UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
[X] |
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
Fiscal Year Ended December
31, 2007
or
[
] |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
transition period from _____to______
Commission
File Number 1-4436
THE
STEPHAN CO.
(Exact
name of registrant as specified in its charter)
Florida
|
|
59-0676812
|
(State
or other jurisdiction of
incorporation or organization)
|
|
(IRS Employer Identification
No.)
|
1850
West
McNab Road, Fort Lauderdale, Florida 33309
(Address
of principal executive offices)(Zip Code)
Registrant’s
telephone number, including area code: (954) 971-0600
Securities
Registered Pursuant to Section 12(b) of the Act:
Title
of each class
|
|
Name
of each exchange on which
registered
|
|
|
|
Common
stock,
$0.01
par value
|
|
American
Stock Exchange
|
Securities
registered pursuant to section 12(g) of the Act: None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
YES
o
NO x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
YES
o
NO x
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
YES
x
NO o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Section 229.405 of this chapter) 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. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See
definitions of "large accelerated filer,” “accelerated filer" and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o |
|
Accelerated filer o |
|
Non-accelerated filer o
|
|
Smaller reporting company
x |
|
|
|
|
(Do
not check if a smaller reporting company)
|
Indicate
by check mark whether the registrant is a shell Company (as defined in Rule
12b-2 of the Exchange Act).
YES
o
NO x
State
the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity
was
last sold, or the average bid and asked price of such common equity, as of
the
last business day of the registrant’s most recently completed second fiscal
quarter: $11.5 million.
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date:
4,389,779
shares of common stock, $0.01 par value, as of March 31, 2008
List
hereunder the following documents if incorporated by reference and the Part
of
the Form 10-K 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:
None.
THE
STEPHAN CO. AND SUBSIDIARIES
INDEX
TO
ANNUAL REPORT
ON
FORM
10-K
|
|
Page
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PART
I
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Item
1:
|
Business
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3
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Item
1A:
|
Risk
Factors
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5
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Item
1B:
|
Unresolved
Staff Comments
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5
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Item
2:
|
Properties
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5
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Item
3:
|
Legal
Proceedings
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6
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Item
4:
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Submission
of Matters to a Vote of Security Holders
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6
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PART
II
|
|
|
Item
5:
|
Market
for the Registrant's Common Equity, Related Stockholder
Matters
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|
and
Issuer Purchases of Equity Securities
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7
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Item
6:
|
Selected
Financial Data
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7
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Item
7:
|
Management's
Discussion and Analysis of Financial Condition
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|
|
and
Results of Operations
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8
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Item
7A:
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Quantitative
and Qualitative Disclosures about Market Risk
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10
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Item
8:
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Financial
Statements and Supplementary Data
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10
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Item
9:
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Changes
in and Disagreements with Accountants on Accounting
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|
|
and
Financial Disclosure
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10
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Item
9A:
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Controls
and Procedures
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10
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Item
9B:
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Other
Information
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10
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|
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PART
III
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Item
10:
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Directors,
Executive Officers, and Corporate Governance
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11
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Item
11:
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Executive
Compensation
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14
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Item
12:
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Security
Ownership of Certain Beneficial Owners and
|
|
|
Management
and Related Stockholder Matters
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17
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Item
13:
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Certain
Relationships and Related Transactions,
|
|
|
and
Director Independence
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20
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Item
14:
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Principal
Accountant Fees and Services
|
20
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|
|
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PART
IV
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|
|
Item
15:
|
Exhibits,
Financial Statement Schedules
|
21
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|
Signatures
|
41
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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 our actual results, condition (financial or otherwise),
performance or achievements to be materially different from any future results,
performance, condition or achievements expressed or implied by such
forward-looking statements.
Words
such as "projects," "believe," "anticipates," "estimate," "plans," "expect,"
"intends," and similar words and expressions are intended to identify
forward-looking statements and are based on our current expectations,
assumptions, and estimates about us and our industry. In addition, any
statements that refer to expectations, projections or other characterizations
of
future events or circumstances are forward-looking statements. Although we
believe that such forward-looking statements are reasonable, we cannot assure
you that such expectations will prove to be correct.
Our
actual results could differ materially from those anticipated in such
forward-looking statements as a result of several factors, risks and
uncertainties. These factors, risks and uncertainties include, without
limitation, the results of the audit and review processes performed by our
independent auditors with respect to our Form 10-K for the year ended December
31, 2007; our ability to satisfactorily address any material weakness in our
financial controls; general economic and business conditions; competition;
the
relative success of our operating initiatives; our development and operating
costs; our advertising and promotional efforts; brand awareness for our product
offerings; the existence or absence of adverse publicity; acceptance of any
new
product offerings; changing trends in customer tastes; the success of any
multi-branding efforts; changes in our business strategy or development plans;
the quality of our management team; the availability, terms and deployment
of
capital; the business abilities and judgment of our personnel; the availability
of qualified personnel; our labor and employee benefit costs; the availability
and cost of raw materials and supplies; changes in or newly-adopted accounting
principles; changes in, or our failure to comply with, applicable laws and
regulations; changes in our product mix and associated gross profit margins,
as
well as management’s response to these factors, and other factors that may be
more fully described in the Company’s literature, press releases and
publicly-filed documents with the Securities and Exchange Commission. You are
urged to carefully review and consider these disclosures, which describe certain
factors that affect our business.
We
do 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,
we
caution 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 our ability to
achieve our objectives and may cause actual results to differ materially from
those projected, anticipated or implied herein.
Item
1. Business
OVERVIEW
The
Stephan Co. (“we,” “our,” “Stephan” 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. Our headquarters are in Fort Lauderdale, Florida;
we
have manufacturing facilities there and in Tampa, Florida. We also have
distribution centers in Danville, Illinois and Williamsport, Pennsylvania.
The
Company is comprised of The Stephan Co. and its nine wholly-owned operating
subsidiaries: Old 97 Company, Williamsport Barber and Beauty Corp., Stephan
& Co., Inc., Scientific Research Products, Inc. of Delaware, Sorbie
Distributing Corp., Stephan Distributing, Inc., Morris Flamingo-Stephan, Inc.,
American Manicure, Inc. and Lee Stafford Beauty Group, Inc.
We
have
identified two reportable operating segments: Distributors and Brands. The
Distributors segment generally consists of a customer base of distributors
that
purchase the Company's hair care products and beauty and barber supplies for
sale to salons, barbershops and beauty schools. The customer base for our Brands
segment is comprised of 1) mass merchandisers, chain drug stores and
supermarkets that sell hair care and other personal care products directly
to
the end user and 2) distributors that sell to retailers. In 2007, Distributors
and Brands segments accounted for approximately 67% and 33%, respectively,
of
the Company’s revenue.
The
segment classification in 2007 differs from that in 2006. “Distributors” in 2007
is equivalent to Professional Hard Goods in previous reports. “Brands” in 2007
is equivalent to all other segment classifications in 2006.
Distributors
Morris
Flamingo-Stephan, Inc., located in Danville, Illinois, is a beauty and barber
distributor, which markets its products utilizing catalogs published under
the
Morris Flamingo and Major-Advance brand names. Williamsport Barber and Beauty
Corp., located in Williamsport, Pennsylvania, is a mail order beauty and barber
supply company. The two subsidiaries comprise the Distributors segments. Our
Distributors generally do not manufacture the products they sell.
Brands
We
manufacture and distribute a wide variety of brands at our Florida facilities.
The Company manufactures Image and Sorbie hair care products that are sold
primarily through distributors to salons and retail outlets. We also make
Cashmere Bouquet talc, Quinsana Medicated talc, Balm Barr and Stretch Mark
creams and lotions, Protein 29 liquid and gel grooming aids, Stiff Stuff and
Wildroot hair care products. Additionally, our Frances Denney division markets
a
full line of cosmetics through retail and mail order channels.
We
manufacture shampoos, hair treatments, after-shave lotion, dandruff lotion,
hair
conditioners and hair spray under the brand name "STEPHAN'S." Our 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 2011.
We
also
manufacture and market LeKair, OLD 97, KNIGHTS, and TAMMY. And we distribute
"Natural" and "French" nail polish manicure kits to other distributors and
salons.
We
have
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.
Pursuant
to an additional license and supply agreement, we have granted Color Me
Beautiful, Inc. ("CMB") a license to distribute certain products of our Frances
Denney line and have agreed to supply the requirements of CMB for such products.
The agreement provides for royalty payments by CMB to us based upon net sales,
with guaranteed minimum annual royalty payments throughout the term of the
agreement. Under the terms of an exclusive Trademark License and Supply
Agreement, CMB markets the brand names Hope, Interlude and Fade-away through
several retail chains in the United States and Canada.
We
also
sell our products to distributors in Europe, South America and Asia.
No
single
customer accounted for more than 10% of our consolidated revenues in 2007.
Please
see Note 9 of the Consolidated Financial Statements for segment
information.
RAW
MATERIALS, PACKAGING and COMPONENTS INVENTORY
The
materials utilized by the Company and our subsidiaries in the manufacture of
its
products consist primarily of common chemicals, fragrances, alcohol, perfumes,
labels, plastic bottles, caps and cartons. All materials are readily available
at competitive prices from numerous sources. Neither the Company nor any of
our
subsidiaries have ever experienced any significant shortage in supplies. Due
to
market conditions in the petroleum industry, the Company continues to experience
cost increases in both raw material and components as well as an increase in
freight costs; the Company periodically increases its selling prices to attempt
to compensate for additional costs incurred.
The
Company and its subsidiaries seek to maintain a level of finished goods
inventory sufficient to cover anticipated sales for the upcoming three months.
Additionally, as many of the Company’s components have an unlimited shelf life,
the Company retains these items for future use. If utilization of the components
is expected to occur after the end of 2008 the cost is classified as an other
(non-current) asset.
FINISHED
GOODS
Our
subsidiaries in the Distributors segment buy and resell finished products,
many
of which are purchased from international sources.
BACKLOG
As
of
December 31, 2007, the Company did not have an unusually large backlog of
orders.
RESEARCH
AND DEVELOPMENT
During
the last two fiscal years ended December 31, 2007, expenditures for
Company-sponsored research relating to the development of new 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 competes
against much larger companies with substantially more resources. Additionally,
we believe that several factors are contributing to greater industry
competition: 1) a decrease in the number of distributors resulting from industry
consolidation, 2) lower beauty school enrollments and 3) general economic
conditions.
We
believe that the principal competitive factors are price and product quality.
Products manufactured and sold by the Company 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 Company. Our products 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 our 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 Company 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, 2007 we employed approximately 100 people engaged in the
production, warehousing and distribution of its products and in the management
and administration of the Company’s business. Although we 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. Fewer than
10%
of our employees were covered by collective bargaining agreements, and the
Company believes its employee relationships are satisfactory.
Item
1A: Risk
Factors
Not
required.
Item
1B:
Unresolved
Staff Comments
None.
Item
2.
Properties
Facilities
we own*:
|
1.
|
Manufacturing/warehouse/headquarters;
33,000 sq. ft.; Fort Lauderdale, FL
|
|
2.
|
Manufacturing/warehouses/office;
82,000 sq. ft.; Tampa, FL
|
Facilities
we lease:
|
1.
|
Warehouse/office;
93,000 sq. ft.; Danville, IL**
|
|
2.
|
Warehouse;
6,000 sq. ft.; Williamsport, PA
|
|
3.
|
Warehouse;
10,000 sq. ft.; Pompano Beach, FL
|
|
4.
|
Warehouse;
31,000 sq. ft.; Tampa, FL ***
|
Please
see Note 11 to the Consolidated Financial Statements for the year ended December
31, 2007 for lease information.
* |
These
facilities are unencumbered.
|
**
|
The
Company has the right to purchase the real property of the landlord
at
fair market value during the term of the lease which expires in 2015.
See
Legal Proceedings.
|
*** |
This
lease will not be renewed.
|
Note:
The
Danville, IL and Williamsport, PA facilities are used in the operations of
the
Distributors segment; all other facilities are used in the Brands segment.
