Back to GetFilings.com
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, 1996
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.
$ 45,622,000 as of March 31, 1997
Indicate the number of shares outstanding of each of the Registrant's
classes of Common Stock, as of the latest practicable date:
4,147,466 Shares of Common Stock, $.01 Par Value,
as of March 31, 1997
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 1997 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................................................. 7
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................ 13
Item 9: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 13
PART III
Item 10: Directors and Executive Officers of the Registrant......... 14
Item 11: Executive Compensation..................................... 14
Item 12: Security Ownership of Certain Beneficial
Owners and Management..................................... 14
Item 13: Certain Relationships and Related Transactions............. 14
PART IV
Item 14: Exhibits, Financial Statement Schedules
and Reports on Form 8-K.................................. 15
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.,
Scientific Research Products, Inc. of Delaware, and Trevor Sorbie of
America, Inc. 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 and distribution of hair and skin care products, as well as
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 1996, only one customer accounted for more than
10% of the Company's net sales, down from three in 1995 due to the
acquisition of Trevor Sorbie of America, Inc. on June 28, 1996 and the loss
of the private label manufacturing business of Martin Himmel, Inc. Sales
of products acquired from Colgate on December 31, 1995 were $5,600,000
in 1996, which also had a significant effect of reducing the Registrant's
dependency on major customers.
4
Changes started in 1995 to distribution methods and channels used by
the Frances Denney line of cosmetics, a division of The Stephan Co.,
continued in 1996, decreasing sales to J.C. Penney, and other retailers.
The Company continues to circulate a full color mail-order catalog as well
as actively advertising and appearing on television shop-at-home programs.
In addition, 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 33% 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. The Tampa facility manufactures most of the
products sold by the Frances Denney line, all the talc manufactured for the
Cashmere Bouquet and Quinsana brands, as well as all the other hair and
skin care brands acquired from Colgate on December 31, 1995, in addition to
a significant amount of private label manufacturing. Old 97 is also
responsible for distributing the Frances Denney products, as well as the
distribution of the brands acquired from Colgate.
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 nation's largest
mail order beauty and barber supply companies and accounted for over 12% of
consolidated revenues for the year ended December 31, 1996.
Stephan & Co.
Formerly known as Heads or Nails, Inc. and acquired in August, 1993,
Stephan & Co. has focused its attention on the manufacture and supply of
personal care amenity products for cruise ships, with production and
shipping commencing in December, 1995. Consolidated revenues for the year
ended December 31, 1996 were not material.
5
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 30% of the Registrant's consolidated revenues, with
sales approximating $8,100,000. 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, 1996 were not material.
Trevor Sorbie of America, Inc.
In June, 1996, the Registrant acquired all of the outstanding capital
stock of Sorbie Acquisition Co. (Trevor Sorbie of America, Inc. (TSA)), a
distributor of a professional line of hair care products manufactured by
the Registrant and sold by TSA to salons in the United States through a
network of distributors. TSA, prior to the acquisition, was a major
customer of the Registrant accounting for $3,600,000 of sales in 1995 and
$1,100,000 through the date of acquisition in 1996. TSA was acquired for
stock valued at $518,000, the termination of a Secured Subordinated
Debenture held by the Company in the amount of $500,000 and the assumption
of liabilities totaling approximately $3,000,000, as more fully described
in Note 2 to the consolidated financial statements in Item 14.
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 31, 1997, the dollar amount of backlog orders was not
material.
RESEARCH AND DEVELOPMENT
During each of the three fiscal years ending December 31, 1996,
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 and were expensed as incurred.
6
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 31, 1997, in addition to its 6 officers, the Registrant
and its subsidiaries employed approximately 150 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 1997, 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.
Item 2. Properties
The Registrant's administrative, manufacturing and warehousing
facilities are located in a building of approximately 33,000 square feet,
which it owns, located at 1850 West McNab Road, Fort Lauderdale, Florida
33309. Approximately two-thirds of the space is utilized by the Registrant
for the manufacture and warehousing of its products. The remainder of the
space is utilized by the Registrant for its administrative offices. The
Registrant also owns certain machinery and equipment suitable for the
manufacture of its products 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.
In connection with the acquisition of Williamsport Barber Supply, the
Company entered into a two year lease, which expired in January, 1994, for
7
office and warehouse space of approximately 6,000 square feet. Subsequent
to January, 1994, the Registrant leased the premises on a month to month
basis and commencing in February, 1997, the lease was extended five years,
expiring January 31, 2002. Monthly rent in the amount of $1,800 is payable
to the former owner of Williamsport Barber Supply, currently the manager of
the Williamsport operations.
