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, 1997
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 or any amendment to this Form 10-K. (X)
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant, computed by reference to the price at which the stock
was sold, or the average bid and asked prices of such stock, as of a
specified date within 60 days prior to the date of filing.
$ 59,664,000 as of March 31, 1998
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date:
4,725,858 Shares of Common Stock, $.01 Par Value,
as of March 31, 1998
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 Registrant's 1998 annual
meeting to be filed no later than 120 days after the end of the Company's
fiscal year are incorporated by reference in Part III of this Form 10-K.
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THE STEPHAN CO. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT
ON FORM 10-K
Page
PART I ______
Item 1: Business................................................... 4
Item 2: Properties................................................. 10
Item 3: Legal Proceedings.......................................... 11
Item 4: Submission of Matters to a Vote of Security Holders......... 11
PART II
Item 5: Market for the Registrant's Common Equity
and Related Stockholder Matters........................... 12
Item 6: Selected Financial Data.................................... 13
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 14
Item 8: Financial Statements and Supplementary Data................ 16
Item 9: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 16
PART III
Item 10: Directors and Executive Officers of the Registrant......... 17
Item 11: Executive Compensation..................................... 17
Item 12: Security Ownership of Certain Beneficial
Owners and Management..................................... 17
Item 13: Certain Relationships and Related Transactions............. 17
PART IV
Item 14: Exhibits, Financial Statement Schedules
and Reports on Form 8-K.................................. 18
Signatures.......................................................... 19
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, condition (financial or otherwise), performance
or achievements of The Stephan Co. and its subsidiaries to be materially
different from any future results, performance, condition or achievements
expressed or implied by such forward-looking statements. Such factors
include, but are not limited to, the following: general economic and
business conditions; competition; success of operating initiatives;
development and operating costs; advertising and promotional efforts; brand
awareness; the existence or absence of adverse publicity; acceptance of new
product offerings; changing trends in customer tastes; the success of
multi-branding; changes in business strategy or development plans; 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; the
ability to successfully integrate newly-acquired businesses and any risks
and problems inherent in such businesses, and other factors or events
referenced in the Form 10-K. The Stephan Co. does 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, Trevor Sorbie of America,
Inc. and Stephan Distributing, Inc. The Company considers itself to be in
a single line of business for reporting purposes.
The Stephan Co.
Located in Fort Lauderdale, Florida, The Stephan Co. ("Stephan") is
principally engaged in the manufacturing of hair care products for sale by
two of its subsidiaries, Scientific Research Products, Inc. and Trevor
Sorbie of America, Inc., in addition to manufacturing products marketed
under the STEPHAN brand name. Stephan also markets and distributes hair
and skin care products under various trade names through different
divisions. Retail brands acquired from Colgate-Palmolive and The Mennen
Co. in December, 1995 include product lines such as Cashmere Bouquet talc,
Quinsana Medicated talc, Balm Barr and Stretch Mark creams and lotions and
Protein 29 and Wildroot hair care products for men. These brands,
manufactured by the Company's Tampa facility, accounted for approximately
$5,100,000 of sales, or approximately 19% of consolidated revenues. The
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Frances Denney division of Stephan continues to market a full line of
cosmetics through retail and mail-order channels. Under the
terms of an exclusive Trademark License and Supply Agreement with Color Me
Beautiful, Inc., the Registrant markets HOPE, INTERLUDE AND FADE-AWAY
products through several retail chains, including J.C. Penney, in the
United States and Canada.
Colgate Palmolive and Mennen Company Products: On December 31, 1995, the
Registrant entered into asset purchase agreements (collectively, the
"Acquisition Agreements") with each of Colgate Palmolive Company and its
subsidiary, The Mennen Company (collectively, the "Sellers"), for the
acquisition by the Registrant of certain consumer product brands of the
Sellers, as well as a licensing agreement for the domestic distribution of
Colgate-Palmolive's Cashmere Bouquet talc product line (the "U.S. Trademark
License"). The aggregate purchase price for the brands and the U.S.
Trademark License was a minimum of $12,000,000, comprised of a $2,000,000
cash down payment, five-year 8% promissory notes in an aggregate amount of
$6,000,000 and an 8% royalty payment based upon "net sales" of the
acquired/licensed products (as defined in the Acquisition Agreements) for a
period of eight years (the "Deferred Payments"), with a minimum aggregate
royalty payment of $4,000,000. In June 1996, the Registrant refinanced the
existing notes payable to the Sellers by securing a five-year term loan
with a bank.
The Registrant purchased the Wildroot product line of men's hair care
products from, and executed a licensing agreement for the manufacture and
domestic distribution of the Cashmere Bouquet talc line with, Colgate
Palmolive Company. Protein 29 and Protein 21, both hair grooming
preparations; Balm Barr, a hand and body lotion and creme product for
women; Stretch Mark, a massage creme for women; and Quinsana, a medicated
anti-fungal talc, were purchased from The Mennen Company.
In December 1996, the Registrant entered into a Settlement Agreement
and Amendment with the Sellers (the "Settlement Agreement") to resolve
certain outstanding disputes between them in respect of the Acquisition
Agreements. In general, the Settlement Agreement (i) terminated an
agreement which granted the Registrant the right to cause the Sellers to
repurchase certain products if certain minimum net sales (as defined in the
Settlement Agreement) were not achieved, (ii) required the Sellers to remit
$500,000 in cash to the Registrant, and (iii) provided for the licensing to
the Registrant of certain trademarks in Canada pursuant to a trademark
license agreement (the "Canadian Trademark License"). Additionally, the
Settlement Agreement provided that (i) Deferred Payments would be made with
respect to products sold under the Canadian Trademark License, (ii) total
Deferred Payments would be subject to a maximum of $4,000,000, and (iii)
the Registrant is required to pay the greater of $150,000 and 50% of such
Deferred Payments in immediately available funds, with the balance payable,
at the option of the Registrant, by wire transfer or a five-year promissory
note. The Registrant has made three of such payments in cash since
execution of the Agreement. In the event that the $4,000,000 maximum
amount is not paid by January 31, 2004, the Registrant must pay the
difference in cash between that amount and Deferred Payments made prior to
such date.
The U.S. Trademark License grants the Registrant an exclusive license
to use certain trademarks relating to the Cashmere Bouquet product line in
connection with the manufacture and distribution of such product lines in
the United States. The Canadian Trademark License grants the Registrant an
5
exclusive license to use certain trademarks relating to the Cashmere
Bouquet powder product line in Canada. Each of the U.S. Trademark License
and the Canadian Trademark License has an initial term of ten years and is
automatically renewable for successive ten-year periods unless earlier
terminated by breach, mutual agreement or upon certain other specified
events. Any products sold under the License Agreement are included in net
sales for purposes of determining the Deferred Payments.
