SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Mark one)
___
| X | ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE
|___| SECURITIES EXCHANGE ACT OF 1934 {FEE REQUIRED}
For the Fiscal Year Ended December 31, 1999
OR
___
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
|___| OF THE SECURITIES EXCHANGE ACT OF 1934 {NO FEE REQUIRED}
For the transition period from _______ to ______
Commission File No. 1-4436
THE STEPHAN CO.
_______________________________________________________________
(Exact Name of Registrant as Specified in its Charter)
Florida 59-0676812
________________________________ _________________
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1850 West McNab Road, Fort Lauderdale, Florida 33309
_______________________________________________________________
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (954) 971-0600
_____________
Securities Registered Pursuant to Section 12 (b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
___________________ _________________________________________
Common Stock, $.01 AMERICAN STOCK EXCHANGE
Par Value
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
the filing requirements for at least the past 90 days.
YES X NO
____ _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. (X)
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant, computed by reference to the price at which the stock
was sold, or the average bid and asked prices of such stock, as of a
specified date within 60 days prior to the date of filing.
$22,837,790 as of March 15, 2000
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date:
4,567,358 Shares of Common Stock, $.01 Par Value,
as of March 15, 2000
List hereunder the following documents if incorporated by reference and the
part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document
is incorporated: (1) Any annual report to security holders; (2) Any proxy
or information statement; and (3) Any prospectus filed pursuant to Rule
424(b) or (c) under the Securities Act of 1933:
Portions of the proxy statement for the Registrant's 1999 annual meeting of
stockholders, filed no later than 120 days after the end of the
Registrant's fiscal year are incorporated by reference in Part III of this
Form 10-K.
2
THE STEPHAN CO. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT
ON FORM 10-K
Page
PART I ______
Item 1: Business................................................... 4
Item 2: Properties................................................. 10
Item 3: Legal Proceedings.......................................... 11
Item 4: Submission of Matters to a Vote of Security Holders......... 12
PART II
Item 5: Market for the Registrant's Common Equity
and Related Stockholder Matters........................... 13
Item 6: Selected Financial Data.................................... 14
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 15
Item 7A: Quantitative and Qualitative Disclosures about Market Risk. 20
Item 8: Financial Statements and Supplementary Data................ 20
Item 9: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 20
PART III
Item 10: Directors and Executive Officers of the Registrant......... 21
Item 11: Executive Compensation..................................... 21
Item 12: Security Ownership of Certain Beneficial
Owners and Management..................................... 21
Item 13: Certain Relationships and Related Transactions............. 21
PART IV
Item 14: Exhibits, Financial Statement Schedules
and Reports on Form 8-K.................................. 22
Signatures.......................................................... 24
3
PART I
Certain statements in this Annual Report on Form 10-K ("Form 10-K")
under "Item 1. Business" and "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations," constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995 (the "Reform Act"). Such forward looking statements
involve known and unknown risks, uncertainties and other factors which may
cause the actual results, condition (financial or otherwise), performance
or achievements of the Registrant to be materially different from any
future results, performance, condition or achievements expressed or implied
by such forward-looking statements. Such factors include, but are not
limited to, the following: general economic and business conditions;
competition; success of operating initiatives; development and operating
costs; advertising and promotional efforts; brand awareness; the existence
or absence of adverse publicity; acceptance of new product offerings;
changing trends in customer tastes; the success of multi-branding; changes
in business strategy or development plans; availability, terms and
deployment of capital; business abilities and judgment of personnel;
availability of qualified personnel; labor and employee benefit costs;
availability and cost of raw materials and supplies; changes in, or failure
to comply with, law; the ability to successfully integrate newly-acquired
businesses and the ability to reduce costs; the institution and outcome of
litigation commenced against the Registrant 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-K. The Registrant does not undertake and
specifically declines any obligation to publicly release the results of any
revisions which may be made to any forward-looking statements to reflect
events or circumstances after the date of such statements or to reflect the
occurrence of anticipated or unanticipated events.
Item 1. Business
GENERAL
The Registrant or the "Company", founded in 1897 and incorporated in
the State of Florida in 1952, is engaged in the manufacture, sale and
distribution of hair care and personal care products at both the wholesale
and retail level. The Registrant is comprised of The Stephan Co.
("Stephan") and its eight wholly-owned subsidiaries, Foxy Products, Inc.,
Old 97 Company, Williamsport Barber and Beauty Corp., Stephan & Co.,
Scientific Research Products, Inc. of Delaware, Trevor Sorbie of America,
Inc., Stephan Distributing, Inc. and Morris Flamingo-Stephan, Inc.
THE STEPHAN CO.
Headquartered in Fort Lauderdale, Florida, The Stephan Co. ("Stephan")
is principally engaged in the manufacture of hair care products for sale by
two of its subsidiaries, Scientific Research Products, Inc. and Trevor
Sorbie of America, Inc., and the manufacturing of products marketed under
the STEPHAN brand name. Stephan also manufactures, markets and distributes
hair and skin care products under various trade names through different
divisions. Retail brands include product lines such as Cashmere Bouquet
talc, Quinsana Medicated talc, Balm Barr and Stretch Mark creams and
4
lotions and Protein 29 and Wildroot hair care products for men. These
brands, included in the Retail Personal Care Products ("Retail") segment of
the Company's business, are manufactured at the Company's Tampa, Florida
facility, and account for approximately $3,600,000 of the Company's sales,
or approximately 10.4% of the Registrant's consolidated revenues. In
addition, The Frances Denney division of Stephan (included in the "Retail"
segment of the Company's business) continues to market a full line of
cosmetics through retail and mail order channels. Under the terms of an
exclusive Trademark License and Supply Agreement with Color Me Beautiful,
Inc., the Company markets the brand names HOPE, INTERLUDE and FADE-AWAY
through several retail chains, including J.C. Penney, in the United States
and Canada.
On December 31, 1995, the Registrant entered into asset purchase
agreements (collectively, the "Acquisition Agreements") with each of
Colgate-Palmolive Company and its subsidiary, The Mennen Company
(collectively, the "Sellers"), for the acquisition by the Registrant of
certain consumer product brands of the Colgate-Palmolive Company, as well
as a licensing agreement for the domestic distribution of Colgate-
Palmolive's Cashmere Bouquet talc product line (the "U.S. Trademark
License").
In December 1996, the Registrant entered into a Settlement Agreement
and Amendment with the Sellers (the "Settlement Agreement") to resolve
certain outstanding disputes with respect to the Acquisition Agreements.
The Settlement Agreement, among other things, provided for the licensing to
the Registrant of certain trademarks in Canada pursuant to a trademark
license agreement (the "Canadian Trademark License"). Additionally, the
Settlement Agreement provided that (i) deferred payments would be made with
respect to products sold under the Canadian Trademark License, (ii) total
deferred payments would be subject to a maximum of $4,000,000, and (iii)
the Registrant was required to pay the greater of $150,000 or 50% of such
deferred payments in immediately available funds, with the balance payable,
at the option of the Registrant, by wire transfer or a five-year promissory
note. In the event that the $4,000,000 maximum amount is not paid by
January 31, 2004, the Registrant must pay the difference in cash between
that amount and deferred payments made prior to such date.
The U.S. Trademark License grants the Registrant an exclusive license
to use certain trademarks relating to the Cashmere Bouquet product line in
connection with the manufacture and distribution of such product lines in
the United States. The Canadian Trademark License grants the Registrant an
exclusive license to use certain trademarks relating to the Cashmere
Bouquet powder product line in Canada. Each of the U.S. Trademark License
and the Canadian Trademark License has an initial term of ten years and is
automatically renewable for successive ten-year periods unless earlier
terminated by breach, mutual agreement or upon certain other specified
events. Any product sold under the License Agreement is included in net
sales for purposes of determining the deferred payments.
In March 1996, the Registrant entered into a Trademark License and
Supply Agreement with Color Me Beautiful, Inc. ("CMB") to license select
products of the Registrant's Frances Denney Line and to supply the
requirements of CMB for such products. The agreement provides CMB with the
exclusive right to market and distribute specified Denney products in
5
certain retail chain stores in the United States and Canada. The agreement
provides for royalty payments by CMB based upon net sales (as defined in
the agreement), with guaranteed minimum annual royalty payments throughout
the term of the agreement which are credited against accrued royalties.
The agreement also provides for the Registrant to be the exclusive supplier
of products sold under the agreement. The agreement continues in effect
unless terminated (i) by the Registrant, upon the occurrence of certain
events including, among others, bankruptcy or a change of control (as
defined in the agreement) of CMB, (ii) by either party, upon the occurrence
of a material breach by the other, (iii) by CMB, on 180 days prior notice
or (iv) by mutual agreement.
Stephan also manufactures and sells products under the name
"STEPHAN'S". Such products consist of different types of shampoos, hair
treatments, after-shave lotion, dandruff lotion, hair conditioners and hair
spray which are distributed throughout the United States to approximately
350 beauty and barber distributors and is included in the Professional Hair
Care Products and Distribution ("Professional") segment of the Companies
business. The Registrant's trademark "STEPHAN'S" and the design utilized
thereby have been registered with the United States Patent and Trademark
Office, which registration is not due for renewal until the year 2001.
Sales of the parent company, Stephan, including the Frances Denney product
line as well as its other retail products, accounted for approximately
$4,250,000 of Company sales or approximately 12.2% of the Registrant's
consolidated revenues.
The Fort Lauderdale location also serves as the Registrant's corporate
headquarters, and the Registrant provides general management services to
its subsidiaries from such location.
OLD 97 COMPANY.
Old 97 Company ("Old 97"), a wholly owned subsidiary of the
Registrant, located in Tampa, Florida, was purchased in 1988 by the
Registrant. Old 97 markets products under brand names such as OLD 97,
KNIGHTS, and TAMMY. In addition to selling more than 100 different
products, including hair and skin care products, fragrances, personal
grooming aids and household items, Old 97 serves as the Company's second
manufacturing facility. The Tampa facility manufactures most of the
products sold by the Frances Denney line, all the talc manufactured for the
Cashmere Bouquet and Quinsana brands, as well as all the other retail hair
and skin care brands sold by Stephan and Stephan Distributing, Inc. The
operations of Old 97 are included in the Manufacturing segment of the
Compnay's business. Old 97 is also responsible for distribution of the above
products. In addition, Old 97 is responsible for the manufacturing of
custom "private label" products, which is the manufacturing of products
marketed and sold under the brand names of customers of the Company.
