Item 1. Business
GENERAL
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 at both the wholesale and retail level. The Registrant is comprised of The Stephan Co. ("Stephan") and its eight 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., Stephan Distributing, Inc. and Morris Flamingo-Stephan, Inc.
The Company has identified three reportable operating segments which are Professional Hair Care Products and Distribution ("Professional"), Retail Personal Care Products ("Retail") and Manufacturing. The Professional segment generally has as a customer base distributors which purchase the Company's hair care products and beauty and barber supplies for sale to salons and barbershops. In this segment, a distinction is made between "wet goods", which include shampoos, conditioners, gels and similar hair treatments, and "hard goods", which include scissors, clippers, combs,
dryers and other products used in styling hair. The customer base for the Retail segment is mass merchandisers, chain drug stores and supermarkets which sell hair care and other personal care products directly to the end user. The Manufacturing segment manufactures products for subsidiaries of the Company, and manufactures private label brands for certain customers.
THE STEPHAN CO.
Headquartered in Fort Lauderdale, Florida, Stephan is principally engaged in the manufacture of hair care products for sale by two of its subsidiaries, Scientific Research Products, Inc. and Trevor Sorbie of America, Inc., and the manufacture of products marketed under the STEPHAN brand name. Stephan also manufactures, markets and distributes hair and skin care products under various trade names through Company subsidiaries. Retail brands include product lines such as Cashmere Bouquet talc, Quinsana Medicated talc, Balm Barr and Stretch Mark creams and lotions, Protein 29 liquid and gel grooming aids and Wildroot hair care products for men. These brands, included in the Retail segment of the Company's business, are manufactured at the Company's Tampa, Florida facility, as are the "Modern" brand of Stiff Stuff products, and those sales are also included in the Company's Retail segment. In addition, The Frances Denney division of Stephan (included in the Retail segment of the Company's business) markets 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 Company markets the brand names HOPE, INTERLUDE and FADE-AWAY through several retail chains, including J.C. Penney, in the United States and Canada.
Stephan also manufactures and sells products under the brand 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 and is included in the Professional segment of the Company's business. The Registrant's trademark "STEPHAN'S" and the design utilized thereby have been registered with the United States Patent and Trademark Office, which registration is due for renewal in November 2006. Retail brand sales of Stephan, including the Frances Denney product line, accounted for approximately $3,700,000 of the Company's 2001 sales, or approximately 13.0% of the Registrant's consolidated revenues.
On December 31, 1995, the Registrant entered into asset purchase agreements (collectively, the "Acquisition Agreements") with 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 Colgate-Palmolive Company, as well as a licensing agreement for the U.S. distribution of Colgate-Palmolive's Cashmere Bouquet talc product line (the "U.S. Trademark License").
In December 1996, the Registrant entered into a Settlement Agreement and Amendment with the Sellers (the "Settlement Agreement"). The Settlement Agreement provided for the licensing to the Registrant of certain trademarks in Canada pursuant to a trademark license agreement (the "Canadian Trademark License"). Additionally, the 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 was required to pay the greater of $150,000 or 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. 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 product sold under the license agreement is included in net sales for purposes of determining the deferred payments.
In March 1996, the Registrant entered into a Trademark License and Supply Agreement with Color Me Beautiful, Inc. ("CMB") to license certain 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 Frances 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 that are credited against accrued royalties. The agreement also provides for the Registrant to be the exclusive supplier of products sold under the agreement.
The Fort Company's Lauderdale location that serves as the Registrant's corporate headquarters, and the Registrant provides general management services to its subsidiaries from such location.
No single customer accounted for more than 10% of the Registrant's consolidated revenues in 2001. Private label production, which is the manufacturing of products marketed and sold under the brand names of customers of the Company, accounted for approximately $1,300,000 of Company sales, or approximately 4.6% of the Registrant's consolidated revenues in 2001, with the majority of such sales being derived from products manufactured in the Tampa facility by Old 97 Company.
OLD 97 COMPANY.
Old 97 Company ("Old 97"), a wholly-owned subsidiary of the Registrant, 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 an additional manufacturing facility for the Company's products. Its 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. The operations of Old 97 are included in the Manufacturing segment of the Company's business. Old 97 is also responsible for distribution of the above products.
WILLIAMSPORT BARBER AND BEAUTY CORP.
Williamsport Barber and Beauty Corp. ("Williamsport"), a wholly-owned subsidiary of the Registrant, was acquired in January 1992 and is located in Williamsport, Pa. Williamsport, a mail order beauty and barber supply company, with sales of approximately $4,500,000 in 2001, accounted for approximately 15.9% of the Registrant's consolidated revenues such year and is included in the Professional business segment of the Company.
STEPHAN & CO.
Formerly known as Heads or Nails, Inc. and acquired by the Registrant in August 1993, Stephan & Co., a wholly-owned subsidiary of the Registrant, has focused on the distribution of personal care amenity products for cruise ships. Sales by Stephan & Co. for the year ended December 31, 2001 were not material.
SCIENTIFIC RESEARCH PRODUCTS, INC. OF DELAWARE.
Purchased by the Company in April 1994, Scientific Research Products, Inc. of Delaware ("Scientific"), a wholly-owned subsidiary of the Registrant, was prior to such purchase, one of the Registrant's largest private label customers and is a distributor of ethnic hair care products. Scientific accounted for 10.9% of the Registrant's consolidated revenues in 2001, with sales of approximately $3,100,000. In addition, 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, 2001 were not material. The majority of the sales of this company are included in the Retail business segment of the Company.
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 it's president and principal stockholder, pursuant to which the Company acquired Sorbie. The Company also entered into related agreements with Sorbie's president, Trevor Sorbie International, Mr. Trevor Sorbie, Samson Arms, Inc. and Redken Laboratories.
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 Sorbie hair care products in 2001 were approximately $1,600,000, representing 5.8% of the Registrant's consolidated revenues, and are included in the Professional segment of the Company's business.
STEPHAN DISTRIBUTING, INC.
On June 26, 1997, the Company, through Stephan Distributing, Inc., a wholly-owned subsidiary, acquired several product lines from New Image Laboratories, Inc. ("New Image"). The primary brands acquired were a professional hair care line of products marketed under the brand name "Image", and a retail hair care line known as "Modern" and marketed under the brand name "Stiff Stuff". The brands were acquired for (i) 250,000 restricted shares of the Registrant's Common Stock, valued for purposes of reserves under the terms of the agreement, at $10.81 per share, with provision for half the restricted shares to be held in escrow pending, among other things, certain potential purchase price adjustments computed 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.
New Image commenced litigation against the Company seeking an order of the Court that the 125,000 shares of Common Stock held in escrow for the contingent payment of certain purchase price adjustments be released from escrow and turned over to New Image. Pursuant to a judgment dated March 20, 2001, the United States District Court for the Central District of California granted New Image partial summary judgment and directed the escrow agent to deliver the 125,000 shares to New Image. The Company has appealed the judgment to the United States Court of Appeals for the Ninth Circuit and believes that its chances of having the judgment overturned on appeal are favorable (see "Item 3. Legal Proceedings"). The recorded value of trademarks recorded, approximating $3,369,000, assumes the return to the Company of the shares held in escrow.
In addition to being popular hair care lines, the brands acquired from New Image have international distribution which the Registrant believes may enhance the distribution of other products of the Registrant. Sales of brands acquired from New Image amounted to approximately $2,900,000 for the year ended December 31, 2001, which accounted for approximately 10.2% of the Registrant's consolidated revenues. Sales of New Image products are included in the Company's Professional business segment while sales of the Modern line are included in the Company's Retail business segment.
MORRIS FLAMINGO-STEPHAN, INC.
Morris-Flamingo, Inc. ("Morris Flamingo") is a barber and beauty supply wholesaler, similar to the Registrant's subsidiary, Williamsport Barber and Beauty Corp., but markets its products utilizing catalogs published under the Morris Flamingo brand name as well as the Major Advance brand name. Additionally, this company manufactures hairpins, scissors and beauty school cases. Sales for the year ended December 31, 2001 were approximately $10,600,000, accounting for approximately 37.4% of the Registrant's consolidated revenues, and are included in the Professional segment of the Company's business.
SEGMENT INFORMATION
"Operating Segments and Related Information", which provides informa- tion on net sales, income before income taxes, interest income and expense
and depreciation and amortization for the last three years and identifiable assets for the last two years, for each of the Registrant's three business segments, is set forth in Note 10 of the consolidated financial statements included elsewhere in this Form 10-K.
RAW MATERIALS, PACKAGING and COMPONENTS INVENTORY
The materials utilized by the Registrant and its subsidiaries in the manufacture of its products consist primarily of common chemicals, alcohol, perfumes, labels, plastic bottles, caps and cartons. All materials are readily available at competitive prices from numerous sources and have in the past been purchased from domestic suppliers. Neither the Registrant nor any of its subsidiaries has ever experienced any significant shortage in supplies nor are any such shortages anticipated by the Registrant or its subsidiaries in the reasonably foreseeable future. Due to market conditions in the petroleum industry, the Registrant continues to experience price increases in both raw material and component prices; however, it is not anticipated that these price increases will have a material adverse effect on operations and believes it can pass such increases on to consumers.
The Registrant and its subsidiaries seek to maintain a level of finished goods inventory of their products sufficient for a period of at least three months. The Registrant does not anticipate any change in such practice during the reasonably foreseeable future.
BACKLOG
As of December 31, 2001, the dollar amount of backlog orders was not believed by the Registrant to be material.
RESEARCH AND DEVELOPMENT
During each of the three prior fiscal years ending December 31, 2001, 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 were not material and were expensed as incurred.
COMPETITION
The hair care and personal grooming business is highly competitive. The Company believes that the principal competitive factors are price and product quality. Products manufactured and sold 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 and sold by companies having substantially greater financial, technical, personnel and other resources than 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
Certain of the Registrant's products are subject to regulation by the
Food and Drug Administration, in addition to other Federal, state and local regulatory agencies. The Company believes that its products are in substantial compliance with all applicable regulations. The Registrant does not believe that compliance with existing or presently 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 December 31, 2001, in addition to its seven officers, the Registrant and its subsidiaries employed approximately 120 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, the Company believes that any such employees, if needed, would be readily available. No significant number of employees are covered by collective bargaining agreements 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. The Registrant utilizes approximately two-thirds of the space 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 is housed in its facility in Fort Lauderdale, Florida. In addition to the facility described above, the Registrant leases approximately 39,000 square feet of warehouse space located at 5300 North Powerline Road, Fort Lauderdale, Florida 33309, under a lease extension which terminates July 31, 2002, with an annual net rental of $238,000.
Old 97 owns three buildings totaling approximately 42,000 square feet of space, one of which is located at 2306 35th Street, Tampa, Florida 33605. Such building is utilized by Old 97 in the manufacture of its various product lines. In connection with a leased warehouse facility adjacent to this location which is utilized by Old 97, a claim has been filed with the Department of Transportation (see "Item 3.
Item 3. Legal Proceedings
In connection with the acquisition of certain assets from New Image, the Company placed 125,000 shares of its Common Stock in escrow to cover certain purchase price adjustment claims it could make if the inventories or the accounts receivable were less than the amounts guaranteed by New Image. In June of 1998, the Company made a claim for the return of all of the stock held in escrow because it calculated that the inventories and the accounts receivable were less than the guaranteed amount by a sum which exceeded the value of the stock held in escrow. New Image then brought a claim in Federal court in Los Angeles for breach of contract and fraud, asserting that the Company was not entitled to any price adjustment. By its action, New Image sought to recover the stock held in escrow. The Company filed counterclaims seeking, among other things, the return of all of the shares and recovery of certain property it alleges New Image failed to turn over to the Company.
New Image and the Company each submitted a partial summary judgment motion to the United States District Court. Pursuant to a judgment entered on March 20, 2001, the Court, among other things, ordered that the escrow agent deliver and transfer the 125,000 shares of Common Stock, including all dividends held in escrow and other property with respect thereto, to New Image. On April 12, 2001, the Company filed a notice of appeal of the judgment to the Ninth Circuit Court of Appeals. The Company believes that the United States District Court improperly weighed evidence, misconstrued the agreement between the parties and misapplied the law. The Company has posted a bond to stay enforcement, of the transfer of shares and other property held by the escrow agent during pendency of the appeal. The judgment of the United States District Court also awarded the Company approximately $20,000, and dismissed certain other claims and affirmative defenses.
New Image has cross-appealed claiming that it is entitled to reversal of certain matters as set forth in the judgment as the court (i) did not grant it monetary damages for the differences between the value of the stock when it should have received the shares and the current value of the Company's stock, (ii) dismissed its claim for promissory deceit and (iii) refused to award it attorney's fees and costs as the prevailing party. While it is not possible to predict with any certainty how a court would rule, the Company and its counsel believe that the chances of the Company prevailing on appeal are favorable. The Company's claims for reimbursement
of certain acquisition related expenses and for undelivered computer equipment remain pending before the District Court.