Color Me Beautiful, Inc.: In March 1996, the Registrant entered into a
Trademark License and Supply Agreement with Color Me Beautiful, Inc.
("CMB") to license select products of the Registrant's Frances Denney Line
and to supply the requirements of CMB for such products. The agreement
provides CMB with the exclusive right to market and distribute specified
Denney products in certain retail chain stores in the United States and
Canada. The agreement provides for royalty payments by CMB based upon net
sales (as defined in the agreement), with guaranteed minimum annual royalty
payments throughout the term of the Agreement which are credited against
accrued royalties. The agreement also provides for the Registrant to be
the exclusive supplier of products sold under the agreement. The agreement
continues in effect unless terminated (i) by the Registrant, upon the
occurrence of certain events including, among others, bankruptcy or a
change of control (as defined in the agreement) of CMB, (ii) by either
party, upon the occurrence of a material breach by the other, (iii) by CMB,
on 180 days prior notice or (iv) by mutual agreement.
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 the parent company, Stephan, including the Frances
Denney product line as well as other retail products, accounted for
approximately 22% of consolidated revenues.
The Fort Lauderdale location also serves as the Registrant's corporate
headquarters, and the Registrant provides general management services to
its subsidiaries therefrom.
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 retail hair
and skin care brands sold by Stephan and Stephan Distributing, Inc. Old 97
is also responsible for distribution of the above products. In addition to
the above, Old 97 is responsible for the manufacturing of custom "private
label" products, which is the manufacturing of products marketed and sold
under the brand names of customers. In 1997, one private label customer,
Vogue International, accounted for 10.4% of the Company's sales. This was
the only customer of the Registrant to have sales in excess of 10% of the
Registrant's consolidated revenues.
6
Williamsport Barber and Beauty Corp.
Williamsport Barber and Beauty Corp. ("Williamsport") was acquired in
January, 1992 and is located in Williamsport, Pa. Williamsport, a large
mail order beauty and barber supply company, had sales of $3,400,000, which
accounted for almost 13% of consolidated revenues for the year ended
December 31, 1997.
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. Sales by Stephan & Co. for the year
ended December 31, 1997 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
distributor of ethnic hair care products. Scientific Research Products
accounted for 26% of the Registrant's consolidated revenues, with sales
approximating $7,000,000. 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. Sales by Foxy Products, Inc. for the year ended December 31, 1997
were not material.
Trevor Sorbie of America, Inc.
On June 28, 1996, the Company entered into a Stock Purchase Agreement
with Sorbie Acquisition Co. ("Sorbie"), and the stockholders of Sorbie,
including the President and principal stockholder, as well as related
agreements described below with the President, Trevor Sorbie International,
Mr. Trevor Sorbie, Samson Arms, Inc. and Redken Laboratories.
Pursuant to the agreements, the Company exchanged 13,733 shares of its
restricted Common Stock, valued at approximately $218,000, and additional
consideration as described below, for all the outstanding common and
preferred stock of Sorbie. 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, the Company (i) terminated a secured subordinated debenture
of Sorbie 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 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 $2,500,000 cash payment.
In separate agreements, the Company amended the existing royalty
contract between Sorbie, Trevor Sorbie International, Sorbie Trading
Limited and Mr. Trevor Sorbie. In accordance with the amended agreement,
the royalty payment percentage rates payable upon future sales were
reduced. The amended agreement also provides for the supply to Sorbie
Trading Limited and Trevor Sorbie International, at their option, by
Sorbie, of such companies' requirements of certain products. The amended
agreement contains certain non-competition provisions, effective until
December 31, 1999, relating to the Sorbie Products (as defined in the
7
amended agreement). The amended agreement expires in December 31, 2044,
but any party thereto may renew it for successive ten-year periods until
December 31, 2093.
Sorbie, prior to the acquisition, was a major customer of the
Registrant and is a distributor of a professional line of hair care
products sold to salons in the United States, Canada and Mexico through a
network of distributors. Sales of professional hair care products in 1997
were $4,800,000, representing 17.5% of consolidated revenues.
Stephan Distributing, Inc.
On June 26, 1997, the Company, through Stephan Distributing, Inc., a
newly-formed subsidiary, acquired several product lines from New Image
Laboratories, Inc. (New Image). The primary brand acquired was a
professional hair care line of products marketed under the brand name
"Image", in addition to a retail hair care line know as "Modern" and
marketed under the brand name "Stiff Stuff". Three smaller hair care lines,
"Ecoterra", "Pure Botanicals"/"Deep Earth", and "Modern Essences" were also
acquired in the transaction. The brands were acquired for (i) 250,000
shares of the Registrant's restricted common stock, valued at $10.81 per
share, with provision for half the shares to be held in escrow pending,
among other things, final adjustment of the purchase price in accordance
with the acquisition agreement and (ii) up to 100,000 restricted shares to
be issued over the next two years contingent upon the achievement of
certain earnings levels as set forth in the acquisition agreement. The
acquisition was accounted for as a purchase, with a net value of
approximately $2,700,000 based upon the quoted market price of the
Registrant's stock at the time of issuance.
Pursuant to the transaction, the Company acquired certain accounts
receivable, inventory, fixed assets and trademarks as well as assuming
certain outstanding trade and other liabilities of approximately
$5,332,000. The liabilities acquired are subject to the terms of a
liquidating trust agreement, and as provided for in the Asset Purchase
Agreement, the Registrant delivered a note payable in the amount of
$2,399,400, payable in two equal installments due in December, 1997 and
February, 1998. Additionally, the Registrant provided the Trust with a
standby letter of credit in the amount of $2,932,600. As indicated above,
the purchase price is subject to adjustment based upon the value of the net
assets acquired, as determined on the first anniversary of the closing
date. The Registrant believes that based upon information available at
December 31, 1997, the 125,000 shares held in escrow will be returned to
the Company. The value of trademarks recorded, approximating $4,100,000,
is net of this anticipated purchase price adjustment.
In addition to being popular hair care lines, the brands acquired from
New Image have international distribution which the Registrant believes
will enhance the distribution of other Stephan Co. products. Sales of
brands acquired from New Image Laboratories, Inc. amounted to approximately
$2,900,000 for the period ended December 31, 1997, which represented over
10.5% of the Registrant's consolidated revenues.
Morris Flamingo-Stephan, Inc.