Item 3. 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 1996 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, 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
___________________________________________________________________________
March 31, 1996 $ 17.13 $ 14.25
June 30, 1996 16.88 14.25
September 30, 1996 16.00 12.25
December 31, 1996 13.00 11.50
(b) Holders
As of March 31, 1997, the Registrant's Common Stock was held of record
by approximately 430 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 each quarter thereafter
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)
1996 1995 1994 1993 1992
(in thousands, except per share data)
____________________________________________________
Net sales $25,779 $26,197 $24,341 $16,719 $14,683
Income before
income taxes 7,093 6,426 6,200 4,350 3,673
Net Income 4,679 4,315 4,076 2,776 2,374
Current assets 20,408 20,438 17,342 12,258 7,030
Total assets 46,499 42,463 29,074 19,606 8,884
Current
liabilities 6,223 4,674 3,525 2,687 1,033
Long term debt 6,689 9,112 811 950 1,093
PER COMMON SHARE: (b)
Net Income 1.13 1.05 1.00 .84 .75
Cash dividends .08 .04 None None None
Notes to Selected Financial Data
(a) The selected financial data includes the operations of the Company
and its wholly-owned subsidiaries, Foxy Products, Inc. (acquired in 1986),
Old 97 Company (acquired in 1988), Williamsport Barber and Beauty Corp.
(acquired in 1992), Stephan & Co., formerly Heads or Nails, Inc. (acquired
in 1993), Scientific Research Products, Inc. of Delaware (acquired April
15, 1994), and Trevor Sorbie of America, Inc. and Subsidiaries (acquired
June 28, 1996).
(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 1992 and 1993. The weighted average
number of shares outstanding were 4,138,629 for 1996, 4,127,765 for 1995,
4,067,819 for 1994, 3,314,274 for 1993, and 3,146,266 for 1992.
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)
3/31/96 6/30/96 9/30/96 12/31/96
_______ _______ _______ ________
Net sales $ 6,740 $ 6,468 $ 7,011 $ 5,560
Gross profit 3,749 4,136 4,274 3,163
Net income 1,219 1,332 1,452 676
Per share .30 .32 .35 .16
3/31/95 6/30/95 9/30/95 12/31/95
_______ _______ _______ ________
Net sales $ 6,873 $ 7,289 $ 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
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
OVERVIEW
Net income for the year ended December 31, 1996 was $4,679,000, or
$1.13 per share, on revenues of $25,779,000, as compared to net income of
$4,315,000, or $1.05 per share, on revenues of $26,197,000 for 1995. With
the acquisition of Trevor Sorbie of America, Inc. (Sorbie) at the end of
the second quarter of 1996 and the integration of the brands purchased from
Colgate-Palmolive (C-P) on December 31, 1995, the Company not only replaced
the majority of the sales decline from the loss of the Martin Himmel, Inc.
("Gold Bond") talc production, but was also able to decrease its historical
dependency on major customers. The Company was able to increase net income
on slightly lower sales due to the better profit margins achieved with the
new product mix.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO 1995
________________________________________________
As indicated above, net income rose in 1996 by over $360,000 when
compared to 1995, representing an 8% increase; however for the year, sales
declined approximately $400,000. Although private label production by the
Tampa facility, Old 97, increased in 1996, sales for the year decreased
slightly because revenue from the newly acquired C-P brands and the Trevor
Sorbie line were less than the sales lost as a result of the loss of Martin
Himmel Inc.'s private label talc production. Gross profit for the year
increased from 52% in 1995 to 59% in 1996 as a result of the above and a
change in the product mix and marketing strategy in connection with the
Denney cosmetic line.
The acquisition of the brands from C-P, as well as the Sorbie
acquisition, increased selling, general and administrative expenses
significantly in 1996. The C-P brands put the Company in more of a retail
environment than previous products manufactured by the Company and this
11
increased marketing costs after the transition period with C-P ended in
July, 1996. The Sorbie line, sold in professional salons nationwide, also
requires significant marketing and education expenses not previously
experienced by the Company. These increased costs are more than offset by
the significantly higher gross margins generated by these products.
Interest expense increased as a result of the debt incurred in
connection with the acquisitions made in 1995 and 1996 and other income of
$75,000 was attributable to the royalty from the Color-Me-Beautiful
Trademark and Licensing Agreement signed in the first quarter of 1996.
YEAR ENDED DECEMBER 31,1995 AS COMPARED TO 1994
_______________________________________________
While overall sales and profit increased in 1995, the gross margin
showed a decline in 1995, primarily due to a change in the product mix.
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.
At the beginning of the third quarter of 1995, management reevaluated
the Denney sales, 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,
including the development of a mail order catalog business for the Denney
products and a trademark and licensing agreement to market specific Denney
products through selected major retail chains. Aggressive advertising in
known markets where Denney sales are strong, as well as appearing on a
national television marketing channel also had a positive impact on sales
and profitability.
In connection with the 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 resumed in the second quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES: Working capital was approximately
$14,200,000 at December 31, 1996, a decrease of $1,600,000 from 1995, due
in large part to the required payments made in connection with the Colgate
acquisition refinancing and the amount owed on the line of credit utilized
to acquire Trevor Sorbie of America, Inc. Cash and cash equivalents
increased almost $600,000 to $8,300,000 from 1995, even after the down
payment to Colgate of $2,000,000 paid on January 2, 1996, the reduction of
outstanding debt on the Colgate acquisition loan ($600,000) and the
retirement of the outstanding mortgage obligation on the Fort Lauderdale
facility ($600,000). There are no material capital commitments for the
upcoming year.
12
In June, 1996, the Registrant refinanced the existing $6,000,000 notes
payable to the Colgate/Mennen companies by securing a 5 year term loan with
NationsBank N.A.(South). As a result, the Company reduced the interest
rate on the debt from 8.00% to 7.85%. The new loan provides for monthly
principal reductions of $100,000, plus interest, commencing in July, 1996.