On April 1, 1999, the Company announced that it would be restating its financial statements for the second and third quarters of 1998 and that results of operations for the year ended December 31, 1998 would be substantially less than expected. On or about April 9, 1999, the Company learned that three class action lawsuits had been filed against it, as well as certain of its officers. The lawsuits alleged, among other things, certain violations of Federal securities laws and sought an unspecified amount of damages. The class action claims were consolidated and the Company moved to dismiss the class action amended complaint. By final order of dismissal, dated March 30, 2000, the Court dismissed the complaint. Subsequent to such dismissal, the class action plaintiffs moved to amend the judgment or for reconsideration. The plaintiffs were granted an opportunity to file a second complaint and in September 2001, the United States District Court for the Southern District of Florida dismissed the class action lawsuit, with prejudice.
In May 2001, Old 97 Company commenced an action against Todd Christopher International, Inc. d/b/a Vogue International ("Vogue") in the Circuit Court of the State of Florida alleging claims for breach of contract for goods sold and delivered and seeking damages in excess of $200,000. Vogue has answered the complaint and has sought to file counterclaims for an unspecified amount of damages. The Company believes its claims against Vogue are meritorious. Moreover, the Company believes that the Vogue counterclaim is not meritorious and intends to vigorously defend the counterclaim.
On November 1, 2001, a private label customer filed a lawsuit against the Company alleging causes of action for breach of contract, declaratory judgment, and trademark infringement. The Company denied the allegations and has counter-sued the customer. The counterclaim seeks unspecified compensatory damages, interest, attorneys fees, costs and other relief on the breach of contract and anticipatory breach claims and, in excess of $400,000 on the account stated claim. At this time, the Registrant is unable to predict the outcome of this matter.
In November 2001, the Registrant filed a claim with the Department of Transportation ("DOT") in connection with the DOT's widening of Interstate Highway 4, which will result in the loss of an adjacent rental facility utilized by one of the Registrant's subsidiaries. After consultation with legal counsel, the Registrant is unable to predict the ultimate outcome of this matter and the amount of recovery, if any, that will result therefrom.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
The Company has not submitted any matters to a vote of its security holders since the Company's September 1, 2000 Annual Meeting.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) Market Information
The Registrant's Common Stock is listed on the American Stock Exchange. The following table sets forth the range of high and low sales prices for the Registrant's Common Stock during each quarterly period within the Registrant's two most recent fiscal years:
High Low Quarter Ended Sales Price Sales Price _____________ ___________ ___________
March 31, 2000 $ 5.13 $ 3.81 June 30, 2000 5.13 3.38 September 30, 2000 4.63 3.63 December 31, 2000 3.88 3.00 ___________________________________________________________________________
March 31, 2001 $ 3.00 $ 3.00 June 30, 2001 3.40 2.91 September 30, 2001 3.20 2.89 December 31, 2001 3.19 2.75
(b) Holders
As of March 31, 2002, the Registrant's Common Stock was held of record by approximately 330 holders. The Registrant's Common Stock is believed to be held beneficially by others through approximately 1,200 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 through 2001. Future dividends, if any, will be determined by the Company's Board of Directors, in its discretion, based on various factors, including the Company's profitability, cash on hand 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.
Other Information:
In November 2000, the Registrant became aware of certain billing and other irregularities involving an employee of a subsidiary of the Company (refer to Note 1 of the Company's Form 10-K for the year ended December 31,
2000). At that time, the Registrant's Audit Committee initiated an independent investigation into the irregularities and trading of the Registrant's stock on the American Stock Exchange ("the Exchange") was suspended until such time as the investigation was completed and the Registrant satisfied certain other information filing requirements of the Exchange. Trading in the Registrant's stock resumed in May 2001.
Item 6.
Item 6. Selected Financial Data (a)
2001 2000 1999 1998 1997 (in thousands, except per share data) ____________________________________________________
Net sales $28,296 $31,138 $34,356 $34,835 $27,113
Income/(Loss) before income taxes 746 1,006 3,036 (4) 7,697
Net income/(loss) 608 622 1,843 (3) 5,041
Current assets 20,116 28,199 27,447 27,961 25,735
Total assets 57,062 58,769 59,435 60,600 57,464
Current liabilities 4,067 4,521 3,725 5,332 8,468
Long term debt 7,758 9,124 10,418 11,718 9,078
PER COMMON SHARE (Basic and Diluted): (b)
Net income/(loss) .14 .14 .40 (.00) 1.20
Cash dividends .08 .08 .08 .08 .08
Notes to Selected Financial Data
(a) The selected financial data above includes the operations of the Company and its wholly-owned subsidiaries, Foxy Products, Inc. (acquired in 1986), Old 97 Company (acquired in 1988), Williamsport (acquired in 1992), Stephan & Co., formerly Heads or Nails, Inc. (acquired in 1993), Scientific (acquired in 1994), Trevor Sorbie of America, Inc. (acquired in 1996), Stephan Distributing, Inc., a subsidiary which acquired certain brands from New Image in 1997, and Morris Flamingo-Stephan, Inc., a subsidiary which acquired the business of Morris-Flamingo, L.P. in 1998.
(b) Net income/(loss) 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. The weighted average number of shares outstanding were 4,285,577 for 2001, 4,385,019 for 2000, 4,567,439 for 1999, 4,535,649 for 1998, and 4,213,372 for 1997. The weighted average number of diluted shares outstanding were
not significantly different in any of the aforementioned years. This data should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this Form 10-K
Selected Quarterly Financial Information (unaudited) (in thousands, except per share data)
3/31/01 6/30/01 9/30/01 12/31/01 ________ ________ ________ ________ Net sales $ 7,580 $ 7,833 $ 6,584 $ 6,299 Gross profit 3,358 3,213 2,858 2,624 Net income/(loss) 387 316 (90) (5) Net income/(loss) per share .09 .07 (.02) (.00)
3/31/00 6/30/00 9/30/00 12/31/00 ________ ________ ________ ________ Net sales $ 8,091 $ 8,237 $ 7,803 $ 7,007 Gross profit 3,656 3,883 2,883 2,209 Net income/(loss) 560 709 (17) (630) Net income/(loss) per share .13 .16 (.00) (.15)
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 AS COMPARED TO 2000 __________________________________________________
Net sales for 2001 decreased as a result of an overall decline in the Company's Professional and Retail business segments. While the sales and distribution of "hard goods" remained relatively unchanged, there was a decline in the net sales of "wet goods" (which comprise a significant portion of the "Retail" segment), of approximately $2,900,000. Management had taken steps to increase sales in 2001 by restructuring reporting lines and hiring additional middle-management personnel in an effort to increase the exposure and distribution of the Sorbie, New Image and retail brands. While these efforts did not have the impact in 2001 that management anticipated, the Company feels that the arrangements and commitments secured early in 2002 as a result of those efforts will have an effect on retail brand sales.
Gross profit decreased $578,000, to $12,053,000 in 2001 when compared to the $12,631,000 achieved in 2000. This decrease of approximately 4.6% was due to an overall decline in net sales. Management was encouraged by the increase in the overall gross profit percentage, increasing from the 40.6% achieved in 2000 to 42.6% for the year ended December 31, 2001. This increase can be largely attributed to new customers and more effective manufacturing operations.
The Retail operating segment experienced a decline in net sales. Net retail sales in 2001 were $6,496,000, as compared to $8,969,000 in 2000. The decline in such net sales was due to an almost across the board decline in the net sales of the Company's retail lines, however, the "Modern" and "Frances Denney" lines showed increases in 2001 and as indicated above, management is encouraged by the Company's prospects in 2002. The continuing consolidation in the chain-drug store industry continues to increase the amount of discounting and promotional allowances that must be extended to large retailers which sometimes has an inhibiting effect on the number of SKU's (stock keeping units) that a retailer may carry.
Private label manufacturing increased slightly in 2001 as the Company finished seasonal production for a significant customer. However, the Company is currently in litigation with this customer, as more fully discussed in Item 3, "Legal Proceedings" and is continuing to explore other private label business opportunities.
Selling, general and administrative expenses decreased $290,000, from $11,653,000 in 2000 to $11,363,000 in 2001. The overall decline in selling, general and administrative expenses was due to a company-wide decrease in payroll and general office expenses offset somewhat by the anticipated increase in consulting, marketing and legal and professional fees.
Interest expense decreased $174,000 from $872,000 in 2000 to $698,000 in 2001 as a result of a decrease in outstanding debt and the refinancing of the long-term note payable, in August 2001. Other income includes a royalty payment of $175,000 from Color Me Beautiful in connection with the marketing of Frances Denney products.
Income taxes decreased $245,000, from $384,000 for the year ended December 31, 2000 to $138,000 for the year ended December 31, 2001, due to a combination of a decline in income before income taxes and a decrease in the overall amount of deferred income taxes.
Earnings per share for the year ended December 31, 2001 was $.14, equal to the $.14 per share achieved in 2000. The average number of shares outstanding decreased in 2001, from 4,385,019 to 4,285,577, as a result of the repurchase of 165,780 shares during 2000.
YEAR ENDED DECEMBER 31, 2000 AS COMPARED TO 1999 __________________________________________________
Net sales for 2000 decreased primarily as a result of declines in the Company's Professional and Retail business segments. While the sales and distribution of "hard goods" continued to improve, with a net increase of approximately $135,000 over the level achieved in 1999, there was a decline in the net sales of "wet goods" of approximately $1,800,000. In general, "hard goods" have a lower gross margin than "wet goods". Management has taken steps to increase sales in 2001 by restructuring reporting lines, hiring additional middle-management personnel in an effort to increase the exposure and distribution of the Sorbie and New Image brands, and plans to increase the amount of expenditures for advertising and promotional expenses.
Gross profit decreased $2,158,000, to $12,631,000 in 2000 when compared to the $14,789,000 achieved in 1999. This decrease of approximately 15% was due to an overall decline in net sales and a continuing change in the overall mix of business. As the net sales of professional "wet goods" declines, the overall gross profit margin continues to erode, decreasing from the 43.0% achieved in 1999 to 40.6% in 2000. As the "hard goods" sales of the Williamsport and Morris Flamingo- Stephan divisions continue to increase, the Company expects to experience a change in the business mix that will reduce its overall gross profit margin. These two divisions accounted for approximately 50% of consolidated Company net sales. The Company continues to devote significant time and effort in trying to improve the gross profit margins of these two divisions, which have improved slightly over last year.
The operating segment "Retail Personal Care Products" experienced a decline in net sales. Net retail sales in 2000 were $8,969,000, as compared to $9,705,000 in 1999. Almost 50% of the $736,000 decline in such net sales was due to a drop in the sales of the "Modern" line, which experienced very successful initial sales to new customers in 1999. While initial year sales are always at a higher than normal level, continued sales of this product line remain encouraging. As net sales of the "LeKair" and "Denney" lines also declined, net sales of the other retail brands increased over 12%. In addition, the continuing consolidation in the chain-drug store industry also increases the amount of discounting and promotional allowances large retailers demand of their suppliers, which reduces the gross profit margins on brands supplied to those retailers. The Company has continued to respond to these discounting pressures in order to maintain as much market share as reasonably practicable without sacrificing the profitability of the Company.
Private label manufacturing declined in 2000 as the Company lost one significant customer but was successful in acquiring a new private label customer in the third quarter of 2000.
In the past, the gross profit margin, as well as gross profit, generally had increased as the Company's business mix shifted away from private labeling, or "contract" filling, to professional hair care products and retail hair and skin care brands, which generally afforded the Company a higher gross profit. However, as discussed above, the Company continues to experience a change in the sales mix and competitive pressures. With the acquisition of Morris-Flamingo, L.P. in 1998, the Company anticipates that its overall gross profit margins will continue to be lower than those experienced in the past. Although the Company expects gross profit margins to increase in the future, it will not reach the historical rates the Company has previously experienced.
Selling, general and administrative expenses decreased by $94,000, from $11,747,000 in 1999 to $11,653,000 in 2000. The overall decline in selling, general and administrative expenses was not as large as the Company had expected, due to an increase in legal and professional costs associated with the investigation into certain billing irregularities, as well as other related costs in the fourth quarter of 2000.
Interest expense decreased over $70,000 from $944,000 in 1999 to $872,000 in 2000 as a result of a decrease in outstanding debt. Other income includes a royalty payment of $175,000 from Color Me Beautiful in connection with the marketing of Frances Denney products, an increase of $15,000 over the fee paid in 1999.
Earnings per share for the year ended December 31, 2000 was $.14, a decrease of $.26 per share from the $.40 in 1999. The average number of shares outstanding decreased in 2000, from 4,567,439 to 4,385,019, as a result of the repurchase of 165,780 shares in 2000.