On March 18, 1998, the Registrant and Morris Flamingo-Stephan, Inc.
signed an Asset Purchase Agreement (the "Agreement") with Morris-Flamingo,
L.P., Morris-Flamingo Beauty Products, Inc., Shaheen & Co., Inc. and Shouky
A. Shaheen, for the acquisition of certain assets and liabilities
8
(including the immediate payment of a note payable to Fleet Capital
Corporation approximating $1,880,000) of Morris-Flamingo, L.P. in exchange
for 307,058 shares of the Registrant's restricted common stock. The
transaction will be recorded as a purchase, and, based upon the net assets
received, goodwill of approximately $2,500,000 will be recorded. The
agreement also provides for 30% of the shares issued to be held in escrow,
pending the final determination of the value of the net assets acquired
within 90 days of closing.
Morris-Flamingo, L.P. is a large mail order barber and beauty supply
retailer, similar to the Registrant's subsidiary, Williamsport Barber and
Beauty Corp. The Company believes that this acquisition will enhance
current distribution channels and provide a larger, more broad based market
for the products manufactured by the Company.
In connection with the acquisition of Morris-Flamingo, L.P., and the
related agreement to retire the outstanding Fleet Capital Corporation debt,
the Registrant secured additional financing from NationsBank, N.A.
RAW MATERIALS, PACKAGING and COMPONENTS INVENTORY
The 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 try to maintain a level of
inventory of their products sufficient for a period of at least two months.
The Registrant does not anticipate any change in such practice during the
reasonably foreseeable future.
BACKLOG
As of March 31, 1998, the dollar amount of backlog orders was not
believed by the Registrant to be material.
RESEARCH AND DEVELOPMENT
During each of the three fiscal years ending December 31, 1997,
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 believed by the Registrant to be material and were expensed as
incurred.
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
9
Registrant. Products produced by the Registrant and its subsidiaries
account for a relatively insignificant portion of the total hair care and
personal grooming products manufactured and sold annually in the United
States.
GOVERNMENT AND INDUSTRY REGULATION, ENVIRONMENTAL MATTERS
The Registrant is subject to regulation by the Food and Drug
Administration ("FDA"), in addition to other Federal, State and local
regulatory agencies. The Company believes that it is in substantial
compliance with all applicable regulations. In addition, the Registrant
does not believe that compliance with existing or proposed environmental
standards, practices or procedures will have a material adverse effect on
operations, capital expenditures or the competitive position of the
Company.
EMPLOYEES
As of March 31, 1998, in addition to its six officers, the Registrant
and its subsidiaries employed approximately 200 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 1998, the
Company believes that any such employees, if needed, would be readily
available. No significant number of employees are 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 that 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, 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 which, by its terms, expired in October, 1997, with
1997 rental payments of approximately $180,000. These premises are
currently being occupied on a month to month basis.
10
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 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 August, 1997 Annual Meeting.
11
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, 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
___________________________________________________________________________
March 31, 1997 $ 14.75 $ 11.00
June 30, 1997 11.00 9.19
September 30, 1997 14.25 10.75
December 31, 1997 14.50 11.75
(b) Holders
As of March 15, 1998, the Registrant's Common Stock was held of record
by approximately 430 holders; 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 at the rate of $.02 per
share for each quarter in 1996 and 1997. 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.
12
Item 6. Selected Financial Data (a)
1997 1996 1995 1994 1993
(in thousands, except per share data)
____________________________________________________
Net sales $27,113 $25,779 $26,197 $24,341 $16,719
Income before
income taxes 7,697 7,093 6,426 6,200 4,350
Net Income 5,041 4,679 4,315 4,076 2,776
Current assets 25,735 19,706 20,438 17,342 12,258
Total assets 57,464 46,499 42,463 29,074 19,606
Current
liabilities 8,468 6,223 4,674 3,525 2,687
Long term debt 9,078 6,689 9,112 811 950
PER COMMON SHARE
(Basic and Diluted): (b)
Net Income 1.20 1.13 1.05 1.01 .86
Cash dividends .08 .08 .04 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 in
1994), Trevor Sorbie of America, Inc. (acquired in 1996) and Stephan
Distributing, Inc., who acquired the brands from New Image Laboratories,
Inc. in 1997.
(b) Earnings per common share is based upon the weighted average number
of common shares outstanding, in accordance with Statement of Financial
Accounting Standards No. 128, issued in February, 1997, and after giving
effect to stock splits in 1993. The weighted average number of shares
outstanding were 4,213,372 for 1997, 4,138,629 for 1996, 4,120,304 for
1995, 4,031,558 for 1994, and 3,237,944 for 1993. The weighted average
number of shares for 1995, 1994 and 1993, as well as the earnings per share
for 1994 and 1993, have been restated in accordance with SFAS No. 128.
This data should be read in conjunction with the audited consolidated
financial statements and related notes included in this Annual Report.
13
Selected Quarterly Financial Information (unaudited)
(in thousands, except per share data)
3/31/97 6/30/97 9/30/97 12/31/97
_______ _______ _______ ________
Net sales $ 6,394 $ 7,106 $ 7,581 $ 6,032
Gross profit 4,059 4,716 5,040 3,106
Net income 1,226 1,460 1,607 748
Per share .30 .35 .37 .17
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
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
OVERVIEW
Net income for the year ended December 31, 1997 was $5,041,000, or
$1.20 per share, on revenues of $27,113,000, as compared to net income of
$4,679,000, or $1.13 per share, on revenues of $25,779,000 for 1996. With
the acquisition of the brands from New Image Laboratories, Inc. ("Image")
at the end of the second quarter of 1997, the Company continued its
practice of product line enhancement and diversification in an effort to
decrease its historical dependency on major customers and to increase and
diversify its channels of distribution. International distributors who
were buying Image products have expressed interest in other product lines
and the Company expects to be able to utilize their distribution
capabilities. The gross profit margin of the Company has continued to
increase as a result of the Image hair care lines, however this increased
gross profit margin is higher in order to compensate for the additional
selling and marketing expenses that these professional and retail hair care
lines demand.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO 1996
________________________________________________
Sales for the year ended December 31, 1997 increased $1,335,000 from
1996 sales, due significantly to the acquisition of several brand lines
from Image. Gross profit increased from $15,220,000 in 1996 to $16,921,000
in 1997, which represented a 11.2% increase. The gross profit margin
increased to 62.4% in 1997 from 59% in 1996. As the product mix of sales
continues to change from that of a private label "contract" filler to that
of a manufacturer and distributor of professional and retail hair care
lines, the gross margin continues to grow to cover the increased selling,
general and administrative expenses that those product lines require.
