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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
___
| X | ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE
|___| SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000
OR
___
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
|___| OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ______
Commission File No. 1-4436
THE STEPHAN CO.
_______________________________________________________________
(Exact Name of Registrant as Specified in its Charter)
Florida 59-0676812
________________________________ _________________
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1850 West McNab Road, Fort Lauderdale, Florida 33309
_______________________________________________________________
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (954) 971-0600
_____________
Securities Registered Pursuant to Section 12 (b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
___________________ _________________________________________
Common Stock, $.01 AMERICAN STOCK EXCHANGE
Par Value
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
the filing requirements for at least the past 90 days.
YES NO X
____ _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. (X)
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant, computed by reference to the price at which the stock
was sold, or the average bid and asked prices of such stock, as of a
specified date within 60 days prior to the date of filing.
$9,736,998 as of May 31, 2001
The above amount excludes shares held by all executive officers and
directors of the Registrant
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date:
4,410,577 Shares of Common Stock, $.01 Par Value,
as of May 31, 2001
List hereunder the following documents if incorporated by reference and the
part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document
is incorporated: (1) any annual report to security holders; (2) any proxy
or information statement; and (3) any prospectus filed pursuant to Rule
424(b) or (c) under the Securities Act of 1933:
Portions of the proxy statement for the Registrant's 2001 annual meeting of
stockholders, filed on May 1, 2001, are incorporated by reference in Part
III of this Form 10-K.
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THE STEPHAN CO. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT
ON FORM 10-K
Page
PART I ______
Item 1: Business................................................... 4
Item 2: Properties................................................. 10
Item 3: Legal Proceedings.......................................... 11
Item 4: Submission of Matters to a Vote of Security Holders......... 12
PART II
Item 5: Market for the Registrant's Common Equity
and Related Stockholder Matters........................... 13
Item 6: Selected Financial Data.................................... 14
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 16
Item 7A: Quantitative and Qualitative Disclosures about Market Risk. 20
Item 8: Financial Statements and Supplementary Data................ 20
Item 9: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 20
PART III
Item 10: Directors and Executive Officers of the Registrant......... 21
Item 11: Executive Compensation..................................... 21
Item 12: Security Ownership of Certain Beneficial
Owners and Management..................................... 21
Item 13: Certain Relationships and Related Transactions............. 21
PART IV
Item 14: Exhibits, Financial Statement Schedules
and Reports on Form 8-K.................................. 22
Signatures.......................................................... 24
3
PART I
Certain statements in this Annual Report on Form 10-K ("Form 10-K")
under "Item 1. Business", "Item 3. Legal Proceedings" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations," constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act").
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
condition (financial or otherwise), performance or achievements of the
Registrant to be materially different from any future results, performance,
condition or achievements expressed or implied by such forward-looking
statements. Such factors include, but are not limited to, the following:
general economic and business conditions; competition; success of operating
initiatives; development and operating costs; advertising and promotional
efforts; brand awareness; the existence or absence of adverse publicity;
acceptance of new product offerings; changing trends in customer tastes;
the success of multi-branding; changes in business strategy or development
plans; availability, terms and deployment of capital; business abilities
and judgment of personnel; availability of qualified personnel; labor and
employee benefit costs; availability and cost of raw materials and
supplies; changes in, or failure to comply with, law; product mix and other
factors affecting gross margin; the ability to successfully integrate
newly-acquired businesses and the ability to reduce costs; the final
outcome of litigation commenced against the Registrant in respect of its
overstatement of operating results for 1998 interim periods and any risks,
uncertainties and problems inherent in such litigation and in any future
litigations; and other factors or events referenced in this Form 10-K. The
Registrant does not undertake any obligation to publicly release the
results of any revisions which may be made to any forward-looking
statements to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated
events.
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 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 "dry goods", which would include scissors, clippers,
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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 the product to the end user. The Manufacturing
segment manufactures products for different subsidiaries of the Company,
and manufactures private label brands for 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 manufacturing of products marketed under the STEPHAN
brand name. Stephan also manufactures, markets and distributes hair and
skin care products under various trade names through different divisions.
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 business 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 2001. Retail brand sales of Stephan, including the Frances Denney
product line, accounted for approximately $4,600,000 of the Company's 2000
sales or approximately 14.8% 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 domestic 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") to resolve
certain outstanding disputes with respect to the Acquisition Agreements.
The Settlement Agreement, among other things, provided for the licensing to
the Registrant of certain trademarks in Canada pursuant to a trademark
license agreement (the "Canadian Trademark License"). Additionally, the
5
Settlement Agreement provided that (i) deferred payments would be made with
respect to products sold under the Canadian Trademark License, (ii) total
deferred payments would be subject to a maximum of $4,000,000, and (iii)
the Registrant 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 select
products of the Registrant's Frances Denney Line and to supply the
requirements of CMB for such products. The agreement provides CMB with the
exclusive right to market and distribute specified Denney products in
certain retail chain stores in the United States and Canada. The agreement
provides for royalty payments by CMB based upon net sales (as defined in
the agreement), with guaranteed minimum annual royalty payments throughout
the term of the agreement which are credited against accrued royalties.
The agreement also provides for the Registrant to be the exclusive supplier
of products sold under the agreement.