In addition to the above, the Company also secured a $2,000,000 line of
credit with NationsBank N.A.(South) in anticipation of funds required in
connection with the acquisition of TSA.
The Company has not experienced any adverse impact from the effects of
inflation in the past. Management maintains the flexibility to increase
prices and does not have any binding contract pricing with either customers
or vendors. Many of the Company's products, as well as the components
used, are petroleum-based products, and in the past, prices can be subject
to various political or economic pressures. The Company does not foresee
any increase in its raw material or component costs but believes it has the
flexibility of multiple vendors and the ability to increase prices to
offset any price changes.
Item 8. Financial Statements and Supplementary Data
Reference is made to the financial statements and supplementary data
contained elsewhere in this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
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.
13
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
1997 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.
14
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K
(a) Exhibits
10.1 Settlement Agreement and Amendment dated December 5, 1996,
between The Stephan Co., The Mennen Company and Colgate-Palmolive Company.
10.2 Trademark License and Supply Agreement dated March 7, 1996,
between Color Me Beautiful, Inc. and The Stephan Co., included with the
Form 8-K filed March 20, 1996, is incorporated herein by reference.
10.3 Agreement dated June 28, 1996 for the acquisition of
Sorbie Acquisition Co. and Subsidiaries, with exhibits, included with the
Form 8-K filed July 15, 1996, and as amended on August 21, September 16 and
October 9, 1996, is incorporated herein by reference.
(b) Financial Statements and Financial Statement Schedules
(i) Financial Statements
Independent Auditors' Report for the years ended
December 31, 1996 and 1995.
Independent Auditors' Report for the year ended
December 31, 1994.
Consolidated Balance Sheets as of December 31, 1996
and 1995.
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995, and 1994.
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1996, 1995, and 1994.
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994.
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.
15
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K (Continued)
(c) Reports on Form 8-K
(i) Form 8-K, filed January 16, 1996, in connection with the
acquisition of certain brands from Colgate-Palmolive
Company, and as amended on January 22, 1996.
(ii) Form 8-K, filed March 20, 1996, in connection with the
Trademark License and Supply Agreement between the
Registrant and Color Me Beautiful, Inc.
(iii)Form 8-K, filed July 15, 1996, in connection with
the acquisition of Sorbie Acquisition Company and
Subsidiaries, and as amended on August 21, September 16 and
October 9, 1996.
16
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, 1996 and 1995, and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for the years 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 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 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, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
April 4, 1997
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
The Stephan Co.
Fort Lauderdale, Florida
We have audited the accompanying consolidated statement of operations,
changes in stockholders' equity, and cash flows of The Stephan Co. and
Subsidiaries for the year 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 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, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and
cash flows for the year ended December 31, 1994 of The Stephan Co. and
Subsidiaries 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 31,1996 AND 1995
ASSETS
1996 1995
____________ ____________
CURRENT ASSETS
Cash and cash equivalents $ 8,276,976 $ 7,711,239
Accounts receivable, less
allowance for doubtful accounts
of $56,171 and $46,401 in 1996
and 1995, respectively 3,405,547 5,414,530
Inventories 8,432,185 7,059,536
Prepaid expenses
and other current assets 293,425 252,205
____________ ____________
TOTAL CURRENT ASSETS 20,408,133 20,437,510
PROPERTY, PLANT AND EQUIPMENT, net 2,160,678 2,097,757
INTANGIBLE ASSETS, net 23,131,120 18,948,428
NOTE RECEIVABLE - 500,000
OTHER ASSETS 798,579 478,848
____________ ____________
TOTAL ASSETS $ 46,498,510 $ 42,462,543
============ ============
See notes to consolidated financial statements.
F-3
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,1996 AND 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
___________ ___________
CURRENT LIABILITIES
Initial payment - Colgate-Palmolive $ - $ 2,000,000
Accounts payable and
accrued expenses 2,553,974 1,661,654
Notes payable to bank 1,400,000 400,000
Current portion of
long-term debt 1,804,879 612,757
Income taxes payable 464,593 -
___________ ___________
TOTAL CURRENT LIABILITIES 6,223,446 4,674,411
DEFERRED INCOME TAXES, net 298,461 120,121
LONG-TERM DEBT, less current
maturities 6,688,930 9,112,129
___________ ___________
TOTAL LIABILITIES 13,210,837 13,906,661
___________ ___________
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value;
25,000,000 shares authorized;
4,147,466 and 4,122,484 shares
issued and outstanding at
December 31, 1996 and 1995,
respectively 41,475 41,225
Additional paid in capital 12,967,462 12,583,995
Retained earnings 20,278,736 15,930,662
___________ ____________
TOTAL STOCKHOLDERS' EQUITY 33,287,673 28,555,882
___________ ____________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $46,498,510 $42,462,543
=========== ===========
See notes to consolidated financial statements.