A
small portion of the Fort Lauderdale facilities is used for corporate offices.
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, 2007, would likely, if
adversely determined, have a material adverse effect on the Company's financial
position or results of operations.
1)
In
March 2006, in a case styled Trevor Sorbie International, Plc. v. Sorbie
Acquisition Co. (CASE NO. 05-14908-09), filed in the Circuit Court of the
17th
Judicial
Circuit in and for Broward County, Florida, Trevor Sorbie International, Plc.
(“TSI”) instituted efforts to collect on a judgment it has against Sorbie
Acquisition Co. (“SAC,” a subsidiary of the Company). The judgment derives from
an October 25, 2004, Pennsylvania arbitration award in favor of TSI and against
SAC with respect to certain royalties and interest due. The financial statements
for the Company for the year ended December 31, 2007, reflected a liability
of
approximately $931,000, including interest, for payment of this judgment. Among
other things, the Florida lawsuit alleges fraud and names as additional
defendants The Stephan Co., Trevor Sorbie of America, Inc. and Sorbie
Distributing Corporation, also subsidiaries of the Company. This matter is
currently unresolved and the Company is unable, at this time, to determine
the
outcome of the litigation. The Company is vigorously defending this legal action
against TSI. While we believe that we may ultimately prevail and/or settle
for
an amount substantially less than that accrued, due to the limited discovery
taken and the complexities of the issues involved, the Company cannot predict
the outcome of the litigation.
2)
On May
4, 2005, the Company entered into a Second Amendment of Lease Agreement (the
"Amendment") with respect to the Danville, IL facility, Morris Flamingo -
Stephan, Inc., extending the term of the lease to June 30, 2015, with a
five-year renewal option, and increasing the annual rental to approximately
$320,000. The base rent is adjustable annually, in accordance with the existing
master lease, the terms of which, including a 90-day right of termination by
the
Company, remain in full force and effect. The Amendment provides a purchase
option, effective during the term of the lease, to purchase the premises at
the
then fair market value of the building, or to match any bona fide third-party
offer to purchase the premises.
On
July
6, 2005, the landlord, Shaheen & Co., Inc., the former owner of Morris
Flamingo, notified the Company that its interpretation of the Amendment differed
from that of the Company as to the existence of the 90-day right of termination.
In October 2005, the landlord filed a lawsuit in the Circuit Court for the
17th
Circuit of Florida in and for Broward County, FL, styled Shaheen & Co., Inc.
(Plaintiff) v. The Stephan Co., Case number 05-15175 seeking a declaratory
judgment with respect to the validity of the 90-day right of termination. In
addition, the lawsuit alleges damages with respect to costs incurred and the
weakening marketability of the property. This matter is currently unresolved
and
the Company is unable, at this time, to determine the outcome of the litigation.
However, if it is ultimately determined that the early termination provision
has
been eliminated with the Amendment, the Company’s minimum lease obligation would
amount to $320,000 in each of the years 2008 through 2012 and approximately
$800,000 thereafter. 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
4. Submission
of Matters to a Vote of Security Holders
Not
required.
PART
II
Item
5. Market
for Registrant’s Common Equity, Related Stockholder
Matters
and Issuer Purchases of Equity Securities
(a)
Market Information
The
Company’s Common Stock is listed on the American Stock Exchange. The following
table sets forth the range of high and low sales prices for the Company’s Common
Stock for each quarterly period during the two most recent fiscal
years:
|
|
2007
|
|
2006
|
|
|
|
Sales
Price
|
|
Sales
Price
|
|
Quarter
Ended
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
March
31
|
|
$
|
4.45
|
|
$
|
3.42
|
|
$
|
3.75
|
|
$
|
3.31
|
|
June
30
|
|
$
|
5.00
|
|
$
|
3.61
|
|
$
|
3.70
|
|
$
|
3.05
|
|
September
30
|
|
$
|
4.33
|
|
$
|
3.64
|
|
$
|
3.17
|
|
$
|
2.91
|
|
December
31
|
|
$
|
3.83
|
|
$
|
3.30
|
|
$
|
3.62
|
|
$
|
2.96
|
|
(b)
Holders
As of
March 15, 2008, the Company’s Common Stock was held of record by approximately
165 holders. Additionally, we believe that the Company’s Common Stock is held
beneficially by approximately 500 shareholders in street name through
approximately 60 institutions.
(c)
Dividends
The
Company has declared and paid quarterly cash dividends at the rate of $.02
per
common share since mid-1995. In 2004 the Company declared a special dividend
of
$2.00 per share. 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 Company’s subsidiaries, to transfer funds to the Company in the form of cash
dividends, loans or advances, that currently materially limit the Company’s
ability to pay cash dividends or that the Company reasonably believes are likely
to materially limit the future payment of dividends on its Common
Stock.
(d)
Repurchase of Shares
The
Company has had a long-standing Board resolution that authorizes executive
officers to repurchase up to 1.0 million shares of common stock in the open
market.
Item
6. Selected
Financial Data
Not
required.
Item
7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
2007
v. 2006
Results
of Operations
EBITDA
(Earnings Before Interest income and expense, Taxes, Depreciation and
Amortization) was $1.4 million in 2007 compared to $1.0 million in 2006
(exclusive of impairment charges in 2006 that were not incurred in 2007). Our
cash and short-term investments continued to grow; cash and cash equivalents
and
short-term investments amount were almost $9.0 million, an increase of $1.9
million from the end of 2006. Short-term investments include auction rate
securities currently impacted by nationwide illiquidity due to effects of the
sub-prime lending crisis in the U.S.
Our
Company returned to profitability in 2007, posting net income of $968,000,
or
$0.22 per share. Last year, intangibles impairment charges of $6.7 million
contributed to a loss of $3.6 million, or ($0.82) per share. There were no
impairment charges in 2007.
Our
gross
profit margin improved to 47% in 2007 compared to 44% in 2006; most of the
improvement was in the brands segment. This improvement was due, in part, to
1)
a more profitable sales mix in 2007 compared to that in 2006 and 2) better
utilization of inventory to reduce purchases. Cost increases, particularly
in
oil-based products and freight increases, depressed the margin improvement.
We
have experienced cost increases from many vendors. Freight costs have increased
as vendors have added various surcharges to their pricing structure. As of
January 1, 2008, we have instituted price increases to attempt to pass-through
to our customers the cost increases that we have been subject to from our
vendors.
Selling
general and administrative (“SG&A”) expenses declined by $6.0 million in
2007 compared to those in 2006, primarily due to the inclusion in 2006 of $5.3
million for intangibles impairments (an additional $1.4 million was classified
as an impairment of goodwill). In 2007 and 2006 SG&A expenses included in
each year approximately $900,000 of manufacturing-related costs.
Our
Company sells thousands of different items to various distributors, beauty
schools and individuals. In the distributor segment, we generally buy and resell
several thousand beauty and barber items. In the brands segment, we produce
and
sell more than one thousand items.
Revenue
was soft in both of our segments (brands and distributors) as general economic
conditions, lower beauty school enrollments and distributor consolidation were
factors in our overall 9.4% revenue decline from that in 2006. Revenue in our
brands segment, which accounted for 33.0% of consolidated revenue in 2007,
was
8.8% down from that in 2006. Within our brands segment, we did see growth
compared to 2006 in our Frances Denney cosmetics line and in the ethnic markets.
Revenue in our distributors segment, which accounted for 67.0% of consolidated
revenue in 2007, was 9.7% lower than that in 2006.
We
anticipate that the slowing growth of the U.S. economy may affect our business
adversely, principally in the first half of 2008. Revenue is likely to decline
from 2007 levels and profitability may be impacted adversely.
Restatement
of interim financial statements
As
disclosed in our Form 8-K and Form 10-QSB filings for various interim periods
in
2007, a former manager unilaterally and clandestinely misstated the results
of
operations at one our subsidiaries for the first six months of 2007. His actions
resulted in the unintentional issuance of erroneous results by us for the first
two quarters of 2007. We detected the results of the manager’s actions and
corrected the previously filed results in the third quarter Form 10-QSB for
2007. This subsidiary’s corrected results are included in the distributors
segment in Note 9 to these Consolidated Financial Statements. The total effect
of the event was an overstatement of reported revenue, net income and net income
per share for the first six months of 2007 of $504,000, $82,000 and $0.02 per
share, respectively. The misstatements have been corrected and the applicable
filings have been amended with restated results.
2006
v. 2005
Results
of Operations
EBITDA
(exclusive of impairment charges) in 2006 was approximately $1.0 million
compared to approximately breakeven in 2005. Our cash continued to grow as
well:
the cash and cash equivalents balance was almost $7.1 million at the end of
2006, an increase of $1.5 million from that at the end of 2005.
We
had a
loss of $3.6 million, or ($0.82 per share) in 2006 due to a non-cash charge
of
$6.7 million (or approximately $4.2 million after tax benefit) for intangibles
impairment in our brands segment. Without this non-cash charge we would have
shown an operating profit of $781,000 in 2006 compared to the reported operating
loss. Without this impairment charge our earnings per share would have
approximated $0.14.
The
impairment charges were required by SFAS No. 142 of the Financial Accounting
Standards Board. This pronouncement eliminated the amortization of goodwill
and
trademarks but required companies to determine annually if the carrying amount
of such goodwill and trademarks exceeded its fair market value. SFAS 142
mandates the use of methodologies that involve estimates and
assumptions.
We
recorded the write-off for book purposes only; we did not get a tax deduction
in
2006 for this write-off.
Our
gross
profit margin improved to 44% in 2006 from 40% in 2005. The increase came
principally in the brands segment and resulted from a better product mix and
improved inventory utilization resulting in lower purchases.
Operating
expenses for 2006 included impairment charges of $5.3 million which, along
with
the separately-shown goodwill write-off of $1.4 million, comprised a total
impairment charge of $6.7 million. Operating expenses for 2006 (exclusive of
impairment charges) were 6.5% less than those in 2005 as a result of favorable
spending variances in the areas of payroll, legal, rent and promotions.
Liquidity
and Capital Resources
We
had
cash and cash equivalents of $5.0 million and short-term investments of $4.0
million, a total of $9.0 million. Although we have long-term debt of $1.1
million, this debt is fully-funded by restricted cash which is over and above
our cash and cash equivalents.
Our
Company generated cash of $2.1 million from operating activities; both of our
segments generate cash and are profitable before the allocation of corporate
overhead. Cash flow increases occur because operating income, plus the favorable
effect of minimal income taxes, exceeds dividends. Our largest use of cash
was
for dividends (which we have paid since mid-1995; we also paid a special
dividend of $2.00 per share in 2004) of $351,000. Capital expenditures were
not
significant.
We
reclassified our auction rate securities from cash and cash equivalents to
short-term investments. The auction rate securities are currently illiquid
as
the bond market restructures to cash out short-term holders (such as us) with
proceeds from longer-term bond holders. Despite having $3.9 million of auction
rate securities, we have cash and cash equivalents of $4.9 million. We have
adequate liquidity and do not foresee the need for additional capital for
day-to-day operations.
Our
cash
balance will vary with growth or decline in operating income and changes, if
any, in dividends. We are building cash now, in part, as a result of paying
minimal income taxes due to taxable losses in 2007 and 2006. At December 31,
2007, we had approximately $2.9 million (before taxes) of net operating loss
carryforwards to offset future taxable income.In 2004, we paid a dividend of
$2.00, or about $9.0 million. This caused a significant, one-time, reduction
in
cash. Since 2004, cash and short-term investments have grown
steadily.
Cash
is
driven by operating income which we endeavor to manage by 1) keeping expenses
low, 2) competitively bidding purchases and freight costs, 3) developing new
products, 4) searching out new markets or expanding existing markets through
new
product offerings to existing customers, 5) updating technology in critical
customer service areas, 6) reducing purchases by utilizing existing inventory
when possible, 7) increasing selling prices to the extent possible and 8)
centralizing administrative functions.