The Fort Lauderdale location also 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 2000. "Private label" production, which is the
manufacturing of products marketed and sold under the brand names of
customers of the Company, accounted for approximately $1,200,000 of
consolidated Company sales, or approximately 3.8% of the Registrant's
revenues in 2000, with the majority of the aforementioned 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
6
manufacturing facility. The Tampa facility manufactures most of the
products sold by the Frances Denney line, all the talc manufactured for the
Cashmere Bouquet and Quinsana brands, as well as all the other retail hair
and skin care brands sold by Stephan and Stephan Distributing, Inc. 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 $4,300,000 in 2000, accounted for
approximately 13.9% of the Registrant's consolidated revenues for the year
ended December 31, 2000, 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, 2000
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 14.5% of the Registrant's consolidated revenues in
2000, with sales of approximately $4,500,000. 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, 2000
were not material. The majority of the sales of this division 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 the President and principal stockholder pursuant to which the
Company acquired Sorbie. The Company also entered into related agreements
with the 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 2000 were
approximately $2,000,000, representing 6.4% of the Registrant's
7
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
shares of the Registrant's restricted Common Stock, valued pursuant to the
terms of the agreement, at $10.81 per share, with provision for half the
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.
Pursuant to the transaction, the Company acquired certain accounts
receivable, inventory, fixed assets and trademarks, and assumed
approximately $5,332,000 in certain outstanding trade and other
liabilities. The liabilities assumed are subject to the terms of a
liquidating trust agreement, and as provided for in such agreement, the
Registrant delivered a note in the amount of $2,399,400, payable in two
equal installments due in December 1997 and February 1998. Additionally,
the Registrant provided the trust, established pursuant to such liquidating
trust agreement, with a standby letter of credit in the amount of
$2,932,600.
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 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 Laboratories, Inc. amounted to approximately
$3,200,000 for the period ended December 31, 2000, which accounted for
approximately 10.3% of the Registrant's consolidated revenues. Sales of New
Image products are included in the Company's Professional business segment
while Modern sales are included in the Company's Retail business segment.
8
MORRIS FLAMINGO-STEPHAN, INC.
Morris-Flamingo, L.P. 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 division manufactures hairpins, scissors and beauty
school cases. Sales for the period ending December 31, 2000 were
approximately $10,900,000, accounting for approximately 34.9% 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
information on net sales, income from operations, capital expenditures and
depreciation 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 filing.
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.
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, 2000, 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, 2000,
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 believed by the Registrant to be material and were expensed as
incurred.
9
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, 2000, in addition to its eight officers, the
Registrant and its subsidiaries employed approximately 170 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. 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 in April 2002, with an annual net rental
of $232,000.
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
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various product lines. It also owns two buildings located at 4829 East
Broadway Avenue, Tampa, Florida 33605. One building, comprising 12,500
square feet, is being used for office facilities and order fulfillment for
the Frances Denney line. The second building, with approximately 30,000
square feet, is used as a warehouse and distribution facility. From time
to time, and as inventory levels dictate, Old 97 may lease temporary
warehouse space on a short-term basis.
The Company leases office and warehouse space of approximately 6,000
square feet in Williamsport, Pa. pursuant to a five-year lease expiring
January 31, 2002. Monthly rent in the amount of $1,800 is payable to the
former owner of Williamsport Barber Supply, who is currently the President
of Williamsport.
In connection with the Morris Flamingo acquisition, the Company
entered into a lease, and subsequent lease extension, expiring in June
2005, for the Morris Flamingo existing office, warehouse and manufacturing
facility located at 204 Eastgate Drive, Danville, Illinois 61834, at an
annual rental payment of approximately $210,000, subject to annual CPI
increases, with purchase options ranging from $1,850,000 to $2,000,000 over
the remaining life of the lease. The Danville facility has 7,500 square
feet of office space and 85,500 square feet of warehouse, distribution and
manufacturing space. The landlord is 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.
Item 3. Legal Proceedings
In connection with the acquisition of certain assets from New Image
Laboratories, Inc. ("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 inventory 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 inventory 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
11
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 it's 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. The Court has not yet
set a date for trial for the remaining claims of the Company.
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 lawsuit alleges, among other things,
certain violations of Federal securities laws and seeks 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 on September 1, 2000, the
Company moved to dismiss the second amended complaint. This motion is
still pending before the Court and no discovery has been taken.
The Company has agreed to indemnify its officers in respect of this
matter, intends to vigorously defend the action and believes it has
meritorious defenses against these allegations. However, until the motion
to dismiss is ruled upon and discovery has commenced, the Company will not
be in a position to assess the likelihood of an unfavorable outcome.
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 there is no merit to
the Vogue counterclaim and intends to vigorously defend the counterclaim.
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.
12
PART II
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 for each quarterly period within
the Registrant's two most recent full fiscal years:
High Low
Quarter Ended Sales Price Sales Price
_____________ ___________ ___________
March 31, 1999 $ 11.63 $ 8.38
June 30, 1999 8.88 4.00
September 30, 1999 5.63 3.88
December 31,1999 4.50 3.38
___________________________________________________________________________
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
(b) Holders
As of April 30, 2001, the Registrant's Common Stock was held of
record by approximately 350 holders. The Registrant's Common Stock is
believed to be held beneficially by others through approximately 1,400
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 2000. Future dividends, if any,
will be determined by the Company's Board of Directors, at 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 accompanying consolidated financial statements for
13
further information). 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 ("Exchange") was
suspended until such time as the investigation was completed and the
Registrant satisfied certain other informational requirements of the
Exchange. Trading in the Registrant's stock resumed in May 2001.
Item 6. Selected Financial Data (a)
2000 1999 1998 1997 1996
(AS RESTATED)(AS RESTATED)
(in thousands, except per share data)
____________________________________________________
Net sales $31,138 $34,356 $34,835 $27,113 $25,779
Income/(Loss)
before income taxes 1,006 3,036 (4) 7,697 7,093
Net income/(loss) 622 1,843 (3) 5,041 4,679
Current assets 28,199 27,447 27,961 25,735 19,706
Total assets 58,769 59,435 60,600 57,464 46,499
Current
liabilities 4,521 3,725 5,332 8,468 6,223
Long term debt 9,124 10,418 11,718 9,078 6,689
PER COMMON SHARE
(Basic and Diluted): (b)
Net income/(loss) .14 .40 (.00) 1.20 1.13
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 Barber and Beauty
Corp. (acquired in 1992), Stephan & Co., formerly Heads or Nails, Inc.
