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STEPHAN CO THE 10-K 2009 Documents found in this filing:
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 EndedDecember
31, 2008
or
o 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)
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:
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:
4,252,675
shares of common stock, $0.01 par value, as of March 23, 2009
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
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, 2008; 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, Williamsport, Pennsylvania and
Wilmington, North Carolina.
The
Company is comprised of The Stephan Co. and its ten 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., Lee Stafford Beauty Group, Inc., and Bowman Beauty and
Barber Supply, Inc. (hereinafter referred to as “Bowman”), a company purchased
by The Stephan Co. in August 2008.
We have
identified two reportable operating segments/reporting units: 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 2008, Distributors and Brands segments accounted for
approximately 74% and 26%, respectively, of the Company’s
revenue. 2
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. Bowman Beauty and Barber Supply, Inc., located in Wilmington,
North Carolina, is principally a mail order barber and beauty supply
company. These 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
manufacture and market LeKair and New Era for the African American market. We
make and sell OLD 97, KNIGHTS, and TAMMY. And we distribute "Natural"
and "French" American Manicure nail polish manicure kits to other distributors
and salons.
Under
certain trademark licenses, 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 with CMB, we market the brand names (owned by CMB) 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
2008. Please see Note 11 to 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
inventory is expected to occur after the end of 2009 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, 2008, the Company did not have an unusually large backlog of
orders. 3
RESEARCH
AND DEVELOPMENT
During
the last two fiscal years ended December 31, 2008, expenditures for
Company-sponsored research relating to the development of new products, services
or techniques were immaterial 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, 2008, 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, including a multi-employer pension plan; the Company
believes its employee relationships are satisfactory.
Item
1A: Risk Factors
Not required.
Item
1B: Unresolved Staff Comments
None.
Facilities
we own*:
Facilities
we lease:
Please
see Note 11 to the Consolidated Financial Statements for the year ended December
31, 2008 for lease information.
Note: The
Danville, IL, Williamsport, PA and Wilmington, NC 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 facility is
used for corporate offices. 4
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, 2008, would
likely, if adversely determined, have a material adverse effect on the Company's
financial position or results of operations.
1) In
March 2007, 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, 2008, reflected a liability that, in
management’s opinion, was adequate to cover the likely liability in the
case. 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 2009
through 2013 and approximately $480,000 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
None. 5
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 NYSE – AMEX 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:
(b) Number
of Holders of Common Stock
As
of March 1, 2009, the Company’s Common Stock was held of record by approximately
152 holders. Additionally, we believe that the Company’s Common Stock was held
beneficially by approximately 500 shareholders in street name through
approximately 60 institutions. Under current law, a publicly held company with
fewer than 300 shareholders (as defined in the Securities and Exchange
Commission (“SEC”) regulations) can elect to de-list from its stock exchange and
cease to be required to file customary SEC reports including Forms 10-K, 10-Q,
8-K and Proxy Statements. Based on our present number of
shareholders, as defined by the SEC, the Company may elect to follow the course
of action outlined above if, in management’s opinion, the shareholders would
benefit from the lower operating costs involved with not being an
exchange-traded, SEC-registered company, including auditing, legal, regulatory,
trading and other costs, particularly including management time devoted to
maintaining an SEC-registered status. Management continues to
evaluate the positive and negative aspects of this ownership issue and intends
to do what it considers to be in the best interests of the
shareholders.
(c) Dividends
Paid
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) Repurchases
of Shares
As authorized by a longstanding Board
resolution, in 2008 the Company purchased approximately 123,000 shares of common
stock for an aggregate cost of $281,000, or about $2.28 cost per share
repurchased. The Company has continued its share repurchase program
into 2009, acquiring an additional 13,888 shares through March 23, 2009 for
approximately $30,000, or $2.16 per share.
Item
6. Selected Financial Data
Not
required. 6
Item
7. Management’s Discussion and Analysis of
Financial Condition
and Results of Operations.
Liquidity and Capital
Resources
We had
cash and cash equivalents of approximately $8.0 million at December 31,
2008. We have minor indebtedness, principally from the acquisition of
Bowman, of less than $0.5 million. Our cash is maintained, as of
March 2009, primarily in FDIC-insured bank accounts.
