revenues. The
Frances Denney division of Stephan continues to market a full line of cosmetics through retail and mail-order channels. Under the terms of an exclusive Trademark License and Supply Agreement with Color Me Beautiful, Inc., the Registrant markets HOPE, INTERLUDE AND FADE-AWAY products through several retail chains, including J.C. Penney, in the United States and Canada.
Colgate Palmolive and Mennen Company Products: On December 31, 1995, the Registrant entered into asset purchase agreements (collectively, the "Acquisition Agreements") with each of Colgate Palmolive Company and its subsidiary, The Mennen Company (collectively, the "Sellers"), for the acquisition by the Registrant of certain consumer product brands of the Sellers, as well as a licensing agreement for the domestic distribution of Colgate-Palmolive's Cashmere Bouquet talc product line (the "U.S. Trademark License"). The aggregate purchase price for the brands and the U.S. Trademark License was a minimum of $12,000,000, comprised of a $2,000,000 cash down payment, five-year 8% promissory notes in an aggregate amount of $6,000,000 and an 8% royalty payment based upon "net sales" of the acquired/licensed products (as defined in the Acquisition Agreements) for a period of eight years (the "Deferred Payments"), with a minimum aggregate royalty payment of $4,000,000. In June 1996, the Registrant refinanced the existing notes payable to the Sellers by securing a five-year term loan with a bank.
The Registrant purchased the Wildroot product line of men's hair care products from, and executed a licensing agreement for the manufacture and domestic distribution of the Cashmere Bouquet talc line with, Colgate Palmolive Company. Protein 29 and Protein 21, both hair grooming preparations; Balm Barr, a hand and body lotion and creme product for women; Stretch Mark, a massage creme for women; and Quinsana, a medicated anti-fungal talc, were purchased from The Mennen Company.
In December 1996, the Registrant entered into a Settlement Agreement and Amendment with the Sellers (the "Settlement Agreement") to resolve certain outstanding disputes between them in respect of the Acquisition Agreements. In general, the Settlement Agreement (i) terminated an agreement which granted the Registrant the right to cause the Sellers to repurchase certain products if certain minimum net sales (as defined in the Settlement Agreement) were not achieved, (ii) required the Sellers to remit $500,000 in cash to the Registrant, and (iii) provided for the licensing to the Registrant of certain trademarks in Canada pursuant to a trademark license agreement (the "Canadian Trademark License"). Additionally, the Settlement Agreement provided that (i) Deferred Payments would be made with respect to products sold under the Canadian Trademark License, (ii) total Deferred Payments would be subject to a maximum of $4,000,000, and (iii) the Registrant is required to pay the greater of $150,000 and 50% of such Deferred Payments in immediately available funds, with the balance payable, at the option of the Registrant, by wire transfer or a five-year promissory note. The Registrant has made three of such payments in cash since execution of the Agreement. In the event that the $4,000,000 maximum amount is not paid by January 31, 2004, the Registrant must pay the difference in cash between that amount and Deferred Payments made prior to such date.
	The U.S. Trademark License grants the Registrant an exclusive license to use certain trademarks relating to the Cashmere Bouquet product line in connection with the manufacture and distribution of such product lines in the United States. The Canadian Trademark License grants the Registrant an
exclusive license to use certain trademarks relating to the Cashmere Bouquet powder product line in Canada. Each of the U.S. Trademark License and the Canadian Trademark License has an initial term of ten years and is automatically renewable for successive ten-year periods unless earlier terminated by breach, mutual agreement or upon certain other specified events. Any products sold under the License Agreement are included in net sales for purposes of determining the Deferred Payments.
Color Me Beautiful, Inc.: In March 1996, the Registrant entered into a Trademark License and Supply Agreement with Color Me Beautiful, Inc. ("CMB") to license select products of the Registrant's Frances Denney Line and to supply the requirements of CMB for such products. The agreement provides CMB with the exclusive right to market and distribute specified Denney products in certain retail chain stores in the United States and Canada. The agreement provides for royalty payments by CMB based upon net sales (as defined in the agreement), with guaranteed minimum annual royalty payments throughout the term of the Agreement which are credited against accrued royalties. The agreement also provides for the Registrant to be the exclusive supplier of products sold under the agreement. The agreement continues in effect unless terminated (i) by the Registrant, upon the occurrence of certain events including, among others, bankruptcy or a change of control (as defined in the agreement) of CMB, (ii) by either party, upon the occurrence of a material breach by the other, (iii) by CMB, on 180 days prior notice or (iv) by mutual agreement.
Stephan also manufactures and sells products under the name "STEPHAN'S". Such products consist of different types of shampoos, hair treatments, after-shave lotion, dandruff lotion, hair conditioners and hair spray which are distributed throughout the United States to approximately 350 beauty and barber distributors. The Registrant's trademark "STEPHAN'S" and the design utilized thereby has been registered with the United States Patent and Trademark Office, which registration is not due for renewal until 2001. Sales of the parent company, Stephan, including the Frances Denney product line as well as other retail products, accounted for approximately 22% of consolidated revenues.
The Fort Lauderdale location also serves as the Registrant's corporate headquarters, and the Registrant provides general management services to its subsidiaries therefrom.
Old 97 Company.
Old 97 Company ("Old 97"), located in Tampa, Florida, was purchased in 1988 by the Registrant. Old 97 markets products under brand names such as OLD 97, KNIGHTS, and TAMMY. In addition to selling more than 100 different products, including hair and skin care products, fragrances, personal grooming aids and household items, Old 97 serves as the Company's second manufacturing facility. The Tampa facility manufactures most of the products sold by the Frances Denney line, all the talc manufactured for the Cashmere Bouquet and Quinsana brands, as well as all the other retail hair and skin care brands sold by Stephan and Stephan Distributing, Inc. Old 97 is also responsible for distribution of the above products. In addition to the above, Old 97 is responsible for the manufacturing of custom "private label" products, which is the manufacturing of products marketed and sold under the brand names of customers. In 1997, one private label customer, Vogue International, accounted for 10.4% of the Company's sales. This was the only customer of the Registrant to have sales in excess of 10% of the Registrant's consolidated revenues.
Williamsport Barber and Beauty Corp.
Williamsport Barber and Beauty Corp. ("Williamsport") was acquired in January, 1992 and is located in Williamsport, Pa. Williamsport, a large mail order beauty and barber supply company, had sales of $3,400,000, which accounted for almost 13% of consolidated revenues for the year ended December 31, 1997.
Stephan & Co.
Formerly known as Heads or Nails, Inc. and acquired in August, 1993, Stephan & Co. has focused its attention on the manufacture and supply of personal care amenity products for cruise ships, with production and shipping commencing in December, 1995. Sales by Stephan & Co. for the year ended December 31, 1997 were not material.
Scientific Research Products, Inc. of Delaware.
Purchased by the Company in April, 1994, Scientific Research Products was one of the Registrant's largest private label customers and is a distributor of ethnic hair care products. Scientific Research Products accounted for 26% of the Registrant's consolidated revenues, with sales approximating $7,000,000. In addition to the above, Scientific is responsible for the distribution of the "Magic Wave" product line, formerly marketed by Foxy Products, Inc., a company acquired by the Registrant in 1986. Sales by Foxy Products, Inc. for the year ended December 31, 1997 were not material.
Trevor Sorbie of America, Inc.
On June 28, 1996, the Company entered into a Stock Purchase Agreement with Sorbie Acquisition Co. ("Sorbie"), and the stockholders of Sorbie, including the President and principal stockholder, as well as related agreements described below with the President, Trevor Sorbie International, Mr. Trevor Sorbie, Samson Arms, Inc. and Redken Laboratories.
	Pursuant to the agreements, the Company exchanged 13,733 shares of its restricted Common Stock, valued at approximately $218,000, and additional consideration as described below, for all the outstanding common and preferred stock of Sorbie. The Company issued an additional 18,899 shares of restricted stock, valued at approximately $300,000, to terminate an existing royalty agreement between Samson Arms, Inc. and Sorbie. Additionally, the Company (i) terminated a secured subordinated debenture of Sorbie held by the Company in the principal amount of $500,000, (ii) assumed liabilities due to the President of Sorbie under a pre-existing employment contract and (iii) replaced a certain secured promissory note of Sorbie in favor of Redken Laboratories in the principal amount of $3,250,000 with a $2,500,000 cash payment.
	In separate agreements, the Company amended the existing royalty contract between Sorbie, Trevor Sorbie International, Sorbie Trading Limited and Mr. Trevor Sorbie. In accordance with the amended agreement, the royalty payment percentage rates payable upon future sales were reduced. The amended agreement also provides for the supply to Sorbie Trading Limited and Trevor Sorbie International, at their option, by Sorbie, of such companies' requirements of certain products. The amended agreement contains certain non-competition provisions, effective until December 31, 1999, relating to the Sorbie Products (as defined in the
amended agreement). The amended agreement expires in December 31, 2044, but any party thereto may renew it for successive ten-year periods until December 31, 2093. Sorbie, prior to the acquisition, was a major customer of the Registrant and is a distributor of a professional line of hair care products sold to salons in the United States, Canada and Mexico through a network of distributors. Sales of professional hair care products in 1997 were $4,800,000, representing 17.5% of consolidated revenues.
Stephan Distributing, Inc.
On June 26, 1997, the Company, through Stephan Distributing, Inc., a newly-formed subsidiary, acquired several product lines from New Image Laboratories, Inc. (New Image). The primary brand acquired was a professional hair care line of products marketed under the brand name "Image", in addition to a retail hair care line know as "Modern" and marketed under the brand name "Stiff Stuff". Three smaller hair care lines, "Ecoterra", "Pure Botanicals"/"Deep Earth", and "Modern Essences" were also acquired in the transaction. The brands were acquired for (i) 250,000 shares of the Registrant's restricted common stock, valued at $10.81 per share, with provision for half the shares to be held in escrow pending, among other things, final adjustment of the purchase price in accordance with the acquisition agreement and (ii) up to 100,000 restricted shares to be issued over the next two years contingent upon the achievement of certain earnings levels as set forth in the acquisition agreement. The acquisition was accounted for as a purchase, with a net value of approximately $2,700,000 based upon the quoted market price of the Registrant's stock at the time of issuance.
Pursuant to the transaction, the Company acquired certain accounts receivable, inventory, fixed assets and trademarks as well as assuming certain outstanding trade and other liabilities of approximately $5,332,000. The liabilities acquired are subject to the terms of a liquidating trust agreement, and as provided for in the Asset Purchase Agreement, the Registrant delivered a note payable in the amount of $2,399,400, payable in two equal installments due in December, 1997 and February, 1998. Additionally, the Registrant provided the Trust with a standby letter of credit in the amount of $2,932,600. As indicated above, the purchase price is subject to adjustment based upon the value of the net assets acquired, as determined on the first anniversary of the closing date. The Registrant believes that based upon information available at December 31, 1997, the 125,000 shares held in escrow will be returned to the Company. The value of trademarks recorded, approximating $4,100,000, is net of this anticipated purchase price adjustment.
In addition to being popular hair care lines, the brands acquired from New Image have international distribution which the Registrant believes will enhance the distribution of other Stephan Co. products. Sales of brands acquired from New Image Laboratories, Inc. amounted to approximately $2,900,000 for the period ended December 31, 1997, which represented over 10.5% of the Registrant's consolidated revenues.
Morris Flamingo-Stephan, Inc.
On March 18, 1998, the Registrant and Morris Flamingo-Stephan, Inc. signed an Asset Purchase Agreement (the "Agreement") with Morris-Flamingo, L.P., Morris-Flamingo Beauty Products, Inc., Shaheen & Co., Inc. and Shouky A. Shaheen, for the acquisition of certain assets and liabilities
(including the immediate payment of a note payable to Fleet Capital Corporation approximating $1,880,000) of Morris-Flamingo, L.P. in exchange for 307,058 shares of the Registrant's restricted common stock. The transaction will be recorded as a purchase, and, based upon the net assets received, goodwill of approximately $2,500,000 will be recorded. The agreement also provides for 30% of the shares issued to be held in escrow, pending the final determination of the value of the net assets acquired within 90 days of closing.
Morris-Flamingo, L.P. is a large mail order barber and beauty supply retailer, similar to the Registrant's subsidiary, Williamsport Barber and Beauty Corp. The Company believes that this acquisition will enhance current distribution channels and provide a larger, more broad based market for the products manufactured by the Company.
In connection with the acquisition of Morris-Flamingo, L.P., and the related agreement to retire the outstanding Fleet Capital Corporation debt, the Registrant secured additional financing from NationsBank, N.A.
RAW MATERIALS, PACKAGING and COMPONENTS INVENTORY
The materials utilized by the Registrant and its subsidiaries in the manufacture of its products consist primarily of chemicals, alcohol, perfumes, paper labels, plastic bottles and caps. All materials are readily available at competitive prices from numerous sources and have been purchased from domestic suppliers. Neither the Registrant nor any of its subsidiaries has ever experienced any shortage in supplies thereof nor are any such shortages anticipated by the Registrant and its subsidiaries in the reasonably foreseeable future.