As
the
overall economy expands and contracts, or as we gain or lose customers, our
cash
flow will vary because we have, especially in the Brands segment, high variable
gross margins, and an increase or decrease in this segment could be significant
to overall results. We expect a softening of demand in 2008 and a consequent
reduction in operating income. Cash may be adversely impacted by these
events.
We
have
no off-balance sheet financing arrangements.
The
following table sets forth certain information regarding future contractual
obligations of the Company as of December 31, 2007:
Contractual
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
|
|
|
|
Less
than
|
|
|
|
|
|
More
than
|
|
(in
thousands)
|
|
Total
|
|
1
Year
|
|
1
to 3 Years
|
|
3-5
Years
|
|
5
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
leases
|
|
$
|
2,494
|
|
$
|
413
|
|
$
|
640
|
|
$
|
640
|
|
$
|
801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
Debt
|
|
|
1,110
|
|
|
1,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employment
Contract
|
|
|
719
|
|
|
719
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,323
|
|
$
|
2,242
|
|
$
|
640
|
|
$
|
640
|
|
$
|
801
|
|
Item
7A. Quantitative
and Qualitative Disclosure about Market Risk
Not
required.
Item
8. Financial
Statements and Supplementary Data
See
Item
15 of Part IV of this Form 10-K.
Item
9. Changes
in and Disagreements with Accountants on Accounting and
Financial
Disclosure
None.
Item
9A:
Controls
and Procedures
|
(a)
|
Evaluation
of Disclosure Controls and
Procedures
|
We
are
responsible for establishing and maintaining adequate internal control over
financial reporting for the Company. During 2007, we documented our procedures
and evaluated the control structure of the Company as a whole as called for
by
the Sarbanes-Oxley Act.
In
the
course of this evaluation we found ways to improve controls through the
centralization of administrative functions and plan to implement this
centralization in 2008.
In
2007,
we also had an event, described in Management’s Discussion and Analysis of
Financial Condition and Results of Operations, that our existing internal
controls detected but that required us to restate our financial statements
for
two quarters of 2007.
Despite
the improvements that we have made and are planning to make and the confirmation
of the adequacy of our controls that we received in detecting the event referred
to, we, in an abundance of caution, do not believe that the Company yet had
effective internal control over financial reporting at December 31,
2007.
To
address this situation, we performed additional analysis and other post-closing
procedures in an effort to ensure that our consolidated financial statements
included in this annual report have been prepared in accordance with accounting
principles generally accepted in the United States. Accordingly, management
believes that the consolidated financial statements included in this report
fairly present in all material respects our financial condition, results
of
operations and cash flows for the periods presented.
|
(b)
|
Change
in Internal Control over Financial Reporting
|
No
change
in the Company’s internal control over financial reporting occurred during the
Company’s fourth fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting, except for the detection in the fourth quarter of a misstatement
of
financial results in the first two quarters of 2007. See Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
Item
9B.
Other
Information
None.
PART
III
ITEM
10. Directors,
Executive Officers and Corporate Governance
Board
of
Directors
Directors
are elected on a staggered basis, with each class generally standing for
election for a three-year term. Our By-Laws provide that the number of directors
shall be set from time-to-time by resolution of the Board of Directors and
must
be a minimum of one.
Set
forth
below is certain information with respect to the members of the Board of
Directors:
|
|
|
|
|
Age
(as
of 3/15/08)
|
Year
first elected as a Company
Director
|
Principal
Occupation(s)
During
Past Five Years;
Other
Directorships
|
|
|
|
|
William
M. Gross
(2)(3)
|
84
|
2005
|
Certified
Public Accountant and Attorney. For more than the previous five years,
he
has served as Authorized House Counsel for the Company on a part-time
basis.
|
|
|
|
|
Shouky
A.
Shaheen
|
78
|
1998
|
For
more than the previous five years, President of Shaheen and Co.,
Inc. Mr.
Shaheen was the former Owner of Morris Flamingo, L.P., which was
acquired
by the Company in March 1998.
|
|
|
|
|
Curtis
Carlson
|
54
|
1996
|
For
more than the previous five years, partner in various law firms.
Currently
a partner in the Miami-based law firm of Carlson & Lewittes,
P.A.
|
|
|
|
|
Frank
F.
Ferola
|
64
|
1981
|
For
more than the previous five years, Chairman of the Board, President
and
Chief Executive Officer of the Company.
|
|
|
|
|
Richard
Barone
(1)(2)(3)
|
66
|
2005
|
Chairman,
CEO and Portfolio Manager for Ancora Advisors, an investment advisor
based
in Cleveland, OH. Additionally, Chairman of Ancora Capital and Ancora
Securities, holding Company and broker/dealer, respectively, based
in
Cleveland.
|
Elliot
Ross (1)(2)
|
62
|
2005
|
Since
2000, co-founder of MFL Group, a corporate consulting firm.
|
|
|
|
|
(1)
Member of the Audit Committee.
(2)
Member of the Compensation Committee.
(3)
Member of the Nominating Committee.
|
Committees
of the Board
The
Board
has established three standing committees including (1) an Audit Committee
(2) a
Compensation Committee and (3)
a
Nominating Committee.
Report
of the Audit Committee
The
Audit
Committee reviews the internal and external audit functions of the Company
and
makes recommendations to the Board of Directors with respect thereto. It also
has primary responsibility for the formulation and development of the auditing
policies and procedures of the Company and for selecting the Company’s
independent auditing firm. The Audit Committee is governed by the Company's
Audit Committee Charter. The Board of Directors of the Company has determined
that the current composition of the Audit Committee satisfies the American
Stock
Exchange’s requirements regarding independence, financial literacy and
experience. The Chairman and financial expert of the Audit Committee is Richard
Barone, an independent director.
The
audit
committee has reviewed the Company’s audited financial statements for the last
fiscal year and has discussed them with management and the Company’s independent
registered public accounting firm.
Specifically,
the audit committee has discussed with its independent registered public
accounting firm the matters required to be discussed by Statement on Auditing
Standards, SAS No. 61, “Communication with Audit Committees, as amended” and
superseded by SAS No. 114, “The Auditor’s Communications with Those Charged with
Governance,” by the Auditing Standards Board of the American Institute of
Certified Public Accountants.
The
audit
committee has received and reviewed the written disclosures and the letter
from
its independent registered public accounting firm required by Independence
Standard No. 1, “Independence Discussions with Audit Committees,” as adopted by
the Public Company Accounting Oversight Board, and has discussed with the
Company’s independent registered public accounting firm their independence,
including a consideration of the compatibility of non-audit services with such
independence.
The
audit
committee, based on the review and discussions described above with management
and the Company’s independent registered public accounting firm, has recommended
to the Board of Directors, which adopted the recommendation, that the audited
consolidated financial statements be included in the Company’s annual report on
Form 10-K for the fiscal year ended December 31, 2007 for filing with the
Securities and Exchange Commission.
Audit
Committee:
Richard
Barone, Chairman
Elliot
Ross
Report
of the Compensation Committee on Executive Compensation
The
following Report on Executive Compensation does not constitute soliciting
material and should not be deemed filed or incorporated by reference in any
other filing by us under the Securities Act of 1933 or the Securities Exchange
Act of 1934, except to the extent that we specifically incorporate this report
by reference therein.
Richard
Barone, Elliot Ross and William Gross comprised the Compensation Committee
in
2007.
The
Compensation Committee is composed of a majority of independent directors.
The
Compensation Committee reviews the base salaries of our employees (as well
as
our executive officers) on an annual basis, considering factors such as
corporate progress toward achieving objectives (without reference to any
specific performance-related targets) and individual performance, experience
and
expertise.
The
Compensation Committee has primary responsibility for the administration of
the
Company’s 1990 Key Employee Stock Incentive Plan (the "Incentive Plan"),
including principal responsibility for granting options thereunder. The
Compensation Committee is also responsible for establishing the overall
philosophy of the Company’s executive compensation program and overseeing the
executive compensation plan developed to execute the Company’s compensation
strategy.
Compensation
Strategy
The
Company’s executive compensation program has been designed to (i) align
executive compensation with stockholder interests, (ii) attract, retain and
motivate a highly competent executive team, (iii) link compensation to
individual and Company performance and (iv) achieve a balance between incentives
for short-term and long-term performance and results. The Company’s executive
compensation package consists of the payment of base salary, potential annual
bonus and stock options awarded through participation in the Incentive Plan.
The
Compensation Committee reviews annually the compensation to be paid to the
Company’s executive officers not covered by contract. In making such review, the
Compensation Committee evaluates information supplied by management. The
Compensation Committee would also participate in the negotiation of employment
contracts, including provisions for salary and bonuses, with the Company’s
executive officers, if applicable.
Base
Salary
The
Compensation Committee’s policy is to negotiate salaries in relation to industry
norms, the principal job duties and responsibilities undertaken by such
executives, individual performance and other relevant criteria.
Annual
Bonus
The
annual bonus for the Chief Executive Officer is determined by specific bonus
formulae set forth in his written employment agreement. Other executives may
be
paid bonuses at the discretion of the Compensation Committee.
Stock
Options
Long-term,
incentive compensation of executives is granted through participation in the
Incentive Plan. The Incentive Plan permits the Company to grant stock options
to
executive officers at a price not less than 100% of the fair market value of
the
Common Stock on the date of the grant. In addition to any obligations pursuant
to the Chief Executive Officer’s employment agreement, stock options may be
granted, in the Compensation Committee’s discretion, to executive officers based
upon its appraisal of the ability of such executive officers to influence the
long-term growth and profitability of the Company. The Compensation Committee
believes that providing a portion of the executive’s compensation in the form of
stock options encourages the officers to share with the Company's stockholders
the goals of increasing the value of the Company’s stock and contributing to the
success of the Company.
Compensation
Committee’s Actions for Fiscal Year 2007
The
Compensation Committee did not award any discretionary stock options to key
employees and did not grant any discretionary salary increases or award any
bonuses. Options were granted only pursuant to Mr. Ferola’s employment
agreement.
Chief
Executive Officer Compensation
As
set
forth in more detail herein, the Compensation Committee approved an employment
agreement on January 1, 1997 for Mr. Frank F. Ferola that has been renewed
for
successive terms until December 31, 2008. Additionally, Mr. Ferola received
salary, stock options and other compensation described earlier in Item
11.
Section
162(m) Compliance
Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), generally
disallows a tax deduction to a public Company for compensation over $1 million
annually paid to its chief executive officer and four other most highly
compensated executive officers. Qualifying performance-based compensation will
not be subject to the deduction limitation if certain requirements are met.
The
Compensation Committee’s current policy is to structure the performance-based
portion of the compensation of the Company’s executive officers (currently
consisting of stock option grants and cash bonuses) in a manner that complies
with Section 162(m) of the Code whenever practicable and appropriate in the
judgment of the Compensation Committee.
Compensation
Committee:
Richard
Barone, Chairman
Elliot
Ross
William
Gross
Executive
Officers
The
four
executive officers of the Company consist of Frank F. Ferola, President,
Chairman of the Board and Chief Executive Officer; Robert C. Spindler, Vice
President, Treasurer and Chief Financial Officer; Curtis Carlson, Vice President
and Secretary and Tyler Kiester, Assistant Secretary.
The
following sets forth certain information with respect to the executive officers
of the Company who are not also directors (based solely on information furnished
by such persons):
Robert
C.
Spindler, 57, was appointed as Chief Financial Officer in July 2007. Prior
to
his becoming Chief Financial Officer, Mr. Spindler was a consultant to the
Company. Prior to that, he was Vice President and Chief Administrative Officer
for a subsidiary of and for National Beverage Corp.
Tyler
Kiester, 36, was appointed Assistant Secretary in January 2003. For more than
the previous five years, Mr. Kiester has been employed by the Company in various
capacities.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s
officers and directors and persons owning more than 10% of the Company’s common
stock to file reports of ownership and changes in ownership with the Securities
and Exchange Commission and to furnish copies of all such reports to the
Company. The Company believes, based on the Company’s stock transfer records and
written representations from certain reporting persons, that, except as set
forth below, all reports required under section 16(a) were timely filed during
2007.
