UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2002
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 Class Name of 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. ( )
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.
$10,596,531
as of March 14, 2003
The above amount excludes shares held by all executive officers and
directors of the Registrant
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date:
4,410,577 Shares of Common Stock, $.01 Par Value,
as of March 14, 2003
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 2003 annual meeting of
stockholders, scheduled to be filed no later than May 1, 2003, 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................................................. 9
Item 3: Legal Proceedings.......................................... 10
Item 4: Submission of Matters to a Vote of Security Holders......... 11
PART II
Item 5: Market for the Registrant's Common Equity
and Related Stockholder Matters........................... 12
Item 6: Selected Financial Data.................................... 13
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 15
Item 7A: Quantitative and Qualitative Disclosures about Market Risk. 22
Item 8: Financial Statements and Supplementary Data................ 22
Item 9: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 22
PART III
Item 10: Directors and Executive Officers of the Registrant......... 23
Item 11: Executive Compensation..................................... 23
Item 12: Security Ownership of Certain Beneficial
Owners and Management..................................... 23
Item 13: Certain Relationships and Related Transactions............. 23
Item 14: Controls and Procedures.................................... 23
PART IV
Item 15: Exhibits, Financial Statement Schedules
and Reports on Form 8-K.................................. 24
Signatures.......................................................... 26
Certifications...................................................... 27-30
3
PART I
Certain statements in this Annual Report on Form 10-K ("Form 10-K")
under "Item 1. Business", "Item 3. Legal Proceedings" 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; relative success of
operating initiatives; development and operating costs; advertising and
promotional efforts; brand awareness; the existence or absence of adverse
publicity; acceptance of any new product offerings; changing trends in
customer tastes; the success of multi-branding; changes in business
strategy or development plans; quality of management; costs and expenses
incurred by the Company in pursuing strategic alternatives; 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
newly-adopted accounting principles; changes in, or failure to comply with,
law; changes in product mix and associated gross profit margins; and other
factors or events referenced in this Form 10-K.
The Company does not undertake, subject to applicable law, any
obligation to publicly release the results of any revisions which may be
made to any forward-looking statements to reflect events or circumstances
occurring after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events. Therefore, the Company cautions each
reader of this report to carefully consider the specific factors and
qualifications discussed herein with respect to such forward-looking
statements, as such factors and qualifications could affect the ability of
the Company to achieve its objectives and may cause actual results to
differ materially from those projected, anticipated or implied herein.
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.
4
The Company has identified three reportable operating segments which
are Professional Hair Care Products and Distribution ("Professional"),
Retail Personal Care Products ("Retail") and Manufacturing. The
Professional segment generally consists of a customer base of distributors
which purchase the Company's hair care products and beauty and barber
supplies for sale to salons and barbershops. In this segment, a
distinction is made between "wet goods", which include shampoos,
conditioners, gels and similar hair treatments, and "hard goods", which
include scissors, clippers, combs, dryers and other products used in
styling hair. The customer base for the Retail segment is mass
merchandisers, chain drug stores and supermarkets which sell hair care and
other personal care products directly to the end user. The Manufacturing
segment manufactures products for subsidiaries of the Company, and
manufactures private label brands for certain customers.
THE STEPHAN CO.
Headquartered in Fort Lauderdale, Florida, 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 manufacture of products marketed under the STEPHAN
brand name. Stephan also manufactures, markets and distributes hair and
skin care products under various trade names through Company subsidiaries.
Retail product lines include brands such as Cashmere Bouquet talc, Quinsana
Medicated talc, Balm Barr and Stretch Mark creams and lotions, Protein 29
liquid and gel grooming aids and Wildroot hair care products for men.
These brands, included in the Retail segment of the Company's business, are
manufactured at the Company's Tampa, Florida facility, as are the "Modern"
brand of Stiff Stuff products. The sales of these products are also
included in the Company's Retail segment. In addition, The Frances Denney
division (included in the Retail segment) markets 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.
Stephan also manufactures and sells products under the brand 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 are included in the Professional
segment of the Company's 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 due for renewal in
November 2006. Retail brand sales of Stephan, including the Frances Denney
product line, accounted for approximately $4,125,000 of the Company's 2002
sales.
Under certain trademark licenses, the Company has been granted the
exclusive use of certain trademarks in connection with the manufacture and
distribution of the Cashmere Bouquet product line of the Colgate-Palmolive
Company in the United States and Canada. Any product sold under these
license agreements is included in net sales for purposes of determining the
5
deferred payments.
Pursuant to an additional license and supply agreement, we have
granted Color Me Beautiful, Inc. ("CMB") a license to distribute certain
products of the Registrant's Frances Denney line and to supply the
requirements of CMB for such products. The agreement provides for royalty
payments by CMB based upon net sales, with guaranteed minimum annual
royalty payments throughout the term of the agreement that are credited
against accrued royalties. As a result of a continuing decline in sales of
Frances Denney products, the Registrant has agreed to a reduction, on a
temporary basis, in the amount of minimum royalty that CMB is required to
pay.
The Company's Fort Lauderdale location serves as the Registrant's
corporate headquarters. General management services are provided to its
subsidiaries from this location.
No single customer accounted for more than 10% of the Registrant's
consolidated revenues in 2002. Private label production, which is the
manufacturing of products marketed and sold under the brand names of
customers of the Company, was not significant in 2002.
OLD 97 COMPANY.
Old 97 Company ("Old 97"), a wholly-owned subsidiary of the
Registrant, located in Tampa, Florida, 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 an additional
manufacturing facility for the Company's products. Its Tampa facility
manufactures most of the products sold under 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 Company's business.
WILLIAMSPORT BARBER AND BEAUTY CORP.
Williamsport Barber and Beauty Corp. ("Williamsport"), a wholly-owned
subsidiary of the Registrant, is located in Williamsport, Pennsylvania.
Williamsport, a mail order beauty and barber supply company, with sales of
approximately $4,373,000 in 2002, accounted for approximately 17.5% of the
Registrant's consolidated revenues for the year and are included in the
Professional business segment.
STEPHAN & CO.
Formerly known as Heads or Nails, Inc., Stephan & Co., a wholly-owned
subsidiary, has focused on the distribution of personal care amenity
products for cruise ships. Sales by Stephan & Co. for the year ended
December 31, 2002 were insignificant.
6
SCIENTIFIC RESEARCH PRODUCTS, INC. OF DELAWARE.
Scientific Research Products, Inc. of Delaware ("Scientific") is a
wholly-owned subsidiary which accounted for 11.2% of the Registrant's
consolidated revenues in 2002, with sales of approximately $2,817,000. The
majority of the sales of Scientific are included in the Retail business
segment.
TREVOR SORBIE OF AMERICA, INC.
Prior to its acquisition, Sorbie Acquisition Co. ("Sorbie") was one of
the Registrant's major customers and a distributor of a professional line
of hair care products sold to salons in the United States and Canada
through a network of distributors. Sales of Sorbie hair care products in
2002 were approximately $1,050,000, representing 4.2% of the Registrant's
consolidated revenues, and are included in the Professional business
segment of the Company's business.
STEPHAN DISTRIBUTING, INC.
In 1997 the Company's wholly-owned subsidiary, Stephan Distributing,
Inc., 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." A portion of the purchase price included a contingent payment of
125,000 shares of the Company's common stock payable upon the achievement
of certain earnings levels.
New Image commenced litigation against the Company seeking, among
other things, a declaratory decree that the 125,000 shares of Common Stock
held in escrow for the contingent payment of certain purchase price
adjustments be released from escrow and turned over to New Image. Pursuant
to a judgment dated March 20, 2001, the United States District Court for
the Central District of California, among other decisions, granted the
Company partial summary judgment in the amount of approximately $20,000 and
New Image was granted partial summary judgment pursuant to which the escrow
agent was directed to deliver the 125,000 shares to New Image. The Company
appealed to the United States Court of Appeals for the Ninth Circuit and in
an opinion issued on April 29, 2002, among other things, reversed the
judgment of the United States District Court granting summary judgment in
favor of New Image against the Company on New Image's contract claim for a
price adjustment and on New Image's claim of breach of the implied covenant
of good faith and fair dealing. Also in the opinion, the Ninth Circuit
concurred with the lower court's ruling that on the present record New
Image is not entitled to (i) damages equal to the diminution in the value
of the Company's common stock price between the scheduled and actual
disbursement dates or (ii) any attorney's fees. As a consequence of the
Ninth Circuit's decision, the judgment granting New Image all shares of the
Company's common stock being held in escrow has been reversed and the case
has been remanded back to the United States District Court for further
proceedings. On May 28, 2002, New Image filed a Motion for Rehearing with
the Ninth Circuit Court of Appeals and on June 26, 2002, the Court denied
the petition for rehearing. A pretrial hearing has been scheduled for
7
spring of 2003 in connection with the remaining claims of the parties to
the litigation. The recorded value of trademarks assumes the return to the
Company of the shares held in escrow.
Sales of professional brands acquired from New Image amounted to
approximately $1,762,000 for the year ended December 31, 2002, which
accounted for approximately 7.0% of the Registrant's consolidated revenues.
Sales of New Image products are included in the Company's Professional
business segment while sales of the Modern line are included in the
Company's Retail business segment.
MORRIS FLAMINGO-STEPHAN, INC.
Morris-Flamingo, Inc. ("Morris Flamingo") is a barber and beauty
supply wholesaler, which markets its products utilizing catalogs published
under the Morris Flamingo brand name as well as the Major Advance
brand name. Sales for the year ended December 31, 2002 were approximately
$10,492,000, accounting for approximately 41.9% 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 informa-
tion on net sales, income before income taxes and cumulative effect of
change in accounting principle, interest income and expense and
depreciation and amortization for the last three years and identifiable
assets for the last two years, for each of the Registrant's three business
segments, is set forth in Note 9 of the consolidated financial statements
included elsewhere in this Form 10-K.