(acquired in 1993), Scientific Research Products, Inc. of Delaware
(acquired in 1994), Trevor Sorbie of America, Inc. (acquired in 1996),
Stephan Distributing, Inc., a subsidiary which acquired the brands from New
Image Laboratories, Inc. 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 4,385,019 for 2000,
4,567,439 for 1999, 4,535,649 for 1998, 4,213,372 for 1997, and 4,138,629
14
for 1996. 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 filing.
(c) Information presented above for 1999 and 1998 has been restated to
correct for certain irregularities involving the improper recording of
sales as more fully disclosed in Note 1 of the consolidated financial
statements included in Item 8.
Selected Quarterly Financial Information (unaudited)
(in thousands, except per share data)
3/31/00 6/30/00 9/30/00
As As As
Previously Previously Previously
Reported Reported Reported
__________ __________ __________
Net sales $ 8,203 $ 8,182 $ 7,580
Gross profit 3,665 3,790 2,782
Net income/(loss) 565 620 (79)
Net income/(loss)
per share .13 .14 (.02)
3/31/00 6/30/00 9/30/00
As As As
Restated Restated Restated 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)
3/31/99 6/30/99 9/30/99 12/31/99
As As As As
Previously Previously Previously Previously
Reported Reported Reported Reported
__________ __________ __________ __________
Net sales $ 8,588 $ 9,105 $ 9,195 $ 7,865
Gross profit 3,817 4,338 4,061 2,971
Net income 468 876 579 206
Net income/(loss)
per share .10 .19 .13 .05
3/31/99 6/30/99 9/30/99 12/31/99
As As As As
Restated Restated Restated Restated
________ ________ ________ ________
Net sales $ 8,564 $ 8,921 $ 9,093 $ 7,778
Gross profit 3,806 4,256 4,015 2,712
Net income 460 817 546 20
Net income/(loss)
per share .10 .18 .12 .00
15
Quarterly information presented above has been restated (where
indicated) to correct for certain irregularities involving the improper
recording of sales as more fully disclosed in Note 1 of the consolidated
financial statements included in Item 8.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The Company's financial statements for the years ended December 31,
1999 and 1998, as well as the first three quarters of the year ended
December 31, 2000 have been restated, as more fully discussed in Note 1 to
the financial statements made a part of Item 8. The information included
in the following discussion reflects the effects of the restatements.
RESULTS OF OPERATIONS
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
16
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
described in Note 1 to the financial statements, 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 were $.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.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 AS COMPARED TO 1998
__________________________________________________
Net sales for 1999 decreased primarily as a result of a decline in the
Company's Retail business segment; however private label sales also
declined, but such declines were offset by an overall increase in the
Company's Professional business segment. Sales and distribution of "hard
17
goods" continued to improve, increasing $2,100,000 over the sales level
achieved in 1998, and although a substantial portion of that increase was
due to the inclusion of the sales of Morris Flamingo-Stephan for the entire
year, the Company has also experienced an increase in the core business of
this segment. Professional "wet goods" sales (the Sorbie, New Image and New
Era lines) declined almost $1,500,000 as a consolidation of the
distribution network for professional products continued to constrict the
buying patterns and number of distributors.
Gross profit increased $2,084,000, to $14,789,000 in 1999 when
compared to the $12,705,000 achieved in 1998. This increase of
approximately 16% was due to an improvement in the overall gross profit
margin, which was 43.0% in 1999, compared to 36.5% in 1998. While
management is encouraged by the increase in the gross profit margin
compared to last year, it is still lower than gross profit margins achieved
in the years prior to 1998.
The operating segment "Retail Personal Care Products" experienced a
decline in net sales as a whole. Net retail sales in 1999 were $9,705,000,
as compared to $10,473,000 in 1998, with the most significant decline
coming from reduced sales of ethnic hair care products and brushes. As was
the case in 1998, this decline was primarily the result of a reduction in
the number of products carried by retailers and a continuing consolidation
in the chain-drug store industry.
Selling, general and administrative expenses declined by $493,000,
from $12,240,000 to $11,747,000 in 1999. This decrease is principally due
to the Company's diligent controlling of overhead expenses and additional
cost savings effected in the Morris Flamingo-Stephan division.
Interest expense decreased slightly from $969,000 in 1998 to $944,000
in 1999 as a result of a decrease in outstanding debt, but was adversely
impacted by a temporary increase in the interest rate charged to the
Company. Other income includes the royalty payment of $160,000 from Color
Me Beautiful in connection with the marketing of Frances Denney products,
as well as a one-time royalty fee for $350,000.
Earnings per share for the year ended December 31, 1999 were $.40, an
increase of $.40 per share over the $.00 in 1998. The average number of
shares outstanding increased in 1999, from 4,535,649 to 4,567,439, despite
the repurchase of 149,500 shares in 1999, due to the fact that the shares
issued in the Morris Flamingo acquisition were outstanding for the entire
1999 fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
_______________________________
Working capital was approximately $23,678,000 at December 31, 2000, a
decrease of $43,000 from December 31, 1999. Cash and cash equivalents
increased almost $1,500,000, to $13,559,000 when compared to the
$12,079,000 on hand at December 31, 1999. Inventory levels declined as
management continued its efforts to reduce the amount of finished goods on
hand. Accounts payable to vendors increased slightly at December 31, 2000
due to an increase in purchases of raw materials required for a new private
18
label customer. In December 2000, the Company retired a $400,000 note
payable that was collateralized by a certificate of deposit, in addition to
repurchasing, throughout the year, almost 166,000 shares of its Common
Stock, at an aggregate cost of over $663,000, with an average share price
paid of $4.00. These shares were purchased under a plan adopted by the
Board of Directors, in April 1999, authorizing the repurchase of up to
1,000,000 shares of Common Stock.