F-4
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
____________ ____________ ____________
NET SALES $ 25,778,618 $ 26,196,516 $ 24,340,903
COST OF GOODS SOLD 10,558,919 12,652,546 10,707,863
____________ ____________ ___________
GROSS PROFIT 15,219,699 13,543,970 13,633,040
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 8,239,386 7,432,929 7,555,969
____________ ____________ ___________
OPERATING INCOME 6,980,313 6,111,041 6,077,071
OTHER INCOME(EXPENSE)
Interest income 392,314 404,631 216,951
Interest expense (354,362) (92,416) (98,189)
Other 75,000 2,540 3,748
____________ ___________ ____________
INCOME BEFORE INCOME TAXES 7,093,265 6,425,796 6,199,581
INCOME TAXES 2,414,105 2,110,385 2,123,245
____________ ___________ ____________
NET INCOME $ 4,679,160 $ 4,315,411 $ 4,076,336
============ =========== ============
NET INCOME PER COMMON SHARE $ 1.13 $ 1.05 $ 1.00
============ =========== ============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,138,629 4,127,765 4,067,819
============ =========== ============
See notes to consolidated financial statements.
F-5
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Common Stock
_______________________ Additional
Paid in Retained Treasury
Shares Par Value Capital Earnings Stock
_________ _________ __________ __________ _________
Balances,
Jan. 1, 1994 3,674,622 $ 36,746 $8,210,399 $7,703,814
Stock issued for
acquisition 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 stock
retired (80,000) (800) (883,200) - 884,000
Retirement of stock
received in
settlement with
former stockholder(16,105) (161) (309,860) - -
Stock options
exercised 35,341 354 61,736 - -
Dividends paid - - - (164,899) -
Net income for 1995 - - - 4,315,411 -
_________ _________ __________ __________ __________
Balances,
Dec. 31, 1995 4,122,484 41,225 12,583,995 15,930,662 -
Stock issued for
acquisition 32,632 326 517,707 - -
Stock options
exercised 6,750 68 49,941 - -
Purchase of
treasury stock - - - - (184,325)
Treasury stock
retired (14,400) (144) (184,181) - 184,325
Dividends paid - - - (331,086) -
Net income for 1996 - - - 4,679,160 -
_________ _________ __________ __________ __________
Balances,
Dec. 31, 1996 4,147,466 $ 41,475 $12,967,462 $20,278,736 $ -
========= ========= ========== ========== ==========
See notes to consolidated financial statements.
F-6
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
_____________________________________________
1996 1995 1994
__________ ___________ ___________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,679,160 $ 4,315,411 $4,076,336
___________ ___________ ___________
Adjustments to reconcile net
income to cash flows provided
by operating activities:
Depreciation 221,867 166,046 100,221
Amortization 889,944 476,815 386,651
Write-off of Goodwill 123,016 127,991 -
Deferred income taxes 178,340 35,121 67,000
Provision for doubtful accounts 10,978 78,951 47,011
Changes in operating assets
and liabilities, net of effects
of acquisitions:
Accounts receivable 586,073 (1,182,627) 806,015
Inventories (555,425) (809,948) (483,653)
Prepaid expenses
and other current assets (28,740) (82,462) (27,163)
Other assets (319,731) (372,729) -
Accounts payable
and accrued expenses (2,340,331) (851,196) (1,269,959)
Income taxes payable 464,593 (468,334) 36,775
__________ __________ __________
Total adjustments (769,416) (2,882,372) (337,102)
__________ __________ __________
Net cash flows provided
by operating activities 3,909,744 1,433,039 3,739,234
__________ __________ __________
See notes to consolidated financial statements.
F-7
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
_____________________________________________
1996 1995 1994
__________ __________ __________
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired from acquisition 128,445 - -
Return of escrow funds - - 428,124
Purchase of debenture - - (500,000)
Colgate purchase price adjustment 331,000 - -
Purchase of property, plant
and equipment (229,238) (185,763) (836,853)
Purchase of marketable securities - - (108,427)
Purchase of intangible assets (75,284) - -
Maturities of marketable securities - 417,237 254,750
Net changes in other assets - - (92,646)
__________ __________ __________
Net cash flows provided by/(used in)
investing activities 154,923 231,474 (855,052)
__________ __________ __________
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (10,033,528) (143,002) (241,411)
Proceeds from notes payable to bank 7,000,000 - 400,000
Proceeds from issuance of stock - - 119,289
Acquisition of treasury stock (184,325) - (884,000)
Dividends paid (331,086) (164,899) -
Proceeds from exercise of
stock options 50,009 62,090 10,006
__________ __________ __________
Net cash flows used in
financing activities (3,498,930) (245,811) (596,116)
__________ __________ __________
NET INCREASE IN CASH AND
CASH EQUIVALENTS 565,737 1,418,702 2,288,066
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 7,711,239 6,292,537 4,004,471
__________ __________ __________
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 8,276,976 $ 7,711,239 $ 6,292,537
========== ========== ==========
See notes to consolidated financial statements.
F-8
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Supplemental Disclosures of Cash Flow Information:
1996 1995 1994
__________ _________ __________
Interest paid $ 354,445 $ 96,452 $ 94,489
========== ========= ==========
Income taxes paid $ 1,612,417 $ 2,488,598 $ 2,011,952
========== ========= ==========
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
In connection with the acquisition of Sorbie Acquisition Company and
Subsidiaries on June 28, 1996, the Company acquired inventory, accounts
receivable, fixed and intangible assets and assumed certain liabilities by
issuance of common stock with an approximate net value of $518,000.