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 Company nor
any of its subsidiaries has ever experienced any significant shortage in
supplies nor does it anticipate any such shortages in the reasonably
foreseeable future. Due to market conditions in the petroleum industry,
the Registrant continues to experience 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 and believes it
can pass such increases on to customers.
The Company and its subsidiaries seek to maintain a level of finished
goods inventory 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, 2002, the Company did not believe that the dollar
amount of its backlog orders was significant.
8
RESEARCH AND DEVELOPMENT
During each of the three prior fiscal years ending December 31, 2002,
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 material and were expensed as incurred.
COMPETITION
The hair care and personal grooming business is highly competitive.
The Company believes that the principal competitive factors are 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
Certain of the Registrant's products are subject to regulation by the
Food and Drug Administration, in addition to other Federal, state and local
regulatory agencies. The Company believes that its products are in
substantial 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, 2002, in addition to its five officers, the Company
and its subsidiaries employed approximately 120 people engaged in the
production, warehousing and distribution of its products. Although the
Company 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 collective bargaining agreements 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. The Registrant utilizes approximately two-thirds of the space 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 this facility, the Registrant leases
9
approximately 43,000 square feet of warehouse space located at 5300 North
Powerline Road, Fort Lauderdale, Florida 33309, under a lease extension
(with a November 30, 2003 cancellation option) which terminates July 31,
2004, at an annual net rental of $160,000.
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. This building is utilized by Old 97 in the manufacture of its
various product lines. A claim has been filed with the Department of
Transportation in connection with a leased warehouse facility adjacent to
this location which was utilized by Old 97, (see "Item 3. Legal
Proceedings"). It also owns 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, consisting of approximately 30,000
square feet, is used as a warehouse and distribution facility. From time
to time, and as inventory levels dictate, Old 97 leases temporary warehouse
space, generally on a short-term basis. The Company is currently leasing a
44,000 square foot warehouse located in close proximity to the general
office and warehouse facility.
The Company leases office and warehouse space of approximately 6,000
square feet in Williamsport, Pennsylvania pursuant to a five-year lease
expiring January 31, 2007. Monthly rent in the amount of $2,100 is payable
to the former owner of Williamsport Barber Supply and the lease has a 60-
day cancellation clause.
In connection with the Morris Flamingo acquisition, the Company
entered into a lease, and subsequent lease extension, expiring in June
2005, for the office, warehouse and manufacturing facility located at 204
Eastgate Drive, Danville, Illinois 61834, at an annual rental payment of
approximately $210,000, subject to annual consumer price index increases,
with purchase options ranging from $1,850,000 to $2,000,000 over the
remaining life of the lease. The Danville facility has 7,500 square feet
of office space and 85,500 square feet of warehouse, distribution and
manufacturing space. The landlord is Shaheen & Co., Inc, the former owner
of Morris-Flamingo. Shouky A. Shaheen, a minority owner of Shaheen & Co.,
Inc., is currently a member of the Board of Directors and a significant
shareholder of the Company.
Item 3. Legal Proceedings
In addition to the matters set forth below, the Company is involved in
other litigation arising in the normal course of business. It is the
opinion of management that none of such matters, at December 31, 2002,
would likely, if adversely determined, have a material adverse effect on
the Company's financial position, results of operations or cash flows.
For a description of certain legal proceedings involving the Company
and New Image, see Item 1. Business. For a description of certain legal
proceedings involving the Company and a shareholder, see Item 7.
Management's Discussion and Analysis of Financial Condition and Results
of Operations - Recent Events.
10
On November 1, 2001, a private label customer filed a lawsuit in the
Circuit Court for the 17th Circuit of Florida in and for Broward County,
styled Faulding Healthcare (IP) Holdings, Inc. and Faulding Consumer, Inc.
v. The Stephan Co., Old 97 Company and Frank Ferola, Sr., Case Number
01-019028 09, against the Company alleging causes of action for breach of
contract, declaratory judgment, and trademark infringement. The Company
denied the allegations and has filed a counter-claim against Faulding
Consumer, Inc. the customer. The counter-claim alleges claims for breach of
contract, anticipatory breach of contract and amounts stated stemming from
Faulding's failure to provide continuing orders and failure to pay for
certain raw materials and components. The Company seeks unspecified
compensatory damages including lost profits, interest, attorneys fees and
costs. At this time, the Registrant is unable to predict the outcome of
this matter.
In November 2001, the Company filed a claim with the U.S. Department
of Transportation ("DOT") in the 13th Judicial Circuit Court of
Hillsborough County, Florida, in connection with the DOT's widening of
Interstate Highway 4, which the Company alleged will result in the loss of
an adjacent rental facility utilized by one of the Company's subsidiaries.
At a hearing held on August 2, 2002, the Company was successful in
asserting a position that would allow for damages to be paid to the Company
by the DOT. The case is scheduled for mediation in May 2003, and there is a
possibility that the Company may receive a material damage award. However,
based on consultation with legal counsel, the Company is presently unable
to accurately predict the amount or type of recovery that will result
therefrom.
In November 2002, a stockholder filed a lawsuit in the Circuit Court
for the 17th Circuit of Florida in and for Broward County, styled Joan
Rosoff v. Frank F. Ferola, Shouky Shaheen, Leonard A. Genovese, Curtis
Carlson, John DePinto, Thomas M. D'Ambrosio and The Stephan Co., Case
Number 0222253, against the Company and others alleging certain breaches of
fiduciary duties and responsibilities. The Company has filed a motion to
dismiss the lawsuit. The Company believes it has meritorious defenses.
Item 4. Submission of Matters to a Vote
of Security Holders
No matters were submitted to a vote of our security holders, through
the solicitation of proxies or otherwise, during the quarter ended December
31, 2002.
11
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters
(a) Market Information
The Registrant's Common Stock is listed on the American Stock Exchange
(the "Exchange"). The following table sets forth the range of high and low
sales prices for the Registrant's Common Stock during each quarterly period
within the two most recent fiscal years:
High Low
Quarter Ended Sales Price Sales Price
_____________ ___________ ___________
March 31, 2001* $ 3.00 $ 3.00
June 30, 2001* 3.40 2.91
September 30, 2001 3.20 2.89
December 31, 2001 3.19 2.75
___________________________________________________________________________
March 31, 2002 $ 3.24 $ 2.75
June 30, 2002 3.83 3.00
September 30, 2002 3.66 3.00
December 31, 2002 3.56 3.29
* Trading of the Registrant's common stock on the Exchange was temporarily
suspended for a portion of these periods.
(b) Holders
As of March 14, 2003, the Registrant's Common Stock was held of
record by approximately 330 holders. The Registrant's Common Stock is
believed to be held beneficially by approximately 1,200 shareholders in
"street-name".
(c) Dividends
The Company declared and paid cash dividends at the rate of $.02 per
share for each quarter in 1996 through 2002. Future dividends, if any,
will be determined by the Company's Board of Directors, in 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 Company in the form of cash dividends, loans or advances, that
currently materially limit the Registrant's ability to pay cash dividends
or that the Registrant reasonably believes are likely to materially limit
the future payment of dividends on its Common Stock.
12
Item 6. Selected Financial Data
2002 2001 2000 1999 1998
(in thousands, except per share data)
____________________________________________________
Net sales $25,067 $28,296 $31,138 $34,356 $34,835
Income/(Loss) before
income taxes and
cumulative effect of
change in accounting
principle 1,400 746 1,006 3,036 (4)
Income/(Loss) before
cumulative effect of
change in accounting
principle 503 608 622 1,843 (3)
Cumulative effect of
change in accounting
principle (6,762) - - - -
Net (loss)/income (6,259) 608 622 1,843 (3)
Current assets 20,284 20,116 28,199 27,447 27,961
Total assets 47,655 57,062 58,769 59,435 60,600
Current
liabilities 3,514 4,067 4,521 3,725 5,332
Long term debt 6,395 7,758 9,124 10,418 11,718
PER COMMON SHARE
(Basic and Diluted): (a)
Income before
cumulative effect of
change in accounting
principle .12 .14 .14 .40 -
Cumulative effect of
change in accounting
principle (1.58) - - - -
Net (loss)/income (1.46) .14 .14 .40 -
Cash dividends .08 .08 .08 .08 .08
Notes to Selected Financial Data
(a) Net (loss)/income per common share is based upon the weighted average
number of common shares outstanding in accordance with Statement of
13
Financial Accounting Standards No. 128. The weighted average number of
shares outstanding were 4,285,577 for 2002, 4,285,577 for 2001, 4,385,019
for 2000, 4,567,439 for 1999, and 4,535,649 for 1998. The weighted average
number of diluted shares outstanding were not significantly different in
any of the aforementioned years.
The following data should be read in conjunction with the audited
consolidated financial statements and related notes included elsewhere in
this Form 10-K.