Messrs.
Barone, Ross, Shaheen, Ferola and Gross each were late filing one Form 4 in
2007.
Code
of
Ethics
We
have
adopted a Code of Ethics that applies to all officers, employees and directors.
This
Code
requires continued observance of high ethical standards including honesty,
integrity and compliance with laws in the conduct of our business. The
Code
is posted on the Company’s website: "www.thestephanco.com".
ITEM
11. Executive
Compensation
Compensation
Disclosure and Analysis
Our
compensation program is designed to attract and retain qualified individuals
and
motivate employees, including executive officers, to achieve corporate goals.
Compensation
The
following table sets forth information for the fiscal years ended December
31,
2007 and 2006 as to the compensation earned by the Company’s Chief Executive
Officer and the other most highly compensated executive officers and/or other
employees of the Company whose total annual salary and bonus exceeded $100,000
for services rendered by them in all capacities to the Company and its
subsidiaries during fiscal year 2007.
Summary
Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Other
|
|
|
|
Name
& principal position
|
|
Year
|
|
Salary
|
|
Option
Awards
|
|
Compensation
(1)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frank
F. Ferola, CEO
|
|
|
2007
|
|
$
|
653,400
|
|
$
|
66,000
|
|
$
|
106,000
|
|
$
|
825,400
|
|
|
|
|
2006
|
|
|
594,000
|
|
|
64,323
|
|
|
99,000
|
|
|
757,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
C. Spindler, CFO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(annual
salary $115,000;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
employed
since July 2007)
|
|
|
2007
|
|
|
50,325
|
|
|
|
|
|
|
|
|
50,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Principally accrual for vacation not taken.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options granted in 2007
The
following table sets forth certain information concerning stock options granted
to those individuals named in the Summary Compensation Table who were granted
stock options in fiscal year 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Grant
Date
|
|
underlying
options
|
|
awards
|
|
|
|
|
|
|
|
|
|
Frank
F. Ferola, CEO
|
|
|
1/1/2007
|
|
|
50,000
|
|
$
|
3.62
|
|
Option
Exercises and Year-End Option Values
The
following table sets forth information with respect to the number of shares
that
may be acquired upon exercise of stock options.
Name
|
|
Underlying
Unexercised
Options
|
|
Option
Exercise
Price
|
|
Option
Expiration
Date
|
|
|
|
|
|
|
|
|
|
Frank
F. Ferola, CEO
|
|
|
50,000
|
|
$
|
3.62
|
|
|
01/01/17
|
|
Frank
F. Ferola
|
|
|
50,000
|
|
$
|
3.54
|
|
|
01/01/16
|
|
Frank
F. Ferola
|
|
|
50,000
|
|
$
|
4.26
|
|
|
01/01/15
|
|
Frank
F. Ferola
|
|
|
50,000
|
|
$
|
4.32
|
|
|
01/01/14
|
|
Frank
F. Ferola
|
|
|
50,000
|
|
$
|
10.25
|
|
|
01/01/09
|
|
Frank
F. Ferola
|
|
|
50,000
|
|
$
|
13.13
|
|
|
01/01/08
|
|
TOTAL
|
|
|
300,000
|
|
|
|
|
|
|
|
Compensation
of Directors
All
directors of the Company are compensated for their services by payment of $300
for each Board meeting attended.
During
2007, options
to purchase an aggregate of 20,248 shares of Common Stock, at an exercise price
of $3.80 per share, were granted by the Company to the four directors of the
Company who were not employees or full-time consultants of the Company (each,
an
"Outside Director") pursuant to the Company’s 1990 Outside Directors’ Stock
Option Plan.
Under
the
Plan, each Outside Director is automatically granted, upon such person’s
election or re-election to serve as a director of the Company, an option
exercisable over five years to purchase shares of Common Stock. Upon initial
election to the Board of Directors, an Outside Director is granted an option
to
purchase 5,062
shares
of
Common Stock at an exercise price equal to the fair market value of the Common
Stock on the date of grant. An option to purchase an additional 5,062
shares
of
Common Stock (at an exercise price equal to the fair market value of the Common
Stock on the date of such grant) is granted to each incumbent Outside Director
during each fiscal year of the Company thereafter on the earlier of (i) June
30
or (ii) the date on which the stockholders of the Company elect directors at
an
annual meeting of such stockholders or any adjournment thereof. The
aggregate number of shares of Common Stock reserved for grant under the Outside
Directors’ Stock Option Plan is 202,500, of which options covering 86,054
shares are
outstanding. See Item 12 below.
Director
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
Meeting
|
|
Option
|
|
|
|
|
|
|
|
Fees
|
|
Awards
|
|
Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Curtis
Carlson
|
|
$
|
900
|
|
$
|
|
|
$
|
24,000
|
|
$
|
24,900
|
|
William
Gross
|
|
|
900
|
|
|
5,921
|
|
|
16,638
|
|
|
23,459
|
|
Richard
Barone
|
|
|
900
|
|
|
5,921
|
|
|
|
|
|
6,821
|
|
Shouky
Shaheen
|
|
|
900
|
|
|
5,921
|
|
|
|
|
|
6,821
|
|
Elliot
Ross
|
|
|
600
|
|
|
5,921
|
|
|
|
|
|
6,521
|
|
Frank
Ferola
|
|
|
900
|
|
|
-
|
|
|
-
|
|
|
900
|
|
|
|
$
|
5,100
|
|
$
|
23,684
|
|
$
|
40,638
|
|
$
|
69,422
|
|
Employment
and Termination Arrangements
Frank
F. Ferola
On
January 1, 1997, the Company entered into an employment agreement with Mr.
Frank
F. Ferola. The agreement provides for a three-year term, which may be renewed
for successive terms of three years if, at least thirty days prior to the end
of
each term, Mr. Ferola gives notice of his election to renew. Mr. Ferola renewed
the agreement at the end of 1999, 2002 and 2005, terminating December 31,
2008.
Under
the
agreement, Mr. Ferola receives an annual base salary which is increased annually
by an amount equal to 10% of the previous year’s base salary. For the year ended
December 31, 2007, Mr. Ferola’s contractual annual base salary would have been
$1.1 million, however, by letter dated July 6, 2005 to the Company, Mr. Ferola
unilaterally reduced his 2005 salary, effective July 1, 2005, to $540,000 per
annum, subject to 10% annual increases. ( See ITEM
13.
Certain Relationships and Related Transactions, and Director
Independence.)
Additionally,
Mr. Ferola is entitled to receive an annual performance bonus if the Company’s
earnings per share increase at least 10% calculated by comparison to a base
year
(currently 2004) and pursuant to a formula set forth in his employment
agreement. By letter dated April 14, 2008, Mr. Ferola unilaterally gave up
his
2007 bonus of $2.9 million and his 2005 bonus of $2.0 million with the
stipulation that, in the event of a "change of control" in the Company (as
defined in the July 6, 2005 letter), Mr. Ferola’s 2007 and 2005 bonuses shall,
among other things, automatically become payable.
Further,
Mr. Ferola’s employment agreement provides that he will receive stock options
with ten-year exercise terms pursuant to the 1990 Key Employee Stock Incentive
Plan or a substitute plan directly from the Company, on each anniversary date
of
the agreement of not less than 50,000 shares based on the closing price of
the
stock on the last business day before the anniversary date.
Moreover,
in the event of a "change in control" of the Company (as defined in the
employment agreement), Mr. Ferola is entitled to receive an amount equal to
his
base salary for the remaining term of his employment agreement plus an
additional 24 months’ salary, plus a lump-sum payment in an amount equal to the
most recent annual bonus paid multiplied by the sum of the number of years
(including any fraction thereof) remaining in the term of his agreement, plus
two. If it were determined that a change in control existed, the CEO would
be
entitled to a payment of approximately $11.6 million.
Tyler
Kiester
Mr.
Kiester has an arrangement whereby the Company pays him a severance payment
upon
a "change in control" (as defined in a letter agreement dated May 19, 2003,
by
and between Mr. Kiester and the Company) in an amount equal to his then-current
monthly base salary multiplied by twelve.
ITEM
12.
Security
Ownership Of Certain Beneficial Owners And Management And Related Stockholder
Matters
Equity
Compensation Plans
The
exercise price range of options outstanding and exercisable as of December
31,
2007 and 2006 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:
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Key
|
|
Exercise
|
|
Outside
|
|
Exercise
|
|
|
|
Employee
|
|
Price
|
|
Directors
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2005
|
|
|
250,000
|
|
$
|
9.00
|
|
|
91,116
|
|
$
|
3.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
50,000
|
|
$
|
3.54
|
|
|
20,248
|
|
$
|
3.15
|
|
Canceled
|
|
|
|
|
|
|
|
|
(5,062
|
)
|
$
|
3.99
|
|
Expired
|
|
|
(50,000
|
)
|
$
|
12.88
|
|
|
(15,186
|
)
|
$
|
3.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
250,000
|
|
$
|
7.14
|
|
|
91,116
|
|
$
|
3.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
50,000
|
|
$
|
3.62
|
|
|
20,248
|
|
$
|
3.80
|
|
Canceled
|
|
|
|
|
|
|
|
|
(10,124
|
)
|
$
|
4.27
|
|
Expired
|
|
|
-
|
|
|
|
|
|
(15,186
|
)
|
$
|
3.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
300,000
|
|
$
|
6.55
|
|
|
86,054
|
|
$
|
3.88
|
|
The
remaining weighted average contractual lives for the Key Employee and Outside
Directors Plans were 5.2 years and 2.8 years, respectively, at December 31,
2007.
Stock
Ownership by Certain Beneficial Owners
The
following table sets forth, as of March 15, 2008, certain information as to
the
stockholders (other than directors and executive officers of the Company) known
by the Company to own beneficially more than 5% of the Common Stock (based
solely upon filings by said holders with the Securities and Exchange Commission
on Schedule 13D, pursuant to the Securities Exchange Act of 1934, as
amended).
|
Name
and
|
Amount
and
|
|
Title
of
|
Address
of
|
Nature
of
|
Percent
of
|
Class
|
Benenficial
Owner
|
Beneficial
Ownership
|
Class
|
|
|
|
|
|
|
|
|
Common
|
Merlin
Partners, L.P., et al.
|
|
|
|
2000
Auburn Drive, Suite 420
|
|
|
|
Cleveland,
OH 44122
|
371,107
|
7.8%
|
|
|
|
|
Common
|
Yorktown
Avenue Capital, et al.
|
|
|
|
124
E. 4th Street
|
|
|
|
Tulsa,
OK 74103
|
792,600
|
16.6%
|
|
|
|
|
Common
|
David
M. Knott, et al.
|
|
|
|
485
Underhill Blvd., Suite 205
|
|
|
|
Syosset,
NY 11791
|
382,800
|
8.0%
|
|
|
|
|
Common
|
Richard
L. Scott
|
|
|
|
Boult
Cummings Conners & Berry, PLC
|
|
|
|
414
Union Street, Suite 1600
|
|
|
|
Nashville,
TN 37219
|
500,000
|
10.4%
|
|
|
|
|
|
|
|
|
*
|
Beneficial
ownership, as reported in the above table, has been determined
in
|
|
|
|
accordance
with Rule 13d-3 under the Exchange Act. Unless otherwise
|
|
|
|
indicated,
beneficial ownership includes both sole voting and dispositive
power.
|
|
|
Stock
Ownership by Management and Directors
The
following table sets forth, as of March 15, 2008, certain information concerning
the beneficial ownership of Common Stock by each of the directors of the
Company, the executive officers, and all current directors and executive
officers of the Company as a group (based solely upon information furnished
by
such persons):
|
|
Amount
and
|
|
|
|
|
Nature
of
|
|
Percent
|
Title
of class
|
Name
of beneficial owner
|
Beneficial
Ownership (1)
|
|
of
Class
|
|
|
|
|
|
Common
|
Frank
F. Ferola
|
989,202
|
(2)
|
20.7%
|
Common
|
Richard
Barone
|
371,107
|
|
7.8%
|
Common
|
Shouky
Shaheen
|
352,616
|
|
7.4%
|
Common
|
Elliot
Ross
|
20,186
|
|
0.4%
|
Common
|
William
M. Gross
|
15,186
|
|
0.3%
|
Common
|
Curtis
Carlson
|
10,124
|
|
0.2%
|
Common
|
All
executive officers and directors as a group
|
|
(3)
|
36.8%
|
|
|
|
|
|
(1)
|
Beneficial
ownership, as reported in the above table, has been determined
in
accordance
|
|
|
|
with
Rule 13d-3 under the Exchange Act. Unless otherwise indicated,
beneficial
|
|
|
|
ownership
includes both sole voting and sole dispositive power. Unless otherwise
|
|
|
|
indicated,
the address of each person listed is c/o The Stephan Co., 1850
W. McNab
Rd.,
|
|
|
|
Fort
Lauderdale, FL 33309.
|
|
|
|
|
|
|
|
|
(2)
|
Includes
43,174 shares owned by Mr. Frank Ferola's personal Charitable Foundation,
|
|
|
|
of
which Mr. Ferola is a co-trustee.
|
|
|
|
|
|
|
|
|
(3)
|
Includes
the following shares that may be acquired upon the exercise of
options
held by
|
|
|
|
the
specified person within 60 days of the Record Date: Mr. Curtis
Carlson -
10,124;
|
|
|
|
Mr.