The Registrant and its subsidiaries try to maintain a level of inventory of their products sufficient for a period of at least two months. The Registrant does not anticipate any change in such practice during the reasonably foreseeable future.
BACKLOG
As of March 31, 1998, the dollar amount of backlog orders was not believed by the Registrant to be material.
RESEARCH AND DEVELOPMENT
During each of the three fiscal years ending December 31, 1997, expenditures by the Registrant and its subsidiaries on Company sponsored research relating to the development of new products, services or techniques or the improvement of existing products, services or techniques as determined in accordance with generally accepted accounting principles were not believed by the Registrant to be material and were expensed as incurred.
COMPETITION
The hair care and personal grooming business is highly competitive in terms of price and product quality. Products manufactured by the Registrant and its subsidiaries compete with numerous varieties of other such products, many of which bear well known, respected and heavily advertised brand names and are produced by companies having substantially greater financial, technical, personnel and other resources than does the
Registrant. Products produced by the Registrant and its subsidiaries account for a relatively insignificant portion of the total hair care and personal grooming products manufactured and sold annually in the United States.
GOVERNMENT AND INDUSTRY REGULATION, ENVIRONMENTAL MATTERS
The Registrant is subject to regulation by the Food and Drug Administration ("FDA"), in addition to other Federal, State and local regulatory agencies. The Company believes that it is in substantial compliance with all applicable regulations. In addition, the Registrant does not believe that compliance with existing or proposed environmental standards, practices or procedures will have a material adverse effect on operations, capital expenditures or the competitive position of the Company.
EMPLOYEES
As of March 31, 1998, in addition to its six officers, the Registrant and its subsidiaries employed approximately 200 people engaged in the production, warehousing, and distribution of their products. Although the Registrant and its subsidiaries do not anticipate the need to hire a material number of additional employees during the remainder of 1998, the Company believes that any such employees, if needed, would be readily available. No significant number of employees are covered by any collective bargaining agreement and the Company believes its employee relationships are satisfactory.
Item 2.
Item 2. Properties
The Registrant's administrative, manufacturing and warehousing facilities are located in a building of approximately 33,000 square feet, which it owns, located at 1850 West McNab Road, Fort Lauderdale, Florida 33309. Approximately two-thirds of the space is utilized by the Registrant for the manufacture and warehousing of its products. The remainder of the space is utilized by the Registrant for its administrative offices. The Registrant also owns certain machinery and equipment suitable for the manufacture of its products that are housed in its facility in Fort Lauderdale, Florida. The Registrant believes that such facilities and equipment are adequate for its needs in the reasonably foreseeable future.
Old 97 owns three buildings totaling approximately 42,000 square feet of space, located at 2306 35th Street, Tampa, Florida 33605. Such facilities are utilized by Old 97 in the manufacture of its various product lines. In October, 1994, Old 97 acquired land and two buildings located at 4829 East Broadway Avenue, Tampa, Florida 33605. One building comprising 12,500 square feet is being used for office facilities and order fulfillment for the Frances Denney line. The second building, with approximately 30,000 square feet, is used as a warehouse and distribution facility.
In connection with the acquisition of Scientific Research Products, the Registrant assumed the leased interest in the office, warehouse and distribution facility located at 1601 SW 5th Court, Pompano Beach, Florida 33069, under a lease which, by its terms, expired in October, 1997, with 1997 rental payments of approximately $180,000. These premises are currently being occupied on a month to month basis.
In connection with the acquisition of Williamsport Barber Supply, the Company entered into a two year lease, which expired in January, 1994, for office and warehouse space of approximately 6,000 square feet. Subsequent to January, 1994, the Registrant leased the premises on a month to month basis and commencing in February, 1997, the lease was extended five years, expiring January 31, 2002. Monthly rent in the amount of $1,800 is payable to the former owner of Williamsport Barber Supply, currently the manager of the Williamsport operations.
Item 3.
Item 3. Legal Proceedings
There are no material pending legal proceedings to which the Registrant or any of its subsidiaries is a party or of which any of their property is the subject. Neither the Registrant nor any of its subsidiaries is aware of any such proceedings known to be contemplated by governmental authorities.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
The Company has not submitted any matters to a vote of security holders since the August, 1997 Annual Meeting.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
(a) Market Information
The Registrant's Common Stock is traded on the American Stock Exchange ("AMEX"). The following table sets forth the range of high and low sales prices for the Registrant's common stock for each quarterly period within the Registrant's two most recent fiscal years:
High Low Quarter Ended Sales Price Sales Price _____________ ___________ ___________
March 31, 1996 $ 17.13 $ 14.25 June 30, 1996 16.88 14.25 September 30, 1996 16.00 12.25 December 31, 1996 13.00 11.50 ___________________________________________________________________________
March 31, 1997 $ 14.75 $ 11.00 June 30, 1997 11.00 9.19 September 30, 1997 14.25 10.75 December 31, 1997 14.50 11.75
(b) Holders
As of March 15, 1998, the Registrant's Common Stock was held of record by approximately 430 holders; however, the Registrant's stock is believed to be held in approximately 2,000 brokerage accounts ("street-name shareholders").
(c) Dividends
The Company declared and paid cash dividends at the rate of $.02 per share for each quarter in 1996 and 1997. Future dividends, if any, will be determined by the Company's Board of Directors, at their discretion, based on various factors, including the Company's profitability and anticipated capital needs.
There are no contractual restrictions, including any restrictions on the ability of any of the Registrant's subsidiaries, to transfer funds to the Registrant in the form of cash dividends, loans or advances, that currently materially limit the Registrant's ability to pay cash dividends or that the Registrant reasonably believes are likely to materially limit the future payment of dividends on its Common Stock.
Item 6.
Item 6. Selected Financial Data (a)
1997 1996 1995 1994 1993 (in thousands, except per share data) ____________________________________________________
Net sales $27,113 $25,779 $26,197 $24,341 $16,719
Income before income taxes 7,697 7,093 6,426 6,200 4,350
Net Income 5,041 4,679 4,315 4,076 2,776
Current assets 25,735 19,706 20,438 17,342 12,258
Total assets 57,464 46,499 42,463 29,074 19,606
Current liabilities 8,468 6,223 4,674 3,525 2,687
Long term debt 9,078 6,689 9,112 811 950
PER COMMON SHARE (Basic and Diluted): (b)
Net Income 1.20 1.13 1.05 1.01 .86
Cash dividends .08 .08 .04 None None
Notes to Selected Financial Data
(a) The selected financial data includes the operations of the Company and its wholly-owned subsidiaries, Foxy Products, Inc. (acquired in 1986), Old 97 Company (acquired in 1988), Williamsport Barber and Beauty Corp. (acquired in 1992), Stephan & Co., formerly Heads or Nails, Inc. (acquired in 1993), Scientific Research Products, Inc. of Delaware (acquired in 1994), Trevor Sorbie of America, Inc. (acquired in 1996) and Stephan Distributing, Inc., who acquired the brands from New Image Laboratories, Inc. in 1997.
(b) Earnings per common share is based upon the weighted average number of common shares outstanding, in accordance with Statement of Financial Accounting Standards No. 128, issued in February, 1997, and after giving effect to stock splits in 1993. The weighted average number of shares outstanding were 4,213,372 for 1997, 4,138,629 for 1996, 4,120,304 for 1995, 4,031,558 for 1994, and 3,237,944 for 1993. The weighted average number of shares for 1995, 1994 and 1993, as well as the earnings per share for 1994 and 1993, have been restated in accordance with SFAS No. 128.
This data should be read in conjunction with the audited consolidated financial statements and related notes included in this Annual Report.
Selected Quarterly Financial Information (unaudited) (in thousands, except per share data)
3/31/97 6/30/97 9/30/97 12/31/97 _______ _______ _______ ________ Net sales $ 6,394 $ 7,106 $ 7,581 $ 6,032 Gross profit 4,059 4,716 5,040 3,106 Net income 1,226 1,460 1,607 748 Per share .30 .35 .37 .17
3/31/96 6/30/96 9/30/96 12/31/96 _______ _______ _______ ________ Net sales $ 6,740 $ 6,468 $ 7,011 $ 5,560 Gross profit 3,749 4,136 4,274 3,163 Net income 1,219 1,332 1,452 676 Per share .30 .32 .35 .16
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
Net income for the year ended December 31, 1997 was $5,041,000, or $1.20 per share, on revenues of $27,113,000, as compared to net income of $4,679,000, or $1.13 per share, on revenues of $25,779,000 for 1996. With the acquisition of the brands from New Image Laboratories, Inc. ("Image") at the end of the second quarter of 1997, the Company continued its practice of product line enhancement and diversification in an effort to decrease its historical dependency on major customers and to increase and diversify its channels of distribution. International distributors who were buying Image products have expressed interest in other product lines and the Company expects to be able to utilize their distribution capabilities. The gross profit margin of the Company has continued to increase as a result of the Image hair care lines, however this increased gross profit margin is higher in order to compensate for the additional selling and marketing expenses that these professional and retail hair care lines demand.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO 1996 ________________________________________________
Sales for the year ended December 31, 1997 increased $1,335,000 from 1996 sales, due significantly to the acquisition of several brand lines from Image. Gross profit increased from $15,220,000 in 1996 to $16,921,000 in 1997, which represented a 11.2% increase. The gross profit margin increased to 62.4% in 1997 from 59% in 1996. As the product mix of sales continues to change from that of a private label "contract" filler to that of a manufacturer and distributor of professional and retail hair care lines, the gross margin continues to grow to cover the increased selling, general and administrative expenses that those product lines require. Selling, general and administrative expenses increased 10.6% in 1997 when compared to 1996, up from $8,239,000 to $9,110,000. The increase in these expenses can be attributed to several areas, such as national and regional sales personnel and the related travel expenses that accompany a sales force, commissions paid to sales representatives, promotional literature
and point of purchase materials and promotions, retail distribution expenses dictated by major drug and department store retailers such as "slotting allowances", promotional "buy one-get one free" offers, "end- cap", coupons and other point of purchase rebates and sales allowances, increased freight and delivery expenses, as well as an increase in payroll and related payroll costs.
Interest expense increased $287,000, to $642,000, as a result of the additional debt incurred in connection with the acquisitions made in 1997 and 1996. Other income increased $50,000 to $125,000 as a result of the royalty provision of the Color-Me-Beautiful Trademark and Licensing Agreement.
YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO 1995 ________________________________________________
Net income rose in 1996 by $362,000 when compared to 1995, representing an 8% increase; however for the year, sales declined approximately $400,000 from 1995. Although private label production by the Tampa facility, Old 97, increased in 1996, sales for the year decreased slightly because revenue from the newly acquired Colgate-Palmolive (C-P) brands and the Trevor Sorbie line were less than the sales lost as a result of the loss of Martin Himmel Inc.'s private label talc production. Gross profit margin for the year increased from 52% in 1995 to 59% in 1996 as a result of the above and a change in the product mix and marketing strategy in connection with the Denney cosmetic line.
The acquisition of the brands from C-P, as well as the Sorbie acquisition, increased selling, general and administrative expenses significantly in 1996. The C-P brands put the Company in more of a retail environment than previous products manufactured by the Company and this increased marketing costs after the transition period with C-P ended in July, 1996. The Sorbie line, sold in professional salons nationwide, also requires significant marketing and education expenses not previously experienced by the Company. These increased costs were more than offset by the significantly higher gross margins generated by these products.
Interest expense increased as a result of the debt incurred in connection with the acquisitions made in 1995 and 1996 and other income of $75,000 was attributable to the royalty from the Color-Me-Beautiful Trademark and Licensing Agreement signed in the first quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES: Working capital was approximately $17,267,000 at December 31, 1997, an increase of $3,784,000 from 1996, due largely to the acquisition of the brands from New Image Laboratories, Inc. in June, 1997. In exchange for 250,000 shares of the Company's restricted (as provided for by Rule 144 of the Securities Act of 1933) common stock, the Company acquired accounts receivable and inventory, among other assets and assumed certain liabilities. In addition, the Company restructured its line of credit from NationsBank, N.A. Cash and cash equivalents increased $214,000 to $8,491,000 from 1996.
Accounts receivable and inventory have increased significantly from 1996 as a result of acquisitions made by the Company. Increased sales of retail brands acquired from Colgate-Palmolive and Image to large, national drug chains and other major retailers has increased the outstanding accounts receivable both from an actual dollar amount due to sales, as well as the length of time the receivable is outstanding. With respect to the increase in inventory, the Image acquisition has added a significant amount
of Stock Keeping Units (SKU's) that the Company must manufacture and carry. As a result, many more chemicals, raw materials, components and packaging are required to be kept in stock in order to insure availability for production.
In July, 1997, the Company restructured its unsecured line of credit with NationsBank, N.A., increasing the line from $2,000,000 to $5,000,000, and changing the maturity date of the loan to July, 1999. As of December 31, 1997, there was $1,000,000 available on the line, which was used to satisfy the note payable to trustee in February, 1998. It is currently estimated that approximately $500,000 will be returned from the Trustee of the Liquidating Trust when the Trust terminates in June, 1998, and these funds will be used to reduce the amount outstanding on the line of credit.
