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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2001
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 Class Name of 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 X NO
____ _____
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. ( )
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.
$13,672,789
as of March 31, 2002
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 March 31, 2002
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 2002 annual meeting of
stockholders, scheduled to be filed no later than May 1, 2002, are
incorporated by reference in Part III of this Form 10-K.
2
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....................... 15
Item 7A: Quantitative and Qualitative Disclosures about Market Risk. 21
Item 8: Financial Statements and Supplementary Data................ 21
Item 9: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 21
PART III
Item 10: Directors and Executive Officers of the Registrant......... 22
Item 11: Executive Compensation..................................... 22
Item 12: Security Ownership of Certain Beneficial
Owners and Management..................................... 22
Item 13: Certain Relationships and Related Transactions............. 22
PART IV
Item 14: Exhibits, Financial Statement Schedules
and Reports on Form 8-K.................................. 23
Signatures.......................................................... 25
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; any risks, uncertainties and problems
inherent in any future litigations; and other factors or events referenced
in this Form 10-K. Subject to applicable law, 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 care products and beauty and barber supplies
for sale to salons and barbershops. In this segment, a distinction is made
between "wet goods", which include shampoos, conditioners, gels and similar
hair treatments, and "hard goods", which include scissors, clippers, combs,
4
dryers and other products used in styling hair. The customer base for the
Retail segment is mass merchandisers, chain drug stores and supermarkets
which sell hair care and other personal care products directly to the end
user. The Manufacturing segment manufactures products for subsidiaries of
the Company, and manufactures private label brands for certain customers.
THE STEPHAN CO.
Headquartered in Fort Lauderdale, Florida, Stephan is principally
engaged in the manufacture of hair care products for sale by two of its
subsidiaries, Scientific Research Products, Inc. and Trevor Sorbie of
America, Inc., and the manufacture of products marketed under the STEPHAN
brand name. Stephan also manufactures, markets and distributes hair and
skin care products under various trade names through Company subsidiaries.
Retail brands include product lines such as Cashmere Bouquet talc, Quinsana
Medicated talc, Balm Barr and Stretch Mark creams and lotions, Protein 29
liquid and gel grooming aids and Wildroot hair care products for men.
These brands, included in the Retail segment of the Company's business, are
manufactured at the Company's Tampa, Florida facility, as are the "Modern"
brand of Stiff Stuff products, and those sales are also included in the
Company's Retail segment. In addition, The Frances Denney division of
Stephan (included in the Retail segment of the Company's business) markets
a full line of cosmetics through retail and mail order channels. Under the
terms of an exclusive Trademark License and Supply Agreement with Color Me
Beautiful, Inc., the Company markets the brand names HOPE, INTERLUDE and
FADE-AWAY through several retail chains, including J.C. Penney, in the
United States and Canada.
Stephan also manufactures and sells products under the brand name
"STEPHAN'S". Such products consist of different types of shampoos, hair
treatments, after-shave lotion, dandruff lotion, hair conditioners and hair
spray which are distributed throughout the United States to approximately
350 beauty and barber distributors and is included in the Professional
segment of the Company's business. The Registrant's trademark "STEPHAN'S"
and the design utilized thereby have been registered with the United States
Patent and Trademark Office, which registration is due for renewal in
November 2006. Retail brand sales of Stephan, including the Frances Denney
product line, accounted for approximately $3,700,000 of the Company's 2001
sales, or approximately 13.0% of the Registrant's consolidated revenues.
On December 31, 1995, the Registrant entered into asset purchase
agreements (collectively, the "Acquisition Agreements") with Colgate-
Palmolive Company and its subsidiary, The Mennen Company (collectively, the
"Sellers"), for the acquisition by the Registrant of certain consumer
product brands of the Colgate-Palmolive Company, as well as a licensing
agreement for the U.S. distribution of Colgate-Palmolive's Cashmere Bouquet
talc product line (the "U.S. Trademark License").
In December 1996, the Registrant entered into a Settlement Agreement
and Amendment with the Sellers (the "Settlement Agreement"). The
Settlement Agreement provided for the licensing to the Registrant of
certain trademarks in Canada pursuant to a trademark license agreement (the
"Canadian Trademark License"). Additionally, the Agreement provided that
(i) deferred payments would be made with respect to products sold under the
5
Canadian Trademark License, (ii) total deferred payments would be subject
to a maximum of $4,000,000 and (iii) the Registrant was required to pay the
greater of $150,000 or 50% of such deferred payments in immediately
available funds, with the balance payable, at the option of the Registrant,
by wire transfer or a five-year promissory note. In the event that the
$4,000,000 maximum amount is not paid by January 31, 2004, the Registrant
must pay the difference in cash between that amount and deferred payments
made prior to such date.
The U.S. Trademark License grants the Registrant an exclusive license
to use certain trademarks relating to the Cashmere Bouquet product line in
connection with the manufacture and distribution of such product lines in
the United States. The Canadian Trademark License grants the Registrant an
exclusive license to use certain trademarks relating to the Cashmere
Bouquet powder product line in Canada. Each of the U.S. Trademark License
and the Canadian Trademark License has an initial term of ten years and is
automatically renewable for successive ten-year periods unless earlier
terminated by breach, mutual agreement or upon certain other specified
events. Any product sold under the license agreement is included in net
sales for purposes of determining the deferred payments.
In March 1996, the Registrant entered into a Trademark License and
Supply Agreement with Color Me Beautiful, Inc. ("CMB") to license certain
products of the Registrant's Frances Denney line and to supply the
requirements of CMB for such products. The agreement provides CMB with the
exclusive right to market and distribute specified Frances Denney products
in certain retail chain stores in the United States and Canada. The
agreement provides for royalty payments by CMB based upon net sales (as
defined in the agreement), with guaranteed minimum annual royalty payments
throughout the term of the agreement that are credited against accrued
royalties. The agreement also provides for the Registrant to be the
exclusive supplier of products sold under the agreement.
The Fort Company's Lauderdale location that serves as the Registrant's
corporate headquarters, and the Registrant provides general management
services to its subsidiaries from such location.
No single customer accounted for more than 10% of the Registrant's
consolidated revenues in 2001. Private label production, which is the
manufacturing of products marketed and sold under the brand names of
customers of the Company, accounted for approximately $1,300,000 of Company
sales, or approximately 4.6% of the Registrant's consolidated revenues in
2001, with the majority of such sales being derived from products
manufactured in the Tampa facility by Old 97 Company.
OLD 97 COMPANY.
Old 97 Company ("Old 97"), a wholly-owned subsidiary of the
Registrant, located in Tampa, Florida, was purchased in 1988 by the
Registrant. Old 97 markets products under brand names such as OLD 97,
KNIGHTS, and TAMMY. In addition to selling more than 100 different
products, including hair and skin care products, fragrances, personal
grooming aids and household items, Old 97 serves as an additional
manufacturing facility for the Company's products. Its Tampa facility
6
manufactures most of the products sold by the Frances Denney line, all the
talc manufactured for the Cashmere Bouquet and Quinsana brands, as well as
all the other retail hair and skin care brands sold by Stephan and Stephan
Distributing, Inc. The operations of Old 97 are included in the
Manufacturing segment of the Company's business. Old 97 is also
responsible for distribution of the above products.
WILLIAMSPORT BARBER AND BEAUTY CORP.
Williamsport Barber and Beauty Corp. ("Williamsport"), a wholly-owned
subsidiary of the Registrant, was acquired in January 1992 and is located
in Williamsport, Pa. Williamsport, a mail order beauty and barber supply
company, with sales of approximately $4,500,000 in 2001, accounted for
approximately 15.9% of the Registrant's consolidated revenues such year and
is included in the Professional business segment of the Company.
STEPHAN & CO.
Formerly known as Heads or Nails, Inc. and acquired by the Registrant
in August 1993, Stephan & Co., a wholly-owned subsidiary of the Registrant,
has focused on the distribution of personal care amenity products for
cruise ships. Sales by Stephan & Co. for the year ended December 31, 2001
were not material.
SCIENTIFIC RESEARCH PRODUCTS, INC. OF DELAWARE.
Purchased by the Company in April 1994, Scientific Research Products,
Inc. of Delaware ("Scientific"), a wholly-owned subsidiary of the
Registrant, was prior to such purchase, one of the Registrant's largest
private label customers and is a distributor of ethnic hair care products.
Scientific accounted for 10.9% of the Registrant's consolidated revenues in
2001, with sales of approximately $3,100,000. In addition, Scientific is
responsible for the distribution of the "Magic Wave" product line, formerly
marketed by Foxy Products, Inc., a company acquired by the Registrant in
1986. Sales by Foxy Products, Inc. for the year ended December 31, 2001
were not material. The majority of the sales of this company are included
in the Retail business segment of the Company.
TREVOR SORBIE OF AMERICA, INC.
On June 28, 1996, the Company entered into a Stock Purchase Agreement
with Sorbie Acquisition Co. ("Sorbie"), and the stockholders of Sorbie,
including it's president and principal stockholder, pursuant to which the
Company acquired Sorbie. The Company also entered into related agreements
with Sorbie's president, Trevor Sorbie International, Mr. Trevor Sorbie,
Samson Arms, Inc. and Redken Laboratories.
Sorbie, prior to the acquisition, was a major customer of the
Registrant and is a distributor of a professional line of hair care
products sold to salons in the United States, Canada and Mexico through a
network of distributors. Sales of Sorbie hair care products in 2001 were
approximately $1,600,000, representing 5.8% of the Registrant's
consolidated revenues, and are included in the Professional segment of the
Company's business.
7
STEPHAN DISTRIBUTING, INC.
On June 26, 1997, the Company, through Stephan Distributing, Inc., a
wholly-owned subsidiary, acquired several product lines from New Image
Laboratories, Inc. ("New Image"). The primary brands acquired were a
professional hair care line of products marketed under the brand name
"Image", and a retail hair care line known as "Modern" and marketed under
the brand name "Stiff Stuff". The brands were acquired for (i) 250,000
restricted shares of the Registrant's Common Stock, valued for purposes of
reserves under the terms of the agreement, at $10.81 per share, with
provision for half the restricted shares to be held in escrow pending,
among other things, certain potential purchase price adjustments computed
in accordance with the acquisition agreement and (ii) up to 100,000
restricted shares to be issued over the next two years contingent upon the
achievement of certain earnings levels as set forth in the acquisition
agreement.