LIQUIDITY AND CAPITAL RESOURCES _______________________________
In August 2001, the Company refinanced its long-term debt by purchasing CD's and pledging them as collateral for the outstanding indebtedness. The Company was able to significantly reduce its cost of money, exchanging debt carried at a rate of 6.65% for debt with a rate that was 50 basis points over the CD rate. At December 31, 2001, the rate on the note was 3.78%. While the CD's periodically mature, they roll over annually at an amount equal to the outstanding indebtedness and reset at the then current market interest rate, but the interest rate charged on the note will also reset, maintaining a spread of 50 basis points. Since the CD's are collateralizing the long-term debt payable, they are classified as non-current and not included in working capital or cash and cash equivalents. Working capital was approximately $16,049,000 at December 31, 2001, a decrease of $7,629,000 from December 31, 2000. Cash and cash equivalents decreased $5,150,000, to $8,409,000 when compared to the $13,559,000 on hand at December 31, 2000. Total cash, including certificates of deposit ("CD's"), increased from $13,559,000 at December 31, 2000 to $15,994,000.
Inventory levels declined as management continued its efforts to reduce the overall amount of inventory on hand. Overall, accounts payable and accrued expenses decreased significantly at December 31, 2001, largely as a result of a decrease in accounts payable to vendors as existing levels of inventory were utilized.
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 as in the past, such prices have been subject to various political or economic pressures. The Company does not presently foresee any increase in its raw material or component costs but believes it has the flexibility of calling upon multiple vendors and the ability to increase prices to offset any price changes.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Among other provisions, SFAS No. 133 established accounting and reporting standards for derivative instruments and for hedging activities. It also required that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure those instruments at fair value. In July 1999, FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities- Deferral of the Effective Date of FASB No. 133" and in June 2000, FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" for financial statements for fiscal years beginning after June 15, 2000. The adoption of these statements on January 1, 2001 did not have a significant effect on the Company's financial position, results of operations or cash flows.
In July 2001, FASB issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". These standards make changes to the accounting for business combinations, goodwill and intangible assets. SFAS No. 141 requires all business combinations entered into subsequent to June 30, 2001 to be accounted for using the purchase method of accounting. SFAS No. 142 provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be tested for impairment at least annually. SFAS No. 142 is effective for years beginning after December 15, 2001. Goodwill and intangible assets acquired subsequent to June 30, 2001 are immediately subject to the provisions of SFAS No. 142. The Company adopted SFAS No. 142 on January 1, 2002 and is in the initial phase of testing for the impairment of existing goodwill. During the year ended December 31, 2001, amortization of goodwill was approximately $528,000.
In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supersedes, but does not replace, SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of", as well as other earlier related pronouncements, either in whole or in part. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years, with earlier application is encouraged. Management does not believe that the adoption of this statement will have a significant effect on the Company's financial position, results of operations or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"), providing guidance on recognition of income, presentation and disclosure of revenue in financial statements. The Company believes that its revenue recognition policies are in conformity with the guidance provided in SAB 101.
On March 5, 2001, the Company announced that its Board of Directors had formed a two-person, special committee to explore various strategic alternatives to enhance shareholder value. Four members of the Company's management and directors, exclusive of the committee members, formed a group to purchase all of the Company's outstanding capital stock in a going private transaction. Independent legal counsel and investment banking advisors were retained to advise and assist in the transaction, and the group submitted a bid for the acquisition of the outstanding Common Stock of the Company. After incurring approximately $125,000 of expenses through December 31, 2001, it is estimated that the remaining costs associated with this process will be in excess of $500,000. On April 16, 2002 the Company announced that the
Special Committee of its Board of Directors has, after an auction conducted by Robinson Humphrey Company LLC, its investment banker, accepted a bid by four members of the Company's management and directors. Such bid is to purchase all of the Company's common stock at $4 per share. No other viable bids were received by the committee for the entire Company. The management bid is subject to various conditions, including financing. The Company's management is currently in the process of negotiating with lenders to obtain financing necessary for the transaction. There can be no assurance that the bidder will be able to obtain such financing on acceptable terms or that the transaction will be consummated.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES __________________________________________
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("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 significantly from those estimates if different assumptions were used or different events ultimately transpire. The Registrant believes that the following discussion touches upon the most critical accounting policies that requires management to make difficult, subjective and/or complex judgments, often due to a need to make estimates about matters that are inherently uncertain.
VALUATION OF ACCOUNTS RECEIVABLE: The ultimate amount of collections received against outstanding accounts receivable must take into account returns, allowances and deductions that may be made by the customer. Many retailers to whom the Registrant sells product take deductions for various forms of marketing expenses, as well as participating in nationwide reclamation cooperatives for processing damaged goods. Other expenses to which the Registrant is subject to, in addition to those experienced in the retail environment, but also with Professional products sold to distributors, include deductions for freight if the invoice is paid within specified terms, co-op advertising allowances, new store/warehouse allowances and, from time to time, limited rebate programs. The Registrant attempts to estimate these costs, as well as also providing for anticipated bad debts, by recording allowances based upon experience, economic conditions, normal customer inventory levels and/or competitive conditions. Actual returns, credits or allowances, as well as the condition of any product actually returned, may differ significantly from the estimates used by the Registrant.
INVENTORIES: Inventories are stated at the lower of cost or market, determined by the first-in, first-out (FIFO) method. The Registrant periodically evaluates inventory levels, giving consideration to factors such as the physical condition of the goods, the sales patterns of finished goods and the useful life of particular packaging, componentry and finished goods and estimates a reasonable amount to be provided for slow moving, obsolete or damaged inventory. These estimates could vary significantly,
either favorably or unfavorably, from actual requirements based upon future economic conditions, customer inventory levels or competitive factors that were not foreseen or did not exist when the valuation allowances were established.
INTANGIBLE ASSETS: Long-lived assets, including intangibles other than goodwill, are periodically reviewed by the Registrant for impairment whenever events or changes in circumstances indicate that the carrying value of any asset may be impaired. This evaluation may include an estimate of the cash flow that can be expected and is based upon, among other things, certain assumptions about expected future operating performance. The Registrant's estimates of undiscounted cash flow may differ from actual cash flow due to, among other things, economic conditions, changes in its business model or changes in its operating performance and these changes may be significant and, ultimately, have a bearing on the carrying value of the intangible asset and may require the recognition of an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
The Company does not participate in derivative or other financial instruments for which fair value disclosure would be required under Statement of Financial Accounting Standards No. 107. In addition, the Company does not invest in securities that would require disclosure of market risk, nor does it have floating rate loans or foreign currency exchange rate risks.
Item 8.
Item 8. Financial Statements and Supplementary Data
Reference is made to the consolidated financial statements and supplementary data contained elsewhere in this Form 10-K.
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 of this Form 10-K ( Items 10-13) is incorporated herein by reference from the Registrant's proxy statement with respect to the Company's 2002 annual meeting of stockholders scheduled to be filed with the Securities and Exchange Commission no later than May 1, 2002.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Exhibits
10.1 Acquisition Agreement, dated December 31, 1995, between Colgate-Palmolive Company and The Stephan Co., with exhibits, including the Transition Agreement, included with the Form 8-K filed January 16, 1996, and as amended on January 22, 1996, is incorporated herein by reference.
10.2 Acquisition Agreement, dated December 31, 1995, between The Mennen Company and The Stephan Co., with exhibits, included with the Form 8-K filed January 16, 1996 and as amended on January 22, 1996, is incorporated herein by reference.
10.3 Letter agreement, dated December 31, 1995, between Colgate-Palmolive Company, The Mennen Company and The Stephan Co., included with the Form 8-K filed January 16, 1996 and as amended on January 22, 1996, is incorporated herein by reference.
10.4 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 filed April 15, 1997, is incorporated herein by reference. 10.5 The Trademark License Agreement, dated December 5, 1996, between Colgate-Palmolive Canada, Inc. and The Stephan Co., included with the Form 10-K filed April 15, 1997, is incorporated herein by reference.
10.6 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.
10.7 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 such was amended on August 21, September 16 and October 9, 1996, is incorporated herein by reference.
10.8 Amended and Restated Sorbie Products Agreement, dated June 27, 1996, among Sorbie Acquisition Co., Sorbie Trading Limited, Trevor Sorbie International, PLC and Trevor Sorbie, included with the Form 8-K/A filed August 21, 1996, is incorporated herein by reference.
10.9 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.
10.10 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.
10.11 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 herein by reference.
10.12 Acquisition Agreement, dated as of March 18, 1998, between Morris Flamingo-Stephan, Inc., The Stephan Co., Morris-Flamingo, L.P., Morris-Flamingo Beauty Products, Inc., Shaheen & Co., Inc. and Shouky A Shaheen, included with the Form 10-Q for the period ended June 30, 1998, filed May 15, 1998, is incorporated herein by reference.
10.13 1990 Key Employee Stock Incentive Plan, as amended.
10.14 1990 Non-Employee (Outside Directors) Plan, as amended.
(b) Financial Statements and Financial Statement Schedules
(i) Financial Statements
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 2001 and 2000.
Consolidated Statements of Operations for the years ended December 31, 2001, 2000, and 1999.
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2001, 2000, and 1999.
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000, and 1999.
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, 2001 and 2000, 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, 2001. 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 auditing standards generally accepted in the United States of America. 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, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP Certified Public Accountants
Miami, Florida April 16, 2002
THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001 AND 2000
ASSETS
2001 2000 ___________ ___________ CURRENT ASSETS
Cash and cash equivalents $ 8,409,142 $13,559,268
Accounts receivable, net 1,808,828 3,026,553
Inventories 9,286,295 10,377,851
Income taxes receivable 345,220 1,028,112
Prepaid expenses and other current assets 266,460 207,061 ___________ ___________
TOTAL CURRENT ASSETS 20,115,945 28,198,845
CERTIFICATES OF DEPOSIT 7,585,000 -
PROPERTY, PLANT AND EQUIPMENT, net 2,308,003 2,617,521
INTANGIBLE ASSETS, net 23,432,105 24,736,603
OTHER ASSETS 3,621,103 3,215,848 ___________ ___________ TOTAL ASSETS $57,062,156 $58,768,817 =========== ===========
See notes to consolidated financial statements.
THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001 AND 2000
LIABILITIES AND STOCKHOLDERS' EQUITY
2001 2000 ___________ ____________ CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,560,051 $3,001,720
Current portion of long-term debt 1,507,256 1,519,277 ___________ ___________ TOTAL CURRENT LIABILITIES 4,067,307 4,520,997
DEFERRED INCOME TAXES, net 1,535,285 1,677,805
LONG-TERM DEBT, less current maturities 7,758,370 9,123,929 ___________ ___________ TOTAL LIABILITIES 13,360,962 15,322,731 ___________ ___________
COMMITMENTS AND CONTINGENCIES (NOTES 2 and 11)
STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued - - Common stock, $.01 par value; 25,000,000 shares authorized; 4,410,577 issued at December 31, 2001 and 4,426,897 issued at December 31, 2000 44,106 44,269 Additional paid in capital 18,417,080 18,477,341 Retained earnings 26,591,571 26,336,463 ___________ ___________ 45,052,757 44,858,073 LESS: 125,000 CONTINGENTLY RETURNABLE SHARES (1,351,563) (1,351,563) TREASURY STOCK (16,320 shares) - (60,424) ___________ ___________ TOTAL STOCKHOLDERS' EQUITY 43,701,194 43,446,086 ___________ ___________ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $57,062,156 $58,768,817 =========== ===========
See notes to consolidated financial statements.
THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999 ___________ ___________ ___________
NET SALES $28,296,312 $31,137,782 $34,355,848
COST OF GOODS SOLD 16,243,428 18,506,860 19,566,466 ___________ ___________ ___________ GROSS PROFIT 12,052,884 12,630,922 14,789,382
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 11,363,190 11,652,923 11,747,107 ___________ ___________ ___________
OPERATING INCOME 689,694 977,999 3,042,275
OTHER INCOME(EXPENSE) Interest income 579,866 724,728 427,804 Interest expense (698,207) (871,853) (943,856) Royalty income 175,000 175,000 510,000 ___________ __________ ___________
INCOME BEFORE INCOME TAXES 746,353 1,005,874 3,036,223
INCOME TAX EXPENSE 138,398 383,647 1,193,397 ___________ __________ ___________
NET INCOME $ 607,955 $ 622,227 $ 1,842,826 =========== ========== ===========
BASIC AND DILUTED EARNINGS PER SHARE $ .14 $ .14 $ .40 =========== ========== =========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 4,285,577 4,385,019 4,567,439 =========== ========== ===========
See notes to consolidated financial statements.
THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Common Stock Additional Contingently ___________________ Paid in Retained Returnable Treasury Shares Par Value Capital Earnings Stock Stock __________ ________ ___________ ___________ __________ _________ Balances, Jan 1,1999 4,725,858 47,259 19,692,043 24,608,845 (1,351,563) -
Treasury stock purchased - - - - - (614,867)
Treasury stock retired (64,900) (649) (287,484) - - 288,133
Dividends paid - - - (375,752) - -
Net income for 1999 - - - 1,842,826 - - _________ _________ ___________ ___________ __________ _________ Balances, Dec31,1999 4,660,958 46,610 19,404,559 26,075,919 (1,351,563)(326,734)
Treasury stock purchased - - - - - (663,249)
Treasury stock retired (234,061) (2,341) (927,218) - - 929,559
Dividends paid - - - (361,683) - -
Net income for 2000 - - - 622,227 - - _________ _________ ___________ ___________ __________ _________ Balances, Dec31,2000 4,426,897 $ 44,269 $18,477,341 $26,336,463$(1,351,563)$(60,424)
Treasury stock retired (16,320) (163) (60,261) - - 60,424
Dividends paid - - - (352,847) - -
Net income for 2001 - - - 607,955 - -
Balances, Dec31,2001 4,410,577 $ 44,106 $18,417,080 $26,591,571$(1,351,563) $ - ========= ========= =========== =========== =========== ======== See notes to consolidated financial statements
THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
2001 2000 1999 __________ __________ __________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 607,955 $ 622,227 $1,842,826 __________ ___________ __________
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation 394,556 423,077 508,362 Amortization of intangibles 1,353,568 1,190,232 1,204,605 Amortization of other assets 146,137 102,014 61,553 Loss on disposal of property, plant and equipment - - 16,076 Deferred income taxes (142,520) 234,855 888,933 Provision for doubtful accounts 131,164 97,627 46,515
Changes in operating assets and liabilities:
Accounts receivable 1,086,561 (230,565) 659,145 Inventories 1,091,556 1,576,340 3,332,179 Income taxes receivable 682,892 (898,972) 358,219 Prepaid expenses and other current assets (59,399) 83,949 (71,113) Certificates of deposit (7,585,000) - - Other assets (551,392) 14,846 (861,330 Accounts payable and accrued expenses (441,669) 1,145,051 (1,270,087) _________ _________ _________
Total adjustments (3,893,546) 3,738,454 4,873,057 _________ _________ _________ Net cash flows (used)/provided by operating activities (3,285,591) 4,360,681 6,715,883 _________ _________ _________
See notes to consolidated financial statements.
THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
2001 2000 1999 __________ __________ __________
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in cash on deposit with trustee - - 270,684
Purchase of property, plant and equipment (85,038) (140,879) (304,812)
Purchase of intangible assets (49,070) (71,096) (57,470) _________ ________ __________ Net cash flows used in investing activities (134,108) (211,975) (91,598) _________ ________ __________
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (9,517,580) (1,643,710) (1,636,224)
Proceeds from notes payable to bank 8,140,000 - -
Acquisition of treasury stock - (663,249) (614,867)
Dividends paid (352,847) (361,683) (375,752)
___________ ___________ ___________ Net cash flows used in financing activities (1,730,427) (2,668,642) (2,626,843) ___________ ___________ ___________ NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (5,150,126) 1,480,064 3,997,442
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 13,559,268 12,079,204 8,081,762 ___________ ___________ ___________ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,409,142 $13,559,268 $12,079,204 =========== =========== ===========
See notes to consolidated financial statements.
THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Supplemental Disclosures of Cash Flow Information:
2001 2000 1999 __________ __________ __________
Interest paid $ 651,533 $ 809,804 $ 976,478 ========== ========== ========== Income taxes paid $ 100,614 $1,422,013 $ 333,814 ========== ========== ==========
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
For the year ended December 31, 2000, equipment costing $99,340 was purchased from a customer and the purchase price was applied against the outstanding account receivable.
For the years ended December 31, 2001, 2000 and 1999, 16,320, 234,061 and 64,900 shares of treasury stock, respectively, were retired.
See notes to consolidated financial statements.
THE STEPHAN CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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., Scientific Research Products, Inc. of Delaware, Trevor Sorbie of America, Inc., Stephan Distributing, Inc. and Morris Flamingo-Stephan, Inc. (collectively, the "Company"). All signifi- cant intercompany balances and transactions have been eliminated in consolidation.
NATURE OF OPERATIONS: The Company is engaged in the manufacture, sale, and distribution of hair and personal care grooming products principally throughout the United States. Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures About Segments of an Enterprise and Related Information," requires the reporting of segment information using a "management approach" as it relates to the operating segments of a business. As explained more fully in Note 10, the Company has allocated substantially all of its business into three segments, which include professional hair care products and distribution, retail personal care products and manufacturing.
USE OF ESTIMATES: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("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: There were no sales to any single customer in excess of 10% of net sales in 2001. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral. The Company does not believe that its customers' credit risk represents a material risk of loss to the Company. However, the loss of a large customer could have an adverse effect on the Company.
LONG-LIVED ASSETS: SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," 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 amount of impairment, if any, in unamortized Goodwill is measured based on projected future undiscounted cash flows. To the extent future undiscounted cash flows 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.
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
STOCK-BASED COMPENSATION: SFAS No. 123, "Accounting for Stock- Based Compensation", permits entities to recognize as an 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 Accounting Principles Board ("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 12.
FAIR VALUE OF FINANCIAL INSTRUMENTS: SFAS 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 recognized 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 sale of such instrument.
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 45flows using current interest rates for financial instruments with similar characteristics and maturity were used to determine the fair value of notes payable and debt.
As of December 31, 2001 and 2000 there was no significant differences in the carrying values and fair market values of financial instruments.
REVENUE RECOGNITION: Revenue is recognized when all significant contractual obligations have been satisfied, which involves the delivery of manufactured goods and reasonable assurance as to the collectability of the resulting account receivable. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"), providing guidance on recognition of income, presentation and disclosure of revenues in the financial statements. The Company believes that its revenue recognition policies are in conformity with the guidance provided in SAB 101.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash, certificates of deposit, U. S. Government issues, and municipal bonds having maturities of 90 days or less when acquired. 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
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
interest-bearing accounts as of December 31, 2001 and 2000 were approximately $7,257,000 and $12,995,000, respectively. At December 31, 2001, the Company excluded certificates of deposit in the amount of $7,585,000 from the above as it is pledged as collateral for a bank loan and has a remaining term of eight months.
INVENTORIES: Inventories are stated at the lower of cost (determined on the first-in, first-out basis) or market. Direct labor and overhead costs charged to inventories for the years ended December 31, 2001 and 2000 were approximately $2,838,000 and $3,219,000, respectively. Direct labor and overhead costs capitalized in inventories as of December 31, 2001 and 2000 were approximately $1,443,000 and $1,701,000, 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
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.
BASIC AND DILUTED EARNINGS PER SHARE: Basic and diluted earnings per share are computed by dividing net income by the weighted average number of shares of common stock outstanding. For the years ended December 31, 2001, 2000 and 1999, the Company had 743,648, 739,524 and 506,625 outstanding stock options, respectively. None of these options were included in the calculation of earnings per share because their inclusion would be anti-dilutive.
NEW FINANCIAL ACCOUNTING STANDARDS: In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Among other provisions, SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It also requires that an entity recognize all derivatives as either assets or liabilities in the statement
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
of financial position and measure those instruments at fair value. In July 1999, FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB No. 133" and, in June 2000, FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", which are effective for financial statements for fiscal years beginning after June 15, 2000. The adoption of these statements on January 1, 2001 did not have a significant effect on the Company's financial position, results of operations or cash flows.
In July 2001, FASB issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". These standards make changes to the accounting for business combinations, goodwill and intangible assets. SFAS No. 141 requires all business combinations entered into subsequent to June 30, 2001 to be accounted for using the purchase method of accounting. SFAS No. 142 provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be tested for impairment at least annually. SFAS No. 142 is effective for years beginning after December 15, 2001. Goodwill and intangible assets acquired subsequent to June 30, 2001 are immediately subject to the provisions of SFAS No. 142. The Company adopted SFAS No. 142 on January 1, 2002 and is in the initial phase of testing for the impairment of existing goodwill. During the year ended December 31, 2001, amortization of goodwill was approximately $528,000.
In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supersedes, but does not replace, SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of", as well as other earlier related pronouncements, either in whole or in part. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years, with earlier application encouraged. Management does not believe that the adoption of this statement would have a significant effect on the Company's financial position, results of operations or cash flows.
NOTE 2. SIGNIFICANT TRANSACTIONS
In connection with the acquisition of several product lines from New Image Laboratories, Inc. ("New Image") on June 26, 1997, the Company acquired certain accounts receivable, inventories, fixed assets and trademarks, and assumed approximately $5,332,000 in certain trade and other liabilities. The purchase price was subject to adjustment based upon the value of the net assets acquired, as determined on the first anniversary of the closing date. New Image commenced litigation against the Company seeking an order of the Court that the 125,000 shares of Common Stock held in escrow for the contingent payment of certain purchase price adjustments be released from escrow and turned over to New Image. Pursuant to a judgment dated March 20, 2001, the United States District Court for the Central District of California granted New Image partial judgment and directed the escrow agent to deliver the 125,000 shares to New Image. The Company has appealed the judgment to the United States Court of Appeals for
NOTE 2. SIGNIFICANT TRANSACTIONS (Continued)
the Ninth Circuit and believes that its chances of having the judgment overturned on appeal are favorable. The value of trademarks recorded, approximating $3,369,000, assumes the return to the Company of the shares held in escrow.
NOTE 3. ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 2001 and 2000 consisted of the following: 2001 2000 __________ __________ Trade accounts receivable $1,961,053 $3,131,555 Less: Allowance for doubtful accounts (152,225) (105,002) __________ __________ Accounts receivable, net $1,808,828 $3,026,553 ========== ==========
The following is an analysis of the allowance for doubtful accounts for the year ended December 31:
2001 2000 1999 _________ _________ _________ Balance, beginning of year $ 105,002 $ 125,846 $ 175,155 Provision for doubtful accounts 131,164 97,627 46,515 Uncollectible accounts written off, net of recoveries (83,941) (118,471) (95,824) _________ _________ _________ Balance, end of year $ 152,225 $ 105,002 $ 125,846 ========= ========= =========
NOTE 4. INVENTORIES
Inventories at December 31, 2001 and 2000 consisted of the following:
2001 2000 ____________ ____________ Raw materials $ 3,180,670 $ 2,620,048 Packaging and components 3,448,541 3,700,758 Work in progress 341,507 703,571 Finished goods 5,502,599 6,284,531 ____________ ____________ 12,473,317 13,308,908 Less: Amount included in other assets (3,187,022) (2,931,057) ____________ ____________ Balance, end of year $ 9,286,295 $ 10,377,851 ============ ============
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 bottles or containers (plastic or glass), jars, caps, pumps and similar materials that will become part of the finished product. Finished goods also include hair dryers, electric clippers, lather machines, scissors and salon furniture. Included in other assets is inventory not anticipated to be utilized within one year.
NOTE 5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment at December 31, 2001 and 2000 consisted of the following: 2001 2000 __________ ___________ Land $ 379,627 $ 379,627 Buildings and improvements 2,094,046 2,094,046 Machinery and equipment 1,950,866 2,042,122 Furniture and office equipment 554,948 509,026 __________ __________ 4,979,487 5,024,821 Less: accumulated depreciation (2,671,484) (2,407,300) __________ __________ Balance, end of year $2,308,003 $2,617,521 ========== ==========
NOTE 6. INTANGIBLE ASSETS
Intangible assets at December 31, 2001 and 2000 consisted of the following: 2001 2000 ___________ ___________ Goodwill-Williamsport Barber Supply $ 510,674 $ 510,674 Goodwill-Stephan & Co. 278,054 278,054 Goodwill-Scientific Research Products, Inc. 1,976,446 1,976,446 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 5,622,130 Trademarks-Image/Modern 3,368,527 3,368,527 Goodwill-Morris Flamingo 2,544,831 2,544,831 Deferred Acquisition Costs 885,475 885,475 Other 136,132 87,062 ___________ ___________ 31,071,137 31,022,067
Less: accumulated amortization (7,639,032) (6,285,464) ___________ ___________ Balance, end of year $23,432,105 $24,736,603 =========== ===========
NOTE 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 2001 and 2000 consisted of the following:
2001 2000 ___________ ___________
Accounts payable $ 824,864 $ 1,574,772 Accrued marketing expenses 613,166 186,263 Accrued payroll and bonuses 651,877 833,253 Accrued legal and professional fees 249,479 254,488 Other accrued expenses 220,665 152,944 ___________ ___________ Balance, end of year $ 2,560,051 $ 3,001,720 =========== ===========
NOTE 8. LONG-TERM DEBT
Long-term debt at December 31, 2001 and 2000 consisted of the following: 2001 2000 ____________ ____________
3.78% note payable to bank, principal of $92,500 plus interest due monthly through August 2, 2006; collateralized by a security interest in a certificate of deposit of like amount, which bears interest at 50 basis points below the interest charged on the note. $ 7,677,500 $ -
6.65% unsecured note payable to bank, principal of $92,500 plus interest due monthly. - 8,787,500
Guaranteed minimum payments of $250,000 due semi-annually to Colgate-Palmolive through January 31, 2004, discounted at an 8% rate; collateralized by a security interest in the brand trademarks acquired from Colgate-Palmolive, with a net carrying value of approximately $7,637,000. 1,588,126 1,855,706 ___________ ___________ 9,265,626 10,643,206 Less: current portion (1,507,256) (1,519,277) ___________ ___________ Long-term debt $ 7,758,370 $ 9,123,929 =========== ===========
At December 31, 2001, approximate maturities of long-term debt are $1,507,000 in 2002, $1,393,000 in 2003, $2,018,000 in 2004, $1,110,000 in 2005, and $3,238,000 in 2006.