The Company is subject to various covenants with respect to working capital, current maturity coverage and funded debt ratios under the loan agreements with Nationsbank, N.A. At December 31, 1997, the Company significantly exceeded the minimum requirements of the covenants.
In June, 1996, the Registrant refinanced the existing $6,000,000 notes payable to the Colgate/Mennen companies by securing a 5-year term loan with NationsBank N.A.(South). As a result, the Company reduced the interest rate on the debt from 8.00% to 7.85%. The new loan provides for monthly principal reductions of $100,000, plus interest, commencing in July, 1996.
There are no material capital commitments for the upcoming year.
The Company has not experienced any adverse impact from the effects of inflation in the past. Management maintains the flexibility to increase prices and does not have any binding contract pricing with either customers or vendors. Many of the Company's products, as well as the components used, are petroleum-based products, and in the past, prices can be subject to various political or economic pressures. The Company does not foresee any increase in its raw material or component costs but believes it has the flexibility of multiple vendors and the ability to increase prices to offset any price changes.
Included in the Asset Purchase Agreement with Image, the Company acquired the computer system used by Image and is in the process of converting its existing computer systems to that system. The software in use will be updated by the end of 1998 and will be Year 2000 compliant. Management of the Company does not expect costs relating to Year 2000 problems to have any material effect on its financial condition, results of operations or cash flows.
Item 8.
Item 8. Financial Statements and Supplementary Data
Reference is made to the financial statements and supplementary data contained elsewhere in this Annual Report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable
PART III
The information required by Part III Items 10-13 of Form 10-K are incorporated by reference from the Registrant's Proxy Statement for its 1998 annual meeting of stockholders which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the Registrant's fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Exhibits
10.1 Settlement Agreement and Amendment dated December 5, 1996, between The Stephan Co., The Mennen Company and Colgate-Palmolive Company, included with the Form 10-K for the year ended December 31, 1996, filed April 15, 1997, is incorporated herein by reference.
10.2 Trademark License and Supply Agreement dated March 7, 1996, between Color Me Beautiful, Inc. and The Stephan Co., included with the Form 8-K filed March 20, 1996, is incorporated herein by reference.
10.3 Agreement dated June 28, 1996 for the acquisition of Sorbie Acquisition Co. and Subsidiaries, with exhibits, included with the Form 8-K filed July 15, 1996, and as amended on August 21, September 16 and October 9, 1996, is incorporated herein by reference.
10.4 Acquisition Agreement dated as of May 23, 1997, between New Image Laboratories, Inc., The Stephan Co. and Stephan Distributing, Inc., in connection with the acquisition of brands, included with the Form 10-Q for the period ended June 30, 1997, filed August 13, 1997, is incorporated by reference.
27. Financial Data Schedule
(b) Financial Statements and Financial Statement Schedules
(i) Financial Statements
Independent Auditors' Report for the years ended December 31, 1997, 1996 and 1995.
Consolidated Balance Sheets as of December 31, 1997 and 1996.
Consolidated Statements of Operations for the years ended December 31, 1997, 1996, and 1995.
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1997, 1996, and 1995.
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995.
Notes to Consolidated Financial Statements.
(ii) Financial Statement Schedules
All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of The Stephan Co.:
We have audited the accompanying consolidated balance sheets of The Stephan Co. and subsidiaries (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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 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 audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Miami, Florida April 9, 1998
THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31,1997 AND 1996
ASSETS
1997 1996 ____________ ____________ CURRENT ASSETS
Cash and cash equivalents $ 8,491,174 $ 8,276,976
Cash on deposit with trustee 610,126 -
Accounts receivable, less allowance for doubtful accounts of $98,359 and $56,171 in 1997 and 1996, respectively 4,696,248 3,405,547
Inventories 11,667,672 7,729,657
Prepaid expenses and other current assets 269,304 293,425 ____________ ____________
TOTAL CURRENT ASSETS 25,734,524	 19,705,605
PROPERTY, PLANT AND EQUIPMENT, net 2,760,011 2,160,678
INTANGIBLE ASSETS, net 26,443,911 23,131,120
OTHER ASSETS 2,525,948 1,501,107 ____________ ____________ TOTAL ASSETS $ 57,464,394 $ 46,498,510 ============ ============
See notes to consolidated financial statements.
THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31,1997 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996 ___________ ___________
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 3,704,383 $ 2,553,974
Notes payable to bank 400,000 1,400,000
Note payable to trustee 1,199,700 -
Current portion of long-term debt 1,773,788 1,804,879
Income taxes payable 1,390,104 464,593 ___________ ___________ TOTAL CURRENT LIABILITIES 8,467,975 6,223,446
DEFERRED INCOME TAXES, net 268,166 298,461
LONG-TERM DEBT, less current maturities 9,078,114 6,688,930 ___________ ___________ TOTAL LIABILITIES 17,814,255 13,210,837 ___________ ___________ COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 25,000,000 shares authorized; 4,418,800 and 4,147,466 shares issued and outstanding at December 31, 1997 and 1996, respectively 44,188 41,475
Additional paid in capital 15,979,709 12,967,462
Retained earnings 24,977,805 20,278,736 ___________ ____________ 41,001,702 33,287,673 LESS 125,000 CONTINGENTLY RETURNABLE SHARES (1,351,563) - ___________ ____________ TOTAL STOCKHOLDERS' EQUITY 39,650,139 33,287,673 ___________ ____________ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $57,464,394 $46,498,510 =========== ===========
See notes to consolidated financial statements.
THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ____________ ____________ ____________
NET SALES $	27,113,306 $ 25,778,618 $ 26,196,516
COST OF GOODS SOLD 10,192,411 10,558,919 12,652,546 ____________ ____________ ___________ GROSS PROFIT 16,920,895 15,219,699 13,543,970
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 9,110,001 8,239,386 7,432,929 ____________ ____________ ___________
OPERATING INCOME 7,810,894 6,980,313 6,111,041
OTHER INCOME(EXPENSE) Interest income 402,940 392,314 404,631 Interest expense (641,654) 	 (354,362)		 (92,416) Other 125,000 75,000 2,540 ____________ ___________ ____________
INCOME BEFORE INCOME TAXES 7,697,180 7,093,265 6,425,796
INCOME TAXES 2,656,171 2,414,105 2,110,385 ____________ ___________ ____________
NET INCOME $ 5,041,009 $ 4,679,160 $ 4,315,411 ============ =========== ============
BASIC AND DILUTED EARNINGS PER SHARE $ 1.20 $ 1.13 $ 1.05 ============ =========== ============ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 4,213,372 4,138,629 4,120,304 ============ =========== ============
See notes to consolidated financial statements.
THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Common Stock Treasury _____________________ Additional Stock/ Paid in Retained Contingently Shares Par Value Capital Earnings Returnable Stock _________ _________ __________ __________ ___________ Balances, Jan. 1, 1995 4,183,248 $ 41,832 $13,715,319 $11,780,150 $ (884,000)
Treasury stock retired (80,000) (800) (883,200) - 884,000
Retirement of stock received in settlement with former stockholder (16,105) (161) (309,860) - -
Stock options exercised 35,341 354 61,736 - -
Dividends paid - - - (164,899) -
Net income for 1995 - - - 4,315,411 - _________ _________ __________ __________ __________ Balances, Dec. 31, 1995 4,122,484 41,225 12,583,995 15,930,662 -
Stock issued for acquisition 32,632 326 517,707 - -
Stock options exercised 6,750 68 49,941 - -
Treasury stock purchased - - - - (184,325)
Treasury stock retired (14,400) (144) (184,181) - 184,325
Dividends paid - - - (331,086) -
Net income for 1996 - - - 4,679,160 - _________ _________ __________ __________ __________ Balances, Dec. 31, 1996 4,147,466 41,475 12,967,462 20,278,736 -
Stock issued for acquisition 250,000 2,500 2,700,625 - -
Contingently returnable stock - - - - (1,351,563)
Stock issued to Retire debt 34,534 345 442,100 - -
Treasury stock purchased - - - - (130,610)
Treasury stock retired (13,200) (132) (130,478) - 130,610
Dividends paid - - - (341,940) -
Net income for 1997 - - - 5,041,009 - _________ _________ ___________ ___________ ___________ Balances, Dec. 31, 1997 4,418,800 $ 44,188 $15,979,709 $24,977,805 $(1,351,563) ========= ========= =========== =========== =========== See notes to consolidated financial statements.
THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 _____________________________________________
1997 1996 1995 __________ ___________ ___________ CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,041,009 $ 4,679,160 $4,315,411 ___________ ___________ ___________
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation 338,326 221,867 166,046
Amortization 1,094,948	 889,944 476,815
Adjustment to Goodwill 111,788 123,016 127,991
Deferred income taxes (30,295) 178,340 35,121
Provision for doubtful accounts 120,953 10,978 78,951
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable (750,621) 586,073 (1,182,627)
Inventories (2,354,349) (555,425) (809,948)
Prepaid expenses and other current assets 24,121 (28,740) (82,462)
Other assets (1,024,841)	 (319,731) (372,729)
Accounts payable and accrued expenses (1,385,587) (2,340,331) (851,196)
Income taxes payable 925,511	 464,593 (468,334) __________ __________ __________
Total adjustments (2,930,046) (769,416) (2,882,372) __________ __________ __________ Net cash flows provided by operating activities 2,110,963 3,909,744 1,433,039 __________ __________ __________
See notes to consolidated financial statements.
THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 _____________________________________________
1997 1996 1995 __________ __________ __________ CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired from acquisition - 128,445 -
Colgate purchase price adjustment - 331,000 -
Cash deposited with trustee (610,126) - -
Purchase of property, plant and equipment (562,659)	 (229,238)	 (185,763)
Purchase of intangible assets (409,823) (75,284) -
Maturities of marketable securities -	 - 	 417,237 __________ __________ __________ Net cash flows (used in)/provided by investing activities (1,582,608) 154,923	 231,474 __________ __________ __________ CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (1,841,907) (10,033,528) 	 (143,002)
Repayment of note payable to trustee (1,199,700) - -
Proceeds from notes payable to bank 3,200,000 7,000,000 -
Acquisition of treasury stock (130,610) (184,325) -
Dividends paid (341,940) (331,086) (164,899)
Proceeds from exercise of stock options - 50,009 	 62,090 __________ __________ __________ Net cash flows used in financing activities (314,157) (3,498,930) 	 (245,811) __________ __________ __________ NET INCREASE IN CASH AND CASH EQUIVALENTS 214,198 565,737 1,418,702
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,276,976 7,711,239 6,292,537 __________ __________ __________ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,491,174	$ 8,276,976 $ 7,711,239 ========== ========== ==========
See notes to consolidated financial statements.
THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Supplemental Disclosures of Cash Flow Information:
1997 1996 1995 __________ _________ __________
Interest paid $ 644,862 $ 354,445 $ 96,452 ========== ========= ========== Income taxes paid $ 1,760,955 $ 1,612,417 $ 2,488,598 ========== ========= ==========
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
In connection with the acquisition of the brands from New Image Laboratories, Inc. on June 26, 1997, the Company acquired inventory, accounts receivable, fixed and intangible assets and assumed certain liabilities by issuance of common stock with an approximate value of $2,700,000.
On September 9, 1997, the Company issued 34,534 shares of common stock to Charles V. Hall, in satisfaction of the amount due him as a result of the acquisition of Trevor Sorbie of America, Inc. in June, 1996.
In connection with the acquisition of Sorbie Acquisition Company and Subsidiaries on June 28, 1996, the Company acquired inventory, accounts receivable, fixed and intangible assets and assumed certain liabilities by issuance of common stock with an approximate net value of $518,000.
In connection with the acquisition of the Colgate-Palmolive Brands on December 31, 1995, the Company acquired inventory, molds and tooling equipment and intangible assets for cash, notes, and contingent consideration to be paid over an 8 year period.
See notes to consolidated financial statements.
THE STEPHAN CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of The Stephan Co. and its wholly-owned subsidiaries, Foxy Products, Inc., Old 97 Company, Williamsport Barber and Beauty Supply Corp., Stephan & Co. (formerly Heads or Nails, Inc.), Scientific Research Products, Inc. of Delaware, Trevor Sorbie of America, Inc. and Stephan Distributing, Inc. (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation.
NATURE OF OPERATIONS: The Company is engaged in the manufacture, sale, and distribution of personal care grooming products throughout the United States. The Company's business activity constitutes a single reportable segment for purposes of Statement of Financial Accounting Standards No. 14.
USE OF ESTIMATES: The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
MAJOR CUSTOMERS: Sales to customers in excess of 10% of net sales for the years ended December 31, 1997, 1996 and 1995 were as follows:
1997 1996 1995 __________ __________ __________
Customer A $ - $ - $ 3,572,000 Customer B - - 4,265,000 Customer C - - 3,128,000 Customer D 2,819,000 3,056,000 - __________ __________ __________ $ 2,819,000 $ 3,056,000 $10,965,000 ========== ========== ==========
The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral. The Company does not believe that the credit risk represents a material risk of loss to the Company. However, the loss of major customers mentioned above could have a material adverse effect on the Company.