New Image commenced litigation against the Company seeking an order of
the Court that the 125,000 shares of Common Stock held in escrow for the
contingent payment of certain purchase price adjustments be released from
escrow and turned over to New Image. Pursuant to a judgment dated March
20, 2001, the United States District Court for the Central District of
California granted New Image partial summary judgment and directed the
escrow agent to deliver the 125,000 shares to New Image. The Company has
appealed the judgment to the United States Court of Appeals for the Ninth
Circuit and believes that its chances of having the judgment overturned on
appeal are favorable (see "Item 3. Legal Proceedings"). The recorded value
of trademarks recorded, approximating $3,369,000, assumes the return to the
Company of the shares held in escrow.
In addition to being popular hair care lines, the brands acquired from
New Image have international distribution which the Registrant believes may
enhance the distribution of other products of the Registrant. Sales of
brands acquired from New Image amounted to approximately $2,900,000 for the
year ended December 31, 2001, which accounted for approximately 10.2% of
the Registrant's consolidated revenues. Sales of New Image products are
included in the Company's Professional business segment while sales of the
Modern line are included in the Company's Retail business segment.
MORRIS FLAMINGO-STEPHAN, INC.
Morris-Flamingo, Inc. ("Morris Flamingo") is a barber and beauty
supply wholesaler, similar to the Registrant's subsidiary, Williamsport
Barber and Beauty Corp., but markets its products utilizing catalogs
published under the Morris Flamingo brand name as well as the Major Advance
brand name. Additionally, this company manufactures hairpins, scissors and
beauty school cases. Sales for the year ended December 31, 2001 were
approximately $10,600,000, accounting for approximately 37.4% of the
Registrant's consolidated revenues, and are included in the Professional
segment of the Company's business.
SEGMENT INFORMATION
"Operating Segments and Related Information", which provides informa-
tion on net sales, income before income taxes, interest income and expense
8
and depreciation and amortization for the last three years and identifiable
assets for the last two years, for each of the Registrant's three business
segments, is set forth in Note 10 of the consolidated financial statements
included elsewhere in this Form 10-K.
RAW MATERIALS, PACKAGING and COMPONENTS INVENTORY
The materials utilized by the Registrant and its subsidiaries in the
manufacture of its products consist primarily of common chemicals, alcohol,
perfumes, labels, plastic bottles, caps and cartons. All materials are
readily available at competitive prices from numerous sources and have in
the past been purchased from domestic suppliers. Neither the Registrant
nor any of its subsidiaries has ever experienced any significant shortage
in supplies nor are any such shortages anticipated by the Registrant or its
subsidiaries in the reasonably foreseeable future. Due to market
conditions in the petroleum industry, the Registrant continues to
experience price increases in both raw material and component prices;
however, it is not anticipated that these price increases will have a
material adverse effect on operations and believes it can pass such
increases on to consumers.
The Registrant and its subsidiaries seek to maintain a level of
finished goods inventory of their products sufficient for a period of at
least three months. The Registrant does not anticipate any change in such
practice during the reasonably foreseeable future.
BACKLOG
As of December 31, 2001, the dollar amount of backlog orders was not
believed by the Registrant to be material.
RESEARCH AND DEVELOPMENT
During each of the three prior fiscal years ending December 31, 2001,
expenditures by the Registrant and its subsidiaries on Company sponsored
research relating to the development of new products, services or
techniques or the improvement of existing products, services or techniques
were not material and were expensed as incurred.
COMPETITION
The hair care and personal grooming business is highly competitive.
The Company believes that the principal competitive factors are price and
product quality. Products manufactured and sold by the Registrant and its
subsidiaries compete with numerous varieties of other such products, many
of which bear well known, respected and heavily advertised brand names and
are produced and sold by companies having substantially greater financial,
technical, personnel and other resources than the Registrant. Products
produced by the Registrant and its subsidiaries account for a relatively
insignificant portion of the total hair care and personal grooming products
manufactured and sold annually in the United States.
GOVERNMENT AND INDUSTRY REGULATION, ENVIRONMENTAL MATTERS
Certain of the Registrant's products are subject to regulation by the
9
Food and Drug Administration, in addition to other Federal, state and local
regulatory agencies. The Company believes that its products are in
substantial compliance with all applicable regulations. The Registrant does
not believe that compliance with existing or presently proposed
environmental standards, practices or procedures will have a material
adverse effect on operations, capital expenditures or the competitive
position of the Company.
EMPLOYEES
As of December 31, 2001, in addition to its seven officers, the
Registrant and its subsidiaries employed approximately 120 people engaged
in the production, warehousing, and distribution of their products.
Although the Registrant and its subsidiaries do not anticipate the need to
hire a material number of additional employees, the Company believes that
any such employees, if needed, would be readily available. No significant
number of employees are covered by collective bargaining agreements and the
Company believes its employee relationships are satisfactory.
Item 2. Properties
The Registrant's administrative, manufacturing and warehousing
facilities are located in a building of approximately 33,000 square feet,
which it owns, located at 1850 West McNab Road, Fort Lauderdale, Florida
33309. The Registrant utilizes approximately two-thirds of the space for
the manufacture and warehousing of its products. The remainder of the
space is utilized by the Registrant for its administrative offices. The
Registrant also owns certain machinery and equipment suitable for the
manufacture of its products that is housed in its facility in Fort
Lauderdale, Florida. In addition to the facility described above, the
Registrant leases approximately 39,000 square feet of warehouse space
located at 5300 North Powerline Road, Fort Lauderdale, Florida 33309, under
a lease extension which terminates July 31, 2002, with an annual net rental
of $238,000.
Old 97 owns three buildings totaling approximately 42,000 square feet
of space, one of which is located at 2306 35th Street, Tampa, Florida
33605. Such building is utilized by Old 97 in the manufacture of its
various product lines. In connection with a leased warehouse facility
adjacent to this location which is utilized by Old 97, a claim has been
filed with the Department of Transportation (see "Item 3. Legal
Proceedings"). 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 leases temporary warehouse space,
generally 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, 2007. Monthly rent in the amount of $1,800 is payable to the
former owner of Williamsport Barber Supply and the lease has a 60-day
cancellation clause.
10
In connection with the Morris Flamingo acquisition, the Company
entered into a lease, and subsequent lease extension, expiring in June
2005, for the 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,
the Company placed 125,000 shares of its Common Stock in escrow to cover
certain purchase price adjustment claims it could make if the inventories
or the accounts receivable were less than the amounts guaranteed by New
Image. In June of 1998, the Company made a claim for the return of all of
the stock held in escrow because it calculated that the inventories and the
accounts receivable were less than the guaranteed amount by a sum which
exceeded the value of the stock held in escrow. New Image then brought a
claim in Federal court in Los Angeles for breach of contract and fraud,
asserting that the Company was not entitled to any price adjustment. By
its action, New Image sought to recover the stock held in escrow. The
Company filed counterclaims seeking, among other things, the return of all
of the shares and recovery of certain property it alleges New Image failed
to turn over to the Company.
New Image and the Company each submitted a partial summary judgment
motion to the United States District Court. Pursuant to a judgment entered
on March 20, 2001, the Court, among other things, ordered that the escrow
agent deliver and transfer the 125,000 shares of Common Stock, including
all dividends held in escrow and other property with respect thereto, to
New Image. On April 12, 2001, the Company filed a notice of appeal of the
judgment to the Ninth Circuit Court of Appeals. The Company believes that
the United States District Court improperly weighed evidence, misconstrued
the agreement between the parties and misapplied the law. The Company has
posted a bond to stay enforcement, of the transfer of shares and other
property held by the escrow agent during pendency of the appeal. The
judgment of the United States District Court also awarded the Company
approximately $20,000, and dismissed certain other claims and affirmative
defenses.
New Image has cross-appealed claiming that it is entitled to reversal
of certain matters as set forth in the judgment as the court (i) did not
grant it monetary damages for the differences between the value of the
stock when it should have received the shares and the current value of the
Company's stock, (ii) dismissed its claim for promissory deceit and (iii)
refused to award it attorney's fees and costs as the prevailing party.
While it is not possible to predict with any certainty how a court would
rule, the Company and its counsel believe that the chances of the Company
prevailing on appeal are favorable. The Company's claims for reimbursement
11
of certain acquisition related expenses and for undelivered computer
equipment remain pending before the District Court.
On April 1, 1999, the Company announced that it would be restating its
financial statements for the second and third quarters of 1998 and that
results of operations for the year ended December 31, 1998 would be
substantially less than expected. On or about April 9, 1999, the Company
learned that three class action lawsuits had been filed against it, as well
as certain of its officers. The lawsuits alleged, among other things,
certain violations of Federal securities laws and sought an unspecified
amount of damages. The class action claims were consolidated and the
Company moved to dismiss the class action amended complaint. By final
order of dismissal, dated March 30, 2000, the Court dismissed the
complaint. Subsequent to such dismissal, the class action plaintiffs moved
to amend the judgment or for reconsideration. The plaintiffs were granted
an opportunity to file a second complaint and in September 2001, the United
States District Court for the Southern District of Florida dismissed the
class action lawsuit, with prejudice.
In May 2001, Old 97 Company commenced an action against Todd
Christopher International, Inc. d/b/a Vogue International ("Vogue") in the
Circuit Court of the State of Florida alleging claims for breach of
contract for goods sold and delivered and seeking damages in excess of
$200,000. Vogue has answered the complaint and has sought to file
counterclaims for an unspecified amount of damages. The Company believes
its claims against Vogue are meritorious. Moreover, the Company believes
that the Vogue counterclaim is not meritorious and intends to vigorously
defend the counterclaim.
On November 1, 2001, a private label customer filed a lawsuit against
the Company alleging causes of action for breach of contract, declaratory
judgment, and trademark infringement. The Company denied the allegations
and has counter-sued the customer. The counterclaim seeks unspecified
compensatory damages, interest, attorneys fees, costs and other relief on
the breach of contract and anticipatory breach claims and, in excess of
$400,000 on the account stated claim. At this time, the Registrant is
unable to predict the outcome of this matter.