Our
Company generated positive cash flows from operating activities primarily due to
the generation of EBITDA of $0.9 million during 2008. Our largest uses of cash
were: 1) $1.1 for debt repayment (this amount retired in full our outstanding
bank loan), 2) a temporary increase in inventory of $0.7 million, 3) $0.5
million for the acquisition of Bowman, 4) dividends of $0.4 million, and 5) the
repurchase of our common stock, which has recently traded at historically low
levels, totaling $0.3 million. Capital expenditures were not
significant.
In 2008
we sold, at par, our auction rate securities of $3.9 million held at the end of
2007. We have adequate liquidity and do not foresee the need for additional
capital for day-to-day operations in the next year. Our cash
flow was helped in both 2008 and 2007 by the utilization of net operating loss
carryforwards of $0.3 million and $0.6 million,
respectively. At December 31, 2008, we had approximately $3.2
million of net operating loss carryforwards available to offset future taxable
income.
We have
no off-balance sheet financing arrangements, and the Company focuses on
maintaining its good credit worthiness. Further, we continue to seek
acquisitions of quality companies that fit our business model.
Acquisition of Bowman Beauty
and Barber Supply, Inc.
On August
14, 2008, we acquired all of the outstanding common stock of Bowman Beauty and
Barber Supply, Inc. (a North Carolina corporation). Subsequently, we
merged this company into our Company’s wholly owned subsidiary: Bowman Beauty
& Barber Supply, Inc. (a Florida corporation). Revenue from
Bowman of $1.0 million is included in the Company’s 2008
results. Operating profit for Bowman was approximately
$40,000.
2008
v. 2007
Results of
Operations
Our
Company sells thousands of different items to various distributors, beauty
schools and individuals utilizing direct salespersons, catalogs and internet
advertising. We also sell our branded products through the distribution networks
of our subsidiaries. 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
in our larger segment, Distributors, which constitutes about 74% of our
consolidated revenue, increased by almost 2.0% in calendar 2008 compared to the
prior year. This increase was due principally to the additional
revenue from the acquisition in mid-August of Bowman. Without the
Bowman acquisition, the segment’s revenue declined about 6.7%. The
gross profit percentage margin in this segment was up slightly from that in
2007.
Our other
segment, Brands, which has had higher gross margins than our distributors
segment, posted results more in line with expectations as its customers focused
on value-priced products with which our branded products compete and have been
more severely affected by the difficult state of the nation’s
economy. This smaller segment’s revenue decreased by 30.6% compared
to 2007. However, the gross margin percentage increased over 17% in
this segment due to a January 1 price increase and lower manufacturing
costs. These improvements mitigated the effect of the volume
shortfall on the segment’s gross margin dollars. However, from a
consolidated viewpoint, the operating income shortfall occurred primarily in
this segment.
On a
consolidated basis, the productivity gains in the brands segment, coupled with
an increase in the percentage of the total business represented by the
distributors segment, resulted in a comparable consolidated gross margin
percentage from year-to-year.
Our focus
in 2008 was to control those elements of the business that we could control: we
focused on more economical sources of supply; we competitively bid
significant-cost items where possible; we implemented an overall cost-reduction
system with specific goals, responsibilities and accountability.
Our
selling, general and administrative expenses (“SG&A”), before Bowman’s
SG&A, were $0.6 million, or 7.3%, less than those in the prior
year. This savings (principally due to decreased payroll and bad debt
costs) mitigated the gross profit softness in the smaller brands segment.
Bowman’s SG&A in 2008 was approximately $0.3 million. Our SG&A expenses
included certain estimated manufacturing-related costs of $0.8 million and $0.9
million in 2008 and 2007, respectively. 7
There
were no intangibles impairment charges in 2008; we tested our intangible assets
as of the end of 2008 in accordance with SFAS No. 142 and determined that
goodwill/trademarks had not been impaired. We computed our TCV (total
corporate value) by reporting unit using discounted cash flow analysis and other
methods.
The
Company’s effective income tax rate was 30.3% in 2008 compared to 39.4% in 2007
due to an adjustment to limit the valuation allowance to the amount of net
deferred tax assets.
