SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1999
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
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
such filing requirements for the past 90 days.
YES X NO
(APPLICABLE ONLY TO CORPORATE ISSUERS)
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Shares of Common Stock outstanding as of July 31, 1999:
4,669,958
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 1999
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 1999 and December 31, 1998 4-5
Unaudited Consolidated Statements of Operations
for the Six months ended June 30, 1999 and 1998 6
Unaudited Consolidated Statements of Operations
for the Three months ended June 30, 1999 and 1998 7
Unaudited Consolidated Statements of Cash Flows
for the Six months ended June 30, 1999 and 1998 8-10
Notes to Unaudited Consolidated Financial
Statements 11-15
ITEM 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations. 16-22
ITEM 3. Quantitative and Qualitative
Disclosure About Market Risk 22
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 23
ITEM 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
2
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 1999
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains certain "forward-looking" statements. The
Stephan Co. (the "Company") desires to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 and is
including this statement for the express purpose of availing itself of the
protections of such safe harbor with respect to all such forward-looking
statements. 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 projected, anticipated 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,
law; the ability to successfully integrate newly-acquired businesses and
the ability to reduce costs; the institution and outcome of litigation
commenced against the Company in respect of its overstatement of operating
results for 1998 interim periods and any risks, uncertainties and problems
inherent in such litigation; and other factors or events referenced in this
Form 10-Q. 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.
Therefore, the Company cautions each reader of this report to
carefully consider the specific factors and qualifications discussed herein
with respect to such forward-looking statements, as such factors could
affect the ability of the Company to achieve its objectives and may cause
actual results to differ materially from those projected or anticipated
herein.
3
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
1999 1998
(UNAUDITED)
____________ ____________
CURRENT ASSETS
Cash and cash equivalents $ 9,738,311 $ 8,081,762
Cash on deposit with trustee 235,441 270,684
Accounts receivable, net 4,794,719 4,680,170
Inventories, net 14,774,556 15,286,370
Income taxes receivable - 83,888
Prepaid expenses and other
current assets 283,260 219,897
____________ ____________
TOTAL CURRENT ASSETS 29,826,287 28,622,771
PROPERTY, PLANT AND EQUIPMENT, net 3,023,957 3,120,658
INTANGIBLE ASSETS, net 26,484,002 27,086,358
OTHER ASSETS 1,916,887 2,432,278
____________ ____________
TOTAL ASSETS $ 61,251,133 $ 61,262,065
============ ============
See Notes to Unaudited Consolidated Financial Statements
4
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
1999 1998
(UNAUDITED)
___________ ____________
CURRENT LIABILITIES
Accounts payable and
accrued expenses $ 2,573,605 $ 3,126,756
Note payable to bank 400,000 400,000
Current portion of
long-term debt 1,610,978 1,804,971
Income taxes payable 317,903 -
____________ ____________
TOTAL CURRENT LIABILITIES 4,902,486 5,331,727
DEFERRED INCOME TAXES 684,896 554,017
LONG-TERM DEBT 10,981,916 11,718,169
____________ ____________
TOTAL LIABILITIES 16,569,298 17,603,913
____________ ____________
STOCKHOLDERS' EQUITY
Common stock, $.01 par value 47,259 47,259
Additional paid in capital 19,692,043 19,692,043
Retained earnings 26,425,322 25,270,413
____________ ____________
46,164,624 45,009,715
LESS:125,000 Contingently
returnable shares (1,351,563) (1,351,563)
28,600 shares of
treasury stock (131,226) -
____________ ____________
TOTAL STOCKHOLDERS' EQUITY 44,681,835 43,658,152
____________ ____________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 61,251,133 $ 61,262,065
============ ============
See Notes to Unaudited Consolidated Financial Statements
5
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30,
===========================
1999 1998
___________ ___________
NET SALES $17,692,653 $16,951,274
COST OF GOODS SOLD 9,537,348 8,319,427
___________ ___________
GROSS PROFIT 8,155,305 8,631,847
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 6,187,767 5,650,218
___________ ____________
OPERATING INCOME 1,967,538 2,981,629
OTHER INCOME(EXPENSE)
Interest income 189,456 201,686
Interest expense (434,025) (446,806)
Other 430,000 62,500
___________ ___________
INCOME BEFORE TAXES 2,152,969 2,799,009
INCOME TAXES 809,026 929,774
___________ ___________
NET INCOME $ 1,343,943 $ 1,869,235
=========== ===========
BASIC AND DILUTED EARNINGS PER SHARE $ .29 $ .42
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,597,516 4,470,441
=========== ===========
See Notes to Unaudited Consolidated Financial Statements
6
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30,
===========================
1999 1998
___________ ___________
NET SALES $ 9,104,783 $ 9,300,587
COST OF GOODS SOLD 4,766,236 5,571,328
___________ ___________
GROSS PROFIT 4,338,547 3,729,259
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 3,189,431 2,918,514
___________ ____________
OPERATING INCOME 1,149,116 810,745
OTHER INCOME(EXPENSE)
Interest income 102,655 102,660
Interest expense (229,419) (260,376)
Other 390,000 31,250
___________ ___________
INCOME BEFORE TAXES 1,412,352 684,279
INCOME TAXES 535,966 227,724
___________ ___________
NET INCOME $ 876,386 $ 456,555
=========== ===========
BASIC AND DILUTED EARNINGS PER SHARE $ .19 $ .10
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,594,175 4,600,858
=========== ===========
See Notes to Unaudited Consolidated Financial Statements
7
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
==========================
1999 1998
__________ __________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,343,943 $ 1,869,235
__________ __________
Adjustments to reconcile net income to
cash flows used in
operating activities:
Depreciation 253,096 167,012
Amortization 599,540 589,458
Deferred income taxes 130,879 81,013
Provision for doubtful accounts 70,407 25,185
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Accounts receivable (184,956) 361,447
Inventory 511,814 (1,141,821)
Income taxes receivable 83,888 -
Prepaid expenses
and other current assets (63,363) 57,477
Other assets 515,391 (790,765)
Accounts payable
and accrued expenses (536,616) (1,428,589)
Income taxes payable 317,903 664,316
___________ ___________
Total adjustments 1,697,983 (1,415,267)
___________ ___________
Net cash flows provided
by operating activities 3,041,926 453,968
___________ ___________
See Notes to Unaudited Consolidated Financial Statements
8
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
===========================
1999 1998
___________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired from acquisition - 5,266
Decrease in cash on deposit with trustee 35,243 80,498
Purchase of property, plant
and equipment (156,395) (379,953)
Purchase of intangible assets (26,172) (85,291)
___________ ___________
Net cash flows used in
investing activities (147,324) (379,480)
___________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (930,246) (914,832)
Repayment of notes payable - (3,077,637)
Acquisition of treasury stock (118,773) -
Proceeds from note payable to bank - 4,000,000
Dividends paid (189,034) (176,752)
___________ ___________
Net cash flows used in
financing activities (1,238,053) (169,221)
___________ ___________
NET CHANGE IN CASH AND
CASH EQUIVALENTS 1,656,549 (94,733)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 8,081,762 8,491,174
___________ ___________
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 9,738,311 $ 8,396,441
=========== ===========
See Notes to Unaudited Consolidated Financial Statements
9
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental Disclosures of Cash Flow Information:
Six Months Ended June 30,
============================
Interest Paid $ 541,311 $ 418,601
=========== ===========
Income Taxes Paid $ 317,440 $ 1,314,424
=========== ===========
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
In connection with the acquisition of Morris-Flamingo, L.P. on March 18,
1998, the Company acquired inventories, accounts receivable, fixed and
intangible assets and assumed certain liabilities by issuance of shares of
common stock with an approximate value, at the time of acquisition, of
$3,700,000.
The cost of 3,000 shares of treasury stock repurchased at the end of June,
1999, totaling $12,453, is omitted from the consolidated statements of cash
flows because the settlement date was subsequent to June 30, 1999.
See Notes to Unaudited Consolidated Financial Statements
10
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED JUNE 30, 1999 AND 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: In the opinion of management, all
adjustments necessary for a fair presentation of financial position and
results of operations are reflected in the interim financial statements.
PRINCIPLES OF CONSOLIDATION: The consolidated financial
statements include the accounts of The Stephan Co. and its eight wholly-
owned subsidiaries, Foxy Products, Inc., Old 97 Company, Williamsport
Barber and Beauty Supply Corp., Stephan & Co., Scientific Research
Products, Inc. of Delaware, Trevor Sorbie of America, Inc., Stephan
Distributing, Inc. and Morris Flamingo-Stephan, Inc. (collectively, the
"Company"). All significant intercompany balances and transactions have
been eliminated in consolidation.
NATURE OF OPERATIONS: The Company is engaged in the manufacture,
sale, and distribution of hair and personal care grooming products
throughout the United States. Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related
Information" requires the reporting of segment information using a
"management approach" as it relates to the operating segments of a
business. The Company has identified and allocated substantially all of
its business into three segments, which include professional hair care
products and distribution, retail personal care products and manufacturing.
USE OF ESTIMATES: The preparation of consolidated financial
statements in conformity with 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: The Company performs ongoing credit evaluations
of its customers' financial condition and, generally, requires no
collateral. The Company does not believe that credit risk represents a
material risk of loss to the Company. However, the loss of one or more
significant customers could have a material adverse effect on the Company.
LONG-LIVED ASSETS: SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. SFAS No. 121 did not have a material
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
11
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED JUNE 30, 1999 AND 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 disclosures in accordance with SFAS No. 123.
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 recognized valuation methodologies.
However, considerable judgment is required in interpreting market data to
develop estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of amounts the Company would actually
realize in a current market sale of such instrument.
The following methods and assumptions were used to estimate fair
value:
- the carrying amounts of cash and cash equivalents, receivables and
accounts payable approximate fair value due to their short term nature;
- discounted cash flows using current interest rates for financial
instruments with similar characteristics and maturity were used to
determine the fair value of notes payable and other debt.
There were no significant differences as of June 30, 1999 and December 31,
1998 in the carrying value and fair market value of financial instruments.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include
cash, certificates of deposit, and short-term municipal bonds having
maturities of 90 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 federally insured
limits of $100,000. Cash and cash equivalents held in interest-bearing
accounts as of June 30, 1999 and December 31, 1998 were approximately
$8,501,000 and $7,121,000, respectively.