In 1999, one private label customer accounted for approximately 38% of the
Tampa facility's production, however no single customer accounted for more
than 10% of the Registrant's consolidated revenues in 1999. The loss of
this private label customer could have an adverse effect on the operations
of the Tampa facility. Private label production accounted for approximately
$2,700,000 of the Company's sales, or approximately 7.8% of the Registrant's
consolidated revenues in 1999.
6
WILLIAMSPORT BARBER AND BEAUTY CORP.
Williamsport Barber and Beauty Corp. ("Williamsport"), a wholly-owned
subsidiary of the Registrant, was acquired in January, 1992 and is located
in Williamsport, Pa. Williamsport, a mail order beauty and barber supply
company, with sales of approximately $4,100,000, which accounted for
approximately 11.8% of the Registrant's consolidated revenues for the year
ended December 31, 1999, and is included in the Professional business
segment of the Company.
STEPHAN & CO.
Formerly known as Heads or Nails, Inc. and acquired by the Registrant
in August, 1993, Stephan & Co., a wholly-owned subsidiary of the
Registrant, has focused on the manufacture and supply of personal care
amenity products for cruise ships in December, 1995. Sales by Stephan & Co.
for the year ended December 31, 1999 were not material.
SCIENTIFIC RESEARCH PRODUCTS, INC. OF DELAWARE.
Purchased by the Company in April, 1994, Scientific Research Products
Inc. of Delaware, a wholly owned subsidiary of the Registrant, was prior to
such purchase, one of the Registrant's largest private label customers and
is a distributor of ethnic hair care products. Scientific Research
Products accounted for 13.5% of the Registrant's consolidated revenues in
1999, with sales of approximately $4,700,000. In addition, Scientific
is responsible for the distribution of the "Magic Wave" product line,
formerly marketed by Foxy Products, Inc., a company acquired by the
Registrant in 1986. Sales by Foxy Products, Inc. for the year ended
December 31, 1999 were not material. The majority of the sales of this
division are included in the Retail business segment of the Company.
TREVOR SORBIE OF AMERICA, INC.
On June 28, 1996, the Company entered into a Stock Purchase Agreement
with Sorbie Acquisition Co. ("Sorbie"), and the stockholders of Sorbie,
including the President and principal stockholder pursuant to which the
Company acquired Sorbie, as well as related agreements described below with
the President, Trevor Sorbie International, Mr. Trevor Sorbie, Samson Arms,
Inc. and Redken Laboratories.
In separate related agreements, the Company amended the existing
royalty contract between Sorbie, Trevor Sorbie International, Sorbie
Trading Limited and Mr. Trevor Sorbie. In accordance with the amended
agreement the royalty payment percentage rates payable upon future sales
were reduced. The amended royalty agreement also provides for the supply
to Sorbie Trading Limited and Trevor Sorbie International, at their option,
by Sorbie, of such companies' requirements of certain products. The
amended royalty agreement expires in December 31, 2044 but any party
thereto may renew it for successive ten-year periods until December 31,
2093.
Sorbie, prior to the acquisition, was a major customer of the
Registrant and is a distributor of a professional line of hair care
7
products sold to salons in the United States, Canada and Mexico through a
network of distributors. Sales of Trevor Sorbie hair care products in 1999
were approximately $3,200,000 of the Company's sales, representing 9.2% of
the Registrant's consolidated revenues, and are included in the
Professional segment of the Company's business.
STEPHAN DISTRIBUTING, INC.
On June 26, 1997, the Company, through Stephan Distributing, Inc., a
wholly-owned subsidiary, acquired several product lines from New Image
Laboratories, Inc. ("New Image"). The primary brands acquired were a
professional hair care line of products marketed under the brand name
"Image", and a retail hair care line known as "Modern" and marketed under
the brand name "Stiff Stuff". The brands were acquired for (i) 250,000
shares of the Registrant's restricted common stock, valued at $10.81 per
share, with provision for half the shares to be held in escrow pending,
among other things, final adjustment of the purchase price in accordance
with the acquisition agreement and (ii) up to 100,000 restricted shares
to be issued over the next two years contingent upon the achievement of
certain earnings levels as set forth in the acquisition agreement.
The acquisition was accounted for as a purchase, with a net value of
approximately $2,700,000 based upon the quoted market price of the
Registrant's stock at the time of issuance.
Pursuant to the transaction, the Company acquired certain accounts
receivable, inventory, fixed assets and trademarks and assumed certain
outstanding trade and other liabilities of approximately $5,332,000. The
liabilities assumed are subject to the terms of a liquidating trust
agreement, and as provided for in such Agreement, the Registrant delivered
a note payable in the amount of $2,399,400, payable in two equal
installments due in December, 1997 and February, 1998.
Additionally, the Registrant provided the Trust, established pursuant
to such liquidating trust agreement, with a standby letter of credit in the
amount of $2,932,600. As indicated above, the purchase price is subject to
adjustment based upon the value of the net assets acquired, as determined
on the first anniversary of the closing date. The Registrant is currently
involved in litigation with New Image Laboratories regarding this purchase
price adjustment. The Registrant believes that based upon information
available to it at December 31, 1999, the 125,000 shares held in escrow and
the subject of the aforementioned litigation will be returned to the
Company. The value of trademarks recorded, approximating $3,369,000, is
net of this anticipated purchase price adjustment.
In addition to being popular hair care lines; the brands acquired from
New Image have international distribution which the Registrant believes
will enhance the distribution of other products of the Registrant. Sales
of brands acquired from New Image Laboratories, Inc. amounted to
approximately $4,400,000 for the period ended December 31, 1999, which
represented over 12.7% of the Registrant's consolidated revenues. Sales of
Image products are included in the Company's Professional business segment
while Modern sales are included in the Company's Retail business segment.
8
MORRIS FLAMINGO-STEPHAN, INC.
On March 18, 1998, the Registrant and Morris Flamingo-Stephan, Inc.
signed an Asset Purchase Agreement (the "Agreement") with Morris-Flamingo,
L.P., Morris-Flamingo Beauty Products, Inc., Shaheen & Co., Inc. and Shouky
A. Shaheen, for the acquisition of certain assets and assumption of certain
liabilities (including the immediate payment of a note payable to Fleet
Capital Corporation of approximately $1,880,000) of Morris-Flamingo, L.P.
in exchange for 307,058 shares of the Registrant's restricted common stock.
The transaction was recorded as a purchase, and, based upon the net assets
received, goodwill of approximately $2,545,000 was recorded.
Morris-Flamingo, L.P. is a barber and beauty supply wholesaler,
similar to the Registrant's subsidiary, Williamsport Barber and Beauty
Corp., but markets its products utilizing catalogs published under the
Morris Flamingo brand name as well as the Major Advance brand name.
Additionally, this division manufactures hairpins, scissors and beauty
school cases. Sales for the period ending December 31, 1999 were
approximately $11,199,000, representing 32.2% of the Registrant's
consolidated revenues, and are included in the Professional segment of
the Company's business.
SEGMENT INFORMATION
"Operating Segments and Related Information", which provides
information on net sales, income from operations, capital expenditures and
depreciation for the last three years and identifiable assets for the last
two years, for each of the Registrant's three business segments, contained
in Footnote 10 of the 1999 Annual Report included elsewhere in this filing,
is hereby incorporated herein by reference.
RAW MATERIALS, PACKAGING and COMPONENTS INVENTORY
The materials utilized by the Registrant and its subsidiaries in the
manufacture of its products consist primarily of common chemicals, alcohol,
perfumes, labels, plastic bottles, caps and cartons. All materials are
readily available at competitive prices from numerous sources and have in
the past been purchased from domestic suppliers. Neither the Registrant
nor any of its subsidiaries has ever experienced any significant shortage
in supplies nor are any such shortages anticipated by the Registrant or its
subsidiaries in the reasonably foreseeable future. Due to current market
conditions in the petroleum industry, the Registrant has been experiencing
price increases in both raw material and component prices, however, it is
not anticipated that these price increases will have a material, adverse
effect on operations.
The Registrant and its subsidiaries seek to maintain a level of
finished goods inventory of their products sufficient for a period of at
least three months. The Registrant does not anticipate any change in such
practice during the reasonably foreseeable future.
BACKLOG
As of December 31, 1999, the dollar amount of backlog orders was not
believed by the Registrant to be material.
9
RESEARCH AND DEVELOPMENT
During each of the four prior fiscal years ending December 31, 1999,
expenditures by the Registrant and its subsidiaries on Company sponsored
research relating to the development of new products, services or
techniques or the improvement of existing products, services or techniques
were not believed by the Registrant to be material and were expensed as
incurred.
COMPETITION
The hair care and personal grooming business is highly competitive in
terms of price and product quality. Products manufactured and sold by the
Registrant and its subsidiaries compete with numerous varieties of other
such products, many of which bear well known, respected and heavily
advertised brand names and are produced and sold by companies having
substantially greater financial, technical, personnel and other resources
than the Registrant. Products produced by the Registrant and its
subsidiaries account for a relatively insignificant portion of the total
hair care and personal grooming products manufactured and sold annually in
the United States.
GOVERNMENT AND INDUSTRY REGULATION, ENVIRONMENTAL MATTERS
The Registrant's products are subject to regulation by the Food and
Drug Administration ("FDA"), in addition to other Federal, state and local
regulatory agencies. The Company believes that its products are in
material compliance with all applicable regulations. The Registrant does
not believe that compliance with existing or presently proposed
environmental standards, practices or procedures will have a material
adverse effect on operations, capital expenditures or the competitive
position of the Company.
EMPLOYEES
As of December 31, 1999, in addition to its nine officers, the
Registrant and its subsidiaries employed approximately 190 people engaged
in the production, warehousing, and distribution of their products.