Largely as a result of the adjustments necessary to reflect the
billing irregularities described in Note 1 to the financial statements
included herein, the Company has a large income tax receivable. A portion
of the receivable is also comprised of estimated tax payments made in 2000,
for the year 2000. The Company anticipates that a portion of the income
tax receivable will be used for estimated tax payments expected to be
required for the tax year 2001 and the balance should be refunded to the
Company.
The Company is subject to various covenants with respect to working
capital, current maturity coverage and funded debt ratios under its loan
agreement with Bank of America, FL. At December 31, 2000, the Company was
in compliance with these covenants but, as of April 30, 2001, the Company
was not in compliance with a covenant that requires audited financial
statements to be delivered to the lender 120 days after year-end. There is
a 90 day "cure period", and the delivery of this Form 10-K will bring the
Company into compliance.
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 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, the 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, the 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 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
19
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.
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, including the possible bid by
several members of the Company's management and directors, exclusive of the
committee members, forming a group to purchase all of the Company's
outstanding capital stock in a going private transaction in which it would
expect to continue the Company's business generally as is currently
operated. The process will involve retaining independent legal counsel and
investment banking advisors to advise and assist in the evaluation. It is
estimated that the costs associated with this process will be in excess of
$650,000, in addition to the use of a substantial portion of the Company's
cash, because according to the terms of a note payable to a bank, a change
in control of the Company would accelerate the payment of the outstanding
remaining debt ($8,325,000 at May 31, 2001).
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. Financial Statements and Supplementary Data
Reference is made to the financial statements and supplementary data
contained elsewhere in this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable.
20
PART III
The information required by Part III Items 10-13 of Form 10-K are
incorporated herein by reference from the Registrant's Proxy Statement for
its 2001 annual meeting of stockholders which was filed with the Securities
and Exchange Commission on May 1, 2001.
21
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.
22
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,
adopted by a majority vote of stockholders on September 1, 2000.
10.14 1990 Non-Employee (Outside Directors) Plan, as amended,
adopted by a majority vote of stockholders on September 1, 2000.
(b) Financial Statements and Financial Statement Schedules
(i) Financial Statements
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 2000
and (restated) 1999.
Consolidated Statements of Operations for the years ended
December 31, 2000, (restated) 1999, and (restated) 1998.
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2000, (restated) 1999, and
(restated) 1998.
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, (restated) 1999, and (restated) 1998.
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.
23
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, 2000 and 1999, 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, 2000. 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, 2000 and 1999, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1, the accompanying 1999 and 1998 consolidated
financial statements have been restated.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
May 11, 2001
F-1
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
ASSETS
2000 1999
(AS RESTATED,
SEE NOTE 1)
___________ ___________
CURRENT ASSETS
Cash and cash equivalents $13,559,268 $12,079,204
Accounts receivable, net 3,026,553 2,992,955
Inventories 10,377,851 11,954,191
Income taxes receivable 1,028,112 129,140
Prepaid expenses
and other current assets 207,061 291,010
___________ ___________
TOTAL CURRENT ASSETS 28,198,845 27,446,500
PROPERTY, PLANT AND EQUIPMENT, net 2,617,521 2,800,379
INTANGIBLE ASSETS, net 24,736,603 25,855,739
OTHER ASSETS 3,215,848 3,332,708
___________ ___________
TOTAL ASSETS $58,768,817 $59,435,326
=========== ===========
See notes to consolidated financial statements.
F-2
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
2000 1999
(AS RESTATED,
SEE NOTE 1)
___________ ____________
CURRENT LIABILITIES
Accounts payable and
accrued expenses $3,001,720 $1,856,669
Note payable to bank - 400,000
Current portion of
long-term debt 1,519,277 1,468,596
___________ ___________
TOTAL CURRENT LIABILITIES 4,520,997 3,725,265
DEFERRED INCOME TAXES, net 1,677,805 1,442,950
LONG-TERM DEBT, less current
maturities 9,123,929 10,418,320
___________ ___________
TOTAL LIABILITIES 15,322,731 15,586,535
___________ ___________
COMMITMENTS AND CONTINGENCIES (NOTES 2 and 11)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value;
25,000,000 shares authorized;
4,426,897 issued at December 31, 2000,
and 4,660,958 issued at
December 31, 1999 44,269 46,610
Additional paid in capital 18,477,341 19,404,559
Retained earnings 26,336,463 26,075,919
___________ ___________
44,858,073 45,527,088
LESS:
125,000 CONTINGENTLY
RETURNABLE SHARES (1,351,563) (1,351,563)
TREASURY STOCK (16,320 shares at
December 31, 2000 and 84,600 shares
at December 31, 1999) (60,424) (326,734)
___________ ___________
TOTAL STOCKHOLDERS' EQUITY 43,446,086 43,848,791
___________ ___________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $58,768,817 $59,435,326
=========== ===========
See notes to consolidated financial statements.
F-3
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
(AS RESTATED (AS RESTATED,
SEE NOTE 1) SEE NOTE 1)
___________ ___________ ___________
NET SALES $31,137,782 $34,355,848 $34,834,635
COST OF GOODS SOLD 18,506,860 19,566,466 22,129,603
___________ ___________ ___________
GROSS PROFIT 12,630,922 14,789,382 12,705,032
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 11,652,923 11,747,107 12,239,694
___________ ___________ ___________
OPERATING INCOME 977,999 3,042,275 465,338
OTHER INCOME(EXPENSE)
Interest income 724,728 427,804 373,968
Interest expense (871,853) (943,856) (968,630)
Royalty income 175,000 510,000 125,000
___________ __________ ___________
INCOME/(LOSS) BEFORE
INCOME TAXES 1,005,874 3,036,223 (4,324)
INCOME TAX EXPENSE/(BENEFIT) 383,647 1,193,397 (1,150)
___________ __________ ___________
NET INCOME/(LOSS) $ 622,227 $1,842,826 $ (3,174)
=========== ========== ===========
BASIC AND DILUTED
EARNINGS/(LOSS) PER SHARE $ .14 $ .40 $ (.00)
=========== ========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,385,019 4,567,439 4,535,649
=========== ========== ===========
See notes to consolidated financial statements.
