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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
___
| X | ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE
|___| SECURITIES EXCHANGE ACT OF 1934 {FEE REQUIRED}
For the Fiscal Year Ended December 31, 1995
OR
___
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
|___| OF THE SECURITIES EXCHANGE ACT OF 1934 {NO FEE REQUIRED}
For the transition period from _______ to ______
Commission File No. 1-4436
THE STEPHAN CO.
_______________________________________________________________
(Exact Name of Registrant as Specified in its Charter)
Florida 59-0676812
________________________________ _________________
(State or Other Jurisdiction of (I.R.S Employer
Incorporation or Organization) Identification No.)
1850 West McNab Road, Fort Lauderdale, Florida 33309
_______________________________________________________________
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (954) 971-0600
_____________
Securities Registered Pursuant to Section 12 (b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
___________________ _________________________________________
Common Stock, $.01 AMERICAN STOCK EXCHANGE
Par Value
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
the filing requirements for at least the past 90 days.
YES 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. (X)
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant. The aggregate market value shall be 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.
$ 50,058,000 as of March 15, 1996
Indicate the number of shares outstanding of each of the Registrant's
classes of Common Stock, as of the latest practicable date:
4,122,484 Shares of Common Stock, $.01 Par Value,
as of March 15, 1996
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 Company's proxy statement for the 1996 annual meeting to be
filed no later than 120 days after the Company's fiscal year are
incorporated by reference in Part III.
2
THE STEPHAN CO. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT
ON FORM 10-K
Page
PART I ______
Item 1: Business................................................... 4
Item 2: Properties................................................. 8
Item 3: Legal Proceedings.......................................... 8
Item 4: Submission of Matters to a Vote of Security Holders......... 8
PART II
Item 5: Market for the Registrant's Common Equity
and Related Stockholder Matters........................... 9
Item 6: Selected Financial Data.................................... 10
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 11
Item 8: Financial Statements and Supplementary Data................ 14
Item 9: Changes in and Disagreements with Accountants
and Financial Disclosure.................................. 14
PART III
Item 10: Directors and Executive Officers of the Registrant......... 15
Item 11: Executive Compensation..................................... 15
Item 12: Security Ownership of Certain Beneficial
Owners and Management..................................... 15
Item 13 Certain Relationships and Related Transactions............. 15
PART IV
Item 14: Exhibits, Financial Statement Schedules
and Reports on Form 8-K.................................. 16
Signatures.......................................................... 17
3
PART I
Certain statements in this Annual Report on Form 10-K("Form 10-K")
under "Item 1. Business" 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, performance or achievements of The Stephan Co.
and its subsidiaries to be materially different from any future results,
performance 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; quality of management; 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,
proceedings; and other factors referenced in the Form 10-K. The Stephan
Co. will not undertake and specifically declines 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 Stephan Co.(the "Registrant" or the "Company"), founded in 1897
and incorporated in the State of Florida in 1952, is engaged in the
manufacture, sale and distribution of hair care and personal care products
on both a wholesale and retail level. The Registrant is comprised of The
Stephan Co. ("Stephan") and its wholly-owned subsidiaries, Foxy Products,
Inc., Old 97 Company, Williamsport Barber and Beauty Corp., Stephan & Co.
and Scientific Research Products, Inc. of Delaware. The Company considers
itself to be in a single line of business for reporting purposes.
The Stephan Co.
Located in Fort Lauderdale, Florida, Stephan is engaged in the
manufacturing of custom "private label" products, which is the
manufacturing of products marketed and sold under the brand names of
customers. In addition, the Fort Lauderdale location serves as the
Registrant's corporate headquarters, providing general management services
to its subsidiaries. In 1995, a significant amount of the Company's net
sales were to three major customers: Martin Himmel, Inc. ("MHI"), Trevor
Sorbie of America, Inc. ("TSA") and J.C Penney. Approximately $3,200,000
of sales related to the manufacture of hair care products for TSA. In
1994, Stephan entered into a 10 year manufacturing agreement with TSA, as
well as an agreement to provide warehouse facilities, shipping services,
and product research and development. Stephan also holds a $500,000
subordinated convertible debenture from TSA and is currently negotiating to
4
buy the company for cash and stock approximating $2,000,000 in accordance
with terms outlined in a letter of intent signed by the two parties in
January 1996. Combined consolidated revenues from TSA, including sales by
a subsidiary, Old 97 Company, totaled approximately $3,600,000, or 13% of
the Company's total net sales in 1995.
The Frances Denney line of cosmetics, a division of The Stephan Co.,
had 1995 sales to one major customer, J.C. Penney, of over $3,100,000 or
12% of consolidated revenues. In 1995, the Company started a program to
change the distribution channels used to market the Frances Denney line in
an effort to generate acceptable profitability for the future. These
changes include initiating a mail order sales program with a full color
catalog to be circulated in the second quarter of 1996 as well as gaining
exposure on the Home Shopping Network. The Company also signed a Trademark
License and Supply Agreement in the first quarter of 1996 that gives
exclusive rights to a company to market and distribute certain Denney
products to several retail chains, including J.C. Penney, in the United
States and Canada.
Stephan also manufactures and sells products under the name
"STEPHAN'S". Such products consist of different types of shampoos, hair
treatments, after shave lotion, dandruff lotion, hair conditioners and hair
spray which are distributed throughout the United States to approximately
350 beauty and barber distributors. The Registrant's trademark "STEPHAN'S"
and the design utilized thereby has been registered with the United States
Patent and Trademark Office, which registration is not due for renewal
until 2001. Sales of Stephan and Denney products, combined with the
private label manufacturing sales of the Stephan Co., accounted for
approximately 35% of consolidated revenues.
Old 97 Company.
Old 97 Company ("Old 97"), located in Tampa, Florida, was purchased in
1988 by the Registrant. Old 97 markets products under brand names such as
OLD 97, KNIGHTS, and TAMMY. In addition to selling more than 100 different
products, including hair and skin care products, fragrances, personal
grooming aids and household items, Old 97 serves as the Company's second
manufacturing facility. Old 97 does a significant amount of private label
manufacturing, and also manufactures most of the products sold by the
Frances Denney line. Almost 90% of Old 97 sales are to two major
customers. The largest customer, Martin Himmel, Inc. (MHI) represented a
substantial portion of Old 97 sales and when combined with Stephan Co.
sales to MHI, amounted to approximately $4,300,000 or 16% of consolidated
revenue. Old 97 is the principal manufacturer of "Gold Bond" talc for MHI,
as well as a distributor of other products marketed by MHI. Old 97 sales
accounted for approximately 18% of consolidated revenue for 1995.
On December 31, 1995, the Registrant entered into asset purchase
agreements with Colgate-Palmolive Company and its subsidiary, The Mennen
Company, for the acquisition of certain consumer product brands, as well as
a licensing agreement for the domestic distribution of the Cashmere Bouquet
Talc product line.
Concurrent with the acquisition of the brands and licensing agreement,
the Registrant entered into a six-month transition agreement with Colgate-
Palmolive to facilitate the orderly transition of sales, production and
5
distribution functions. Inasmuch as all the acquired brands' products can
be manufactured by the Registrant, this six month period allows the
Registrant lead time to order packaging and components, establish a
distribution network, evaluate the customer base and shipping points, and
otherwise assume production and distribution of the brands.