Selected Quarterly Financial Information (unaudited)
(in thousands, except per share data)
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
3/31/02 6/30/02 9/30/02 12/31/02
_______ _______ _______ ________
Net sales $ 6,320 $ 6,839 $ 6,721 $ 5,187
Gross profit 2,779 2,982 2,539 1,561
Net income/(loss)
before cumulative
effect of change
in accounting
principle 327 405 240 (469)
Cumulative effect of
change in accounting
principle, net of tax
benefit of $1,663 (6,762) - - -
Net (loss)/income (6,435) 405 240 (469)
Net income/(loss)
per common share:
Before cumulative
effect of change in
accounting principle .08 .09 .06 (.11)
Cumulative effect of
change in accounting
principle (1.58) - - -
Net (loss)/income (1.50) .09 .06 (.11)
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
3/31/01 6/30/01 9/30/01 12/31/01
_______ _______ _______ ________
Net sales $ 7,580 $ 7,833 $ 6,584 $ 6,299
Gross profit 3,358 3,213 2,858 2,624
Net income/(loss) 387 316 (90) (5)
Net income/(loss)
per share .09 .07 (.02) (.00)
14
Information presented above for the quarters ended March 31, 2002, June 30,
2002 and September 30, 2002 have been restated to reflect the retroactive
application of the impairment loss recognized in accordance with the
adoption of SFAS No. 142, effective January 1, 2002.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 AS COMPARED TO 2001
__________________________________________________
Net sales for 2002 decreased primarily as a result of declines in the
revenues from the Company's Professional and Manufacturing business
segments. The decline in net sales for the Professional segment was
approximately $1,861,000. Over the past several years, there has been a
consolidation in the distribution network for professional products and
this has had an adverse impact on net sales. The Manufacturing segment
experienced a decline in sales as a result of a decline in private label
production. Management is negotiating with potential customers in order to
enhance the private label business and is also encouraged by prospects
generated in the first quarter of 2003. The Retail segment showed a small
sales increase, largely on the strength of an increase in sales of talc
products. In the retail environment, the Company continues to experience
demands for considerable up-front concessions, such as slotting allowances,
from major retailers in order to carry retail products from suppliers like
Stephan.
Gross profit decreased $2,192,000, to $9,861,000 in 2002 when compared
to 2001 levels. This decrease was due to an overall decline in net sales
and a continuing change in the overall mix of business. The Morris
Flamingo-Stephan and Williamsport subsidiaries (Professional business
segment) accounted for approximately 59% of consolidated net sales, an
increase of 9% over 2001 levels. These two subsidiaries have traditionally
had lower gross margins than other entities comprising the professional
group. The Company continues to devote efforts to improving the gross
profit margins of these two divisions, though they have improved slightly
over 2001.
The Retail Personal Care Products operating segment experienced a
moderate increase in net sales, with a 41% increase in net sales of the
brands acquired from Colgate offsetting decreased net sales of other retail
brands. Net retail sales in 2002 were $6,728,000, as compared to
$6,496,000 in 2001. By offering quantity discounts, the Company was
successful in acquiring new customers, but experienced a lower gross margin
due to discounts and promotional pricing. In addition, due to the
continued consolidation in the chain-drug store industry, the amount of
discounting and promotional allowances large retailers demand of their
suppliers has increased, which reduces the gross profit margins on brands
supplied to those retailers. The Company responded to these discounting
pressures in an effort to maintain market share without materially
sacrificing our profitability by selectively participating in promotional
programs that would benefit both the Company and the customer.
15
Management of the Company was able to substantially reduce expenses,
with selling, general and administrative expenses (SG&A) decreasing in
excess of $2,850,000, from $11,363,000 in 2001 to $8,509,000 in 2002. The
Company significantly reduced payroll and related costs as well as
professional fees. In addition, the decline in sales resulted in reduced
freight and delivery expenses. The implementation of SFAS No. 142, with
respect to goodwill and trademark amortization, reduced amortization
expense (which is included in SG&A) by $1,260,000 in 2002.
Interest expense decreased over $219,000 in 2002 as a result of a
decrease in outstanding debt and lower interest rates; interest income
also declined over $200,000 due to significantly lower interest rates.
Interest income for the year ended December 31, 2002 was $378,000, compared
to $580,000 earned in 2001. Other income included royalty payments from
Color Me Beautiful of $105,000 in connection with the marketing of Frances
Denney products, and a royalty fee of $43,750 for the temporary licensing
of New Era products.
Income before income taxes and cumulative effect of a change in
accounting principle was $1,400,000, an 88% increase over the corresponding
period in 2001, as a result of the reasons indicated above; however income
before the cumulative effect of a change in accounting principle as a
result of the application of SFAS No. 142 was $503,000 for the year ended
December 31, 2002, compared to $608,000 for the year ended December 31,
2001. This decrease was due to an abnormally high provision for income
taxes as a result of a reduction in the realizable value of the Company's
charitable contribution carryforward. This valuation allowance caused the
effective tax rate for the year ended December 31, 2002 to increase to 64%,
as compared to 18.5% for the prior year, and was taken because it is
anticipated that the time limit on the deductibility of the charitable
contribution carryforward will expire before it can be utilized. Should
taxable income increase in the near future, some of this write down may be
recoverable.
Net income for the year ended December 31, 2002 was adversely impacted
by the write-down of goodwill and other intangible assets; an aggregate of
approximately $8.4 million was written-off, with a net after tax effect of
reducing income by approximately $6.8 million. The net loss for the year
ended December 31, 2002, after taking into consideration the goodwill and
other intangible assets charge, was $6,259,000.
Basic earnings per share for the year ended December 31, 2002, before
the effect of the goodwill and other intangible assets charge was $.12,
compared to $.14 for the year ended December 31, 2001. After giving effect
to the adjustment for the impairment of goodwill and other intangible
assets, the net loss per share was $1.46. The average number of shares
outstanding, 4,285,577, was the same in 2002 and 2001.
YEAR ENDED DECEMBER 31, 2001 AS COMPARED TO 2000
__________________________________________________
Net sales for 2001 decreased as a result of an overall decline in
revenues from the Company's Professional and Retail business segments.
16
While the sales and distribution of "hard goods" remained relatively
unchanged, there was a decline in the net sales of "wet goods" (which
comprise a significant portion of the "Retail" segment), of approximately
$2,900,000.
Gross profit decreased $578,000, to $12,053,000 in 2001 when compared
to 2000 levels. This decrease was primarily due to an overall decline in
net sales. The overall gross profit percentage increased from 40.6% in
2000 to 42.6% for the year ended December 31, 2001. This increase was
largely attributable to sales to new customers and more effective manu-
facturing operations.
Net retail sales in 2001 were $6,496,000, as compared to $8,969,000
for 2000. The decline in such net sales was primarily due to an almost
across-the-board decline in the net sales of the Company's retail lines;
however, the "Modern" and "Frances Denney" lines showed increases in 2001.
The continuing consolidation in the chain-drug store industry continues to
increase the amount of discounting and promotional allowances that must be
extended to large retailers which often has an inhibiting effect on the
number of SKU's (stock keeping units) that a retailer may carry.
Selling, general and administrative (SG&A) expenses decreased
$290,000, from $11,653,000 in 2000 to $11,363,000 in 2001. The overall
decline in SG&A expenses was due to a Company-wide decrease in payroll and
general office expenses partially offset by the anticipated increases in
consulting, marketing and legal and professional fees.
Interest expense decreased $174,000 from 2001 levels as the result of
a decrease in outstanding debt and the refinancing of a long-term note
payable in August 2001. Other income in 2001 includes a royalty payment of
$175,000 from Color Me Beautiful in connection with the marketing of
Frances Denney products.
Income taxes decreased $246,000, from $384,000 for the year ended
December 31, 2000 to $138,000 for the year ended December 31, 2001, due to
a combination of a decline in income before income taxes and a decrease in
the overall amount of deferred income taxes.
Earnings per share for the year ended December 31, 2001 was $.14,
equal to the amount for 2000. The average number of shares outstanding
decreased in 2001, from 4,385,019 to 4,285,577, as a result of the
repurchase, by the Company, of 165,780 shares during 2000.
LIQUIDITY AND CAPITAL RESOURCES
_______________________________
Working capital was approximately $16,770,000 at December 31, 2002, an
increase of over $720,000 from December 31, 2001. Cash and cash
equivalents increased to $10,786,000 compared to $8,409,000 as of December
31, 2001. Total cash, including certificates of deposit ("CDs"), increased
from $15,994,000 at December 31, 2001 to $17,538,000 at December 31, 2002.
The Company has continued to secure its outstanding long-term debt with
Wachovia Bank with all of the CDs. While the CDs periodically mature, they
are classified as non-current and not included in working capital or cash
17
and cash equivalents. The Company does not anticipate any significant
capital expenditures in the near term and management believes that there is
sufficient cash on hand and working capital to satisfy upcoming
requirements, including any funds that may be needed in connection with the
going-private transaction.
The Company does not have any off-balance sheet financing or similar
arrangements.
Inventory levels continued to decline as management continued to
engage its efforts to reduce the overall amount of inventory on hand, both
through the use of more effective inventory control techniques, as well as
a more thorough phasing out of old, obsolete or slow moving items. Overall,
accounts payable and accrued expenses had decreased $542,000 as of December
31, 2002, when compared to the end of 2001, which decrease was largely the
result of a decrease in accounts payable to vendors as well as a decline in
accrued payroll due to the timing of year end payments.
The Company has not experienced any material adverse impact from the
effects of inflation in the last several years. Management maintains some
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 as a
result, the prices for raw materials are and will continue to be subject to
oil prices which, in turn, are subject to various political or economic
pressures. The Company does not presently foresee any material increase in
the costs of raw materials or component costs, and believes it has the
flexibility of calling upon multiple vendors and the ability to increase
prices to offset any price changes.
NEW FINANCIAL ACCOUNTING STANDARDS
__________________________________
In June 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill
and Other Intangible Assets." These standards made changes to the
accounting for business combinations, goodwill and intangible assets. SFAS
No. 141 requires all business combinations entered into subsequent to June
30, 2001 to be accounted for using the purchase method of accounting. SFAS
No. 142 provides that goodwill and other intangible assets with indefinite
lives not be amortized, but be tested for impairment at least annually.