Selling, general and administrative expenses increased 10.6% in 1997 when
compared to 1996, up from $8,239,000 to $9,110,000. The increase in these
expenses can be attributed to several areas, such as national and regional
sales personnel and the related travel expenses that accompany a sales
force, commissions paid to sales representatives, promotional literature
14
and point of purchase materials and promotions, retail distribution
expenses dictated by major drug and department store retailers such as
"slotting allowances", promotional "buy one-get one free" offers, "end-
cap", coupons and other point of purchase rebates and sales allowances,
increased freight and delivery expenses, as well as an increase in payroll
and related payroll costs.
Interest expense increased $287,000, to $642,000, as a result of the
additional debt incurred in connection with the acquisitions made in 1997
and 1996. Other income increased $50,000 to $125,000 as a result of the
royalty provision of the Color-Me-Beautiful Trademark and Licensing
Agreement.
YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO 1995
________________________________________________
Net income rose in 1996 by $362,000 when compared to 1995,
representing an 8% increase; however for the year, sales declined
approximately $400,000 from 1995. 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 Colgate-Palmolive (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 margin 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
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 were 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.
LIQUIDITY AND CAPITAL RESOURCES: Working capital was approximately
$17,267,000 at December 31, 1997, an increase of $3,784,000 from 1996, due
largely to the acquisition of the brands from New Image Laboratories, Inc.
in June, 1997. In exchange for 250,000 shares of the Company's restricted
(as provided for by Rule 144 of the Securities Act of 1933) common stock,
the Company acquired accounts receivable and inventory, among other assets
and assumed certain liabilities. In addition, the Company restructured its
line of credit from NationsBank, N.A. Cash and cash equivalents increased
$214,000 to $8,491,000 from 1996.
Accounts receivable and inventory have increased significantly from
1996 as a result of acquisitions made by the Company. Increased sales of
retail brands acquired from Colgate-Palmolive and Image to large, national
drug chains and other major retailers has increased the outstanding
accounts receivable both from an actual dollar amount due to sales, as well
as the length of time the receivable is outstanding. With respect to the
increase in inventory, the Image acquisition has added a significant amount
15
of Stock Keeping Units (SKU's) that the Company must manufacture and carry.
As a result, many more chemicals, raw materials, components and packaging
are required to be kept in stock in order to insure availability for
production.
In July, 1997, the Company restructured its unsecured line of credit
with NationsBank, N.A., increasing the line from $2,000,000 to $5,000,000,
and changing the maturity date of the loan to July, 1999. As of December
31, 1997, there was $1,000,000 available on the line, which was used to
satisfy the note payable to trustee in February, 1998. It is currently
estimated that approximately $500,000 will be returned from the Trustee of
the Liquidating Trust when the Trust terminates in June, 1998, and these
funds will be used to reduce the amount outstanding on the line of credit.
The Company is subject to various covenants with respect to working
capital, current maturity coverage and funded debt ratios under the loan
agreements with Nationsbank, N.A. At December 31, 1997, the Company
significantly exceeded the minimum requirements of the covenants.
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.
There are no material capital commitments for the upcoming year.
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.
Included in the Asset Purchase Agreement with Image, the Company
acquired the computer system used by Image and is in the process of
converting its existing computer systems to that system. The software in
use will be updated by the end of 1998 and will be Year 2000 compliant.
Management of the Company does not expect costs relating to Year 2000
problems to have any material effect on its financial condition, results of
operations or cash flows.
Item 8. Financial Statements and Supplementary Data
Reference is made to the financial statements and supplementary data
contained elsewhere in this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable
16
PART III
The information required by Part III Items 10-13 of Form 10-K are
incorporated by reference from the Registrant's Proxy Statement for its
1998 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.
17
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,
included with the Form 10-K for the year ended December 31, 1996, filed
April 15, 1997, is incorporated herein by reference.
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.
10.4 Acquisition Agreement dated as of May 23, 1997, between New
Image Laboratories, Inc., The Stephan Co. and Stephan Distributing, Inc.,
in connection with the acquisition of brands, included with the Form 10-Q
for the period ended June 30, 1997, filed August 13, 1997, is incorporated
by reference.
27. Financial Data Schedule
(b) Financial Statements and Financial Statement Schedules
(i) Financial Statements
Independent Auditors' Report for the years ended
December 31, 1997, 1996 and 1995.
Consolidated Balance Sheets as of December 31, 1997
and 1996.
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996, and 1995.
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1997, 1996, and 1995.
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996, and 1995.
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.
18
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, 1997 and 1996, and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1997. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of
December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Miami, Florida
April 9, 1998
F-1
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,1997 AND 1996
ASSETS
1997 1996
____________ ____________
CURRENT ASSETS
Cash and cash equivalents $ 8,491,174 $ 8,276,976
Cash on deposit with trustee 610,126 -
Accounts receivable, less
allowance for doubtful accounts
of $98,359 and $56,171 in 1997
and 1996, respectively 4,696,248 3,405,547
Inventories 11,667,672 7,729,657
Prepaid expenses
and other current assets 269,304 293,425
____________ ____________
TOTAL CURRENT ASSETS 25,734,524 19,705,605
PROPERTY, PLANT AND EQUIPMENT, net 2,760,011 2,160,678
INTANGIBLE ASSETS, net 26,443,911 23,131,120
OTHER ASSETS 2,525,948 1,501,107
____________ ____________
TOTAL ASSETS $ 57,464,394 $ 46,498,510
============ ============
See notes to consolidated financial statements.
F-2
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,1997 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
___________ ___________
CURRENT LIABILITIES
Accounts payable and
accrued expenses $ 3,704,383 $ 2,553,974
Notes payable to bank 400,000 1,400,000
Note payable to trustee 1,199,700 -
Current portion of
long-term debt 1,773,788 1,804,879
Income taxes payable 1,390,104 464,593
___________ ___________
TOTAL CURRENT LIABILITIES 8,467,975 6,223,446
DEFERRED INCOME TAXES, net 268,166 298,461
LONG-TERM DEBT, less current
maturities 9,078,114 6,688,930
___________ ___________
TOTAL LIABILITIES 17,814,255 13,210,837
___________ ___________
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value;
25,000,000 shares authorized;
4,418,800 and 4,147,466 shares
issued and outstanding at
December 31, 1997 and 1996,
respectively 44,188 41,475
Additional paid in capital 15,979,709 12,967,462
Retained earnings 24,977,805 20,278,736
___________ ____________
41,001,702 33,287,673
LESS 125,000 CONTINGENTLY
RETURNABLE SHARES (1,351,563) -
___________ ____________
TOTAL STOCKHOLDERS' EQUITY 39,650,139 33,287,673
___________ ____________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $57,464,394 $46,498,510
=========== ===========
See notes to consolidated financial statements.