In November 2001, the Registrant filed a claim with the Department of
Transportation ("DOT") in connection with the DOT's widening of Interstate
Highway 4, which will result in the loss of an adjacent rental facility
utilized by one of the Registrant's subsidiaries. After consultation with
legal counsel, the Registrant is unable to predict the ultimate outcome of
this matter and the amount of recovery, if any, that will result therefrom.
Item 4. 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 during each quarterly period
within the Registrant's two most recent fiscal years:
High Low
Quarter Ended Sales Price Sales Price
_____________ ___________ ___________
March 31, 2000 $ 5.13 $ 3.81
June 30, 2000 5.13 3.38
September 30, 2000 4.63 3.63
December 31, 2000 3.88 3.00
___________________________________________________________________________
March 31, 2001 $ 3.00 $ 3.00
June 30, 2001 3.40 2.91
September 30, 2001 3.20 2.89
December 31, 2001 3.19 2.75
(b) Holders
As of March 31, 2002, the Registrant's Common Stock was held of
record by approximately 330 holders. The Registrant's Common Stock is
believed to be held beneficially by others through approximately 1,200
brokerage accounts ("street-name shareholders").
(c) Dividends
The Company declared and paid cash dividends at the rate of $.02 per
share for each quarter in 1996 through 2001. Future dividends, if any,
will be determined by the Company's Board of Directors, in its discretion,
based on various factors, including the Company's profitability, cash on
hand and anticipated capital needs.
There are no contractual restrictions, including any restrictions on
the ability of any of the Registrant's subsidiaries, to transfer funds to
the Registrant in the form of cash dividends, loans or advances, that
currently materially limit the Registrant's ability to pay cash dividends
or that the Registrant reasonably believes are likely to materially limit
the future payment of dividends on its Common Stock.
Other Information:
In November 2000, the Registrant became aware of certain billing and
other irregularities involving an employee of a subsidiary of the Company
(refer to Note 1 of the Company's Form 10-K for the year ended December 31,
13
2000). At that time, the Registrant's Audit Committee initiated an
independent investigation into the irregularities and trading of the
Registrant's stock on the American Stock Exchange ("the Exchange") was
suspended until such time as the investigation was completed and the
Registrant satisfied certain other information filing requirements of the
Exchange. Trading in the Registrant's stock resumed in May 2001.
Item 6. Selected Financial Data (a)
2001 2000 1999 1998 1997
(in thousands, except per share data)
____________________________________________________
Net sales $28,296 $31,138 $34,356 $34,835 $27,113
Income/(Loss)
before income taxes 746 1,006 3,036 (4) 7,697
Net income/(loss) 608 622 1,843 (3) 5,041
Current assets 20,116 28,199 27,447 27,961 25,735
Total assets 57,062 58,769 59,435 60,600 57,464
Current
liabilities 4,067 4,521 3,725 5,332 8,468
Long term debt 7,758 9,124 10,418 11,718 9,078
PER COMMON SHARE
(Basic and Diluted): (b)
Net income/(loss) .14 .14 .40 (.00) 1.20
Cash dividends .08 .08 .08 .08 .08
Notes to Selected Financial Data
(a) The selected financial data above includes the operations of the
Company and its wholly-owned subsidiaries, Foxy Products, Inc. (acquired in
1986), Old 97 Company (acquired in 1988), Williamsport (acquired in 1992),
Stephan & Co., formerly Heads or Nails, Inc. (acquired in 1993),
Scientific (acquired in 1994), Trevor Sorbie of America, Inc. (acquired in
1996), Stephan Distributing, Inc., a subsidiary which acquired certain
brands from New Image in 1997, and Morris Flamingo-Stephan, Inc., a
subsidiary which acquired the business of Morris-Flamingo, L.P. in 1998.
(b) Net income/(loss) per common share is based upon the weighted average
number of common shares outstanding, in accordance with Statement of
Financial Accounting Standards No. 128, issued in February 1997. The
weighted average number of shares outstanding were 4,285,577 for 2001,
4,385,019 for 2000, 4,567,439 for 1999, 4,535,649 for 1998, and 4,213,372
for 1997. The weighted average number of diluted shares outstanding were
14
not significantly different in any of the aforementioned years. This data
should be read in conjunction with the audited consolidated financial
statements and related notes included elsewhere in this Form 10-K
Selected Quarterly Financial Information (unaudited)
(in thousands, except per share data)
3/31/01 6/30/01 9/30/01 12/31/01
________ ________ ________ ________
Net sales $ 7,580 $ 7,833 $ 6,584 $ 6,299
Gross profit 3,358 3,213 2,858 2,624
Net income/(loss) 387 316 (90) (5)
Net income/(loss)
per share .09 .07 (.02) (.00)
3/31/00 6/30/00 9/30/00 12/31/00
________ ________ ________ ________
Net sales $ 8,091 $ 8,237 $ 7,803 $ 7,007
Gross profit 3,656 3,883 2,883 2,209
Net income/(loss) 560 709 (17) (630)
Net income/(loss)
per share .13 .16 (.00) (.15)
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 AS COMPARED TO 2000
__________________________________________________
Net sales for 2001 decreased as a result of an overall decline in the
Company's Professional and Retail business segments. While the sales and
distribution of "hard goods" remained relatively unchanged, there was a
decline in the net sales of "wet goods" (which comprise a significant
portion of the "Retail" segment), of approximately $2,900,000. Management
had taken steps to increase sales in 2001 by restructuring reporting lines
and hiring additional middle-management personnel in an effort to increase
the exposure and distribution of the Sorbie, New Image and retail brands.
While these efforts did not have the impact in 2001 that management
anticipated, the Company feels that the arrangements and commitments
secured early in 2002 as a result of those efforts will have an effect on
retail brand sales.
Gross profit decreased $578,000, to $12,053,000 in 2001 when compared
to the $12,631,000 achieved in 2000. This decrease of approximately 4.6%
was due to an overall decline in net sales. Management was encouraged by
the increase in the overall gross profit percentage, increasing from the
40.6% achieved in 2000 to 42.6% for the year ended December 31, 2001.
This increase can be largely attributed to new customers and more effective
manufacturing operations.
15
The Retail operating segment experienced a decline in net sales. Net
retail sales in 2001 were $6,496,000, as compared to $8,969,000 in 2000.
The decline in such net sales was due to an almost across the board decline
in the net sales of the Company's retail lines, however, the "Modern" and
"Frances Denney" lines showed increases in 2001 and as indicated above,
management is encouraged by the Company's prospects in 2002. The
continuing consolidation in the chain-drug store industry continues to
increase the amount of discounting and promotional allowances that must be
extended to large retailers which sometimes has an inhibiting effect on the
number of SKU's (stock keeping units) that a retailer may carry.
Private label manufacturing increased slightly in 2001 as the Company
finished seasonal production for a significant customer. However, the
Company is currently in litigation with this customer, as more fully
discussed in Item 3, "Legal Proceedings" and is continuing to explore other
private label business opportunities.
Selling, general and administrative expenses decreased $290,000, from
$11,653,000 in 2000 to $11,363,000 in 2001. The overall decline in
selling, general and administrative expenses was due to a company-wide
decrease in payroll and general office expenses offset somewhat by the
anticipated increase in consulting, marketing and legal and professional
fees.
Interest expense decreased $174,000 from $872,000 in 2000 to $698,000
in 2001 as a result of a decrease in outstanding debt and the refinancing
of the long-term note payable, in August 2001. Other income includes a
royalty payment of $175,000 from Color Me Beautiful in connection with the
marketing of Frances Denney products.
Income taxes decreased $245,000, from $384,000 for the year ended
December 31, 2000 to $138,000 for the year ended December 31, 2001, due to
a combination of a decline in income before income taxes and a decrease in
the overall amount of deferred income taxes.
Earnings per share for the year ended December 31, 2001 was $.14,
equal to the $.14 per share achieved in 2000. The average number of shares
outstanding decreased in 2001, from 4,385,019 to 4,285,577, as a result of
the repurchase of 165,780 shares during 2000.
YEAR ENDED DECEMBER 31, 2000 AS COMPARED TO 1999
__________________________________________________
Net sales for 2000 decreased primarily as a result of declines in the
Company's Professional and Retail business segments. While the sales and
distribution of "hard goods" continued to improve, with a net increase of
approximately $135,000 over the level achieved in 1999, there was a decline
in the net sales of "wet goods" of approximately $1,800,000. In general,
"hard goods" have a lower gross margin than "wet goods". Management has
taken steps to increase sales in 2001 by restructuring reporting lines,
hiring additional middle-management personnel in an effort to increase the
exposure and distribution of the Sorbie and New Image brands, and plans to
increase the amount of expenditures for advertising and promotional
expenses.
16
Gross profit decreased $2,158,000, to $12,631,000 in 2000 when
compared to the $14,789,000 achieved in 1999. This decrease of
approximately 15% was due to an overall decline in net sales and a
continuing change in the overall mix of business. As the net sales of
professional "wet goods" declines, the overall gross profit margin
continues to erode, decreasing from the 43.0% achieved in 1999 to 40.6% in
2000. As the "hard goods" sales of the Williamsport and Morris Flamingo-
Stephan divisions continue to increase, the Company expects to experience a
change in the business mix that will reduce its overall gross profit
margin. These two divisions accounted for approximately 50% of
consolidated Company net sales. The Company continues to devote
significant time and effort in trying to improve the gross profit margins
of these two divisions, which have improved slightly over last year.
The operating segment "Retail Personal Care Products" experienced a
decline in net sales. Net retail sales in 2000 were $8,969,000, as compared
to $9,705,000 in 1999. Almost 50% of the $736,000 decline in such net
sales was due to a drop in the sales of the "Modern" line, which
experienced very successful initial sales to new customers in 1999. While
initial year sales are always at a higher than normal level, continued
sales of this product line remain encouraging. As net sales of the
"LeKair" and "Denney" lines also declined, net sales of the other retail
brands increased over 12%. In addition, the continuing consolidation in
the chain-drug store industry also increases the amount of discounting and
promotional allowances large retailers demand of their suppliers, which
reduces the gross profit margins on brands supplied to those retailers. The
Company has continued to respond to these discounting pressures in order to
maintain as much market share as reasonably practicable without sacrificing
the profitability of the Company.