NOTE 9. INCOME TAXES
The provision for income taxes is comprised of the following for the years ended December 31:
2001 2000 1999 ___________ ___________ ___________ Current Tax: Federal $ 213,843 $ 162,680 $ 274,747 State 67,075 (13,888) 29,717 ___________ ___________ ___________
Total Current 280,918 148,792 304,464 ___________ ___________ ___________ Deferred Tax: Federal (83,715) 181,917 762,299 State (58,805) 52,938 126,634 ___________ ___________ ___________
Total Deferred (142,520) 234,855 888,933 ___________ ___________ ___________ Total provision for income taxes $ 138,398 $ 383,647 $ 1,193,397 =========== =========== ===========
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 income tax liability in the accompanying consolidated balance sheets includes deferred tax assets and liabilities attributable to the following items:
2001 2000 ___________ ___________ Accounts receivable allowances $ (60,129) $ (47,479) Property, plant and equipment 101,792 35,748 Amortization of intangibles 2,048,920 2,309,892 Charitable contribution carryforward (282,793) (398,002) State income taxes (83,162) - Accrued liabilities and other (189,343) (222,354) ___________ ___________
Deferred income taxes, net $ 1,535,285 $ 1,677,805 =========== ===========
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:
NOTE 9. INCOME TAXES (Continued)
2001 2000 1999 ______ ______ ______ Amount computed on pretax income 35.0% 35.0% 35.0% Increase(decrease) in taxes: State income taxes, net of federal tax benefit .7 2.6 3.2 Charitable contributions of inventory - - (2.6) Goodwill 16.8 7.1 2.1 Benefit of graduated rates (1.0) (1.0) (1.0) Tax exempt interest (3.3) (4.0) (1.0) Other (29.7) (1.6) 3.6 _____ _____ _____ Total income tax 18.5% 38.1% 39.3% ===== ===== =====
The tax provision was reduced by approximately $210,000 due to a reduction for tax liabilities which are no longer required.
NOTE 10. SEGMENT INFORMATION
In accordance with the guidelines established by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," the Company has identified three reportable operating segments based upon how management evaluates its business. These segments are Professional Hair Care Products and Distribution ("Professional"), Retail Personal Care Products ("Retail") and Manufacturing. The Professional segment generally has as a customer base distributors that purchase the Company's hair products and beauty and barber supplies for sale to salons and barbershops. The customer base for the Retail segment is mass merchandisers, chain drug stores and supermarkets that sell the product to the end user. The Manufacturing segment manufactures products for subsidiaries of the Company, and manufactures private label brands for customers.
The Company conducts operations primarily in the United States and sales to international customers are not material to consolidated revenues. The following tables, in thousands, summarize significant accounts and balances by reportable segment:
NET SALES INCOME BEFORE INCOME TAXES ________________________ __________________________ 2001 2000 1999 2001 2000 1999 _______________________ __________________________ Professional $19,752 $20,393 $22,129 $ 379 $ 1,011 $ 1,845 Retail 6,496 8,969 9,705 596 1,265 1,985 Manufacturing 9,358 8,330 12,341 325 (621) 176 _______ _______ _______ _______ _______ _______ Total 35,606 37,692 44,175 1,300 1,655 4,006
Intercompany Manufacturing (7,310) (6,554) (9,819) (554) (649) (970) _______ _______ _______ _______ _______ _______ Consolidated $28,296 $31,138 $34,356 $ 746 $ 1,006 $ 3,036 ======= ======= ======= ======= ======= =======
NOTE 10. SEGMENT INFORMATION (Continued)
INTEREST INCOME INTEREST EXPENSE _______________________ __________________________ 2001 2000 1999 2001 2000 1999 _______________________ __________________________ Professional $ 316 $ 338 $ 142 $ 388 $ 387 $ 418 Retail 150 310 245 292 465 505 Manufacturing 114 77 41 18 20 21 ______ ______ ______ ______ ______ ______ Total $ 580 $ 725 $ 428 $ 698 $ 872 $ 944 ====== ====== ====== ====== ====== ======
DEPRECIATION AND AMORTIZATION TOTAL ASSETS ______________________ _________________ 2001 2000 1999 2001 2000 ______________________ _________________ Professional $ 941 $ 882 $ 789 $17,963 $18,839 Retail 799 744 908 24,574 25,388 Manufacturing 154 89 78 14,525 14,542 _______ _______ ______ _______ _______ Total $1,894 $1,715 $1,775 $57,062 $58,769 ======= ======= ====== ======= =======
The accounting policies used for each of the segments are the same as those used for the Company generally, and are described in the summary of significant accounting policies in Note 1. Included in Manufacturing net sales are intercompany sales to related segments, which are generally recorded at cost plus 10%. Management of the Company evaluates the performance of each segment based upon results of operations before income taxes, intercompany allocations, interest and amortization.
NOTE 11. COMMITMENTS AND CONTINGENCIES
In addition to the matters set forth below, the Company is involved in other litigation matters arising in the normal course of business. It is the opinion of management that none of such matters, at December 31, 2001, would likely, if adversely determined, have a material adverse effect on the Company's financial position, results of operations or cash flows.
The Company has entered into employment agreements with certain officers. These agreements, which expire on various dates through January 2006, provide for incentive bonuses based on consolidated income before taxes or earnings per share. No significant bonuses were paid in the years 1999 through 2001.
Annual rent payments due under non-cancelable operating leases at December 31, 2001 are: 2002 $ 254,600 2003 243,200 2004 234,800 _______ $ 732,600 =======
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
Annual rent expense for each of the last three years is as follows:
2001 $624,400 2000 579,300 1999 610,800
Included in rent expense above for the years ended December 31, 2001, 2000 and 1999 is $191,000, $192,000 and $199,000 paid to Shaheen & Co., Inc., the former owner of Morris Flamingo. Shouky A. Shaheen, a minority owner of Shaheen & Co., Inc., is currently a member of the Board of Directors and a significant shareholder of the Registrant.
In connection with the acquisition of certain assets from New Image, the Company placed 125,000 shares of its Common Stock in escrow to cover certain purchase price adjustment claims it could make if the inventories or the accounts receivable were less than the amounts guaranteed by New Image. In June of 1998, the Company made a claim for the return of all of the stock held in escrow because it calculated that the inventories and the accounts receivable were less than the guaranteed amount by a sum which exceeded the value of the stock held in escrow. New Image then brought a claim in Federal court in Los Angeles for breach of contract and fraud, asserting that the Company was not entitled to any price adjustment. By its action, New Image sought to recover the stock held in escrow. The Company filed counterclaims seeking, among other things, the return of all of the shares and recovery of certain property it alleges New Image failed to turn over to the Company.
New Image and the Company each submitted a partial summary judgment motion to the United States District Court. Pursuant to a judgment entered on March 20, 2001, the Court, among other things, ordered that the Escrow Agent deliver and transfer the 125,000 shares of Common Stock, including all dividends held in escrow and other property with respect thereto, to New Image. On April 12, 2001, the Company filed a notice of appeal of the judgment to the Ninth Circuit Court of Appeals. The Company believes that the United States District Court improperly weighed evidence, misconstrued the agreement between the parties and misapplied the law. The Company has posted a bond to stay enforcement of the transfer of shares and other property held by the escrow agent during pendency of the appeal. The judgment of the United States District Court also awarded the Company approximately $20,000, and dismissed certain other claims and affirmative defenses.
New Image has cross-appealed claiming that it is entitled to reversal of certain matters as set forth in the judgment as the court (i) did not grant it monetary damages for the differences between the value of the stock when it should have received the shares and the current value of the Company's stock, (ii) dismissed its claim for promissory deceit and (iii) refused to award it attorney's fees and costs as the prevailing party. While it is not possible to predict with any certainty how a court would rule, the Company and its counsel believe that the chances of the Company prevailing on appeal are favorable. The Company's claims for reimbursement of certain acquisition related expenses and for undelivered computer equipment remain pending before the District Court.
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
On April 1, 1999, the Company announced that it would be restating its financial statements for the second and third quarters of 1998 and that results of operations for the year ended December 31, 1998 would be substantially less than expected. On or about April 9, 1999, the Company learned that three class action lawsuits had been filed against it, as well as certain of its officers. The lawsuits alleged, among other things, certain violations of Federal securities laws and sought an unspecified amount of damages. The class action claims were consolidated and the Company moved to dismiss the class action amended complaint. By final order of dismissal, dated March 30, 2000, the Court dismissed the complaint. Subsequent to such dismissal, the class action plaintiffs moved to amend the judgment or for reconsideration. The plaintiffs were granted an opportunity to file a second complaint and in September 2001, the United States District Court for the Southern District of Florida dismissed the class action lawsuit, with prejudice.
Old 97 Company commenced an action against Todd Christopher International, Inc. d/b/a Vogue International ("Vogue") in the Circuit Court of the State of Florida alleging claims for breach of contract for goods sold and delivered and seeking damages in excess of $200,000. Vogue has answered the complaint and has sought to file counterclaims for an unspecified amount of damages. The Company believes its claims against Vogue are meritorious. Moreover, the Company believes that the counterclaim is not meritorious and intends to vigorously defend the counterclaim.
On November 1, 2001, a private label customer filed a lawsuit against the Company alleging causes of action for breach of contract, declaratory judgment, and trademark infringement. The Company denied the allegations and has counter-sued the customer. The counterclaim seeks unspecified compensatory damages, interest, attorneys fees, costs and other relief on the breach of contract and anticipatory breach claims and, in excess of $400,000 on the account stated claim. At this time, the Registrant is unable to predict the outcome of this matter.
On March 5, 2001, the Company announced that the Board of Directors had formed a two-person, special committee to explore various strategic alternatives to enhance shareholder value. Four members of the Company's management and directors, exclusive of the committee members, formed a group to purchase all of the Company's outstanding capital stock in a going private transaction. Independent legal counsel and investment banking advisors were retained to advise and assist in the transaction. After incurring approximately $125,000 of expenses through December 31, 2001, it is estimated that the remaining costs associated with this process will be in excess of $500,000. On April 16, 2002 the Company announced that the Special Committee of its Board of Directors has, after an auction conducted by Robinson Humphrey Company LLC, its investment banker, accepted a bid by four members of the Company's management and directors. Such bid is to purchase all of the Company's common stock at $4 per share. No other viable bids were received by the committee for the entire Company. The management bid is subject to various conditions, including financing. The Company's management is currently in the process of negotiating with lenders to obtain financing
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
necessary for the transaction. There can be no assurance that the bidder will be able to obtain such financing on acceptable terms or that the transaction will be consummated.
In November 2001, the Company filed a claim with the Department of Transportation ("DOT") in connection with the DOT's widening of Interstate Highway 4, which will result in the loss of an adjacent rental facility utilized by one of the Company's subsidiaries. After consultation with legal counsel, the Company is unable to predict the ultimate outcome of this matter and the amount of recovery, if any, that will result therefrom.
NOTE 12. 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, as amended, and the 1990 Non-Employee (Outside Directors) Plan, as amended, and in 2000, the shareholders approved a ten-year extension of both plans. The aggregate number of shares currently authorized pursuant to the Key Employee Plan, as adjusted for stock splits and shareholder-approved increases 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. 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 are exercisable within a maximum of 10 years from the date of grant. Stock option activity for 2001, 2000, and 1999 is set forth below: Key Employee Outside Incentive Avg. Directors Avg. Plan Price Plan Price __________________________________________________________________________ Outstanding at December 31, 1998.. 431,195 $15.95 66,806 $13.54 Granted........................... 70,000 10.25 20,248 4.18 Canceled.......................... (70,500) 16.67 (11,124) 15.38 Exercised......................... - - __________ __________ Outstanding at December 31, 1999.. 430,695 15.17 75,930 11.05 Granted........................... 268,075 3.87 20,248 4.50 Canceled.......................... (45,300) 9.02 (10,124) 15.50 Exercised......................... - - __________ __________ Outstanding at December 31, 2000.. 653,470 9.69 86,054 8.98
NOTE 12. CAPITAL STOCK AND STOCK OPTIONS (Continued)
Key Employee Outside Incentive Avg. Directors Avg. Plan Price Plan Price __________________________________________________________________________
Granted........................... 70,000 3.00 20,248 3.05 Canceled.......................... (76,000) 14.78 (10,124) 15.75 Exercised......................... - - __________ __________ Outstanding at December 31, 2001.. 647,470 $ 8.36 96,178 $ 7.02 ========== ==========
The number of shares and average exercise price of options exercisable at December 31, 2001, 2000 and 1999 were 568,275 shares at $8.36, 329,000 shares at $13.17, and 281,500 shares at $13.66 for the 1990 Key Employee Stock Incentive Plan and 75,930 at $7.02, 65,806 at $10.36, and 55,682 at $13.55 for the Outside Directors Plan, respectively. At December 31, 2001 and 2000, 115,280 and 121,280 respectively, were available for future grants under the terms of the 1990 Key Employee Stock Incentive Plan and 55,697 shares and 65,821 shares, respectively, were available for future grants under the terms of the Outside Directors Plan.