The Registrant plans to use the Old 97 facility to manufacture the
former Colgate brands' products, and on the basis of anticipated needs for
both existing product lines and the Colgate products, management decided to
cease talc production in November 1995 in order to do extensive renovations
to the talc producing facility. Management is projecting talc production
to resume by the start of the second quarter of 1996. These renovations
will enhance the Registrant's ability to increase production and facilitate
obtaining new private label customers.
Williamsport Barber and Beauty Corp.
Williamsport Barber and Beauty Corp. was acquired in January, 1992 and
is located in Williamsport, Pa. Williamsport is one of the nations largest
mail order beauty and barber supply companies and accounted for over 11% of
consolidated revenues for the year ended December 31, 1995.
Stephan & Co.
Formerly known as Heads or Nails, Inc. and acquired in August, 1993,
Stephan & Co. operated salon concessions on cruise ships through July,
1995. As part of a restructuring of the business, salon concession
contracts were not renewed and the company has focused its attention on the
manufacture and supply of personal care amenity products for cruise ships,
with production and shipping commencing in December, 1995. Consolidated
revenues for the year ended December 31, 1995 were not material.
Scientific Research Products, Inc. of Delaware.
Purchased by the Company in April, 1994, Scientific Research Products
was one of the Registrant's largest private label customers and is a
leading distributor of ethnic hair care products. Scientific Research
Products accounted for 34% of the Registrant's consolidated revenues, with
sales approximating $9,200,000. In addition to the above, Scientific is
responsible for the distribution of the "Magic Wave" product line, formerly
marketed by Foxy Products, Inc., a Company acquired by the Registrant in
1986. Consolidated revenues for Foxy Products, Inc. for the year ended
December 31, 1995 were not material.
Since 1992, the Registrant has reduced its dependence on major
customers, however the loss of any of the customers mentioned above could
have a material adverse effect on the Registrant and its subsidiaries taken
as a whole. On April 10, 1996, the Registrant learned that MHI signed a
definitive agreement to sell the "Gold Bond" brand. The Company is unable
at this time to determine if this will have any adverse effect on sales.
During the year, no sales were made to any other customers or to the
Registrant's knowledge, a group of customers under common control, or
customers that are affiliates of each other, by the Registrant and its
subsidiaries, which sales represented 10% or more of the Registrant's
consolidated revenues.
6
RAW MATERIALS AND INVENTORY
The raw materials utilized by the Registrant and its subsidiaries in
the manufacture of its products consist primarily of chemicals, alcohol,
perfumes, paper labels, plastic bottles and caps. All materials are
readily available at competitive prices from numerous sources and have been
purchased from domestic suppliers. Neither the Registrant nor any of its
subsidiaries has ever experienced any shortage in supplies thereof nor are
any such shortages anticipated by the Registrant and its subsidiaries in
the reasonably foreseeable future.
The Registrant and its subsidiaries have followed the practice of
maintaining a level of inventory of their products sufficient for a period
of not less than two months. The Registrant does not anticipate any change
in such practice during the reasonably foreseeable future.
BACKLOG
As of March 15, 1996, the dollar amount of backlog orders was not
material.
RESEARCH AND DEVELOPMENT
During each of the three fiscal years ending December 31, 1995,
expenditures by the Registrant and its subsidiaries on company sponsored
research relating to the development of new products, services or
techniques or the improvement of existing products, services or techniques
as determined in accordance with generally accepted accounting principles
were not material.
COMPETITION
The hair care and personal grooming business is highly competitive in
terms of price and product quality. Products manufactured by the
Registrant and its subsidiaries compete with numerous varieties of other
such products, many of which bear well known, respected and heavily
advertised brand names and are produced by companies having substantially
greater financial, technical, personnel and other resources than does the
Registrant. Products produced by the Registrant and its subsidiaries
account for a relatively insignificant portion of the total hair care and
personal grooming products manufactured and sold annually in the United
States.
EMPLOYEES
As of March 15, 1996, in addition to its 5 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 during the remainder of 1996, the
Company believes that any such employees, if needed, would be readily
available. The employees are not covered by any collective bargaining
agreement and the Company believes its' employee relationships are
satisfactory.
7
Item 2. Properties
The Registrant's administrative, manufacturing and warehousing
facilities are located in a modern, air-conditioned building of
approximately 33,000 square feet, which it owns, located at 1850 West McNab
Road, Fort Lauderdale, Florida 33309. Approximately two-thirds of the
space is utilized by the Registrant for the manufacture and warehousing of
its products. The remainder of the space is utilized by the Registrant for
its administrative offices. The Registrant also owns certain machinery and
equipment suitable for the manufacture of its products which are housed in
its facility in Fort Lauderdale, Florida. The Registrant believes that
such facilities and equipment are adequate for its needs in the reasonably
foreseeable future.
Old 97 owns three buildings totaling approximately 42,000 square
feet of space, located at 2306 35th Street at 12th Avenue, Tampa, Florida
33605. Such facilities are utilized by Old 97 in the manufacture of its
various product lines. In October, 1994, Old 97 acquired land and two
buildings located at 4829 East Broadway Avenue, Tampa, Florida 33605. One
building comprising 12,500 square feet is being used for office facilities
and order fulfillment for the Frances Denney line. The second building,
with approximately 30,000 square feet, is used as a warehouse and
distribution facility.
In connection with the acquisition of Scientific Research
Products, the Registrant assumed the leased interest in the office,
warehouse and distribution facility located at 1601 SW 5th Court, Pompano
Beach, Florida 33069, under a lease expiring in October, 1997 with annual
rental payments of approximately $180,000. The Registrant has sublet a
portion of this 25,000 square foot facility to Trevor Sorbie of America,
Inc., in accordance with the manufacturing and warehouse agreement
discussed previously.
In connection with the acquisition of Williamsport Barber Supply,
the Company entered into a two year lease, which expired in January, 1994,
for office and warehouse space of approximately 6,000 square feet.
Subsequent to January, 1994 the Registrant is leasing on a month to month
basis. Monthly rent in the amount of $1,500 is payable to the former owner
of Williamsport Barber Supply, currently the manager of the Williamsport
operations.
Item 3. Legal Proceedings
There are no material pending legal proceedings to which the
Registrant or any of its subsidiaries is a party or of which any of their
property is the subject. Neither the Registrant nor any of its
subsidiaries is aware of any such proceedings known to be contemplated by
governmental authorities.
Item 4. Submission of Matters to a Vote
of Security Holders
The Company has not submitted any matters to a vote of security
holders since the June 1995 Annual Meeting.
8
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters
(a) Market Information
The Registrant's Common Stock is traded on the American Stock Exchange
("AMEX"). The following table sets forth the range of high and low sales
prices for the Registrant's common stock for each quarterly period within
the Registrant's two most recent fiscal years:
High Low
Quarter Ended Sales Price Sales Price
_____________ ___________ ___________
March 31, 1994 $ 21.75 $ 16.00
June 30, 1994 18.50 14.00
September 30, 1994 16.00 14.00
December 31, 1994 15.13 11.00
___________________________________________________________________________
March 31, 1995 $ 17.00 $ 12.00
June 30, 1995 19.38 15.25
September 30, 1995 17.00 14.13
December 31, 1995 16.75 14.00
(b) Holders
As of March 15, 1996, the Registrant's Common Stock was held of record
by approximately 450 holders thereof; however, the Registrant's stock is
believed to be held in approximately 2,000 brokerage accounts ("street-name
shareholders").