Although the Registrant and its subsidiaries do not anticipate the need to
hire a material number of additional employees, the Company believes that
any such employees, if needed, would be readily available. No significant
number of employees are covered by any collective bargaining agreement and
the Company believes its employee relationships are satisfactory.
Item 2. Properties
The Registrant's administrative, manufacturing and warehousing
facilities are located in a building of approximately 33,000 square feet,
which it owns, located at 1850 West McNab Road, Fort Lauderdale, Florida
33309. Approximately two-thirds of the space is utilized by the Registrant
for the manufacture and warehousing of its products. The remainder of the
space is utilized by the Registrant for its administrative offices. The
Registrant also owns certain machinery and equipment suitable for the
manufacture of its products that is housed in its facility in Fort
Lauderdale, Florida. In addition to the facility described above, the
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Registrant leases approximately 42,000 square feet of warehouse space
located at 5300 North Powerline Road, Fort Lauderdale, Florida 33309, under
a 3 year lease which commenced in May 1998, with an annual rental of
$222,000.
Old 97 owns three buildings totaling approximately 42,000 square feet
of space, one of which is located at 2306 35th Street, Tampa, Florida
33605. Such building is utilized by Old 97 in the manufacture of its
various product lines. In October 1994, Old 97 acquired land and two
buildings located at 4829 East Broadway Avenue, Tampa, Florida 33605. One
building comprising 12,500 square feet is being used for office facilities
and order fulfillment for the Frances Denney line. The second building,
with approximately 30,000 square feet, is used as a warehouse and
distribution facility. On December 30, 1998, Old 97 entered into a 1-year
lease agreement for an additional 20,000 square feet of warehouse space
located at 6706 N. 54th Street, Tampa, Florida 33610.
In connection with the acquisition of Williamsport Barber Supply, the
Company entered into a two-year lease, which expired in January 1994, for
office and warehouse space of approximately 6,000 square feet. Subsequent
to January 1994, the Registrant leased the premises on a month to month
basis and commencing in February 1997, the lease was extended five years,
expiring January 31, 2002. Monthly rent in the amount of $1,800 is payable
to the former owner of Williamsport Barber Supply, who is currently the
President of Williamsport Barber and Beauty Corp.
In connection with the Morris Flamingo acquisition, the Company
entered into a 3 year lease expiring in March, 2001, for the Morris
Flamingo existing office, warehouse and manufacturing facility located at
204 Eastgate Drive, Danville, Illinois 61834, at an annual rental payment
of approximately $210,000. The Danville facility has 7,500 square feet of
office space and 85,500 square feet of warehouse, distribution and
manufacturing space. The lease is held by Shaheen & Co., Inc, the former
owner of Morris-Flamingo. Shouky A. Shaheen, owner of Shaheen & Co., Inc.,
is currently a member of the Board of Directors and a significant
shareholder of the Registrant. The Registrant has the option to terminate
the lease with three month's notice at any time prior to the expiration of
the lease term.
The Registrant continues to explore several options with respect to
the Tampa manufacturing plant, including the purchase or lease of
additional warehousing facilities or the construction of new facilities on
existing land adjacent to its Tampa operations in an effort to consolidate
off-site locations and reduce rental expenses. It is anticipated that the
cost of new construction could be as much as $1,000,000. The Registrant
believes that the ultimate decision with respect to the aforementioned
properties will be suitable and adequate for their intended use and purpose
for the reasonably foreseeable future.
Item 3. Legal Proceedings
Subsequent to the year ended December 31, 1998, the Company discovered
that the method used by the Registrant to determine its cost of sales
during interim periods had resulted in the overstatement of its gross
profit and net income for the second and third quarters of 1998. This
11
accounting overstatement was due, in part, to the significant change in the
sales mix of the business as a result of the Morris Flamingo acquisition,
coupled with the decline in sales and gross profit margins of certain of
the Registrant's products. This error in the calculation of the Company's
gross profit also contributed to an overstatement of the inventory level of
approximately $5,000,000 as compared to the reported September 30, 1998
inventory level.
Following the Company's April 1, 1999 press release describing the
aforementioned matter, the Company, as well as certain of its officers,
were named as defendants in a class action suit filed in the United States
Federal District Court, Southern District of Florida. The lawsuit alleges,
among other things, certain violations of Federal securities laws and seeks
an unspecified amount of damages. 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, and the outcome of a jury trial.
Item 4. Submission of Matters to a Vote
of Security Holders
The Company has not submitted any matters to a vote of its security
holders since the Company's August 27, 1999 Annual Meeting.
12
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters
(a) Market Information
The Registrant's Common Stock is traded on the American Stock Exchange
("AMEX"). The following table sets forth the range of high and low sales
prices for the Registrant's Common Stock for each quarterly period within
the Registrant's two most recent full fiscal years:
High Low
Quarter Ended Sales Price Sales Price
_____________ ___________ ___________
March 31, 1998 $ 14.50 $ 12.50
June 30, 1998 14.25 12.25
September 30, 1998 13.75 9.31
December 31,1998 12.75 9.50
___________________________________________________________________________
March 31, 1999 $ 11.63 $ 8.38
June 30, 1999 8.88 4.00
September 30, 1999 5.63 3.88
December 31, 1999 4.50 3.38
(b) Holders
As of March 30, 2000, the Registrant's Common Stock was held of record
by approximately 350 holders. However, the Registrant's common stock is
believed to be held beneficially by others through approximately 1,400
brokerage accounts ("street-name shareholders").
(c) Dividends
The Company declared and paid cash dividends at the rate of $.02 per
share for each quarter in 1996, 1997, 1998 and 1999. Future dividends, if
any, will be determined by the Company's Board of Directors, at its
discretion, based on various factors, including the Company's
profitability, cash on hand and anticipated capital needs.
There are no contractual restrictions, including any restrictions on
the ability of any of the Registrant's subsidiaries, to transfer funds to
the Registrant in the form of cash dividends, loans or advances, that
currently materially limit the Registrant's ability to pay cash dividends
or that the Registrant reasonably believes are likely to materially limit
the future payment of dividends on its Common Stock.
13
Item 6. Selected Financial Data (a)
1999 1998 1997 1996 1995
(in thousands, except per share data)
____________________________________________________
Net sales $34,753 $35,816 $27,113 $25,779 $26,197
Income before
income taxes 3,434 977 7,697 7,093 6,426
Net Income 2,129 658 5,041 4,679 4,315
Current assets 28,727 28,623 25,735 19,706 20,438
Total assets 60,716 61,262 57,464 46,499 42,463
Current
liabilities 4,058 5,332 8,468 6,223 4,674
Long term debt 10,418 11,718 9,078 6,689 9,112
PER COMMON SHARE
(Basic and Diluted): (b)
Net Income .47 .15 1.20 1.13 1.05
Cash dividends .08 .08 .08 .08 .04
Notes to Selected Financial Data
(a) The selected financial data includes the operations of the Company and
its wholly-owned subsidiaries, Foxy Products, Inc. (acquired in 1986), Old
97 Company (acquired in 1988), Williamsport Barber and Beauty Corp.
(acquired in 1992), Stephan & Co., formerly Heads or Nails, Inc. (acquired
in 1993), Scientific Research Products, Inc. of Delaware (acquired in
1994), Trevor Sorbie of America, Inc. (acquired in 1996), Stephan
Distributing, Inc., a subsidiary which acquired the brands from New Image
Laboratories, Inc. in 1997, and Morris Flamingo-Stephan, Inc., a subsidiary
which acquired the business of Morris-Flamingo, L.P. in 1998.
(b) Net Income per common share is based upon the weighted average number
of common shares outstanding, in accordance with Statement of Financial
Accounting Standards No. 128, issued in February 1997. The weighted
average number of shares outstanding were 4,567,439 for 1999, 4,535,649 for
1998, 4,213,372 for 1997, 4,138,629 for 1996, and 4,120,304 for 1995. This
data should be read in conjunction with the audited consolidated financial
statements and related notes included in this Annual Report.
14
Selected Quarterly Financial Information (unaudited)
(in thousands, except per share data)
3/31/99 6/30/99 9/30/99 12/31/99
_______ _______ _______ ________
Net sales $ 8,588 $ 9,105 $ 9,195 $ 7,865
Gross profit 3,817 4,338 4,061 2,971
Net income 468 876 579 206
Per share .10 .19 .13 .05
3/31/98 6/30/98 9/30/98 12/31/98
_______ _______ _______ ________
Net sales $ 7,651 $ 9,301 $ 9,926 $ 8,938
Gross profit 4,903 3,729 2,769 2,286
Net income 1,413 457 (458) (754)
Per share .33 .10 (.10) (.16)
Information presented above for the quarters ended June 30, 1998 and
September 30, 1998 has been restated to correct for certain errors made in
the estimates used to determine the interim periods' inventory carrying
values and their cost of sales. See Item 3 "Legal Proceedings".
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
OVERVIEW
In 1999, the Company increased net income over 220%, recording
profits, after taxes, of $2,130,000, an increase of almost $1,470,000
over net income of approximately $660,000 achieved in 1998. This increase
in net income was attained despite the fact that sales declined almost
$1,100,000 due to an overall drop in the retail business segment, however,
a decline in selling, general and administrative expenses, coupled with an
increase in the gross profit margin offset the decline in sales. In
addition, the Company received a one-time licensing fee of $350,000 in
1999 for the use of the "Image" trademark on certain fragrances marketed
in a limited number of countries in which Image has trademark rights.
This fee was non-refundable and no future obligations exist with respect
to the license granted.
YEAR ENDED DECEMBER 31, 1999 AS COMPARED TO 1998
________________________________________________
As indicated above, net sales for 1999 decreased primarily as a result
of a decline in the retail business segment; however private label sales
also declined, but such declines were offset by an overall increase in the
professional business segment. Sales and distribution of "hard goods"
continued to improve, increasing $2,100,000 over the sales level achieved
in 1998, and although a substantial portion of that increase was due to the
inclusion of the sales of Morris Flamingo-Stephan for the entire year, the
Company has also experienced an increase in the core business of this segment.
Professional "wet goods" sales (the Sorbie, Image and New Era lines)
15
declined almost $1,500,000 as a consolidation of the distribution network
for professional products continued to constrict the buying patterns and
number of distributors.