INVENTORIES: Inventories are stated at the lower of cost
(determined on a first-in, first-out basis) or market.
12
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED JUNE 30, 1999 AND 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories were as follows:
June 30, December 31,
1999 1998
____________ ____________
Raw Materials $ 3,408,897 $ 4,042,217
Packaging and components 4,740,860 4,375,596
Work in progress 963,178 959,057
Finished goods 7,212,541 7,848,046
____________ ____________
$ 16,325,476 $ 17,224,916
Less: Amount included in
other assets (1,550,920) (1,938,546)
____________ ____________
$ 14,774,556 $ 15,286,370
============ ============
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. Finished goods also include hair
dryers, electric clippers, lather machines, scissors and salon furniture.
Included in other assets are raw materials, packaging and components
inventory not anticipated to be utilized in less than one year.
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, 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
Deferred acquisition costs 10 years
13
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED JUNE 30, 1999 AND 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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
over 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.
BASIC AND DILUTED EARNINGS PER SHARE: Basic and diluted earnings
per share are computed by dividing net income by the weighted average
number of shares of common stock outstanding. The weighted average number
of shares outstanding was 4,597,516 for the six months ended June 30, 1999
and 4,470,441 for the six months ended June 30, 1998. For the quarter
ended June 30, 1999, the weighted average number of shares outstanding was
4,594,175 and 4,600,858 for the quarter ended June 30, 1998.
NOTE 2: SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", effective for the year ended December
31, 1998. In accordance with the guidelines established by SFAS No. 131,
the Company has identified three reportable operating segments, based upon
how management evaluates its business. These segments are Professional
Hair Care Products and Distribution ("Professional"), Retail Personal Care
Products ("Retail"), and Manufacturing. The Professional segment generally
has as a customer base distributors who purchase the Company's hair
products and beauty and barber supplies for sale to salons and barber
shops. The customer base for the Retail segment is generally mass
merchandisers, chain drug stores and supermarkets who sell the product to
the end user. The Manufacturing segment manufactures products for
subsidiaries of the Company, as well as manufacturing private label brands
for customers.
The Company conducts operations primarily in the United States and
sales to international customers are not material to consolidated revenues.
The following table, in thousands, summarizes Net Sales and Income Before
Income Taxes by reportable segment:
14
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED JUNE 30, 1999 AND 1998
NOTE 2: SEGMENT INFORMATION (continued)
NET SALES NET SALES
_______________ _______________
Six Months Three Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
_______________ _______________
Professional $10,772 $10,197 $ 5,455 $ 5,952
Retail 5,175 5,078 2,720 2,495
Manufacturing 6,672 7,160 3,875 3,854
_______ _______ _______ _______
Total 22,619 22,435 12,050 12,301
Intercompany
Manufacturing (4,926) (5,484) (2,945) (3,000)
_______ _______ _______ _______
Consolidated $17,693 $16,951 $ 9,105 $ 9,301
======= ======= ======= =======
INCOME BEFORE INCOME BEFORE
INCOME TAXES INCOME TAXES
_______________ _______________
Six Months Three Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
_______________ _______________
Professional $ 530 $ 1,129 $ 683 $ 227
Retail 1,360 1,028 590 198
Manufacturing 263 642 139 259
_______ _______ ______ _______
Consolidated $ 2,153 $ 2,799 $1,412 $ 684
======= ======= ====== =======
Income Before Income Taxes as shown above reflects an allocation of
corporate overhead expenses incurred by the Manufacturing segment.
15
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 1999 AND 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW
In the second quarter of 1999, the Company continued to improve its
gross margin, when compared to the most recent preceding four quarters,
while continuing to seek to reduce selling, general and administrative
expenses. In an effort to improve overall performance, the Company
continues to work aggressively to control costs in order to achieve higher
profit margins and higher net income.
Net sales for the quarter were approximately 2% lower than the
comparable quarter in 1998, declining almost $200,000 for the three months
ended June 30, 1999. However, net sales for the six months ended June 30,
1999, when compared to the six months ended June 30, 1998, were up
approximately 4%, or $741,000. The overall decrease in sales for the
second quarter can be principally attributed to a decline in revenues of
the Morris Flamingo-Stephan subsidiary included in the Professional
business segment. Management is, however, encouraged by an increase in the
Retail business segment. Increased sales of the "Stiff Stuff" retail
product line for the six months ended June 30, 1999 indicates a renewed
interest in this line by both consumers and major retailers.
RESULTS OF OPERATIONS
Net sales for the quarter ended June 30, 1999 were $9,105,000 compared
to the $9,301,000 achieved in the comparable second quarter of 1998. As
indicated above, this decline in net sales is due to a decrease in the net
sales of the Professional segment, and more specifically, the Morris
Flamingo-Stephan subsidiary. Morris Flamingo-Stephan sales declined
approximately $400,000 from the comparable second quarter of 1998, and
alternatively, approximately $260,000 from the first quarter of 1999,
largely as a result of a managed reduction in the number of items sold by
the company. As part of the continuing effort to improve the overall gross
profit margin of the subsidiary, certain low margin items have been
discontinued, while sales emphasis has been placed on higher margin items
in quarterly customer mailings. Net sales of the Sorbie and Image lines of
shampoos, conditioners, and other hair products (referred to as "wet
goods") showed improvement over the first quarter of 1999, increasing
approximately $235,000. With more active promotions being planned for the
rest of the year, management is optimistic that sales of these brands will
continue to increase. Television "infomercials", enhanced education
programs for distributors, as well as updated packaging and new, innovative
product line extensions are anticipated to have a positive impact on future
sales of wet goods.
Net sales of the Retail segment for the second quarter of 1999 showed
improvement over both the comparable second quarter of 1998 and the first
quarter of 1999. "Stiff Stuff" net sales almost tripled, when compared to
net sales for the comparable period in 1998, and net sales of "Stretch
16
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 1999 AND 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued).
Mark", "Balm Barr" and "Protein 29" also showed improvement. Additionally,
retail sales of the Frances Denney product lines showed a modest increase
during the aforementioned periods. Net sales of the Manufacturing segment
were level for the quarter ended June 30, 1999 when compared to the
comparable period in 1998, but increased approximately 40% when compared to
the first quarter of 1999. This increase can be attributed to increased
sales of wet goods manufactured for the Company's subsidiaries as well as
an increase in private label sales.
Largely as a result of controlling expenses by diligent sourcing of
purchases and moderate price increases, gross profit in the second quarter
of 1999 improved to $4,339,000, or 47.6%, compared to restated gross profit
of $3,729,000, or 40.1%, for the quarter ended June 30, 1998. This
increase of over $600,000 is encouraging to management as efforts continue
to improve gross profit and margins. When compared to the first quarter of
1999, gross profit increased over $500,000, and the gross profit margin
increased from 44.4% for the quarter ended March 31, 1999 to 47.6% for the
quarter ended June 30, 1999.
For the quarter ended June 30, 1999, selling, general and
administrative expenses increased $271,000 over the corresponding second
quarter of 1998. Some of this increase in expenses can be attributable to
additional costs related to the restatement of earnings for the second and
third quarters of 1998, and the corresponding increases in bank fees, legal
and professional expenses incurred in connection with the temporary
restructuring of debt covenants and certain class action litigation
(discussed later). When the June 30, 1999 quarter's selling, general and
administrative expenses are compared to the selling, general and
administrative expenses incurred in the third and fourth quarters of 1998,
the Company was able to reduce these expenses by approximately $100,000 per
quarter. Following the acquisition of Morris-Flamingo in mid-March, 1998,
selling, general and administrative expenses had increased to approximately
$3,300,000 in each of the third and fourth quarters of 1998, so management
is pleased with its efforts to reduce these expenses. While the Company is
continuing its efforts to control these expenses, there can be no
assurances that these expenses will decline in the future, especially in
light of the class action litigations mentioned above and as more fully
described later herein and in the Company's annual report filed on Form
10-K for the year ended December 31, 1998.
Interest expense for the quarter and six months ended June 30, 1999
decreased approximately $31,000 and $13,000, respectively, from the
corresponding periods in 1998, as a result of the favorable refinancing (in
November, 1998) of debt incurred for various acquisitions, and the
continued reduction in the amount of outstanding debt. While income taxes
for the six months ended June 30, 1999 decreased due to lower net income,
income taxes for the quarter ended June 30, 1999 increased more than
$300,000 from the 1998 comparable quarter, due to significantly higher
17
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 1999 AND 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued).
income in such quarters.
Net income for the quarter ended June 30, 1999 was $876,000, which was
$420,000 higher than restated net income of $456,000 achieved in the second
quarter of 1998. Basic earnings per share for the second quarter was $.19,
which represents a 90% increase when compared to a restated $.10 for the
comparable quarter in 1998. Net income was favorably impacted for the
three and six month periods ended June 30, 1999 by a one-time license fee
in the amount of $350,000 for the use of the Image trademark on certain
fragrances marketed in all countries in which Image has trademark rights.
This license agreement had the effect of increasing basic earnings per
share by approximately $.05, net of taxes, for both the three and six month
period. Even without the benefit of this one time license fee, net income
for the second quarter of 1999 was over 40% higher when compared to the
corresponding second quarter of 1998, as well as the first quarter of 1999.
Other income also includes a $40,000 royalty fee, received in both the
first and second quarters of 1999, from the licensing of Frances Denney
products. This minimum fee increased in 1999 from the $31,250 received in
each quarter of 1998.
Net sales of $17,693,000 is an approximate 4% increase over the net
sales of $16,951,000 for the first six months of 1998. However, such
increase was largely as a result of the Morris-Flamingo, L.P. acquisition,
which was consummated in mid-March, 1998. In the Professional segment, net
sales of wet goods for the six months ended June 30, 1999 declined in
comparison to the net sales of the same period in 1998, but an increase in
net sales of the Williamsport subsidiary, coupled with an increase in net
sales of Morris Flamingo-Stephan subsidiary, led to an increase in net
sales for the Professional segment of almost 6%. Retail segment net sales
increased slightly, primarily as a result of increased sales of "Stiff
Stuff" and "LeKair" products, and Manufacturing segment sales also
increased slightly because private label sales, included in the
Manufacturing segment, increased for the six month period ended June 30,
1999 when compared to the six month period ended June 30, 1998.