The
consolidated result was a decline in operating profit from $1.2 million in 2007
to $0.8 million in 2008. Lower short-term investment rates caused by
broad economic changes principally accounted for the decline in our interest
income. The overall result was a reduction in net income to $0.7
million and basic income per share of $0.16 in 2008 compared to net income of
$1.0 million and $0.22 per share in 2007. In the
fourth quarter of 2008, as part of our normal annual review process, we
increased overhead allocations to inventories by $0.4 million to reflect cost of
goods sold appropriately.
Despite a
difficult operating environment, The Stephan Co. has cash of about $8.0 million
and little debt. We are pleased with our position in this tough
economy as we are cushioned from adversity by significant cash balances and a
small amount of debt. We have paid dividends since 1995 and did so
again in 2008 and in the first quarter of 2009.
However,
we anticipate that the world-wide recession will affect our business adversely
in 2009. Revenue is likely to decline from 2008 levels and
profitability could decline. Nonetheless, we continue to look
aggressively for acquisitions, opportunities and new venues to enhance corporate
value for our shareholders.
2007
v. 2006
Results of
Operations
EBITDA
(earnings before interest, 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. In 2006, intangibles impairment non-cash 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 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 impairment (an additional $1.4 million was classified as
an impairment of goodwill, bringing the total non-cash charge to $6.7 million).
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. 8
The
following table sets forth certain information regarding future contractual
obligations of the Company as of December 31, 2008:
Recent
Accounting Pronouncements and Developments
In Note 2
to our consolidated financial statements, we discuss new accounting policies
adopted by the Company during 2008 and the expected financial impact of
accounting policies recently issued or proposed but not yet required to be
adopted.
Critical
Accounting Policies and Estimates
In Note 1
to our consolidated financial statements, we discuss critical accounting
policies and estimates used by the Company in 2008.
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
We are
responsible for establishing and maintaining adequate internal control over
financial reporting for the Company. During 2008 we reviewed
procedures at all of our subsidiaries and evaluated the control structure of the
Company as a whole. However, because of organization changes recently made in
our company, including the acquisition of Bowman in 2008 that we have not had a
chance to fully document, and in an abundance of caution, we believe it prudent
to report that our Company did not have effective internal control over
financial reporting (“ICFR”) at December 31, 2008. In 2009, we will
again review our controls and determine the effectiveness of our ICFR, and our
auditors will attest to our ICFR determination.
This
annual report does not include an attestation report of the Company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the Company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management's report
in this annual report.
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.
Item
9B. Other Information
None. 9
PART
III
ITEM
10. Directors,
Executive Officers and Corporate Governance
Board of
Directors
Directors
are elected on a staggered basis, with each 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:
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. 10
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 NYSE - AMEX 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 114, “The Auditor’s Communication with Those Charged with Governance,”
by the Auditing Standards Board of the American Institute of Certified Public
Accountants and Public Company Accounting Oversight Board Auditing Standard No.
5, “An Audit of Internal Control Over Financial Reporting That is Integrated
with an Audit of Financial Statements.”
In
addition, the audit committee has received from its independent registered
public accounting firm the written disclosure required by applicable
requirements of the Public Accounting Oversight Board and discussed with them
their independence from The Stephan Co. and its management, including
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, 2008 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 2008.
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 stock options. 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. 11
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 a specific bonus
formula 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 2008
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, 2011. Additionally, Mr. Ferola
receives salary, stock options and other compensation described earlier in this
Item 10.
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, 58, was appointed 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, 37, 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. 12
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 filed timely during
2008.
Messrs. Barone, Ross, Shaheen, Ferola
and Gross each filed one late Form 4 for 2008.
Code of
Ethics
We have
adopted a Code of Ethics (“Code”) 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,
2008 and 2007 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 2008.
Stock
options granted in 2008
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 2008.
13
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.
Compensation
of Directors
All
directors of the Company are compensated for their services by payment of $300
for each Board meeting attended.
During
2008, options to purchase an aggregate of 20,248 shares of Common Stock, at an
exercise price of $3.18 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 96,178 shares are
outstanding. See Item 12 below.
14
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,
2005 and 2008, terminating December 31, 2011.
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, 2008, Mr. Ferola’s contractual annual base salary would
have been $1.2 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 2007) pursuant to a formula set forth in his employment
agreement. By letter dated April 14, 2008, Mr. Ferola unilaterally
gave up his 2007 and 2005 bonuses with the stipulation that, in the event of a
"change of control" in the Company (as defined in the July 6, 2005 letter),
these bonuses shall, among other things, automatically become
payable. 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
$11.0 million.