LONG-LIVED ASSETS: The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" in the year ended December 31, 1996. SFAS No. 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used, and for long-lived assets and certain identifiable intangibles to be disposed of. The adoption of SFAS No. 121 did not have a material
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
effect on the Company's financial position or results of operations.
STOCK-BASED COMPENSATION: On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation", which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows entities to continue to measure compensation cost for stock- based awards using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees", and to provide pro forma net income and pro forma earnings per share disclosures as if the fair value method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. See Note 11 to the financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS: Statement of Financial Accounting Standards No. 107, "Disclosure about Fair Value of Financial Instruments," requires disclosure of the fair value of financial instruments, both assets and liabilities, recognized and not recognized in the consolidated balance sheets of the Company, for which it is practicable to estimate fair value. The estimated fair values of financial instruments which are presented herein have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of amounts the Company could realize in a current market exchange.
The following methods and assumptions were used to estimate fair value:
- the carrying amounts of cash and cash equivalents, receivables and accounts payable approximate fair value due to their short term nature;
- discounted cash flows using current interest rates for financial instruments with similar characteristics and maturity were used to determine the fair value of notes receivable, notes payable and debt.
There were no significant differences as of December 31, 1997 and 1996 in the carrying value and fair market value of financial instruments.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash, certificates of deposit, United States Treasury Bills, and municipal bonds having maturities of 90 days or less when acquired. Also included in cash and cash equivalents is a $400,000 certificate of deposit pledged as collateral against a $400,000 note payable to bank. The Company maintains cash deposits at certain financial institutions in amounts in excess of federally insured limits of $100,000. Cash and cash equivalents held in interest-bearing accounts as of December 31, 1997 and 1996 was approximately $7,342,000 and $7,023,000, respectively.
INVENTORIES: Inventories are stated at the lower of cost (determined on the first-in, first-out basis) or market. Capitalized direct labor and overhead costs charged to inventory for the years ended December 31, 1997 and 1996 were approximately $2,404,000 and $2,037,000, respectively.
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Capitalized direct labor and overhead costs included in inventory as of December 31, 1997 and 1996 were approximately $1,476,000 and $893,000 respectively.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are recorded at cost. Routine repairs and maintenance are expensed as incurred. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets as follows:
Buildings and improvements 15-30 years Machinery and equipment 5-10 years Furniture and office equipment 3-5 years
INTANGIBLE ASSETS: Intangible assets are amortized using the straight-line method based on the following estimated useful lives:
Goodwill 20-40 years Covenant not to compete 7 years Trademarks 20-40 years Deferred acquisition costs 10 years
The amount of impairment, if any, in unamortized Goodwill is measured based on projected future results of operations. To the extent future results of operations of those subsidiaries to which the Goodwill relates through the period such Goodwill is being amortized are sufficient to absorb the amortization of Goodwill, the Company has deemed there to be no impairment of Goodwill.
INCOME TAXES: Income taxes are calculated under the asset and liability method of accounting. Deferred income taxes are recognized by applying the enacted statutory rates applicable to future year differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. A valuation allowance is recorded when it is more likely than not that some portion or all of the deferred tax asset will not be realized.
EARNINGS PER SHARE: Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128). The provisions of SFAS No. 128 establish standards for computing and presenting earnings per share (EPS) and requires the Company to restate all prior years' EPS data presented. The adoption of SFAS No. 128 did not have a material effect on the Company's previously reported earnings per share. Basic and diluted EPS are computed by dividing net income by the sum of the weighted average number of shares of common stock outstanding. The Company has 303,253 outstanding stock options, of which 138,872 are exercisable. These options were not included in the calculation of earnings per share because their inclusion would be antidilutive.
NEW FINANCIAL ACCOUNTING STANDARDS: In June, 1997, SFAS No. 130, "Reporting Comprehensive Income" and SFAS. No. 131, "Disclosures about Segments of an Enterprise and Related Information" were issued. The provisions of SFAS No. 130 must be adopted by the Company in the first quarter of 1998. This statement establishes standards for the reporting of comprehensive income and its components. Implementation of this disclosure standard will not affect the Company's financial position, results of
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
operations or the manner in which financial information is currently presented. In accordance with SFAS No. 131, the Company may be required to modify or expand the financial statement disclosures for operating segments, products and services, and geographic areas. Implementation of this disclosure standard, which must be adopted by December 31, 1998, will not affect the Company's financial position or results of operations.
RECLASSIFICATIONS: Certain reclassifications have been made to prior year amounts to conform to current year presentation.
NOTE 2. SIGNIFICANT TRANSACTIONS
On June 26, 1997, the Company acquired several product lines from New Image Laboratories, Inc. The brands were acquired for 250,000 shares of the Company's restricted (as provided for by Rule 144 of the Securities Act of 1933) common stock, valued at $10.81 per share, with provision for half the shares to be held in escrow pending, among other things, final adjustment of the purchase price in accordance with the acquisition agreement and up to 100,000 restricted shares to be issued over the next two years contingent upon the achievement of certain levels of earnings as set forth in the agreement. The Company will record the additional value of trademarks resulting from this contingent payment, if necessary, once the contingency is resolved. The acquisition was accounted for as a purchase, with a net value of approximately $2,700,000 based upon the quoted market price of the Company's stock at the time of issuance.
The Company acquired certain accounts receivable, inventory, fixed assets and trademarks as well as assuming certain outstanding trade and other liabilities of approximately $5,332,000. The liabilities acquired are subject to the terms of a liquidating trust agreement, and as provided for in the Asset Purchase Agreement, the Company signed a non-interest bearing, unsecured note payable in the amount of $2,399,400, payable in two equal installments due in December, 1997 and February, 1998. Additionally, the Company provided the Trust with a standby letter of credit in the amount of $2,932,600. Claims filed with the Trustee are funded periodically by the Company at the request of the Trustee, in addition to funds provided by the payment of the above note. The Trust will terminate on the first anniversary of the agreement, and all funds on deposit with respect to unfiled claims will be refunded to the Company. Management of the Company has reduced the value of the trademarks arising from the acquisition in accordance with the amount it believes will ultimately be refunded. As of December 31, 1997, the Trustee had on deposit funds approximating $610,000 for satisfaction of claims filed in accordance with the provisions of the Liquidating Trust Agreement.
As indicated above, the purchase price is subject to adjustment based upon the value of the net assets acquired, as determined on the first anniversary of the closing date. The Company believes that based upon information available at December 31, 1997, the 125,000 shares held in escrow will be returned to the Company and has reduced the value of trademarks and stockholders' equity to reflect this anticipated purchase price adjustment.
On June 28, 1996, the Company entered into a Stock Purchase Agreement with Sorbie Acquisition Co. and Subsidiaries (Sorbie), and all the stockholders of Sorbie, including the President and principal stockholder, as well as related agreements described below with the President, Trevor
NOTE 2. SIGNIFICANT TRANSACTIONS (Continued)
Sorbie International, Trevor Sorbie, Samson Arms, Inc. and Redken Laboratories.
Pursuant to the agreements, the Company exchanged 13,733 shares of restricted common stock, valued at approximately $218,000, and additional consideration as described below, for all the outstanding common and preferred stock of Sorbie. In addition, the Company issued an additional 18,899 shares of restricted stock, valued at approximately $300,000, to terminate an existing royalty agreement between Samson Arms, Inc. and Sorbie. Additionally, and as further consideration for the acquisition, the Company (i) terminated a Secured Subordinated Debenture of Sorbie, dated July 20, 1994, held by the Company in the principal amount of $500,000, (ii) assumed liabilities due to the President of Sorbie under a pre-existing employment contract of approximately $500,000 and (iii) replaced a certain Secured Promissory Note of Sorbie in favor of Redken Laboratories in the principal amount of $3,250,000 with a cash payment of $2,500,000.
In separate agreements, the Company amended the existing royalty contract between Sorbie, Trevor Sorbie International, Sorbie Trading Limited and Trevor Sorbie. In accordance with the amended agreement, the royalty payment percentage rate payable upon future sales was reduced.
Sorbie, formerly a major customer of the Company, is engaged in the distribution of professional hair care products sold in beauty salons in the United States and Canada. The transaction was recorded using the purchase method and, accordingly, the purchase price was allocated to assets and liabilities based on their estimated fair values as of the date of acquisition. The cost in excess of identifiable net assets acquired was approximately $5,600,000 and is being amortized over 30 years on a straight-line basis.
Unaudited pro-forma results of operations, assuming the acquisition of Sorbie occurred as of the beginning of 1995, after giving effect to certain adjustments such as the elimination of intercompany sales and amortization of goodwill resulting from the acquisition are summarized as follows (in thousands, except per share data): 1996 1995 __________ __________
Net sales $ 27,076 $ 30,315 ========== ==========
Income before income taxes $ 6,699 $ 5,195 ========== ==========
Net Income $ 4,431 $ 3,539 ========== ==========
Earnings per share $ 1.07 $ .85 ========== ==========
On December 31, 1995, the Company entered into asset purchase agreements with Colgate-Palmolive Company and its subsidiary, The Mennen Company, to acquire certain consumer product brands, as well as a licensing agreement for the domestic distribution of the Cashmere Bouquet talc product line. The combined purchase price for the brands and licensing
NOTE 2. SIGNIFICANT TRANSACTIONS (Continued)
agreement, as amended, was $12,000,000, comprised of a $2,000,000 cash down payment; 5 year, 8% notes in an aggregate amount of $6,000,000; and a royalty payment of $4,000,000 payable semi-annually over a period of 8 years. Approximately $600,000 of the purchase price was allocated to inventory, $200,000 was allocated to molds and other tooling equipment acquired and the balance of approximately $10,100,000 (after giving consideration to the net present value of the royalty stream) was allocated to trademarks and licenses which are being amortized over 30 years. Concurrent with the acquisition of the brands and the licensing agreement, the parties signed a seven-month transition agreement to facilitate the orderly transition of sales, production and distribution functions. In connection with the Acquisition Agreement between the Company and Colgate- Palmolive, a purchase price adjustment was made at the end of the transition period that had the effect of reducing goodwill recorded on the acquisition by approximately $570,000.
NOTE 3. ACCOUNTS RECEIVABLE
Accounts Receivable at December 31, 1997 and 1996 consisted of the following: 1997 1996 ___________ ___________ Accounts Receivable: Trade $ 4,753,965 $ 3,362,126 Other 40,642 99,592 ___________ ___________ 4,794,607 3,461,718 Less: Allowance for doubtful accounts (98,359) (56,171) ___________ ___________ $ 4,696,248 $ 3,405,547 =========== ===========
The following is an analysis of the allowance for doubtful accounts for the year ended December 31: 1997 1996 1995 __________ __________ __________ Balance, beginning of year $ 56,171 $ 46,401 $ 41,819 Provision for doubtful accounts 120,953 10,978 78,951 Uncollectible accounts written off (78,765) (1,208) (74,369) __________ __________ __________ Balance, end of year $ 98,359 $ 56,171 $ 46,401 ========== ========== ==========
NOTE 4. INVENTORIES
Inventories at December 31, 1997 and 1996 consisted of the following:
1997 1996 ____________ ____________ Raw materials $ 2,880,011 $ 1,087,257 Packaging and components 4,060,389 1,639,231 Work in progress 437,965 1,019,317 Finished goods 4,289,307 3,983,852 ____________ ____________ $ 11,667,672 $ 7,729,657 ============ ============
NOTE 4. INVENTORIES (Continued)
Raw materials include surfactants, chemicals and fragrances used in the production process. Packaging materials include cartons, inner sleeves and boxes used in the actual product, as well as outer boxes and cartons used for shipping purposes. Components are the actual bottles or containers (plastic or glass), jars, caps, pumps and similar materials that will be part of the finished product.
Included in other assets is packaging and components inventory not anticipated to be utilized in less than one year, amounting to $1,740,167 in 1997 and $702,528 in 1996.
NOTE 5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at December 31, 1997 and 1996 consisted of the following: 1997 1996 ____________ ____________
Land $ 379,627 $ 379,627 Buildings and improvements 1,873,508 1,610,191 Machinery and equipment 1,398,922 834,435 Furniture and office equipment 477,816 381,213 ____________ ___________ 4,129,873 3,205,466 Less: accumulated depreciation (1,369,862) (1,044,788) ____________ ___________
$ 2,760,011 $ 2,160,678 ============ ===========
NOTE 6. INTANGIBLE ASSETS
Intangible assets at December 31, 1997 and 1996 consisted of the following: 1997 1996 ____________ ____________ Goodwill-Williamsport Barber Supply $ 510,674 $ 510,674 Covenant not to compete- Williamsport Barber Supply 275,000 275,000 Goodwill-Stephan & Co. 278,054 278,054 Goodwill-Scientific Research Products, Inc. 2,088,234 2,200,022 Trademarks-Scientific Research 1,758,343 1,758,343 Trademarks-Frances Denney 4,442,455 4,442,455 Trademarks-Colgate/Mennen 9,548,070 9,548,070 Goodwill-Trevor Sorbie 5,622,130 5,610,903 Trademarks-Image/Modern 4,109,705 - Deferred Acquisition Costs 693,222 294,627 Other 103,005 103,005 ___________ ____________ 29,428,892 25,021,153
Less: accumulated amortization (2,984,981) (1,890,033) ____________ ____________ $ 26,443,911 $ 23,131,120 ============ ============
NOTE 6. INTANGIBLE ASSETS (Continued)
Goodwill arising from the acquisition of Scientific Research Products of Delaware, Inc. in April, 1994 has been reduced by the tax effect of the Net Operating Loss carryforwards utilized.