The Company continues to apply the provisions of APB 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 2001, 2000 and 1999. 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:
(Dollars in thousands, except per share data)
2001 2000 1999 ___________ ___________ __________ Net income:
As reported $ 608 $ 622 $ 1,843 Pro forma $ 532 304 $ 1,513
Earnings per share:
As reported $.14 $ .14 $ .40 Pro forma $.12 $ .07 $ .33
The above pro forma effect takes into consideration only options granted since January 1, 1997 and is likely to increase in future years as additional options are granted and amortized ratably over the vesting
NOTE 12. CAPITAL STOCK AND STOCK OPTIONS (Continued)
period. The average fair value of stock options granted during 2001, 2000 and 1999 was $3.01, $1.78, and $5.22, respectively. The fair value of stock options granted was estimated using the Black-Scholes option-pricing model and included the following assumptions for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999 __________ __________ __________
Life expectancy 5 years 5 years 5-10 years Risk-free interest rate 5% 6% 6% Expected volatility 59% 57% 62% Dividends per share $.08 $.08 $.08
The exercise price range of options outstanding and exercisable for both the Key Employee Stock Incentive and Outside Directors plans, the weighted average contractual lives 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 _______________ __________ _______ ________ ___________________
$ 3.00 - $ 9.99 376,019 5.49 $ 3.72 285,771 $ 3.95 $10.00 - $15.99 367,629 3.89 $12.76 358,434 $12.81 _________ _________ 743,648 644,205 ========= =========
Included in the $10.00-$15.99 range above are 9,195 options which are not exercisable until (and unless) the stock trades for 20 consecutive trading days at a price of $14.14 and higher. These options expired in April 2002.
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:___________________________________ Frank F. Ferola President and Chairman of the Board April 18, 2002
By:___________________________________ David A. Spiegel Principal Financial Officer Principal Accounting Officer April 18, 2002
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:______________________________ By:_______________________________ Frank F. Ferola, Principal Thomas M. D'Ambrosio Executive Officer and Director Vice President and Director Date: April 18, 2002 Date: April 18, 2002
By:______________________________ By:_______________________________ John DePinto, Director Curtis Carlson, Director Date: April 18, 2002 Date: April 18, 2002
By:______________________________ By:_______________________________ Leonard Genovese, Director Shouky Shaheen, Director Date: April 18, 2002 Date: April 18, 2002
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 18, 2002
By: /s/ David A. Spiegel ___________________________________ David A. Spiegel Principal Financial Officer Principal Accounting Officer April 18, 2002
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 18, 2002 Date: April 18, 2002
By: /s/ John DePinto By: /s/ Curtis Carlson ______________________________ ____________________________ John DePinto, Director Curtis Carlson, Director Date: April 18, 2002 Date: April 18, 2002
By: /s/ Leonard Genovese By: /s/ Shouky Shaheen ______________________________ ____________________________ Leonard Genovese, Director Shouky Shaheen, Director Date: April 18, 2002 Date: April 18, 2002
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Exhibits
10.1 Acquisition Agreement, dated December 31, 1995, between Colgate-Palmolive Company and The Stephan Co., with exhibits, including the Transition Agreement, included with the Form 8-K filed January 16, 1996, and as amended on January 22, 1996, is incorporated herein by reference.
10.2 Acquisition Agreement, dated December 31, 1995, between The Mennen Company and The Stephan Co., with exhibits, included with the Form 8-K filed January 16, 1996 and as amended on January 22, 1996, is incorporated herein by reference.
10.3 Letter agreement, dated December 31, 1995, between Colgate-Palmolive Company, The Mennen Company and The Stephan Co., included with the Form 8-K filed January 16, 1996 and as amended on January 22, 1996, is incorporated herein by reference.
10.4 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 filed April 15, 1997, is incorporated herein by reference. 10.5 The Trademark License Agreement, dated December 5, 1996, between Colgate-Palmolive Canada, Inc. and The Stephan Co., included with the Form 10-K filed April 15, 1997, is incorporated herein by reference.
10.6 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.
10.7 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 such was amended on August 21, September 16 and October 9, 1996, is incorporated herein by reference.
10.8 Amended and Restated Sorbie Products Agreement, dated June 27, 1996, among Sorbie Acquisition Co., Sorbie Trading Limited, Trevor Sorbie International, PLC and Trevor Sorbie, included with the Form 8-K/A filed August 21, 1996, is incorporated herein by reference.
10.9 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.
10.10 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.
10.11 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 herein by reference.
10.12 Acquisition Agreement, dated as of March 18, 1998, between Morris Flamingo-Stephan, Inc., The Stephan Co., Morris-Flamingo, L.P., Morris-Flamingo Beauty Products, Inc., Shaheen & Co., Inc. and Shouky A Shaheen, included with the Form 10-Q for the period ended June 30, 1998, filed May 15, 1998, is incorporated herein by reference.
10.13 1990 Key Employee Stock Incentive Plan, as amended.
10.14 1990 Non-Employee (Outside Directors) Plan, as amended.
(b) Financial Statements and Financial Statement Schedules
(i) Financial Statements
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 2001 and 2000.
Consolidated Statements of Operations for the years ended December 31, 2001, 2000, and 1999.
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2001, 2000, and 1999.
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000, and 1999.
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, 2001 and 2000, 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, 2001. 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 auditing standards generally accepted in the United States of America. 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, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP Certified Public Accountants
Miami, Florida April 16, 2002
THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001 AND 2000
ASSETS
2001 2000 ___________ ___________ CURRENT ASSETS
Cash and cash equivalents $ 8,409,142 $13,559,268
Accounts receivable, net 1,808,828 3,026,553
Inventories 9,286,295 10,377,851
Income taxes receivable 345,220 1,028,112
Prepaid expenses and other current assets 266,460 207,061 ___________ ___________
TOTAL CURRENT ASSETS 20,115,945 28,198,845
CERTIFICATES OF DEPOSIT 7,585,000 -
PROPERTY, PLANT AND EQUIPMENT, net 2,308,003 2,617,521
INTANGIBLE ASSETS, net 23,432,105 24,736,603
OTHER ASSETS 3,621,103 3,215,848 ___________ ___________ TOTAL ASSETS $57,062,156 $58,768,817 =========== ===========
See notes to consolidated financial statements.
THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001 AND 2000
LIABILITIES AND STOCKHOLDERS' EQUITY
2001 2000 ___________ ____________ CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,560,051 $3,001,720
Current portion of long-term debt 1,507,256 1,519,277 ___________ ___________ TOTAL CURRENT LIABILITIES 4,067,307 4,520,997
DEFERRED INCOME TAXES, net 1,535,285 1,677,805
LONG-TERM DEBT, less current maturities 7,758,370 9,123,929 ___________ ___________ TOTAL LIABILITIES 13,360,962 15,322,731 ___________ ___________
COMMITMENTS AND CONTINGENCIES (NOTES 2 and 11)
STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued - - Common stock, $.01 par value; 25,000,000 shares authorized; 4,410,577 issued at December 31, 2001 and 4,426,897 issued at December 31, 2000 44,106 44,269 Additional paid in capital 18,417,080 18,477,341 Retained earnings 26,591,571 26,336,463 ___________ ___________ 45,052,757 44,858,073 LESS: 125,000 CONTINGENTLY RETURNABLE SHARES (1,351,563) (1,351,563) TREASURY STOCK (16,320 shares) - (60,424) ___________ ___________ TOTAL STOCKHOLDERS' EQUITY 43,701,194 43,446,086 ___________ ___________ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $57,062,156 $58,768,817 =========== ===========
See notes to consolidated financial statements.
THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999 ___________ ___________ ___________
NET SALES $28,296,312 $31,137,782 $34,355,848
COST OF GOODS SOLD 16,243,428 18,506,860 19,566,466 ___________ ___________ ___________ GROSS PROFIT 12,052,884 12,630,922 14,789,382
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 11,363,190 11,652,923 11,747,107 ___________ ___________ ___________
OPERATING INCOME 689,694 977,999 3,042,275
OTHER INCOME(EXPENSE) Interest income 579,866 724,728 427,804 Interest expense (698,207) (871,853) (943,856) Royalty income 175,000 175,000 510,000 ___________ __________ ___________
INCOME BEFORE INCOME TAXES 746,353 1,005,874 3,036,223
INCOME TAX EXPENSE 138,398 383,647 1,193,397 ___________ __________ ___________
NET INCOME $ 607,955 $ 622,227 $ 1,842,826 =========== ========== ===========
BASIC AND DILUTED EARNINGS PER SHARE $ .14 $ .14 $ .40 =========== ========== =========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 4,285,577 4,385,019 4,567,439 =========== ========== ===========
See notes to consolidated financial statements.
THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Common Stock Additional Contingently ___________________ Paid in Retained Returnable Treasury Shares Par Value Capital Earnings Stock Stock __________ ________ ___________ ___________ __________ _________ Balances, Jan 1,1999 4,725,858 47,259 19,692,043 24,608,845 (1,351,563) -
Treasury stock purchased - - - - - (614,867)
Treasury stock retired (64,900) (649) (287,484) - - 288,133
Dividends paid - - - (375,752) - -
Net income for 1999 - - - 1,842,826 - - _________ _________ ___________ ___________ __________ _________ Balances, Dec31,1999 4,660,958 46,610 19,404,559 26,075,919 (1,351,563)(326,734)
Treasury stock purchased - - - - - (663,249)
Treasury stock retired (234,061) (2,341) (927,218) - - 929,559
Dividends paid - - - (361,683) - -
Net income for 2000 - - - 622,227 - - _________ _________ ___________ ___________ __________ _________ Balances, Dec31,2000 4,426,897 $ 44,269 $18,477,341 $26,336,463$(1,351,563)$(60,424)
Treasury stock retired (16,320) (163) (60,261) - - 60,424
Dividends paid - - - (352,847) - -
Net income for 2001 - - - 607,955 - -
Balances, Dec31,2001 4,410,577 $ 44,106 $18,417,080 $26,591,571$(1,351,563) $ - ========= ========= =========== =========== =========== ======== See notes to consolidated financial statements
THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
2001 2000 1999 __________ __________ __________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 607,955 $ 622,227 $1,842,826 __________ ___________ __________
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation 394,556 423,077 508,362 Amortization of intangibles 1,353,568 1,190,232 1,204,605 Amortization of other assets 146,137 102,014 61,553 Loss on disposal of property, plant and equipment - - 16,076 Deferred income taxes (142,520) 234,855 888,933 Provision for doubtful accounts 131,164 97,627 46,515
Changes in operating assets and liabilities:
Accounts receivable 1,086,561 (230,565) 659,145 Inventories 1,091,556 1,576,340 3,332,179 Income taxes receivable 682,892 (898,972) 358,219 Prepaid expenses and other current assets (59,399) 83,949 (71,113) Certificates of deposit (7,585,000) - - Other assets (551,392) 14,846 (861,330 Accounts payable and accrued expenses (441,669) 1,145,051 (1,270,087) _________ _________ _________
Total adjustments (3,893,546) 3,738,454 4,873,057 _________ _________ _________ Net cash flows (used)/provided by operating activities (3,285,591) 4,360,681 6,715,883 _________ _________ _________
See notes to consolidated financial statements.
THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
2001 2000 1999 __________ __________ __________
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in cash on deposit with trustee - - 270,684
Purchase of property, plant and equipment (85,038) (140,879) (304,812)
Purchase of intangible assets (49,070) (71,096) (57,470) _________ ________ __________ Net cash flows used in investing activities (134,108) (211,975) (91,598) _________ ________ __________
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (9,517,580) (1,643,710) (1,636,224)
Proceeds from notes payable to bank 8,140,000 - -
Acquisition of treasury stock - (663,249) (614,867)
Dividends paid (352,847) (361,683) (375,752)
___________ ___________ ___________ Net cash flows used in financing activities (1,730,427) (2,668,642) (2,626,843) ___________ ___________ ___________ NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (5,150,126) 1,480,064 3,997,442
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 13,559,268 12,079,204 8,081,762 ___________ ___________ ___________ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,409,142 $13,559,268 $12,079,204 =========== =========== ===========
See notes to consolidated financial statements.
THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Supplemental Disclosures of Cash Flow Information:
2001 2000 1999 __________ __________ __________
Interest paid $ 651,533 $ 809,804 $ 976,478 ========== ========== ========== Income taxes paid $ 100,614 $1,422,013 $ 333,814 ========== ========== ==========
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
For the year ended December 31, 2000, equipment costing $99,340 was purchased from a customer and the purchase price was applied against the outstanding account receivable.
For the years ended December 31, 2001, 2000 and 1999, 16,320, 234,061 and 64,900 shares of treasury stock, respectively, were retired.