William Gross - 15,186; Mr. Frank Ferola - 300,000; Mr. Elliot
Ross -
15,186;
|
|
|
|
Mr.
Shouky Shaheen - 20,248 and Mr. Richard Barone - 15,186 and all
executive
officers
|
|
|
|
and
directors as a group - 375,930.
|
|
|
|
ITEM
13.
Certain
Relationships and Related Transactions, and Director
Independence
In
fiscal
years 2007 and 2006, the Company incurred rent expense of approximately $320,000
in both years to Shaheen & Co., Inc., a corporation in which Mr. Shaheen, a
member of the Board, has an ownership interest, for a building the Company
leases in Danville, Illinois. On May 4, 2005, the Company entered into a Second
Amendment of Lease Agreement for the Danville facility which, among other
things, increased the annual rental to above amount (See Item 3. Legal
Proceedings, for pending litigation regarding this lease.).
By
way of
letter dated July 6, 2005, Frank F. Ferola, President, CEO and Chairman of
the
Board, unilaterally reduced his salary from $910,953 in 2005 to $540,000 per
annum, subject to the contractual annual 10% increase ($653,400 in 2007). In
the
event of a "change of control" in the Company (as defined in the July 6, 2005
letter) Mr. Ferola’s salary, as set forth in his employment contract, shall,
among other things, automatically resume.
ITEM
14.
Principal
Accountant Fees and Services
Principal
Accountant Fees and Services
The
following table sets forth the fees billed to us by Goldstein Lewin & Co.,
our independent registered accounting firm, for the years ended December 31,
2007 and 2006.
|
|
|
|
|
|
2007
|
|
2006
|
|
Audit
fees(1)
|
|
$
|
201,695
|
|
$
|
189,557
|
|
Audit
- related fees
|
|
$
|
-
|
|
$
|
-
|
|
Tax
fees
|
|
$
|
-
|
|
$
|
-
|
|
All
other fees
|
|
$
|
-
|
|
$
|
-
|
|
---------
|
|
|
|
|
|
---------
|
|
|
|
$
|
201,695
|
|
$
|
189,557
|
|
|
|
|
|
|
|
|
|
Audit
fees billed to us by Goldstein Lewin & Co. in 2007 and 2006 related to
1) the review of our interim consolidated financial statements included
in
our Quarterly Reports on Form 10-QSB and Form 10-QSB/A for the periods
ended March 31, June 30 and September 30, 2007 and 2006, respectively,
and
to 2) the audit of our annual consolidated financial statements and
assistance with the preparation of Form 10-K for the years ended
December
31, 2006 and 2005.
|
PART
IV
Item
15. Exhibits,
Financial Statement Schedules
(a)
(1) Financial Statements
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
22
|
|
|
Consolidated
Balance Sheets
|
|
At
December 31, 2007 and 2006
|
23
|
|
|
Consolidated
Statements of Operations
|
|
For
the years ended December 31, 2007 and 2006
|
24
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
|
For
the years ended December 31, 2007 and 2006
|
25
|
|
|
Consolidated
Statements of Cash Flows
|
|
For
the years ended December 31, 2007 and 2006
|
26
|
|
|
Notes
to Consolidated Financial Statements
|
27
|
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of The Stephan Co.
Fort
Lauderdale, FL
We
have
audited the accompanying consolidated balance sheets of The Stephan Co. and
subsidiaries (the "Company") as of December 31, 2007 and 2006, and the related
consolidated statements of operations, changes in stockholders’ equity, and cash
flows for each of the years in the two-year period ended December 31, 2007.
The
Stephan Co.’s management is responsible for these financial statements. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated 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 consolidated financial position of The Stephan Co. and
subsidiaries as of December 31, 2007 and 2006, and the consolidated results
of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 2007, in conformity with accounting principles
generally accepted in the United States of America.
GOLDSTEIN
LEWIN & CO.
Certified
Public Accountants
Boca
Raton, Florida
April
14,
2008
The
Stephan Co. And Subsidiaries
Consolidated
Balance Sheets
December
31, 2007 And 2006
(In
Thousands, Except Share Data)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
4,977
|
|
$
|
7,064
|
|
Short-term
investments
|
|
|
3,950
|
|
|
-
|
|
Restricted
cash
|
|
|
1,110
|
|
|
1,110
|
|
Accounts
receivable, net
|
|
|
1,430
|
|
|
1,717
|
|
Inventories
|
|
|
4,240
|
|
|
4,792
|
|
Prepaid
expenses and other current assets
|
|
|
306
|
|
|
335
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
16,013
|
|
|
15,018
|
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
-
|
|
|
1,206
|
|
Property,
plant and equipment, net
|
|
|
1,419
|
|
|
1,574
|
|
Deferred
income taxes
|
|
|
277
|
|
|
864
|
|
Goodwill,
net
|
|
|
2,603
|
|
|
2,603
|
|
Trademarks,
net
|
|
|
3,070
|
|
|
3,070
|
|
Other
intangible assets, net
|
|
|
76
|
|
|
76
|
|
Other
assets
|
|
|
2,846
|
|
|
2,355
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
26,304
|
|
$
|
26,766
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
1,110
|
|
$
|
1,110
|
|
Accounts
payable and accrued expenses
|
|
|
2,156
|
|
|
2,215
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
3,266
|
|
|
3,325
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current portion
|
|
|
-
|
|
|
1,110
|
|
TOTAL
LIABILITIES
|
|
|
3,266
|
|
|
4,435
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value; 1,000,000 shares
|
|
|
|
|
|
|
|
authorized;
none issued
|
|
|
|
|
|
|
|
Common
stock, $.01 par value; 25,000,000 shares
|
|
|
|
|
|
|
|
authorized;
4,389,779 and 4,389,805 issued and
|
|
|
|
|
|
|
|
outstanding
at December 31, 2007 and 2006,
|
|
|
|
|
|
|
|
respectively.
|
|
|
44
|
|
|
44
|
|
Additional
paid-in capital
|
|
|
17,736
|
|
|
17,646
|
|
Retained
earnings
|
|
|
5,258
|
|
|
4,641
|
|
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
|
23,038
|
|
|
22,331
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES & STOCKHOLDERS' EQUITY
|
|
$
|
26,304
|
|
$
|
26,766
|
|
See
Notes
to Consolidated Financial Statements.
The
Stephan Co. And Subsidiaries
Consolidated
Statements Of Operations
Years
Ended December 31, 2007 And 2006
(In
Thousands, Except Per Share Data)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
20,561
|
|
$
|
22,702
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
10,880
|
|
|
12,795
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
9,681
|
|
|
9,907
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
8,441
|
|
|
14,421
|
|
Impairment
of goodwill
|
|
|
-
|
|
|
1,411
|
|
Total
operating expenses
|
|
|
8,441
|
|
|
15,832
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
1,240
|
|
|
(5,925
|
)
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
381
|
|
|
233
|
|
Interest
expense
|
|
|
(24
|
)
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
1,597
|
|
|
(5,731
|
)
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
|
629
|
|
|
(2,129
|
)
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$
|
968
|
|
$
|
(3,602
|
)
|
|
|
|
|
|
|
|
|
Basic
income (loss) per share
|
|
$
|
0.22
|
|
$
|
(0.82
|
)
|
Diluted
income (loss) per share
|
|
$
|
0.22
|
|
$
|
(0.82
|
)
|
See
Notes
to Consolidated Financial Statements.
The
Stephan Co. And Subsidiaries
Consolidated
Statements Of Stockholders’ Equity
Years
Ended December 31, 2007 And 2006
(In
Thousands, Except Share Data)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
Additional
|
|
Retained
|
|
Stockholders'
|
|
|
|
Shares
|
|
Par
Value
|
|
Paid-in
Capital
|
|
Earnings
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
4,389,805
|
|
$
|
44
|
|
$
|
17,557
|
|
$
|
8,594
|
|
$
|
26,195
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options granted
|
|
|
|
|
|
|
|
|
89
|
|
|
|
|
|
89
|
|
Dividends
paid
|
|
|
|
|
|
|
|
|
|
|
|
(351
|
)
|
|
(351
|
)
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,602
|
)
|
|
(3,602
|
)
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
4,389,805
|
|
|
44
|
|
|
17,646
|
|
|
4,641
|
|
|
22,331
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
repurchased and canceled
|
|
|
(26
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
Stock
options granted
|
|
|
|
|
|
|
|
|
90
|
|
|
|
|
|
90
|
|
Dividends
paid
|
|
|
|
|
|
|
|
|
|
|
|
(351
|
)
|
|
(351
|
)
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
968
|
|
|
968
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
4,389,779
|
|
$
|
44
|
|
$
|
17,736
|
|
$
|
5,258
|
|
$
|
23,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes
to Consolidated Financial Statements.
The
Stephan Co. And Subsidiaries
Consolidated
Statements Of Cash Flows
Years
Ended December 31, 2007 And 2006
(In
Thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$
|
968
|
|
$
|
(3,602
|
)
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income (loss) to net cash flows
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
182
|
|
|
143
|
|
Stock
option compensation
|
|
|
90
|
|
|
89
|
|
Amortization
of deferred acquisition costs
|
|
|
-
|
|
|
66
|
|
Deferred
income tax expense (benefit)
|
|
|
587
|
|
|
(2,208
|
)
|
Impairment
losses on goodwill and trademarks
|
|
|
-
|
|
|
6,706
|
|
Changes
in operating assets & liabilities
|
|
|
-
|
|
|
|
|
Accounts
receivable
|
|
|
287
|
|
|
(285
|
)
|
Inventories
|
|
|
552
|
|
|
1,356
|
|
Prepaid
expenses and other current assets
|
|
|
29
|
|
|
(1
|
)
|
Other
assets
|
|
|
(491
|
)
|
|
(633
|
)
|
Accounts
payable and accrued expenses
|
|
|
(59
|
)
|
|
214
|
|
Total
adjustments to net income (loss)
|
|
|
1,177
|
|
|
5,447
|
|
|
|
|
|
|
|
|
|
NET
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
|
|
|
2,145
|
|
|
1,845
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in short-term investments
|
|
|
(3,950
|
)
|
|
-
|
|
Decrease
in restricted cash
|
|
|
1,206
|
|
|
1,019
|
|
Purchases
of property, plant and equipment
|
|
|
(27
|
)
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
NET
CASH FLOWS (USED IN) PROVIDED BY INVESTING
ACTIVITIES
|
|
|
(2,771
|
)
|
|
985
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment
of long-term debt
|
|
|
(1,110
|
)
|
|
(1,018
|
)
|
Dividends
|
|
|
(351
|
)
|
|
(351
|
)
|
|
|
|
|
|
|
|
|
NET
CASH FLOWS USED IN FINANCING ACTIVITIES
|
|
|
(1,461
|
)
|
|
(1,369
|
)
|
|
|
|
|
|
|
|
|
NET
(DECRASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(2,087
|
)
|
|
1,461
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
|
|
7,064
|
|
|
5,603
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS AT END OF YEAR
|
|
$
|
4,977
|
|
$
|
7,064
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
15
|
|
$
|
39
|
|
Income
taxes paid
|
|
$
|
96
|
|
$
|
55
|
|
See
Notes
to Consolidated Financial Statements.