Morris Flamingo had a significantly lower gross profit level than
other subsidiaries of the Company, and as such, the Company's consolidated
gross profit for the six months ended June 30, 1999 decreased by $477,000,
to $8,155,000 as compared to the corresponding 1998 period. This reduced
gross profit is due to the effect of the Morris Flamingo sales, with its
corresponding lower gross profit margin, and a decline in the sales and
gross profit margins of certain other retail and professional brands, which
adversely affected the consolidated gross profit of the Company.
Gross profit margin decreased to 46.1% for the six months ended June
30, 1999 when compared to the restated 50.9% achieved in the six months
ended June 30, 1998. This decline was primarily a result of the factors
mentioned above. However, the gross profit margin has increased from the
18
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 1999 AND 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued).
overall annual gross profit margin for 1998, when it declined to 38.2%.
While the Company is optimistic that it can continue to improve its gross
profit margin, it is still expected to be adversely impacted in future
quarters as a result of the lower gross margin generated by Morris-Flamingo
sales. Efforts and initiatives to reduce cost of sales continue with
extensive line reviews and evaluations of suppliers in an effort to improve
the gross margin and the overall profitability of Morris-Flamingo, as well
as the Company as a whole, but given the current mix of sales, it is not
anticipated that the Company will return to the higher gross profit margins
experienced before the Morris-Flamingo acquisition in the near future,
however the Company does expect to eventually achieve a gross profit margin
that is more in line with the historical gross profit margins of the
Company.
Selling, general and administrative expenses for the six months ended
June 30, 1999 increased $538,000, to $6,188,000, when compared to last
year's comparable six month period total of $5,650,000, primarily due to
the inclusion of Morris Flamingo expenses for a full six month period this
year (the subsidiary was not acquired until mid-March, 1998).
Net income for the six months ended June 30, 1999 was $1,344,000,
decreasing 28%, or $525,000, from net income for the restated six months
ended June 30, 1998 of approximately $1,869,000. Basic earnings per share
decreased 30% to $.29 for the six months ended June 30, 1999, when compared
to the restated $.42 for the six months ended June 30, 1998, but was
computed on a higher weighted average number of shares outstanding due to
the Morris-Flamingo acquisition.
LIQUIDITY & CAPITAL RESOURCES
Cash and cash equivalents increased $1,657,000 from December 31, 1998,
to $9,738,000. Inventory decreased $512,000 from the amount of inventory
on hand at December 31, 1998. The reduction in inventory is indicative of
the Company's efforts to reduce the amount of inventory on hand, especially
as it relates to Morris Flamingo. However, inventory has risen slightly
over the March 31, 1999 balance due to an inventory buildup for seasonal
increases in sales, among other reasons. The Company still finds it
necessary, however, to carry a larger inventory than in past years due to
the significant amount of Stock Keeping Units (SKU's) the Company must
manufacture and carry. As such, many more chemicals, raw materials,
components, packaging and finished goods are required to be kept in stock
in order to help ensure product availability. Inventory has also
temporarily increased due to changing regulations in California as it
relates to the alcohol content of certain products. Current inventory that
was manufactured prior to June 1, 1999 will not be subject to the more
stringent regulations, so the Company manufactured additional product prior
to that date, in order to forestall price increases that this legislation
is expected to necessitate. Management believes that this legislation will
19
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 1999 AND 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued).
not adversely affect sales or profit margins on these items.
Expenditures for new equipment, as well as other additions to fixed
assets, continued through the second quarter of 1999 in an effort to
increase production capabilities to meet product and customer requirements.
As previously indicated in the Company's annual report for the year ended
December 31, 1998, the Company anticipates that it will spend approximately
$1,000,000 to construct new warehousing on existing land adjacent to the
Tampa manufacturing facility in an effort to consolidate off-site locations
and reduce rental expense. These improvements will either be funded from
existing cash resources or new borrowings, depending upon available cash
and current interest rates. In as much as architect's plans and city
permits are still being finalized, no material expenditures have been made
through June 30, 1999.
In April, 1999, the Board of Directors authorized the repurchase of up
to 1,000,000 shares of the Company's outstanding common stock. As at June
30, 1999, the Company had repurchased 28,600 shares, at a total cost of
$131,000. Through July 31, 1999, an aggregate total of 55,900 shares,
costing $249,000, had been repurchased under this program. Management of
the Company will continue to evaluate market and other conditions to
determine the extent of any future stock repurchases.
Total current assets at June 30, 1999 were $29,826,000 compared to
$28,623,000 at December 31, 1998. Working capital increased
$1,633,000 when compared to December 31, 1998. The Company is subject
to various financial covenants with respect to working capital, current
maturity coverage and funded debt ratios under the loan agreement with a
bank. At June 30, 1999, the Company was in compliance with the modified
requirements of these covenants, under the terms of the waiver obtained.
Subsequent to the year ended December 31, 1998, the Company discovered
that the method used to estimate interim inventory figures resulted in the
use of incorrect inventory and cost of sales amounts in the financial
information of the second and third quarters of 1998. This error was
caused, in part, by the change in sales mix of the business as a result of
the Morris Flamingo acquisition and a decline in the sales and historical
gross profit margins of certain of the Company's other retail and
professional brands. Subsequent to the Company's April 1, 1999 press
release referencing the foregoing, the Company was named in several
lawsuits seeking to recover damages for shareholders who may have been
adversely affected by these inaccurate interim financial statements. The
Company has agreed to indemnify its officers in respect of this matter, and
believes it has meritorious defenses against these allegations. However,
it is impossible to predict the outcome of any such matters and any future
effect upon liquidity and capital resources that may occur, as many unknown
factors exist, such as the likelihood of future claims, insurance limits,
the costs of litigation, and the outcome of jury trial.
20
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 1999 AND 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued).
YEAR 2000 COMPUTER SYSTEMS COMPLIANCE
The Year 2000, or Y2K problem, relates to the inability of computer
systems to properly recognize and process date sensitive information. Many
older computer software programs refer to years by their final two digits,
thus some computer systems may interpret the year 2000 as 1900, and cause
date related or operational failures. The problems caused by these
potential system failures may have a more significant impact on certain
types of businesses or industries than others, and these factors must be
taken into consideration when assessing the overall risk that a company may
be exposed to. Management has determined that the Company's Year 2000
compliance project takes all relevant factors into consideration when
determining that the risk of business disruption would be limited due to
the nature of the business the Company is involved in, the degree of
sophistication of customers and suppliers, and the financial stability of
the Company itself.
While it is the Company's assessment that its risk of exposure to Y2K
problems are low, certain Year 2000 risk factors could have a material
adverse effect on results of operations, liquidity and financial condition.
For the most part, these risks are not within the Company's control. These
risk factors include, but are not limited to, unexpected failures by
significant business suppliers and/or customers, extended failures by
public utility companies or common carriers supplying goods or services to
the Company or delivering finished product manufactured by the Company, or
failures in the banking system and/or capital markets.
The Company has completed an assessment of its current Information
Technology (IT) systems and has determined that sales and accounts
receivable comprise the more significant IT systems that might be affected
by the Y2K problem. The Company believes that there currently is in place
sufficient collateral or alternative methods of maintaining information
should other IT systems fail. Costs related to the overall assessment of
the Company's Y2K readiness are not material.
The Company purchases all of its raw materials, components and
packaging from third party suppliers, and as such, may be at risk from
suppliers who may not be Y2K compliant. The inability or failure of
suppliers to be Y2K compliant may result in shortages that could adversely
impact the operations and condition of the Company. While it is difficult
to accurately project the disruptions that may occur under these
circumstances, the Company believes that it maintains a sufficient level of
inventory that would mitigate any disruption caused by an inability of one
or more current suppliers to fulfill the Company's orders. On the basis of
communications and correspondence with existing suppliers, the Company has
determined that most suppliers are attempting to be, or are already, Y2K
compliant.
21
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 1999 AND 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued).
In addition to the above, the Company has determined that there may
also be a risk arising from the inability of customers who are not Y2K
compliant to pay their invoices in a timely manner. The Company believes
it has adequate resources to lessen any disruption in sales and or cash
flow that may occur as a result of this and will continue to assess this
risk through Y2K readiness inquiries with customers.
As it relates specifically to the Company's and its subsidiaries'
computer systems and software, the Company is in the process of converting
all of its existing computer systems to become Y2K compliant. The software
in use by the Florida facilities is anticipated to be completely updated by
the fourth quarter of 1999 (at no additional cost other than the normal
quarterly software maintenance fee paid by the Company), at which time the
Company believes such software will be Year 2000 compliant. Included in
this process was the Y2K upgrade of both the hardware operating system and
the application software, however not all modules of the software have been
implemented at this time. Plans call for the implementation of all Y2K
compliant modules to be completed by the start of the fourth quarter of
1999. While the Y2K compliant application software for the subsidiaries
located in Florida was purchased from the Company's software developer, the
Y2K compliant software for Morris Flamingo-Stephan and Williamsport Barber
and Beauty Supply Corp. is being modified by outside sources and is
progressing as scheduled. All testing of installed Y2K compliant operating
and application system software has been completed and no problems have
been encountered to date. The Company currently uses a consultant to
assist in the implementation of the hardware and software system, who is
also monitoring the Y2K upgrade procedures and related Company upgrade and
integration plans. Based upon the Company's current readiness and the
procedures that have been implemented, the Company does not anticipate
costs relating to Year 2000 problems to have any material adverse effect on
its financial condition, results of operations or cash flows. While there
are no formal contingency plans, the Company feels that its overall
financial stability, the ability to maintain excess inventory quantities,
and back-up production capabilities will enable the Company to deal with
Y2K problems as they arise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not participate in derivative or other financial
instruments for which fair value disclosure would be required under
Statement of Financial Accounting Standards No. 107. In addition, the
Company does not invest in securities that would require disclosure of
market risk, nor does it have floating rate loans or foreign currency
exchange rate risks.