F-4
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Common Stock Additional Contingently
___________________ Paid in Retained Returnable Treasury
Shares Par Value Capital Earnings Stock Stock
_________ _________ ___________ ___________ __________ _________
Balances,
Jan.1,1998 4,418,800 $ 44,188 $15,979,709 $24,977,805 $(1,351,563) $ -
Stock
issued for
acquisition 307,058 3,071 3,712,334 - - -
Dividends
paid - - - (365,786) - -
Net loss
for 1998
(as restated) - - - (3,174) - -
_________ _________ ___________ ___________ __________ _________
Balances,
Dec31,1998 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
(as restated) - - - 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,
Dec. 31
2000 4,426,897 $ 44,269 $18,477,341 $26,336,463 $(1,351,563) $(60,424)
========= ========= =========== =========== =========== =========
(Retained earnings for 1998 and 1999 have been restated; See Note 1)
See notes to consolidated financial statements
F-5
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
(AS RESTATED,(AS RESTATED,
SEE NOTE 1) SEE NOTE 1)
__________ __________ __________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ 622,227 $ 1,842,826 $ (3,174)
__________ ___________ __________
Adjustments to reconcile net income/
(loss) to net cash flows provided by
operating activities:
Depreciation 423,077 508,362 407,482
Amortization of goodwill 1,190,232 1,204,605 1,208,079
Amortization of other assets 102,014 61,553 -
Loss on disposal of property,
plant and equipment - 16,076 4,463
Deferred income taxes 234,855 888,933 285,851
Provision for doubtful accounts 97,627 46,515 122,047
Changes in operating assets
and liabilities, net of effects
of acquisitions:
Accounts receivable (230,565) 659,145 2,221,974
Inventories 1,576,340 3,332,179 (956,960)
Prepaid expenses
and other current assets 83,949 (71,113) 131,613
Other assets 14,846 (861,330) 93,670
Accounts payable
and accrued expenses 1,145,051 (1,270,087) (1,044,566)
Income taxes payable (898,972) 358,219 (1,682,191)
_________ _________ _________
Total adjustments 3,738,454 4,873,057 791,462
_________ _________ _________
Net cash flows provided
by operating activities 4,360,681 6,715,883 788,288
_________ _________ _________
See notes to consolidated financial statements.
F-6
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
(AS RESTATED, (AS RESTATED,
SEE NOTE 1) SEE NOTE 1)
__________ __________ __________
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired from acquisition - - 5,266
Decrease in cash on
deposit with trustee - 270,684 339,442
Purchase of property, plant
and equipment (140,879) (304,812) (684,932)
Purchase of intangible assets (71,096) (57,470) (85,291)
_________ ________ _________
Net cash flows used in
investing activities (211,975) (91,598) (425,515)
_________ ________ _________
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (1,643,710) (1,636,224) (12,428,762)
Repayment of acquired debt - - (1,877,937)
Repayment of note payable
to trustee - - (1,199,700)
Proceeds from notes payable to bank - - 15,100,000
Acquisition of treasury stock (663,249) (614,867) -
Dividends paid (361,683) (375,752) (365,786)
___________ ___________ __________
Net cash flows used in
financing activities (2,668,642) (2,626,843) (772,185)
___________ ___________ __________
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 1,480,064 3,997,442 (409,412)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 12,079,204 8,081,762 8,491,174
___________ ___________ __________
CASH AND CASH EQUIVALENTS,
END OF PERIOD $13,559,268 $12,079,204 $8,081,762
=========== =========== ==========
See notes to consolidated financial statements.
F-7
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Supplemental Disclosures of Cash Flow Information:
2000 1999 1998
__________ __________ __________
Interest paid $ 809,804 $ 976,478 $ 845,669
========== ========== ==========
Income taxes paid $1,422,013 $ 333,814 $1,341,899
========== ========== ==========
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 year ended December 31, 2000, 165,780 shares of common stock were
repurchased, at a cost totaling $663,249, and 234,061 shares of treasury
stock were retired, including the 32,600 discussed below. On December 29th
and 30th, 1999, 32,600 shares of common stock were repurchased, at a cost
totaling $122,179, and are included in the consolidated statements of cash
flows for the year ended December 31, 2000 because the settlement date was
subsequent to December 31, 1999. In addition, the Company retired 64,900
shares of treasury stock acquired earlier in 1999.
In connection with the acquisition of certain assets of Morris-Flamingo,
L.P. on March 18, 1998, the Company acquired inventories, accounts
receivable, fixed and intangible assets and assumed certain liabilities by
issuance of common stock with an approximate value, at the time of
acquisition, of $3,700,000.
See notes to consolidated financial statements.
F-8
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
BASIS OF PRESENTATION: In November 2000, the Company became aware
of certain irregularities involving the improper recording of sales. The
Company's Audit Committee commenced an investigation utilizing outside
counsel and a "Big 5" accounting firm other than the Company's independent
auditors. The investigation was completed in April 2001, and the results
of the investigation indicated that no cash or other property was
misappropriated and the irregularities were committed by an employee of a
subsidiary who is no longer employed by the Company. Based upon the
findings of the investigation, it was determined that during the period
1998 through 2000, sales were overstated by approximately $1,379,000.