The
Stephan Co. And Subsidiaries
Notes
To
Consolidated Financial Statements
Years
Ended December 31, 2007 And 2006
NOTE
1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE
OF
OPERATIONS: The Company is engaged in the manufacture, sale, and distribution
of
hair grooming and personal care products principally throughout the United
States, and as more fully explained in Note 10, the Company has allocated
substantially all of its business into two segments: brands and
distributors.
Our
financial statements have been prepared using generally accepted accounting
principles in the United States (“U.S. GAAP”).
USE
OF
ESTIMATES: The preparation of consolidated financial statements in conformity
with U.S. GAAP 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 revenue 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 require management
to
make difficult, subjective and/or complex judgments, often due to a need to
make
estimates about matters that are inherently uncertain:
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, Sorbie Distributing Corporation,
Stephan Distributing, Inc., Morris Flamingo-Stephan, Inc., American Manicure,
Inc. and Lee Stafford Beauty Group, Inc. (collectively, the "Company"). All
signifi-cant inter-Company balances and transactions have been eliminated in
consolidation. Certain reclassifications (having no net profit or loss impact)
have been made to the previously reported amounts in the 2006 financial
statements to effect comparability with the 2007 presentation.
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 their remaining useful lives 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 projection their associated cash flows and then the
discounting of these projected cash flows to their present value.
In
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill
and other indefinite-lived 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. For
the
years ended December 31, 2007 and 2006, the Company incurred impairment losses
of $-0- and $6,706,000, respectively. The Company has less than $6.0 million
of
intangibles subject to future impairment testing.
MAJOR
CUSTOMERS: There were no sales to any single customer in excess of 10% of
revenue in 2007 or 2006. 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.
STOCK-BASED
COMPENSATION: Effective January 1, 2006, the Company adopted Statement of
Financial Accounting Standards No. 123 (revised), “Share-Based Payment”
(“SFAS 123(R)”), and chose to utilize the modified prospective transition
method. Under this method, compensation costs recognized in 2007 and 2006 relate
to the estimated fair value at the grant date of 70,248 stock options granted
in
each year subsequent to January 1, 2006 in accordance with SFAS 123(R).
Prior to the adoption of SFAS 123(R) the Company accounted for stock options
in
accordance with APB Opinion No. 25, “Accounting for Stock Issued to
Employees,” and, using the intrinsic value of the grant to determine stock
option value, recognized no compensation expense in net income for stock options
granted and elected the “disclosure only” provisions of SFAS 123. In accordance
with the provisions of SFAS 123(R), options granted prior to January 1,
2006 have not been restated to reflect the adoption of SFAS 123(R). The required
services for awards prior to January 1, 2006 had been rendered prior to December
31, 2005.
As
a
result of adopting SFAS 123(R) on January 1, 2006, the Company’s net income
for the years ended December 31, 2007 and 2006 was reduced as a result of
the Company's recognition of approximately $90,000 and $89,000 (net of income
tax benefit), respectively, of compensation expense (included in Selling,
General and Administrative Expenses). The impact on basic and diluted earnings
per share for the years ended December 31, 2007 and 2006 amounted to
approximately $.02 per share in each year. The Company used the Black-Scholes
option pricing model to estimate the fair value of stock options using the
following assumptions as of the respective dates of grant during 2007 and 2006:
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Life
expectancy - Key employee
|
|
|
10
years
|
|
|
10
years
|
|
Life
expectancy - Outside directors
|
|
|
5
years
|
|
|
5
years
|
|
Risk-free
interest rate
|
|
|
4.0
|
%
|
|
5.2
|
%
|
Expected
volatility
|
|
|
63.0
|
%
|
|
61.1
|
%
|
Dividends
per share
|
|
|
2.2
|
%
|
|
2.1
|
%
|
Weighted
average fair value at grant date
|
|
$
|
1.99
|
|
$
|
1.88
|
|
The
above
assumptions are based on a number of factors as follows: (i) expected
volatility was determined using the historical volatility of the Company's
stock
price; (ii) the expected term of the options was based on the period of
time that the options granted are expected to be outstanding, and (iii) the
risk-free rate is the U.S. Treasury rate effective at the time of grant for
the
duration of the options granted. Compensation cost is recognized on a
straight-line basis over the vesting period.
FAIR
VALUE OF FINANCIAL INSTRUMENTS: the Company, using available market information
and recognized valuation methodologies, has determined the estimated fair values
of financial instruments that are presented herein. 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
instruments.
The
following methods and assumptions were used to estimate fair value: 1) the
carrying amounts of cash and cash equivalents, short-term investments, accounts
receivable and accounts payable were assumed to approximate fair value due
to
their short-term nature; 2) debt service cash flows were discounted using
current interest rates for financial instruments with similar characteristics
and maturity to determine the fair value of bank debt. As of December 31, 2007
and 2006 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 involve the delivery of the products sold and
reasonable assurance as to the collectibility of the resulting account
receivable. We do not sell on a consignment basis; returns are permitted for
damaged or unsaleable items only. Revenue is shown after deductions for payment
and volume discounts and returns. We estimate that these discounts and returns
will approximate between 1% and 2% of gross revenue, and we accrue for these
costs accordingly. The Company participates in various promotional activities
in
conjunction with its retailers and distributors, primarily through the use
of
discounts, new warehouse allowances, slotting allowances, co-op advertising
and
periodic price reduction programs. These costs have been subtracted from revenue
and approximated $320,000 and $500,000 for the years ended December 31, 2007
and
2006, respectively. The allowances for sales returns and consumer and trade
promotion liabilities are established based on the Company’s estimate of the
amounts necessary to settle future and existing obligations for such items
on
products sold as of the balance sheet date.
COST
OF
GOODS SOLD: This item includes the costs of raw materials, packaging, inbound
freight, direct labor and depreciation. Other manufacturing-related overhead,
including purchasing, receiving, inspection, internal transfer costs,
warehousing and manufacturing center costs (principally rent, real estate taxes
and insurance, related to product manufacturing and warehousing but co-mingled
to facilitate historical comparison and for more efficient administration)
are
classified in Selling,
General and Administrative Expenses in the Consolidated Statements of
Operations. For the years ended December 31, 2007 and 2006, the
manufacturing-related overhead included in Selling, General and Administrative
Expenses was approximately $900,000 in each year.
SHIPPING
AND HANDLING FEES AND COSTS: Expenses for the shipping and delivery of products
sold to customers were approximately $1,600,000 and $1,800,000 in 2007 and
2006,
respectively, and were included in Selling, General and Administrative Expenses
in the Consolidated Statements of Operations.
CASH
AND
CASH EQUIVALENTS: Cash and cash equivalents include cash, money market funds,
repurchase agreements and similar highly-liquid investments 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 excludes restricted cash of $1.1 million
pledged for the repayment of bank debt.
SHORT-TERM
INVESTMENTS: We have $3.9 million in government backed, highly-rated auction
rate securities that have been subject recently to market illiquidity due to
the
effects of the sub-prime lending crisis and other factors. These bonds continue
to pay us interest as due. We believe, based on discussion with investment
professionals, that there is little or no credit risk associated with these
investments and that the illiquidity in the market will eventually abate as
the
issuers refinance the auction rate securities in favor of long-term issuances.
The Company has been unable to liquidate its auction rate securities since
February 2008 due to failed auctions. We believe that, due to our present cash
position and projected cash flow, this market illiquidity will not affect
day-to-day operations of the Company.
However,
in the event that the Company needs to access the funds related to the affected
securities, it may be unable to do so without a potential loss of principal
unless future auctions on these securities are successful. If the issuers are
unable to successfully close future auctions or refinance their obligations
and
their credit ratings deteriorate, the Company may be required to adjust the
carrying value of these securities and recognize an impairment charge for an
other-than-temporary decline in the fair
values. We have not reduced the carrying value of these investments as we
believe that these securities will ultimately be refinanced by their
issuers.
ALLOWANCE
FOR DOUBTFUL ACCOUNTS: The allowance is based upon specific identification
of
customer balances that are unlikely to be collected plus an estimated amount
for
potentially uncollectible amounts.
INVENTORIES:
Inventories are stated at the lower of cost (determined on the first-in,
first-out basis) or market. Other manufacturing -related costs (See COST OF
GOODS SOLD.) classified in Selling, General and Administrative expenses, are
allocated to finished goods inventory. The amount of these allocations to
inventory was approximately $540,000 at both December 31, 2007 and 2006. We
periodically evaluate our inventory composition, giving consideration to factors
such as the probability and timing of anticipated usage and the physical
condition of the items, and then estimate an allowance (reducing the inventory)
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 inventory
write-downs were established.
At
December 31, 2007 and 2006 we classified as Other Assets approximately $4.8
million and $4.4 million, respectively, of slow moving and potentially obsolete
inventories. From these amounts we have subtracted obsolescence reserves of
$2.0
million and $2.1 million, respectively, for 2007 and 2006. The net long-term
inventory amounts in Other Assets were $2.8 million and $2.3 million at the
end
of 2007 and 2006, respectively.
PROPERTY,
PLANT AND EQUIPMENT: Property, plant and equipment are recorded at cost. Routine
repairs and maintenance are expensed as incurred. Depreciation is provided
on a
straight-line basis over the estimated useful lives of the assets as
follows:
|
Buildings and
improvements |
|
15-30 years |
|
Machinery and
equipment |
|
5-10 years |
|
Furniture and office
equipment |
|
3-5
years |
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 estimated future year differences between the
financial statement (“book basis”) and tax basis carrying amounts. Our tax basis
exceeds our book basis because our future tax benefits have already been
recorded for book purposes; therefore, we have recorded a deferred tax asset.
A
valuation allowance (reducing the deferred tax asset) is recorded when it is
more likely than not that some portion, or all, of the deferred tax asset will
not be realized. See Note 9 to the Consolidated Financial Statements.
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, 2007 and 2006, the Company
had approximately 400,000 options outstanding of which an insignificant amount
had exercise prices that were less than the Company’s stock price at year-end.
Consequently, no additional shares were assumed to be outstanding for purposes
of calculating earnings per share.
NOTE
2:
NEW FINANCIAL ACCOUNTING STANDARDS:
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations.” SFAS No. 141(R), amends the principles and requirements for how
an acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any noncontrolling interest in the
acquiree and the goodwill acquired. SFAS No. 141(R) also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of
the
business combination. SFAS No. 141(R) is effective for us on January 1, 2009,
and we will apply its provisions prospectively to all business combinations
after that time.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51.” SFAS No. 160 establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 also establishes disclosure requirements that clearly
identify and distinguish between controlling and noncontrolling interests and
requires the separate disclosure of income attributable to controlling and
noncontrolling interests. SFAS No. 160 is effective for fiscal years beginning
after December 15, 2008. The Company is currently evaluating the impact that
the
adoption of SFAS No. 160 may have on our consolidated financial
statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (SFAS No. 159), which establishes a
fair value option under which entities can elect to report certain financial
assets and liabilities at fair value, with changes in fair value recognized
in
earnings. SFAS 159 is effective for fiscal years beginning after November 15,
2007, and we are currently evaluating the impact SFAS 159 may have on our
consolidated financial statements.
In
September 2006 the FASB issued SFAS 157 “Fair Value Measurements.” SFAS 157 does
not expand the use of fair value measurements in financial statements but
standardizes their definition and guidance by defining fair value as used in
numerous accounting pronouncements, establishes a framework for measuring fair
value and expands disclosure related to the use of fair value measures. SFAS
157
is effective for our fiscal year ending December 31, 2008, and we are currently
evaluating the impact SFAS 157 may have on our financial
statements.