F-3
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
____________ ____________ ____________
NET SALES $ 27,113,306 $ 25,778,618 $ 26,196,516
COST OF GOODS SOLD 10,192,411 10,558,919 12,652,546
____________ ____________ ___________
GROSS PROFIT 16,920,895 15,219,699 13,543,970
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 9,110,001 8,239,386 7,432,929
____________ ____________ ___________
OPERATING INCOME 7,810,894 6,980,313 6,111,041
OTHER INCOME(EXPENSE)
Interest income 402,940 392,314 404,631
Interest expense (641,654) (354,362) (92,416)
Other 125,000 75,000 2,540
____________ ___________ ____________
INCOME BEFORE INCOME TAXES 7,697,180 7,093,265 6,425,796
INCOME TAXES 2,656,171 2,414,105 2,110,385
____________ ___________ ____________
NET INCOME $ 5,041,009 $ 4,679,160 $ 4,315,411
============ =========== ============
BASIC AND DILUTED
EARNINGS PER SHARE $ 1.20 $ 1.13 $ 1.05
============ =========== ============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,213,372 4,138,629 4,120,304
============ =========== ============
See notes to consolidated financial statements.
F-4
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Common Stock Treasury
_____________________ Additional Stock/
Paid in Retained Contingently
Shares Par Value Capital Earnings Returnable
Stock
_________ _________ __________ __________ ___________
Balances,
Jan. 1, 1995 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 - -
Treasury stock
purchased - - - - (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 -
Stock issued for
acquisition 250,000 2,500 2,700,625 - -
Contingently returnable
stock - - - - (1,351,563)
Stock issued to
Retire debt 34,534 345 442,100 - -
Treasury stock
purchased - - - - (130,610)
Treasury stock
retired (13,200) (132) (130,478) - 130,610
Dividends paid - - - (341,940) -
Net income for 1997 - - - 5,041,009 -
_________ _________ ___________ ___________ ___________
Balances,
Dec. 31, 1997 4,418,800 $ 44,188 $15,979,709 $24,977,805 $(1,351,563)
========= ========= =========== =========== ===========
See notes to consolidated financial statements.
F-5
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
_____________________________________________
1997 1996 1995
__________ ___________ ___________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,041,009 $ 4,679,160 $4,315,411
___________ ___________ ___________
Adjustments to reconcile net income
to net cash flows provided by
operating activities:
Depreciation 338,326 221,867 166,046
Amortization 1,094,948 889,944 476,815
Adjustment to Goodwill 111,788 123,016 127,991
Deferred income taxes (30,295) 178,340 35,121
Provision for doubtful accounts 120,953 10,978 78,951
Changes in operating assets
and liabilities, net of effects
of acquisitions:
Accounts receivable (750,621) 586,073 (1,182,627)
Inventories (2,354,349) (555,425) (809,948)
Prepaid expenses
and other current assets 24,121 (28,740) (82,462)
Other assets (1,024,841) (319,731) (372,729)
Accounts payable
and accrued expenses (1,385,587) (2,340,331) (851,196)
Income taxes payable 925,511 464,593 (468,334)
__________ __________ __________
Total adjustments (2,930,046) (769,416) (2,882,372)
__________ __________ __________
Net cash flows provided
by operating activities 2,110,963 3,909,744 1,433,039
__________ __________ __________
See notes to consolidated financial statements.
F-6
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
_____________________________________________
1997 1996 1995
__________ __________ __________
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired from acquisition - 128,445 -
Colgate purchase price adjustment - 331,000 -
Cash deposited with trustee (610,126) - -
Purchase of property, plant
and equipment (562,659) (229,238) (185,763)
Purchase of intangible assets (409,823) (75,284) -
Maturities of marketable securities - - 417,237
__________ __________ __________
Net cash flows (used in)/provided by
investing activities (1,582,608) 154,923 231,474
__________ __________ __________
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (1,841,907) (10,033,528) (143,002)
Repayment of note payable
to trustee (1,199,700) - -
Proceeds from notes payable to bank 3,200,000 7,000,000 -
Acquisition of treasury stock (130,610) (184,325) -
Dividends paid (341,940) (331,086) (164,899)
Proceeds from exercise of
stock options - 50,009 62,090
__________ __________ __________
Net cash flows used in
financing activities (314,157) (3,498,930) (245,811)
__________ __________ __________
NET INCREASE IN CASH AND
CASH EQUIVALENTS 214,198 565,737 1,418,702
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 8,276,976 7,711,239 6,292,537
__________ __________ __________
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 8,491,174 $ 8,276,976 $ 7,711,239
========== ========== ==========
See notes to consolidated financial statements.
F-7
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Supplemental Disclosures of Cash Flow Information:
1997 1996 1995
__________ _________ __________
Interest paid $ 644,862 $ 354,445 $ 96,452
========== ========= ==========
Income taxes paid $ 1,760,955 $ 1,612,417 $ 2,488,598
========== ========= ==========
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
In connection with the acquisition of the brands from New Image
Laboratories, Inc. on June 26, 1997, the Company acquired inventory,
accounts receivable, fixed and intangible assets and assumed certain
liabilities by issuance of common stock with an approximate value of
$2,700,000.
On September 9, 1997, the Company issued 34,534 shares of common stock to
Charles V. Hall, in satisfaction of the amount due him as a result of the
acquisition of Trevor Sorbie of America, Inc. in June, 1996.
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.
See notes to consolidated financial statements.
F-8
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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, Trevor Sorbie of America,
Inc. and Stephan Distributing, 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 customers in excess of 10% of net
sales for the years ended December 31, 1997, 1996 and 1995 were as follows:
1997 1996 1995
__________ __________ __________
Customer A $ - $ - $ 3,572,000
Customer B - - 4,265,000
Customer C - - 3,128,000
Customer D 2,819,000 3,056,000 -
__________ __________ __________
$ 2,819,000 $ 3,056,000 $10,965,000
========== ========== ==========
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.
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 material
F-9
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 Opinion 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, 1997 and 1996 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 90 days or less when acquired. 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, 1997 and 1996 was
approximately $7,342,000 and $7,023,000, respectively.
INVENTORIES: Inventories are stated at the lower of cost
(determined on the first-in, first-out basis) or market. Capitalized
direct labor and overhead costs charged to inventory for the years ended
December 31, 1997 and 1996 were approximately $2,404,000 and $2,037,000,
respectively.