Accordingly, the Company has restated its financial statements as of
December 31, 1999 and for each of the years ended December 31, 1999 and
1998. The following is a summary of the significant effects of the
restatement:
As Previously
As Restated Reported
___________________________
As of December 31, 1999:
Accounts receivable $ 2,992,955 $ 4,371,833
Income taxes receivable/(payable) 129,140 (302,097)
Retained earnings 26,075,919 27,023,560
For the year ended December 31, 1999:
Net sales 34,355,848 34,753,171
Gross Profit 14,789,382 15,186,705
Operating income 3,042,275 3,439,598
Income before income taxes 3,036,223 3,433,546
Income taxes 1,193,397 1,304,647
Net income 1,842,826 2,128,899
Basic and diluted earnings per share .40 .47
For the year ended December 31, 1998:
Net sales 34,834,635 35,816,190
Gross profit 12,705,032 13,686,587
Operating income 465,338 1,446,893
(Loss)/Income before income taxes (4,324) 977,231
Income tax (benefit)/expense (1,150) 318,837
Net (loss)/income (3,174) 658,394
Basic and diluted (loss)/earnings
per share (.00) .15
F-9
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
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. 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 major 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 cash flows. To
the extent future 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.
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")
F-10
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
to the financial statements.
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 flows 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, 1999, the 6.65% note payable to bank had a carrying
value of $9,897,500 and a fair value of $9,467,000. There were no other
significant differences as of December 31, 2000 and 1999 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. Also included in cash
and cash equivalents in 1999 is a $400,000 certificate of deposit pledged
as collateral against a $400,000 note payable to a bank. The Company
maintains cash deposits at certain financial institutions in amounts in
excess of federally insured limits of $100,000. Cash and cash equivalents
held in interest-bearing accounts as of December 31, 2000 and 1999 were
approximately $12,995,000 and $11,264,000, respectively.
F-11
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, 2000
and 1999 were approximately $3,219,000 and $3,546,000, respectively. Direct
labor and overhead costs capitalized in inventories as of December 31, 2000
and 1999 were approximately $1,701,000 and $2,062,000, 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, 2000, 1999 and 1998, the Company had 739,524, 506,625 and 498,001
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 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, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities-Deferral of the Effective Date of FASB No. 133" and
F-12
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
in June 2000, the 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.
NOTE 2. SIGNIFICANT TRANSACTIONS
On March 18, 1998, the Company entered into an Asset Purchase
Agreement with Morris-Flamingo, L.P., Morris-Flamingo Beauty Products,
Inc., Shaheen & Co., Inc. and Shouky A. Shaheen, for the acquisition of
certain assets and assumption of certain liabilities (including payment of
a note payable of approximately $1,880,000) in exchange for 307,058 shares
of the Company's restricted (as provided for in Rule 144 of the Securities
Act of 1933, as amended) common stock valued at $12.10 per share. Morris-
Flamingo is a wholesaler of barber and beauty supplies, as well as a
manufacturer of hairpins, scissors and beauty school cases. The
transaction was recorded as a purchase and goodwill of approximately
$2,545,000 was recorded.
The Company also entered into a three-year lease agreement
(subsequently extended to 2005), with Shaheen & Co., Inc. for the existing
office, warehouse and distribution facility occupied by Morris-Flamingo in
Danville, Illinois, at an annual rental of approximately $210,000.
In connection with the acquisition of several product lines from New
Image Laboratories, Inc. ("Image") on June 26, 1997, the Company acquired
certain accounts receivable, inventories, fixed assets and trademarks, and
assumed approximately $5,332,000 in certain outstanding trade and other
liabilities. The liabilities assumed are subject to the terms of a
liquidating trust agreement, and as provided for in the liquidating trust
agreement, the Company delivered a non-interest bearing, unsecured note
payable in the amount of $2,399,400, which was paid in two equal
installments in December 1997 and February 1998. The rights of creditors
to file claims against the Trust terminated on the first anniversary of the
agreement, and all funds on deposit with respect to unfiled claims have
been refunded to the Company and treated as a reduction of intangible
assets. Management of the Company has reduced the value of the trademarks
arising from the acquisition in accordance with the amount it believes will
ultimately be refunded. As of December 31, 2000, the Trustee had on
deposit funds approximating $31,000 for satisfaction of the remaining
claims filed in accordance with the provisions of the liquidating trust
agreement.
The purchase price is subject to adjustment based upon the value of
the net assets acquired, as determined on the first anniversary of the
closing date. 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
F-13
NOTE 2. SIGNIFICANT TRANSACTIONS (Continued)
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. 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, 2000 and 1999 consisted of the
following:
2000 1999
__________ __________
Trade accounts receivable $3,131,555 $3,118,801
Less: Allowance for
doubtful accounts (105,002) (125,846)
__________ __________
Accounts receivable, net $3,026,553 $2,992,955
========== ==========
The following is an analysis of the allowance for doubtful accounts
for the year ended December 31:
2000 1999 1998
_________ _________ _________
Balance, beginning of year $ 125,846 $ 175,155 $ 98,359
Provision for doubtful
accounts 97,627 46,515 122,047
Uncollectible accounts
written off, net of recoveries (118,471) (95,824) (45,251)
_________ _________ _________
Balance, end of year $ 105,002 $ 125,846 $ 175,155
========= ========= =========
NOTE 4. INVENTORIES
Inventories at December 31, 2000 and 1999 consisted of the following:
2000 1999
____________ ____________
Raw materials $ 2,620,048 $ 2,490,406
Packaging and components 3,700,758 4,187,055
Work in progress 703,571 938,698
Finished goods 6,284,531 7,257,713
____________ ____________
13,308,908 14,873,872
Less: Amount included
in other assets (2,931,057) (2,919,681)
____________ ____________
Balance, end of year $ 10,377,851 $ 11,954,191
============ ============
F-14
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 be
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 in one year.