In
September 2006, the Securities and Exchange Commission staff published
Staff Accounting Bulletin ("SAB") No. 108, "Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements." SAB No. 108 addresses quantifying the
financial statement effects of misstatements, and, specifically, how the effects
of prior year uncorrected errors must be considered in quantifying misstatements
in the current year financial statements. SAB No. 108 is effective for
fiscal years ending after November 15, 2006. The adoption of SAB
No. 108 by our Company in the fourth quarter of 2006 did not have a
material impact on our consolidated financial statements.
In
July
2006 the FASB issued FASB Interpretation No. 48, ("FIN 48") "Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109".
FIN
48 requires that we recognize in our financial statements the impact of a tax
position, taken or expected to be taken in a tax return, provided that the
position is more likely than not of being sustained on audit. FIN 48 is
effective for fiscal years beginning after December 15, 2006. FIN 48 did not
have an adverse effect on our financial statements in 2007. See Note 9 to the
Consolidated Financial Statements. The
Company files income tax returns in the U.S. federal jurisdiction and various
states. The Company is subject to U.S. federal or state examinations by tax
authorities for five years after 2002. During the periods open to examination,
the Company had net operating losses for U.S. federal and state tax purposes
that have attributes from closed periods. Since these NOLs and tax credit carry
forwards may be utilized in future periods, they remain subject to
examination.
NOTE
3:
ACCOUNTS RECEIVABLE
Accounts
receivable at December 31, 2007 and 2006 consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Trade
accounts receivable
|
|
$
|
1,637
|
|
$
|
1,856
|
|
Allowance
for doubtful accounts
|
|
|
(207
|
)
|
|
(139
|
)
|
Accounts
receivable, net
|
|
$
|
1,430
|
|
$
|
1,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following is an analysis of the allowances for doubtful
accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$
|
(139
|
)
|
$
|
(109
|
)
|
Provision
for doubtful accounts
|
|
|
(124
|
)
|
|
(40
|
)
|
Uncollectible
accounts written-off, net of recoveries
|
|
|
56
|
|
|
10
|
|
Balance
at end of year
|
|
$
|
(207
|
)
|
$
|
(139
|
)
|
NOTE
4:
INVENTORIES
Inventories
at December 31, 2007 and 2006 consisted of the following:
(in
thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
1,380
|
|
$
|
1,403
|
|
Packaging
and components
|
|
|
1,995
|
|
|
2,015
|
|
Work-in-process
|
|
|
437
|
|
|
592
|
|
Finished
goods
|
|
|
5,231
|
|
|
5,177
|
|
Total
inventory
|
|
|
9,043
|
|
|
9,187
|
|
|
|
|
|
|
|
|
|
Less:
amount included in Other Assets
|
|
|
(4,803
|
)
|
|
(4,395
|
)
|
|
|
|
|
|
|
|
|
Inventory
included in Current Assets
|
|
$
|
4,240
|
|
$
|
4,792
|
|
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 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 long-term inventory not anticipated to be utilized within
one
year based on estimation methods established by the Company. We reduce the
carrying value of this slower moving inventory to provide for an estimated
amount that may ultimately become unusable or obsolete. See Note 1 to the
Consolidated Financial Statements.
NOTE
5:
PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment at December 31, 2007 and 2006 consisted of the
following:
|
|
2007
|
|
2006
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
380
|
|
$
|
380
|
|
Buildings
and improvements
|
|
|
2,230
|
|
|
2,230
|
|
Machinery
and equipment
|
|
|
2,057
|
|
|
1,984
|
|
Furniture
and office equipment
|
|
|
556
|
|
|
602
|
|
|
|
|
5,223
|
|
|
5,196
|
|
Accumulated
depreciation
|
|
|
(3,804
|
)
|
|
(3,622
|
)
|
Fixed
assets, net
|
|
$
|
1,419
|
|
$
|
1,574
|
|
NOTE
6:
GOODWILL, TRADEMARKS AND OTHER INTANGIBLE ASSETS
|
|
2007
|
|
2006
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Brands
segment
|
|
$
|
2,614
|
|
$
|
2,614
|
|
Distributors
segment
|
|
|
3,135
|
|
|
3,135
|
|
|
|
$
|
5,749
|
|
$
|
5,749
|
|
In
2006,
the Company recorded an intangibles impairment loss of $6.7 million. See Note
1
to the Consolidated Financial Statements.
NOTE
7:
LONG-TERM DEBT
Long-term
debt at December 31, 2007 and 2006 consisted of the following:
|
|
|
|
|
|
|
|
($
in thousands)
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.50%
note payable in monthly monthly instalments
|
|
|
|
|
|
of
$92,500 plus interest, maturing December 31, 2008
|
|
$
|
1,110
|
|
$
|
2,220
|
|
(secured
by restricted cash of a like amount)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
|
(1,110
|
)
|
|
(1,110
|
)
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$
|
-
|
|
$
|
1,110
|
|
|
|
|
|
|
|
|
|
NOTE
8:
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses at December 31, 2007 and 2006 consisted of the
following:
(in
thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
670
|
|
$
|
515
|
|
Accrued
payroll and related costs
|
|
|
294
|
|
|
244
|
|
Other
accrued expenses
|
|
|
261
|
|
|
525
|
|
Accrued
royalty and related interest (Note 13)
|
|
|
931
|
|
|
931
|
|
|
|
$
|
2,156
|
|
$
|
2,215
|
|
NOTE
9:
INCOME TAXES
The
provision in 2007 and (benefit) in 2006 for income taxes were comprised of
the
following for the years
ended
December 31:
(in
thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Current
tax provision:
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
$
|
-
|
|
State
|
|
|
42
|
|
|
76
|
|
|
|
|
42
|
|
|
76
|
|
|
|
|
|
|
|
|
|
Deferred
tax provision:
|
|
|
|
|
|
|
|
Federal
|
|
|
554
|
|
|
(2,009
|
)
|
State
|
|
|
33
|
|
|
(196
|
)
|
|
|
|
587
|
|
|
(2,205
|
)
|
|
|
|
|
|
|
|
|
Total
tax provision:
|
|
|
|
|
|
|
|
Federal
|
|
|
554
|
|
|
(2,009
|
)
|
State
|
|
|
75
|
|
|
(120
|
)
|
|
|
$
|
629
|
|
$
|
(2,129
|
)
|
Deferred
income taxes reflect the net tax effects of temporary differences (items
recognized for tax returns and financial statements in different
years).
The
Consolidated Financial Statements include deferred income tax assets of $277,000
and $864,000, respectively, attributable to the following items:
(in
thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Net
operating loss carryover
|
|
$
|
1,113
|
|
$
|
1,162
|
|
Interest
expense
|
|
|
78
|
|
|
78
|
|
Amortization
of intangibles
|
|
|
59
|
|
|
648
|
|
Accrued
liabilities and other
|
|
|
39
|
|
|
40
|
|
Accounts
receivable allowance
|
|
|
29
|
|
|
29
|
|
Inventory
allowance
|
|
|
-
|
|
|
127
|
|
State
income taxes
|
|
|
-
|
|
|
96
|
|
Property,
plant and equipment
|
|
|
(71
|
)
|
|
(76
|
)
|
|
|
|
1,247
|
|
|
2,104
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
(970
|
)
|
|
(1,240
|
)
|
|
|
|
|
|
|
|
|
Deferred
income tax asset
|
|
$
|
277
|
|
$
|
864
|
|
The
provision for Federal and state income taxes differed from statutory tax expense
(computed by applying the U.S. Federal corporate tax rate to income (loss)
before income taxes) as follows:
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Statutory
rate
|
|
|
34.0
|
%
|
|
34.0
|
%
|
State
taxes, net of federal benefit
|
|
|
3.1
|
%
|
|
2.7
|
%
|
Stock
option compensation
|
|
|
1.9
|
%
|
|
0.5
|
%
|
Other
|
|
|
0.4
|
%
|
|
-0.1
|
%
|
|
|
|
|
|
|
|
|
Effective
income tax rate
|
|
|
39.4
|
%
|
|
37.1
|
%
|
Note
that, although stock option compensation was approximately the same amount
in
both years presented, the percentage effect on the rate reconciliation was
different because of the effect of significantly different denominators in
2007
($1.6 million income before income taxes) and 2006 ($5.7 million loss before
income taxes).
Valuation
Allowances:
For
the
year ended December 31, 2007 and 2006, the Company had income tax valuation
allowances of $970,000 and $1,240,000 to provide for the likelihood that the
utilization of net deferred tax assets may not be realized. The Company has
net
operating loss carryforwards (before income taxes) of approximately $2,900,000
for Federal income tax purposes; these carryforwards will begin to expire in
2024 if not utilized before then.
The
increase in the valuation account in 2006 resulted from our determination
at
that time that it was more likely than not that certain loss carry forwards
and
accrued expenses would not be utilized prior to expiration. The decrease
in the
valuation account in 2007 resulted from our assessment that we will realize
more
deferred tax assets than originally expected.
NOTE
10:
SEGMENT INFORMATION
The
Company has identified two reportable operating segments (See Note 1 for prior
year classifications.) based upon how management evaluates its business. These
segments are Distributors and Brands. The Distributors 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. Our sales to
beauty schools are also classified in this segment. The Brands segment includes
sales to mass merchandisers, chain drug stores and distributors. The Company
conducts operations primarily in the United States; sales to international
customers are not material to consolidated revenue. The following table
summarizes significant items by reportable segment:
2007
|
|
|
|
|
|
|
|
(in
thousands)
|
|
Distributors
|
|
Brands
|
|
Total
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
13,842
|
|
$
|
6,719
|
|
$
|
20,561
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
$
|
(91
|
)
|
$
|
1,331
|
|
|
1,240
|
|
Net
interest income
|
|
|
|
|
|
|
|
|
357
|
|
Income
before income taxes
|
|
|
|
|
|
|
|
|
1,597
|
|
Income
taxes
|
|
|
|
|
|
|
|
|
(629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
$
|
968
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
assets:
|
|
$
|
5,944
|
|
$
|
11,274
|
|
|
17,218
|
|
Not
allocated to segments:
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, short-term investments
|
|
|
|
|
|
|
|
|
10,037
|
|
Deferred
income taxes
|
|
|
|
|
|
|
|
|
277
|
|
Eliminations/other
|
|
|
|
|
|
|
|
|
(1,228
|
)
|
Consolidated
assets
|
|
|
|
|
|
|
|
$
|
26,304
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$
|
13
|
|
$
|
169
|
|
$
|
182
|
|
Capital
expenditures
|
|
$
|
-
|
|
$
|
27
|
|
$
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
Distributors
|
|
|
Brands
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
15,334
|
|
$
|
7,368
|
|
$
|
22,702
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income before unusual item
|
|
|
153
|
|
|
628
|
|
|
781
|
|
Unusual
item - impairment of intangibles
|
|
|
-
|
|
|
(6,706
|
)
|
|
(6,706
|
)
|
Operating
Income
|
|
$
|
153
|
|
$
|
(6,078
|
)
|
|
(5,925
|
)
|
Net
interest income
|
|
|
|
|
|
|
|
|
194
|
|
Loss
before income tax benefit
|
|
|
|
|
|
|
|
|
(5,731
|
)
|
Income
tax benefit
|
|
|
|
|
|
|
|
|
2,129
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
$
|
(3,602
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Segment
assets:
|
|
$
|
6,314
|
|
$
|
10,563
|
|
|
16,877
|
|
Not
allocated to segments:
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, short-term investments
|
|
|
|
|
|
|
|
|
9,380
|
|
Deferred
income taxes
|
|
|
|
|
|
|
|
|
864
|
|
Eliminations/other
|
|
|
|
|
|
|
|
|
(355
|
)
|
Consolidated
assets
|
|
|
|
|
|
|
|
$
|
26,766
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$
|
13
|
|
$
|
130
|
|
$
|
143
|
|
Capital
expenditures
|
|
$
|
12
|
|
$
|
22
|
|
$
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
corporate overhead was allocated to each segment based on revenues
contributed by
|
|
|
|
|
|
|
|
|
|
|
that
segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
11:
RELATED PARTIES
1)
The
Company has an employment agreement with its Chief Executive Officer. The
agreement expires on December 31, 2008, but provides for the unilateral renewal
by the CEO. The contract includes an incentive bonus award based on consolidated
earnings per share in excess of the applicable base year, as defined in the
employment agreement.