In connection with the acquisition of the Colgate-Palmolive Brands on
December 31, 1995, the Company acquired inventory, molds and tooling
equipment and intangible assets for cash, notes, and contingent
consideration to be paid over an 8 year period.
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.
See notes to consolidated financial statements.
F-9
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial
statements include the accounts of The Stephan Co. and its wholly-owned
subsidiaries, Foxy Products, Inc., Old 97 Company, Williamsport Barber and
Beauty Supply Corp., Stephan & Co. (formerly Heads or Nails, Inc.),
Scientific Research Products, Inc. of Delaware and Trevor Sorbie of
America, Inc. (collectively, the "Company"). All significant intercompany
balances and transactions have been eliminated in consolidation.
NATURE OF OPERATIONS: The Company is engaged in the manufacture,
sale, and distribution of personal care grooming products throughout the
United States. The Company's business activity constitutes a single
reportable segment for purposes of Statement of Financial Accounting
Standards No 14.
USE OF ESTIMATES: The preparation of consolidated financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
MAJOR CUSTOMERS: Sales to unaffiliated customers in excess of
10% of net sales for the years ended December 31, 1996, 1995 and 1994 were
as follows:
1996 1995 1994
__________ __________ __________
Customer A $ - $ 3,572,000 $ 1,012,000
Customer B - 4,265,000 5,256,000
Customer C - 3,128,000 3,786,000
Customer D 3,056,000 - -
__________ __________ __________
$ 3,056,000 $10,965,000 $10,054,000
========== ========== ==========
The Company performs ongoing credit evaluations of its customers'
financial condition and, generally, requires no collateral. The Company
does not believe that the credit risk represents a material risk of loss to
the Company. However, the loss of major customers mentioned above could
have a material adverse effect on the Company.
F-10
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LONG-LIVED ASSETS: The Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" in the year ended December 31, 1996. SFAS No. 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held
and used, and for long-lived assets and certain identifiable intangibles to
be disposed of. The adoption of SFAS No. 121 did not have a significant
effect on the Company's financial position or results of operations.
STOCK-BASED COMPENSATION: On January 1, 1996, the Company
adopted SFAS No. 123, "Accounting for Stock-Based Compensation", which
permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS
No. 123 allows entities to continue to measure compensation cost for stock-
based awards using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and to provide pro forma net income and pro forma earnings per
share disclosures as if the fair value method defined in SFAS No. 123 had
been applied. The Company has elected to continue to apply the provisions
of APB No. 25 and provide the pro forma disclosure provisions of SFAS No.
123. See Note 11 to the financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS: Statement of Financial
Accounting Standards No. 107, "Disclosure about Fair Value of Financial
Instruments," requires disclosure of the fair value of financial
instruments, both assets and liabilities, recognized and not recognized in
the consolidated balance sheets of the Company, for which it is practicable
to estimate fair value. The estimated fair values of financial instruments
which are presented herein have been determined by the Company using
available market information and appropriate valuation methodologies.
However, considerable judgment is required in interpreting market data to
develop estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of amounts the Company could realize
in a current market exchange.
The following methods and assumptions were used to estimate fair
value:
- the carrying amounts of cash and cash equivalents, receivables and
accounts payable approximate fair value due to their short term nature;
- discounted cash flows using current interest rates for financial
instruments with similar characteristics and maturity were used to
determine the fair value of notes receivable, notes payable and debt.
There were no significant differences as of December 31, 1996 and 1995 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 35 days 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
F-11
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
federally insured limits of $100,000. Cash and cash equivalents held in
interest-bearing accounts as of December 31, 1996 and 1995 were
approximately $7,023,000 and $5,342,000, 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, 1996
and 1995 were approximately $2,037,000 and $2,835,000, respectively.
Capitalized overhead costs included in inventory as of December 31, 1996
and 1995 were approximately $893,000 and $1,649,000 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 5-7 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.
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.
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.
F-12
NOTE 2. SIGNIFICANT TRANSACTIONS
On June 28, 1996, the Company entered into a Stock Purchase Agreement
with Sorbie Acquisition Co. and Subsidiaries (Sorbie), and all the
stockholders of Sorbie, including the President and principal stockholder,
as well as related agreements described below with the President, Trevor
Sorbie International, Trevor Sorbie, Samson Arms, Inc. and Redken
Laboratories.
Pursuant to the agreements, the Company exchanged 13,733 shares of
restricted common stock, valued at approximately $218,000, and additional
consideration as described below, for all the outstanding common and
preferred stock of Sorbie. In addition, the Company issued an additional
18,899 shares of restricted stock, valued at approximately $300,000, to
terminate an existing royalty agreement between Samson Arms, Inc. and
Sorbie. Additionally, and as further consideration for the acquisition,
the Company has (i) terminated a Secured Subordinated Debenture of Sorbie,
dated July 20, 1994, held by the Company in the principal amount of
$500,000, (ii) assumed liabilities due to the President of Sorbie under a
pre-existing employment contract of approximately $500,000 and (iii)
replaced a certain Secured Promissory Note of Sorbie in favor of Redken
Laboratories in the principal amount of $3,250,000 with a cash payment of
$2,500,000.