SFAS No. 142 is effective for years beginning after December 15, 2001.
Goodwill and intangible assets acquired subsequent to June 30, 2001 are
immediately subject to the provisions of SFAS No. 142. The Company adopted
SFAS No. 142 on January 1, 2002 and, as a result of impairment testing
required under SFAS No. 142, the Company reduced the carrying value of
certain goodwill and trademarks by approximately $8,424,000 ($6,762,000,
net of taxes).
In August 2001, FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which supersedes, but does
not replace, SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and For Long-Lived Assets to be Disposed Of", as well as other
earlier related pronouncements, either in whole or in part. SFAS No. 144
18
is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and interim periods within those fiscal years, with
earlier application is encouraged. The adoption of this statement did not
have a significant effect on the Company's financial position, results of
operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements 4, 44 and 64, Amendment to FASB Statement 13, and Technical
Corrections". One of the major changes of this Statement is to change the
accounting for the classification of gains and losses from the
extinguishment of debt. Currently, the Company does not have any
circumstances that would make this Statement relevant.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This Statement requires
recording costs associated with exit or disposal activities at their fair
values when a liability has been incurred. Under previous guidance, certain
exit costs were accrued upon management's commitment to an exit plan, which
is generally before a liability has been actually incurred. Adoption of
this Statement is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. Currently, the Company does
not have any existing circumstances that would make this Statement
relevant.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others," an interpretation
of SFAS Nos. 5, 57 and 107 and rescission of FASB Interpretation No. 34.
The interpretation requires certain disclosures to be made by a guarantor
about its obligations under certain guarantees that is issued. The Company
does not have existing circumstances that would make this Interpretation
relevant.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation-Transition and Disclosure," an amendment of FASB
Statement No. 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-
based employee compensation. In addition, this statement amends the
disclosure requirements of Statement 123 to require prominent disclosures
in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company has adopted the disclosure
provisions of SFAS No. 148.
In January 2003, the FASB issued Financial Interpretation ("FIN") No.
46, "Consolidation of Variable Interest Entities." FIN No. 46 provides
accounting guidance for consolidating of off-balance sheet entities with
certain characteristics (variable interest entities). The consolidation
requirements apply to variable interest entities created after January 31,
2003 and to variable interest entities in which the Company maintains an
interest after June 30, 2003. The Company does not have existing
circumstances that would make this statement relevant.
19
RECENT EVENTS
_____________
As previously reported, on April 16, 2002, the Company announced that
the previously-formed Special Committee (consisting of two outside
directors) had accepted a bid by a management led group. This initial bid
was to purchase all of the Company's common stock at $4 per share in cash,
which offer was later revised to $4.50 per share with $3.25 to be paid in
cash, and $1.25 to be paid by a 42-month, unsecured debt instrument
providing for interest at an annual rate of 4 1/2%. A separate payment
fund, in an amount equal to 50% of the aggregate principal and interest
amount due under the debt instrument, will be established by the management
group to fund its payment obligations thereunder. The management group bid
is subject to various conditions, including obtaining adequate financing.
The management group is currently negotiating with lenders to obtain
financing necessary for the transaction. There is no assurance that the
group will be able to obtain such financing on acceptable terms or that the
transaction will be consummated.
In late 2001 and during 2002 the Special Committee received from
Curtis Rudolph, a shareholder of the Company, an indication of his interest
in acquiring the Company; however, no offer was forthcoming. In November
2002, Mr. Rudolph initiated an action in Florida state court (Broward
County, Florida) seeking to obtain a review of certain "books and records"
of the Company to which he claimed he was entitled as a shareholder of the
Company (See Item 3. Legal Proceedings). The Company had previously denied
him access to those books and records due to his unwillingness to sign a non-
disclosure agreement relating to the Company's non-public information in
the standard form required of other potential bidders for the Company. In
January 2003, pursuant to a settlement agreement with the Company, Mr.
Rudolph agreed to execute the non-disclosure agreement.
By letter dated January 13, 2003, Mr. Rudolph reiterated his interest
in making a proposal to acquire the Company. On or about February 14,
2003, Mr. Rudolph submitted an unexecuted proposal to acquire substantially
all of the assets and assume certain liabilities of the Company. The
Special Committee rejected this proposal as it was unexecuted, contained
certain unacceptable terms, was subject to unacceptable conditions, and was
structured as an asset purchase rather than a stock purchase. In
particular, the asset purchase structure presented substantial negative tax
consequences to the Company and its shareholders and was deemed
impractical. Under the circumstances, the Special Committee determined Mr.
Rudolph's proposal to not be in the best interests of the Company's
shareholders. The Board of Directors, through its Special Committee, has
continued to negotiate with Mr. Rudolph, but no further offer has been
forthcoming.
CURRENT TRENDS
______________
The Company has had a broad-based increase in net sales for the first
quarter of 2003, primarily as a result of the current war in the Middle
East and the impact it is having on net sales of Quinsana Medicated Talc, a
20
branded retail item. Quinsana is experiencing a significant increase in
net sales and as a result, net sales for this brand in the first quarter of
2003 were in excess of total net sales for this product for the entire
prior year. Net sales is anticipated to be over 10% higher than the
corresponding first quarter of 2001. There can be no assurances, however,
that this trend will continue, nor that continuing market pricing pressures
will not arise with respect to these sales.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
__________________________________________
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States of
America ("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 significantly from those estimates if different assumptions were
used or different events ultimately transpire. We believe that the
following are the most critical accounting policies that requires
management to make difficult, subjective and/or complex judgments, often
due to a need to make estimates about matters that are inherently
uncertain:
VALUATION OF ACCOUNTS RECEIVABLE: The ultimate amount of collections
received against outstanding accounts receivable must take into account
returns, allowances and deductions that may be made by our customers. Many
retailers to whom we sell products take deductions for various forms of
marketing expenses, as well as participating in nationwide reclamation
cooperatives for processing damaged goods. Other expenses to which we are
subject to, in addition to those experienced in the retail environment (but
also with Professional products sold to distributors) include deductions
for freight if the invoice is paid within specified terms, co-op
advertising allowances, new store/warehouse allowances and, from time to
time, limited rebate programs. We attempt to estimate these costs, as well
as providing for anticipated bad debts, by recording allowances based upon
our experience, economic conditions, normal customer inventory levels
and/or competitive conditions. Actual returns, credits or allowances, as
well as the condition of any product actually returned, may differ
significantly from the estimates used by the Company.
INVENTORIES: Inventories are stated at the lower of cost, determined
by the first-in, first-out (FIFO) method, or market. We periodically
evaluate inventory levels, giving consideration to factors such as the
physical condition of the goods, the sales patterns of finished goods and
the useful life of particular packaging, componentry and finished goods and
estimates a reasonable amount to be provided for slow moving, obsolete or
damaged inventory. These estimates could vary significantly, either
favorably or unfavorably, from actual requirements based upon future
economic conditions, customer inventory levels or competitive factors that
were not foreseen or did not exist when the valuation allowances were
established.
21
IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL: The Company
periodically evaluates whether events or circumstances have occurred that
would indicate that long-lived assets may not be recoverable or that the
remaining useful life may be impaired. When such events or circumstances
are present, the Company assesses the recoverability of long-lived assets
by determining whether the carrying value will be recovered through the
expected future cash flows resulting from the use of the asset. If the
results of this testing indicates an impairment of the carrying value of
the asset, an impairment loss equal to the excess of the asset's carrying
value over its fair value is recorded. The long-term nature of these assets
requires the estimation of its cash inflows and outflows several years into
the future and only takes into consideration circumstances known at the
time of the impairment test.
In accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets," goodwill and other intangible assets are to be evaluated for
impairment on an annual basis, and between annual tests, whenever events or
circumstances indicate that the carrying value of an asset may exceed its
fair value. The use of various acceptable and appropriate methods of
valuation requires the use of long-term planning forecasts and assumptions
regarding industry-specific economic conditions that are outside the
control of the Company.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
The Company does not own or maintain an interest 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 consolidated financial statements and
supplementary data contained elsewhere in this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
22
PART III
The information required by Part III of this Form 10-K (Items 10-13)
is incorporated herein by reference from the Registrant's proxy statement
with respect to the Company's 2003 annual meeting of stockholders scheduled
to be filed with the Securities and Exchange Commission no later than April
30, 2003.
Item 14: Controls and Procedures
As of a date within 90 days of the filing date of this annual report,
an evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures was performed under the
supervision and with the participation of the Company's management,
including the chief executive officer and principal financial officer.
Based on that evaluation, the Company's management, including the chief
executive officer and chief financial officer, concluded that the Company's
disclosure controls and procedures were effective as of the evaluation
date. Subsequent to the evaluation date, there have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect internal controls.
23
PART IV
Item 15. 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.
24
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.
10.13 1990 Key Employee Stock Incentive Plan, as amended.
10.14 1990 Non-Employee (Outside Directors) Plan, as amended.
99.1 Chief Executive Officer Certification pursuant to
Section 906 of the Sarbanes Oxley Act of 2002.
99.2 Chief Financial Officer Certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Financial Statements and Financial Statement Schedules
(i) Financial Statements
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 2002
and 2001.
Consolidated Statements of Operations for the years
ended December 31, 2002, 2001, and 2000.
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 2002, 2001,
and 2000.
Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2001, and 2000.
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.
25
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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United
States of America.