NOTE 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 1997 and 1996 consisted of the following: 1997 1996 ____________ ____________
Accounts payable $ 3,259,119 $ 1,353,889 Accrued marketing expenses 121,311 140,000 Accrued payroll and bonuses 240,545 834,246 Other accrued expenses 83,408 225,839 ____________ ____________ $ 3,704,383 $ 2,553,974 ============ ============
NOTE 8. LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996 consisted of the following: 1997 1996 ____________ ____________
7.7% note payable to former owner of Williamsport Barber Supply; principal and interest due in monthly install- ments of $5,403, through January, 1999; collateralized by operating assets of Williamsport Barber and Beauty Supply with a carrying value of approximately $1,500,000. 67,183 124,431
Non-interest bearing note payable to the seller of the Massimo Faust product line; payable in annual installments of $15,000, paid in January, 1998. 15,000 30,000
Guaranteed royalty payments to former owner of Sorbie brand, payable in quarterly installments of $22,401, through December 31, 1999, discounted at an 8% rate; unsecured. 183,172 262,067
7.85% note payable to bank, principal of $100,000 plus interest, due monthly, through June 26, 2001; collateralized by a secondary security interest in the brands acquired from Colgate-Palmolive with a carrying value of approximately $8,900,000. 4,200,000 5,400,000
Revolving credit line note payable to Bank, interest payable monthly, due July 15, 1999; unsecured. 4,000,000 -
Guaranteed payments of $250,000 due semi- annually to Colgate-Palmolive over an 8-year period discounted at an 8% rate; collateralized by a security interest in the brands acquired with a carrying value of approximately $8,900,000. 2,386,547 2,677,311 ____________ ____________ 10,851,902 8,493,809 Less: current portion (1,773,788) (1,804,879) ____________ ____________ Long-term debt $ 9,078,114 $ 6,688,930 ============ ============
In July, 1997, the Company increased its $2,000,000 revolving credit line to $5,000,000, with a variable interest rate at LIBOR plus 1.5%. At December 31, 1997, the outstanding obligation under this line of credit was $4,000,000, with an effective interest rate of 7.02%. At December 31, 1997 the Company has a $400,000 note payable to a bank due January 9, 1998 with interest at 3/4% above the certificate of deposit rate (5.5% in 1997 and 1996) that is pledged as collateral against the note.
NOTE 8. LONG-TERM DEBT (Continued)
The notes payable to bank have covenants with respect to current maturity coverage, funded debt to earnings (as defined) and minimum working capital. At December 31, 1997, the Company was in compliance with all covenants.
At December 31, 1997, approximate maturities of long-term debt are $1,774,000 for 1998, $5,677,000 for 1999, $1,581,000 for 2000, $932,000 for 2001, $318,000 for 2002, and $570,000 thereafter.
NOTE 9. INCOME TAXES
The provision for income taxes is comprised of the following for the years ended December 31: 1997 1996 1995 ___________ ___________ ___________ Current Tax: Federal $ 2,318,398 $ 1,872,701 $ 1,843,532 State 368,068 363,064 231,732 ___________ ___________ ___________
Total Current 2,686,466 2,235,765 2,075,264 ___________ ___________ ___________ Deferred Tax: Federal (26,425) 154,374 23,487 State (3,870) 23,966 11,634 ___________ ___________ ___________
Total Deferred (30,295) 178,340 35,121 ___________ ___________ ___________ Total provision for income taxes $ 2,656,171 $ 2,414,105 $ 2,110,385 =========== =========== ===========
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes.
The net deferred tax liability in the accompanying balance sheets includes deferred tax assets and liabilities attributable to the following items: 1997 1996 ___________ ___________ Accounts receivable allowances $ (38,680) $ (20,952) Goodwill 537,035 324,916 Inventory (221,862) (5,054) Other (8,327) (449) Net operating loss carryforward (409,691) (510,000) ___________ ___________
(141,525) (211,539) Less: Valuation allowance 409,691 510,000 ___________ ___________ Net deferred tax liability $ 268,166 $ 298,461 =========== ===========
NOTE 9. INCOME TAXES (Continued)
The provision for federal and state income taxes differs from statutory tax expense (computed by applying the U.S. Federal corporate tax rate to income before taxes) as follows: 1997 1996 1995 ________ ________ ________ Amount computed on pretax income 35.0% 35.0% 35.0% Increase(decrease) in taxes: State income taxes, net of federal tax benefit 3.4 3.6 2.5 Charitable contributions of inventory (2.8) (2.9) (2.9) Benefit of graduated rates (1.0) (1.0) (1.0) Other ( .1) ( .3) ( .8) ________ ________ ________ Total income tax 34.5% 34.4% 32.8% ======== ======== ========
NOTE 10. COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation matters arising in the normal course of business. It is the opinion of management that any such matters, at December 31, 1997, would not have a material adverse effect on the Company's financial position, results of operations and cash flows.
In connection with the acquisition of certain brands from New Image Laboratories, Inc., the Company secured a Standby Letter of Credit in the amount of $2,932,000 to guarantee payments to creditors in accordance with the provisions of the Liquidating Trust Agreement. The face amount of this Standby Letter of Credit is reduced as payments are made to the Trustee. At December 31, 1997, the remaining amount of the outstanding letter of credit was $696,000.
The Company has entered into employment agreements with certain officers and employees. These agreements, which expire on various dates through June, 2001, provide for incentive bonuses based on consolidated income before taxes, earnings per share, or earnings of a subsidiary. In the aggregate, such bonuses were approximately $68,000, $694,000 and $350,000 in 1997, 1996 and 1995, respectively, and are included in selling, general and administrative expenses.
NOTE 11. CAPITAL STOCK AND STOCK OPTIONS
1,000,000 shares of preferred stock, $0.01 par value are authorized, however, no shares have been issued.
In 1990, the shareholders of the Company approved the 1990 Key Employee Stock Incentive Plan and the 1990 Outside Directors Plan. The aggregate number of shares currently authorized pursuant to the Key Employee Plan, as adjusted for stock splits and a shareholder-approved increase in 1994 and 1997, is 870,000 shares. The number of shares and terms of each grant is determined by the Compensation Committee of the Board of Directors, in accordance with the 1990 Key Employee Plan, as amended.
The Outside Directors Plan provides for annual grants, as adjusted for stock splits, of 5,062 shares to non-employee directors. Such grants are granted on the earlier of June 30 or the date of the Company's Annual Meeting of Shareholders, at the fair market value at the date of grant.
NOTE 11. CAPITAL STOCK AND STOCK OPTIONS (Continued)
The aggregate number of shares reserved for granting under this plan, as adjusted for stock splits, is 202,500.
Stock options are granted at the discretion of the Compensation Committee of the Board of Directors. The options become exercisable one year from the grant date and must be exercised within five years of the grant date. Stock option activity for 1997, 1996, and 1995 is set forth below:
Key Employee Outside Option Avg. Directors Avg. Plan Price Plan Price __________________________________________________________________________
Outstanding at December 31, 1994.. 205,524 $13.52 29,749 $12.76 Granted........................... - 10,124 15.50 Canceled.......................... (1,758) 1.16 - Exercised......................... (31,966) 1.16 (3,375) 7.41 __________ __________
Outstanding at December 31, 1995.. 171,800 15.95 36,498 14.09 Granted........................... 112,500 17.81 15,186 15.75 Canceled.......................... (5,000) 14.33 (2,500) 7.41 Exercised......................... - (6,750) 7.41 __________ __________
Outstanding at December 31, 1996.. 279,300 16.77 42,434 15.89 Granted........................... 79,195 12.65 15,186 11.23 Canceled.......................... (104,800) 15.46 (8,062) 17.17 Exercised......................... - - - __________ __________
Outstanding at December 31, 1997.. 253,695 $16.03 49,558 $14.14 ========== ====== ========== ======
The number of shares and average price of options exercisable at December 31, 1997, 1996 and 1995 were 104,500 shares at $16.43, 174,800 shares at $15.95 and 171,800 at $15.95 for the Key Employee Option Plan and 34,372 at $15.80, 25,248 at $16.54 and 24,374 at $13.56 for the Outside Directors Plan, respectively. At December 31, 1997 and 1996, 445,055 shares and 85,450 shares, respectively, were available for future grants under the terms of the Key Employee Option Plan and 102,317 shares and 107,941 shares, respectively, were available for future grants under the terms of the Outside Directors Plan.
The Company continues to apply the provisions of Accounting Principles Board Opinion No. 25, and related Interpretations in accounting for stock- based compensation plans. Accordingly, no compensation expense has been recorded in the accompanying consolidated statements of operations for options granted in 1997, 1996 and 1995, however pro forma disclosures of net earnings and earnings per share must be made as if SFAS No. 123 had been adopted. Had compensation costs for options granted been determined on the basis of the fair value of the awards at the date of grant, consistent with the treatment prescribed by SFAS No. 123, the Company's net income and earnings per share, on a pro forma basis, would be as follows:
NOTE 11. CAPITAL STOCK AND STOCK OPTIONS (Continued)
(Dollars in thousands, except per share data)
1997 1996 1995 ___________ ___________ __________ Net income:
As reported $ 5,041 $ 4,679 $ 4,315 Pro forma $ 4,514 $ 4,418 $ 4,276
Earnings per share:
As reported $ 1.20 $ 1.13 $ 1.05
Pro forma $ 1.07 $ 1.07 $ 1.04
The above pro forma effect only takes into consideration options granted since January 1, 1995 and is likely to increase in future years as additional options are granted and amortized ratably over the vesting period. The average fair value of options granted during 1997, 1996 and 1995 was $8.52, $3.32 and $5.68, respectively. The fair value of stock options granted in 1997, 1996 and 1995 was estimated using the Black- Scholes option-pricing model and included the following assumptions: a life expectancy of 3 years for 1997, 1996 and 1995, a risk-free interest rate of 6.2% for 1997, 5.9% for 1996 and 6.9% for 1995 and volatility of 48% for 1997 and 46% for 1996 and 1995. Since the Company did not start paying dividends until August, 1995, at an annual yield of less than 1%, dividends paid was not material to the determination of the fair value of options granted.
The exercise price range of options outstanding and exercisable for both the Key Employee and Outside Directors plans, the weighted average contractual life remaining in years and the weighted average exercise price are as follows:
Outstanding Exercisable ____________________________ ___________________
Exercise Number Average Average Number Average Price Range of shares Life Price of shares Price _______________ __________ _______ ________ ___________________
$10.00 - $13.99 94,381 3.72 $12.42 - - $14.00 - $16.99 151,872 2.60 $15.18 81,872 $15.55 $17.00 - $18.99 57,000 .88 $17.32 57,000 $17.32 _________ _________ 303,253 138,872 ========= =========
Included in the $14.00-$16.99 range above are 70,000 ooptions which are not exercisable until the stock trades for 20 consecutive days at a price equal to $19.18 or higher.
NOTE 12. SUBSEQUENT EVENTS
On March 18, 1998, the Company signed an Asset Purchase Agreement (the "Agreement") with Morris-Flamingo, L.P., Morris-Flamingo Beauty Products, Inc., Shaheen & Co., Inc. and Shouky A. Shaheen, for the acquisition of certain assets and liabilities (including the immediate payment of a note
NOTE 12. SUBSEQUENT EVENTS (Continued)
payable to Fleet Capital Corporation approximating $1,880,000) of Morris- Flamingo, L.P., in exchange for 307,058 shares of the Company's restricted common stock. The transaction will be recorded as a purchase, and, based upon the net assets received, goodwill of approximately $2,500,000 will be recorded. The agreement also provides for 30% of the shares issued to be held in escrow, pending the final determination of the value of the net assets acquired within 90 days of closing. Morris-Flamingo, L.P. is a large mail order barber and beauty supply retailer. In connection with the acquisition of Morris-Flamingo, L.P., and the related agreement to retire the outstanding Fleet Capital Corporation debt, the Company secured additional financing from NationsBank, N.A. in the amount of $3,000,000, and pledged all of the issued common stock of Morris Flamingo-Stephan, Inc. to the bank as collateral for the loan. The loan is payable in equal monthly installments through March, 2005 and bears interest at the rate of 6.92%.
In addition to the above, the Company has signed a lease for the Danville, Illinois facility currently occupied by Morris-Flamingo, L.P. (and owned by the former owner of the partnership) for a three year period, with an option to cancel in one year. The annual rental is $210,000 and comprises approximately 93,000 square feet of office, manufacturing and warehouse space.
SIGNATURES
Pursuant to the requirements of Section 13 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.
THE STEPHAN CO.