In separate agreements, the Company amended the existing royalty
contract between Sorbie, Trevor Sorbie International, Sorbie Trading
Limited and Trevor Sorbie. In accordance with the amended agreement, the
royalty payment percentage rate payable upon future sales was reduced.
Sorbie, formerly a major customer of the Company, is engaged in the
distribution of professional hair care products sold in beauty salons in
the United States and Canada. The transaction was recorded using the
purchase method and, accordingly, the purchase price was allocated to
assets and liabilities based on their estimated fair values as of the date
of acquisition. The cost in excess of identifiable net assets acquired was
approximately $5,700,000 and is being amortized over 30 years on a straight-
line basis.
Unaudited pro-forma results of operations, assuming the acquisition of
Sorbie occurred as of the beginning of 1995, after giving effect to certain
adjustments such as the elimination of intercompany sales and amortization
of goodwill resulting from the acquisition is summarized as follows (in
thousands, except per share data):
1996 1995
__________ __________
Net sales $ 27,076 $ 30,315
========== ==========
Income before income taxes $ 6,699 $ 5,195
========== ==========
Net Income $ 4,431 $ 3,539
========== ==========
Earnings per share $ 1.07 $ .85
========== ==========
F-13
NOTE 2. SIGNIFICANT TRANSACTIONS (Continued)
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, as amended, was $12,000,000, comprised of a $2,000,000 cash down
payment; 5 year, 8% notes in an aggregate amount of $6,000,000; and a
royalty payment of $4,000,000 payable semi-annually over a period of 8
years. Approximately $600,000 of the purchase price was allocated to
inventory, $200,000 was allocated to molds and other tooling equipment
acquired and the balance of approximately $10,200,000 (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 seven-month transition agreement to facilitate the
orderly transition of sales, production and distribution functions. In
accordance with the Acquisition Agreement between the Company and Colgate-
Palmolive, a purchase price adjustment was made at the end of the
transition period which had the effect of reducing goodwill recorded on the
acquisition by approximately $570,000.
In May, 1994, the Company filed suit against the former stockholder of
Pennys 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 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. ACCOUNTS RECEIVABLE
Accounts Receivable at December 31, 1996 and 1995 consisted of the
following:
1996 1995
___________ ___________
Accounts Receivable:
Trade $ 3,362,126 $ 4,863,120
Other 99,592 597,811
___________ ___________
3,461,718 5,460,931
Less: Allowance for
doubtful accounts (56,171) (46,401)
___________ ___________
$ 3,405,547 $ 5,414,530
=========== ===========
F-14
NOTE 3. ACCOUNTS RECEIVABLE (Continued)
The following is an analysis of the allowance for doubtful accounts for the
year ended December 31:
1996 1995 1994
__________ __________ __________
Balance, beginning of year $ 46,401 $ 41,819 $ 36,331
Provision for doubtful
accounts 10,978 78,951 47,011
Uncollectible accounts
written off ( 1,208) (74,369) (41,523)
__________ __________ __________
Balance, end of year $ 56,171 $ 46,401 $ 41,819
========== ========== ==========
NOTE 4. INVENTORIES
Inventories at December 31, 1996 and 1995 consisted of the following:
1996 1995
____________ ____________
Raw materials $ 1,087,257 $ 1,078,275
Packaging and components 2,341,759 2,000,850
Work in progress 1,019,317 596,391
Finished goods 3,983,852 3,384,020
____________ ____________
$ 8,432,185 $ 7,059,536
============ ============
NOTE 5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at December 31, 1996 and 1995 consisted
of the following:
1996 1995
____________ ____________
Land $ 379,627 $ 379,627
Buildings and improvements 1,610,191 1,514,599
Machinery and equipment 834,435 754,511
Furniture and office equipment 381,213 284,864
____________ ___________
3,205,466 2,933,601
Less: accumulated depreciation (1,044,788) (835,844)
____________ ___________
$ 2,160,678 $ 2,097,757
============ ===========
F-15
NOTE 6. INTANGIBLE ASSETS
Intangible assets at December 31, 1996 and 1995 consisted of the
following:
1996 1995
____________ ____________
Goodwill-Williamsport
Barber Supply $ 501,000 $ 501,000
Covenant not to compete-
Williamsport Barber Supply 275,000 275,000
Goodwill-Stephan & Co. 278,054 278,054
Goodwill-Scientific
Research Products, Inc. 2,200,022 2,311,810
Trademarks-Scientific Research 1,758,343 1,758,343
Trademarks-Frances Denney 4,541,802 4,541,802
Trademarks-Colgate/Mennen 9,608,070 10,174,832
Goodwill-Trevor Sorbie 5,700,902 -
Other 157,960 112,679
___________ ____________
25,021,153 19,953,520
Less: accumulated amortization (1,890,033) (1,005,092)
____________ ____________
$ 23,131,120 $ 18,948,428
============ ============
Goodwill arising from the acquisition of Scientific Research Products
of Delaware, Inc. in April, 1994 was reduced by the tax effect of the Net
Operating Loss carryforward utilized subsequent thereto. See Note 9.