22
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 1999 AND 1998
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As more fully described elsewhere in this quarterly report and in
the Company's annual report as filed on Form 10-K for the year ended
December 31, 1998, the Company, as well as certain of its officers,
were named as defendants in class action suits filed in the United
States Federal District Court, Southern District of Florida. The
lawsuits allege, among other things, certain violations of Federal
securities laws and seek an unspecified amount of damages. Based
upon information currently available to the Company, an amended
complaint has been filed, a consolidation of the different class
actions is anticipated and no additional assessment of exposure can
be determined at this time. The Company has agreed to indemnify its
officers in respect of this matter and believes it has meritorious
defenses against these allegations. However, it is not possible at
this time to predict the outcome as many unknown factors exist such
as the likelihood of future claims, insurance limits, the costs of
litigation, and the outcome of jury trial.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10: License agreement between The Stephan Co. and Parfums
International Ltd. granting the right to use the IMAGE trademark in
connection with the marketing of certain personal care (excluding
hair care) products bearing the mark or name CERRUTI, in certain
European countries.
(b) Exhibit 10.1: Credit agreement between NationsBank, N.A. and The
Stephan Co., in connection with the term loan dated November 30,
1998, in the amount of $11,100,000.
(c) Exhibit 10.2: Letter agreement between The Stephan Co. and
NationsBank, N.A. amending certain provisions of the Loan Agreement
dated November 30, 1998.
(d) Exhibit 27: Financial Data Schedule
23
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.
/s/ Frank F. Ferola
_____________________________________
Frank F. Ferola
President and Chief Executive Officer
August 13, 1999
/s/ David A. Spiegel
___________________________
David A. Spiegel
Principal Financial and
Accounting Officer
August 13, 1999
24
IMAGE LICENSE AGREEMENT
THIS AGREEMENT is entered into by and between The Stephan Co.
(hereinafter "Licensor"), with offices at 1850 West McNab Road, Fort
Lauderdale, Florida 33309, and Parfums International Ltd. (hereinafter
"Licensee"), with offices at 1345 Avenue of the Americas, New York,
New York 10105.
WITNESSETH:
WHEREAS, Licensor or its Related Company (as defined herein)
represents and warrants that it is the owner by assignment of the
trademarks IMAGE and/or IMAGE and design in the United States and
certain countries outside the United States, as well as applications
and registrations therefor, as set forth in Exhibit A, for use in
international class 3, including in connection with hair care products
(collectively the "Licensed Trademarks") (as defined herein); and
WHEREAS, Licensee or its Related Company desires to acquire an
exclusive license (except for Licensor and/or its Related Company) of
Licensor's rights in the Licensed Territory (as defined herein) to
use the Licensed Trademarks in the development, manufacture,
distribution, advertising, promotion and sale of the Licensed Products
(as defined herein); and
WHEREAS, Licensor or its Related Company represents and warrants
that it has the power and authority and desires to grant to Licensee
such license of Licensor's rights;
WHEREAS, in consideration of the license granted by Licensor to
Licensee herein, Licensee agrees to use its best efforts to obtain a
license or consent granting Licensor the right to use the mark IMAGE
on or in connection with hair care products, as well as fragrance and
cosmetic products ancillary to and for the purpose of promoting the
sale of Licensor's hair care products;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants of this Agreement, the parties hereto agree as follows:
1. DEFINITIONS
A. "Licensed Products" means eau de toilette, eau de cologne,
eau de parfum, parfum, body lotion, body talc and powder, bath and
shower gel, body oil, body soap, body wash, body splash, facial
moisturizer, facial wash, after shave lotion/balm, deodorants,
antiperspirants and such other products commonly sold in a full
fragrance line of goods, all bearing the mark or name Cerruti.
B. "Ancillary Hair Care Products" means hair care products that
are sold or given away in combination with the Licensed Products for
purposes of promoting the sale of the Licensed Products, all bearing
the mark or name Cerruti. In no event shall Ancillary Hair Care
Products include the sale of individual, regular sized hair care
products in retail or mass market channels of distribution or in
Licensee's premium lines of distribution such as Licensee's Red Door
salon.
C. "Licensed Trademarks" means the trademarks IMAGE or IMAGE and
design.
D. "Licensed Territory" means all countries and territories set
forth in Exhibit A, attached hereto and incorporated by reference
herein. "Licensed Territory" shall also be deemed to include all
countries and territories in which Licensor files a trademark
application to register the Licensed Trademarks prior to Licensee (or
Cerruti) having filed an application for the trademark CERRUTI IMAGE
in connection with the Licensed Products or Ancillary Hair Care
Products. Licensor shall notify Licensee once it has filed an
application for the Licensed Trademarks in countries or territories
not included in Exhibit A. Exhibit A will be modified from time to
time to include these additional countries or territories. The
ultimate rejection of Licensor's application or invalidation of
Licensor's registration in a particular country will not be grounds
for removing that country from Exhibit A.
E. "Related Company" means any parent, subsidiary or affiliate
of either Parfums International Ltd. or The Stephan Co. or any entity
which, directly, or indirectly, controls, is controlled by or is under
common control with either Parfums International Ltd. or The Stephan
Co. For purposes of this Agreement "control" shall mean the ownership
of more than 50% of the voting interests of an entity.
2. LICENSE; RESTRICTIONS; CONSENT OF LICENSEE
A. Licensor hereby grants to Licensee or its Related Company,
upon and subject to all the terms and conditions of this Agreement,
an exclusive (except for Licensor and/or its Related Company) license
of Licensor's right to use or reproduce the Licensed Trademarks
solely on the Licensed Products and Ancillary Hair Care Products and
in connection with the development, manufacture, sale, distribution
and advertising and promotion of the Licensed Products in the
Licensed Territory during the Term of this Agreement.
B. In no event shall Licensee be licensed to use the Licensed
Trademarks on any Licensed Products or Ancillary Hair Care Products
that do not also bear the mark or name CERRUTI.
C. In the event that a trademark registration or registrations
for the Licensed Trademarks in a country or countries in the Licensed
Territory do not cover all of the goods within the definition of
Licensed Products, Licensee may request Licensor to file a new
trademark application or applications covering additional goods
within the definition of Licensed Products, and Licensor agrees to
file such new trademark applications solely at Licensee's cost and
expense for the Licensed Trademarks in connection with the Licensed
Products in the Licensed Territory at the request of Licensee, in
those countries requested by Licensee. Licensor will file such
trademark applications, prosecute such applications to registration,
all at Licensee's cost and expense, and Licensee agrees to execute
whatever consents, authorizations, or licenses are reasonably
necessary to enable Licensor to obtain such trademark registrations
or protection of the IMAGE mark or design in the Licensed Territory.
D. In consideration of the license granted by Licensor to
Licensee herein, Licensee agrees to use its best efforts to obtain
an exclusive license(except for Licensee and its Related Company
and/or Cerruti) from Licensee, its Related Company and/or Cerruti
granting Licensor the right to use the mark IMAGE and/or IMAGE and
design in any country or territory where Licensee, its Related
Company and/or Cerruti claims superior rights to the mark IMAGE, on
or in connection with hair care products, as well as fragrance and
cosmetic products ancillary to and for the purpose of promoting the
sale of Licensor's hair care products. Licensee represents that it
has no knowledge of any prior rights granted by Licensee or any
Related Company and/or Cerruti that would prevent Licensor from
obtaining the license or consent set forth in this paragraph.
3. LICENSOR'S TRADEMARK RIGHTS
A. Licensee acknowledges that Licensor acquired the applications
and/or registrations of the Licensed Trademarks in the Licensed
Territory by assignment. Licensee shall not, at any time during or
after the effective Term of the Agreement, dispute or contest,
directly or indirectly, Licensor's right and title to the Licensed
Trademarks in the Licensed Territory. Licensor, however, makes no
representation or warranty with respect to (i) the validity or
enforceability of the applications and/or registrations for the
Licensed Trademarks; or (ii) Licensee's or its Related Company's right
or ability to use the Licensed Trademarks in any particular country or
territory of the Licensed Territory.
B. Licensee agrees that its use of the Licensed Trademarks in
the Licensed Territory inures to the benefit of Licensor and that the
Licensee shall not acquire any rights in the Licensed Trademarks as a
result of this license in the Licensed Territory.
4. SUBLICENSE; SUBDISTRIBUTORS; THIRD PARTY MANUFACTURERS
Licensee shall be prohibited from granting any sublicense of the
license granted herein without the written consent of Licensor;
provided however, that Licensee may grant a sublicense to any Related
Company of Licensee without the written consent of Licensor. Licensee
may have the Licensed Products and Ancillary Hair Care Products
manufactured by third parties as submanufacturers and distributed by
third parties as subdistributors.
5. EFFECTIVE DATE; TERM
This Agreement shall be effective as of December 15, 1998 (the
"Effective Date") and shall continue through December 31, 2003 (the
"Initial Term"), and shall automatically renew for successive five (5)
year periods without any additional payment other than that specified
in Paragraph 7 herein, unless sooner terminated by the parties
pursuant to the terms of this Agreement.
6. TERMINATION
A. Either party may terminate this Agreement on ninety (90)
days' written notice by notice to the other party of a material
breach of any provision of this Agreement by that other party, which
shall be effective unless the party alleged to be in breach shall
make its best efforts to cure said breach within ninety (90) days'
of receipt of the notice, or as soon as possible after receipt of
written notice of such breach from the non-breaching party.
B. Licensee shall have the right to terminate this Agreement at
any time on 30 days' written notice to Licensor, such termination to
become effective at the conclusion of such 30-day period.
7. COMPENSATION
In consideration of the license granted hereunder, Licensee
agrees to pay to Licensor the sum of $U.S. 350,000 (three hundred
and fifty thousand dollars) as a one-time non-refundable fully paid
license fee, to be paid by wire transfer in immediately available
funds within 106 days of the Effective Date of this Agreement.
Licensee shall not be entitled to a return in full or part of the
said sum of $U.S. 350,000 (three hundred and fifty thousand
dollars).
8. RECORD INSPECTION AND AUDIT; QUALITY CONTROL
A. Licensor shall have the right, upon reasonable notice (but
not more than twice per calendar year), to inspect Licensee's product
lists and other related documents showing the products on which
Licensee is using the Licensed Trademarks. In no event shall
Licensor have the right to examine information with respect to
Licensee's costs, pricing, formulas, or percentages of markup.