F-10
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Capitalized direct labor and overhead costs included in inventory as of
December 31, 1997 and 1996 were approximately $1,476,000 and $893,000
respectively.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are
recorded at cost. Routine repairs and maintenance are expensed as
incurred. Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets as follows:
Buildings and improvements 15-30 years
Machinery and equipment 5-10 years
Furniture and office equipment 3-5 years
INTANGIBLE ASSETS: Intangible assets are amortized using the
straight-line method based on the following estimated useful lives:
Goodwill 20-40 years
Covenant not to compete 7 years
Trademarks 20-40 years
Deferred acquisition costs 10 years
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.
EARNINGS PER SHARE: Effective December 31, 1997, the Company
adopted Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" (SFAS No. 128). The provisions of SFAS No. 128 establish standards
for computing and presenting earnings per share (EPS) and requires the
Company to restate all prior years' EPS data presented. The adoption of
SFAS No. 128 did not have a material effect on the Company's previously
reported earnings per share. Basic and diluted EPS are computed by
dividing net income by the sum of the weighted average number of shares of
common stock outstanding. The Company has 303,253 outstanding stock
options, of which 138,872 are exercisable. These options were not included
in the calculation of earnings per share because their inclusion would be
antidilutive.
NEW FINANCIAL ACCOUNTING STANDARDS: In June, 1997, SFAS No. 130,
"Reporting Comprehensive Income" and SFAS. No. 131, "Disclosures about
Segments of an Enterprise and Related Information" were issued. The
provisions of SFAS No. 130 must be adopted by the Company in the first
quarter of 1998. This statement establishes standards for the reporting of
comprehensive income and its components. Implementation of this disclosure
standard will not affect the Company's financial position, results of
F-11
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
operations or the manner in which financial information is currently
presented. In accordance with SFAS No. 131, the Company may be required to
modify or expand the financial statement disclosures for operating
segments, products and services, and geographic areas. Implementation of
this disclosure standard, which must be adopted by December 31, 1998, will
not affect the Company's financial position or results of operations.
RECLASSIFICATIONS: Certain reclassifications have been made to
prior year amounts to conform to current year presentation.
NOTE 2. SIGNIFICANT TRANSACTIONS
On June 26, 1997, the Company acquired several product lines from New
Image Laboratories, Inc. The brands were acquired for 250,000 shares of
the Company's restricted (as provided for by Rule 144 of the Securities Act
of 1933) common stock, valued at $10.81 per share, with provision for half
the shares to be held in escrow pending, among other things, final
adjustment of the purchase price in accordance with the acquisition
agreement and up to 100,000 restricted shares to be issued over the next
two years contingent upon the achievement of certain levels of earnings as
set forth in the agreement. The Company will record the additional value
of trademarks resulting from this contingent payment, if necessary, once
the contingency is resolved. The acquisition was accounted for as a
purchase, with a net value of approximately $2,700,000 based upon the
quoted market price of the Company's stock at the time of issuance.
The Company acquired certain accounts receivable, inventory, fixed
assets and trademarks as well as assuming certain outstanding trade and
other liabilities of approximately $5,332,000. The liabilities acquired
are subject to the terms of a liquidating trust agreement, and as provided
for in the Asset Purchase Agreement, the Company signed a non-interest
bearing, unsecured note payable in the amount of $2,399,400, payable in two
equal installments due in December, 1997 and February, 1998. Additionally,
the Company provided the Trust with a standby letter of credit in the
amount of $2,932,600. Claims filed with the Trustee are funded
periodically by the Company at the request of the Trustee, in addition to
funds provided by the payment of the above note. The Trust will terminate
on the first anniversary of the agreement, and all funds on deposit with
respect to unfiled claims will be refunded to the Company. Management of
the Company has reduced the value of the trademarks arising from the
acquisition in accordance with the amount it believes will ultimately be
refunded. As of December 31, 1997, the Trustee had on deposit funds
approximating $610,000 for satisfaction of claims filed in accordance with
the provisions of the Liquidating Trust Agreement.
As indicated above, the purchase price is subject to adjustment based
upon the value of the net assets acquired, as determined on the first
anniversary of the closing date. The Company believes that based upon
information available at December 31, 1997, the 125,000 shares held in
escrow will be returned to the Company and has reduced the value of
trademarks and stockholders' equity to reflect this anticipated purchase
price adjustment.
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
F-12
NOTE 2. SIGNIFICANT TRANSACTIONS (Continued)
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 (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 $5,600,000 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 are 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
========== ==========
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
F-13
NOTE 2. SIGNIFICANT TRANSACTIONS (Continued)
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 $10,100,000 (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
connection with the Acquisition Agreement between the Company and Colgate-
Palmolive, a purchase price adjustment was made at the end of the
transition period that had the effect of reducing goodwill recorded on the
acquisition by approximately $570,000.
NOTE 3. ACCOUNTS RECEIVABLE
Accounts Receivable at December 31, 1997 and 1996 consisted of the
following:
1997 1996
___________ ___________
Accounts Receivable:
Trade $ 4,753,965 $ 3,362,126
Other 40,642 99,592
___________ ___________
4,794,607 3,461,718
Less: Allowance for
doubtful accounts (98,359) (56,171)
___________ ___________
$ 4,696,248 $ 3,405,547
=========== ===========
The following is an analysis of the allowance for doubtful accounts
for the year ended December 31:
1997 1996 1995
__________ __________ __________
Balance, beginning of year $ 56,171 $ 46,401 $ 41,819
Provision for doubtful
accounts 120,953 10,978 78,951
Uncollectible accounts
written off (78,765) (1,208) (74,369)
__________ __________ __________
Balance, end of year $ 98,359 $ 56,171 $ 46,401
========== ========== ==========
NOTE 4. INVENTORIES
Inventories at December 31, 1997 and 1996 consisted of the following:
1997 1996
____________ ____________
Raw materials $ 2,880,011 $ 1,087,257
Packaging and components 4,060,389 1,639,231
Work in progress 437,965 1,019,317
Finished goods 4,289,307 3,983,852
____________ ____________
$ 11,667,672 $ 7,729,657
============ ============
F-14
NOTE 4. INVENTORIES (Continued)
Raw materials include surfactants, chemicals and fragrances used in
the production process. Packaging materials include cartons, inner sleeves
and boxes used in the actual product, as well as outer boxes and cartons
used for shipping purposes. Components are the actual bottles or
containers (plastic or glass), jars, caps, pumps and similar materials that
will be part of the finished product.
Included in other assets is packaging and components inventory not
anticipated to be utilized in less than one year, amounting to $1,740,167
in 1997 and $702,528 in 1996.