As discussed in Notes 1 and 5 to the consolidated financial statements, the
Company changed its method of accounting for goodwill and other intangible
assets in 2002 to conform to Statement of Financial Accounting Standards
No. 142.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
April 11, 2003
F-1
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
ASSETS
2002 2001
___________ ___________
CURRENT ASSETS
Cash and cash equivalents $10,785,995 $ 8,409,142
Accounts receivable, net 1,451,299 1,808,828
Inventories 7,623,764 9,286,295
Income taxes receivable 65,378 345,220
Prepaid expenses
and other current assets 357,829 266,460
___________ ___________
TOTAL CURRENT ASSETS 20,284,265 20,115,945
CERTIFICATES OF DEPOSIT 6,752,500 7,585,000
PROPERTY, PLANT AND EQUIPMENT, net 2,004,465 2,308,003
INTANGIBLE ASSETS, net 14,914,154 23,432,105
OTHER ASSETS 3,699,657 3,621,103
___________ ___________
TOTAL ASSETS $47,655,041 $57,062,156
=========== ===========
See notes to consolidated financial statements.
F-2
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
LIABILITIES AND STOCKHOLDERS' EQUITY
2002 2001
___________ ____________
CURRENT LIABILITIES
Accounts payable and
accrued expenses $ 2,018,236 $2,560,051
Current portion of
long-term debt 1,496,147 1,507,256
___________ ___________
TOTAL CURRENT LIABILITIES 3,514,383 4,067,307
DEFERRED INCOME TAXES, net 655,773 1,535,285
LONG-TERM DEBT, less current
maturities 6,395,443 7,758,370
___________ ___________
TOTAL LIABILITIES 10,565,599 13,360,962
___________ ___________
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value;
1,000,000 shares authorized; none issued - -
Common stock, $.01 par value;
25,000,000 shares authorized;
4,410,577 issued at December 31,
2002 and 2001 44,106 44,106
Additional paid in capital 18,417,080 18,417,080
Retained earnings 19,979,819 26,591,571
___________ ___________
38,441,005 45,052,757
LESS:
125,000 CONTINGENTLY
RETURNABLE SHARES (1,351,563) (1,351,563)
___________ ___________
TOTAL STOCKHOLDERS' EQUITY 37,089,442 43,701,194
___________ ___________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $47,655,041 $57,062,156
=========== ===========
See notes to consolidated financial statements.
F-3
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
___________ ___________ ___________
NET SALES $25,066,950 $28,296,312 $31,137,782
COST OF GOODS SOLD 15,206,352 16,243,428 18,506,860
___________ ___________ ___________
GROSS PROFIT 9,860,598 12,052,884 12,630,922
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 8,509,114 11,363,190 11,652,923
___________ ___________ ___________
OPERATING INCOME 1,351,484 689,694 977,999
OTHER INCOME(EXPENSE)
Interest income 378,441 579,866 724,728
Interest expense (479,125) (698,207) (871,853)
Royalty income 148,750 175,000 175,000
___________ __________ ___________
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 1,399,550 746,353 1,005,874
INCOME TAX EXPENSE 896,880 138,398 383,647
___________ __________ ___________
INCOME BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 502,670 607,955 622,227
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET OF
TAX BENEFIT OF $1,662,911 (6,761,576) - -
___________ __________ ___________
NET (LOSS)/INCOME $(6,258,906) $ 607,955 $ 622,227
=========== ========== ===========
BASIC AND DILUTED (LOSS)/
EARNINGS PER SHARE:
INCOME BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE .12 .14 .14
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE (1.58) - -
___________ __________ ___________
BASIC AND DILUTED (LOSS)/
EARNINGS PER SHARE $ (1.46) $ .14 $ .14
=========== ========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,285,577 4,285,577 4,385,019
=========== ========== ===========
See notes to consolidated financial statements.
F-4
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Common Stock Additional Contingently
____________________ Paid in Retained Returnable Treasury
Shares Par Value Capital Earnings Shares Stock
__________ _________ ___________ ___________ ____________ _________
Balances,
Jan. 1,
2000 4,660,958 $ 46,610 $19,404,559 $26,075,919 $(1,351,563) $(326,734)
Treasury
stock
purchased - - - - - (663,249)
Treasury
stock
retired (234,061) (2,341) (927,218) - - 929,559
Dividends
paid - - - (361,683) - -
Net
income - - - 622,227 - -
_________ _________ __________ __________ __________ _________
Balances,
Dec. 31,
2000 4,426,897 44,269 18,477,341 26,336,463 (1,351,563) (60,424)
Treasury
stock
retired (16,320) (163) (60,261) - - 60,424
Dividends
paid - - - (352,847) - -
Net
income - - - 607,955 - -
_________ ________ ___________ ___________ ___________ _________
Balances,
Dec. 31,
2001, 410,577 44,106 18,417,080 26,591,571 (1,351,563) -
Dividends
paid - - - (352,846) - -
Net loss - - - (6,258,906) - -
_________ ________ ___________ ___________ ___________ _________
Balances,
Dec. 31,
2002 4,410,577 $ 44,106 $18,417,080 $19,979,819 $(1,351,563) $ -
========= ======== =========== =========== =========== =========
See notes to consolidated financial statements.
F-5
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
2002 2001 2000
__________ __________ __________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)/income $(6,258,906) $ 607,955 $ 622,227
___________ ___________ __________
Adjustments to reconcile net (loss)/
income to net cash flows provided
by/(used in) operating activities:
Depreciation 333,632 394,556 423,077
Amortization of intangibles 93,464 1,353,568 1,190,232
Amortization of other assets - 146,137 102,014
Deferred income
tax (benefit)/provision (879,512) (142,520) 234,855
Provision for doubtful accounts 80,725 131,164 97,627
Impairment loss on goodwill 8,424,487 - -
Changes in operating assets
and liabilities:
Accounts receivable 276,804 1,086,561 (230,565)
Inventories 1,662,531 1,091,556 1,576,340
Income taxes receivable 279,842 682,892 (898,972)
Prepaid expenses
and other current assets (91,369) (59,399) 83,949
Certificates of deposit 832,500 (7,585,000) -
Other assets (78,554) (551,392) 14,846
Accounts payable
and accrued expenses (541,815) (441,669) 1,145,051
__________ _________ _________
Total adjustments 10,392,735 (3,893,546) 3,738,454
__________ _________ _________
Net cash flows provided by/(used
in) operating activities 4,133,829 (3,285,591) 4,360,681
__________ _________ _________
See notes to consolidated financial statements.
F-6
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
2002 2001 2000
__________ __________ __________
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant
and equipment (30,094) (85,038) (140,879)
Purchase of intangible assets - (49,070) (71,096)
_________ ________ __________
Net cash flows used in
investing activities ( 30,094) (134,108) (211,975)
_________ ________ __________
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (1,374,036) (9,517,580) (1,643,710)
Proceeds from notes payable
to bank - 8,140,000 -
Acquisition of treasury stock - - (663,249)
Dividends paid (352,846) (352,847) (361,683)
___________ ___________ ___________
Net cash flows used in
financing activities (1,726,882) (1,730,427) (2,668,642)
___________ ___________ ___________
NET INCREASE/(DECREASE) IN
CASH AND CASH EQUIVALENTS 2,376,853 (5,150,126) 1,480,064
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 8,409,142 13,559,268 12,079,204
___________ ___________ ___________
CASH AND CASH EQUIVALENTS,
END OF PERIOD $10,785,995 $ 8,409,142 $13,559,268
=========== =========== ===========
See notes to consolidated financial statements.
F-7
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Supplemental Disclosures of Cash Flow Information:
2002 2001 2000
__________ __________ __________
Interest paid $ 448,650 $ 651,533 $ 809,804
========== ========== ==========
Income taxes paid $ 212,324 $ 100,614 $1,422,013
========== ========== ==========
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
For the year ended December 31, 2000, equipment costing $99,340 was
purchased from a customer and the purchase price was applied against the
outstanding account receivable.
For the years ended December 31, 2001 and 2000, 16,320 and 234,061 shares
of treasury stock, respectively, were retired.
See notes to consolidated financial statements.
F-8
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
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 signifi-
cant 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
principally 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 9, 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 accounting principles generally accepted in
the United States of America ("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: There were no sales to any single customer in
excess of 10% of net sales in 2002. 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 large customer could have an adverse effect on the Company.
GOODWILL and OTHER INTANGIBLE ASSETS: Goodwill is the excess of
the purchase price over the fair value of identifiable assets acquired in
transactions accounted for as a purchase. The Company adopted SFAS No.
142, "Goodwill and Other Intangible Assets" on January 1, 2002. Goodwill
and trademarks having indefinite lives, which were being amortized over
various periods, are no longer being amortized and in accordance with SFAS
No. 142, are now subject to periodic testing for impairment. Deferred
acquisition costs that have definite lives are continuing to be amortized
over their estimated useful lives of 10 years. Goodwill and trademarks of
a reporting unit (as defined in SFAS No. 142) are tested for impairment on
an annual basis at a minimum, or as circumstances dictate. As a result of
F-9
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
implementing SFAS No. 142, the Company incurred a $6,762,000 impairment
charge (net of an income tax benefit of $1,663,000) in 2002.
IMPAIRMENT OF LONG-LIVED ASSETS: Long-lived assets are reviewed
for impairment whenever events or changes in circumstances warrant, which
may be an indication that the carrying value of the asset may ultimately be
unrecoverable. The Company uses fair value methods to determine the amount
of impairment, if any. If necessary, an impairment loss equal to the
difference between the asset's fair value and its carrying value is
recognized.