Private label manufacturing declined in 2000 as the Company lost one
significant customer but was successful in acquiring a new private label
customer in the third quarter of 2000.
In the past, the gross profit margin, as well as gross profit,
generally had increased as the Company's business mix shifted away from
private labeling, or "contract" filling, to professional hair care products
and retail hair and skin care brands, which generally afforded the Company
a higher gross profit. However, as discussed above, the Company continues
to experience a change in the sales mix and competitive pressures. With
the acquisition of Morris-Flamingo, L.P. in 1998, the Company anticipates
that its overall gross profit margins will continue to be lower than those
experienced in the past. Although the Company expects gross profit margins
to increase in the future, it will not reach the historical rates the
Company has previously experienced.
Selling, general and administrative expenses decreased by $94,000,
from $11,747,000 in 1999 to $11,653,000 in 2000. The overall decline in
selling, general and administrative expenses was not as large as the
Company had expected, due to an increase in legal and professional costs
associated with the investigation into certain billing irregularities, as
well as other related costs in the fourth quarter of 2000.
17
Interest expense decreased over $70,000 from $944,000 in 1999 to
$872,000 in 2000 as a result of a decrease in outstanding debt. Other
income includes a royalty payment of $175,000 from Color Me Beautiful in
connection with the marketing of Frances Denney products, an increase of
$15,000 over the fee paid in 1999.
Earnings per share for the year ended December 31, 2000 was $.14, a
decrease of $.26 per share from the $.40 in 1999. The average number of
shares outstanding decreased in 2000, from 4,567,439 to 4,385,019, as a
result of the repurchase of 165,780 shares in 2000.
LIQUIDITY AND CAPITAL RESOURCES
_______________________________
In August 2001, the Company refinanced its long-term debt by
purchasing CD's and pledging them as collateral for the outstanding
indebtedness. The Company was able to significantly reduce its cost of
money, exchanging debt carried at a rate of 6.65% for debt with a rate that
was 50 basis points over the CD rate. At December 31, 2001, the rate on
the note was 3.78%. While the CD's periodically mature, they roll over
annually at an amount equal to the outstanding indebtedness and reset at
the then current market interest rate, but the interest rate charged on the
note will also reset, maintaining a spread of 50 basis points. Since the
CD's are collateralizing the long-term debt payable, they are classified as
non-current and not included in working capital or cash and cash
equivalents. Working capital was approximately $16,049,000 at December 31,
2001, a decrease of $7,629,000 from December 31, 2000. Cash and cash
equivalents decreased $5,150,000, to $8,409,000 when compared to the
$13,559,000 on hand at December 31, 2000. Total cash, including
certificates of deposit ("CD's"), increased from $13,559,000 at December
31, 2000 to $15,994,000.
Inventory levels declined as management continued its efforts to
reduce the overall amount of inventory on hand. Overall, accounts payable
and accrued expenses decreased significantly at December 31, 2001, largely
as a result of a decrease in accounts payable to vendors as existing levels
of inventory were utilized.
The Company has not experienced any adverse impact from the effects of
inflation in the past. Management maintains the flexibility to increase
prices and does not have any binding contract pricing with either customers
or vendors. Many of the Company's products, as well as the components
used, are petroleum-based products, and as in the past, such prices have
been subject to various political or economic pressures. The Company does
not presently foresee any increase in its raw material or component costs
but believes it has the flexibility of calling upon multiple vendors and
the ability to increase prices to offset any price changes.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." Among other provisions, SFAS No. 133 established accounting
and reporting standards for derivative instruments and for hedging
activities. It also required that an entity recognize all derivatives as
18
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. In July 1999, FASB issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities-
Deferral of the Effective Date of FASB No. 133" and in June 2000, FASB
issued SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities" for financial statements for fiscal years
beginning after June 15, 2000. The adoption of these statements on January
1, 2001 did not have a significant effect on the Company's financial
position, results of operations or cash flows.
In July 2001, FASB issued SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". These standards make
changes to the accounting for business combinations, goodwill and
intangible assets. SFAS No. 141 requires all business combinations entered
into subsequent to June 30, 2001 to be accounted for using the purchase
method of accounting. SFAS No. 142 provides that goodwill and other
intangible assets with indefinite lives will not be amortized, but will be
tested for impairment at least annually. SFAS No. 142 is effective for
years beginning after December 15, 2001. Goodwill and intangible assets
acquired subsequent to June 30, 2001 are immediately subject to the
provisions of SFAS No. 142. The Company adopted SFAS No. 142 on January 1,
2002 and is in the initial phase of testing for the impairment of existing
goodwill. During the year ended December 31, 2001, amortization of
goodwill was approximately $528,000.
In August 2001, FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which supersedes, but does
not replace, SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets to be Disposed Of", as well as other earlier related pronouncements,
either in whole or in part. SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and
interim periods within those fiscal years, with earlier application is
encouraged. Management does not believe that the adoption of this
statement will have a significant effect on the Company's financial
position, results of operations or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"), providing guidance on recognition of income, presentation and
disclosure of revenue in financial statements. The Company believes that
its revenue recognition policies are in conformity with the guidance
provided in SAB 101.
On March 5, 2001, the Company announced that its Board of Directors
had formed a two-person, special committee to explore various strategic
alternatives to enhance shareholder value. Four members of the Company's
management and directors, exclusive of the committee members, formed a
group to purchase all of the Company's outstanding capital stock in a going
private transaction. Independent legal counsel and investment banking
advisors were retained to advise and assist in the transaction, and the
group submitted a bid for the acquisition of the outstanding Common Stock
of the Company. After incurring approximately $125,000 of expenses through
December 31, 2001, it is estimated that the remaining costs associated with
this process will be in excess of $500,000. On April 16, 2002 the Company
announced that the
19
Special Committee of its Board of Directors has, after an auction conducted
by Robinson Humphrey Company LLC, its investment banker, accepted a bid by
four members of the Company's management and directors. Such bid is to
purchase all of the Company's common stock at $4 per share. No other viable
bids were received by the committee for the entire Company. The management
bid is subject to various conditions, including financing. The Company's
management is currently in the process of negotiating with lenders to
obtain financing necessary for the transaction. There can be no assurance
that the bidder will be able to obtain such financing on acceptable terms
or that the transaction will be consummated.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
__________________________________________
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States of
America ("generally accepted accounting principles") requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ significantly from those estimates if different assumptions were
used or different events ultimately transpire. The Registrant believes
that the following discussion touches upon the most critical accounting
policies that requires management to make difficult, subjective and/or
complex judgments, often due to a need to make estimates about matters that
are inherently uncertain.
VALUATION OF ACCOUNTS RECEIVABLE: The ultimate amount of collections
received against outstanding accounts receivable must take into account
returns, allowances and deductions that may be made by the customer. Many
retailers to whom the Registrant sells product take deductions for various
forms of marketing expenses, as well as participating in nationwide
reclamation cooperatives for processing damaged goods. Other expenses to
which the Registrant is subject to, in addition to those experienced in the
retail environment, but also with Professional products sold to
distributors, include deductions for freight if the invoice is paid within
specified terms, co-op advertising allowances, new store/warehouse
allowances and, from time to time, limited rebate programs. The Registrant
attempts to estimate these costs, as well as also providing for anticipated
bad debts, by recording allowances based upon experience, economic
conditions, normal customer inventory levels and/or competitive conditions.
Actual returns, credits or allowances, as well as the condition of any
product actually returned, may differ significantly from the estimates used
by the Registrant.
INVENTORIES: Inventories are stated at the lower of cost or market,
determined by the first-in, first-out (FIFO) method. The Registrant
periodically evaluates inventory levels, giving consideration to factors
such as the physical condition of the goods, the sales patterns of finished
goods and the useful life of particular packaging, componentry and finished
goods and estimates a reasonable amount to be provided for slow moving,
obsolete or damaged inventory. These estimates could vary significantly,
20
either favorably or unfavorably, from actual requirements based upon future
economic conditions, customer inventory levels or competitive factors that
were not foreseen or did not exist when the valuation allowances were
established.
INTANGIBLE ASSETS: Long-lived assets, including intangibles other
than goodwill, are periodically reviewed by the Registrant for impairment
whenever events or changes in circumstances indicate that the carrying
value of any asset may be impaired. This evaluation may include an
estimate of the cash flow that can be expected and is based upon, among
other things, certain assumptions about expected future operating
performance. The Registrant's estimates of undiscounted cash flow may
differ from actual cash flow due to, among other things, economic
conditions, changes in its business model or changes in its operating
performance and these changes may be significant and, ultimately, have a
bearing on the carrying value of the intangible asset and may require the
recognition of an impairment loss, measured as the amount by which the
carrying value exceeds the fair value of the asset.
Item 7A. 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 consolidated financial statements and
supplementary data contained elsewhere in this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
21
PART III
The information required by Part III of this Form 10-K ( Items 10-13)
is incorporated herein by reference from the Registrant's proxy statement
with respect to the Company's 2002 annual meeting of stockholders scheduled
to be filed with the Securities and Exchange Commission no later than May
1, 2002.
22
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.
45
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.
23
10.11 Acquisition Agreement, dated as of May 23, 1997, between
New Image Laboratories, Inc., The Stephan Co. and Stephan Distributing,
Inc., in connection with the acquisition of brands, included with the Form
10-Q for the period ended June 30, 1997, filed August 13, 1997, is
incorporated herein by reference.
10.12 Acquisition Agreement, dated as of March 18, 1998,
between Morris Flamingo-Stephan, Inc., The Stephan Co., Morris-Flamingo,
L.P., Morris-Flamingo Beauty Products, Inc., Shaheen & Co., Inc. and Shouky
A Shaheen, included with the Form 10-Q for the period ended June 30, 1998,
filed May 15, 1998, is incorporated herein by reference.
10.13 1990 Key Employee Stock Incentive Plan, as amended.
10.14 1990 Non-Employee (Outside Directors) Plan, as amended.