In
July
2005, the CEO took a voluntary, unilateral reduction in compensation to
$540,000. In accordance with the terms of the employment agreement, this amended
base compensation level is subject to an annual increase of 10% in each of
the
remaining years of the contract.
Also,
the
terms of the waiver of compensation allows the CEO to retain the right to his
original contractual compensation level at the time of the occurrence of certain
specified events relating to a change in control, or reasonable likelihood
of a
change in control of the Company, as defined in the waiver. If it were
determined that a change in control existed, the CEO would be entitled to a
payment of approximately $11.6 million. (See Note 13.)
2)
We
paid rent to Shaheen & Co., Inc., the former owner of Morris Flamingo which
is now a wholly owned subsidiary of the Company, for the years ended December
31, 2007 and 2006 approximately $320,000 for each year. Mr. Shouky A. Shaheen,
a
minority owner of Shaheen & Co., Inc., which owns the building that the
Company rents in Danville, Illinois, is currently a member of the Board of
Directors and a significant shareholder of the Company. Shaheen & Co, Inc.,
sued the Company with respect to the interpretation of a 90-day right of
termination by the Company stated in the lease. (See Note 13.)
3)
In
fiscal year 2007, the Company paid approximately $17,000 to Carlson &
Lewittes, P.A. a law firm of which Curtis Carlson, an officer and director
of
the Company, is a partner, for legal services rendered to the Company.
Additionally, the Company paid Mr. Carlson $2,000 per month for his services
as
Vice President and Secretary.
4)
The
Company paid approximately $17,000 to Mr. William Gross, a director, for legal
services rendered to the Company.
NOTE
12:
LEASES
Rent
expense for 2007 and 2006 was $521,000 and $599,000, respectively.
Annual
lease payments are:
2008
|
|
$
|
413,000
|
|
2009
|
|
|
320,000
|
|
2010
|
|
|
320,000
|
|
2011
|
|
|
320,000
|
|
2012
|
|
|
320,000
|
|
Thereafter
|
|
|
801,000
|
|
|
|
$
|
2,494,000
|
|
Projected
lease payments will be adjusted annually with changes in the Consumer Price
Index.
Annual
lease payments in 2008 include the remaining months of a lease in Tampa, FL
which expires in mid-2008 and will not be renewed.
We
also
have month-to-month operating leases for real estate aggregating $29,000
annually through 2011.
NOTE
13:
CONTINGENCIES & COMMITMENTS
As
mentioned in NOTE 11. RELATED PARTIES , the CEO retains the right to his
original contractual compensation level at the time of the occurrence of certain
specified events relating to a change in control, or reasonable likelihood
of a
change in control, of the Company, as defined in the waiver. If it were
determined that a change in control existed, the CEO would be entitled to a
payment of approximately $11.6 million.
The
Company was not a party to any non-cancelable operating leases at December
31,
2007, except for a warehouse lease in Tampa, FL that expires on July 31, 2008.
The minimum annual rental due under this lease is approximately $93,000 for
2008. This lease will not be renewed.
In
addition to the matters set forth below, the Company is involved in other
litigation arising in the normal course of business. It is our opinion that
none
of such matters, at December 31, 2007, would likely, if adversely determined,
have a material adverse effect on the Company's financial position or results
of
operations.
1)
In
March 2006, in a case styled Trevor Sorbie International, Plc. v. Sorbie
Acquisition Co. (CASE NO. 05-14908-09), filed in the Circuit Court of the
17th
Judicial
Circuit in and for Broward County, Florida, Trevor Sorbie International, Plc.
(“TSI”) instituted efforts to collect on a judgment it has against Sorbie
Acquisition Co. (“SAC”, a subsidiary of the Company). The judgment derives from
an October 25, 2004, Pennsylvania arbitration award in favor of TSI and against
SAC with respect to certain royalties and interest due. The financial statements
for the Company for the year ended December 31, 2007, reflected a liability
of
approximately $931,000, including interest, for payment of this judgment. Among
other things, the Florida lawsuit alleges fraud and names as additional
defendants The Stephan Co., Trevor Sorbie of America, Inc. and Sorbie
Distributing Corporation, also subsidiaries of the Company. This matter is
currently unresolved and the Company is unable, at this time, to determine
the
outcome of the litigation. The Company is vigorously defending this legal action
against TSI. While we believe that we may ultimately prevail and/or settle
for
an amount substantially less than that accrued, due to the limited discovery
taken and the complexities of the issues involved, the Company cannot predict
the outcome of the litigation.
2)
On May
4, 2005, the Company entered into a Second Amendment of Lease Agreement (the
"Amendment") with respect to the Danville, IL facility, Morris Flamingo -
Stephan, Inc., extending the term of the lease to June 30, 2015, with a
five-year renewal option, and increasing the annual rental to approximately
$320,000. The base rent is adjustable annually, in accordance with the existing
master lease, the terms of which, including a 90-day right of termination by
the
Company, remain in full force and effect. The Amendment provides a purchase
option, effective during the term of the lease, to purchase the premises at
the
then fair market value of the building, or to match any bona fide third-party
offer to purchase the premises.
On
July
6, 2005, the landlord, Shaheen & Co., Inc., the former owner of Morris
Flamingo, notified the Company that its interpretation of the Amendment differed
from that of the Company as to the existence of the 90-day right of termination.
In October 2005, the landlord filed a lawsuit in the Circuit Court for the
17th
Circuit of Florida in and for Broward County, FL, styled Shaheen & Co., Inc.
(Plaintiff) v. The Stephan Co., Case number 05-15175 seeking a declaratory
judgment with respect to the validity of the 90-day right of termination. In
addition, the lawsuit alleges damages with respect to costs incurred and the
weakening marketability of the property. This matter is currently unresolved
and
the Company is unable, at this time, to determine the outcome of the litigation.
However, if it is ultimately determined that the early termination provision
has
been eliminated with the Amendment, the Company’s minimum lease obligation would
amount to $320,000 in each of the years 2008 through 2012 and approximately
$800,000 thereafter, subject to Consumer Price Index adjustments. 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.
NOTE
14:
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 available to grant pursuant
to
the Key Employee Plan, as adjusted for stock splits and shareholder-approved
increases in 1994 and 1997, is 523,822 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 5-10 years from the date of grant. Stock
option activity and the weighted average exercise prices for 2007 and 2006
are
set forth below:
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Key
|
|
Exercise
|
|
Outside
|
|
Exercise
|
|
|
|
Employee
|
|
Price
|
|
Directors
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2005
|
|
|
250,000
|
|
$
|
9.00
|
|
|
91,116
|
|
$
|
3.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
50,000
|
|
$
|
3.54
|
|
|
20,248
|
|
$
|
3.15
|
|
Canceled
|
|
|
|
|
|
|
|
|
(5,062
|
)
|
$
|
3.99
|
|
Expired
|
|
|
(50,000
|
)
|
$
|
12.88
|
|
|
(15,186
|
)
|
$
|
3.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
250,000
|
|
$
|
7.14
|
|
|
91,116
|
|
$
|
3.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
50,000
|
|
$
|
3.62
|
|
|
20,248
|
|
$
|
3.80
|
|
Canceled
|
|
|
|
|
|
|
|
|
(10,124
|
)
|
$
|
4.27
|
|
Expired
|
|
|
-
|
|
|
|
|
|
(15,186
|
)
|
$
|
3.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
300,000
|
|
$
|
6.55
|
|
|
86,054
|
|
$
|
3.88
|
|
The
fair
value of options granted in 2007 and 2006 was approximately $90,000 and $89,000
(both amounts net of income tax benefits) for 2007 and 2006, respectively.
All
options are exercisable, except for 20,248 shares which will become exercisable
on June 30, 2008.
The
exercise price range of options outstanding and exercisable as of December
31,
2007 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:
|
|
Key
Employee
|
|
Outside
Directors
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Options
|
|
Exercise
|
|
Options
|
|
Exercise
|
|
|
|
Outstanding
|
|
Price
|
|
Outstanding
|
|
Price
|
|
Price
Range
|
|
|
|
|
|
|
|
|
|
$3.00
- $5.00
|
|
|
200,000
|
|
$
|
3.94
|
|
|
86,054
|
|
$
|
3.88
|
|
Over
$10.00
|
|
|
100,000
|
|
$
|
11.78
|
|
|
-
|
|
$
|
-
|
|
|
|
|
300,000
|
|
$
|
6.55
|
|
|
86,054
|
|
$
|
3.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
remaining
life (years):
|
|
|
5.2
|
|
|
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
aggregate intrinsic value of outstanding and currently exercisable
options
was $3,000 at December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
(3)
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.
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, as set forth in the
Definitive Proxy filed July 5, 2000, in connection with the Company's 2000
Annual Meeting of Stockholders.
10.14
1990 Non-Employee (Outside Directors) Plan, as amended, as set forth in the
Definitive Proxy filed July 5, 2000, in connection with the Company's 2000
Annual Meeting of Stockholders.
10.15
Merger Agreement, dated April 30, 2003, by and among The Stephan Co., Gunhill
Enterprises and Eastchester Enterprises, including exhibits, included with
Form
8-K filed May 8, 2003, is incorporated herein by reference.
10.16
Working Capital Management Account agreement dated September 19, 2003 with
Merrill Lynch Business Financial Services, Inc., creating a line of credit
not
to exceed $5,000,000, included with Form 8-K filed October 3, 2003, and amended
October 9, 2003, is incorporated herein by reference.
10.17
Second Amended and Restated Agreement and Plan of Merger, dated March 24, 2004,
by and among The Stephan Co., Gunhill Enterprises and Eastchester Enterprises,
including exhibits, included with Form 8-K filed March 30, 2004, is incorporated
herein by reference.
10.18
Modification of employment agreement between the Company and Frank F. Ferola,
President and Chief Executive Officer, dated July 6, 2005, included with Form
10-K for the year ended December 31, 2004, filed September 9, 2005, is
incorporated herein by reference.
10.19
Brand License Agreement with The Quantum Beauty Company Limited for the
exclusive rights to manufacture, market and distribute the "Lee Stafford" brand
of hair care products included with the Form 8-K filed August 4, 2005, is
incorporated herein by reference.
10.20
Loan Modification Agreement with Wachovia Bank, dated September 26, 2006,
included with Form 10-Q for the nine months ended September 30, 2006, filed
November 13, 2006, is incorporated herein by reference.
10.21
Modification of employment agreements, dated April 14, 2007, between the Company
and Frank F. Ferola, President and Chief Executive Officer, included with Form
10-K for the year ended December 31, 2007, filed April 15, 2008, is incorporated
herein by reference.
31.1
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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,
2008
By:
/s/
Robert C. Spindler
___________________________________
Robert
C.
Spindler
Principal
Financial Officer
Principal
Accounting Officer
April
15,
2008
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/ Shouky Shaheen |
|
|
|
Frank F. Ferola,
Principal |
|
Shouky Shaheen, Director |
Executive Officer and
Director |
|
Date: April 15, 2008 |
Date: April 15, 2008 |
|
|
By: /s/ Curtis Carlson |
|
By: /s/ Richard A. Barone |
|
|
|
Curtis Carlson,
Director |
|
Richard A. Barone,
Director |
Date: April 15, 2008 |
|
Date: April 15,
2008 |
By: /s/ William Gross |
|
By: /s/ Elliot Ross |
|
|
|
William Gross,
Director |
|
Elliot Ross, Director |
Date: April 15, 2008 |
|
Date: April 15,
2008 |