Gross profit increased $1,500,000, to $15,187,000 in 1999
when compared to the $13,687,000 achieved in 1998. This increase of
approximately 11% was due to an improvement in the overall gross profit
margin, which was 43.7% in 1999, compared to 38.2% in 1998. While
management is encouraged by the increase in the gross profit margin
compared to last year, it is still lower than gross profit margins achieved
in the years prior to 1998. As the "hard goods" sales of the Williamsport
and Morris Flamingo-Stephan divisions continue to improve, the Company
expects to experience a change in the business mix that will reduce its
overallgross profit margin. These two divisions accounted for over 43% of
Company sales; Morris Flamingo at a 32% gross profit margin and Williamsport
Barber and Beauty Corp. at a 39% gross profit margin. The Company continues
to devote significant time and effort in trying to improve the gross profit
margins of these two divisions, and they have improved slightly over last
year's gross profit margins.
The operating segment "Retail Personal Care Products" experienced a
decline in net sales as a whole. Net retail sales in 1999 were $9,473,000,
as compared to $10,473,000 in 1998, with the most significant decline
coming from reduced sales of ethnic hair care products and brushes. As was
the case last year, this decline was primarily the result of a reduction in
the number of products carried by retailers and a continuing consolidation
in the chain-drug store industry. This industry consolidation also increases
the amount of discounting and promotional allowances large retailers demand
of their suppliers, which diminishes the profit margins on brands supplied to
those retailers. The Company has continued to respond to these discounting
pressures in order to maintain as much market share as reasonably
practicable without sacrificing the profitability of the Company. Sales
performance of the "Stiff Stuff" line, a brand acquired from New Image
Laboratories, Inc., had increased sales in 1999, which continued a trend
from 1998.
In the past, the gross profit margin, as well as gross profit, has
generally increased as the Registrant's business mix shifted away from
private labeling, or "contract" filling, to professional hair care products
and retail hair and skin care brands, which generally afforded the
Registrant a higher gross profit. As discussed above, the Company
continues to experience a change in the sales mix and competitive
pressures. With the acquisition of Morris-Flamingo, L.P. in 1998, the
Company anticipates that its overall gross profit margins will continue to
be lower than those experienced in the past, but should continue to
increase. Overall, the Company presently expects gross profit to increase
in the future, but not at the historical rates the Company has previously
experienced.
Selling, general and administrative expenses declined by $493,000,
from $12,240,000 to $11,747,000 in 1999. This decrease is principally
due to diligent controlling of overhead expenses and additional cost savings
effected in the Morris Flamingo-Stephan division.
Interest expense decreased slightly from $969,000 in 1998 to $944,000
in 1999 as a result of a decrease in outstanding debt, but was adversely
16
impacted by a temporary increase in the interest rate charged to the
Company as a result of the default on two of the covenants contained in its
debt agreement, as explained more fully in Note 8 to the Company's
consolidated financial statements.
Other income includes the royalty payment of $160,000 from Color Me
Beautiful in connection with the marketing of Frances Denney products, as
well as a one-time royalty fee for $350,000 as discussed previously.
Earnings per share for the year ended December 31, 1999 were $.47, an
increase of $.32 per share over the $.15 in 1998. The average number of
shares outstanding increased in 1999, from 4,535,649 to 4,567,439, despite
the repurchase of 149,500 shares in 1999, due to the fact that the shares
issued in the Morris Flamingo acquisition were outstanding for the entire
year in 1999.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO 1997
________________________________________________
Net sales for 1998 increased primarily as a result of the Morris-
Flamingo, L.P. acquisition, but at a significantly lower associated gross
profit level than other divisions or subsidiaries of the Company. In
addition, net sales from certain higher margin professional and retail
brands declined. These factors combined to cause an overall adverse change
in the mix of the Company's business and substantially depressed the gross
profit margin of the Company. The impact of this change was not realized
until the Company completed its December 31, 1998 inventory compilation, as
interim inventory values had been determined by estimates utilizing
historical gross profit margins and other factors. These factors, together
with an increase in selling, general, and administrative expenses, resulted
in the decrease of the overall net earnings of the Company.
Gross profit declined slightly more than $3,200,000, to $13,687,000 in
1998 when compared to the $16,921,000 achieved in 1997. This decline of
approximately 19% was due to the factors previously discussed, reflecting a
decline in the overall gross profit margin, from 62.4% in 1997 to 38.2% in
1998. For the period ended December 31, 1998, the gross margin of Morris
Flamingo increased to 31% from 29% in 1997, representing an improvement
over the level this entity was operating at prior to the acquisition. In
addition, the Company is continuing its efforts to review and control the
selling, general and administrative expenses of this division. Williamsport
Barber and Beauty Corp, which operates in a similar market, continued to
perform well, with a gross profit margin of over 38%.
The Company's overall product mix was also adversely affected by a
decline in certain professional and retail brand sales. Net sales of
Trevor Sorbie of America products, Stephan Distributing, Inc.'s Image line
and Scientific Research Products' New Era line declined from $8,844,000 in
1997 to $8,568,000 in 1998. These sales are included in the operating
segment "Professional Hair Care Products and Distribution".
Although net sales for Image products rose in 1998, they did not keep
pace with the increases experienced in 1997. In late 1997 Stephan
Distributing, Inc.'s net sales were, somewhat artificially, enhanced by a
"sell-in", of the Image brand, as distributors restocked depleted
17
inventories caused by New Image Laboratories' inability to maintain a
consistent source of supply. In addition, the Company re-evaluated its
international Image business and terminated certain distributorship
agreements for non-payment. This had, in the short term, the effect of
lowering Image's level of sales in 1998 while new distributors were
evaluated and relationships established, but the Company believes this will
ultimately enhance the long-term growth of the Image line. The Company has
since replaced its South American distributor which it had terminated in
1998, and began selling in that region again in the first quarter of 1999.
Both the Sorbie and Image lines are selling in a professional environment
that is currently experiencing a consolidation of distributors, which might
have a negative effect on the future sales and gross profit of the Company.
The operating segment "Retail Personal Care Products" also experienced
a decline in net sales as a whole. Net retail sales in 1998 were
$10,473,000, as compared to $11,628,000 in 1997, with the most significant
decline coming from some of the brands purchased from The Colgate-Palmolive
Company. in December 1995. This, in the Company's opinion, was primarily the
result of a reduction in the number of products carried by retailers and a
continuing consolidation in the chain-drug industry. Retail Personal Care
Products sales also includes certain brands which did outperform last year.
Retailers have shown a renewed acceptance of "Stiff Stuff", a brand
acquired from New Image Laboratories, Inc., which had increased sales in
1998, along with "Stretch Mark" and "Quinsana" products, and net sales of
the Frances Denney line almost doubled over 1997 levels. In addition,
commencing in the first quarter of 1999, a large national retailer began
carrying a number of "Stiff Stuff" products, increasing the exposure of
that product line.
Selling, general and administrative expenses increased 34% from
$9,110,000 in 1997 to $12,240,000 in 1998. This increase is primarily due
to the expenses of Morris Flamingo-Stephan, Inc. Management is continually
trying to reduce overhead expenses where possible and is confident that a
continued scrutiny of certain expense categories will result in lower costs
and expenses in 1999.
Interest expense increased from $642,000 in 1997 to $969,000 in 1998
as a result of increased borrowings to finance the last note payment
related to the Image acquisition, and to repay the outstanding asset-based
financing in connection with the Morris-Flamingo, L.P. acquisition. In
November 1998, the Company refinanced all of its existing debt into a
seven-year term loan, taking advantage of the lower interest rates
available at that time. Other income includes the royalty payment of
$125,000 from Color Me Beautiful in connection with the marketing of
Frances Denney products.
LIQUIDITY AND CAPITAL RESOURCES
_______________________________
Working capital was approximately $24,700,000 at December 31, 1999, an
increase of $1,378,000 from December 31, 1998, due principally to more
profitable operations. Cash and cash equivalents increased almost
$4,000,000, to $12,079,000 when compared to the $8,082,000 on hand at
December 31, 1998.
18
Overall, inventory has decreased more than $3,300,000 from December
31, 1998 as a result of more efficient inventory control, including more
efficient purchasing practices and better utilization of goods and
materials on hand, however, there is still a need for an increased level of
chemicals, raw materials, components and packaging in order to ensure
availability for production, as well as to maintain a higher level of
finished goods inventory.
During 1999, the Company repurchased almost 150,000 shares, at an
aggregate cost of almost $615,000, with an average share price paid of
$4.11. These shares were purchased under a plan adopted by the Board of
Directors authorizing the repurchase of up to 1,000,000 shares of Common
Stock. The Company will continue to evaluate market conditions to determine
if additional share purchases are warranted.
The Company is subject to various covenants with respect to working
capital, current maturity coverage and funded debt ratios under the loan
agreement with Nationsbank, N.A. At December 31, 1998, the Company was not
in compliance with the current maturity coverage and funded debt ratio
covenants, but obtained a waiver from the lender. Under the terms of the
waiver, the Company was subject to an additional 1% interest until the
September 30, 1999, when the Company was in compliance with the original
covenants.
The Company continues to explore options with respect to new
construction and modernization of its Tampa manufacturing plant. If the
Company ultimately determines that construction of new facilities is the
best policy to pursue, these improvements will either be funded from
existing cash resources or new borrowings, depending upon available cash
and current interest rates, and are presently projected to cost
approximately $1,000,000.
The Company has not experienced any adverse impact from the effects of
inflation in the past. Management maintains the flexibility to increase
prices and does not have any binding contract pricing with either customers
or vendors. Many of the Company's products, as well as the components
used, are petroleum-based products, and in the past, prices can be subject
to various political or economic pressures. The Company does not foresee
any increase in its raw material or component costs but believes it has the
flexibility of multiple vendors and the ability to increase prices to
offset any price changes.