(c) Dividends
The Company declared and paid cash dividends for the first time in
August, 1995, at the rate of $ .02 per share, and again in November, 1995
at the rate of $ .02 per share. Future dividends, if any, will be
determined by the Company's Board of Directors, at their discretion, based
on various factors, including the Company's profitability and anticipated
capital needs.
There are no contractual restrictions, including any restrictions on
the ability of any of the Registrant's subsidiaries, to transfer funds to
the Registrant in the form of cash dividends, loans or advances, that
currently materially limit the Registrant's ability to pay cash dividends
or that the Registrant reasonably believes are likely to materially limit
the future payment of dividends on its Common Stock.
9
Item 6. Selected Financial Data (a)
1995 1994 1993 1992 1991
(in thousands, except per share data)
____________________________________________________
Net sales $26,197 $24,341 $16,719 $14,683 $10,025
Income before
income taxes 6,426 6,200 4,350 3,673 2,491
Net Income 4,315 4,076 2,776 2,374 1,617
Current assets 20,438 17,342 12,258 7,030 4,959
Total assets 42,463 29,074 19,606 8,884 5,952
Current
liabilities 4,674 3,525 2,687 1,033 1,526
Long term debt 9,112 811 950 1,093 852
PER COMMON SHARE: (b)
Net Income 1.05 1.00 .84 .75 .51
Cash dividends .04 None None None None
Notes to Selected Financial Data
(a) The selected financial data includes the operations of its wholly-
owned subsidiaries, Foxy Products, Inc. (acquired in 1986), Old 97 Company
(acquired in 1988), Williamsport Barber and Beauty Corp. (acquired in
1992), Stephan & Co., formerly Heads or Nails, Inc. (acquired in 1993) and
Scientific Research Products, Inc. of Delaware, (acquired April 15, 1994).
(b) Earnings per share is based upon the weighted average number of
common shares and common share equivalents (stock options) outstanding
after giving effect to stock splits in 1991, 1992 and 1993. The weighted
average number of shares outstanding were 4,127,765 for 1995, 4,067,819
for 1994, 3,314,274 for 1993, 3,146,266 for 1992 and 3,140,822 for 1991.
This data should be read in conjunction with the audited consolidated
financial statements and related notes included in this Annual Report.
10
Selected Quarterly Financial Information (unaudited)
(in thousands, except per share data)
3/31/95 6/30/95 9/30/95 12/31/95
_______ _______ _______ ________
Net sales $ 6,873 $ 7,288 $ 7,160 $ 4,875
Gross profit 3,639 3,969 4,437 1,499
Net income 1,068 1,191 1,386 670
Per share .26 .29 .34 .16
3/31/94 6/30/94 9/30/94 12/31/94
_______ _______ _______ ________
Net sales $ 4,918 $ 6,074 $ 6,523 $ 6,826
Gross profit 2,460 3,467 4,366 3,340
Net income 804 983 1,249 1,039
Per share .22 .24 .30 .25
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
OVERVIEW
Net income for the year ended December 31, 1995 was $4,315,000, or
$1.05 per share, on revenues of $26,197,000, as compared to net income of
$4,076,000, or $1.00 per share, on revenues of $24,341,000 for 1994. In
1995 the Company continued to decrease its' dependency on major customers
by diversifying current distribution channels for the Frances Denney line
and acquiring new brands from Colgate-Palmolive. The new products acquired
from the Colgate-Palmolive Company, and its' subsidiary, The Mennen
Company, on December 31, 1995, included brands such as Balm Barr and
Stretch Mark, both topical skin cremes for women; Wildroot and Protein 29
hair treatments for men; and Quinsana medicated talc. In addition, a
licensing agreement was signed, giving the Company the right to manufacture
and domestically distribute the Cashmere Bouquet talc product line.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31,1995 AS COMPARED TO 1994
_______________________________________________
While overall sales and profit increased in 1995, the results for the
fourth quarter of 1995 declined considerably as compared to the quarter
ended December 31, 1994. Sales in the fourth quarter of 1995 were down
approximately $1,950,000, or 29%, and net income declined approximately
$370,000, or 36%, principally due to management's decision to change the
distribution channels for the Frances Denney product line and to upgrade
the talc producing facility at Old 97, which resulted in the ceasing of
talc production at that location for most of the fourth quarter.
11
At the beginning of the third quarter of 1995, management reevaluated
the Denney sales and profit level and customer base in connection with
existing distribution through one major retailer and developed a new
marketing strategy that involved several new methods of distribution. As a
result of negotiations started in mid 1995 and in accordance with an
agreement signed in the first quarter of 1996, the Company entered into a
Trademark License and Supply Agreement giving the exclusive rights to
market and distribute certain Denney products in various retail chain
stores in the United States and Canada to an independent third party
distributor. Also, the Company is in the process of developing a mail
order catalog which it anticipates will be ready for distribution in the
second quarter of 1996. Aggressive advertising in known markets where
Denney sales are strong, as well as an initial showing on a national
television marketing channel has management optimistic that Denney sales
and profitability will increase in 1996.
In connection with the anticipated acquisition of the Colgate-
Palmolive brands and a reevaluation of required inventory levels by the
Company's major talc customer, talc production was shut down in the middle
of the fourth quarter so that renovations and repairs could be made to the
talc production lines at Old 97. Extensive remodeling and improvements
were made, both in anticipation of the production of the new Colgate-
Palmolive brands and because of the desire to have increased capacity to
produce for other customers. Talc production is scheduled to begin in the
second quarter of 1996.
Both of the changes noted above will be implemented during the first
quarter of 1996, however, management does not anticipate any adverse effect
on first quarter 1996 sales and profits due to the acquisition of the
Colgate-Palmolive brands, the impact of cost efficiencies and improved
divisional profits.
The gross margin showed a decline in 1995, primarily due to a change
in the product mix. Management believes that the acquisition of the
Colgate brands' products, as well as the change in marketing strategies for
the Frances Denney line, will have a positive effect on the gross margin in
1996.
Selling, general and administrative expenses decreased slightly in
1995, but began to show stronger declines in the fourth quarter as savings
in overhead expenses, due to changes in the Denney marketing strategy,
began to take effect.
In 1995, the Company contributed slow moving and obsolete inventory to
a charitable organization. This had the effect of reducing the overall
provision for income taxes and as a result, income taxes in 1995 decreased
slightly when compared to 1994.
12
YEAR ENDED DECEMBER 31, 1994 AS COMPARED TO 1993
________________________________________________
As a result of acquisitions, and the manufacturing agreement with
Trevor Sorbie of America, Inc., sales rose in 1994 to $24,341,000 when
compared to 1993 sales of $16,719,000. A full year of operations for the
Frances Denney line, as well as the acquisition of Scientific Research
Products had a significant impact on gross profit margin and the selling,
general and administrative expenses. Gross profit increased from
$7,722,000, or 46%, in 1993 to 13,633,000, or 56% in 1994. This increase
is due to the higher profit margin realized on Denney and Scientific sales.