NOTE 5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at December 31, 1997 and 1996 consisted
of the following:
1997 1996
____________ ____________
Land $ 379,627 $ 379,627
Buildings and improvements 1,873,508 1,610,191
Machinery and equipment 1,398,922 834,435
Furniture and office equipment 477,816 381,213
____________ ___________
4,129,873 3,205,466
Less: accumulated depreciation (1,369,862) (1,044,788)
____________ ___________
$ 2,760,011 $ 2,160,678
============ ===========
NOTE 6. INTANGIBLE ASSETS
Intangible assets at December 31, 1997 and 1996 consisted of the
following:
1997 1996
____________ ____________
Goodwill-Williamsport
Barber Supply $ 510,674 $ 510,674
Covenant not to compete-
Williamsport Barber Supply 275,000 275,000
Goodwill-Stephan & Co. 278,054 278,054
Goodwill-Scientific
Research Products, Inc. 2,088,234 2,200,022
Trademarks-Scientific Research 1,758,343 1,758,343
Trademarks-Frances Denney 4,442,455 4,442,455
Trademarks-Colgate/Mennen 9,548,070 9,548,070
Goodwill-Trevor Sorbie 5,622,130 5,610,903
Trademarks-Image/Modern 4,109,705 -
Deferred Acquisition Costs 693,222 294,627
Other 103,005 103,005
___________ ____________
29,428,892 25,021,153
Less: accumulated amortization (2,984,981) (1,890,033)
____________ ____________
$ 26,443,911 $ 23,131,120
============ ============
F-15
NOTE 6. INTANGIBLE ASSETS (Continued)
Goodwill arising from the acquisition of Scientific Research Products
of Delaware, Inc. in April, 1994 has been reduced by the tax effect of the
Net Operating Loss carryforwards utilized.
NOTE 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 1997 and 1996
consisted of the following:
1997 1996
____________ ____________
Accounts payable $ 3,259,119 $ 1,353,889
Accrued marketing expenses 121,311 140,000
Accrued payroll and bonuses 240,545 834,246
Other accrued expenses 83,408 225,839
____________ ____________
$ 3,704,383 $ 2,553,974
============ ============
F-16
NOTE 8. LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996 consisted of the
following:
1997 1996
____________ ____________
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 $1,500,000. 67,183 124,431
Non-interest bearing note payable to the
seller of the Massimo Faust product line;
payable in annual installments of $15,000,
paid in January, 1998. 15,000 30,000
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. 183,172 262,067
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
$8,900,000. 4,200,000 5,400,000
Revolving credit line note payable to
Bank, interest payable monthly, due
July 15, 1999; unsecured. 4,000,000 -
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 $8,900,000. 2,386,547 2,677,311
____________ ____________
10,851,902 8,493,809
Less: current portion (1,773,788) (1,804,879)
____________ ____________
Long-term debt $ 9,078,114 $ 6,688,930
============ ============
In July, 1997, the Company increased its $2,000,000 revolving credit
line to $5,000,000, with a variable interest rate at LIBOR plus 1.5%. At
December 31, 1997, the outstanding obligation under this line of credit was
$4,000,000, with an effective interest rate of 7.02%. At December 31, 1997
the Company has a $400,000 note payable to a bank due January 9, 1998 with
interest at 3/4% above the certificate of deposit rate (5.5% in 1997 and
1996) that is pledged as collateral against the note.
F-17
NOTE 8. LONG-TERM DEBT (Continued)
The notes payable to bank have covenants with respect to current
maturity coverage, funded debt to earnings (as defined) and minimum working
capital. At December 31, 1997, the Company was in compliance with all
covenants.
At December 31, 1997, approximate maturities of long-term debt are
$1,774,000 for 1998, $5,677,000 for 1999, $1,581,000 for 2000, $932,000 for
2001, $318,000 for 2002, and $570,000 thereafter.
NOTE 9. INCOME TAXES
The provision for income taxes is comprised of the following for the
years ended December 31:
1997 1996 1995
___________ ___________ ___________
Current Tax:
Federal $ 2,318,398 $ 1,872,701 $ 1,843,532
State 368,068 363,064 231,732
___________ ___________ ___________
Total Current 2,686,466 2,235,765 2,075,264
___________ ___________ ___________
Deferred Tax:
Federal (26,425) 154,374 23,487
State (3,870) 23,966 11,634
___________ ___________ ___________
Total Deferred (30,295) 178,340 35,121
___________ ___________ ___________
Total provision
for income taxes $ 2,656,171 $ 2,414,105 $ 2,110,385
=========== =========== ===========
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:
1997 1996
___________ ___________
Accounts receivable
allowances $ (38,680) $ (20,952)
Goodwill 537,035 324,916
Inventory (221,862) (5,054)
Other (8,327) (449)
Net operating loss
carryforward (409,691) (510,000)
___________ ___________
(141,525) (211,539)
Less: Valuation allowance 409,691 510,000
___________ ___________
Net deferred tax
liability $ 268,166 $ 298,461
=========== ===========
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:
1997 1996 1995
________ ________ ________
Amount computed on pretax income 35.0% 35.0% 35.0%
Increase(decrease) in taxes:
State income taxes, net of
federal tax benefit 3.4 3.6 2.5
Charitable contributions of inventory (2.8) (2.9) (2.9)
Benefit of graduated rates (1.0) (1.0) (1.0)
Other ( .1) ( .3) ( .8)
________ ________ ________
Total income tax 34.5% 34.4% 32.8%
======== ======== ========
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, 1997, would not have a material adverse effect on the
Company's financial position, results of operations and cash flows.
In connection with the acquisition of certain brands from New Image
Laboratories, Inc., the Company secured a Standby Letter of Credit in the
amount of $2,932,000 to guarantee payments to creditors in accordance with
the provisions of the Liquidating Trust Agreement. The face amount of this
Standby Letter of Credit is reduced as payments are made to the Trustee.
At December 31, 1997, the remaining amount of the outstanding letter of
credit was $696,000.
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 approximately $68,000, $694,000 and
$350,000 in 1997, 1996 and 1995, 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 and 1997, is 870,000 shares. The number of shares and
terms of each grant is determined by the Compensation Committee of the
Board of Directors, in accordance with the 1990 Key Employee Plan, as
amended.
The Outside Directors Plan provides for annual grants, as adjusted for
stock splits, of 5,062 shares to non-employee directors. Such grants are
granted on the earlier of June 30 or the date of the Company's Annual
Meeting of Shareholders, at the fair market value at the date of grant.