YEAR 2000 COMPUTER SYSTEMS COMPLIANCE
- -------------------------------------
The Company successfully completed its comprehensive assessment and
conversion of its Information Technology (IT) systems in conjunction with
the integration of the software and hardware currently in use and as
expected, did not experience any material adverse effects on its business,
products, results of operations or financial condition as a result of Y2K
related issues. The Company will continue to monitor its own operations
and computer systems as well as its trading partners, for potential Year
2000 related problems. However, the Company does not anticipate that it
will discover any future Y2K problems that will have a material adverse
effect on the business, products, operations or financial position of the
Company. Expenditures related to Year 2000 issues were under $150,000 in
1999 and are not expected to be significant in 2000.
19
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
The Company does not participate in derivative or other financial
instruments for which fair value disclosure would be required under
Statement of Financial Accounting Standards No. 107. In addition, the
Company does not invest in securities that would require disclosure of
market risk, nor does it have floating rate loans or foreign currency
exchange rate risks.
Item 8. Financial Statements and Supplementary Data
Reference is made to the financial statements and supplementary data
contained elsewhere in this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable.
20
PART III
The information required by Part III Items 10-13 of Form 10-K are
incorporated herein by reference from the Registrant's Proxy Statement for
its 2000 annual meeting of stockholders which will be filed with the
Securities and Exchange Commission not later than 120 days after the end of
the Registrant's fiscal year 1999.
21
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K
(a) Exhibits
10.1 Acquisition Agreement, dated December 31, 1995, between
Colgate-Palmolive Company and The Stephan Co., with exhibits, including the
Transition Agreement, included with the Form 8-K filed January 16, 1996 and
as amended on January 22, 1996, is incorporated herein by reference.
10.2 Acquisition Agreement, dated December 31, 1995, between
The Mennen Company and The Stephan Co., with exhibits, included with the
Form 8-K filed January 16, 1996 and as amended on January 22, 1996 is
incorporated herein by reference.
10.3 Letter agreement, dated December 31, 1995, between
Colgate-Palmolive Company, The Mennen Company and The Stephan Co., included
with the Form 8-K filed January 16, 1996 and as amended on January 22,
1996, is incorporated herein by reference.
10.4 Settlement Agreement and Amendment, dated December 5,
1996, between The Stephan Co., The Mennen Company and Colgate-Palmolive
Company, included with the Form 10-K filed April 15, 1997, is incorporated
herein by reference.
10.5 The Trademark License Agreement, dated December 5, 1996,
between Colgate-Palmolive Canada, Inc. and The Stephan Co., included with
the Form 10-K filed April 15, 1997, is incorporated herein by reference.
10.6 Trademark License and Supply Agreement, dated March 7,
1996, between Color Me Beautiful, Inc. and The Stephan Co., included with
the Form 8-K filed March 20, 1996, is incorporated herein by reference.
10.7 Agreement, dated June 28, 1996, for the acquisition of
Sorbie Acquisition Co. and Subsidiaries, with exhibits, included with the
Form 8-K filed July 15, 1996, and as such was amended on August 21,
September 16 and October 9, 1996, is incorporated herein by reference.
10.8 Amended and Restated Sorbie Products Agreement, dated
June 27, 1996, among Sorbie Acquisition Co., Sorbie Trading Limited, Trevor
Sorbie International, PLC and Trevor Sorbie, included with the Form 8-K/A
filed August 21, 1996, is incorporated herein by reference.
10.9 Settlement Agreement and Amendment dated December 5,
1996, between The Stephan Co., The Mennen Company and Colgate-Palmolive
Company, included with the Form 10-K for the year ended December 31, 1996,
filed April 15, 1997, is incorporated herein by reference.
10.10 Trademark License and Supply Agreement dated March 7, 1996,
between Color Me Beautiful, Inc. and The Stephan Co., included with the
Form 8-K filed March 20, 1996, is incorporated herein by reference.
22
10.11 Acquisition Agreement dated as of May 23, 1997, between
New Image Laboratories, Inc., The Stephan Co. and Stephan Distributing,
Inc., in connection with the acquisition of brands, included with the Form
10-Q for the period ended June 30, 1997, filed August 13, 1997, is
incorporated herein by reference.
10.12 Acquisition Agreement dated as of March 18, 1998,
between Morris Flamingo-Stephan, Inc., The Stephan Co., Morris-Flamingo,
L.P., Morris-Flamingo Beauty Products, Inc., Shaheen & Co., Inc. and Shouky
A Shaheen, included with the Form 10-Q for the period ended June 30, 1998,
filed May 15, 1998, is incorporated herein by reference.
27. Financial Data Schedule
(b) Financial Statements and Financial Statement Schedules
(i) Financial Statements
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 1999
and 1998.
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998, and 1997.
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999, 1998, and 1997.
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997.
Notes to Consolidated Financial Statements.
(ii) Financial Statement Schedules
All schedules are omitted because they are not applicable or
the required information is shown in the consolidated
financial statements or notes thereto.
23
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of The Stephan Co.:
We have audited the accompanying consolidated balance sheets of The Stephan
Co. and subsidiaries (the "Company") as of December 31, 1999 and 1998, and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December
31, 1999 and 1998, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United
States of America.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
March 24, 2000
F-1
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,1999 AND 1998
ASSETS
1999 1998
____________ ___________
CURRENT ASSETS
Cash and cash equivalents $12,079,204 $ 8,081,762
Cash on deposit with trustee 31,018 270,684
Accounts receivable 4,371,833 4,680,170
Inventories 11,954,191 15,286,370
Income taxes receivable - 83,888
Prepaid expenses
and other current assets 291,010 219,897
__________ __________
TOTAL CURRENT ASSETS 28,727,256 28,622,771
PROPERTY, PLANT AND EQUIPMENT, net 2,984,260 3,120,658
INTANGIBLE ASSETS, net 25,855,739 27,086,358
OTHER ASSETS 3,148,827 2,432,278
___________ ___________
TOTAL ASSETS $60,716,082 $61,262,065
=========== ===========
See notes to consolidated financial statements.
F-2
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,1999 AND 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
___________ ____________
CURRENT LIABILITIES
Accounts payable and
accrued expenses $1,887,687 $3,126,756
Note payable to bank 400,000 400,000
Current portion of
long-term debt 1,468,596 1,804,971
Income taxes payable 302,097 -
___________ ___________
TOTAL CURRENT LIABILITIES 4,058,380 5,331,727
DEFERRED INCOME TAXES, net 1,442,950 554,017
LONG-TERM DEBT, less current
maturities 10,418,320 11,718,169
___________ ___________
TOTAL LIABILITIES 15,919,650 17,603,913
___________ ___________
COMMITMENTS AND CONTINGENCIES (NOTES 2 and 11)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value;
25,000,000 shares authorized;
at December 31, 1999, 4,660,958
issued and 4,576,358 outstanding;
at December 31, 1998, 4,725,858
issued and outstanding. 46,610 47,259
Additional paid in capital 19,404,559 19,692,043
Retained earnings 27,023,560 25,270,413
___________ ___________
46,474,729 45,009,715
LESS: 125,000 CONTINGENTLY
RETURNABLE SHARES (1,351,563) (1,351,563)
TREASURY STOCK (84,600 shares) (326,734) -
___________ ___________
TOTAL STOCKHOLDERS' EQUITY 44,796,432 43,658,152
___________ ___________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $60,716,082 $61,262,065
=========== ===========
See notes to consolidated financial statements.
F-3
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
___________ ___________ __________
NET SALES $34,753,171 $35,816,190 $27,113,306
COST OF GOODS SOLD 19,566,466 22,129,603 10,192,411
___________ ___________ ___________
GROSS PROFIT 15,186,705 13,686,587 16,920,895
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 11,747,107 12,239,694 9,110,001
___________ ___________ __________
OPERATING INCOME 3,439,598 1,446,893 7,810,894
OTHER INCOME(EXPENSE)
Interest income 427,804 373,968 402,940
Interest expense (943,856) (968,630) (641,654)
Royalty income 510,000 125,000 125,000
__________ __________ __________
INCOME BEFORE INCOME TAXES 3,433,546 977,231 7,697,180
INCOME TAXES 1,304,647 318,837 2,656,171
___________ __________ __________
NET INCOME $ 2,128,899 $ 658,394 $ 5,041,009
=========== ========== ===========
BASIC AND DILUTED
EARNINGS PER SHARE $ .47 $ .15 $ 1.20
=========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,567,439 4,535,649 4,213,372
=========== =========== ===========
See notes to consolidated financial statements.
F-4
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Common Stock
____________________ Additional Contingently
Paid in Retained Returnable Treasury
Shares Par Value Capital Earnings Stock Stock
_______ _________ ___________ ___________ ____________ _________
Balances,
Jan. 1,1997
4,147,466 $ 41,475 $12,967,462 $20,278,736 $ - $ -
Stock issued
for acqui-
sition 250,000 2,500 2,700,625 - - -
Contingently
returnable
stock - - - - (1,351,563) -
Stock issued
to Retire
debt 34,534 345 442,100 - - -
Treasury
stock
purchased _ - - - - (130,610)
Treasury
stock retired
(13,200) (132) (130,478) - - 130,610
Dividends
paid - - - (341,940) - -
Net income for
1997 - - - 5,041,009 - -
_________ ________ __________ __________ ___________ _________
Balances,
Dec. 31, 1997
4,418,800 44,188 15,979,709 24,977,805 (1,351,563) -
Stock issued for
acquisition
307,058 3,071 3,712,334 - - -
Dividends
paid - - - (365,786) - -
Net income
for 1998 - - - 658,394 - -
_________ _________ __________ __________ __________ _________
Balances,
Dec. 31,1998
4,725,858 47,259 19,692,043 25,270,413 (1,351,563) -
Treasury
stock
purchased - - - - - (614,867)
Treasury
stock
retired
(64,900) (649) (287,484) - - 288,133
Dividends
paid - - - (375,752) - -
Net income
for 1999 - - - 2,128,899 - -
_________ ________ ___________ ___________ ___________ _________
Balances,
Dec. 31,1999
4,660,958 $ 46,610 $19,404,559 $27,023,560 $(1,351,563) $(326,734)
========= ======== =========== =========== =========== =========
See notes to consolidated financial statements.