Coupled with the increase in gross profit from a change in the mix of
business, the Registrant experienced a large increase in overhead
expenditures for sales promotion, advertising, commissions, shipping and
travel. While management is diligent in monitoring these expenses, the
increases were high in relation to past expenses, but not unexpected.
Management is optimistic about the impact that the Sorbie agreement
will have on future operations. Sales to Sorbie for the 5 months that they
have been in operation were approximately $1,000,000 and it is expected
that production levels will increase in the next year.
Net income for the year ended December 31, 1994 amounted to
$4,076,000, which was $1,300,000 higher than 1993, and represented a 47%
increase in net earnings. Due to the increase in the weighted average
number of shares outstanding, as a result of the stock issued in connection
with the acquisition of the Frances Denney Line and the Scientific Research
Products acquisition, the per share earnings increase was less, increasing
only 20%, from $.84 per share in 1993 to $1.00 per share in 1994.
LIQUIDITY AND CAPITAL RESOURCES: Working capital was approximately
$15,763,000 at December 31, 1995, an increase of almost $1,950,000 over
1994. Although cash and cash equivalents increased over $1,400,000 to
$7,700,000 from 1994, under the terms of the Colgate-Palmolive agreement
that closed on December 31, 1995, the cash down payment of the purchase
price of $2,000,000 was paid on January 2, 1996. Capital improvements and
renovations discussed above in connection with the Old 97 talc facility are
not expected to require any material expenditures and management believes
that all associated costs will be under $75,000. There are no material
capital commitments for the upcoming year.
The Company does not anticipate any collection problem on accounts
receivable and current acquisition negotiations will not affect the
carrying value of the receivable from Trevor Sorbie of America. The
conversion of the subordinated debenture of $500,000 at an interest rate of
14%, coupled with the extended receivable terms granted should have the
effect of reducing the anticipated interest income in 1996, which was over
$400,000 in 1995. As noted previously, the Colgate-Palmolive brand
acquisition closed on December 31, 1995 and the $2,000,000 cash down
payment was wired on January 2, 1996. In addition, the transaction also
increased intangible assets by $10,175,000, inventory by approximately
$600,000 and property, plant, and equipment by $200,000.
13
The Company has not experienced any adverse impact from the effects of
inflation in the past and does not anticipate any problems in 1996.
Management maintains the flexibility to increase prices and does not have
any binding contract pricing with either customers or vendors. Many of the
Registrant's products, as well as the components used, are petroleum-based
products, and in the past, prices can be subject to various political or
economic pressures. The Company does not foresee any increase in its raw
material or component costs but believes it has the flexibility of multiple
vendors and the ability to increase prices to offset any price changes.
In 1994, the Registrant purchased new office, warehouse and
distribution facilities in Tampa, FL. for approximately $650,000 and added
improvements to both facilities amounting to almost $85,000.
In addition to the cash expended for the new building, the Registrant
also invested $500,000 in the Sorbie secured, subordinated debenture and
repurchased 80,000 shares of stock for $884,000. After giving
consideration to the above, the cash and cash equivalent position still
increased by about $2,300,000, due in part to continued profitable
operations, diligent credit policies, and effective inventory management.
Total assets increased from $19,600,000 to over $29,074,000 primarily due
to the acquisition of Scientific Research Products.
Accounts receivable from three major customers at December 31, 1994
were current and within credit terms granted by the Registrant. Again, due
to the acquisition of Scientific Research and the manufacturing agreement
with Sorbie, both accounts receivable and inventory levels have increased
significantly when compared to prior years.
Item 8. Financial Statements and Supplementary Data
Reference is made to the financial statements and supplementary data
contained elsewhere in this Annual Report.
Item 9. Changes in and Disagreements with Accountants and Financial
Disclosure
On October 12, 1995, the Registrant's independent accountants, Kaufman
Rossin & Co., CPAs, resigned as certifying auditors. On November 29, 1995
the Company retained the firm of Deloitte & Touche LLP for the purpose of
performing the audit for the year ended December 31, 1995. None of the
reportable events as described in Item 304 (a)(1)(ii) occurred with respect
to the Company within the last two fiscal years reported on by Kaufman
Rossin & Co. or in the subsequent interim periods. In addition, the
Company did not consult Deloitte & Touche LLP regarding any of the matters
or events set forth in Item 304 (a)(2)(i) and (ii) of Regulation S-K.
14
PART III
The information required by Part III Items 10-13 of Form 10-K will be
incorporated by reference from the Registrant's Proxy Statement for its
1996 annual meeting of stockholders which will be filed with the Securities
and Exchange Commission not later than 120 days after the end of the
Registrant's fiscal year.
15
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.
(b) Financial Statements and Financial Statement Schedules
(i) Financial Statements
Independent Auditors Report for the year ended December 31,
1995.
Independent Auditors Report for the years ended December 31,
1994 and 1993.
Consolidated Balance Sheets as of December 31, 1995 and
1994.
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994, and 1993.
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1995, 1994, and 1993.
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994, and 1993.
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.
(c) Reports on Form 8-K
(i) Form 8-K, filed October 17, 1995 in connection with the
change of independent accountants.
(ii) Form 8-K, filed November 30, 1995, in connection with the
change of independent accountants.
16
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of The Stephan Co.
We have audited the accompanying consolidated balance sheet of The Stephan
Co. and subsidiaries (the "Company") as of December 31, 1995, and the
related consolidated statements of operations, changes in stockholders'
equity, and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is
to express an opinion on the financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform 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 audit
provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of The Stephan Co. and
subsidiaries as of December 31, 1995, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
March 29, 1996
F-1
KAUFMAN ROSSIN & CO
Certified Public Accountants
2699 South Bayshore Drive
Miami, Florida 33133-5486
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
The Stephan Co.
Fort Lauderdale, Florida
We have audited the accompanying consolidated balance sheet of The Stephan
Co. and Subsidiaries as of December 31, 1994 and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows
for each of the two years in the period ended December 31, 1994. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Stephan Co. and Subsidiaries as of December 31, 1994 and the results of
their operations and their cash flows for each of the two years in the
period ended December 31, 1994 in conformity with generally accepted
accounting principles.
KAUFMAN, ROSSIN & CO.