F-19
NOTE 11. CAPITAL STOCK AND STOCK OPTIONS (Continued)
The aggregate number of shares reserved for granting under this plan, as
adjusted for stock splits, is 202,500.
Stock options are granted at the discretion of the Compensation
Committee of the Board of Directors. The options become exercisable one
year from the grant date and must be exercised within five years of the
grant date. Stock option activity for 1997, 1996, and 1995 is set forth
below:
Key Employee Outside
Option Avg. Directors Avg.
Plan Price Plan Price
__________________________________________________________________________
Outstanding at December 31, 1994.. 205,524 $13.52 29,749 $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 36,498 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 42,434 15.89
Granted........................... 79,195 12.65 15,186 11.23
Canceled.......................... (104,800) 15.46 (8,062) 17.17
Exercised......................... - - -
__________ __________
Outstanding at December 31, 1997.. 253,695 $16.03 49,558 $14.14
========== ====== ========== ======
The number of shares and average price of options exercisable at
December 31, 1997, 1996 and 1995 were 104,500 shares at $16.43, 174,800
shares at $15.95 and 171,800 at $15.95 for the Key Employee Option Plan and
34,372 at $15.80, 25,248 at $16.54 and 24,374 at $13.56 for the Outside
Directors Plan, respectively. At December 31, 1997 and 1996, 445,055
shares and 85,450 shares, respectively, were available for future grants
under the terms of the Key Employee Option Plan and 102,317 shares and
107,941 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
options granted in 1997, 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:
F-20
NOTE 11. CAPITAL STOCK AND STOCK OPTIONS (Continued)
(Dollars in thousands, except per share data)
1997 1996 1995
___________ ___________ __________
Net income:
As reported $ 5,041 $ 4,679 $ 4,315
Pro forma $ 4,514 $ 4,418 $ 4,276
Earnings per share:
As reported $ 1.20 $ 1.13 $ 1.05
Pro forma $ 1.07 $ 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 1997, 1996 and
1995 was $8.52, $3.32 and $5.68, respectively. The fair value of stock
options granted in 1997, 1996 and 1995 was estimated using the Black-
Scholes option-pricing model and included the following assumptions: a life
expectancy of 3 years for 1997, 1996 and 1995, a risk-free interest rate of
6.2% for 1997, 5.9% for 1996 and 6.9% for 1995 and volatility of 48% for
1997 and 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, the weighted average
contractual life remaining in years and the weighted average exercise price
are as follows:
Outstanding Exercisable
____________________________ ___________________
Exercise Number Average Average Number Average
Price Range of shares Life Price of shares Price
_______________ __________ _______ ________ ___________________
$10.00 - $13.99 94,381 3.72 $12.42 - -
$14.00 - $16.99 151,872 2.60 $15.18 81,872 $15.55
$17.00 - $18.99 57,000 .88 $17.32 57,000 $17.32
_________ _________
303,253 138,872
========= =========
Included in the $14.00-$16.99 range above are 70,000 ooptions which are
not exercisable until the stock trades for 20 consecutive days at a price
equal to $19.18 or higher.
NOTE 12. SUBSEQUENT EVENTS
On March 18, 1998, the Company signed an Asset Purchase Agreement (the
"Agreement") with Morris-Flamingo, L.P., Morris-Flamingo Beauty Products,
Inc., Shaheen & Co., Inc. and Shouky A. Shaheen, for the acquisition of
certain assets and liabilities (including the immediate payment of a note
F-21
NOTE 12. SUBSEQUENT EVENTS (Continued)
payable to Fleet Capital Corporation approximating $1,880,000) of Morris-
Flamingo, L.P., in exchange for 307,058 shares of the Company's restricted
common stock. The transaction will be recorded as a purchase, and, based
upon the net assets received, goodwill of approximately $2,500,000 will be
recorded. The agreement also provides for 30% of the shares issued to be
held in escrow, pending the final determination of the value of the net
assets acquired within 90 days of closing. Morris-Flamingo, L.P. is a
large mail order barber and beauty supply retailer. In connection with the
acquisition of Morris-Flamingo, L.P., and the related agreement to retire
the outstanding Fleet Capital Corporation debt, the Company secured
additional financing from NationsBank, N.A. in the amount of $3,000,000,
and pledged all of the issued common stock of Morris Flamingo-Stephan, Inc.
to the bank as collateral for the loan. The loan is payable in equal
monthly installments through March, 2005 and bears interest at the rate of
6.92%.
In addition to the above, the Company has signed a lease for the
Danville, Illinois facility currently occupied by Morris-Flamingo, L.P.
(and owned by the former owner of the partnership) for a three year period,
with an option to cancel in one year. The annual rental is $210,000 and
comprises approximately 93,000 square feet of office, manufacturing and
warehouse space.
F-22
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto, duly authorized.
THE STEPHAN CO.
By: /s/ Frank F. Ferola
___________________________________
Frank F. Ferola
President and Chairman of the Board
April 15, 1998
By: /s/ David A. Spiegel
___________________________________
David A. Spiegel
Principal Financial Officer
Principal Accounting Officer
April 15, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
By: /s/ Frank F. Ferola By: /s/ Thomas M. D'Ambrosio
______________________________ ____________________________
Frank F. Ferola, Principal Thomas M. D'Ambrosio
Executive Officer and Director Vice President and Director
Date: April 15, 1998 Date: April 15, 1998
By: /s/ John DePinto By: /s/ Curtis Carlson
______________________________ ____________________________
John DePinto, Director Curtis Carlson, Director
Date: April 15, 1998 Date: April 15, 1998
By: /s/ Leonard Genovese
______________________________
Leonard Genovese, Director
Date: April 15, 1998
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,101,300
<SECURITIES> 0
<RECEIVABLES> 4,794,607
<ALLOWANCES> 98,359
<INVENTORY> 11,667,672
<CURRENT-ASSETS> 25,734,524
<PP&E> 4,129,873
<DEPRECIATION> 1,369,862
<TOTAL-ASSETS> 57,464,394
<CURRENT-LIABILITIES> 8,467,975
<BONDS> 9,078,114
0
0
<COMMON> 44,188
<OTHER-SE> 39,605,951
<TOTAL-LIABILITY-AND-EQUITY> 57,464,394
<SALES> 27,113,306
<TOTAL-REVENUES> 27,641,246
<CGS> 10,192,411
<TOTAL-COSTS> 10,192,411
<OTHER-EXPENSES> 9,751,655
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<INCOME-PRETAX> 7,697,180
<INCOME-TAX> 2,656,171
<INCOME-CONTINUING> 5,041,009
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,041,009
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.20
</TABLE>