B. Licensor agrees to use its reasonable efforts to ensure that
the reputation, image and the goodwill of the Licensed Trademarks
retains its present standing. Licensee agrees that the Licensed
products shall be of a high quality, at least equal to comparable
fragrances and related products currently sold by Licensee, and
Licensee agrees to submit samples of the Licensed Products bearing
the Licensed Trademarks to Licensor from time to time at Licensor's
reasonable request to ensure that the Licensed Products meet the
standard set forth herein.
9. WARRANTIES AND OBLIGATIONS
A. Subject to paragraph 3 hereof, Licensor and/or its Related
Company has the right and power to grant the license of Licensor's
rights granted herein.
B. Licensee shall be solely responsible for the manufacture,
production, sale, and distribution of the Licensed Products and
Ancillary Hair Care Products and will bear all costs associated
therewith.
C. Upon termination of this Agreement for whatever reason, all
rights given to Licensee to use the Licensed Trademarks shall cease.
Licensee shall, however, be entitled to sell off its existing stock of
Licensed Products and Ancillary Hair Care Products for a period up to
eighteen (18) months following the date of termination and to use up
the existing materials for the manufacture of the Licensed Products
and Ancillary Hair Care Products and to sell off the so produced
Licensed Products within this sell-off period.
10. INFRINGEMENTS
The parties agree to inform each other about any and each violation or
infringement of the Licensed Trademarks in the Licensed Territory by
third parties which come to their knowledge. Licensor may take what
action, if any, it deems appropriate to protect its rights, at its own
expense, and Licensee agrees to cooperate with Licensor in such
action. If Licensor does not take any action, Licensee, at its own
expense, shall have the right, but not the obligation, to institute
trademark infringement, unfair competition and/or other actions
against any third party to protect the Licensed Trademarks, and
Licensor agrees to cooperate with Licensee in such action.
11. INDEMNITY
A. Licensee agrees to defend, indemnify, and hold Licensor, and
its officers, directors, agents and employees, harmless against all
costs, expenses, and losses (including reasonable attorneys' fees and
costs) incurred through claims of third parties against Licensor based
on the manufacture or sale of the Licensed Products bearing the
Licensed Trademarks in the Licensed Territory, including, but not
limited to, actions founded on product liability.
B. Licensor agrees to defend, indemnify, and hold Licensee, and
its officers, directors, agents and employees, harmless against all
costs, expenses, and losses (including reasonable attorneys' fees and
costs) resulting from any breach by Licensor of its representations
and warranties made in this Agreement.
12. INSURANCE
Licensee shall, throughout the Term of the Agreement, obtain and
maintain at its own cost and expense from a qualified insurance
company standard Product Liability Insurance naming Licensor, and its
officers, directors, employees, agents, and shareholders, as an
additional insured. Such policy shall provide protection against all
claims, demands and causes of action arising out of any defects or
failure to perform, alleged or otherwise, of the Licensed Products or
any material used in connection therewith or any use thereof. The
amount of coverage shall be $1,000,000 per occurrence/claim. The
policy shall provide for 30 days' notice to Licensor from the insurer
by registered or certified mail, return receipt requested, in the
event of any modification, cancellation, or termination thereof.
Licensee agrees to furnish Licensor a certificate of insurance
evidencing same within 30 days after execution of this Agreement and,
in no event, shall Licensee manufacture, distribute, or sell the
Licensed Products prior to receipt by Licensor of such evidence of
insurance.
13. NOTICES
A. Any notice required to be given pursuant to this Agreement
shall be in writing and mailed by certified or registered mail, return
receipt requested, or delivered by a national overnight express
service, to the addresses of the parties set forth on page I of this
Agreement.
B. Either party may change the address to which notice is to be
sent by written notice to the other party pursuant to the provisions
of this paragraph.
14. JURISDICTION AND DISPUTES
A. This Agreement shall be governed by the laws of the State of
New York applicable to contracts made and wholly performed therein.
B. In connection with any claim by Licensor against Licensee
(other than a claim for declaratory relief) which may arise under
this Agreement or any other agreement between Licensor and Licensee
or any amendment of, or supplement to, any of them, Licensee hereby
irrevocably submits to, consents to, and waives any objection to, the
jurisdiction of the courts of the State of Florida located in the
County of Broward or in the United States District Court for the
Southern District of Florida, or, at Licensor's option, to the courts
of any jurisdiction in which Licensee may be located, and waives any
objection to the laying of venue in such a court. Licensee admits
that any such dispute may be resolved at least as conveniently in
such a court as in any other court, and will not seek dismissal or a
change of venue on the ground that resolution of such an action in
any such court is not convenient or in the interests of justice.
C. In connection with any claim by Licensee against Licensor
(other than a claim for declaratory relief) which may arise under
this Agreement or any other agreement between Licensee and Licensor
or any amendment of, or supplement to, any of them, Licensor hereby
irrevocably submits to, consents to, and waives any objection to, the
jurisdiction of the courts of the State of New York located in the
County of New York or in the United States District Court for the
Southern District of New York, or, at Licensee's option, to the
courts of any jurisdiction in which Licensor may be located, and
waives any objection to the laying of venue in such a court.
Licensor admits that any such dispute may be resolved at least as
conveniently in such a court as in any other court, and will not seek
dismissal or a change of venue on the ground that resolution of such
an action in any such court is not convenient or in the interests of
justice.
15. AGREEMENT BINDING ON SUCCESSORS
This Agreement shall be binding on and shall inure to the
benefit of the parties hereto, and their heirs, administrators,
successors, and permitted assigns.
16. WAIVER
No waiver by either party of any default shall be deemed as a
waiver of any prior or subsequent default of the same or other
provisions of this Agreement.
17. SEVERABILITY
If any provision hereof is held invalid or unenforceable by a
court of competent jurisdiction, such invalidity shall not affect the
validity or operation of any other provision and such invalid
provision shall be deemed to be severed from the Agreement.
18. ASSIGNABILITY
This Agreement may not be transferred or assigned, in whole or in
part, by either party without the prior written consent of the other
party, except that either party shall have the right to transfer or
assign this Agreement to its Related Company, or any company to whom
either party is sold, or assets sold as part of a transfer of the
business.
19. RELATIONSHIP OF PARTIES
Nothing herein shall create, or be deemed to create, any
partnership, employer-employee, joint venture, or agency relationship
between the parties hereto.
20. INTEGRATION
This Agreement constitutes the entire understanding of the
parties, and revokes and supersedes all prior agreements between the
parties and is intended as a final expression of their Agreement. It
shall not be modified or amended except in writing signed by the
parties hereto and specifically referring to this Agreement. This
Agreement shall take precedence over any other documents that may be
in conflict therewith.
21. COUNTERPARTS; FACSIMILES.
This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original. Facsimile copies hereof shall
be deemed to be originals.
IN WITNESS WHEREOF, the parties hereto, intending to be legally
bound hereby, have each caused to be affixed hereto its or his/her
hand and seal the day indicated.
THE STEPHAN CO. PARFUMS INTERNATIONAL LTD.
Title: President Title: Executive Vice President
Global Marketing
CREDIT AGREEMENT
BY AND BETWEEN
NATIONSBANK, N.A.,
a national banking association
(the "Bank")
AND
THE STEPHAN CO.,
a Florida corporation
(the "Borrower")
Dated November 30, 1998
CREDIT AGREEMENT
THIS CREDIT AGREEMENT , made this 30th day of November, 1998
between THE STEPHAN CO., a Florida corporation (the "Borrower")
and NATIONSBANK, N.A., a national banking association (the
"Bank").
WITNESSETH:
WHEREAS, Bank has agreed to extend a Term Loan in the amount of
ELEVEN MILLION ONE HUNDRED THOUSAND DOLLARS ($11,100,000.00) (the
"Term Loan") to Borrower as evidenced by a Promissory Note dated
November 30, 1998 (the "Note") which shall be used by Borrower
for refinancing existing debts with Bank; and
WHEREAS, Bank has agreed to provide such financing conditioned
upon the Borrower agreeing to the terms and conditions set forth
in this Credit Agreement and to the execution of certain other
documents in connection therewith.
NOW, THEREFORE, in consideration of the Sum of Ten Dollars
($10.00) and other good and valuable consideration, the receipt
whereof is hereby acknowledged, the parties agree as follows:
1. DEFINITIONS. The following definitions will apply to this
Credit Agreement as well as all other documentation involved in
this Term Loan transaction:
A. "Bank" - NATIONSBANK, N.A., a national banking association.
B. "Borrower" - THE STEPHAN CO., a Florida corporation.
C. "Promissory Note" or "Note" - is the Promissory Note in the
original principal amount of Eleven Million One Hundred and
No/100 Dollars ($11,100,000.00) from Borrower in favor of Bank.
D. "Current Maturity Coverage" - is defined as the sum of Net
Income, non-cash charges less dividends divided by the sum of
current maturities of long term debt. Borrower shall maintain a
Current Maturity Coverage of not less than 1.75:1.00.
E. "Current Minimum Ratio" - Borrower shall maintain at all
times a ratio of current assets to current liabilities of not
less than 2.0:1.0, tested quarterly.
F. "Funded Debt/EBITDA" - is 2.50: 1.00 to be tested quarterly
on a trailing monthly basis.
G. "Interest Rate" - Fixed rate of Six and 65/100 Percent
(6.65%) per annum.
H. "Loan Documents" - This term includes all documents which
comprise the loan documentation including, but not limited to the
Promissory Note, Credit Agreement, and any and all supplemental
related Loan Documents between Bank and Borrower.
I. "Maturity Date" - November 30, 2005.
2. INTEREST RATE. Fixed rate of Six and 65/100 Percent (6.65%)
per annum.
3. DEFAULT RATE OF INTEREST. After maturity, whether by
acceleration or otherwise, or after the entry of judgment, at
Holder's option, the entire unpaid principal balance of the Term
Loan shall bear interest until paid at an augmented annual rate
(the "Default Rate") from and after the stated or accelerated
maturity of the Note, or from and after failure to pay on the due
date any sum payable under the Note or under any other Loan
Document (and the expiration of any applicable grace period
provided in the Note or any such other Loan Document for that
payment), or from and after the occurrence of any other default
(whether concerned with the payment of money or otherwise) under
any Loan Document (and the expiration of any applicable grace
period provided in such Loan Document for the cure of that
default); provided, however that after judgment all such sums
shall bear interest at the greater of the Default Rate or the
rate prescribed by applicable law for judgments. The Default
Rate shall be eighteen percent (18%) per annum.