(b) Financial Statements and Financial Statement Schedules
(i) Financial Statements
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 2001
and 2000.
Consolidated Statements of Operations for the years
ended December 31, 2001, 2000, and 1999.
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 2001, 2000,
and 1999.
Consolidated Statements of Cash Flows for the years
ended December 31, 2001, 2000, and 1999.
Notes to Consolidated Financial Statements.
(ii) Financial Statement Schedules
All schedules are omitted because they are not applicable
or the required information is shown in the consolidated
financial statements or notes thereto.
24
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of The Stephan Co.:
We have audited the accompanying consolidated balance sheets of The Stephan
Co. and subsidiaries (the "Company") as of December 31, 2001 and 2000, and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December
31, 2001 and 2000, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United
States of America.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
April 16, 2002
F-1
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
ASSETS
2001 2000
___________ ___________
CURRENT ASSETS
Cash and cash equivalents $ 8,409,142 $13,559,268
Accounts receivable, net 1,808,828 3,026,553
Inventories 9,286,295 10,377,851
Income taxes receivable 345,220 1,028,112
Prepaid expenses
and other current assets 266,460 207,061
___________ ___________
TOTAL CURRENT ASSETS 20,115,945 28,198,845
CERTIFICATES OF DEPOSIT 7,585,000 -
PROPERTY, PLANT AND EQUIPMENT, net 2,308,003 2,617,521
INTANGIBLE ASSETS, net 23,432,105 24,736,603
OTHER ASSETS 3,621,103 3,215,848
___________ ___________
TOTAL ASSETS $57,062,156 $58,768,817
=========== ===========
See notes to consolidated financial statements.
F-2
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
LIABILITIES AND STOCKHOLDERS' EQUITY
2001 2000
___________ ____________
CURRENT LIABILITIES
Accounts payable and
accrued expenses $ 2,560,051 $3,001,720
Current portion of
long-term debt 1,507,256 1,519,277
___________ ___________
TOTAL CURRENT LIABILITIES 4,067,307 4,520,997
DEFERRED INCOME TAXES, net 1,535,285 1,677,805
LONG-TERM DEBT, less current
maturities 7,758,370 9,123,929
___________ ___________
TOTAL LIABILITIES 13,360,962 15,322,731
___________ ___________
COMMITMENTS AND CONTINGENCIES (NOTES 2 and 11)
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value;
1,000,000 shares authorized; none issued - -
Common stock, $.01 par value;
25,000,000 shares authorized;
4,410,577 issued at December 31, 2001
and 4,426,897 issued at
December 31, 2000 44,106 44,269
Additional paid in capital 18,417,080 18,477,341
Retained earnings 26,591,571 26,336,463
___________ ___________
45,052,757 44,858,073
LESS:
125,000 CONTINGENTLY
RETURNABLE SHARES (1,351,563) (1,351,563)
TREASURY STOCK (16,320 shares) - (60,424)
___________ ___________
TOTAL STOCKHOLDERS' EQUITY 43,701,194 43,446,086
___________ ___________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $57,062,156 $58,768,817
=========== ===========
See notes to consolidated financial statements.
F-3
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
___________ ___________ ___________
NET SALES $28,296,312 $31,137,782 $34,355,848
COST OF GOODS SOLD 16,243,428 18,506,860 19,566,466
___________ ___________ ___________
GROSS PROFIT 12,052,884 12,630,922 14,789,382
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 11,363,190 11,652,923 11,747,107
___________ ___________ ___________
OPERATING INCOME 689,694 977,999 3,042,275
OTHER INCOME(EXPENSE)
Interest income 579,866 724,728 427,804
Interest expense (698,207) (871,853) (943,856)
Royalty income 175,000 175,000 510,000
___________ __________ ___________
INCOME BEFORE
INCOME TAXES 746,353 1,005,874 3,036,223
INCOME TAX EXPENSE 138,398 383,647 1,193,397
___________ __________ ___________
NET INCOME $ 607,955 $ 622,227 $ 1,842,826
=========== ========== ===========
BASIC AND DILUTED
EARNINGS PER SHARE $ .14 $ .14 $ .40
=========== ========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,285,577 4,385,019 4,567,439
=========== ========== ===========
See notes to consolidated financial statements.
F-4
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Common Stock Additional Contingently
___________________ Paid in Retained Returnable Treasury
Shares Par Value Capital Earnings Stock Stock
__________ ________ ___________ ___________ __________ _________
Balances,
Jan 1,1999 4,725,858 47,259 19,692,043 24,608,845 (1,351,563) -
Treasury
stock
purchased - - - - - (614,867)
Treasury
stock
retired (64,900) (649) (287,484) - - 288,133
Dividends paid - - - (375,752) - -
Net income
for 1999
- - - 1,842,826 - -
_________ _________ ___________ ___________ __________ _________
Balances,
Dec31,1999 4,660,958 46,610 19,404,559 26,075,919 (1,351,563)(326,734)
Treasury
stock
purchased - - - - - (663,249)
Treasury
stock
retired (234,061) (2,341) (927,218) - - 929,559
Dividends paid - - - (361,683) - -
Net income
for 2000 - - - 622,227 - -
_________ _________ ___________ ___________ __________ _________
Balances,
Dec31,2000 4,426,897 $ 44,269 $18,477,341 $26,336,463$(1,351,563)$(60,424)
Treasury
stock
retired (16,320) (163) (60,261) - - 60,424
Dividends paid - - - (352,847) - -
Net income
for 2001 - - - 607,955 - -
Balances,
Dec31,2001 4,410,577 $ 44,106 $18,417,080 $26,591,571$(1,351,563) $ -
========= ========= =========== =========== =========== ========
See notes to consolidated financial statements
F-5
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
2001 2000 1999
__________ __________ __________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 607,955 $ 622,227 $1,842,826
__________ ___________ __________
Adjustments to reconcile net income
to net cash flows provided by
operating activities:
Depreciation 394,556 423,077 508,362
Amortization of intangibles 1,353,568 1,190,232 1,204,605
Amortization of other assets 146,137 102,014 61,553
Loss on disposal of property,
plant and equipment - - 16,076
Deferred income taxes (142,520) 234,855 888,933
Provision for doubtful accounts 131,164 97,627 46,515
Changes in operating assets
and liabilities:
Accounts receivable 1,086,561 (230,565) 659,145
Inventories 1,091,556 1,576,340 3,332,179
Income taxes receivable 682,892 (898,972) 358,219
Prepaid expenses
and other current assets (59,399) 83,949 (71,113)
Certificates of deposit (7,585,000) - -
Other assets (551,392) 14,846 (861,330
Accounts payable
and accrued expenses (441,669) 1,145,051 (1,270,087)
_________ _________ _________
Total adjustments (3,893,546) 3,738,454 4,873,057
_________ _________ _________
Net cash flows (used)/provided
by operating activities (3,285,591) 4,360,681 6,715,883
_________ _________ _________
See notes to consolidated financial statements.
F-6
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
2001 2000 1999
__________ __________ __________
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in cash on
deposit with trustee - - 270,684
Purchase of property, plant
and equipment (85,038) (140,879) (304,812)
Purchase of intangible assets (49,070) (71,096) (57,470)
_________ ________ __________
Net cash flows used in
investing activities (134,108) (211,975) (91,598)
_________ ________ __________
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (9,517,580) (1,643,710) (1,636,224)
Proceeds from notes payable
to bank 8,140,000 - -
Acquisition of treasury stock - (663,249) (614,867)
Dividends paid (352,847) (361,683) (375,752)
___________ ___________ ___________
Net cash flows used in
financing activities (1,730,427) (2,668,642) (2,626,843)
___________ ___________ ___________
NET (DECREASE)/INCREASE IN
CASH AND CASH EQUIVALENTS (5,150,126) 1,480,064 3,997,442
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 13,559,268 12,079,204 8,081,762
___________ ___________ ___________
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 8,409,142 $13,559,268 $12,079,204
=========== =========== ===========
See notes to consolidated financial statements.
F-7
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Supplemental Disclosures of Cash Flow Information:
2001 2000 1999
__________ __________ __________
Interest paid $ 651,533 $ 809,804 $ 976,478
========== ========== ==========
Income taxes paid $ 100,614 $1,422,013 $ 333,814
========== ========== ==========
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
For the year ended December 31, 2000, equipment costing $99,340 was
purchased from a customer and the purchase price was applied against the
outstanding account receivable.
For the years ended December 31, 2001, 2000 and 1999, 16,320, 234,061 and
64,900 shares of treasury stock, respectively, were retired.
See notes to consolidated financial statements.
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
PRINCIPLES OF CONSOLIDATION: The consolidated financial
statements include the accounts of The Stephan Co. and its wholly-owned
subsidiaries, Foxy Products, Inc., Old 97 Company, Williamsport Barber and
Beauty Supply Corp., Stephan & Co., Scientific Research Products, Inc. of
Delaware, Trevor Sorbie of America, Inc., Stephan Distributing, Inc. and
Morris Flamingo-Stephan, Inc. (collectively, the "Company"). All signifi-
cant intercompany balances and transactions have been eliminated in
consolidation.
NATURE OF OPERATIONS: The Company is engaged in the manufacture,
sale, and distribution of hair and personal care grooming products
principally throughout the United States. Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures About Segments of an Enterprise
and Related Information," requires the reporting of segment information
using a "management approach" as it relates to the operating segments of a
business. As explained more fully in Note 10, the Company has allocated
substantially all of its business into three segments, which include
professional hair care products and distribution, retail personal care
products and manufacturing.
USE OF ESTIMATES: The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in
the United States of America ("generally accepted accounting principles")
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
MAJOR CUSTOMERS: There were no sales to any single customer in
excess of 10% of net sales in 2001. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires
no collateral. The Company does not believe that its customers' credit
risk represents a material risk of loss to the Company. However, the loss
of a large customer could have an adverse effect on the Company.
LONG-LIVED ASSETS: SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. The amount of impairment, if any, in
unamortized Goodwill is measured based on projected future undiscounted
cash flows. To the extent future undiscounted cash flows of those
subsidiaries to which the Goodwill relates through the period such Goodwill
is being amortized are sufficient to absorb the amortization of Goodwill,
the Company has deemed there to be no impairment of Goodwill.