STOCK-BASED COMPENSATION: SFAS No. 123, "Accounting for Stock-
Based Compensation", permits entities to recognize as an expense over the
vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 allows entities to continue to measure
compensation cost for stock-based awards using the intrinsic value based
method of accounting prescribed by Accounting Principles Board ("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. There were no
stock based compensation charges in operations during 2002, 2001 or 2000.
The following table illustrates the effect on net (loss)/income and
net loss)/income per share as if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensation
(in thousands, except per share data):
2002 2001 2000
________ ________ ________
Net (loss)/income, as reported $ (6,259) $ 608 $ 622
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects 65 76 318
________ ________ _______
Pro forma net (loss)/income $ (6,324) $ 532 $ 304
======== ======== =======
Net (loss)/income per share:
As reported $(1.46) $ .14 $ .14
Pro forma $(1.48) $ .12 $ .07
F-10
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS: SFAS 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, 2002 and 2001 there were no significant differences
in the carrying values and fair market values of financial instruments.
REVENUE RECOGNITION: Revenue is recognized when all significant
contractual obligations have been satisfied, which involves the delivery of
manufactured goods and reasonable assurance as to the collectability of the
resulting account receivable.
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. 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, 2002 and 2001 were
approximately $10,121,000 and $7,257,000, respectively. At December 31,
2002 and 2001, the Company excluded certificates of deposit in the amount
of $6,752,500 and $7,585,000, respectively, from the above as they are
pledged as collateral for a bank loan.
INVENTORIES: Inventories are stated at the lower of cost
(determined on the first-in, first-out basis) or market. Direct labor and
overhead costs charged to inventories for the years ended December 31, 2002
and 2001 were approximately $2,614,000 and $2,838,000, respectively. Direct
labor and overhead costs capitalized in inventories as of December 31, 2002
and 2001 were approximately $1,257,000 and $1,443,000, respectively.
F-11
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
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/(loss) by the weighted
average number of shares of common stock outstanding. For the years ended
December 31, 2002, 2001 and 2000, the Company had 672,120, 743,648 and
739,524 outstanding stock options, respectively. None of these options
were included in the calculation of earnings per share because their
inclusion would be anti-dilutive.
NEW FINANCIAL ACCOUNTING STANDARDS: In June 2001, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets".
These standards made changes to the accounting for business combinations,
goodwill and intangible assets. SFAS No. 141 requires all business
combinations entered into subsequent to June 30, 2001 to be accounted for
using the purchase method of accounting. SFAS No. 142 provides that
goodwill and other intangible assets with indefinite lives will not be
amortized, but will be tested for impairment at least annually. SFAS No.
142 is effective for years beginning after December 15, 2001. Goodwill and
intangible assets acquired subsequent to June 30, 2001 are immediately
subject to the provisions of SFAS No. 142. The Company adopted SFAS No.
142 on January 1, 2002. SFAS No. 142 requires that goodwill be tested for
impairment at the reporting unit level upon adoption and at least annually
thereafter. The initial step requires that the Company determine the fair
value of each reporting unit and compare it to the carrying value,
including goodwill, of the reporting unit. If the fair value exceeds the
carrying value, no impairment loss would be recognized. However, if the
carrying value of the reporting unit exceeds its fair value, the goodwill
of the reporting unit may be impaired. The amount, if any, of the
impairment would then be measured in the second step (See Note 5).
In August 2001, FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which supersedes, but does
not replace, SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", as well as other
earlier related pronouncements, either in whole or in part. SFAS No. 144 is
F-12
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
effective for financial statements issued for fiscal years beginning after
December 15, 2001 and interim periods within those fiscal years. The
adoption of this statement did not have a significant effect on the
Company's financial position, results of operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements 4, 44 and 64, Amendment to FASB Statement 13, and Technical
Corrections". One of the major changes of this Statement is to change the
accounting for the classification of gains and losses from the
extinguishment of debt. Currently, the Company does not have any
circumstances that would make this Statement relevant.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This Statement requires
recording costs associated with exit or disposal activities at their fair
values when a liability has been incurred. Under previous guidance, certain
exit costs were accrued upon management's commitment to an exit plan, which
is generally before a liability has been actually incurred. Adoption of
this Statement is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. Currently, the Company does
not have any existing circumstances that would make this Statement
relevant.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others," an interpretation
of SFAS Nos. 5, 57 and 107 and rescission of FASB Interpretation No. 34.
The interpretation requires certain disclosures to be made by a guarantor
about its obligations under certain guarantees that is issued. The Company
does not have existing circumstances that would make this Interpretation
relevant.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation-Transition and Disclosure," an amendment of FASB
Statement No. 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-
based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures
in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company has adopted the disclosure
provisions of SFAS No. 148.
In January 2003, the FASB issued Financial Interpretation ("FIN") No.
46, "Consolidation of Variable Interest Entities." FIN No. 46 provides
accounting guidance for consolidating of off-balance sheet entities with
certain characteristics (variable interest entities). The consolidation
requirements apply to variable interest entities created after January 31,
2003 and to variable interest entities in which the Company maintains an
interest after June 30, 2003. The Company does not have existing
circumstances that would make this Statement relevant.
F-13
NOTE 2. ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 2002 and 2001 consisted of the
following:
2002 2001
__________ __________
Trade accounts receivable $1,614,580 $1,961,053
Less: Allowance for
doubtful accounts (163,281) (152,225)
__________ __________
Accounts receivable, net $1,451,299 $1,808,828
========== ==========
The following is an analysis of the allowance for doubtful accounts
for the year ended December 31:
2002 2001 2000
_________ _________ _________
Balance, beginning of year $ 152,225 $ 105,002 $ 125,846
Provision for doubtful
accounts 80,725 131,164 97,627
Uncollectible accounts
written off, net of recoveries (69,669) (83,941) (118,471)
_________ _________ _________
Balance, end of year $ 163,281 $ 152,225 $ 105,002
========= ========= =========
NOTE 3. INVENTORIES
Inventories at December 31, 2002 and 2001 consisted of the following:
2002 2001
____________ ____________
Raw materials $ 2,162,273 $ 3,180,670
Packaging and components 3,100,917 3,448,541
Work in progress 328,976 341,507
Finished goods 5,579,290 5,502,599
____________ ____________
11,171,456 12,473,317
Less: Amount included
in other assets (3,547,692) (3,187,022)
____________ ____________
Balance, end of year $ 7,623,764 $ 9,286,295
============ ============
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
become 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 within
one year.
F-14
NOTE 4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment at December 31, 2002 and 2001 consisted
of the following:
2002 2001
__________ ___________
Land $ 379,627 $ 379,627
Buildings and improvements 2,129,570 2,094,046
Machinery and equipment 1,934,774 1,950,866
Furniture and office equipment 526,762 554,948
__________ __________
4,970,733 4,979,487
Less: accumulated depreciation (2,966,268) (2,671,484)
__________ __________
Balance, end of year $2,004,465 $2,308,003
========== ==========
NOTE 5. INTANGIBLE ASSETS
Intangible assets at December 31, 2002 and 2001 consisted of the
following:
2002 2001
___________ ___________
Goodwill $ 8,311,359 $10,932,135
Trademarks 13,370,762 19,117,395
Deferred acquisition costs 964,529 1,021,607
___________ ___________
22,646,650 31,071,137
Less: accumulated amortization (7,732,496) (7,639,032)
___________ ___________
Balance, end of year $14,914,154 $23,432,105
=========== ===========
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 142 provides that goodwill and other
intangible assets with indefinite lives will not be amortized, but will be
tested for impairment at least annually. The Company adopted SFAS No. 142
on January 1, 2002. SFAS No. 142 requires that goodwill and other
intangible assets be tested for impairment upon adoption and at least
annually thereafter.
As a result of the impairment review mandated by SFAS No. 142, the
Company determined that the carrying value of certain goodwill and other
intangible assets with indefinite lives was impaired, decreasing the
carrying value of goodwill and other such intangible assets by
approximately $8,424,000 ($6,762,000, net of taxes).
The above impairment charge impacted several different subsidiaries
and divisions. Based upon information available to the Company, in
general, goodwill and trademark valuations were performed using present
value techniques involving estimates of future cash flows. The changes
F-15
NOTE 5. INTANGIBLE ASSETS (Continued)
in the carrying amount of goodwill and trademarks, by segment impacted, for
the year ended December 31, 2002 can be summarized as follows (in
thousands, except per share data):
Total Professional Retail
_________ ____________ ________
Balance, December 31, 2001 $ 31,071 $ 12,796 $ 18,275
Goodwill and trademark
impairment for 2002 (8,424) (3,440) (4,984)
________ ________ ________
Balance, December 31, 2002 $ 22,647 $ 9,356 $ 13,291
======== ======== ========
Amortization of goodwill and other intangible assets ceased upon
adoption of SFAS No. 142 on January 1, 2002. The table below reflects the
impact of the implementation of SFAS No. 142 for the years ended December
31, 2002, 2001 and 2000 (in thousands, except per share data):
2002 2001 2000
_______ ______ ______
Income before cumulative effect of change
in accounting principle (as reported) $ 503 $ 608 $ 622
After tax goodwill amortization - 1,026 682
_______ ______ ______
Adjusted income before cumulative effect
of change in accounting principle $ 503 $1,634 $1,304
======= ====== ======
Income per share before cumulative effect
of change in accounting principle
(as reported) (basic and diluted) $ .12 $ .14 $ .14
======= ====== ======
Pro forma basic and diluted
earnings per share before
cumulative effect of change
in accounting principle $ .12 $ .38 $ .30
====== ====== ======
Amortization expense for other intangible assets, recorded as of December
31, 2002, 2001 and 2000 was $93,000, $98,000 and $88,000. Amortization
expense for other intangible assets, recorded as of December 31, 2002, for
the years ended December 31, 2003 through 2007 is anticipated to be as
follows: 2003: $93,000; 2004: $84,000; 2005: $82,000; 2006: $66,000; 2007:
$66,000.