NOTE 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 1996 and
1995 consisted of the following:
1996 1995
____________ ____________
Accounts payable $ 1,353,889 $ 859,304
Accrued marketing expenses 140,000 195,681
Accrued payroll and bonuses 834,246 433,717
Other accrued expenses 225,839 172,952
____________ ____________
$ 2,553,974 $ 1,661,654
============ ============
NOTE 8. LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1995 consisted of the
following:
1996 1995
____________ ____________
10% mortgage payable to former owner
of land and building. $ - $ 104,496
Variable rate mortgage payable
to bank. - 484,867
F-16
NOTE 8. LONG-TERM DEBT (Continued)
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 $1,250,000. 124,431 177,448
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. 30,000 45,000
Guaranteed royalty payments to former
owner of Sorbie brand, payable in
quarterly installments of $22,401,
through December 31, 1999, discounted
at an 8% rate; unsecured. 262,067 -
8% notes payable to The Colgate/Mennen
Co.; due January 2, 2001 interest
payable semi-annually. - 6,000,000
7.85% note payable to bank, principal of
$100,000 plus interest, due monthly,
through June 26, 2001; collateralized
by a secondary security interest in the
brands acquired from Colgate-Palmolive
with a carrying value of approximately
$9,250,000. 5,400,000 -
Guaranteed payments of $250,000 due semi-
annually to Colgate-Palmolive over an
8 year period discounted at an 8% rate;
collateralized by a security interest
in the brands acquired with a carrying
value of approximately $9,250,000. 2,677,311 2,913,075
____________ ____________
8,493,809 9,724,886
Less: current portion (1,804,879) (612,757)
____________ ____________
Long-term debt $ 6,688,930 $ 9,112,129
============ ============
In June, 1996, the Company refinanced the existing notes payable to Colgate-
Palmolive by securing a 5 year term loan with a bank.
The Company entered into a $2,000,000 revolving credit line with a variable
interest rate at LIBOR plus 1.5%. At December 31, 1996, the outstanding
obligation under this line of credit was $1,000,000, with an interest rate
of 7.16%. At December 31, 1996 and 1995, the Company has a $400,000 note
payable to a bank due October 9, 1997, with interest at 3/4% above the
certificate of deposit rate (5.5% in 1996 and 4.75% in 1995) that is
pledged as collateral against the note.
F-17
NOTE 8. LONG-TERM DEBT (Continued)
In December, 1996, the Company retired the two outstanding mortgages on the
Fort Lauderdale facility, without penalty.
At December 31, 1996, approximate maturities of long-term debt are
$1,805,000 for 1997, $1,775,000 for 1998, $1,675,000 for 1999, $1,580,000
for 2000, $930,000 for 2001, and $725,000 thereafter.
NOTE 9. INCOME TAXES
The provision for income taxes is comprised of the following for the years
ended December 31:
1996 1995 1994
___________ ___________ ___________
Current Tax:
Federal $ 1,872,701 $ 1,843,532 $ 1,776,481
State 363,064 231,732 279,764
___________ ___________ ___________
Total Current 2,235,765 2,075,264 2,056,245
___________ ___________ ___________
Deferred Tax:
Federal 154,374 23,487 67,000
State 23,966 11,634 -
___________ ___________ ___________
Total Deferred 178,340 35,121 67,000
___________ ___________ ___________
Total provision
for income taxes $ 2,414,105 $ 2,110,385 $ 2,123,245
=========== =========== ===========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for tax purposes.
The net deferred tax liability in the accompanying balance sheets includes
deferred tax assets and liabilities attributable to the following items:
1996 1995
___________ ___________
Accounts receivable
allowances $ (20,952) $ (17,307)
Goodwill 324,916 137,428
Other reserves (5,503) -
Net operating loss
carryforward (510,000) (204,000)
___________ ___________
(211,539) (83,879)
Less: Valuation allowance 510,000 204,000
___________ ___________
Net deferred tax
liability $ 298,461 $ 120,121
=========== ===========
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:
1996 1995 1994
________ ________ ________
Amount computed on pretax income 35.0% 35.0% 35.0%
Increase(decrease) in taxes:
State income taxes, net of
federal tax benefit 3.6 2.5 3.6
Charitable contributions of inventory (2.9) (2.9) -
Benefit of graduated rates (1.0) (1.0) (1.0)
Other ( .3) ( .8) (3.4)
________ ________ ________
Total income tax 34.4% 32.8% 34.2%
======== ======== ========
The Company had available a net operating loss carryforward
approximating $300,000 at December 31, 1996, arising from the acquisition
of Scientific Research Products, Inc. of Delaware and approximately
$1,200,000 arising from the purchase of Sorbie Acquisition Company. Due to
limitations imposed by current tax laws, it is anticipated that a
significant portion of the Sorbie net operating loss carryforward will not
be able to be utilized.
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, 1996, would not have a material adverse effect on the
Company's financial position or results of operations.
Scientific Research Products is committed to an operating lease of
office, warehouse and distribution facilities through October 1997 for an
annual rental of $180,000.
The Company has entered into employment agreements with certain
officers and employees. These agreements, which expire on various dates
through June, 2001, provide for incentive bonuses based on consolidated
income before taxes, earnings per share, or earnings of a subsidiary. In
the aggregate, such bonuses were $694,000, $350,000 and $696,000 in 1996,
1995 and 1994, respectively, and are included in selling, general and
administrative expenses.