F-9
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
STOCK-BASED COMPENSATION: SFAS No. 123, "Accounting for Stock-
Based Compensation", permits entities to recognize as an expense over the
vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 allows entities to continue to measure
compensation cost for stock-based awards using the intrinsic value based
method of accounting prescribed by Accounting Principles Board
("APB")Opinion No. 25, "Accounting for Stock Issued to Employees," and to
provide pro forma net income and pro forma earnings per share disclosures
as if the fair value method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No.
25 and provide the pro forma disclosure provisions of SFAS No. 123. See
Note 12.
FAIR VALUE OF FINANCIAL INSTRUMENTS: SFAS No. 107, "Disclosure
about Fair Value of Financial Instruments," requires disclosure of the fair
value of financial instruments, both assets and liabilities, recognized and
not recognized in the consolidated balance sheets of the Company, for which
it is practicable to estimate fair value. The estimated fair values of
financial instruments which are presented herein have been determined by
the Company using available market information and recognized valuation
methodologies. However, considerable judgment is required in interpreting
market data to develop estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of amounts the Company
could realize in a current market sale of such instrument.
The following methods and assumptions were used to estimate fair
value:
- the carrying amounts of cash and cash equivalents, receivables and
accounts payable approximate fair value due to their short term
nature;
- discounted cash 45flows using current interest rates for financial
instruments with similar characteristics and maturity were used to
determine the fair value of notes payable and debt.
As of December 31, 2001 and 2000 there was no significant differences in
the carrying values and fair market values of financial instruments.
REVENUE RECOGNITION: Revenue is recognized when all significant
contractual obligations have been satisfied, which involves the delivery of
manufactured goods and reasonable assurance as to the collectability of the
resulting account receivable. In December 1999, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"), providing guidance on
recognition of income, presentation and disclosure of revenues in the
financial statements. The Company believes that its revenue recognition
policies are in conformity with the guidance provided in SAB 101.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include
cash, certificates of deposit, U. S. Government issues, and municipal bonds
having maturities of 90 days or less when acquired. The Company maintains
cash deposits at certain financial institutions in amounts in excess of
federally insured limits of $100,000. Cash and cash equivalents held in
F-10
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
interest-bearing accounts as of December 31, 2001 and 2000 were
approximately $7,257,000 and $12,995,000, respectively. At December 31,
2001, the Company excluded certificates of deposit in the amount of
$7,585,000 from the above as it is pledged as collateral for a bank loan
and has a remaining term of eight months.
INVENTORIES: Inventories are stated at the lower of cost
(determined on the first-in, first-out basis) or market. Direct labor and
overhead costs charged to inventories for the years ended December 31, 2001
and 2000 were approximately $2,838,000 and $3,219,000, respectively. Direct
labor and overhead costs capitalized in inventories as of December 31, 2001
and 2000 were approximately $1,443,000 and $1,701,000, respectively.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are
recorded at cost. Routine repairs and maintenance are expensed as
incurred. Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets as follows:
Buildings and improvements 15-30 years
Machinery and equipment 5-10 years
Furniture and office equipment 3-5 years
INTANGIBLE ASSETS: Intangible assets are amortized using the
straight-line method based on the following estimated useful lives:
Goodwill 20-40 years
Covenant not to compete 7 years
Trademarks 20-40 years
Deferred acquisition costs 10 years
INCOME TAXES: Income taxes are calculated under the asset and
liability method of accounting. Deferred income taxes are recognized by
applying the enacted statutory rates applicable to future year differences
between the financial statement carrying amounts and the tax basis of
existing assets and liabilities. A valuation allowance is recorded when it
is more likely than not that some portion or all of the deferred tax asset
will not be realized.
BASIC AND DILUTED EARNINGS PER SHARE: Basic and diluted earnings
per share are computed by dividing net income by the weighted average
number of shares of common stock outstanding. For the years ended December
31, 2001, 2000 and 1999, the Company had 743,648, 739,524 and 506,625
outstanding stock options, respectively. None of these options were
included in the calculation of earnings per share because their inclusion
would be anti-dilutive.
NEW FINANCIAL ACCOUNTING STANDARDS: In June 1998, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." Among other provisions,
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. It also requires that an entity
recognize all derivatives as either assets or liabilities in the statement
F-11
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
of financial position and measure those instruments at fair value. In July
1999, FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of FASB No. 133" and, in
June 2000, FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", which are effective for
financial statements for fiscal years beginning after June 15, 2000. The
adoption of these statements on January 1, 2001 did not have a significant
effect on the Company's financial position, results of operations or cash
flows.
In July 2001, FASB issued SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". These standards make
changes to the accounting for business combinations, goodwill and
intangible assets. SFAS No. 141 requires all business combinations entered
into subsequent to June 30, 2001 to be accounted for using the purchase
method of accounting. SFAS No. 142 provides that goodwill and other
intangible assets with indefinite lives will not be amortized, but will be
tested for impairment at least annually. SFAS No. 142 is effective for
years beginning after December 15, 2001. Goodwill and intangible assets
acquired subsequent to June 30, 2001 are immediately subject to the
provisions of SFAS No. 142. The Company adopted SFAS No. 142 on January 1,
2002 and is in the initial phase of testing for the impairment of existing
goodwill. During the year ended December 31, 2001, amortization of
goodwill was approximately $528,000.
In August 2001, FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which supersedes, but does
not replace, SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets to be Disposed Of", as well as other earlier related pronouncements,
either in whole or in part. SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and
interim periods within those fiscal years, with earlier application
encouraged. Management does not believe that the adoption of this
statement would have a significant effect on the Company's financial
position, results of operations or cash flows.
NOTE 2. SIGNIFICANT TRANSACTIONS
In connection with the acquisition of several product lines from New
Image Laboratories, Inc. ("New Image") on June 26, 1997, the Company
acquired certain accounts receivable, inventories, fixed assets and
trademarks, and assumed approximately $5,332,000 in certain trade and other
liabilities. The purchase price was subject to adjustment based upon the
value of the net assets acquired, as determined on the first anniversary of
the closing date. New Image commenced litigation against the Company
seeking an order of the Court that the 125,000 shares of Common Stock held
in escrow for the contingent payment of certain purchase price adjustments
be released from escrow and turned over to New Image. Pursuant to a
judgment dated March 20, 2001, the United States District Court for the
Central District of California granted New Image partial judgment and
directed the escrow agent to deliver the 125,000 shares to New Image. The
Company has appealed the judgment to the United States Court of Appeals for
F-12
NOTE 2. SIGNIFICANT TRANSACTIONS (Continued)
the Ninth Circuit and believes that its chances of having the judgment
overturned on appeal are favorable. The value of trademarks recorded,
approximating $3,369,000, assumes the return to the Company of the shares
held in escrow.
NOTE 3. ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 2001 and 2000 consisted of the
following:
2001 2000
__________ __________
Trade accounts receivable $1,961,053 $3,131,555
Less: Allowance for
doubtful accounts (152,225) (105,002)
__________ __________
Accounts receivable, net $1,808,828 $3,026,553
========== ==========
The following is an analysis of the allowance for doubtful accounts
for the year ended December 31:
2001 2000 1999
_________ _________ _________
Balance, beginning of year $ 105,002 $ 125,846 $ 175,155
Provision for doubtful
accounts 131,164 97,627 46,515
Uncollectible accounts
written off, net of recoveries (83,941) (118,471) (95,824)
_________ _________ _________
Balance, end of year $ 152,225 $ 105,002 $ 125,846
========= ========= =========
NOTE 4. INVENTORIES
Inventories at December 31, 2001 and 2000 consisted of the following:
2001 2000
____________ ____________
Raw materials $ 3,180,670 $ 2,620,048
Packaging and components 3,448,541 3,700,758
Work in progress 341,507 703,571
Finished goods 5,502,599 6,284,531
____________ ____________
12,473,317 13,308,908
Less: Amount included
in other assets (3,187,022) (2,931,057)
____________ ____________
Balance, end of year $ 9,286,295 $ 10,377,851
============ ============
F-13
NOTE 4. INVENTORIES (Continued)
Raw materials include surfactants, chemicals and fragrances used in
the production process. Packaging materials include cartons, inner sleeves
and boxes used in the actual product, as well as outer boxes and cartons
used for shipping purposes. Components are the bottles or containers
(plastic or glass), jars, caps, pumps and similar materials that will
become part of the finished product. Finished goods also include hair
dryers, electric clippers, lather machines, scissors and salon furniture.
Included in other assets is inventory not anticipated to be utilized within
one year.
NOTE 5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment at December 31, 2001 and 2000 consisted
of the following:
2001 2000
__________ ___________
Land $ 379,627 $ 379,627
Buildings and improvements 2,094,046 2,094,046
Machinery and equipment 1,950,866 2,042,122
Furniture and office equipment 554,948 509,026
__________ __________
4,979,487 5,024,821
Less: accumulated depreciation (2,671,484) (2,407,300)
__________ __________
Balance, end of year $2,308,003 $2,617,521
========== ==========
NOTE 6. INTANGIBLE ASSETS
Intangible assets at December 31, 2001 and 2000 consisted of the
following:
2001 2000
___________ ___________
Goodwill-Williamsport
Barber Supply $ 510,674 $ 510,674
Goodwill-Stephan & Co. 278,054 278,054
Goodwill-Scientific
Research Products, Inc. 1,976,446 1,976,446
Trademarks-Scientific Research 1,758,343 1,758,343
Trademarks-Frances Denney 4,442,455 4,442,455
Trademarks-Colgate/Mennen 9,548,070 9,548,070
Goodwill-Trevor Sorbie 5,622,130 5,622,130
Trademarks-Image/Modern 3,368,527 3,368,527
Goodwill-Morris Flamingo 2,544,831 2,544,831
Deferred Acquisition Costs 885,475 885,475
Other 136,132 87,062
___________ ___________
31,071,137 31,022,067
Less: accumulated amortization (7,639,032) (6,285,464)
___________ ___________
Balance, end of year $23,432,105 $24,736,603
=========== ===========
F-14
NOTE 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 2001 and 2000
consisted of the following:
2001 2000
___________ ___________
Accounts payable $ 824,864 $ 1,574,772
Accrued marketing expenses 613,166 186,263
Accrued payroll and bonuses 651,877 833,253
Accrued legal and professional fees 249,479 254,488
Other accrued expenses 220,665 152,944
___________ ___________
Balance, end of year $ 2,560,051 $ 3,001,720
=========== ===========
NOTE 8. LONG-TERM DEBT
Long-term debt at December 31, 2001 and 2000 consisted of the
following:
2001 2000
____________ ____________
3.78% note payable to bank, principal
of $92,500 plus interest due monthly
through August 2, 2006; collateralized
by a security interest in a certificate
of deposit of like amount, which bears
interest at 50 basis points below the
interest charged on the note. $ 7,677,500 $ -
6.65% unsecured note payable to bank,
principal of $92,500 plus interest
due monthly. - 8,787,500
Guaranteed minimum payments of $250,000
due semi-annually to Colgate-Palmolive
through January 31, 2004, discounted at
an 8% rate; collateralized by a security
interest in the brand trademarks acquired
from Colgate-Palmolive, with a net carrying
value of approximately $7,637,000. 1,588,126 1,855,706
___________ ___________
9,265,626 10,643,206
Less: current portion (1,507,256) (1,519,277)
___________ ___________
Long-term debt $ 7,758,370 $ 9,123,929
=========== ===========
At December 31, 2001, approximate maturities of long-term debt are
$1,507,000 in 2002, $1,393,000 in 2003, $2,018,000 in 2004, $1,110,000 in
2005, and $3,238,000 in 2006.