Miami, Florida
March 30, 1995
F-2
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,1995 AND 1994
ASSETS
1995 1994
____________ ____________
CURRENT ASSETS
Cash and cash equivalents $ 7,711,239 $ 6,292,537
Marketable securities - 417,237
Receivables, less allowance
for doubtful accounts of $46,401
and $41,819 in 1995 and 1994,
respectively 5,414,530 4,310,853
Inventories, net 7,059,536 5,651,346
Note receivable - 500,000
Prepaid expenses
and other current assets 252,205 169,743
____________ ____________
TOTAL CURRENT ASSETS 20,437,510 17,341,716
PROPERTY, PLANT AND EQUIPMENT, net 2,097,757 1,878,040
INTANGIBLE ASSETS, net 18,948,428 9,748,425
NOTE RECEIVABLE 500,000 -
OTHER ASSETS 478,848 106,119
____________ ____________
TOTAL ASSETS $42,462,543 $ 29,074,300
============ ============
See notes to consolidated financial statements
F-3
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,1995 AND 1994
LIABILITIES AND STOCKHOLDERS' EQUITY
1995 1994
___________ ___________
CURRENT LIABILITIES
Initial payment - Colgate-Palmolive $ 2,000,000 $ -
Accounts payable and
accrued expenses 1,661,654 2,512,850
Note payable to bank 400,000 400,000
Current portion of
long-term debt 612,757 143,828
Income taxes payable - 468,334
___________ ___________
TOTAL CURRENT LIABILITIES 4,674,411 3,525,012
DEFERRED INCOME TAXES 120,121 85,000
LONG-TERM DEBT 9,112,129 810,987
___________ ___________
TOTAL LIABILITIES 13,906,661 4,420,999
___________ ___________
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value;
25,000,000 shares authorized;
4,122,484 and 4,183,248 shares
issued and outstanding at
December 31, 1995 and 1994,
respectively 41,225 41,832
Additional paid in capital 12,583,995 13,715,319
Retained earnings 15,930,662 11,780,150
___________ ____________
28,555,882 25,537,301
LESS TREASURY STOCK (80,000 Shares) - (884,000)
___________ ____________
TOTAL STOCKHOLDERS' EQUITY 28,555,882 24,653,301
___________ ____________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $42,462,543 $29,074,300
=========== ===========
See notes to consolidated financial statements
F-4
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
____________ ____________ ____________
NET SALES $ 26,196,516 $ 24,340,903 $ 16,718,568
COST OF GOODS SOLD 12,652,546 10,707,863 8,996,713
____________ ____________ ___________
GROSS PROFIT 13,543,970 13,633,040 7,721,855
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 7,432,929 7,555,969 3,388,328
____________ ____________ ___________
OPERATING INCOME 6,111,041 6,077,071 4,333,527
OTHER INCOME(EXPENSE)
Interest income 404,631 216,951 102,771
Interest expense (92,416) (98,189) (96,601)
Other 2,540 3,748 10,781
____________ ___________ ____________
INCOME BEFORE TAXES 6,425,796 6,199,581 4,350,478
INCOME TAXES 2,110,385 2,123,245 1,574,619
____________ ___________ ____________
NET INCOME $ 4,315,411 $ 4,076,336 $ 2,775,859
============ =========== ============
NET INCOME PER COMMON SHARE $ 1.05 $ 1.00 $ .84
============ =========== ============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,127,765 4,067,819 3,314,274
============ =========== ============
See notes to consolidated financial statements
F-5
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Common Stock
_______________________ Additional
Paid in Retained Treasury
Shares Par Value Capital Earnings Stock
_________ _________ __________ __________ __________
Balances,
Jan 1, 1993 $ 3,154,859 $ 31,548 $ 1,798,301 $ 4,927,955 $ -
Shares issued
for acquisitions 423,007 4,230 6,348,655 - -
Stock options
exercised 96,756 968 63,443 - -
Net income
for 1993 - - - 2,775,859 -
_________ _________ __________ __________ __________
Balances,
Dec 31, 1993 3,674,622 36,746 8,210,399 7,703,814 -
Shares issued
for acquisitions 500,000 5,000 5,495,000 - -
Stock options
exercised 8,626 86 9,920 - -
Purchase of
treasury stock - - - - (884,000)
Net income
for 1994 - - - 4,076,336 -
__________ _________ __________ __________ ___________
Balances,
Dec 31, 1994 4,183,248 41,832 13,715,319 11,780,150 (884,000)
Treasury
shares retired (80,000) (800) (883,200) - 884,000
Retirement of
shares received
in settlement
with former
stockholder (16,105) (161) (309,860) - -
Stock options
exercised 35,341 354 61,736 - -
Dividends paid - - - (164,899) -
Net income
for 1995 - - - 4,315,411 -
__________ _________ __________ __________ __________
Balances,
Dec 31, 1995 $ 4,122,484 $ 41,225 $12,583,995 $15,930,662 $ -
========== ========= ========== ========== ==========
See notes to consolidated financial statements
F-6
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
_____________________________________________
1995 1994 1993
__________ ___________ ___________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,315,411 $ 4,076,336 $ 2,775,859
___________ ___________ ___________
Adjustments to reconcile net
income to cash flows provided
by operating activities:
Depreciation 166,046 100,221 85,654
Amortization 476,815 386,651 54,676
Write-off of Goodwill 127,991 - -
Deferred income taxes 35,121 67,000 18,000
Provision for doubtful accounts 78,951 47,011 51,880
Changes in operating assets
and liabilities, net of effects
of acquisitions:
Accounts receivable (1,182,627) 806,015 (2,081,783)
Inventories (809,948) (483,653) (75,456)
Prepaid expenses
and other current assets (82,462) (27,163) 20,391
Other assets (372,729) - -
Accounts payable
and accrued expenses (851,196) (1,269,959) 619,168
Income taxes payable (468,334) 36,775 444,179
__________ __________ __________
Total adjustments (2,882,372) (337,102) (863,291)
__________ __________ __________
Net cash flows provided
by operating activities 1,433,039 3,739,234 1,912,568
__________ __________ __________
See notes to consolidated financial statements
F-7
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
_____________________________________________
1995 1994 1993
__________ __________ __________
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for assets acquired in
bulk asset purchase - - (1,028,503)
Return of escrow funds - 428,124
Purchase of debenture (500,000)
Purchase of intangible assets - - (357,116)
Purchase of property, plant
and equipment (185,763) (836,853) (71,908)
Purchase of marketable securities - (108,427) (358,000)
Maturities of marketable securities 417,237 254,750 197,357
Net changes in other assets - (92,646) -
__________ __________ __________
Net cash flows provided by/(used in)
investing activities 231,474 (855,052) (1,618,170)
__________ __________ __________
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (143,002) (241,411) (116,320)
Proceeds from note payable to bank 400,000
Proceeds from issuance of stock - 119,289 -
Acquisition of treasury stock - (884,000)
Dividends paid (164,899) - -
Proceeds from exercise of
stock options 62,090 10,006 64,411
__________ __________ __________
Net cash flows used in
financing activities (245,811) (596,116) (51,909)
__________ __________ __________
NET INCREASE IN CASH AND
CASH EQUIVALENTS 1,418,702 2,288,066 242,489
CASH, BEGINNING OF PERIOD 6,292,537 4,004,471 3,761,982
__________ __________ __________
CASH, END OF PERIOD $ 7,711,239 $ 6,292,537 $ 4,004,471
========== ========== ==========
See notes to consolidated financial statements
F-8
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Supplemental Disclosures of Cash Flow Information:
1995 1994 1993
__________ _________ __________
Interest paid $ 96,452 $ 94,489 $ 96,699
========== ========= ==========
Income taxes paid $ 2,488,598 $ 2,011,952 $ 1,112,440
========== ========= ==========
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
In connection with the acquisition of the Colgate-Palmolive Brands on
December 31, 1995, the Company acquired inventory($600,000), molds and
tooling equipment($200,000) and intangible assets ($10,200,000) for cash,
notes, and contingent consideration to be paid over an 8 year period.