See notes to consolidated financial statements.
THE STEPHAN CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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., Scientific Research Products, Inc. of Delaware, Trevor Sorbie of America, Inc., Stephan Distributing, Inc. and Morris Flamingo-Stephan, Inc. (collectively, the "Company"). All signifi- cant intercompany balances and transactions have been eliminated in consolidation.
NATURE OF OPERATIONS: The Company is engaged in the manufacture, sale, and distribution of hair and personal care grooming products principally throughout the United States. Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures About Segments of an Enterprise and Related Information," requires the reporting of segment information using a "management approach" as it relates to the operating segments of a business. As explained more fully in Note 10, the Company has allocated substantially all of its business into three segments, which include professional hair care products and distribution, retail personal care products and manufacturing.
USE OF ESTIMATES: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("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: There were no sales to any single customer in excess of 10% of net sales in 2001. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral. The Company does not believe that its customers' credit risk represents a material risk of loss to the Company. However, the loss of a large customer could have an adverse effect on the Company.
LONG-LIVED ASSETS: SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," 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 amount of impairment, if any, in unamortized Goodwill is measured based on projected future undiscounted cash flows. To the extent future undiscounted cash flows 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.
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
STOCK-BASED COMPENSATION: SFAS No. 123, "Accounting for Stock- Based Compensation", permits entities to recognize as an 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 Accounting Principles Board ("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 12.
FAIR VALUE OF FINANCIAL INSTRUMENTS: SFAS 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 recognized 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 sale of such instrument.
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 45flows using current interest rates for financial instruments with similar characteristics and maturity were used to determine the fair value of notes payable and debt.
As of December 31, 2001 and 2000 there was no significant differences in the carrying values and fair market values of financial instruments.
REVENUE RECOGNITION: Revenue is recognized when all significant contractual obligations have been satisfied, which involves the delivery of manufactured goods and reasonable assurance as to the collectability of the resulting account receivable. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"), providing guidance on recognition of income, presentation and disclosure of revenues in the financial statements. The Company believes that its revenue recognition policies are in conformity with the guidance provided in SAB 101.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash, certificates of deposit, U. S. Government issues, and municipal bonds having maturities of 90 days or less when acquired. 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
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
interest-bearing accounts as of December 31, 2001 and 2000 were approximately $7,257,000 and $12,995,000, respectively. At December 31, 2001, the Company excluded certificates of deposit in the amount of $7,585,000 from the above as it is pledged as collateral for a bank loan and has a remaining term of eight months.
INVENTORIES: Inventories are stated at the lower of cost (determined on the first-in, first-out basis) or market. Direct labor and overhead costs charged to inventories for the years ended December 31, 2001 and 2000 were approximately $2,838,000 and $3,219,000, respectively. Direct labor and overhead costs capitalized in inventories as of December 31, 2001 and 2000 were approximately $1,443,000 and $1,701,000, 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
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.
BASIC AND DILUTED EARNINGS PER SHARE: Basic and diluted earnings per share are computed by dividing net income by the weighted average number of shares of common stock outstanding. For the years ended December 31, 2001, 2000 and 1999, the Company had 743,648, 739,524 and 506,625 outstanding stock options, respectively. None of these options were included in the calculation of earnings per share because their inclusion would be anti-dilutive.
NEW FINANCIAL ACCOUNTING STANDARDS: In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Among other provisions, SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It also requires that an entity recognize all derivatives as either assets or liabilities in the statement
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
of financial position and measure those instruments at fair value. In July 1999, FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB No. 133" and, in June 2000, FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", which are effective for financial statements for fiscal years beginning after June 15, 2000. The adoption of these statements on January 1, 2001 did not have a significant effect on the Company's financial position, results of operations or cash flows.
In July 2001, FASB issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". These standards make changes to the accounting for business combinations, goodwill and intangible assets. SFAS No. 141 requires all business combinations entered into subsequent to June 30, 2001 to be accounted for using the purchase method of accounting. SFAS No. 142 provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be tested for impairment at least annually. SFAS No. 142 is effective for years beginning after December 15, 2001. Goodwill and intangible assets acquired subsequent to June 30, 2001 are immediately subject to the provisions of SFAS No. 142. The Company adopted SFAS No. 142 on January 1, 2002 and is in the initial phase of testing for the impairment of existing goodwill. During the year ended December 31, 2001, amortization of goodwill was approximately $528,000.
In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supersedes, but does not replace, SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of", as well as other earlier related pronouncements, either in whole or in part. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years, with earlier application encouraged. Management does not believe that the adoption of this statement would have a significant effect on the Company's financial position, results of operations or cash flows.
NOTE 2. SIGNIFICANT TRANSACTIONS
In connection with the acquisition of several product lines from New Image Laboratories, Inc. ("New Image") on June 26, 1997, the Company acquired certain accounts receivable, inventories, fixed assets and trademarks, and assumed approximately $5,332,000 in certain trade and other liabilities. The purchase price was subject to adjustment based upon the value of the net assets acquired, as determined on the first anniversary of the closing date. New Image commenced litigation against the Company seeking an order of the Court that the 125,000 shares of Common Stock held in escrow for the contingent payment of certain purchase price adjustments be released from escrow and turned over to New Image. Pursuant to a judgment dated March 20, 2001, the United States District Court for the Central District of California granted New Image partial judgment and directed the escrow agent to deliver the 125,000 shares to New Image. The Company has appealed the judgment to the United States Court of Appeals for
NOTE 2. SIGNIFICANT TRANSACTIONS (Continued)
the Ninth Circuit and believes that its chances of having the judgment overturned on appeal are favorable. The value of trademarks recorded, approximating $3,369,000, assumes the return to the Company of the shares held in escrow.
NOTE 3. ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 2001 and 2000 consisted of the following: 2001 2000 __________ __________ Trade accounts receivable $1,961,053 $3,131,555 Less: Allowance for doubtful accounts (152,225) (105,002) __________ __________ Accounts receivable, net $1,808,828 $3,026,553 ========== ==========
The following is an analysis of the allowance for doubtful accounts for the year ended December 31:
2001 2000 1999 _________ _________ _________ Balance, beginning of year $ 105,002 $ 125,846 $ 175,155 Provision for doubtful accounts 131,164 97,627 46,515 Uncollectible accounts written off, net of recoveries (83,941) (118,471) (95,824) _________ _________ _________ Balance, end of year $ 152,225 $ 105,002 $ 125,846 ========= ========= =========
NOTE 4. INVENTORIES
Inventories at December 31, 2001 and 2000 consisted of the following:
2001 2000 ____________ ____________ Raw materials $ 3,180,670 $ 2,620,048 Packaging and components 3,448,541 3,700,758 Work in progress 341,507 703,571 Finished goods 5,502,599 6,284,531 ____________ ____________ 12,473,317 13,308,908 Less: Amount included in other assets (3,187,022) (2,931,057) ____________ ____________ Balance, end of year $ 9,286,295 $ 10,377,851 ============ ============
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 bottles or containers (plastic or glass), jars, caps, pumps and similar materials that will become part of the finished product. Finished goods also include hair dryers, electric clippers, lather machines, scissors and salon furniture. Included in other assets is inventory not anticipated to be utilized within one year.
NOTE 5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment at December 31, 2001 and 2000 consisted of the following: 2001 2000 __________ ___________ Land $ 379,627 $ 379,627 Buildings and improvements 2,094,046 2,094,046 Machinery and equipment 1,950,866 2,042,122 Furniture and office equipment 554,948 509,026 __________ __________ 4,979,487 5,024,821 Less: accumulated depreciation (2,671,484) (2,407,300) __________ __________ Balance, end of year $2,308,003 $2,617,521 ========== ==========
NOTE 6. INTANGIBLE ASSETS
Intangible assets at December 31, 2001 and 2000 consisted of the following: 2001 2000 ___________ ___________ Goodwill-Williamsport Barber Supply $ 510,674 $ 510,674 Goodwill-Stephan & Co. 278,054 278,054 Goodwill-Scientific Research Products, Inc. 1,976,446 1,976,446 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 5,622,130 Trademarks-Image/Modern 3,368,527 3,368,527 Goodwill-Morris Flamingo 2,544,831 2,544,831 Deferred Acquisition Costs 885,475 885,475 Other 136,132 87,062 ___________ ___________ 31,071,137 31,022,067
Less: accumulated amortization (7,639,032) (6,285,464) ___________ ___________ Balance, end of year $23,432,105 $24,736,603 =========== ===========
NOTE 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 2001 and 2000 consisted of the following:
2001 2000 ___________ ___________
Accounts payable $ 824,864 $ 1,574,772 Accrued marketing expenses 613,166 186,263 Accrued payroll and bonuses 651,877 833,253 Accrued legal and professional fees 249,479 254,488 Other accrued expenses 220,665 152,944 ___________ ___________ Balance, end of year $ 2,560,051 $ 3,001,720 =========== ===========
NOTE 8. LONG-TERM DEBT
Long-term debt at December 31, 2001 and 2000 consisted of the following: 2001 2000 ____________ ____________
3.78% note payable to bank, principal of $92,500 plus interest due monthly through August 2, 2006; collateralized by a security interest in a certificate of deposit of like amount, which bears interest at 50 basis points below the interest charged on the note. $ 7,677,500 $ -
6.65% unsecured note payable to bank, principal of $92,500 plus interest due monthly. - 8,787,500
Guaranteed minimum payments of $250,000 due semi-annually to Colgate-Palmolive through January 31, 2004, discounted at an 8% rate; collateralized by a security interest in the brand trademarks acquired from Colgate-Palmolive, with a net carrying value of approximately $7,637,000. 1,588,126 1,855,706 ___________ ___________ 9,265,626 10,643,206 Less: current portion (1,507,256) (1,519,277) ___________ ___________ Long-term debt $ 7,758,370 $ 9,123,929 =========== ===========
At December 31, 2001, approximate maturities of long-term debt are $1,507,000 in 2002, $1,393,000 in 2003, $2,018,000 in 2004, $1,110,000 in 2005, and $3,238,000 in 2006.
NOTE 9. INCOME TAXES
The provision for income taxes is comprised of the following for the years ended December 31:
2001 2000 1999 ___________ ___________ ___________ Current Tax: Federal $ 213,843 $ 162,680 $ 274,747 State 67,075 (13,888) 29,717 ___________ ___________ ___________
Total Current 280,918 148,792 304,464 ___________ ___________ ___________ Deferred Tax: Federal (83,715) 181,917 762,299 State (58,805) 52,938 126,634 ___________ ___________ ___________
Total Deferred (142,520) 234,855 888,933 ___________ ___________ ___________ Total provision for income taxes $ 138,398 $ 383,647 $ 1,193,397 =========== =========== ===========
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 income tax liability in the accompanying consolidated balance sheets includes deferred tax assets and liabilities attributable to the following items:
2001 2000 ___________ ___________ Accounts receivable allowances $ (60,129) $ (47,479) Property, plant and equipment 101,792 35,748 Amortization of intangibles 2,048,920 2,309,892 Charitable contribution carryforward (282,793) (398,002) State income taxes (83,162) - Accrued liabilities and other (189,343) (222,354) ___________ ___________
Deferred income taxes, net $ 1,535,285 $ 1,677,805 =========== ===========
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:
NOTE 9. INCOME TAXES (Continued)
2001 2000 1999 ______ ______ ______ Amount computed on pretax income 35.0% 35.0% 35.0% Increase(decrease) in taxes: State income taxes, net of federal tax benefit .7 2.6 3.2 Charitable contributions of inventory - - (2.6) Goodwill 16.8 7.1 2.1 Benefit of graduated rates (1.0) (1.0) (1.0) Tax exempt interest (3.3) (4.0) (1.0) Other (29.7) (1.6) 3.6 _____ _____ _____ Total income tax 18.5% 38.1% 39.3% ===== ===== =====
The tax provision was reduced by approximately $210,000 due to a reduction for tax liabilities which are no longer required.
NOTE 10. SEGMENT INFORMATION
In accordance with the guidelines established by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," the Company has identified three reportable operating segments based upon how management evaluates its business. These segments are Professional Hair Care Products and Distribution ("Professional"), Retail Personal Care Products ("Retail") and Manufacturing. The Professional segment generally has as a customer base distributors that purchase the Company's hair products and beauty and barber supplies for sale to salons and barbershops. The customer base for the Retail segment is mass merchandisers, chain drug stores and supermarkets that sell the product to the end user. The Manufacturing segment manufactures products for subsidiaries of the Company, and manufactures private label brands for customers.