F-5
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
1999 1998 1997
__________ __________ __________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,128,899 $ 658,394 $5,041,009
__________ ___________ __________
Adjustments to reconcile net income
to net cash flows provided by
operating activities:
Depreciation 508,362 407,482 338,326
Amortization 1,204,606 1,208,079 1,094,948
Adjustment to goodwill 83,484 111,788 111,788
Loss on disposal of property,
plant and equipment 16,076 4,463 -
Deferred income taxes 888,933 285,851 (30,295)
Provision for doubtful accounts 46,515 122,047 120,953
Changes in operating assets
and liabilities, net of effects
of acquisitions:
Accounts receivable 261,822 1,240,419 (750,621)
Inventories 3,332,179 (956,960) (2,354,349)
Prepaid expenses
and other current assets (71,113) 131,613 24,121
Other assets (716,549) 93,670 (1,024,841)
Accounts payable
and accrued expenses (1,361,248) (1,044,566) (1,385,587)
Income taxes payable 385,985 (1,473,992) 925,511
_________ _________ _________
Total adjustments 4,579,052 129,894 (2,930,046)
_________ _________ _________
Net cash flows provided
by operating activities 6,707,951 788,288 2,110,963
_________ _________ _________
F-6
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
1999 1998 1997
__________ __________ __________
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired from acquisition - 5,266 -
Decrease(increase) in cash on
deposit with trustee 239,666 339,442 (610,126)
Purchase of property, plant
and equipment (388,040) (684,932) (562,659)
Purchase of intangible assets (57,471) (85,291) (409,823)
_________ ________ ________
Net cash flows used in
investing activities (205,845) (425,515) (1,582,608)
_________ ________ _________
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (1,636,224) (12,428,762) (1,841,907)
Repayment of acquired debt - (1,877,937) -
Repayment of note payable
to trustee - (1,199,700) (1,199,700)
Proceeds from notes payable to bank - 15,100,000 3,200,000
Acquisition of treasury stock (492,688) - (130,610)
Dividends paid (375,752) (365,786) (341,940)
___________ _________ _________
Net cash flows used in
financing activities (2,504,664) (772,185) (314,157)
___________ _________ _________
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 3,997,442 (409,412) 214,198
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 8,081,762 8,491,174 8,276,976
___________ __________ __________
CASH AND CASH EQUIVALENTS,
END OF PERIOD $12,079,204 $8,081,762 $8,491,174
=========== ========== ==========
F-7
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Supplemental Disclosures of Cash Flow Information:
1999 1998 1997
__________ __________ __________
Interest paid $ 976,478 $ 845,669 $ 644,862
========== ========== ==========
Income taxes paid 333,814 $1,341,899 $1,760,955
========== ========== ==========
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
On December 29th and 30th, 1999, 32,600 shares of treasury stock were
repurchased, totaling $122,179, and are omitted from the consolidated
statements of cash flows because the settlement date was subsequent to
December 31, 1999. In addition, the Company retired 64,900 shares of
treasury stock acquired earlier in 1999.
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 common
stock with an approximate value, at the time of acquisition, of $3,700,000.
In connection with the acquisition of certain assets and brands from New
Image Laboratories, Inc. on June 26, 1997, the Company acquired
inventories, accounts receivable, fixed and intangible assets and assumed
certain liabilities by issuance of common stock with an approximate value,
at the time of acquisition, of $2,700,000.
On September 9, 1997, the Company issued 34,534 shares of common stock to
Charles V. Hall, in satisfaction of the amount due him as a result of the
acquisition of Trevor Sorbie of America, Inc. in June, 1996.
See notes to consolidated financial statements.
F-8
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial
statements include the accounts of The Stephan Co. and its wholly-owned
subsidiaries, Foxy Products, Inc., Old 97 Company, Williamsport Barber and
Beauty Supply Corp., Stephan & Co., Scientific Research Products, Inc. of
Delaware, Trevor Sorbie of America, Inc., Stephan Distributing, Inc. and
Morris Flamingo-Stephan, Inc. (collectively, the "Company"). All
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
"SFAS" No. 131, "Disclosures About Segments of an Enterprise and Related
Information," requires the reporting of segment information using a
"management approach" as it relates to the operating segments of a
business. As explained more fully in Note 10, the Company has allocated
substantially all of its business into three segments, which include
professional hair care products and distribution, retail personal care
products and manufacturing.
USE OF ESTIMATES: The preparation of consolidated financial
statements in conformity with 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: In 1999 and 1998, there were no sales to any
single customer in excess of 10% of net sales. Sales to a major customer
in excess of 10% of net sales for the year ended December 31, 1997 was
$2,819,000. The Company performs ongoing credit evaluations of its
customers' financial condition and, generally, requires no collateral. The
Company does not believe that its customers' credit risk represents a
material risk of loss to the Company. However, the loss of a major
customer could have an adverse effect on the Company.
LONG-LIVED ASSETS: SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. 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 an expense over the vesting period the
F-9
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
fair value of all stock-based awards on the date of grant. Alternatively,
SFAS No. 123 allows entities to continue to measure compensation cost for
stock-based awards using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and to provide pro forma net income and pro forma earnings per
share disclosures as if the fair value method defined in SFAS No. 123 had
been applied. The Company has elected to continue to apply the provisions
of APB Opinion No. 25 and provide the pro forma disclosure provisions of
SFAS No. 123. See Note 12 to the financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS: Statement of Financial
Accounting Standards No. 107, "Disclosure about Fair Value of Financial
Instruments," requires disclosure of the fair value of financial
instruments, both assets and liabilities, recognized and not recognized in
the consolidated balance sheets of the Company, for which it is practicable
to estimate fair value. The estimated fair values of financial instruments
which are presented herein have been determined by the Company using
available market information and recognized valuation methodologies.
However, considerable judgment is required in interpreting market data to
develop estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of amounts the Company could realize
in a current market sale of such instrument.
The following methods and assumptions were used to estimate fair
value:
- the carrying amounts of cash and cash equivalents, receivables and
accounts payable approximate fair value due to their short term nature;
- discounted cash flows using current interest rates for financial
instruments with similar characteristics and maturity were used to
determine the fair value of notes payable and debt.
As of December 31, 1999, the 6.65% note payable to bank had a carrying
value of $9,897,500 and a fair value of $9,467,000. There were no other
significant differences as of December 31, 1999 and 1998 in the carrying
value and fair market value of financial instruments.
REVENUE RECOGNITION: Revenue is generally recognized when all
significant contractual obligations have been satisfied, which involves the
manufacture and/or delivery of goods, and collectability of the resulting
account receivable is reasonably assured.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include
cash, certificates of deposit, U. S. Government issues, and municipal bonds
having maturities of 90 days or less when acquired. Also included in cash
and cash equivalents is a $400,000 certificate of deposit pledged as
collateral against a $400,000 note payable to a bank. The Company
maintains cash deposits at certain financial institutions in amounts in
excess of federally insured limits of $100,000. Cash and cash equivalents
held in interest-bearing accounts as of December 31, 1999 and 1998 were
approximately $11,264,000 and $7,121,000, respectively.
F-10
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INVENTORIES: Inventories are stated at the lower of cost
(determined on the first-in, first-out basis) or market. Capitalized
direct labor and overhead costs charged to inventory for the years ended
December 31, 1999 and 1998 were approximately $2,227,000 and $3,117,000,
respectively. Capitalized direct labor and overhead costs included in
inventory as of December 31, 1999 and 1998 were approximately $2,062,000
and $2,005,000, respectively.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are
recorded at cost. Routine repairs and maintenance are expensed as
incurred. Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets as follows:
Buildings and improvements 15-30 years
Machinery and equipment 5-10 years
Furniture and office equipment 3-5 years
INTANGIBLE ASSETS: Intangible assets are amortized using the
straight-line method based on the following estimated useful lives:
Goodwill 20-40 years
Covenant not to compete 7 years
Trademarks 20-40 years
Deferred acquisition costs 10 years
The amount of impairment, if any, in unamortized Goodwill is measured
based on projected future results of operations. To the extent future
results of operations of those subsidiaries to which the Goodwill relates
through the period such Goodwill is being amortized are sufficient to
absorb the amortization of Goodwill, the Company has deemed there to be no
impairment of Goodwill.
INCOME TAXES: Income taxes are calculated under the asset and
liability method of accounting. Deferred income taxes are recognized by
applying the enacted statutory rates applicable to future year differences
between the financial statement carrying amounts and the tax basis of
existing assets and liabilities. A valuation allowance is recorded when it
is more likely than not that some portion or all of the deferred tax asset
will not be realized.
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 Company has 506,625
outstanding stock options, of which 337,182 were exercisable. None of these
options were included in the calculation of earnings per share because
their inclusion would be antidilutive.
NEW FINANCIAL ACCOUNTING STANDARDS: In June 1998, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". Among other provisions,
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. It also requires that an entity
F-11
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. In July
1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities-Deferral of the Effective Date of FASB No. 133" for
financial statements for fiscal years beginning after June 15, 2000. This
statement is not expected to have a material impact on the Company's
financial position, results of operations or cash flows.
NOTE 2. SIGNIFICANT TRANSACTIONS
On March 18, 1998, the Company entered into an Asset Purchase
Agreement with Morris-Flamingo, L.P., Morris-Flamingo Beauty Products,
Inc., Shaheen & Co., Inc. Shouky A. Shaheen, for the acquisition of
certain assets and liabilities (including payment of a note payable of
approximately $1,880,000) in exchange for 307,058 shares of the Company's
restricted (as provided for in Rule 144 of the Securities Act of 1933, as
amended) common stock valued at $12.10 per share. Morris-Flamingo is a
wholesaler of barber and beauty supplies, as well as a manufacturer of
hairpins, scissors and beauty school cases. The transaction was recorded
as a purchase and goodwill of approximately $2,545,000 was recorded.
The Company also entered into a 3 year lease agreement with Shaheen &
Co., Inc. for the existing office, warehouse and distribution facility
occupied by Morris-Flamingo in Danville, Illinois, at an annual rental of
approximately $210,000.