In connection with the acquisition of Scientific Research Products, Inc.,
in 1994, the Company acquired inventory, accounts receivable, fixed and
intangible assets and assumed certain liabilities by issuance of common
stock with an approximate net value of $5,500,000.
In connection with the acquisition of the Frances Denney cosmetic line in
1993, the Company acquired inventory and intangible assets aggregating
approximately $6,674,000 by issuance of restricted common stock plus the
assumption of certain liabilities.
In connection with the acquisition of salon contracts and the start-up of
Heads or Nails, Inc., in 1993, the Company acquired intangible assets of
approximately $243,000 by issuance of restricted common stock. In
connection with the settlement of a lawsuit with the former owners in 1995,
16,105 shares issued in the acquisition were returned and retired.
See notes to consolidated financial statements
F-9
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial
statements include the accounts of The Stephan Co. and its' wholly-owned
subsidiaries, Foxy Products, Inc., Old 97 Company, Williamsport Barber and
Beauty Supply Corp., Stephan & Co. (formerly Heads or Nails, Inc.) and
Scientific Research Products, Inc. of Delaware (collectively, the
"Company"). All significant intercompany balances and transactions have
been eliminated in consolidation.
NATURE OF OPERATIONS: The Company is engaged in the
manufacture, sale, and distribution of personal care grooming products
throughout the United States. The Company's business activity constitutes
a single reportable segment for purposes of Statement of Financial
Accounting Standards No 14. Approximately $9,000,000 (34%) of the
Company's revenue is derived from the manufacturing of products marketed
under the brand names of customers.
USE OF ESTIMATES: The preparation of consolidated financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
MAJOR CUSTOMERS: Sales to unaffiliated customers in excess of
10% of net sales for the years ended December 31, 1995, 1994 and 1993 were
as follows:
1995 1994 1993
__________ __________ __________
Customer A $ 3,572,000 $ 1,012,000 $ -
Customer B 4,365,000 5,256,000 2,913,000
Customer C 3,128,000 3,786,000 989,000
Customer D - 1,300,000 7,594,000
__________ __________ __________
$11,065,000 $11,354,000 $11,496,000
========== ========== ==========
The loss of any of the customers mentioned above could have a
material adverse effect on the Registrant and its subsidiaries taken as a
whole. During the year, no sales were made to any other customers or to
the Registrant's knowledge a group of customers under common control, or
customers that are affiliates of each other, by the Registrant and its
subsidiaries, which sales represented 10% or more of the Registrant's
consolidated revenues.
F-10
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
At December 31, 1995 and 1994 amounts included in accounts
receivable in excess of 10% of net accounts receivable were as follows:
1995 1994
__________ __________
Customer A $ 1,661,862 $ 741,985
Customer B 1,401,039 1,197,722
Customer C 92,485 642,996
__________ __________
$ 3,155,386 $ 2,582,703
========== ==========
NEW ACCOUNTING PRONOUNCEMENTS: The Company will adopt the
following Statements of Financial Accounting Standards (SFAS) in the year
ending December 31, 1996:
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. Long-
lived assets and certain identifiable intangibles to be held and used by a
company are required to be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Measurement of an impairment loss for such long-lived
assets and identifiable intangibles should be based on the fair value of
the asset. Long-lived assets and certain identifiable intangibles to be
disposed of are required to be reported generally at the lower of the
carrying amount or fair value less cost to sell. SFAS No. 121, which is
effective for financial statements for fiscal years beginning after
December 15, 1995, is not expected to have a significant effect on the
Company's financial position or results of operations.
SFAS No. 123, "Accounting for Stock-Based Compensation" establishes
financial accounting and reporting standards for stock-based employee
compensation plans, including stock options, stock purchase plans,
restricted stock and stock appreciation rights. SFAS No. 123 defines and
encourages the use of the fair value method in accounting for employee
stock-based compensation. Continuing use of the intrinsic value based
method of accounting prescribed in Accounting Principles Board Opinion No.
25 (APB 25) for the measurement of employee stock-based compensation is
allowed with pro forma disclosures of net income and earnings per share as
if the fair value method of accounting had been applied. Transactions in
which equity instruments are issued in exchange for goods or services from
non-employees must be accounted for based on the fair value of the
consideration received or of the equity instrument issued, whichever is
more reliably measurable. SFAS No. 123 is effective for transactions
entered into in fiscal years that begin after December 15, 1995. The
Company has determined that it will continue to use the method of
accounting prescribed in APB 25 for measurement of employee stock-based
compensation, and will begin providing the required proforma disclosures in
its financial statements for the year ending December 31, 1996 as allowed
by SFAS No. 123.
F-11
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS: Statement of Financial
Accounting Standards No. 107, "Disclosure about Fair Value of Financial
Instruments," requires disclosure of the fair value of financial
instruments, both assets and liabilities, recognized and not recognized in
the consolidated balance sheets of the Company, for which it is practicable
to estimate fair value. The estimated fair values of financial instruments
which are presented herein have been determined by the Company using
available market information and appropriate valuation methodologies.
However, considerable judgment is required in interpreting market data to
develop estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of amounts the Company could realize
in a current market exchange.
The following methods and assumptions were used to estimate fair
value:
- the carrying amounts of cash and cash equivalents, receivables and
accounts payable approximate fair value due to their short term nature;
- discounted cash flows using current interest rates for financial
instruments with similar characteristics and maturity were used to
determine the fair value of short-term and long-term debt.
There were no significant differences as of December 31, 1995 and
December 31, 1994 in the carrying value and fair market value of financial
instruments.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include
cash, certificates of deposit, United States Treasury Bills, and municipal
bonds having maturities of one month or less. Also included in cash and
cash equivalents is a $400,000 certificate of deposit pledged as collateral
against a $400,000 note payable to bank. The Company maintains cash
deposits at certain financial institutions in amounts in excess of
federally insured limits of $100,000. Cash and cash equivalents held in
interest-bearing accounts as of December 31, 1995 and 1994 were
approximately $5,342,000 and $4,867,000, respectively.
MARKETABLE SECURITIES: Effective January 1, 1994, the Company
adopted Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities". The Company
classifies its investments in debt securities as held to maturity and
carries them at amortized cost.
Investments as shown in the consolidated balance sheets are as
follows:
Gross
Unrealized Fair
Cost Losses Value
____________ ___________ ___________
Securities held to maturity as of
December 31, 1994:
Commonwealth bonds $ 417,237 $ (15,304) $ 401,933
F-12
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
The maturities of investment securities at December 31, 1994 are as
follows:
Fair
Cost Value
___________ ___________
Due in one year or less $ 417,237 $ 401,933
=========== ===========
Interest income on investments was approximately $26,000 and $17,000
in 1994 and 1993, respectively.
INVENTORIES: Inventories are stated at the lower of cost
(determined on the first-in, first-out basis) or market. Capitalized
overhead costs charged to inventory for the year ended December 31, 1995
and 1994 were approximately $2,835,000 and $1,775,000, respectively.
Capitalized overhead costs included in inventory as of December 31, 1995
and 1994 were approximately $1,649,000 and $351,000, respectively.
PROPERTY AND EQUIPMENT: Property and equipment are recorded
at cost. 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 5-7 years
Furniture, fixtures 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
The amount of impairment, if any, in unamortized Goodwill is measured
based on projected future results of operations. To the extent future
results of operations of those subsidiaries to which the Goodwill relates
through the period such Goodwill is being amortized are sufficient to
absorb the amortization of Goodwill, the Company has deemed there to be no
impairment of Goodwill.