By: /s/ Frank F. Ferola ___________________________________ Frank F. Ferola President and Chairman of the Board April 15, 1998
By: /s/ David A. Spiegel ___________________________________ David A. Spiegel Principal Financial Officer Principal Accounting Officer April 15, 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:
By: /s/ Frank F. Ferola By: /s/ Thomas M. D'Ambrosio ______________________________ ____________________________ Frank F. Ferola, Principal Thomas M. D'Ambrosio Executive Officer and Director Vice President and Director Date: April 15, 1998 Date: April 15, 1998
By: /s/ John DePinto By: /s/ Curtis Carlson ______________________________ ____________________________ John DePinto, Director Curtis Carlson, Director Date: April 15, 1998 Date: April 15, 1998
By: /s/ Leonard Genovese ______________________________ Leonard Genovese, Director Date: April 15, 1998
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Exhibits
10.1 Settlement Agreement and Amendment dated December 5, 1996, between The Stephan Co., The Mennen Company and Colgate-Palmolive Company, included with the Form 10-K for the year ended December 31, 1996, filed April 15, 1997, is incorporated herein by reference.
10.2 Trademark License and Supply Agreement dated March 7, 1996, between Color Me Beautiful, Inc. and The Stephan Co., included with the Form 8-K filed March 20, 1996, is incorporated herein by reference.
10.3 Agreement dated June 28, 1996 for the acquisition of Sorbie Acquisition Co. and Subsidiaries, with exhibits, included with the Form 8-K filed July 15, 1996, and as amended on August 21, September 16 and October 9, 1996, is incorporated herein by reference.
10.4 Acquisition Agreement dated as of May 23, 1997, between New Image Laboratories, Inc., The Stephan Co. and Stephan Distributing, Inc., in connection with the acquisition of brands, included with the Form 10-Q for the period ended June 30, 1997, filed August 13, 1997, is incorporated by reference.
27. Financial Data Schedule
(b) Financial Statements and Financial Statement Schedules
(i) Financial Statements
Independent Auditors' Report for the years ended December 31, 1997, 1996 and 1995.
Consolidated Balance Sheets as of December 31, 1997 and 1996.
Consolidated Statements of Operations for the years ended December 31, 1997, 1996, and 1995.
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1997, 1996, and 1995.
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995.
Notes to Consolidated Financial Statements.
(ii) Financial Statement Schedules
All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of The Stephan Co.:
We have audited the accompanying consolidated balance sheets of The Stephan Co. and subsidiaries (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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 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 audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Miami, Florida April 9, 1998
THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31,1997 AND 1996
ASSETS
1997 1996 ____________ ____________ CURRENT ASSETS
Cash and cash equivalents $ 8,491,174 $ 8,276,976
Cash on deposit with trustee 610,126 -
Accounts receivable, less allowance for doubtful accounts of $98,359 and $56,171 in 1997 and 1996, respectively 4,696,248 3,405,547
Inventories 11,667,672 7,729,657
Prepaid expenses and other current assets 269,304 293,425 ____________ ____________
TOTAL CURRENT ASSETS 25,734,524	 19,705,605
PROPERTY, PLANT AND EQUIPMENT, net 2,760,011 2,160,678
INTANGIBLE ASSETS, net 26,443,911 23,131,120
OTHER ASSETS 2,525,948 1,501,107 ____________ ____________ TOTAL ASSETS $ 57,464,394 $ 46,498,510 ============ ============
See notes to consolidated financial statements.
THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31,1997 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996 ___________ ___________
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 3,704,383 $ 2,553,974
Notes payable to bank 400,000 1,400,000
Note payable to trustee 1,199,700 -
Current portion of long-term debt 1,773,788 1,804,879
Income taxes payable 1,390,104 464,593 ___________ ___________ TOTAL CURRENT LIABILITIES 8,467,975 6,223,446
DEFERRED INCOME TAXES, net 268,166 298,461
LONG-TERM DEBT, less current maturities 9,078,114 6,688,930 ___________ ___________ TOTAL LIABILITIES 17,814,255 13,210,837 ___________ ___________ COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 25,000,000 shares authorized; 4,418,800 and 4,147,466 shares issued and outstanding at December 31, 1997 and 1996, respectively 44,188 41,475
Additional paid in capital 15,979,709 12,967,462
Retained earnings 24,977,805 20,278,736 ___________ ____________ 41,001,702 33,287,673 LESS 125,000 CONTINGENTLY RETURNABLE SHARES (1,351,563) - ___________ ____________ TOTAL STOCKHOLDERS' EQUITY 39,650,139 33,287,673 ___________ ____________ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $57,464,394 $46,498,510 =========== ===========
See notes to consolidated financial statements.
THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ____________ ____________ ____________
NET SALES $	27,113,306 $ 25,778,618 $ 26,196,516
COST OF GOODS SOLD 10,192,411 10,558,919 12,652,546 ____________ ____________ ___________ GROSS PROFIT 16,920,895 15,219,699 13,543,970
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 9,110,001 8,239,386 7,432,929 ____________ ____________ ___________
OPERATING INCOME 7,810,894 6,980,313 6,111,041
OTHER INCOME(EXPENSE) Interest income 402,940 392,314 404,631 Interest expense (641,654) 	 (354,362)		 (92,416) Other 125,000 75,000 2,540 ____________ ___________ ____________
INCOME BEFORE INCOME TAXES 7,697,180 7,093,265 6,425,796
INCOME TAXES 2,656,171 2,414,105 2,110,385 ____________ ___________ ____________
NET INCOME $ 5,041,009 $ 4,679,160 $ 4,315,411 ============ =========== ============
BASIC AND DILUTED EARNINGS PER SHARE $ 1.20 $ 1.13 $ 1.05 ============ =========== ============ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 4,213,372 4,138,629 4,120,304 ============ =========== ============
See notes to consolidated financial statements.
THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Common Stock Treasury _____________________ Additional Stock/ Paid in Retained Contingently Shares Par Value Capital Earnings Returnable Stock _________ _________ __________ __________ ___________ Balances, Jan. 1, 1995 4,183,248 $ 41,832 $13,715,319 $11,780,150 $ (884,000)
Treasury stock retired (80,000) (800) (883,200) - 884,000
Retirement of stock received in settlement with former stockholder (16,105) (161) (309,860) - -
Stock options exercised 35,341 354 61,736 - -
Dividends paid - - - (164,899) -
Net income for 1995 - - - 4,315,411 - _________ _________ __________ __________ __________ Balances, Dec. 31, 1995 4,122,484 41,225 12,583,995 15,930,662 -
Stock issued for acquisition 32,632 326 517,707 - -
Stock options exercised 6,750 68 49,941 - -
Treasury stock purchased - - - - (184,325)
Treasury stock retired (14,400) (144) (184,181) - 184,325
Dividends paid - - - (331,086) -
Net income for 1996 - - - 4,679,160 - _________ _________ __________ __________ __________ Balances, Dec. 31, 1996 4,147,466 41,475 12,967,462 20,278,736 -
Stock issued for acquisition 250,000 2,500 2,700,625 - -
Contingently returnable stock - - - - (1,351,563)
Stock issued to Retire debt 34,534 345 442,100 - -
Treasury stock purchased - - - - (130,610)
Treasury stock retired (13,200) (132) (130,478) - 130,610
Dividends paid - - - (341,940) -
Net income for 1997 - - - 5,041,009 - _________ _________ ___________ ___________ ___________ Balances, Dec. 31, 1997 4,418,800 $ 44,188 $15,979,709 $24,977,805 $(1,351,563) ========= ========= =========== =========== =========== See notes to consolidated financial statements.
THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 _____________________________________________
1997 1996 1995 __________ ___________ ___________ CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,041,009 $ 4,679,160 $4,315,411 ___________ ___________ ___________
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation 338,326 221,867 166,046
Amortization 1,094,948	 889,944 476,815
Adjustment to Goodwill 111,788 123,016 127,991
Deferred income taxes (30,295) 178,340 35,121
Provision for doubtful accounts 120,953 10,978 78,951
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable (750,621) 586,073 (1,182,627)
Inventories (2,354,349) (555,425) (809,948)
Prepaid expenses and other current assets 24,121 (28,740) (82,462)
Other assets (1,024,841)	 (319,731) (372,729)
Accounts payable and accrued expenses (1,385,587) (2,340,331) (851,196)
Income taxes payable 925,511	 464,593 (468,334) __________ __________ __________
Total adjustments (2,930,046) (769,416) (2,882,372) __________ __________ __________ Net cash flows provided by operating activities 2,110,963 3,909,744 1,433,039 __________ __________ __________
See notes to consolidated financial statements.
THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 _____________________________________________
1997 1996 1995 __________ __________ __________ CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired from acquisition - 128,445 -
Colgate purchase price adjustment - 331,000 -
Cash deposited with trustee (610,126) - -
Purchase of property, plant and equipment (562,659)	 (229,238)	 (185,763)
Purchase of intangible assets (409,823) (75,284) -
Maturities of marketable securities -	 - 	 417,237 __________ __________ __________ Net cash flows (used in)/provided by investing activities (1,582,608) 154,923	 231,474 __________ __________ __________ CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (1,841,907) (10,033,528) 	 (143,002)
Repayment of note payable to trustee (1,199,700) - -
Proceeds from notes payable to bank 3,200,000 7,000,000 -
Acquisition of treasury stock (130,610) (184,325) -
Dividends paid (341,940) (331,086) (164,899)
Proceeds from exercise of stock options - 50,009 	 62,090 __________ __________ __________ Net cash flows used in financing activities (314,157) (3,498,930) 	 (245,811) __________ __________ __________ NET INCREASE IN CASH AND CASH EQUIVALENTS 214,198 565,737 1,418,702
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,276,976 7,711,239 6,292,537 __________ __________ __________ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,491,174	$ 8,276,976 $ 7,711,239 ========== ========== ==========
See notes to consolidated financial statements.
THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Supplemental Disclosures of Cash Flow Information:
1997 1996 1995 __________ _________ __________
Interest paid $ 644,862 $ 354,445 $ 96,452 ========== ========= ========== Income taxes paid $ 1,760,955 $ 1,612,417 $ 2,488,598 ========== ========= ==========
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
In connection with the acquisition of the brands from New Image Laboratories, Inc. on June 26, 1997, the Company acquired inventory, accounts receivable, fixed and intangible assets and assumed certain liabilities by issuance of common stock with an approximate value of $2,700,000.
On September 9, 1997, the Company issued 34,534 shares of common stock to Charles V. Hall, in satisfaction of the amount due him as a result of the acquisition of Trevor Sorbie of America, Inc. in June, 1996.
In connection with the acquisition of Sorbie Acquisition Company and Subsidiaries on June 28, 1996, the Company acquired inventory, accounts receivable, fixed and intangible assets and assumed certain liabilities by issuance of common stock with an approximate net value of $518,000.
In connection with the acquisition of the Colgate-Palmolive Brands on December 31, 1995, the Company acquired inventory, molds and tooling equipment and intangible assets for cash, notes, and contingent consideration to be paid over an 8 year period.
See notes to consolidated financial statements.
THE STEPHAN CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of The Stephan Co. and its wholly-owned subsidiaries, Foxy Products, Inc., Old 97 Company, Williamsport Barber and Beauty Supply Corp., Stephan & Co. (formerly Heads or Nails, Inc.), Scientific Research Products, Inc. of Delaware, Trevor Sorbie of America, Inc. and Stephan Distributing, Inc. (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation.
NATURE OF OPERATIONS: The Company is engaged in the manufacture, sale, and distribution of personal care grooming products throughout the United States. The Company's business activity constitutes a single reportable segment for purposes of Statement of Financial Accounting Standards No. 14.
USE OF ESTIMATES: The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
MAJOR CUSTOMERS: Sales to customers in excess of 10% of net sales for the years ended December 31, 1997, 1996 and 1995 were as follows:
1997 1996 1995 __________ __________ __________
Customer A $ - $ - $ 3,572,000 Customer B - - 4,265,000 Customer C - - 3,128,000 Customer D 2,819,000 3,056,000 - __________ __________ __________ $ 2,819,000 $ 3,056,000 $10,965,000 ========== ========== ==========
The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral. The Company does not believe that the credit risk represents a material risk of loss to the Company. However, the loss of major customers mentioned above could have a material adverse effect on the Company.
LONG-LIVED ASSETS: The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" in the year ended December 31, 1996. SFAS No. 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used, and for long-lived assets and certain identifiable intangibles to be disposed of. The adoption of SFAS No. 121 did not have a material
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
effect on the Company's financial position or results of operations.
STOCK-BASED COMPENSATION: On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation", which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows entities to continue to measure compensation cost for stock- based awards using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees", and to provide pro forma net income and pro forma earnings per share disclosures as if the fair value method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. See Note 11 to the financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS: Statement of Financial Accounting Standards No. 107, "Disclosure about Fair Value of Financial Instruments," requires disclosure of the fair value of financial instruments, both assets and liabilities, recognized and not recognized in the consolidated balance sheets of the Company, for which it is practicable to estimate fair value. The estimated fair values of financial instruments which are presented herein have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of amounts the Company could realize in a current market exchange.