F-16
NOTE 6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 2002 and 2001
consisted of the following:
2002 2001
___________ ___________
Accounts payable $ 486,262 $ 824,864
Accrued marketing expenses 673,125 613,166
Accrued payroll and bonuses 272,254 651,877
Accrued legal and professional fees 285,401 249,479
Other accrued expenses 301,194 220,665
___________ ___________
Balance, end of year $ 2,018,236 $ 2,560,051
=========== ===========
NOTE 7. LONG-TERM DEBT
Long-term debt at December 31, 2002 and 2001 consisted of the
following:
2002 2001
____________ ____________
2.66% note payable to bank, principal
of $92,500 plus interest due monthly
through August 2, 2006; collateralized
by a security interest in a certificate
of deposit of like amount, which bears
interest at 50 basis points below the
interest charged on the note. $ 6,567,500 $ 7,677,500
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 brand trade-
marks acquired from Colgate-Palmolive,
with a net carrying value of
approximately $7,300,000. 1,324,090 1,588,126
___________ ___________
7,891,590 9,265,626
Less: current portion (1,496,147) (1,507,256)
___________ ___________
Long-term debt $ 6,395,443 $ 7,758,370
=========== ===========
At December 31, 2002, approximate maturities of long-term debt are
$1,496,000 in 2003, $2,048,000 in 2004, $1,110,000 in 2005 and $3,237,000
in 2006.
F-17
NOTE 8. INCOME TAXES
The (benefit)/provision for income taxes is comprised of the following
for the years ended December 31:
2002 2001 2000
___________ ___________ ___________
Current Tax:
Federal $ - $ 213,843 $ 162,680
State 113,482 67,075 (13,888)
___________ ___________ ___________
Total Current 113,482 280,918 148,792
___________ ___________ ___________
Deferred Tax:
Federal 703,396 (83,715) 181,917
State 80,002 (58,805) 52,938
___________ ___________ ___________
Total Deferred 783,398 (142,520) 234,855
___________ ___________ ___________
Total provision
for income
taxes $ 896,880 $ 138,398 $ 383,647
=========== =========== ===========
The tax benefit of $1,663,000 resulting from the cumulative effect
of a change in accounting principle is deferred in its entirety and is
reduced by the current year's tax provision of $897,000, resulting in
a net tax benefit for the year ended December 31, 2002 of $766,000.
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 income tax liability in the accompanying consolidated
balance sheets includes deferred tax assets and liabilities attributable to
the following items:
2002 2001
__________ ___________
Net operating losses $ (105,900)
Accounts receivable allowances (64,496) $ (60,129)
Property, plant and equipment 68,758 101,792
Amortization of intangibles 984,776 2,048,920
Charitable contribution
carryforward (268,359) (282,793)
State income taxes (34,912) (83,162)
Accrued liabilities and other (192,453) (189,343)
__________ ___________
387,414 1,535,285
Valuation allowance 268,359 -
__________ ___________
Deferred income tax liability, net $ 655,773 $ 1,535,285
========== ===========
F-18
NOTE 8. 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:
2002 2001 2000
______ ______ ______
Amount computed on pretax income 35.0% 35.0% 35.0%
Increase(decrease) in taxes:
State income taxes, net of
federal tax benefit 9.1 .7 2.6
Change in valuation allowance 19.2 - -
Goodwill .2 16.8 7.1
Benefit of graduated rates (1.0) (1.0) (1.0)
Tax exempt interest (1.8) (3.3) (4.0)
Other 3.3 (29.7) (1.6)
_____ _____ _____
Total income tax 64.0% 18.5% 38.1%
===== ===== =====
For the year ended December 31, 2002, the tax provision was increased
by approximately $268,000 in order to provide for the likelihood that the
Company's charitable contribution carryforward will expire unused.
For the year ended December 31, 2001, the tax provision was reduced by
approximately $210,000 due to a reduction for tax liabilities which are no
longer required.
NOTE 9. 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 a customer base of distributors that purchase the Company's hair
products and beauty and barber supplies for sale to salons and barbershops.
The customer base for the Retail segment is mass merchandisers, chain drug
stores and supermarkets that sell the product to the end user. The
Manufacturing segment manufactures products for 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:
F-19
NOTE 9. SEGMENT INFORMATION (Continued)
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE
NET SALES IN ACCOUNTING PRINCIPLE
________________________ ______________________________
2002 2001 2000 2002 2001 2000
_______________________ ______________________________
Professional $17,891 $19,752 $20,393 $ 1,081 $ 379 $ 1,011
Retail 6,728 6,496 8,969 885 596 1,265
Manufacturing 7,144 9,358 8,330 (29) 325 (621)
_______ _______ _______ _______ _______ _______
Total 31,763 35,606 37,692 1,937 1,300 1,655
Intercompany
Manufacturing (6,696) (7,310) (6,554) (537) (554) (649)
_______ _______ _______ _______ _______ _______
Consolidated $25,067 $28,296 $31,138 $ 1,400 $ 746 $ 1,006
======= ======= ======= ======= ======= =======
INTEREST INCOME INTEREST EXPENSE
_______________________ __________________________
2002 2001 2000 2002 2001 2000
_______________________ __________________________
Professional $ 233 $ 316 $ 338 $ 270 $ 388 $ 387
Retail 95 150 310 201 292 465
Manufacturing 50 114 77 8 18 20
______ ______ ______ ______ ______ ______
Total $ 378 $ 580 $ 725 $ 479 $ 698 $ 872
====== ====== ====== ====== ====== ======
DEPRECIATION AND
AMORTIZATION TOTAL ASSETS
______________________ _________________
2002 2001 2000 2002 2001
______________________ _________________
Professional $ 135 $ 941 $ 882 $15,284 $17,963
Retail 43 799 744 20,280 24,574
Manufacturing 249 154 89 12,091 14,525
_______ _______ ______ _______ _______
Total $ 427 $1,894 $1,715 $47,655 $57,062
======= ======= ====== ======= =======
The accounting policies used for each of the segments are the same as
those used for the Company generally, and are described in the summary of
significant accounting policies in Note 1. Included in Manufacturing net
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.
F-20
NOTE 10. COMMITMENTS AND CONTINGENCIES
The Company has entered into employment agreements with certain
officers. These agreements, which expire on various dates through January
2006, provide for incentive bonuses based on consolidated income before
taxes or earnings per share. No significant bonuses were paid in the years
2000 through 2002.
Annual rent payments due under non-cancelable operating leases at
December 31, 2002 are:
2003 $ 209,600
2004 209,600
2005 104,800
__________
$ 524,000
==========
Annual rent expense for each of the last three years is as follows:
2002 $600,800
2001 624,400
2000 579,300
Included in rent expense above for the years ended December 31, 2002,
2001 and 2000 is $179,000, $191,000 and $192,000, respectively, paid to
Shaheen & Co., Inc., the former owner of Morris Flamingo. Shouky A.
Shaheen, a minority owner of Shaheen & Co., Inc., is currently a member of
the Board of Directors and a significant shareholder of the Company.
In addition to the matters set forth below, the Company is involved in
other litigation arising in the normal course of business. It is the
opinion of management that none of such matters, at December 31, 2002,
would likely, if adversely determined, have a material adverse effect on
the Company's financial position, results of operations or cash flows.
The United States Court of Appeals for the Ninth Circuit entered an
order on April 29, 2002 that, among other things, reversed the judgment of
the United States District Court granting summary judgment in favor of New
Image Laboratories, Inc. ("New Image") against the Company on New Image's
contract claim for a price adjustment and on New Image's claim of breach of
the implied covenant of good faith and fair dealing. In addition, the
Ninth Circuit's opinion affirmed the lower court's ruling that on the
present record New Image is not entitled to (i) damages equal to the
diminution in the value of the Company's common stock price between the
scheduled and actual disbursement dates or (ii) any attorney's fees. As a
consequence of the Ninth Circuit's decision, the judgment granting New
Image all 125,000 shares of the Company's common stock being held in escrow
has been reversed and the case has been remanded back to the United States
District Court for further proceedings. On May 28, 2002, New Image filed a
Motion for Rehearing with the Ninth Circuit Court of Appeals and on June
26, 2002, the Court denied the petition for rehearing. A pretrial hearing
has been scheduled for the early part of 2003 in connection with the
remaining claims of the parties to the litigation.
F-21
NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)
On November 1, 2001, a private label customer filed a lawsuit against
the Company alleging causes of action for breach of contract, declaratory
judgment, and trademark infringement. The Company denied the allegations
and has counter-sued the customer. The counterclaim seeks unspecified
compensatory damages, interest, attorneys fees, costs and other relief on
the breach of contract and anticipatory breach claims and, in excess of
$400,000 on the account stated claim. At this time, the Company is unable
to predict the outcome of this matter.
In November 2001, the Company filed a claim with the U.S. Department
of Transportation ("DOT") in the 13th Judicial Circuit Court of
Hillsborough County, Florida, in connection with the DOT's widening of
Interstate Highway 4, which the Company alleged will result in the loss of
an adjacent rental facility utilized by one of the Company's subsidiaries.
At a hearing held on August 2, 2002, the Company was successful in
asserting a position that would allow for damages to be paid to the Company
by the DOT. The case has been scheduled for mediation in May 2003, where it
is anticipated that the Company could receive a material damage award.
After consultation with legal counsel at this time, the Company is
presently unable to accurately predict the amount or type of recovery that
will result therefrom.