NET INCOME PER SHARE: Net income per share is computed by
dividing net income by the sum of the weighted average number of shares of
common stock and common stock assumed to be outstanding upon exercise of
all stock options, utilizing the treasury stock method. Fully diluted
earnings per share is not presented as it is not materially different.
RECLASSIFICATIONS: Certain prior year amounts have been
reclassified to conform to the 1995 presentation.
F-13
NOTE 2. SIGNIFICANT TRANSACTIONS
On December 31, 1995, the Company entered into asset purchase
agreements with Colgate-Palmolive Company and its subsidiary, The Mennen
Company, to acquire certain consumer product brands, as well as a licensing
agreement for the domestic distribution of the Cashmere Bouquet Talc
product line. The combined purchase price for the brands and licensing
agreement was a minimum of $12,000,000, comprised of a $2,000,000 cash
down payment; 5 year, 8% notes in an aggregate amount of $6,000,000; and an
8% royalty payment based upon net sales of the brands' products for a
period of 8 years, with a minimum royalty payment of $4,000,000.
Approximately $600,000 of the purchase price was allocated to inventory,
$200,000 was allocated to molds and other tooling equipment acquired and
the balance of approximately $10,200,000 (after giving consideration to the
net present value of the royalty stream) was allocated to trademarks and
licenses which are being amortized over 30 years. Concurrent with the
acquisition of the brands and the licensing agreement, the parties signed a
six-month transition agreement to facilitate the orderly transition of
sales, production and distribution functions.
On April 15, 1994, the Company acquired all of the outstanding stock
of Scientific Research Products, Inc. of Delaware, a former major private
label customer of the Company, for 500,000 shares of common stock(a
valuation of $5,500,000). The transaction was recorded using the purchase
method. Accordingly, the purchase price was allocated to assets and
liabilities based on their estimated fair values as of the date of
acquisition. The cost in excess of identifiable net assets acquired was
approximately $4,246,000 and is being amortized over 30 years on a straight-
line basis.
Unaudited pro-forma results of continuing operations, assuming the
acquisition of Scientific Research Products, Inc. of Delaware occurred as
of the beginning of 1993, after giving effect to certain adjustments such
as the elimination of intercompany sales and amortization of goodwill
resulting from the acquisition can be summarized as follows (in thousands,
except per share data):
1994 1993
__________ __________
Net sales $ 26,405 $ 21,828
========== ==========
Income before taxes $ 6,445 $ 3,821
========== ==========
Net income $ 4,403 $ 2,521
========== ==========
Earnings per share $ 1.04 $ .66
========== ==========
In July, 1994, the Company purchased a $500,000 secured subordinated
convertible debenture, provided a $300,000 working capital loan, and
entered into a long-term manufacturing and warehousing agreement with
Trevor Sorbie of America, Inc. (TSA). The $500,000 debenture is due
February 29, 1996 and bears interest at a rate of 14%. It is secured by
the accounts receivable and inventory of TSA and is subordinated to a
$200,000 line of credit with a bank. On January 30, 1996, the Company
signed a letter of intent to acquire TSA for an acquisition price of
approximately $2,000,000 in cash and stock. The acquisition is subject to
F-14
NOTE 2. SIGNIFICANT TRANSACTIONS(Continued)
the satisfactory completion of due diligence, third party consents and
other considerations. As a result of the pending acquisition, the secured
subordinated convertible debenture has been reclassified as long term on
the accompanying consolidated balance sheet as of December 31, 1995.
In May, 1994, the Company filed suit against the former stockholder of
Penny's Heads or Nails, Inc. The suit alleged certain breaches of
representations and warranties in connection with the purchase of the
company's common stock in August, 1993, for $ 357,116 cash and 23,007
restricted shares of Stephan's common stock. In August, 1995, the
litigation was terminated by a settlement between the parties, resulting in
a return of 16,105 shares. Also, as a result of the settlement, goodwill
and additional paid in capital have been reduced by approximately $300,000.
NOTE 3. RECEIVABLES
Receivables at December 31, 1995 and 1994 consisted of the following:
1995 1994
___________ ___________
Receivables:
Trade $ 4,863,120 $ 4,298,267
Other 597,811 54,405
___________ ___________
5,460,931 4,352,672
Less: Allowance for
doubtful accounts (46,401) (41,819)
___________ ___________
$ 5,414,530 $ 4,310,853
=========== ===========
The following is an analysis of the allowance for doubtful accounts for the
year ended December 31:
1995 1994 1993
__________ __________ __________
Balance, beginning of year $ 41,819 $ 36,331 $ 23,280
Provision for doubtful
accounts 78,951 47,011 51,880
Uncollectible accounts
written off (74,369) (41,523) (38,829)
__________ __________ __________
Balance, end of year $ 46,401 $ 41,819 $ 36,331
========== ========== ==========
NOTE 4. INVENTORIES
Inventories at December 31, 1995 and 1994 consisted of the following:
1995 1994
____________ ____________
Raw materials $ 1,078,275 $ 539,842
Packaging and components 2,000,850 2,017,061
Work in progress 596,391 446,311
Finished goods 3,384,020 2,648,132
____________ ____________
$ 7,059,536 $ 5,651,346
============ ============
F-15
NOTE 5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at December 31, 1995 and 1994 consisted
of the following:
1995 1994
____________ ____________
Land $ 379,627 $ 379,627
Buildings 1,514,599 1,426,066
Machinery and equipment 754,511 510,645
Office and other equipment 284,864 231,500
____________ ___________
2,933,601 2,547,838
Less: accumulated depreciation (835,844) (669,798)
____________ ___________
$ 2,097,757 $ 1,878,040
============ ===========
NOTE 6. INTANGIBLE ASSETS
Intangible assets at December 31, 1995 and 1994 consisted of the
following:
1995 1994
____________ ____________
Goodwill-Williamsport
Barber Supply $ 501,000 $ 501,000
Covenant not to compete-
Williamsport Barber Supply 275,000 275,000
Goodwill-Stephan & Co. 278,054 600,000
Goodwill-Scientific
Research Products, Inc. 2,311,810 4,245,720
Trademarks-Scientific Research 1,758,343 -
Trademarks-Frances Denney 4,541,802 4,541,802
Trademarks-Colgate/Mennen 10,174,832 -
Other 112,679 90,941
___________ ___________
19,953,520 10,254,463
Less: accumulated amortization (1,005,092) (506,038)
____________ ___________
$ 18,948,428 $ 9,748,425
============ ===========
NOTE 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 1995 and
1994 consisted of the following:
1995 1994
____________ ____________
Trade accounts payable $ 859,304 $ 775,061
Accrued marketing expenses 195,681 305,000
Accrued payroll and bonuses 433,717 798,888
Other accrued expenses 172,952 633,901
____________ ____________
$ 1,661,654 $ 2,512,850
============ ============
F-16
NOTE 8. LONG-TERM DEBT
Long-term debt at December 31, 1995 and 1994 consisted of the
following:
1995 1994
____________ ____________
10% mortgage payable to former owner
of land and building; principal and
interest due in monthly installments
of $4,824, through December, 1997;
collateralized by a first mortgage on
land and building with a carrying
value of approximately $773,000. $ 104,496 $ 149,458
Variable rate (8.86% at December 31,
1995) mortgage payable to bank,
principal and interest due in
monthly installments of $5,436,
through December, 2008;
collateralized by a second mortgage
on land and building. 484,867 505,413
7.7% note payable to former owner of
Williamsport Barber Supply; principal
and interest due in monthly install-
ments of $5,403, through January,
1999; collateralized by operating
assets of Williamsport Barber and
Beauty Supply with a carrying value
of approximately $1,000,000. 177,448 226,549
Non-interest bearing note payable to the
seller of the Massimo Faust product line;
payable in annual installments of $15,000,
through December 1997; unsecured. 45,000 60,000
4% note payable to former owner of Old 97;
principal and interest due in monthly
installments of $3,349, through April,
1995; collateralized by property and
equipment with a carrying value of
approximately $900,000. - 13,395
8% notes payable to The Colgate/Mennen
Co.; due January 2, 2001 interest
payable semi-annually. 6,000,000 -
Guaranteed minimum payments of $250,000
due semi-annually to The Colgate/Mennen
Co. over an 8 year period discounted
at 8%. 2,913,075 -
____________ _____________
9,724,886 954,815
Less: current portion (612,757) (143,828)
____________ ____________
Long-term debt $ 9,112,129 $ 810,987
============ ============
F-17
NOTE 8. LONG-TERM DEBT(Continued)
At December 31, 1995, approximate maturities of long-term debt are $613,000
for 1996, $590,000 for 1997, $509,000 for 1998, $411,000 for 1999, 380,000
for 2000, and $7,222,000 thereafter.