The following methods and assumptions were used to estimate fair value:
- the carrying amounts of cash and cash equivalents, receivables and accounts payable approximate fair value due to their short term nature;
- discounted cash flows using current interest rates for financial instruments with similar characteristics and maturity were used to determine the fair value of notes receivable, notes payable and debt.
There were no significant differences as of December 31, 1997 and 1996 in the carrying value and fair market value of financial instruments.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash, certificates of deposit, United States Treasury Bills, and municipal bonds having maturities of 90 days or less when acquired. Also included in cash and cash equivalents is a $400,000 certificate of deposit pledged as collateral against a $400,000 note payable to bank. The Company maintains cash deposits at certain financial institutions in amounts in excess of federally insured limits of $100,000. Cash and cash equivalents held in interest-bearing accounts as of December 31, 1997 and 1996 was approximately $7,342,000 and $7,023,000, respectively.
INVENTORIES: Inventories are stated at the lower of cost (determined on the first-in, first-out basis) or market. Capitalized direct labor and overhead costs charged to inventory for the years ended December 31, 1997 and 1996 were approximately $2,404,000 and $2,037,000, respectively.
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Capitalized direct labor and overhead costs included in inventory as of December 31, 1997 and 1996 were approximately $1,476,000 and $893,000 respectively.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are recorded at cost. Routine repairs and maintenance are expensed as incurred. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets as follows:
Buildings and improvements 15-30 years Machinery and equipment 5-10 years Furniture and office equipment 3-5 years
INTANGIBLE ASSETS: Intangible assets are amortized using the straight-line method based on the following estimated useful lives:
Goodwill 20-40 years Covenant not to compete 7 years Trademarks 20-40 years Deferred acquisition costs 10 years
The amount of impairment, if any, in unamortized Goodwill is measured based on projected future results of operations. To the extent future results of operations of those subsidiaries to which the Goodwill relates through the period such Goodwill is being amortized are sufficient to absorb the amortization of Goodwill, the Company has deemed there to be no impairment of Goodwill.
INCOME TAXES: Income taxes are calculated under the asset and liability method of accounting. Deferred income taxes are recognized by applying the enacted statutory rates applicable to future year differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. A valuation allowance is recorded when it is more likely than not that some portion or all of the deferred tax asset will not be realized.
EARNINGS PER SHARE: Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128). The provisions of SFAS No. 128 establish standards for computing and presenting earnings per share (EPS) and requires the Company to restate all prior years' EPS data presented. The adoption of SFAS No. 128 did not have a material effect on the Company's previously reported earnings per share. Basic and diluted EPS are computed by dividing net income by the sum of the weighted average number of shares of common stock outstanding. The Company has 303,253 outstanding stock options, of which 138,872 are exercisable. These options were not included in the calculation of earnings per share because their inclusion would be antidilutive.
NEW FINANCIAL ACCOUNTING STANDARDS: In June, 1997, SFAS No. 130, "Reporting Comprehensive Income" and SFAS. No. 131, "Disclosures about Segments of an Enterprise and Related Information" were issued. The provisions of SFAS No. 130 must be adopted by the Company in the first quarter of 1998. This statement establishes standards for the reporting of comprehensive income and its components. Implementation of this disclosure standard will not affect the Company's financial position, results of
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
operations or the manner in which financial information is currently presented. In accordance with SFAS No. 131, the Company may be required to modify or expand the financial statement disclosures for operating segments, products and services, and geographic areas. Implementation of this disclosure standard, which must be adopted by December 31, 1998, will not affect the Company's financial position or results of operations.
RECLASSIFICATIONS: Certain reclassifications have been made to prior year amounts to conform to current year presentation.
NOTE 2. SIGNIFICANT TRANSACTIONS
On June 26, 1997, the Company acquired several product lines from New Image Laboratories, Inc. The brands were acquired for 250,000 shares of the Company's restricted (as provided for by Rule 144 of the Securities Act of 1933) common stock, valued at $10.81 per share, with provision for half the shares to be held in escrow pending, among other things, final adjustment of the purchase price in accordance with the acquisition agreement and up to 100,000 restricted shares to be issued over the next two years contingent upon the achievement of certain levels of earnings as set forth in the agreement. The Company will record the additional value of trademarks resulting from this contingent payment, if necessary, once the contingency is resolved. The acquisition was accounted for as a purchase, with a net value of approximately $2,700,000 based upon the quoted market price of the Company's stock at the time of issuance.
The Company acquired certain accounts receivable, inventory, fixed assets and trademarks as well as assuming certain outstanding trade and other liabilities of approximately $5,332,000. The liabilities acquired are subject to the terms of a liquidating trust agreement, and as provided for in the Asset Purchase Agreement, the Company signed a non-interest bearing, unsecured note payable in the amount of $2,399,400, payable in two equal installments due in December, 1997 and February, 1998. Additionally, the Company provided the Trust with a standby letter of credit in the amount of $2,932,600. Claims filed with the Trustee are funded periodically by the Company at the request of the Trustee, in addition to funds provided by the payment of the above note. The Trust will terminate on the first anniversary of the agreement, and all funds on deposit with respect to unfiled claims will be refunded to the Company. Management of the Company has reduced the value of the trademarks arising from the acquisition in accordance with the amount it believes will ultimately be refunded. As of December 31, 1997, the Trustee had on deposit funds approximating $610,000 for satisfaction of claims filed in accordance with the provisions of the Liquidating Trust Agreement.
As indicated above, the purchase price is subject to adjustment based upon the value of the net assets acquired, as determined on the first anniversary of the closing date. The Company believes that based upon information available at December 31, 1997, the 125,000 shares held in escrow will be returned to the Company and has reduced the value of trademarks and stockholders' equity to reflect this anticipated purchase price adjustment.
On June 28, 1996, the Company entered into a Stock Purchase Agreement with Sorbie Acquisition Co. and Subsidiaries (Sorbie), and all the stockholders of Sorbie, including the President and principal stockholder, as well as related agreements described below with the President, Trevor
NOTE 2. SIGNIFICANT TRANSACTIONS (Continued)
Sorbie International, Trevor Sorbie, Samson Arms, Inc. and Redken Laboratories.
Pursuant to the agreements, the Company exchanged 13,733 shares of restricted common stock, valued at approximately $218,000, and additional consideration as described below, for all the outstanding common and preferred stock of Sorbie. In addition, the Company issued an additional 18,899 shares of restricted stock, valued at approximately $300,000, to terminate an existing royalty agreement between Samson Arms, Inc. and Sorbie. Additionally, and as further consideration for the acquisition, the Company (i) terminated a Secured Subordinated Debenture of Sorbie, dated July 20, 1994, held by the Company in the principal amount of $500,000, (ii) assumed liabilities due to the President of Sorbie under a pre-existing employment contract of approximately $500,000 and (iii) replaced a certain Secured Promissory Note of Sorbie in favor of Redken Laboratories in the principal amount of $3,250,000 with a cash payment of $2,500,000.
In separate agreements, the Company amended the existing royalty contract between Sorbie, Trevor Sorbie International, Sorbie Trading Limited and Trevor Sorbie. In accordance with the amended agreement, the royalty payment percentage rate payable upon future sales was reduced.
Sorbie, formerly a major customer of the Company, is engaged in the distribution of professional hair care products sold in beauty salons in the United States and Canada. The transaction was recorded using the purchase method and, accordingly, the purchase price was allocated to assets and liabilities based on their estimated fair values as of the date of acquisition. The cost in excess of identifiable net assets acquired was approximately $5,600,000 and is being amortized over 30 years on a straight-line basis.
Unaudited pro-forma results of operations, assuming the acquisition of Sorbie occurred as of the beginning of 1995, after giving effect to certain adjustments such as the elimination of intercompany sales and amortization of goodwill resulting from the acquisition are summarized as follows (in thousands, except per share data): 1996 1995 __________ __________
Net sales $ 27,076 $ 30,315 ========== ==========
Income before income taxes $ 6,699 $ 5,195 ========== ==========
Net Income $ 4,431 $ 3,539 ========== ==========
Earnings per share $ 1.07 $ .85 ========== ==========
On December 31, 1995, the Company entered into asset purchase agreements with Colgate-Palmolive Company and its subsidiary, The Mennen Company, to acquire certain consumer product brands, as well as a licensing agreement for the domestic distribution of the Cashmere Bouquet talc product line. The combined purchase price for the brands and licensing
NOTE 2. SIGNIFICANT TRANSACTIONS (Continued)
agreement, as amended, was $12,000,000, comprised of a $2,000,000 cash down payment; 5 year, 8% notes in an aggregate amount of $6,000,000; and a royalty payment of $4,000,000 payable semi-annually over a period of 8 years. Approximately $600,000 of the purchase price was allocated to inventory, $200,000 was allocated to molds and other tooling equipment acquired and the balance of approximately $10,100,000 (after giving consideration to the net present value of the royalty stream) was allocated to trademarks and licenses which are being amortized over 30 years. Concurrent with the acquisition of the brands and the licensing agreement, the parties signed a seven-month transition agreement to facilitate the orderly transition of sales, production and distribution functions. In connection with the Acquisition Agreement between the Company and Colgate- Palmolive, a purchase price adjustment was made at the end of the transition period that had the effect of reducing goodwill recorded on the acquisition by approximately $570,000.
NOTE 3. ACCOUNTS RECEIVABLE
Accounts Receivable at December 31, 1997 and 1996 consisted of the following: 1997 1996 ___________ ___________ Accounts Receivable: Trade $ 4,753,965 $ 3,362,126 Other 40,642 99,592 ___________ ___________ 4,794,607 3,461,718 Less: Allowance for doubtful accounts (98,359) (56,171) ___________ ___________ $ 4,696,248 $ 3,405,547 =========== ===========
The following is an analysis of the allowance for doubtful accounts for the year ended December 31: 1997 1996 1995 __________ __________ __________ Balance, beginning of year $ 56,171 $ 46,401 $ 41,819 Provision for doubtful accounts 120,953 10,978 78,951 Uncollectible accounts written off (78,765) (1,208) (74,369) __________ __________ __________ Balance, end of year $ 98,359 $ 56,171 $ 46,401 ========== ========== ==========
NOTE 4. INVENTORIES
Inventories at December 31, 1997 and 1996 consisted of the following:
1997 1996 ____________ ____________ Raw materials $ 2,880,011 $ 1,087,257 Packaging and components 4,060,389 1,639,231 Work in progress 437,965 1,019,317 Finished goods 4,289,307 3,983,852 ____________ ____________ $ 11,667,672 $ 7,729,657 ============ ============
NOTE 4. INVENTORIES (Continued)
Raw materials include surfactants, chemicals and fragrances used in the production process. Packaging materials include cartons, inner sleeves and boxes used in the actual product, as well as outer boxes and cartons used for shipping purposes. Components are the actual bottles or containers (plastic or glass), jars, caps, pumps and similar materials that will be part of the finished product.
Included in other assets is packaging and components inventory not anticipated to be utilized in less than one year, amounting to $1,740,167 in 1997 and $702,528 in 1996.
NOTE 5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at December 31, 1997 and 1996 consisted of the following: 1997 1996 ____________ ____________
Land $ 379,627 $ 379,627 Buildings and improvements 1,873,508 1,610,191 Machinery and equipment 1,398,922 834,435 Furniture and office equipment 477,816 381,213 ____________ ___________ 4,129,873 3,205,466 Less: accumulated depreciation (1,369,862) (1,044,788) ____________ ___________
$ 2,760,011 $ 2,160,678 ============ ===========
NOTE 6. INTANGIBLE ASSETS
Intangible assets at December 31, 1997 and 1996 consisted of the following: 1997 1996 ____________ ____________ Goodwill-Williamsport Barber Supply $ 510,674 $ 510,674 Covenant not to compete- Williamsport Barber Supply 275,000 275,000 Goodwill-Stephan & Co. 278,054 278,054 Goodwill-Scientific Research Products, Inc. 2,088,234 2,200,022 Trademarks-Scientific Research 1,758,343 1,758,343 Trademarks-Frances Denney 4,442,455 4,442,455 Trademarks-Colgate/Mennen 9,548,070 9,548,070 Goodwill-Trevor Sorbie 5,622,130 5,610,903 Trademarks-Image/Modern 4,109,705 - Deferred Acquisition Costs 693,222 294,627 Other 103,005 103,005 ___________ ____________ 29,428,892 25,021,153
Less: accumulated amortization (2,984,981) (1,890,033) ____________ ____________ $ 26,443,911 $ 23,131,120 ============ ============
NOTE 6. INTANGIBLE ASSETS (Continued)
Goodwill arising from the acquisition of Scientific Research Products of Delaware, Inc. in April, 1994 has been reduced by the tax effect of the Net Operating Loss carryforwards utilized.