NOTE 11. CAPITAL STOCK AND STOCK OPTIONS
1,000,000 shares of preferred stock, $0.01 par value are authorized,
however, no shares have been issued.
In 1990, the shareholders of the Company approved the 1990 Key
Employee Stock Incentive Plan and the 1990 Outside Directors Plan. The
aggregate number of shares currently authorized pursuant to the Key
Employee Plan, as adjusted for stock splits and a shareholder approved
increase in 1994, is 470,000 shares. The number of shares and terms of
F-19
NOTE 11. CAPITAL STOCK AND STOCK OPTIONS (Continued)
each grant are 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 Board of Directors.
The options become exercisable one year from the grant date and must be
exercised within six years of the grant date. Stock option activity for
1996, 1995, and 1994 is set forth below:
Key Employee Outside
Option Avg. Directors Avg.
Plan Price Plan Price
__________________________________________________________________________
Outstanding at December 31, 1993.. 134,150 $10.88 17,625 $11.26
Granted........................... 80,000 16.71 10,124 15.38
Exercised......................... (8,626) 1.16 -
__________ __________
Outstanding at December 31, 1994.. 205,524 13.52 27,749 12.76
Granted........................... - 10,124 15.50
Canceled.......................... (1,758) 1.16 -
Exercised......................... (31,966) 1.16 (3,375) 7.41
__________ __________
Outstanding at December 31, 1995.. 171,800 15.95 34,498 14.09
Granted........................... 112,500 17.81 15,186 15.75
Canceled.......................... (5,000) 14.33 (2,500) 7.41
Exercised......................... - (6,750) 7.41
__________ __________
Outstanding at December 31, 1996.. 279,300 $16.77 40,434 $16.24
========== ====== ========== ======
The number of shares and average price of options exercisable at
December 31, 1996, 1995 and 1994 were 174,800 shares at $15.95, 171,800
shares at $15.95 and 134,150 at $10.88 for the Key Employee Option Plan and
25,248 at $16.54, 24,374 at $13.50 and 17,625 at $11.26 for the Outside
Directors Plan, respectively. At December 31, 1996 and 1995, 192,300
shares and 304,800 shares, respectively, were available for future grants
under the terms of the Key Employee Option Plan and 138,066 shares and
153,252 shares, respectively, were available for future grants under the
terms of the Outside Directors Plan.
The Company continues to apply the provisions of Accounting Principles
Board Opinion No. 25, and related Interpretations in accounting for stock-
based compensation plans. Accordingly, no compensation expense has been
recorded in the accompanying consolidated statements of operations for
F-20
NOTE 11. CAPITAL STOCK AND STOCK OPTIONS (Continued)
options granted in 1996 and 1995, however pro forma disclosures of net
earnings and earnings per share must be made as if SFAS No. 123 had been
adopted. Had compensation costs for options granted been determined
on the basis of the fair value of the awards at the date of grant,
consistent with the treatment prescribed by SFAS No. 123, the Company's net
income and earnings per share, on a pro forma basis, would be as follows:
(Dollars in thousands, except per share data)
1996 1995
___________ __________
Net income:
As reported $ 4,679 $ 4,315
Pro forma $ 4,418 $ 4,276
Earnings per share:
As reported $ 1.13 $ 1.05
Pro forma $ 1.07 $ 1.04
The above pro forma effect only takes into consideration options
granted since January 1, 1995 and is likely to increase in future years as
additional options are granted and amortized ratably over the vesting
period. The average fair value of options granted during 1996 and 1995 was
$3.32 and $5.68, respectively. The fair value of stock options granted in
1996 and 1995 was estimated using the Black-Scholes option-pricing model
and included the following assumptions: a grant life expectancy of 3 years
for 1996 and 1995, a risk-free interest rate of 5.9% for 1996 and 6.9% for
1995 and volatility of 46% for 1996 and 1995. Since the Company did not
start paying dividends until August, 1995, at an annual yield of less than
1%, dividends paid was not material to the determination of the fair value
of options granted.
The exercise price range of options outstanding and exercisable for
both the Key Employee and Outside Directors plans is as follows:
Outstanding Exercisable
______________________________ ___________________
Exercise Number Average Average Number Average
Price Range of shares Life Price of shares Price
_______________ __________ ________ ________ _________ _______
$14.00 - $16.99 182,734 3.17 $15.45 133,048 $15.30
$17.00 - $18.99 67,000 3.17 $17.28 67,000 $17.28
$19.00 - $19.99 70,000 5.25 $19.18 - -
__________ _________
319,734 200,048
========== =========
The above table reflects the weighted average contractual life
remaining in years and the weighted average exercise price.
F-21
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 15, 1997
By: /s/ David A. Spiegel
___________________________________
David A. Spiegel
Principal Financial Officer
April 15, 1997
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 15, 1997 Date: April 15, 1997
By: /s/ John DePinto By: /s/ Curtis Carlson
______________________________ ____________________________
John DePinto, Director Curtis Carlson, Director
Date: April 15, 1997 Date: April 15, 1997
17