NOTE 9. INCOME TAXES
The provision for income taxes is comprised of the following for the years
ended December 31:
1995 1994 1993
___________ ___________ ___________
Current Tax:
Federal $ 1,843,532 $ 1,776,481 $ 1,306,619
State 231,732 279,764 268,000
___________ ___________ ___________
Total Current 2,075,264 2,056,245 1,574,619
___________ ___________ ___________
Deferred Tax:
Federal 23,487 67,000
State 11,634 - -
___________ ___________ ___________
Total Deferred 35,121 67,000 -
___________ ___________ ___________
Total provision
for income taxes $ 2,110,385 $ 2,123,245 $ 1,574,619
=========== =========== ===========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for tax purposes.
The net deferred tax asset in the accompanying balance sheets includes
deferred tax assets and liabilities attributable to the following items:
1995 1994
___________ ___________
Accounts receivable
allowances $ (17,307) $ -
Goodwill 137,428 85,000
___________ ___________
Net deferred tax
liability $ 120,121 $ 85,000
=========== ===========
F-18
NOTE 9. INCOME TAXES(Continued)
The provision for federal and state income taxes differs from statutory tax
expense (computed by applying the U.S. Federal corporate tax rate to income
before taxes) as follows:
1995 1994 1993
________ ________ ________
Amount computed on pretax income 35.0% 35.0% 34.0%
Increase(decrease) in taxes:
State income taxes, net of
federal tax benefit 2.5 3.6 3.6
Charitable contributions of inventory (2.9) - -
Benefit of graduated rates (1.0) (1.0) -
Other (0.8) (3.4) (1.4)
________ ________ ________
Total income tax 32.8% 34.2% 36.2%
======== ======== ========
The Company had available a net operating loss carryforward
approximating $600,000 at December 31, 1995, arising from the acquisition
of Scientific Research Products, Inc. of Delaware.
NOTE 10. COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation matters arising in the normal
course of business. It is the opinion of management that any such matters
at December 31, 1995 would not have a material adverse effect on the
Company's financial position or operations.
The 10% mortgage payable ($104,496 at December 31, 1995) has an
acceleration clause calling for payment of the note six months after
Mr. Frank Ferola ceases to be a stockholder and/or a director.
Scientific Research Products is committed to a lease of office,
warehouse and distribution facilities through October 1997 for an annual
rental of $180,000. After giving consideration to sublease income from
Trevor Sorbie of America, Inc., the net rental commitment is not material.
In accordance with the terms of the asset purchase agreements with
Colgate-Palmolive Company and its subsidiary, the Mennen Company, the
Company is obligated to pay an 8% royalty based upon net sales of the
brands' products, with a minimum royalty payment of $4,000,000 over an
eight year period. The net present value of the minimum payment is
reflected in the consolidated financial statements as long-term debt.
F-19
NOTE 11. CAPITAL STOCK AND STOCK OPTIONS
At the annual stockholder's meeting in July, 1994 the number of common
shares authorized was increased to 25,000,000.
1,000,000 shares of preferred stock, $0.01 par value are authorized,
however, no shares have been issued.
In 1989 and 1990, the Company established stock option plans for
officers and directors, outside directors and key employees. Pursuant to a
plan adopted in June, 1990, and as adjusted for stock splits, 202,500
shares are reserved for grants under the Outside Directors Plan. In June,
1990, the Board also approved, as adjusted for stock splits, 470,000 shares
to be available under the Key Employee Option Plan. In addition, at
December 31, 1995 specific individual options for 7,500 shares, at prices
ranging from $14.33 to $15.67 per share, were outstanding. Stock options
are granted at the discretion of the Board of Directors. The options
become exercisable one year from the grant date and must be exercised
within five years of the grant date. At December 31, 1995, options for
64,548 shares were outstanding below the fair market value of the stock.
Stock option activity for 1995, 1994, and 1993 is set forth below:
Key Employee Outside
Option Plan Directors Plan
__________________________________________________________________________
Outstanding at December 31, 1992..... 98,002 9,750
Granted.............................. - 3,000
3 for 2 Stock Split.................. 48,998 4,875
Exercised............................ (12,850) -
____________ ____________
Outstanding at December 31, 1993..... 134,150 17,625
Granted.............................. 80,000 10,124
Exercised............................ (8,626) -
____________ ____________
Outstanding at December 31, 1994..... 205,524 27,749
Granted.............................. - 10,124
Canceled............................. (1,758) -
Exercised............................ (31,966) (3,375)
____________ ____________
Outstanding at December 31, 1995..... 171,800 34,498
============ ============
Exercisable at December 31, 1995..... 171,800 21,874
============ ============
Option prices per share:
Exercised during 1993 $1.16 n/a
Exercised during 1994 $1.16 n/a
Exercised during 1995 $1.16 $7.41
Outstanding at year-end 1995 $14.33 TO $17.25 $7.41 to $18.50
F-20
SIGNATURES
Pursuant to the requirements 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 12, 1996
By: /s/ David A. Spiegel
___________________________________
David A. Spiegel
Principal Financial Officer
April 12, 1996
Pursuant to the requirements of Section 13 or 15(d) 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 12, 1996 Date: April 12, 1996
By: /s/ John DePinto By: /s/ Stephen Letizia
______________________________ ____________________________
John DePinto, Director Stephen Letizia
Date: April 12, 1996 Vice President and Director
Date: April 12, 1996
By: /s/ W. Gregg Baldwin
______________________________
W. Gregg Baldwin, Director
Date: April 12, 1996
17