In November 2002, a stockholder filed a lawsuit in the Circuit Court
for the 17th Circuit of Florida in and for Broward County, styled Joan
Rosoff v. Frank F. Ferola, Shouky Shaheen, Leonard A. Genovese, Curtis
Carlson, John DePinto, Thomas M. D'Ambrosio and The Stephan Co., Case
Number 0222253, against the Company alleging certain breaches of fiduciary
duties and responsibilities. The Company has filed a motion to dismiss the
lawsuit. The Company believes it has meritorious defenses.
As previously reported, on April 16, 2002, the Company announced that
the previously-formed Special Committee (consisting of two outside
directors) had accepted a bid by a management led group. This initial bid
was to purchase all of the Company's common stock at $4 per share in cash,
which offer was later revised to $4.50 per share with $3.25 to be paid in
cash, and $1.25 to be paid by a 42-month, unsecured debt instrument
providing for interest at an annual rate of 4 1/2%. A separate payment
fund, in an amount equal to 50% of the aggregate principal and interest
amount due under the debt instrument, will be established by the management
group to fund its payment obligations thereunder. The management group bid
is subject to various conditions, including obtaining adequate financing.
The management group is currently negotiating with lenders to obtain
financing necessary for the transaction. There is no assurance that the
group will be able to obtain such financing on acceptable terms or that the
transaction will be consummated.
In late 2001 and during 2002 the Special Committee received from
Curtis Rudolph, a shareholder of the Company, an indication of his interest
in acquiring the Company; however, no offer was forthcoming. In November
2002, Mr. Rudolph initiated an action in Florida state court (Broward
County, Florida) seeking to obtain a review of certain "books and records"
of the Company to which he claimed he was entitled as a shareholder of the
F-22
NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)
Company (See Item 3. Legal Proceedings). The Company had previously denied
him access to those books and records due to his unwillingness to sign a
non-disclosure agreement relating to the Company's non-public information in
the standard form required of other potential bidders for the Company. In
January 2003, pursuant to a settlement agreement with the Company, Mr.
Rudolph agreed to execute the non-disclosure agreement.
By letter dated January 13, 2003, Mr. Rudolph reiterated his interest
in making a proposal to acquire the Company. On or about February 14,
2003, Mr. Rudolph submitted an unexecuted proposal to acquire substantially
all of the assets and assume certain liabilities of the Company. The
Special Committee rejected this proposal as it was unexecuted, contained
certain unacceptable terms, was subject to unacceptable conditions, and was
structured as an asset purchase rather than a stock purchase. In
particular, the asset purchase structure presented substantial negative tax
consequences to the Company and its shareholders and was deemed
impractical. Under the circumstances, the Special Committee determined Mr.
Rudolph's proposal to not be in the best interests of the Company's
shareholders. The Board of Directors, through its Special Committee, has
continued to negotiate with Mr. Rudolph, but no further offer has been
forthcoming.
Independent legal counsel and investment banking advisors were
retained to advise the Special Committee in connection with the
transaction. After incurring approximately $200,000 of expenses through
December 31, 2002, it is estimated that the remaining costs associated with
this process will be in excess of $450,000.
As a result of the length of time for the going private transaction to
be consummated, the Company has not submitted any matters to a vote of its
security holders since the Company's September 1, 2000 Annual Meeting. In
accordance with the rules and regulations of the American Stock Exchange
(AMEX), the Company was required to promptly notify its stockholders and
AMEX, in writing, indicating the reasons for the failure to have a meeting
and to use good faith efforts to ensure that an annual meeting is held as
soon as reasonably practicable. In addition, the current composition of
the Board of Directors and the current composition of the Audit Committee
are in violation of AMEX rules. The continuing non-compliance with these
AMEX rules could subject the Company to civil penalties, in addition to the
possibility that the stock of the Company could be removed from listing.
NOTE 11. CAPITAL STOCK AND STOCK OPTIONS
1,000,000 shares of preferred stock, $0.01 par value are authorized;
however, no shares have been issued.
In 1990, the shareholders of the Company approved the 1990 Key
Employee Stock Incentive Plan, as amended, and the 1990 Non-Employee
(Outside Directors) Plan, as amended, and in 2000, the shareholders
approved a ten-year extension of both plans. The aggregate number of shares
currently authorized pursuant to the Key Employee Plan, as adjusted for
stock splits and shareholder-approved increases in 1994 and 1997, is
F-23
NOTE 11. CAPITAL STOCK AND STOCK OPTIONS (Continued)
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.
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 are exercisable within a maximum of 10 years
from the date of grant. Stock option activity for 2002, 2001, and 2000 is
set forth below:
Key Employee Outside
Incentive Avg. Directors Avg.
Plan Price Plan Price
__________________________________________________________________________
Outstanding at December 31, 1999.. 430,695 $15.17 75,930 $11.05
Granted........................... 268,075 3.87 20,248 4.50
Canceled.......................... (45,300) 9.02 (10,124) 15.50
Exercised......................... - -
__________ __________
Outstanding at December 31, 2000.. 653,470 9.69 86,054 8.98
Granted........................... 70,000 3.00 20,248 3.05
Canceled.......................... (76,000) 14.78 (10,124) 15.75
Exercised......................... - -
__________ __________
Outstanding at December 31, 2001.. 647,470 8.36 96,178 7.02
Granted........................... 70,000 3.00 20,248 3.67
Canceled.......................... (146,590) 8.47 (15,186) 11.23
Exercised......................... - -
__________ __________
Outstanding at December 31, 2002.. 570,880 $ 7.68 101,240 $ 5.72
========== ==========
The number of shares and average exercise price of options
exercisable at December 31, 2002, 2001 and 2000 were 510,880 shares at
$8.23, 568,275 shares at $8.36, and 329,000 shares at $13.17 for the 1990
Key Employee Stock Incentive Plan and 80,992 at $6.23, 75,930 at $7.02, and
65,806 at $10.36 for the Outside Directors Plan, respectively. At December
31, 2002 and 2001, 299,120 and 115,280 respectively, were available for
future grants under the terms of the 1990 Key Employee Stock Incentive Plan
and 101,260 shares and 55,697 shares, respectively, were available for
future grants under the terms of the Outside Directors Plan.
The exercise price range of options outstanding and exercisable for
both the Key Employee Stock Incentive and Outside Directors plans, the
weighted average contractual lives remaining (in years) and the weighted
average exercise price are as follows:
F-24
NOTE 11. CAPITAL STOCK AND STOCK OPTIONS (Continued)
Outstanding Exercisable
____________________________ ___________________
Exercise Number Average Average Number Average
Price Range of shares Life Price of shares Price
_______________ __________ _______ ________ ___________________
$ 3.00 - $ 9.99 394,372 5.20 $ 3.61 314,124 $ 3.72
$10.00 - $15.99 277,748 3.44 $12.76 277,748 $12.76
_________ _________
672,120 591,872
========= =========
In connection with the pro-forma information relating to the cost of
stock options granted presented in Note 1, the pro forma effect takes into
consideration only 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 stock options
granted during 2002, 2001 and 2000 was $1.30, $1.37, and $1.78,
respectively. The fair value of stock options granted was estimated using
the Black-Scholes option-pricing model and included the following
assumptions for the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000
__________ __________ __________
Life expectancy 5 years 5 years 5-10 years
Risk-free interest rate 3% 5% 6%
Expected volatility 55% 59% 57%
Dividends per share $.08 $.08 $.08
F-25
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto, duly authorized.
THE STEPHAN CO.
By: /s/ Frank F. Ferola
___________________________________
Frank F. Ferola
President and Chairman of the Board
April 15, 2003
By: /s/ David A. Spiegel
___________________________________
David A. Spiegel
Principal Financial Officer
Principal Accounting Officer
April 15, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
By: /s/ Frank F. Ferola By: /s/ Thomas M. D'Ambrosio
______________________________ ____________________________
Frank F. Ferola, Principal Thomas M. D'Ambrosio
Executive Officer and Director Vice President and Director
Date: April 15, 2003 Date: April 15, 2003
By: /s/ John DePinto By: /s/ Curtis Carlson
______________________________ ____________________________
John DePinto, Director Curtis Carlson, Director
Date: April 15, 2003 Date: April 15, 2003
By: /s/ Leonard Genovese By: /s/ Shouky Shaheen
______________________________ ____________________________
Leonard Genovese, Director Shouky Shaheen, Director
Date: April 15, 2003 Date: April 15, 2003
26
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Frank F. Ferola, certify that:
1. I have reviewed this annual report on Form 10-K of The Stephan Co.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
27
CERTIFICATION OF CHIEF EXECUTIVE OFFICER (continued)
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Frank F. Ferola
__________________________________
Frank F. Ferola
Chief Executive Officer
April 15, 2003
28
CERTIFICATION OF CHIEF FINANCIAL OFFICER
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, David A. Spiegel, certify that:
1. I have reviewed this annual report on Form 10-K of The Stephan Co.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
29
CERTIFICATION OF CHIEF FINANCIAL OFFICER (continued)
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ David A. Spiegel
__________________________________
David A. Spiegel
Chief Financial Officer
April 15, 2003
30
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of The Stephan Co. (the "Company) on
Form 10-K for the period ended December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I,
Frank F. Ferola, Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
/s/ Frank F. Ferola
__________________________________
Frank F. Ferola
Chief Executive Officer
April 15, 2003
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of The Stephan Co. (the "Company) on
Form 10-K for the period ended December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I,
David Spiegel, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
/s/ David A. Spiegel
__________________________________
David A. Spiegel
Chief Financial Officer
April 15, 2003