4. PRINCIPAL PAYMENTS. Borrower shall make monthly payments of
principal in the amount of Ninety-Two Thousand Five Hundred
Dollars ($92,500.00), plus interest for seven (7) years, at which
time the entire outstanding principal balance unpaid, plus all
accrued interest shall be due and payable.
5. MATURITY DATE. Provided there is no event of a monetary or
non-monetary default under the Note or Loan Documents, the entire
principal balance and any unpaid charges, together with any
accrued, but unpaid, interest thereon shall be due and payable in
full on November 30, 2005.
6. USE OF PROCEEDS. The proceeds shall be used by Borrower for
refinancing its existing debts with Bank as well as for
Borrower's operating expenses.
7. REPRESENTATIONS AND WARRANTIES. Borrower hereby
represents and warrants to Bank as follows:
A. Good Standing. Borrower is a corporation, duly organized,
validly existing and in good standing under the laws of Florida
and has the power and authority to own its property and to carry
on its business in each jurisdiction in which Borrower does
business.
B. Authority and Compliance. Borrower has full power and
authority to execute and deliver the Loan Documents and to incur
and perform the obligations provided for therein, all of which
have been duly authorized by all proper and necessary action of
the appropriate governing body of Borrower. No consent or
approval of any public authority or other third party is required
as a condition to the validity of any Loan Document, and Borrower
is in compliance with all laws and regulatory requirements to
which it is subject.
C. Binding Agreement. This Agreement and the other Loan
documents executed by Borrower constitute valid and legally
binding obligations of Borrower, enforceable in accordance with
their terms.
D. Litigation. There is no actions suits, or proceedings
involving Borrower pending or, to the knowledge of Borrower,
threatened before any court or governmental authority, agency or
arbitration authority, except as disclosed to Bank in writing and
acknowledged by Bank prior to the date of this Agreement, which
involve or would adversely affect the transactions contemplated
herein or which could have an adverse affect on the Borrower's
business or financial condition.
E. No Conflicting Agreements. There is no charter, bylaw,
stock provision, partnership agreement or other document
pertaining to the organization, power or authority of Borrower
and no provision of any existing agreement, mortgage, indenture
or contract binding on Borrower or affecting its property, which
would conflict with or in any way prevent the execution, delivery
or carrying out of the terms of this Agreement and the other Loan
Documents.
F. Taxes. All taxes and assessments due and payable by
Borrower have been paid or are being contested in good faith by
appropriate proceedings and the Borrower has filed all tax
returns which it is required to file.
G. Financial Statements. The financial statements of Borrower
heretofore delivered to Bank have been prepared in accordance
with GAAP applied on a consistent basis throughout the period
involved and fairly present Borrower's financial condition as of
the date or dates thereof, and there has been no material adverse
change in Borrower's financial condition or operations since
September 30, 1998. All factual information furnished by
Borrower to Bank in connection with this Agreement and the other
Loan Documents is and will be accurate and complete on the date
as of which such information is delivered to Bank and is not and
will not be incomplete by the omission of any material fact
necessary to make such information not misleading.
H. Place of Business. Borrower's chief executive office is
located at 1850 West McNab Road, Fort Lauderdale, Florida 33309.
I. Environmental. The conduct of Borrower's business
operations and the condition of Borrower's property does not and
will not violate any federal laws, rules or ordinances for
environmental protection, regulations of the Environmental
Protection Agency, any applicable local or state law, rule,
regulation or rule of common law or any judicial interpretation
thereof relating primarily to the environment or Hazardous
Materials.
J. Continuation of Representations and Warranties. All
representations and warranties made under this Agreement shall be
deemed to be made at least as of the date hereof and at the time
of any future advance, if any, hereunder.
8. CONDITIONS PRECEDENT TO FUNDING. The following are
conditions precedent to Bank's obligation to close and fund the
Note and the Borrower agrees to furnish the following to the
Bank, as a condition precedent to closing:
A. Opinion Letter - Written opinion letter addressed to Bank
and Borrower's counsel, from Borrower's attorney, in a form and
substance satisfactory to Bank and its counsel.
B. Corporate Documents - Certified copies of the Articles of
Incorporation and Bylaws of Borrower, and all amendments thereto,
together with a Certificate of Good Standing of Borrower and
proof of qualification to do business in each jurisdiction
business is conducted.
C. An executed Note, Loan Documents and other documents and
instruments necessary or advisable in connection with this Term
Loan.
D. Certification that there exists no material pending or
threatened litigation, the result of which could have an adverse
effect on the business or financial condition of the Borrower.
9. FINANCIAL COVENANTS. Until full payment and performance of
all obligations of Borrower under the Loan Documents, Borrower
will, unless Bank consents otherwise in writing (and without
limiting any requirement of any other Loan Document):
A. Financial Condition. Maintain Borrower's financial
condition as follows, determined in accordance with GAAP applied
on a consistent basis throughout the period involved except to
the extent modified by the following definitions:
i. Funded Debt/EBITDA Coverage Ratio. Borrower will maintain a
minimum Funded Debt/EBITDA Coverage Ratio of not more than
2.50:1.00 throughout the Note term. The Funded Debt/EBITDA
Coverage Ratio shall be tested quarterly beginning with the
December 31, 1998 quarterly financial statements on a trailing
twelve month basis.
ii. Current Maturity Coverage Ratio. Borrower will maintain a
minimum Current Maturity Coverage Ratio of not less than 1.75:
1.00 throughout the Note term.
iii. Current Minimum Ratio. Borrower will maintain at all times
a ratio of current assets to current liabilities of not less than
2.0:1.0 tested quarterly.
B. Financial Statements and Other Information. Maintain a
system of accounting in accordance with GAAP applied on a
consistent basis throughout the period involved, and in the event
of default, permit Bank's officers or authorized representatives
to visit and inspect Borrower's books of account and other
records at such reasonable times and as often as Bank may desire,
and further pay the reasonable fees and disbursements of any
accountants or other agents of Bank selected by Bank for the
foregoing purposes. Unless written notice of another location is
given to Bank, Borrower's books and records will be located at
Borrower's chief executive office set forth above. All financial
statements called for below shah be prepared in form and content
acceptable to Bank and by independent certified public
accountants acceptable to Bank, the same acceptance not to be
unreasonably withheld by Bank.
In addition, Borrower will:
i. Furnish to Bank annual audited unqualified consolidated
financial statements of Borrower for each fiscal year of
Borrower, within one hundred twenty (120) days after the close of
each such fiscal year.
ii. Furnish to Bank company prepared consolidated financial
statements of Borrower for each fiscal quarter of Borrower,
within fifty (50) days after the close of each such period,
together with quarterly compliance certificates.
iii. Furnish to Bank a compliance certificate for (and executed
by an authorized representative of) Borrower concurrently with
and dated as of the date of delivery of each of the financial
statements as required in paragraphs i and ii above, containing
(a) a certification that the financial statements of even date
are true and correct and that the Borrower is not in default
under the terms of this Agreement, and (b) computations and
conclusions, in such detail as Bank may request, with respect to
compliance with this Agreement, and the other Loan Documents,
including computations of all quantitative covenants.
10. AFFIRMATIVE COVENANTS. Until full payment and performance
of all obligations of Borrower under the Note Documents, borrower
will, unless Bank consents otherwise in writing (and without
limiting any requirement of any other Loan Document):
A. Insurance. Maintain insurance with responsible insurance
companies on such of its properties in such amounts and against
such risks as is customarily maintained by similar businesses
operating in the same vicinity, specifically to include fire and
extended coverage insurance covering all assets, business
liability insurance, all to be with such companies and in such
amounts a are satisfactory to Bank and providing for at least 30
days prior notice to Bank of any cancellation thereof.
Satisfactory evidence of such insurance will be supplied to Bank
prior to funding under the Note and 30 days prior to each policy
renewal.
B. Existence and Compliance. Maintain its existence, good
standing and qualification to do business, where required and
comply with all laws, regulations and governmental requirements
including, without limitation, environmental laws applicable to
it or to any of its properties, business operations and
transactions and comply with OHSA, EPA, Pension Guaranty Board
and ERISA.
C. Adverse Conditions or Events. Promptly advise Bank in
writing of (i) any act, omission or undertaking which would
singly or in the aggregate have a materially adverse effect upon
the business, assets, liabilities, financial condition, results
of operations or business prospects of the Borrower, any of its
subsidiaries, or upon the ability of the Borrower to perform any
material obligations arising under the Loan Documents, (ii) any
actual or potential contingent liabilities in excess of Five
Hundred Thousand and No/100 Dollars ($500,000.00), (iii) any
litigation against Borrower claiming damages in excess of Two
Hundred Fifty Thousand Dollars ($250,000.00) (iv) any event that
has occurred that would constitute an event of default under any
Loan Documents and (v) any uninsured or partially uninsured loss
through fire, theft, liability or property damage in excess of an
aggregate of $250,000.00.
D. Taxes and Other Obligations. Pay all of its taxes,
assessments and other obligations, including, but not limited to
taxes, cost or other expenses arising out of this transaction, as
the same become due and payable, except to the extent that same
are being contested in good faith by appropriate proceedings in a
diligent manner.
E. Maintenance. Maintain and preserve all license, trademarks,
privileges, permits, franchises, certificates and the like
necessary for the operation of its business.
F. Payment and Performance. Borrower shall promptly pay and
punctually perform, or shall cause to be promptly paid and
punctually performed, all of the obligations as and when due and
payable and after expiration of any grace period and upon due
notice.
G. Inspection. In the event of default, Borrower shall permit
Bank and its agents to inspect its records, assets and properties
at any time during normal business hours and at all other
reasonable times.
H. Expenses. Borrower shall pay all costs and expenses in
connection with the Note and the preparation, execution, and
delivery of the Loan Documents including, but not limited to,
reasonable fees and disbursements of counsel appointed by Bank,
and all expenses, documentary stamp tax and intangible tax, and
other taxes, appraisals, insurance and all other fees, costs and
expenses, if any, set forth in the Loan Documents, or otherwise
connected with this transaction.
I. Preservation of Agreements. Borrower shall preserve and
keep in full force and effect all agreements, approvals, permits
and licenses necessary for the development, use and operation of
the its assets for their intended purpose or purposes.