F-15
NOTE 9. INCOME TAXES
The provision for income taxes is comprised of the following for the
years ended December 31:
2001 2000 1999
___________ ___________ ___________
Current Tax:
Federal $ 213,843 $ 162,680 $ 274,747
State 67,075 (13,888) 29,717
___________ ___________ ___________
Total Current 280,918 148,792 304,464
___________ ___________ ___________
Deferred Tax:
Federal (83,715) 181,917 762,299
State (58,805) 52,938 126,634
___________ ___________ ___________
Total Deferred (142,520) 234,855 888,933
___________ ___________ ___________
Total provision for
income taxes $ 138,398 $ 383,647 $ 1,193,397
=========== =========== ===========
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for tax purposes.
The net deferred income tax liability in the accompanying consolidated
balance sheets includes deferred tax assets and liabilities attributable to
the following items:
2001 2000
___________ ___________
Accounts receivable allowances $ (60,129) $ (47,479)
Property, plant and equipment 101,792 35,748
Amortization of intangibles 2,048,920 2,309,892
Charitable contribution
carryforward (282,793) (398,002)
State income taxes (83,162) -
Accrued liabilities and other (189,343) (222,354)
___________ ___________
Deferred income taxes, net $ 1,535,285 $ 1,677,805
=========== ===========
The provision for Federal and state income taxes differs from
statutory tax expense (computed by applying the U.S. Federal corporate tax
rate to income before taxes) as follows:
F-16
NOTE 9. INCOME TAXES (Continued)
2001 2000 1999
______ ______ ______
Amount computed on pretax income 35.0% 35.0% 35.0%
Increase(decrease) in taxes:
State income taxes, net of
federal tax benefit .7 2.6 3.2
Charitable contributions of inventory - - (2.6)
Goodwill 16.8 7.1 2.1
Benefit of graduated rates (1.0) (1.0) (1.0)
Tax exempt interest (3.3) (4.0) (1.0)
Other (29.7) (1.6) 3.6
_____ _____ _____
Total income tax 18.5% 38.1% 39.3%
===== ===== =====
The tax provision was reduced by approximately $210,000 due to a reduction
for tax liabilities which are no longer required.
NOTE 10. SEGMENT INFORMATION
In accordance with the guidelines established by SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," the
Company has identified three reportable operating segments based upon how
management evaluates its business. These segments are Professional Hair
Care Products and Distribution ("Professional"), Retail Personal Care
Products ("Retail") and Manufacturing. The Professional segment generally
has as a customer base distributors that purchase the Company's hair
products and beauty and barber supplies for sale to salons and barbershops.
The customer base for the Retail segment is mass merchandisers, chain drug
stores and supermarkets that sell the product to the end user. The
Manufacturing segment manufactures products for subsidiaries of the
Company, and manufactures private label brands for customers.
The Company conducts operations primarily in the United States and
sales to international customers are not material to consolidated revenues.
The following tables, in thousands, summarize significant accounts and
balances by reportable segment:
NET SALES INCOME BEFORE INCOME TAXES
________________________ __________________________
2001 2000 1999 2001 2000 1999
_______________________ __________________________
Professional $19,752 $20,393 $22,129 $ 379 $ 1,011 $ 1,845
Retail 6,496 8,969 9,705 596 1,265 1,985
Manufacturing 9,358 8,330 12,341 325 (621) 176
_______ _______ _______ _______ _______ _______
Total 35,606 37,692 44,175 1,300 1,655 4,006
Intercompany
Manufacturing (7,310) (6,554) (9,819) (554) (649) (970)
_______ _______ _______ _______ _______ _______
Consolidated $28,296 $31,138 $34,356 $ 746 $ 1,006 $ 3,036
======= ======= ======= ======= ======= =======
F-17
NOTE 10. SEGMENT INFORMATION (Continued)
INTEREST INCOME INTEREST EXPENSE
_______________________ __________________________
2001 2000 1999 2001 2000 1999
_______________________ __________________________
Professional $ 316 $ 338 $ 142 $ 388 $ 387 $ 418
Retail 150 310 245 292 465 505
Manufacturing 114 77 41 18 20 21
______ ______ ______ ______ ______ ______
Total $ 580 $ 725 $ 428 $ 698 $ 872 $ 944
====== ====== ====== ====== ====== ======
DEPRECIATION AND
AMORTIZATION TOTAL ASSETS
______________________ _________________
2001 2000 1999 2001 2000
______________________ _________________
Professional $ 941 $ 882 $ 789 $17,963 $18,839
Retail 799 744 908 24,574 25,388
Manufacturing 154 89 78 14,525 14,542
_______ _______ ______ _______ _______
Total $1,894 $1,715 $1,775 $57,062 $58,769
======= ======= ====== ======= =======
The accounting policies used for each of the segments are the same as
those used for the Company generally, and are described in the summary of
significant accounting policies in Note 1. Included in Manufacturing net
sales are intercompany sales to related segments, which are generally
recorded at cost plus 10%. Management of the Company evaluates the
performance of each segment based upon results of operations before income
taxes, intercompany allocations, interest and amortization.
NOTE 11. COMMITMENTS AND CONTINGENCIES
In addition to the matters set forth below, the Company is involved in
other litigation matters arising in the normal course of business. It is
the opinion of management that none of such matters, at December 31, 2001,
would likely, if adversely determined, have a material adverse effect on
the Company's financial position, results of operations or cash flows.
The Company has entered into employment agreements with certain
officers. These agreements, which expire on various dates through January
2006, provide for incentive bonuses based on consolidated income before
taxes or earnings per share. No significant bonuses were paid in the years
1999 through 2001.
Annual rent payments due under non-cancelable operating leases at
December 31, 2001 are:
2002 $ 254,600
2003 243,200
2004 234,800
_______
$ 732,600
=======
F-18
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
Annual rent expense for each of the last three years is as follows:
2001 $624,400
2000 579,300
1999 610,800
Included in rent expense above for the years ended December 31, 2001,
2000 and 1999 is $191,000, $192,000 and $199,000 paid to Shaheen & Co.,
Inc., the former owner of Morris Flamingo. Shouky A. Shaheen, a minority
owner of Shaheen & Co., Inc., is currently a member of the Board of
Directors and a significant shareholder of the Registrant.
In connection with the acquisition of certain assets from New Image,
the Company placed 125,000 shares of its Common Stock in escrow to cover
certain purchase price adjustment claims it could make if the inventories
or the accounts receivable were less than the amounts guaranteed by New
Image. In June of 1998, the Company made a claim for the return of all of
the stock held in escrow because it calculated that the inventories and the
accounts receivable were less than the guaranteed amount by a sum which
exceeded the value of the stock held in escrow. New Image then brought a
claim in Federal court in Los Angeles for breach of contract and fraud,
asserting that the Company was not entitled to any price adjustment. By
its action, New Image sought to recover the stock held in escrow. The
Company filed counterclaims seeking, among other things, the return of all
of the shares and recovery of certain property it alleges New Image failed
to turn over to the Company.
New Image and the Company each submitted a partial summary judgment
motion to the United States District Court. Pursuant to a judgment entered
on March 20, 2001, the Court, among other things, ordered that the Escrow
Agent deliver and transfer the 125,000 shares of Common Stock, including
all dividends held in escrow and other property with respect thereto, to
New Image. On April 12, 2001, the Company filed a notice of appeal of the
judgment to the Ninth Circuit Court of Appeals. The Company believes that
the United States District Court improperly weighed evidence, misconstrued
the agreement between the parties and misapplied the law. The Company has
posted a bond to stay enforcement of the transfer of shares and other
property held by the escrow agent during pendency of the appeal. The
judgment of the United States District Court also awarded the Company
approximately $20,000, and dismissed certain other claims and affirmative
defenses.
New Image has cross-appealed claiming that it is entitled to reversal
of certain matters as set forth in the judgment as the court (i) did not
grant it monetary damages for the differences between the value of the
stock when it should have received the shares and the current value of the
Company's stock, (ii) dismissed its claim for promissory deceit and (iii)
refused to award it attorney's fees and costs as the prevailing party.
While it is not possible to predict with any certainty how a court would
rule, the Company and its counsel believe that the chances of the Company
prevailing on appeal are favorable. The Company's claims for reimbursement
of certain acquisition related expenses and for undelivered computer
equipment remain pending before the District Court.