NOTE 5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment at December 31, 2000 and 1999 consisted
of the following:
2000 1999
__________ ___________
Land $ 379,627 $ 379,627
Buildings and improvements 2,094,046 2,071,337
Machinery and equipment 2,042,122 1,804,326
Furniture and office equipment 509,026 537,097
__________ __________
5,024,821 4,792,387
Less: accumulated depreciation (2,407,300) (1,992,008)
__________ __________
Balance, end of year $2,617,521 $2,800,379
========== ==========
NOTE 6. INTANGIBLE ASSETS
Intangible assets at December 31, 2000 and 1999 consisted of the
following:
2000 1999
___________ ___________
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 885,475 814,379
Other 87,062 103,005
___________ ___________
31,022,067 30,966,914
Less: accumulated amortization (6,285,464) (5,111,175)
___________ ___________
Balance, end of year $24,736,603 $25,855,739
=========== ===========
F-15
NOTE 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 2000 and 1999
consisted of the following:
2000 1999
___________ ___________
Accounts payable $ 1,574,772 $ 1,184,262
Accrued marketing expenses 186,263 238,783
Accrued payroll and bonuses 833,253 255,689
Accrued legal and professional fees 254,488 146,500
Other accrued expenses 152,944 31,435
___________ ___________
Balance, end of year $ 3,001,720 $ 1,856,669
=========== ===========
NOTE 8. LONG-TERM DEBT
Long-term debt at December 31, 2000 and 1999 consisted of the
following:
2000 1999
____________ ____________
6.65% unsecured note payable to bank,
principal of $92,500 plus interest
due monthly through November 30, 2005;
final balloon payment of $3,330,000
due November 30, 2005. $ 8,787,500 $ 9,897,500
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 brands acquired from
Colgate-Palmolive, with a carrying
value of approximately $7,956,000. 1,855,706 1,989,416
___________ ___________
10,643,206 11,886,916
Less: current portion (1,519,277) (1,468,596)
___________ ___________
Long-term debt $ 9,123,929 $10,418,320
=========== ===========
The 6.65% note payable to bank has covenants with respect to current
maturity coverage, funded debt to earnings (as defined) and minimum working
capital. At December 31, 2000 and 1999, the Company was in compliance with
all covenants, but is currently in default of a covenant that requires
financial statements to be delivered to the lender. There is a 90 day
"cure period" and the delivery of these audited consolidated financial
statements will bring the Company into compliance.
At December 31, 2000, approximate maturities of long-term debt are
$1,519,000 in 2001, $1,417,000 in 2002, $1,393,000 in 2003, $1,966,000 in
2004, and $4,348,000 in 2005.
F-16
NOTE 9. INCOME TAXES
The provision for income taxes is comprised of the following for the
years ended December 31:
2000 1999 1998
___________ ___________ ___________
Current Tax:
Federal $ 162,680 $ 274,747 $ (245,055)
State (13,888) 29,717 (41,946)
___________ ___________ ___________
Total Current 148,792 304,464 (287,001)
___________ ___________ ___________
Deferred Tax:
Federal 181,917 762,299 229,208
State 52,938 126,634 56,643
___________ ___________ ___________
Total Deferred 234,855 888,933 285,851
___________ ___________ ___________
Total provision for/
(benefit from)
income taxes $ 383,647 $ 1,193,397 $ (1,150)
=========== =========== ===========
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 balance
sheets includes deferred tax assets and liabilities attributable to the
following items:
2000 1999
___________ ___________
Accounts receivable allowances $ (47,479) $ (49,709)
Inventories (115,391) (73,733)
Amortization of goodwill 2,309,892 1,972,561
Charitable contribution
carryforward (398,002) (285,498)
Accrued liabilities and other (71,215) (120,671)
___________ ___________
Deferred income taxes, net $ 1,677,805 $ 1,442,950
=========== ===========
F-17
NOTE 9. INCOME TAXES (Continued)
The provision for federal and state income taxes differs from
statutory tax expense (computed by applying the U.S. Federal corporate tax
rate to income before taxes) as follows:
2000 1999 1998
______ ______ ______
Amount computed on pretax income 35.0% 35.0% 35.0%
Increase(decrease) in taxes:
State income taxes, net of
federal tax benefit 2.6 3.2 4.2
Charitable contributions of inventory - (2.6) (13.2)
Goodwill 7.1 2.1 7.3
Benefit of graduated rates (1.0) (1.0) (1.0)
Tax exempt interest (4.0) (1.0) (10.6)
Other (1.6) 3.6 4.9
_____ _____ _____
Total income tax 38.1% 39.3% 26.6%
===== ===== =====
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 which 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 which sell the product to the end user. The
Manufacturing segment manufactures products for different 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:
INCOME/(LOSS)
NET SALES BEFORE INCOME TAXES
________________________ __________________________
2000 1999 1998 2000 1999 1998
_______________________ __________________________
Professional $20,393 $22,129 $21,511 $ 1,011 $ 1,845 $ 437
Retail 8,969 9,705 10,473 1,265 1,985 825
Manufacturing 8,330 12,341 13,134 (621) 176 (248)
_______ _______ _______ ________ ________ ________
Total 37,692 44,175 45,118 1,655 4,006 1,014
Intercompany
Manufacturing (6,554) (9,819)(10,283) (649) (970) (1,018)
_______ _______ _______ ________ ________ ________
Consolidated $31,138 $34,356 $34,835 $ 1,006 $ 3,036 $ (4)
======= ======= ======= ======== ======== ========
F-18
NOTE 10. SEGMENT INFORMATION (Continued)
INTEREST INCOME INTEREST EXPENSE
_______________________ __________________________
2000 1999 1998 2000 1999 1998
_______________________ __________________________
Professional $ 338 $ 142 $ 101 $ 387 $ 418 $ 426
Retail 310 245 200 465 505 519
Manufacturing 77 41 73 20 21 24
______ ______ ______ ______ ______ ______
Total $ 725 $ 428 $ 374 $ 872 $ 944 $ 969
====== ====== ====== ====== ====== ======
DEPRECIATION AND
AMORTIZATION TOTAL ASSETS
______________________ _________________
2000 1999 1998 2000 1999
______________________ _________________
Professional $ 882 $ 789 $ 686 $18,839 $17,673
Retail 744 908 852 25,388 25,595
Manufacturing 89 78 78 14,542 16,167
_______ _______ ______ _______ _______
Total $1,715 $1,775 $1,616 $58,769 $59,435
======= ======= ====== ======= =======
The accounting policies used for each of the segments are the same as
those used for the Company, 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, 2000,
would, 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
2003, provide for incentive bonuses based on consolidated income before
taxes, earnings per share, or earnings of a subsidiary. No significant
bonuses were paid in the years 1998 through 2000.