J. Books and Records. Borrower shall keep and maintain, at all
times, full, true and accurate books of accounts and records,
adequate to correctly reflect the results of the development, us
and operation of its assets and properties. The Bank shall have
the right to examine such books and records and to make such
copies or extracts therefrom as the Bank shall require.
K. Indemnification. Notwithstanding anything to the contrary
contained in Section 8(I), Borrower shall indemnify, defend and
hold Bank and its successors and assigns harmless from and
against any and all claims, demands, suits, losses, damages,
assessments, fines, penalties, costs or other expenses (including
reasonable attorneys' fees and court costs) arising from or in
any way related to any of the transactions contemplated hereby.
The Borrower's obligations under this paragraph shall survive the
repayment of the Note.
L. Comply with GAAP. Borrower shall comply with generally
accepted accounting principals which are to be applied
consistently throughout the term of the Note.
M. Performance of Loan Documents. Borrower shall duly and
punctually perform all covenants, terms and agreements expressed
as binding upon it under Note and all of the Loan Documents.
11. NEGATIVE COVENANTS. Until full payment and performance of
all obligations of Borrower under the Note and/or Loan Documents,
Borrower will not, without the prior written consent of Bank,
which consent shall not be unreasonably withheld (and without
limiting any requirement of any other Loan Documents):
A. Transfer of Assets or Control. Sell, lease, assign or
otherwise dispose of or transfer any existing assets, except in
the normal course of its business, or enter into any merger or
consolidation, or transfer control or ownership of the Borrower
or form or acquire any subsidiary that would result in the
Borrower not being the surviving entity.
B. Management Change. Change or remove Frank F. Ferola from
his current management positions as President and Chief Executive
Officer of Borrower.
C. Advances to Third Parties. No advances in aggregate of more
than One Million Dollars ($1,000,000.00) at any one time during
the life of the Note except for acquisitions.
D. Other Liens. Create or permit to be created or to remain,
any mortgage, pledge, construction lien or other lien,
conditional sale or other title retention agreement, encumbrance,
claim, or charge on the assets or income therefrom. Any
transaction prohibited under this paragraph shall be null and
void.
E. Character of Business. Change the general character of
business as conducted at the date hereof, or engage in any type
of business not reasonably related to its business as presently
conducted without prior consent of Bank. Bank shall not
unreasonably withhold its consent.
F. Borrower's Certificate of Incorporation. Materially amend
or modify its articles or certificate of incorporation or bylaws.
12. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to
Bank immediately upon demand the full amount of all costs and
expenses, including reasonable attorneys' fees (to include
outside counsel fees and all allocated fees of Bank's in-house
counsel if permitted by applicable law), incurred by Bank in
connection with (a) negotiation and preparation of this Agreement
and each of the Loan Documents, and (b) all other costs and
attorneys' fees incurred by Bank for which Borrower is obligated
to reimburse Bank in accordance with the terms of the Loan
Documents. Additionally, Borrower shall pay any documentary
stamps, intangible taxes and filing, search and recording fees
and the costs of any appraisal and environmental report required
by Bank. Borrower shall also be responsible and liable for, and
shall hold Bank harmless for, all expenses and costs in
connection with the administration and enforcement of any of
Borrower's obligations to Bank. If at any time the State of
Florida shall determine that the Documentary Stamps affixed
thereto, if any, are insufficient, and that additional
Documentary Stamps should be affixed, then Borrower shall pay for
the same, together with any interest or penalties imposed in
connection with such determination, and Borrower hereby agrees to
indemnify and hold Bank harmless therefrom. If any such sums
shall be advanced by Bank, they shall bear interest, shall be
paid and shall be secured as provided in the Loan Documents.
13. DEFAULTS AND REMEDIES. If any one or more of the following
events of default (an "Event of Default") shall occur for any
reason whatsoever (and whether such occurrences shall be
voluntary or involuntary, or come about or be effected by
operation of law or pursuant to or in compliance with any
judgment, decree or order of any court, or any order, rule or
regulation of any administrative or governmental body), that is
to say:
A. Any representation or warranty made herein or in any report,
certificate, financial statement or other instrument furnished in
connection with this Credit Agreement or the borrowings
hereunder, shall prove to be false or misleading in any respect;
B. Default shall occur in the payment of principal or interest
on any indebtedness created hereunder, when and as the same shall
become due and payable, whether at the due date or by
acceleration or otherwise, which remains after the due date of
such payment; or failure of the borrower to make payment of
principal or interest on any other indebtedness beyond any period
or grace provided with respect thereto, or in the performance of
any other agreement, term or condition contained in any agreement
under which such obligation is created;
C. Any default or violation shall occur on the part of the
Borrower in the due observance or performance of any covenant,
agreement or other provision of this Credit Agreement, or any
other agreement, instrument or contract with Bank, other than for
the payment of money, which shall remain uncured past any cure
period provided for herein or therein, and if no such cure period
is specified, if such default shall remain uncured for ninety
(90) days after notice of such default or violation has been
given by Bank to Borrower, or after borrower has knowledge of
such default or violation, whichever is earlier.
D. Borrower shall (i) apply for or consent to the appointment
of a receiver, trustee in bankruptcy for benefit of creditor's,
or liquidator of Borrower or any of Borrower's assets and/or
properties; (ii) admit in writing Borrower's inability to pay its
debts as they mature or generally fail to pay its debts as they
mature; (iii) make a general assignment for the benefit of
credit; (iv) be adjudicated as bankrupt or insolvent (v) file a
voluntary petition in bankruptcy, or a petition or an answer
seeking reorganization or an arrangement with creditors, or
seeking to take advantage of any bankruptcy, reorganization,
insolvency, readjustment of debt, dissolution of liquidation law
or statute of an answer admitting an act of bankruptcy alleged in
a petition filed against it in any proceeding under any such law;
or (vi) take any action for the purpose of affecting any of the
foregoing;
E. An order, judgment or decree shall be entered against the
Borrower without its application, approval or consent, or by any
court of competent jurisdiction, approving a petition seeking its
reorganization or appointing a receiver, trustee or liquidator of
the Borrower or of all or a substantial part of any of its
assets, and such order, judgment or decree shall continue
unstayed and in effect for a period of thirty (30) days from the
date of entry thereof;
F. Final judgments for the payment of money in excess of Two
Hundred Fifty Thousand Dollars ($250,000.00), shall be rendered
against the Borrower and the same shall remain undischarged for a
period of thirty (30) consecutive days during which execution
shall not be effectively stayed;
G. Any monies, deposits or other property of the Borrower now
or hereafter on deposit with, or in the possession or under
control of the Bank, shall be attached or become subject to
distraint proceedings or any order or process of court, provided
Borrower has not obtained a court order staying such proceeding;
H. Any material adverse change in the financial or business
condition of Borrower;
I. Borrower's corporate existence is changed;
J. Borrower fails to indemnify and pay Bank, upon demand, for
additional Documentary Stamps imposed by any governmental entity
within fifteen (15) days of such demand by Bank, including the
payment of any penalties, interest, and other charges;
K. Borrower defaults on any other obligation to Bank;
L. Borrower, without first obtaining the prior written consent
of Bank, creates or permits any lien, encumbrance, charge, or
security interest of any kind to exist on any of its existing
trademarks and brands, whether now owned or hereafter acquired,
except in the normal course of its business.
THEN, and in every such Event of Default, the Bank may, at its
option, upon written notice of not less than ten (10) days by
certified mail to Borrower, (i) declare all indebtedness of
principal and interest hereunder forthwith to be due and payable,
whereupon the Note shall become due and payable, both as to
principal and interest, without presentment, demand, protest or
notice of any kind, all of which are hereby expressly waived,
anything contained herein or in such Note to the contrary
notwithstanding, and (ii) exercise all legal rights and remedies
against Borrower or any assets for the indebtedness of Borrower
to Bank. Bank shall also have the following specific rights and
remedies;
(a) To require Borrower to assemble and make available to Bank
at a place to be designated by Bank which is also reasonably
convenient to Borrower all documentation regarding Borrower's
right, title and interest in the assets and properties.
(b) To exercise any and all rights of set-off which Bank may
have against any account funds (excluding investment funds), or
assets and properties belonging to Borrower which shall be in
Bank's possession or under its control.
(c) To cure such default, with the result that all costs an
expenses incurred or paid by Bank in effecting such cure shall be
additional charges on the Note which bear interest at the
interest rate of the Note and are payable upon demand.
The proceeds of any disposition of the assets and/or
properties for the Note shall be used to satisfy the following
items in the order they are listed:
(a) The expenses of taking, removing, storing, repairing,
holding, and selling the assets and/or properties, including any
legal cost and attorneys' fees. If the Note is referred to an
attorney for collection, Borrower and all others liable for the
Note jointly and severally agree to pay reasonable attorneys'
fees (including appellate, administrative and bankruptcy fees and
costs) and legal expenses.
(b) The expense of liquidating or satisfying any liens, security
interest, or encumbrances on the assets and/or properties which
may be prior to the security interest of Bank.
(c) Any unpaid fees, accrued interest, and then the unpaid
principal amount of the Note.
(d) Any other indebtedness of Borrower to Bank.
If the proceeds realized from the disposition of the asset and/or
properties shall fail to satisfy any of the foregoing items,
Borrower and all others liable for the Note shall forthwith pay
any deficiency to Bank upon demand.
14. CROSS DEFAULT. A default or breach under any of the terms
or conditions of any credit facility with Bank, or any agreement
to which Borrower is obligated, shall at Bank's option,
constitute a default under the Note and this Credit Agreement.
15. NOTICE. All notices required or allowed to be given
hereunder shall be delivered by hand or sent by certified mail
return receipt requested, overnight courier or facsimile
transmission, to the party to which such notice is to be given as
follows:
If to Borrower:
THE STEPHAN CO.
1850 West McNab Road
Fort Lauderdale, FL 33309
Attn: David A. Spiegel, CFO
If to Bank:
NATIONSBANK, N.A.
Commercial Banking
NationsBank Tower, 10th Floor
One Financial Plaza
Fort Lauderdale, FL 33394
Attention: Allen H. Brown,
Sr. Vice President
and a copy to:
PAUL M. MAY, ESQUIRE MAY, MEACHAM & DAVELL, P.A. NationsBank
Tower, Suite 2602 One Financial Plaza Fort Lauderdale, FL 33394
Provided that additional or other addresses for the giving of
notice may be thereafter designated by the giving of written
notice thereof to the other party. Such notices shall be deemed
given or made three (3) business days following deposit in the
U.S. Mail, certified return receipt requested, or immediately
upon receipt if delivered by hand, overnight courier or facsimile
transmission addressed as herein provided.