F-19
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
On April 1, 1999, the Company announced that it would be restating its
financial statements for the second and third quarters of 1998 and that
results of operations for the year ended December 31, 1998 would be
substantially less than expected. On or about April 9, 1999, the Company
learned that three class action lawsuits had been filed against it, as well
as certain of its officers. The lawsuits alleged, among other things,
certain violations of Federal securities laws and sought an unspecified
amount of damages. The class action claims were consolidated and the
Company moved to dismiss the class action amended complaint. By final
order of dismissal, dated March 30, 2000, the Court dismissed the
complaint. Subsequent to such dismissal, the class action plaintiffs moved
to amend the judgment or for reconsideration. The plaintiffs were granted
an opportunity to file a second complaint and in September 2001, the United
States District Court for the Southern District of Florida dismissed the
class action lawsuit, with prejudice.
Old 97 Company commenced an action against Todd Christopher
International, Inc. d/b/a Vogue International ("Vogue") in the Circuit
Court of the State of Florida alleging claims for breach of contract for
goods sold and delivered and seeking damages in excess of $200,000. Vogue
has answered the complaint and has sought to file counterclaims for an
unspecified amount of damages. The Company believes its claims against
Vogue are meritorious. Moreover, the Company believes that the
counterclaim is not meritorious and intends to vigorously defend the
counterclaim.
On November 1, 2001, a private label customer filed a lawsuit against
the Company alleging causes of action for breach of contract, declaratory
judgment, and trademark infringement. The Company denied the allegations
and has counter-sued the customer. The counterclaim seeks unspecified
compensatory damages, interest, attorneys fees, costs and other relief on
the breach of contract and anticipatory breach claims and, in excess of
$400,000 on the account stated claim. At this time, the Registrant is
unable to predict the outcome of this matter.
On March 5, 2001, the Company announced that the Board of Directors
had formed a two-person, special committee to explore various strategic
alternatives to enhance shareholder value. Four members of the Company's
management and directors, exclusive of the committee members, formed a
group to purchase all of the Company's outstanding capital stock in a going
private transaction. Independent legal counsel and investment banking
advisors were retained to advise and assist in the transaction. After
incurring approximately $125,000 of expenses through December 31, 2001, it is
estimated that the remaining costs associated with this process will be in
excess of $500,000. On April 16, 2002 the Company announced that the Special
Committee of its Board of Directors has, after an auction conducted by Robinson
Humphrey Company LLC, its investment banker, accepted a bid by four members of
the Company's management and directors. Such bid is to purchase all of the
Company's common stock at $4 per share. No other viable bids were received
by the committee for the entire Company. The management bid is subject to
various conditions, including financing. The Company's management is
currently in the process of negotiating with lenders to obtain financing
F-20
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
necessary for the transaction. There can be no assurance that the bidder
will be able to obtain such financing on acceptable terms or that the
transaction will be consummated.
In November 2001, the Company filed a claim with the Department of
Transportation ("DOT") in connection with the DOT's widening of Interstate
Highway 4, which will result in the loss of an adjacent rental facility
utilized by one of the Company's subsidiaries. After consultation with
legal counsel, the Company is unable to predict the ultimate outcome of
this matter and the amount of recovery, if any, that will result therefrom.
NOTE 12. CAPITAL STOCK AND STOCK OPTIONS
1,000,000 shares of preferred stock, $0.01 par value are authorized;
however, no shares have been issued.
In 1990, the shareholders of the Company approved the 1990 Key
Employee Stock Incentive Plan, as amended, and the 1990 Non-Employee
(Outside Directors) Plan, as amended, and in 2000, the shareholders
approved a ten-year extension of both plans. The aggregate number of shares
currently authorized pursuant to the Key Employee Plan, as adjusted for
stock splits and shareholder-approved increases in 1994 and 1997, is
870,000 shares. The number of shares and terms of each grant is determined
by the Compensation Committee of the Board of Directors, in accordance with
the 1990 Key Employee Plan, as amended.
The Outside Directors Plan provides for annual grants, as adjusted for
stock splits, of 5,062 shares to non-employee directors. Such grants are
granted on the earlier of June 30 or the date of the Company's Annual
Meeting of Shareholders, at the fair market value at the date of grant. The
aggregate number of shares reserved for granting under this plan, as
adjusted for stock splits, is 202,500.
Stock options are granted at the discretion of the Compensation
Committee of the Board of Directors. The options become exercisable one
year from the grant date and are exercisable within a maximum of 10 years
from the date of grant. Stock option activity for 2001, 2000, and 1999 is
set forth below:
Key Employee Outside
Incentive Avg. Directors Avg.
Plan Price Plan Price
__________________________________________________________________________
Outstanding at December 31, 1998.. 431,195 $15.95 66,806 $13.54
Granted........................... 70,000 10.25 20,248 4.18
Canceled.......................... (70,500) 16.67 (11,124) 15.38
Exercised......................... - -
__________ __________
Outstanding at December 31, 1999.. 430,695 15.17 75,930 11.05
Granted........................... 268,075 3.87 20,248 4.50
Canceled.......................... (45,300) 9.02 (10,124) 15.50
Exercised......................... - -
__________ __________
Outstanding at December 31, 2000.. 653,470 9.69 86,054 8.98
F-21
NOTE 12. CAPITAL STOCK AND STOCK OPTIONS (Continued)
Key Employee Outside
Incentive Avg. Directors Avg.
Plan Price Plan Price
__________________________________________________________________________
Granted........................... 70,000 3.00 20,248 3.05
Canceled.......................... (76,000) 14.78 (10,124) 15.75
Exercised......................... - -
__________ __________
Outstanding at December 31, 2001.. 647,470 $ 8.36 96,178 $ 7.02
========== ==========
The number of shares and average exercise price of options
exercisable at December 31, 2001, 2000 and 1999 were 568,275 shares at
$8.36, 329,000 shares at $13.17, and 281,500 shares at $13.66 for the 1990
Key Employee Stock Incentive Plan and 75,930 at $7.02, 65,806 at $10.36,
and 55,682 at $13.55 for the Outside Directors Plan, respectively. At
December 31, 2001 and 2000, 115,280 and 121,280 respectively, were
available for future grants under the terms of the 1990 Key Employee Stock
Incentive Plan and 55,697 shares and 65,821 shares, respectively, were
available for future grants under the terms of the Outside Directors Plan.
The Company continues to apply the provisions of APB Opinion No. 25
and related Interpretations in accounting for stock-based compensation
plans. Accordingly, no compensation expense has been recorded in the
accompanying consolidated statements of operations for options granted in
2001, 2000 and 1999. However, pro forma disclosures of net earnings and
earnings per share must be made as if SFAS No. 123 had been adopted. Had
compensation costs for options granted been determined on the basis of the
fair value of the awards at the date of grant, consistent with the
treatment prescribed by SFAS No. 123, the Company's net income and earnings
per share, on a pro forma basis, would be as follows:
(Dollars in thousands, except per share data)
2001 2000 1999
___________ ___________ __________
Net income:
As reported $ 608 $ 622 $ 1,843
Pro forma $ 532 304 $ 1,513
Earnings per share:
As reported $.14 $ .14 $ .40
Pro forma $.12 $ .07 $ .33
The above pro forma effect takes into consideration only options
granted since January 1, 1997 and is likely to increase in future years as
additional options are granted and amortized ratably over the vesting
F-22
NOTE 12. CAPITAL STOCK AND STOCK OPTIONS (Continued)
period. The average fair value of stock options granted during 2001, 2000
and 1999 was $3.01, $1.78, and $5.22, respectively. The fair value of
stock options granted was estimated using the Black-Scholes option-pricing
model and included the following assumptions for the years ended December
31, 2001, 2000 and 1999:
2001 2000 1999
__________ __________ __________
Life expectancy 5 years 5 years 5-10 years
Risk-free interest rate 5% 6% 6%
Expected volatility 59% 57% 62%
Dividends per share $.08 $.08 $.08
The exercise price range of options outstanding and exercisable for
both the Key Employee Stock Incentive and Outside Directors plans, the
weighted average contractual lives remaining (in years) and the weighted
average exercise price are as follows:
Outstanding Exercisable
____________________________ ___________________
Exercise Number Average Average Number Average
Price Range of shares Life Price of shares Price
_______________ __________ _______ ________ ___________________
$ 3.00 - $ 9.99 376,019 5.49 $ 3.72 285,771 $ 3.95
$10.00 - $15.99 367,629 3.89 $12.76 358,434 $12.81
_________ _________
743,648 644,205
========= =========
Included in the $10.00-$15.99 range above are 9,195 options which are
not exercisable until (and unless) the stock trades for 20 consecutive
trading days at a price of $14.14 and higher. These options expired in
April 2002.
F-23
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto, duly authorized.
THE STEPHAN CO.
By:___________________________________
Frank F. Ferola
President and Chairman of the Board
April 18, 2002
By:___________________________________
David A. Spiegel
Principal Financial Officer
Principal Accounting Officer
April 18, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
By:______________________________ By:_______________________________
Frank F. Ferola, Principal Thomas M. D'Ambrosio
Executive Officer and Director Vice President and Director
Date: April 18, 2002 Date: April 18, 2002
By:______________________________ By:_______________________________
John DePinto, Director Curtis Carlson, Director
Date: April 18, 2002 Date: April 18, 2002
By:______________________________ By:_______________________________
Leonard Genovese, Director Shouky Shaheen, Director
Date: April 18, 2002 Date: April 18, 2002
25
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto, duly authorized.
THE STEPHAN CO.
By: /s/ Frank F. Ferola
___________________________________
Frank F. Ferola
President and Chairman of the Board
April 18, 2002
By: /s/ David A. Spiegel
___________________________________
David A. Spiegel
Principal Financial Officer
Principal Accounting Officer
April 18, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
By: /s/ Frank F. Ferola By: /s/ Thomas M. D'Ambrosio
______________________________ ____________________________
Frank F. Ferola, Principal Thomas M. D'Ambrosio
Executive Officer and Director Vice President and Director
Date: April 18, 2002 Date: April 18, 2002
By: /s/ John DePinto By: /s/ Curtis Carlson
______________________________ ____________________________
John DePinto, Director Curtis Carlson, Director
Date: April 18, 2002 Date: April 18, 2002
By: /s/ Leonard Genovese By: /s/ Shouky Shaheen
______________________________ ____________________________
Leonard Genovese, Director Shouky Shaheen, Director
Date: April 18, 2002 Date: April 18, 2002
25