NOTE 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 1997 and 1996 consisted of the following: 1997 1996 ____________ ____________
Accounts payable $ 3,259,119 $ 1,353,889 Accrued marketing expenses 121,311 140,000 Accrued payroll and bonuses 240,545 834,246 Other accrued expenses 83,408 225,839 ____________ ____________ $ 3,704,383 $ 2,553,974 ============ ============
NOTE 8. LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996 consisted of the following: 1997 1996 ____________ ____________
7.7% note payable to former owner of Williamsport Barber Supply; principal and interest due in monthly install- ments of $5,403, through January, 1999; collateralized by operating assets of Williamsport Barber and Beauty Supply with a carrying value of approximately $1,500,000. 67,183 124,431
Non-interest bearing note payable to the seller of the Massimo Faust product line; payable in annual installments of $15,000, paid in January, 1998. 15,000 30,000
Guaranteed royalty payments to former owner of Sorbie brand, payable in quarterly installments of $22,401, through December 31, 1999, discounted at an 8% rate; unsecured. 183,172 262,067
7.85% note payable to bank, principal of $100,000 plus interest, due monthly, through June 26, 2001; collateralized by a secondary security interest in the brands acquired from Colgate-Palmolive with a carrying value of approximately $8,900,000. 4,200,000 5,400,000
Revolving credit line note payable to Bank, interest payable monthly, due July 15, 1999; unsecured. 4,000,000 -
Guaranteed payments of $250,000 due semi- annually to Colgate-Palmolive over an 8-year period discounted at an 8% rate; collateralized by a security interest in the brands acquired with a carrying value of approximately $8,900,000. 2,386,547 2,677,311 ____________ ____________ 10,851,902 8,493,809 Less: current portion (1,773,788) (1,804,879) ____________ ____________ Long-term debt $ 9,078,114 $ 6,688,930 ============ ============
In July, 1997, the Company increased its $2,000,000 revolving credit line to $5,000,000, with a variable interest rate at LIBOR plus 1.5%. At December 31, 1997, the outstanding obligation under this line of credit was $4,000,000, with an effective interest rate of 7.02%. At December 31, 1997 the Company has a $400,000 note payable to a bank due January 9, 1998 with interest at 3/4% above the certificate of deposit rate (5.5% in 1997 and 1996) that is pledged as collateral against the note.
NOTE 8. LONG-TERM DEBT (Continued)
The notes payable to bank have covenants with respect to current maturity coverage, funded debt to earnings (as defined) and minimum working capital. At December 31, 1997, the Company was in compliance with all covenants.
At December 31, 1997, approximate maturities of long-term debt are $1,774,000 for 1998, $5,677,000 for 1999, $1,581,000 for 2000, $932,000 for 2001, $318,000 for 2002, and $570,000 thereafter.
NOTE 9. INCOME TAXES
The provision for income taxes is comprised of the following for the years ended December 31: 1997 1996 1995 ___________ ___________ ___________ Current Tax: Federal $ 2,318,398 $ 1,872,701 $ 1,843,532 State 368,068 363,064 231,732 ___________ ___________ ___________
Total Current 2,686,466 2,235,765 2,075,264 ___________ ___________ ___________ Deferred Tax: Federal (26,425) 154,374 23,487 State (3,870) 23,966 11,634 ___________ ___________ ___________
Total Deferred (30,295) 178,340 35,121 ___________ ___________ ___________ Total provision for income taxes $ 2,656,171 $ 2,414,105 $ 2,110,385 =========== =========== ===========
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes.
The net deferred tax liability in the accompanying balance sheets includes deferred tax assets and liabilities attributable to the following items: 1997 1996 ___________ ___________ Accounts receivable allowances $ (38,680) $ (20,952) Goodwill 537,035 324,916 Inventory (221,862) (5,054) Other (8,327) (449) Net operating loss carryforward (409,691) (510,000) ___________ ___________
(141,525) (211,539) Less: Valuation allowance 409,691 510,000 ___________ ___________ Net deferred tax liability $ 268,166 $ 298,461 =========== ===========
NOTE 9. INCOME TAXES (Continued)
The provision for federal and state income taxes differs from statutory tax expense (computed by applying the U.S. Federal corporate tax rate to income before taxes) as follows: 1997 1996 1995 ________ ________ ________ Amount computed on pretax income 35.0% 35.0% 35.0% Increase(decrease) in taxes: State income taxes, net of federal tax benefit 3.4 3.6 2.5 Charitable contributions of inventory (2.8) (2.9) (2.9) Benefit of graduated rates (1.0) (1.0) (1.0) Other ( .1) ( .3) ( .8) ________ ________ ________ Total income tax 34.5% 34.4% 32.8% ======== ======== ========
NOTE 10. COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation matters arising in the normal course of business. It is the opinion of management that any such matters, at December 31, 1997, would not have a material adverse effect on the Company's financial position, results of operations and cash flows.
In connection with the acquisition of certain brands from New Image Laboratories, Inc., the Company secured a Standby Letter of Credit in the amount of $2,932,000 to guarantee payments to creditors in accordance with the provisions of the Liquidating Trust Agreement. The face amount of this Standby Letter of Credit is reduced as payments are made to the Trustee. At December 31, 1997, the remaining amount of the outstanding letter of credit was $696,000.
The Company has entered into employment agreements with certain officers and employees. These agreements, which expire on various dates through June, 2001, provide for incentive bonuses based on consolidated income before taxes, earnings per share, or earnings of a subsidiary. In the aggregate, such bonuses were approximately $68,000, $694,000 and $350,000 in 1997, 1996 and 1995, respectively, and are included in selling, general and administrative expenses.
NOTE 11. CAPITAL STOCK AND STOCK OPTIONS
1,000,000 shares of preferred stock, $0.01 par value are authorized, however, no shares have been issued.
In 1990, the shareholders of the Company approved the 1990 Key Employee Stock Incentive Plan and the 1990 Outside Directors Plan. The aggregate number of shares currently authorized pursuant to the Key Employee Plan, as adjusted for stock splits and a shareholder-approved increase in 1994 and 1997, is 870,000 shares. The number of shares and terms of each grant is determined by the Compensation Committee of the Board of Directors, in accordance with the 1990 Key Employee Plan, as amended.
The Outside Directors Plan provides for annual grants, as adjusted for stock splits, of 5,062 shares to non-employee directors. Such grants are granted on the earlier of June 30 or the date of the Company's Annual Meeting of Shareholders, at the fair market value at the date of grant.
NOTE 11. CAPITAL STOCK AND STOCK OPTIONS (Continued)
The aggregate number of shares reserved for granting under this plan, as adjusted for stock splits, is 202,500.
Stock options are granted at the discretion of the Compensation Committee of the Board of Directors. The options become exercisable one year from the grant date and must be exercised within five years of the grant date. Stock option activity for 1997, 1996, and 1995 is set forth below:
Key Employee Outside Option Avg. Directors Avg. Plan Price Plan Price __________________________________________________________________________
Outstanding at December 31, 1994.. 205,524 $13.52 29,749 $12.76 Granted........................... - 10,124 15.50 Canceled.......................... (1,758) 1.16 - Exercised......................... (31,966) 1.16 (3,375) 7.41 __________ __________
Outstanding at December 31, 1995.. 171,800 15.95 36,498 14.09 Granted........................... 112,500 17.81 15,186 15.75 Canceled.......................... (5,000) 14.33 (2,500) 7.41 Exercised......................... - (6,750) 7.41 __________ __________
Outstanding at December 31, 1996.. 279,300 16.77 42,434 15.89 Granted........................... 79,195 12.65 15,186 11.23 Canceled.......................... (104,800) 15.46 (8,062) 17.17 Exercised......................... - - - __________ __________
Outstanding at December 31, 1997.. 253,695 $16.03 49,558 $14.14 ========== ====== ========== ======
The number of shares and average price of options exercisable at December 31, 1997, 1996 and 1995 were 104,500 shares at $16.43, 174,800 shares at $15.95 and 171,800 at $15.95 for the Key Employee Option Plan and 34,372 at $15.80, 25,248 at $16.54 and 24,374 at $13.56 for the Outside Directors Plan, respectively. At December 31, 1997 and 1996, 445,055 shares and 85,450 shares, respectively, were available for future grants under the terms of the Key Employee Option Plan and 102,317 shares and 107,941 shares, respectively, were available for future grants under the terms of the Outside Directors Plan.
The Company continues to apply the provisions of Accounting Principles Board Opinion No. 25, and related Interpretations in accounting for stock- based compensation plans. Accordingly, no compensation expense has been recorded in the accompanying consolidated statements of operations for options granted in 1997, 1996 and 1995, however pro forma disclosures of net earnings and earnings per share must be made as if SFAS No. 123 had been adopted. Had compensation costs for options granted been determined on the basis of the fair value of the awards at the date of grant, consistent with the treatment prescribed by SFAS No. 123, the Company's net income and earnings per share, on a pro forma basis, would be as follows:
NOTE 11. CAPITAL STOCK AND STOCK OPTIONS (Continued)
(Dollars in thousands, except per share data)
1997 1996 1995 ___________ ___________ __________ Net income:
As reported $ 5,041 $ 4,679 $ 4,315 Pro forma $ 4,514 $ 4,418 $ 4,276
Earnings per share:
As reported $ 1.20 $ 1.13 $ 1.05
Pro forma $ 1.07 $ 1.07 $ 1.04
The above pro forma effect only takes into consideration options granted since January 1, 1995 and is likely to increase in future years as additional options are granted and amortized ratably over the vesting period. The average fair value of options granted during 1997, 1996 and 1995 was $8.52, $3.32 and $5.68, respectively. The fair value of stock options granted in 1997, 1996 and 1995 was estimated using the Black- Scholes option-pricing model and included the following assumptions: a life expectancy of 3 years for 1997, 1996 and 1995, a risk-free interest rate of 6.2% for 1997, 5.9% for 1996 and 6.9% for 1995 and volatility of 48% for 1997 and 46% for 1996 and 1995. Since the Company did not start paying dividends until August, 1995, at an annual yield of less than 1%, dividends paid was not material to the determination of the fair value of options granted.
The exercise price range of options outstanding and exercisable for both the Key Employee and Outside Directors plans, the weighted average contractual life remaining in years and the weighted average exercise price are as follows:
Outstanding Exercisable ____________________________ ___________________
Exercise Number Average Average Number Average Price Range of shares Life Price of shares Price _______________ __________ _______ ________ ___________________
$10.00 - $13.99 94,381 3.72 $12.42 - - $14.00 - $16.99 151,872 2.60 $15.18 81,872 $15.55 $17.00 - $18.99 57,000 .88 $17.32 57,000 $17.32 _________ _________ 303,253 138,872 ========= =========
Included in the $14.00-$16.99 range above are 70,000 ooptions which are not exercisable until the stock trades for 20 consecutive days at a price equal to $19.18 or higher.
NOTE 12. SUBSEQUENT EVENTS
On March 18, 1998, the Company signed an Asset Purchase Agreement (the "Agreement") with Morris-Flamingo, L.P., Morris-Flamingo Beauty Products, Inc., Shaheen & Co., Inc. and Shouky A. Shaheen, for the acquisition of certain assets and liabilities (including the immediate payment of a note
NOTE 12. SUBSEQUENT EVENTS (Continued)
payable to Fleet Capital Corporation approximating $1,880,000) of Morris- Flamingo, L.P., in exchange for 307,058 shares of the Company's restricted common stock. The transaction will be recorded as a purchase, and, based upon the net assets received, goodwill of approximately $2,500,000 will be recorded. The agreement also provides for 30% of the shares issued to be held in escrow, pending the final determination of the value of the net assets acquired within 90 days of closing. Morris-Flamingo, L.P. is a large mail order barber and beauty supply retailer. In connection with the acquisition of Morris-Flamingo, L.P., and the related agreement to retire the outstanding Fleet Capital Corporation debt, the Company secured additional financing from NationsBank, N.A. in the amount of $3,000,000, and pledged all of the issued common stock of Morris Flamingo-Stephan, Inc. to the bank as collateral for the loan. The loan is payable in equal monthly installments through March, 2005 and bears interest at the rate of 6.92%.
In addition to the above, the Company has signed a lease for the Danville, Illinois facility currently occupied by Morris-Flamingo, L.P. (and owned by the former owner of the partnership) for a three year period, with an option to cancel in one year. The annual rental is $210,000 and comprises approximately 93,000 square feet of office, manufacturing and warehouse space.
SIGNATURES
Pursuant to the requirements of Section 13 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.
THE STEPHAN CO.
By: /s/ Frank F. Ferola ___________________________________ Frank F. Ferola President and Chairman of the Board April 15, 1998
By: /s/ David A. Spiegel ___________________________________ David A. Spiegel Principal Financial Officer Principal Accounting Officer April 15, 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:
By: /s/ Frank F. Ferola By: /s/ Thomas M. D'Ambrosio ______________________________ ____________________________ Frank F. Ferola, Principal Thomas M. D'Ambrosio Executive Officer and Director Vice President and Director Date: April 15, 1998 Date: April 15, 1998
By: /s/ John DePinto By: /s/ Curtis Carlson ______________________________ ____________________________ John DePinto, Director Curtis Carlson, Director Date: April 15, 1998 Date: April 15, 1998
By: /s/ Leonard Genovese ______________________________ Leonard Genovese, Director Date: April 15, 1998