16. MISCELLANEOUS. Borrower and Bank further covenant and agree
as follows, without limiting any requirement of any other Loan
Document:
A. Cumulative Rights and No Waiver. Each and every right
granted to Bank under any Loan Document, or allowed it by law or
equity shall be cumulative of each other and may be exercised in
addition to any and all other rights of Bank, and no delay in
exercising any right shall operate as a waiver thereof, nor shall
any single or partial exercise by Bank of any right preclude any
other or future exercise thereof or the exercise of any other
right. Borrower expressly waives any presentment, demand,
protest or other notice of any kind, excluding a notice of intent
to accelerate and notice of acceleration under which
circumstances, Bank shall give notice to Borrower. No notice to
or demand on Borrower in any case shall, of itself, entitle
Borrower to any other or future notice or demand in similar or
other circumstances.
B. Applicable Law. This Credit Agreement and the rights and
obligations of the parties hereunder shall be governed by and
interpreted in accordance with the laws of Florida and applicable
United States federal law.
C. Amendment. No modification, consent, amendment or waiver of
any provision of this Credit Agreement, nor consent to any
departure by Borrower therefrom, shall be effective unless the
same shall be in writing and signed by an officer of Bank, and
then shall be effective only in the specified instance and for
the purpose for which given. This Credit Agreement is binding
upon Borrower, its successors and assigns, and inures to the
benefit of Bank, its successors and assigns; however, no
assignment or other transfer of Borrower's rights or obligations
hereunder shall be made or be effective without Bank's prior
written consent, nor shall it relieve Borrower of any obligations
hereunder. There is no third party beneficiary of this Credit
Agreement.
D. Documents. All documents, certificates and other items
required under this Credit Agreement to be executed and/or
delivered to Bank shall be in form and content satisfactory to
Bank and its counsel.
E. Partial Invalidity. The unenforceability or invalidity of
an provision of this Credit Agreement shall not affect the
enforceability or validity of any other provision herein and the
invalidity or unenforceability of any provision of any Loan
Document to any person or circumstance shall not affect the
enforceability or validity of such provision as it may apply to
other persons or circumstances.
F. Indemnification. Notwithstanding anything to the contrary
contained in paragraph E above, Borrower shall indemnify, defend
and hold Bank and its successors and assigns harmless from and
against any and all claims, -demands, suits, losses, damages,
assessments, fines, penalties, costs or other expenses (including
reasonable attorneys' fees and court costs) arising from or in
any way related to any of the transactions contemplated hereby
resulting from Borrower's actions and not due to the negligence,
malfeasance or misfeasance of the Bank. The Borrower's
obligations under this paragraph shall survive the repayment of
the Note.
G. Survivability. All covenants, agreements, representations
and warranties made herein or in the other Loan Documents shall
survive the making of the Loan and shall continue in full force
and effect so long as the Note is outstanding or the obligation
of the Bank to make any advances under the Note shall not have
expired.
H. Personal. This Credit Agreement is personal in nature and
may not be assigned.
I. Gender/Plural. Wherever used herein the singular number
shall include the plural and the plural the singular, and the use
of any gender shall include all genders. This Agreement shall
inure to the benefit of and be binding upon the parties hereto
and their heirs, successors, personal representatives and
assigns.
J. Document Conflict. If the terms and provisions of this
Credit Agreement conflict with any terms and provisions of any
other related loan documents executed in connection herewith, the
terms and provisions herein shall control.
17. WAIVER OF JURY TRIAL. BORROWER AND BANK HEREBY KNOWINGLY,
IRREVOCABLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT EITHER
MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY ACTION, PROCEEDING,
DEFENSE OR COUNTERCLAIM BASED ON THIS CREDIT AGREEMENT, OR
ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS CREDIT
AGREEMENT, OR PROMISSORY NOTE, OR ANY OTHER LOAN DOCUMENT, OR ANY
COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL
OR WRITTEN) OR ACTIONS OF ANY PARTY HERETO OR TO ANY LOAN
DOCUMENT. THIS PROVISION IS A MATERIAL INDUCEMENT FOR BORROWER
AND BANK ENTERING INTO THE SUBJECT TERM LOAN TRANSACTION.
IN WITNESS WHEREOF, the parties hereto set their hands and seals
the day and year first above written.
Witnesses: BORROWER:
THE STEPHAN CO.,
/s/ F. Gerard Litrento a Florida corporation
/s/ Allen H. Brown
By /s/ David A. Spiegel
David A. Spiegel,
Printed Name of Witnesses Chief Financial Officer
[Corporate Seal]
NationsBank
May 19,1999
The Stephan Company
1850 West McNab Road
Fort Lauderdale, FL 33309
Attention- Mr. Frank F. Ferola
Re: Credit Agreement by and between The Stephan Company, a Florida
corporation (the "Borrower") and NationsBank, N.A. ("Bank"),
dated November 30, 1998 (the "Loan Agreement").
Dear Mr. Ferola:
As you are aware, Section 9.A.i of the above-referenced Loan Agreement
makes provision for a maximum Funded Debt to EBITDA (earnings before
interest, taxes, depreciation and amortization) ratio of 2.50:1.00,
tested quarterly on a trailing four (4) quarter basis and Section
9.A.ii of the Loan Agreement makes provision for a minimum Current
Maturity Coverage ratio of not less than 1.75:1. As of December 31,
1998, the Borrower is in default under both covenants.
Subject to the "Conditions Precedent" (as hereinafter defined), this
letter shall serve as a limited waiver of (i) the foregoing
requirements up to and including September 30, 1999; provided:
Borrower provides Bank evidence in the form of a 10-Q Statement filed
with the Securities and Exchange Commission and a compliance
certificate executed by an authorized officer of the Borrower of a
minimum EBITDA of $1,300,000 for the quarter ended March 31, 1999, a
minimum EBITDA of $2,800,000 for the six months ended June 30, 1999,
and a minimum EBITDA of $4,000,000 for the nine (9) months ended
September 30, 1999. Effective December 31, 1999, the provisions of
Sections 9.A.i (with the covenant being a maximum Funded Debt to
EBITDA) and 9.A.ii of the Loan Agreement shall again be applicable;
and (ii) the failure of the Borrower to deliver to the Bank the
Borrower's audited annual statement for 1998 and first quarter 1999
statement, provided such are delivered to the Bank on or prior to June
30, 1999. As set forth herein, "Conditions Precedent" shall mean the
Bank's receipt and approval of all of the following in form and
substance satisfactory to the Bank (in the Bank's sole discretion):
The Stephan Company
May 19,1999
Page 2
(i) cleared Funds in the amount of Fifty-Three Thousand One Hundred
Eighty-Seven and 50/100 Dollars ($53,187.50) ("Waiver Fee")
representing a waiver fee; (ii) unconditional guaranty of payment and
performance of all of the Borrower's obligations to the Bank (and/or
the Bank's affiliates) executed by each of the Borrower's
subsidiaries; (iii) modification of the existing term loan in the
original principal amount of $11,100,000 (currently with an
outstanding principal balance of $10,637,500) to increase the interest
rate an additional one (1%) percent per annum effective May 19, 1999,
which shall be reduced to the original contract rate the fiscal
quarter following all original loan covenants being in compliance;
(iv) opinion letter with respect to the Borrower and each Guarantor;
(v) corporate resolutions with respect to Borrower and each Guarantor;
(vi) articles, by-laws and good standing certificates with respect to
Borrower and each Guarantor; (vii) payment of the Bank's reasonable
legal fees associated with documenting the proposed waiver; and (viii)
termination of the existing $5,000,000 line of credit effective as of
the date hereof.
This waiver is limited solely to the matters set forth herein and the
time period set forth herein and shall not be deemed to waive any
other provision of the loan documents and shall not exceed the scope
of this letter.
This letter shall not be binding upon NationsBank, N.A. unless all the
Conditions Precedent shall have been satisfied and we shall have
received a duplicate copy of this letter signed by the Borrower and
returned to us on or prior to 5:00 p.m., May 21, 1999.
This letter supersedes the letters to you dated May 17, 1999 and May
18, 1999.
1 trust this letter is responsive to your request and, should you have
any questions or comments, please do not hesitate to contact me.
Very truly yours,
NATIONSBANK, N.A.
/s/ F. Gerard Litrento
________________________
F. Gerard Litrento
Senior Vice President
The Stephan Company
May 19,1999
Page 3
The undersigned consents to the foregoing waiver and authorizes the
Bank to debit the Borrower's account at the Bank in the amount of the
Waiver Fee to pay the waiver fee required as one of the Conditions
Precedent hereunder. By our signing below, we hereby release and hold
the Bank harmless from all loss, cost, damage and/or claim which the
Borrower has or could have against the Bank from the beginning of the
world through the date hereof.
THE STEPHAN CO, a Florida
corporation
/s/ Frank F. Ferola
_______________________________
By: Frank F. Ferola, President
Date: May 21, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 9,973,752
<SECURITIES> 0
<RECEIVABLES> 5,026,354
<ALLOWANCES> 231,635
<INVENTORY> 14,774,556
<CURRENT-ASSETS> 29,826,287
<PP&E> 4,866,115
<DEPRECIATION> 1,842,158
<TOTAL-ASSETS> 61,251,133
<CURRENT-LIABILITIES> 4,902,486
<BONDS> 10,981,916
0
0
<COMMON> 47,259
<OTHER-SE> 44,634,576
<TOTAL-LIABILITY-AND-EQUITY> 61,251,133
<SALES> 17,692,653
<TOTAL-REVENUES> 18,312,109
<CGS> 9,537,348
<TOTAL-COSTS> 9,537,348
<OTHER-EXPENSES> 6,621,792
<LOSS-PROVISION> 70,407
<INTEREST-EXPENSE> 434,025
<INCOME-PRETAX> 2,152,969
<INCOME-TAX> 809,026
<INCOME-CONTINUING> 1,343,943
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,343,943
<EPS-BASIC> 0.29
<EPS-DILUTED> 0.29
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