In connection with the acquisition of several product lines from New
Image Laboratories, Inc. ("Image") on June 26, 1997, the Company acquired
certain accounts receivable, inventories, fixed assets and trademarks, and
assumed certain outstanding trade and other liabilities of approximately
$5,332,000. The liabilities acquired are subject to the terms of a
liquidating trust agreement, and as provided for in the liquidating trust
agreement, the Company delivered a non-interest bearing, unsecured note
payable in the amount of $2,399,400, which was paid in two equal
installments in December 1997 and February 1998. The rights of creditors
to file claims against the Trust terminated on the first anniversary of the
agreement, and all funds on deposit with respect to unfiled claims have
been refunded to the Company and treated as a reduction of intangible
assets. Management of the Company has reduced the value of the trademarks
arising from the acquisition in accordance with the amount it believes will
ultimately be refunded. As of December 31, 1999, the Trustee had on
deposit funds approximating $31,000 for satisfaction of the remaining
claims filed in accordance with the provisions of the liquidating trust
agreement.
The purchase price is subject to adjustment based upon the value of
the net assets acquired, as determined on the first anniversary of the
closing date. Although the Company is currently involved in litigation
with Image with respect to the shares held in escrow, the Company believes
that based upon information available at December 31, 1999, the 125,000
shares held in escrow will be returned to the Company and, accordingly,
reduced the value of trademarks and stockholders' equity to reflect this
anticipated purchase price adjustment.
F-12
NOTE 3. ACCOUNTS RECEIVABLE
Accounts Receivable at December 31, 1999 and 1998 consisted of the
following:
1999 1998
__________ ___________
Accounts Receivable:
Trade $4,494,628 $ 4,845,656
Other 3,051 9,669
__________ ___________
4,497,679 4,855,325
Less: Allowance for
doubtful accounts (125,846) (175,155)
__________ ___________
$4,371,833 $ 4,680,170
========== ===========
The following is an analysis of the allowance for doubtful accounts
for the year ended December 31:
1999 1998 1997
_________ _________ _________
Balance, beginning of year $ 175,155 $ 98,359 $ 56,171
Provision for doubtful
accounts, net of recoveries 46,515 122,047 120,953
Uncollectible accounts
written off (95,824) (45,251) (78,765)
_________ _________ _________
Balance, end of year $ 125,846 $ 175,155 $ 98,359
========= ========= =========
NOTE 4. INVENTORIES
Inventories at December 31, 1999 and 1998 consisted of the following:
1999 1998
____________ ____________
Raw materials $ 2,490,406 $ 4,042,217
Packaging and components 4,187,055 4,375,596
Work in progress 938,698 959,057
Finished goods 7,257,713 7,848,046
____________ ____________
14,873,872 17,224,916
Less: Amount included
in other assets (2,919,681) (1,938,546)
____________ ____________
$ 11,954,191 $ 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 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 is inventory not anticipated to be utilized in one year.
F-13
NOTE 5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at December 31, 1999 and 1998 consisted
of the following:
1999 1998
___________ ____________
Land $ 379,627 $ 379,627
Buildings and improvements 2,071,337 1,979,823
Machinery and equipment 1,804,326 1,736,010
Furniture and office equipment 812,918 641,618
___________ ___________
5,068,208 4,737,078
Less: accumulated depreciation (2,083,948) (1,616,420)
___________ ___________
$ 2,984,260 $ 3,120,658
=========== ===========
NOTE 6. INTANGIBLE ASSETS
Intangible assets at December 31, 1999 and 1998 consisted of the
following:
1999 1998
___________ ___________
Goodwill-Williamsport
Barber Supply $ 510,674 $ 510,674
Covenant not to compete-
Williamsport Barber Supply 275,000 275,000
Goodwill-Stephan & Co. 278,054 278,054
Goodwill-Scientific
Research Products, Inc. 1,976,446 1,976,446
Trademarks-Scientific Research 1,758,343 1,758,343
Trademarks-Frances Denney 4,442,455 4,442,455
Trademarks-Colgate/Mennen 9,548,070 9,548,070
Goodwill-Trevor Sorbie 5,622,130 5,622,130
Trademarks-Image/Modern 3,368,527 3,452,011
Goodwill-Morris Flamingo 2,544,831 2,544,831
Deferred Acquisition Costs 814,379 756,908
Other 103,005 103,005
___________ ___________
31,241,914 31,267,927
Less: accumulated amortization (5,386,175) (4,181,569)
___________ ___________
$25,855,739 $27,086,358
=========== ===========
F-14
NOTE 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 1999 and 1998
consisted of the following:
1999 1998
___________ ___________
Accounts payable $ 1,215,280 $ 2,273,765
Accrued marketing expenses 238,783 258,192
Accrued payroll and bonuses 255,689 257,341
Accrued property taxes 46,945 92,671
Other accrued expenses 130,990 244,787
___________ ___________
$ 1,887,687 $ 3,126,756
=========== ===========
NOTE 8. LONG-TERM DEBT
Long-term debt at December 31, 1999 and 1998 consisted of the
following:
1999 1998
____________ ____________
6.65% unsecured note payable to bank,
principal of $92,500 plus interest
due monthly through November 30, 2005;
final balloon payment of $3,330,000
due November 30, 2005. $ 9,897,500 $11,100,000
Guaranteed minimum payments of $250,000
due semi-annually to Colgate-Palmolive
through January 31, 2004, discounted at
an 8% rate; collateralized by a security
interest in the brands acquired from
Colgate-Palmolive, with a carrying
value of approximately $8,275,000. 1,989,416 2,312,067
Other - 111,073
___________ ___________
11,886,916 13,523,140
Less: current portion (1,468,596) (1,804,971)
___________ ___________
Long-term debt $10,418,320 $11,718,169
=========== ===========
At December 31, 1999 the Company has a $400,000 note payable to a bank
due January 8, 2001 with interest at 3/4% above the certificate of deposit
rate (5.5% in 1999 and 1998) pledged as collateral against the note.
The 6.65% note payable to bank has covenants with respect to current
maturity coverage, funded debt to earnings (as defined) and minimum working
capital. At December 31, 1999, the Company was in compliance with all
covenants. At December 31, 1998, the Company was not in compliance with
F-15
NOTE 8. LONG-TERM DEBT (Continued)
the current maturity coverage and funded debt to earnings covenants, but
obtained a waiver from the lender. Under the terms of the waiver, the
Company was subject to an additional 1% interest until September 30, 1999
when the Company was once again in compliance with the original covenants.
At December 31, 1999, approximate maturities of long-term debt are
$1,469,000 for 2000, $1,442,000 for 2001, $1,417,000 for 2002, $1,393,000
for 2003, $1,819,000 for 2004, and $4,347,000 for 2005.
NOTE 9. INCOME TAXES
The provision for income taxes is comprised of the following for the
years ended December 31:
1999 1998 1997
___________ ___________ ___________
Current Tax:
Federal $ 375,139 $ 28,165 $ 2,318,398
State 40,575 4,821 368,068
___________ ___________ ___________
Total Current 415,714 32,986 2,686,466
___________ ___________ ___________
Deferred Tax:
Federal 762,299 229,208 (26,425)
State 126,634 56,643 (3,870)
___________ ___________ ___________
Total Deferred 888,933 285,851 (30,295)
___________ ___________ ___________
Total provision
for income taxes $ 1,304,647 $ 318,837 $ 2,656,171
=========== =========== ===========
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for tax purposes.
The net deferred tax liability in the accompanying balance sheets
includes deferred tax assets and liabilities attributable to the following
items:
1999 1998
___________ ___________
Accounts receivable allowances $ (49,709) $ (65,911)
Inventories (73,733) (569,221)
Amortization of goodwill 1,972,561 1,572,394
Charitable contribution
carryforward (285,498) (300,154)
Accrued liabilities and other (120,671) (83,091)
___________ ___________
$ 1,442,950 $ 554,017
=========== ===========
F-16
NOTE 9. INCOME TAXES (Continued)
The provision for federal and state income taxes differs from
statutory tax expense (computed by applying the U.S. Federal corporate tax
rate to income before taxes) as follows:
1999 1998 1997
_____ _____ _____
Amount computed on pretax income 35.0% 35.0% 35.0%
Increase(decrease) in taxes:
State income taxes, net of
federal tax benefit 3.2 4.2 3.4
Charitable contributions of inventory (2.6) (13.2) (2.8)
Goodwill 2.1 7.3 -
Benefit of graduated rates (1.0) (1.0) (1.0)
Other 1.3 .3 (.1)
_____ _____ _____
Total income tax 38.0% 32.6% 34.5%
===== ===== =====
NOTE 10. SEGMENT INFORMATION
In accordance with the guidelines established by SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," the
Company has identified three reportable operating segments based upon how
management evaluates its business. These segments are Professional Hair
Care Products and Distribution ("Professional"), Retail Personal Care
Products ("Retail"), and Manufacturing. The Professional segment generally
has as a customer base distributors 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 mass merchandisers,
chain drug stores and supermarkets who sell the product to the end user.
The Manufacturing segment manufactures products for different subsidiaries
of the Company, and manufactures private label brands for customers.
The Company conducts operations primarily in the United States and
sales to international customers are not material to consolidated revenues.