The Company conducts operations primarily in the United States and sales to international customers are not material to consolidated revenues. The following tables, in thousands, summarize significant accounts and balances by reportable segment:
NET SALES INCOME BEFORE INCOME TAXES ________________________ __________________________ 2001 2000 1999 2001 2000 1999 _______________________ __________________________ Professional $19,752 $20,393 $22,129 $ 379 $ 1,011 $ 1,845 Retail 6,496 8,969 9,705 596 1,265 1,985 Manufacturing 9,358 8,330 12,341 325 (621) 176 _______ _______ _______ _______ _______ _______ Total 35,606 37,692 44,175 1,300 1,655 4,006
Intercompany Manufacturing (7,310) (6,554) (9,819) (554) (649) (970) _______ _______ _______ _______ _______ _______ Consolidated $28,296 $31,138 $34,356 $ 746 $ 1,006 $ 3,036 ======= ======= ======= ======= ======= =======
NOTE 10. SEGMENT INFORMATION (Continued)
INTEREST INCOME INTEREST EXPENSE _______________________ __________________________ 2001 2000 1999 2001 2000 1999 _______________________ __________________________ Professional $ 316 $ 338 $ 142 $ 388 $ 387 $ 418 Retail 150 310 245 292 465 505 Manufacturing 114 77 41 18 20 21 ______ ______ ______ ______ ______ ______ Total $ 580 $ 725 $ 428 $ 698 $ 872 $ 944 ====== ====== ====== ====== ====== ======
DEPRECIATION AND AMORTIZATION TOTAL ASSETS ______________________ _________________ 2001 2000 1999 2001 2000 ______________________ _________________ Professional $ 941 $ 882 $ 789 $17,963 $18,839 Retail 799 744 908 24,574 25,388 Manufacturing 154 89 78 14,525 14,542 _______ _______ ______ _______ _______ Total $1,894 $1,715 $1,775 $57,062 $58,769 ======= ======= ====== ======= =======
The accounting policies used for each of the segments are the same as those used for the Company generally, and are described in the summary of significant accounting policies in Note 1. Included in Manufacturing net sales are intercompany sales to related segments, which are generally recorded at cost plus 10%. Management of the Company evaluates the performance of each segment based upon results of operations before income taxes, intercompany allocations, interest and amortization.
NOTE 11. COMMITMENTS AND CONTINGENCIES
In addition to the matters set forth below, the Company is involved in other litigation matters arising in the normal course of business. It is the opinion of management that none of such matters, at December 31, 2001, would likely, if adversely determined, have a material adverse effect on the Company's financial position, results of operations or cash flows.
The Company has entered into employment agreements with certain officers. These agreements, which expire on various dates through January 2006, provide for incentive bonuses based on consolidated income before taxes or earnings per share. No significant bonuses were paid in the years 1999 through 2001.
Annual rent payments due under non-cancelable operating leases at December 31, 2001 are: 2002 $ 254,600 2003 243,200 2004 234,800 _______ $ 732,600 =======
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
Annual rent expense for each of the last three years is as follows:
2001 $624,400 2000 579,300 1999 610,800
Included in rent expense above for the years ended December 31, 2001, 2000 and 1999 is $191,000, $192,000 and $199,000 paid to Shaheen & Co., Inc., the former owner of Morris Flamingo. Shouky A. Shaheen, a minority owner of Shaheen & Co., Inc., is currently a member of the Board of Directors and a significant shareholder of the Registrant.
In connection with the acquisition of certain assets from New Image, the Company placed 125,000 shares of its Common Stock in escrow to cover certain purchase price adjustment claims it could make if the inventories or the accounts receivable were less than the amounts guaranteed by New Image. In June of 1998, the Company made a claim for the return of all of the stock held in escrow because it calculated that the inventories and the accounts receivable were less than the guaranteed amount by a sum which exceeded the value of the stock held in escrow. New Image then brought a claim in Federal court in Los Angeles for breach of contract and fraud, asserting that the Company was not entitled to any price adjustment. By its action, New Image sought to recover the stock held in escrow. The Company filed counterclaims seeking, among other things, the return of all of the shares and recovery of certain property it alleges New Image failed to turn over to the Company.
New Image and the Company each submitted a partial summary judgment motion to the United States District Court. Pursuant to a judgment entered on March 20, 2001, the Court, among other things, ordered that the Escrow Agent deliver and transfer the 125,000 shares of Common Stock, including all dividends held in escrow and other property with respect thereto, to New Image. On April 12, 2001, the Company filed a notice of appeal of the judgment to the Ninth Circuit Court of Appeals. The Company believes that the United States District Court improperly weighed evidence, misconstrued the agreement between the parties and misapplied the law. The Company has posted a bond to stay enforcement of the transfer of shares and other property held by the escrow agent during pendency of the appeal. The judgment of the United States District Court also awarded the Company approximately $20,000, and dismissed certain other claims and affirmative defenses.
New Image has cross-appealed claiming that it is entitled to reversal of certain matters as set forth in the judgment as the court (i) did not grant it monetary damages for the differences between the value of the stock when it should have received the shares and the current value of the Company's stock, (ii) dismissed its claim for promissory deceit and (iii) refused to award it attorney's fees and costs as the prevailing party. While it is not possible to predict with any certainty how a court would rule, the Company and its counsel believe that the chances of the Company prevailing on appeal are favorable. The Company's claims for reimbursement of certain acquisition related expenses and for undelivered computer equipment remain pending before the District Court.
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
On April 1, 1999, the Company announced that it would be restating its financial statements for the second and third quarters of 1998 and that results of operations for the year ended December 31, 1998 would be substantially less than expected. On or about April 9, 1999, the Company learned that three class action lawsuits had been filed against it, as well as certain of its officers. The lawsuits alleged, among other things, certain violations of Federal securities laws and sought an unspecified amount of damages. The class action claims were consolidated and the Company moved to dismiss the class action amended complaint. By final order of dismissal, dated March 30, 2000, the Court dismissed the complaint. Subsequent to such dismissal, the class action plaintiffs moved to amend the judgment or for reconsideration. The plaintiffs were granted an opportunity to file a second complaint and in September 2001, the United States District Court for the Southern District of Florida dismissed the class action lawsuit, with prejudice.
Old 97 Company commenced an action against Todd Christopher International, Inc. d/b/a Vogue International ("Vogue") in the Circuit Court of the State of Florida alleging claims for breach of contract for goods sold and delivered and seeking damages in excess of $200,000. Vogue has answered the complaint and has sought to file counterclaims for an unspecified amount of damages. The Company believes its claims against Vogue are meritorious. Moreover, the Company believes that the counterclaim is not meritorious and intends to vigorously defend the counterclaim.
On November 1, 2001, a private label customer filed a lawsuit against the Company alleging causes of action for breach of contract, declaratory judgment, and trademark infringement. The Company denied the allegations and has counter-sued the customer. The counterclaim seeks unspecified compensatory damages, interest, attorneys fees, costs and other relief on the breach of contract and anticipatory breach claims and, in excess of $400,000 on the account stated claim. At this time, the Registrant is unable to predict the outcome of this matter.
On March 5, 2001, the Company announced that the Board of Directors had formed a two-person, special committee to explore various strategic alternatives to enhance shareholder value. Four members of the Company's management and directors, exclusive of the committee members, formed a group to purchase all of the Company's outstanding capital stock in a going private transaction. Independent legal counsel and investment banking advisors were retained to advise and assist in the transaction. After incurring approximately $125,000 of expenses through December 31, 2001, it is estimated that the remaining costs associated with this process will be in excess of $500,000. On April 16, 2002 the Company announced that the Special Committee of its Board of Directors has, after an auction conducted by Robinson Humphrey Company LLC, its investment banker, accepted a bid by four members of the Company's management and directors. Such bid is to purchase all of the Company's common stock at $4 per share. No other viable bids were received by the committee for the entire Company. The management bid is subject to various conditions, including financing. The Company's management is currently in the process of negotiating with lenders to obtain financing
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
necessary for the transaction. There can be no assurance that the bidder will be able to obtain such financing on acceptable terms or that the transaction will be consummated.
In November 2001, the Company filed a claim with the Department of Transportation ("DOT") in connection with the DOT's widening of Interstate Highway 4, which will result in the loss of an adjacent rental facility utilized by one of the Company's subsidiaries. After consultation with legal counsel, the Company is unable to predict the ultimate outcome of this matter and the amount of recovery, if any, that will result therefrom.
NOTE 12. 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, as amended, and the 1990 Non-Employee (Outside Directors) Plan, as amended, and in 2000, the shareholders approved a ten-year extension of both plans. The aggregate number of shares currently authorized pursuant to the Key Employee Plan, as adjusted for stock splits and shareholder-approved increases 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. 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 are exercisable within a maximum of 10 years from the date of grant. Stock option activity for 2001, 2000, and 1999 is set forth below: Key Employee Outside Incentive Avg. Directors Avg. Plan Price Plan Price __________________________________________________________________________ Outstanding at December 31, 1998.. 431,195 $15.95 66,806 $13.54 Granted........................... 70,000 10.25 20,248 4.18 Canceled.......................... (70,500) 16.67 (11,124) 15.38 Exercised......................... - - __________ __________ Outstanding at December 31, 1999.. 430,695 15.17 75,930 11.05 Granted........................... 268,075 3.87 20,248 4.50 Canceled.......................... (45,300) 9.02 (10,124) 15.50 Exercised......................... - - __________ __________ Outstanding at December 31, 2000.. 653,470 9.69 86,054 8.98
NOTE 12. CAPITAL STOCK AND STOCK OPTIONS (Continued)
Key Employee Outside Incentive Avg. Directors Avg. Plan Price Plan Price __________________________________________________________________________
Granted........................... 70,000 3.00 20,248 3.05 Canceled.......................... (76,000) 14.78 (10,124) 15.75 Exercised......................... - - __________ __________ Outstanding at December 31, 2001.. 647,470 $ 8.36 96,178 $ 7.02 ========== ==========
The number of shares and average exercise price of options exercisable at December 31, 2001, 2000 and 1999 were 568,275 shares at $8.36, 329,000 shares at $13.17, and 281,500 shares at $13.66 for the 1990 Key Employee Stock Incentive Plan and 75,930 at $7.02, 65,806 at $10.36, and 55,682 at $13.55 for the Outside Directors Plan, respectively. At December 31, 2001 and 2000, 115,280 and 121,280 respectively, were available for future grants under the terms of the 1990 Key Employee Stock Incentive Plan and 55,697 shares and 65,821 shares, respectively, were available for future grants under the terms of the Outside Directors Plan.
The Company continues to apply the provisions of APB 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 2001, 2000 and 1999. 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:
(Dollars in thousands, except per share data)
2001 2000 1999 ___________ ___________ __________ Net income:
As reported $ 608 $ 622 $ 1,843 Pro forma $ 532 304 $ 1,513
Earnings per share:
As reported $.14 $ .14 $ .40 Pro forma $.12 $ .07 $ .33
The above pro forma effect takes into consideration only options granted since January 1, 1997 and is likely to increase in future years as additional options are granted and amortized ratably over the vesting
NOTE 12. CAPITAL STOCK AND STOCK OPTIONS (Continued)
period. The average fair value of stock options granted during 2001, 2000 and 1999 was $3.01, $1.78, and $5.22, respectively. The fair value of stock options granted was estimated using the Black-Scholes option-pricing model and included the following assumptions for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999 __________ __________ __________
Life expectancy 5 years 5 years 5-10 years Risk-free interest rate 5% 6% 6% Expected volatility 59% 57% 62% Dividends per share $.08 $.08 $.08
The exercise price range of options outstanding and exercisable for both the Key Employee Stock Incentive and Outside Directors plans, the weighted average contractual lives 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 _______________ __________ _______ ________ ___________________
$ 3.00 - $ 9.99 376,019 5.49 $ 3.72 285,771 $ 3.95 $10.00 - $15.99 367,629 3.89 $12.76 358,434 $12.81 _________ _________ 743,648 644,205 ========= =========
Included in the $10.00-$15.99 range above are 9,195 options which are not exercisable until (and unless) the stock trades for 20 consecutive trading days at a price of $14.14 and higher. These options expired in April 2002.
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:___________________________________ Frank F. Ferola President and Chairman of the Board April 18, 2002
By:___________________________________ David A. Spiegel Principal Financial Officer Principal Accounting Officer April 18, 2002
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:______________________________ By:_______________________________ Frank F. Ferola, Principal Thomas M. D'Ambrosio Executive Officer and Director Vice President and Director Date: April 18, 2002 Date: April 18, 2002
By:______________________________ By:_______________________________ John DePinto, Director Curtis Carlson, Director Date: April 18, 2002 Date: April 18, 2002
By:______________________________ By:_______________________________ Leonard Genovese, Director Shouky Shaheen, Director Date: April 18, 2002 Date: April 18, 2002
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 18, 2002
By: /s/ David A. Spiegel ___________________________________ David A. Spiegel Principal Financial Officer Principal Accounting Officer April 18, 2002
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 18, 2002 Date: April 18, 2002
By: /s/ John DePinto By: /s/ Curtis Carlson ______________________________ ____________________________ John DePinto, Director Curtis Carlson, Director Date: April 18, 2002 Date: April 18, 2002
By: /s/ Leonard Genovese By: /s/ Shouky Shaheen ______________________________ ____________________________ Leonard Genovese, Director Shouky Shaheen, Director Date: April 18, 2002 Date: April 18, 2002