F-19
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
Annual rent payments due under non-cancelable operating leases at
December 31, 2000 are:
2000 $ 624,400
2001 321,900
2002 218,000
___________
$ 1,164,300
===========
Annual rent expense for each of the last three years is as follows:
2000 $579,300
1999 610,800
1998 616,400
In connection with the acquisition of certain assets from New Image
Laboratories, Inc. ("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 inventory 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 inventory 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)
F-20
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 it's 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. The Court has not yet
set a date for trial for the remaining claims of the Company.
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 lawsuit alleges, among other things,
certain violations of Federal securities laws and seeks 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 on September 1, 2000, the
Company moved to dismiss the second amended complaint. This motion is
still pending before the Court and no discovery has been taken.
The Company has agreed to indemnify its officers in respect of this
matter, intends to vigorously defend the action and believes it has
meritorious defenses against these allegations. However, until the motion
to dismiss is ruled upon and discovery has commenced, the Company will not
be in a position to assess the likelihood of an unfavorable outcome.
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 there is no merit to
the Vogue counterclaim and intends to vigorously defend the counterclaim.
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, including the possible bid by
several members of the Company's management and directors, exclusive of the
committee members, forming a group to purchase all of the Company's
outstanding capital stock in a going private transaction in which it would
expect to continue the Company's business generally as is currently
operated. The process will involve retaining independent legal counsel and
investment banking advisors to advise and assist in the evaluation. It is
estimated that the costs associated with this process will be in excess of
$650,000, in addition to the use of a substantial portion of the Company's
cash, because according to the terms of a note payable to a bank, a change
in control of the Company would accelerate the payment of the outstanding
remaining debt ($8,325,000 at May 31, 2001).
F-21
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 must be exercised within a maximum of 10 years
from the date of grant. Stock option activity for 2000, 1999, and 1998 is
set forth below:
Key Employee Outside
Incentive Avg. Directors Avg.
Plan Price Plan Price
__________________________________________________________________________
Outstanding at December 31, 1997.. 253,695 $16.03 49,558 $13.97
Granted........................... 178,000 13.54 20,248 13.20
Canceled.......................... (500) 15.13 (3,000) 18.50
Exercised......................... - -
__________ __________
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
========== ==========
The number of shares and average exercise price of options
exercisable at December 31, 2000, 1999 and 1998 were 329,000 shares at
$13.17, 281,500 shares at $13.66, and 174,000 shares at $15.00 for the 1990
Key Employee
F-22
NOTE 12. CAPITAL STOCK AND STOCK OPTIONS (Continued)
Stock Incentive Plan and 65,806 at $10.36, 55,682 at $13.55, and 46,558 at
$14.13 for the Outside Directors Plan, respectively. At December 31, 2000
and 1999, 115,280 shares and 338,055 shares, respectively, were available
for future grants under the terms of the 1990 Key Employee Stock Incentive
Plan and 65,821 shares and 75,945 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
2000, 1999 and 1998. 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)
2000 1999 1998
___________ ___________ __________
Net income/(loss):
As reported $ 622 $ 1,843 $ (3)
Pro forma $ 304 1,513 $ (864)
Earnings/(Loss) per share:
As reported $.14 $ .40 $ (.00)
Pro forma $.07 $ .33 $ (.19)
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
period. The average fair value of stock options granted during 2000, 1999
and 1998 was $1.78, $5.22, and $11.12, 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, 2000, 1999 and 1998:
2000 1999 1998
__________ __________ __________
Life expectancy 5 years 5-10 years 5-10 years
Risk-free interest rate 6% 6% 5%
Expected volatility 57% 62% 47%
Dividends per share $.08 $.08 $.08
F-23
NOTE 12. CAPITAL STOCK AND STOCK OPTIONS (Continued)
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
_______________ __________ _______ ________ ___________________
$ 4.00 - $ 9.99 285,771 3.95 $ 3.95 20,248 $ 4.18
$10.00 - $13.99 347,629 8.05 $12.55 338,434 $13.23
$14.00 - $16.99 106,124 1.16 $15.20 36,124 $15.83
_________ _________
739,524 394,806
========= =========
Included in the $10.00-$13.99 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 and included in the $14.00-
$16.99 range above are 70,000 options which are not exercisable until (and
unless) the stock trades for 20 consecutive trading days at a price of
$19.18 and higher.
F-24
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
June 13, 2001
By: /s/ David A. Spiegel
___________________________________
David A. Spiegel
Principal Financial Officer
Principal Accounting Officer
June 13, 2001
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: June 13, 2001 Date: June 13, 2001
By: /s/ John DePinto By: /s/ Curtis Carlson
______________________________ ____________________________
John DePinto, Director Curtis Carlson, Director
Date: June 13, 2001 Date: June 13, 2001
By: /s/ Leonard Genovese By: /s/ Shouky Shaheen
______________________________ ____________________________
Leonard Genovese, Director Shouky Shaheen, Director
Date: June 13, 2001 Date: June 13, 2001
24