The following tables, in thousands, summarize significant accounts and
balances by reportable segment:
NET SALES INCOME BEFORE INCOME TAXES
________________________ __________________________
1999 1998 1997 1999 1998 1997
_______________________ __________________________
Professional $22,137 $21,511 $12,284 $ 1,304 $ 505 $ 2,775
Retail 9,473 10,473 11,628 1,114 173 4,338
Manufacturing 12,962 14,116 13,048 1,996 1,234 1,479
_______ _______ _______ ________ ________ ________
Total 44,572 46,100 36,960 4,414 1,912 8,592
Intercompany
Manufacturing (9,819)(10,284) (9,847) (980) (935) (895)
_______ _______ _______ ________ ________ ________
Consolidated $34,753 $35,816 $27,113 $ 3,434 $ 977 $ 7,697
======= ======= ======= ======== ======== ========
F-17
NOTE 10. SEGMENT INFORMATION (Continued)
INTEREST INCOME INTEREST EXPENSE
_______________________ __________________________
1999 1998 1997 1999 1998 1997
_______________________ __________________________
Professional $ 142 $ 101 $ 63 $ 418 $ 426 $ 73
Retail 245 200 177 505 519 545
Manufacturing 41 73 163 21 24 24
______ ______ ______ ______ ______ ______
Total $ 428 $ 374 $ 403 $ 944 $ 969 $ 642
====== ====== ====== ====== ====== ======
DEPRECIATION AND TOTAL
AMORTIZATION ASSETS
______________________ _________________
1999 1998 1997 1999 1998
______________________ _________________
Professional $ 727 $ 686 $ 542 $18,702 $16,977
Retail 908 852 847 25,501 24,910
Manufacturing 78 78 44 16,513 19,375
_______ _______ ______ _______ _______
Total $1,713 $1,616 $1,433 $60,716 $61,262
======= ======= ====== ======= =======
The accounting policies used for the segments are the same as those
used for the Company, and are described in the summary of significant
accounting policies in Note 1. Included in manufacturing sales are
intercompany sales to related segments, which are generally recorded at
cost plus 10%. Management of the Company evaluates the performance of each
segment based upon results of operations, before income taxes, intercompany
allocations, interest and amortization.
NOTE 11. COMMITMENTS AND CONTINGENCIES
In addition to the matters set forth below, the Company is involved in
other litigation matters arising in the normal course of business. It is
the opinion of management that any such matters, at December 31, 1999,
would not have a material adverse effect on the Company's financial
position, results of operations and cash flows.
The Company has entered into employment agreements with certain
officers and employees. These agreements, which expire on various dates
through June 2001, provide for incentive bonuses based on consolidated
income before taxes, earnings per share, or earnings of a subsidiary. In
the aggregate, such bonuses were approximately $30,000, $60,000 and $68,000
in 1999, 1998 and 1997, respectively, and are included in selling, general
and administrative expenses.
F-18
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
Annual rental payments due under existing operating leases at
December 31, 1999 are:
2000 $ 453,600
2001 148,100
2002 1,800
----------
$ 603,500
==========
Annual rent expense for each of the last three years is as follows:
1999 $610,793
1998 616,445
1997 242,186
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 amounts and cost of sales 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 retail and professional brands. Subsequent
to the Company's April 1, 1999 press release referencing the foregoing, the
Company learned that it has been named in two lawsuits seeking to recover
damages by shareholders who may have been adversely affected by these
inaccurate interim financial statements. The Company has agreed to
indemnify its officers and directors and believes it has meritorious
defenses against these allegations. However, it is impossible to predict
the outcome of any such matters as many unknown factors exist such as the
likelihood of future claims, insurance limits, and the outcome of jury
trial.
NOTE 12. CAPITAL STOCK AND STOCK OPTIONS
1,000,000 shares of preferred stock, $0.01 par value are authorized;
however, no shares have been issued.
In 1990, the shareholders of the Company approved the 1990 Key
Employee Stock Incentive Plan and the 1990 Outside Directors Plan. The
aggregate number of shares currently authorized pursuant to the Key
Employee Plan, as adjusted for stock splits and a shareholder-approved
increases in 1994 and 1997, is 870,000 shares. The number of shares and
terms of each grant is determined by the Compensation Committee of the
Board of Directors, in accordance with the 1990 Key Employee Plan, as
amended.
The Outside Directors Plan provides for annual grants, as adjusted for
stock splits, of 5,062 shares to non-employee directors. Such grants are
granted on the earlier of June 30 or the date of the Company's Annual
Meeting of Shareholders, at the fair market value at the date of grant. The
aggregate number of shares reserved for granting under this plan, as
adjusted for stock splits, is 202,500.
F-19
NOTE 12. CAPITAL STOCK AND STOCK OPTIONS (Continued)
Stock options are granted at the discretion of the Compensation
Committee of the Board of Directors. The options become exercisable one
year from the grant date and must be exercised within a maximum of 10 years
from the date of grant. Stock option activity for 1999, 1998, and 1997 is
set forth below:
Key Employee Outside
Option Avg. Directors Avg.
Plan Price Plan Price
__________________________________________________________________________
Outstanding at December 31, 1996.. 279,300 $16.77 43,934 $15.42
Granted........................... 79,195 12.65 15,186 11.23
Canceled.......................... (104,800) 15.46 (9,562) 16.42
Exercised......................... - -
__________ __________
Outstanding at December 31, 1997.. 253,695 16.03 49,558 13.97
Granted........................... 178,000 13.54 20,248 13.20
Canceled.......................... (500) 15.13 (3,000) 18.50
Exercised......................... - -
__________ __________
Outstanding at December 31, 1998.. 431,195 15.95 66,806 13.54
Granted........................... 70,000 10.25 20,248 4.18
Canceled.......................... (70,500) 16.67 (11,124) 15.38
Exercised......................... - -
__________ __________
Outstanding at December 31, 1999.. 430,695 $15.17 75,930 $11.05
========== ====== ========== ======
The number of shares and average exercise price of options exercisable
at December 31, 1999, 1998 and 1997 were 281,500 shares at $13.66, 174,000
shares at $15.00, and 104,500 shares at $16.43 for the 1990 Key Employee
Stock Incentive Plan and 55,682 at $13.55, 46,558 at $14.13, and 34,372 at
$15.80 for the Outside Directors Plan, respectively. At December 31, 1999
and 1998, 338,055 shares and 337,555 shares, respectively, were available
for future grants under the terms of the 1990 Key Employee Stock Incentive
Plan and 75,945 shares and 85,069 shares, respectively, were available for
future grants under the terms of the Outside Directors Plan.
The Company continues to apply the provisions of Accounting Principles
Board Opinion No. 25 and related Interpretations in accounting for stock-
based compensation plans. Accordingly, no compensation expense has been
recorded in the accompanying consolidated statements of operations for
options granted in 1999, 1998 and 1997. However, pro forma disclosures of
net earnings and earnings per share must be made as if SFAS No. 123 had
been adopted. Had compensation costs for options granted been determined
on the basis of the fair value of the awards at the date of grant,
consistent with the treatment prescribed by SFAS No. 123, the Company's net
income and earnings per share, on a pro forma basis, would be as follows:
F-20
NOTE 12. CAPITAL STOCK AND STOCK OPTIONS (Continued)
(Dollars in thousands, except per share data)
1999 1998 1997
___________ ___________ __________
Net income:
As reported $ 2,129 $ 658 $ 5,041
Pro forma $ 1,821 (203) $ 4,586
Earnings per share:
As reported $.47 $ .15 $ 1.20
Pro forma $.40 $ (.04) $ 1.09
The above pro forma effect only takes into consideration options
granted since January 1, 1997 and is likely to increase in future years as
additional options are granted and amortized ratably over the vesting
period. The average fair value of options granted during 1999, 1998 and
1997 was $5.22, $11.12, and $7.37, respectively. The fair value of stock
options granted in 1999, 1998 and 1997 was estimated using the Black-
Scholes option-pricing model and included the following assumptions: a life
expectancy of 5 to 10 years for 1999, 5 to 10 years for 1998, and 3 years
for 1997, a risk-free interest rate of 6.0% for 1999, 5.0% for 1998, and
6.2% for 1997 and volatility of 62% for 1999, 47% for 1998, and 48% for
1997. Dividends of $.08 per share were used in the determination of the
fair value of options granted for each of the years 1999, 1998 and 1997.
The exercise price range of options outstanding and exercisable for
both the Key Employee and Outside Directors plans, the weighted average
contractual life remaining in years and the weighted average exercise price
are as follows:
Outstanding Exercisable
____________________________ ___________________
Exercise Number Average Average Number Average
Price Range of shares Life Price of shares Price
_______________ __________ _______ ________ ___________________
$ 4.00 - $ 9.99 20,248 4.50 $ 4.18 - $ -
$10.00 - $13.99 362,629 5.91 $12.59 283,434 $13.23
$14.00 - $16.99 123,748 1.99 $15.22 53,748 $15.83
_________ _________
506,625 337,182
========= =========
Included in the $10.00-$13.99 range above are 9,195 options which are
not exercisable until the stock trades for 20 consecutive trading days at a
price equal to $14.14 or higher and included in the $14.00-$16.99 range
above are 70,000 options which are not exercisable until the stock trades
for 20 consecutive trading days at a price equal to $19.18 or higher.
F-21
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto, duly authorized.
THE STEPHAN CO.
By: /s/ Frank F. Ferola
___________________________________
Frank F. Ferola
President and Chairman of the Board
March 30, 2000
By: /s/ David A. Spiegel
___________________________________
David A. Spiegel
Principal Financial Officer
Principal Accounting Officer
March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
By: /s/ Frank F. Ferola By: /s/ Thomas M. D'Ambrosio
______________________________ ____________________________
Frank F. Ferola, Principal Thomas M. D'Ambrosio
Executive Officer and Director Vice President and Director
Date: March 30, 2000 Date: March 30, 2000
By: /s/ John DePinto By: /s/ Curtis Carlson
______________________________ ____________________________
John DePinto, Director Curtis Carlson, Director
Date: March 30, 2000 Date: March 30, 2000
By: /s/ Leonard Genovese By: /s/ Shouky Shaheen
______________________________ ____________________________
Leonard Genovese, Director Shouky Shaheen, Director
Date: March 30, 2000 Date: March 30, 2000
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 12,110,222
<SECURITIES> 0
<RECEIVABLES> 4,497,679
<ALLOWANCES> 125,846
<INVENTORY> 11,954,191
<CURRENT-ASSETS> 28,727,256
<PP&E> 5,068,208
<DEPRECIATION> 2,083,948
<TOTAL-ASSETS> 60,716,082
<CURRENT-LIABILITIES> 4,058,380
<BONDS> 10,418,320
0
0
<COMMON> 46,610
<OTHER-SE> 44,796,432
<TOTAL-LIABILITY-AND-EQUITY> 60,716,082
<SALES> 34,753,171
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<LOSS-PROVISION> 46,515
<INTEREST-EXPENSE> 943,856
<INCOME-PRETAX> 3,433,546
<INCOME-TAX> 1,304,647
<INCOME-CONTINUING> 2,128,899
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,128,899
<EPS-BASIC> 0.47
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