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.
Tyler
Kiester
Mr.
Kiester has an arrangement whereby the Company would pay 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. 15
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 (options vest one
year from date of grant) as of December 31, 2008 and 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:
The
remaining weighted average contractual lives for the Key Employee and Outside
Directors Plans were 6.8 years and 3.1 years, respectively, at December 31,
2008. 16
Stock
Ownership by Certain Beneficial Owners
The
following table sets forth, as of March 1, 2009, 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).
17
Stock
Ownership by Management and Directors
The
following table sets forth, as of March 1, 2009, 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):
18
ITEM
13. Certain Relationships and Related Transactions, and Director
Independence
In fiscal
years 2008 and 2007, 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 that 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 the 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 (his salary was $718,740 in 2008). 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. See accompanying
Notes to Consolidated Financial Statements: Note 12. RELATED
PARTIES.
ITEM
14. 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,
2008 and 2007.
(1) Audit
fees billed to us by Goldstein Lewin & Co. in 2008 and 2007 related to 1)
the review of our interim consolidated financial statements included in our
Quarterly Reports on Form 10-Q, Form 10-QSB and Form 10-QSB/A for the periods
ended March 31, June 30 and September 30, and 2) the audit of our annual
consolidated financial statements and assistance with the preparation of Form
10-K for the years ended December 31, 2007 and 2006. 19
PART
IV
(a) (1)
Financial Statements
20
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, 2008 and 2007, 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,
2008. 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, 2008 and 2007, and the consolidated results of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 2008, in conformity with accounting principles
generally accepted in the United States of America.
GOLDSTEIN
LEWIN & CO.
Certified
Public Accountants and Consultants
Boca
Raton, Florida
April 1,
2009 21
THE
STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
DECEMBER
31, 2008 AND 2007
(in
thousands, except share data)
See Notes
to Consolidated Financial Statements. 22
THE
STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
YEARS
ENDED DECEMBER 31, 2008 AND 2007
(in
thousands, except per share data)
Weighted
average common shares outstanding were approximately 4.4 million in each
year.
See Notes
to Consolidated Financial Statements. 23
THE
STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS
ENDED DECEMBER 31, 2008 AND 2007
(in
thousands, except per share data)
See Notes
to Consolidated Financial Statements. 24
THE
STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEARS
ENDED DECEMBER 31, 2008 AND 2007
(in
thousands)
See Notes
to Consolidated Financial Statements. 25
THE
STEPHAN CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2008 AND 2007
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 11, 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., Lee Stafford Beauty Group, Inc. and Bowman Beauty & Barber
Supply, Inc. (collectively, the "Company"). Bowman Beauty &
Barber Supply, Inc., acquired in August 2008, is hereinafter referred to as
“Bowman.” All significant inter-Company balances and transactions have been
eliminated in consolidation.
RECLASSIFICATIONS:
Certain reclassifications (having no net profit or loss impact on previously
issued statements) have been made to the previously reported amounts in the 2007
consolidated financial statements to reflect comparability with the 2008
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, 2008 and 2007, in
management’s opinion, the Company did not incur impairment
losses. The Company has less than $7.0 million of intangibles subject
to future impairment testing.
We tested
our intangible assets as of the end of 2008 in accordance with SFAS No. 142 and
determined that goodwill/trademarks had not been impaired. We
computed our TCV (total corporate value) by reporting unit using discounted cash
flow analysis and other methods.
MAJOR
CUSTOMERS, CERTAIN VENDORS: There were no sales to any single
customer in excess of 10% of revenue in 2008 or 2007. 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. In the purchase of goods from other countries, some foreign
manufacturers require a 20% deposit at the time of order. 26
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 2008 and
2007 relate to the estimated fair value at the grant date of 70,248 stock
options granted in each year 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, 2008 and 2007 was reduced as a result of the
Company's recognition of approximately $97,000 and $90,000, 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, 2008 and 2007 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 2008 and 2007:
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, accounts receivable, accounts
payable and long-term debt were assumed to approximate fair value due to their
short-term nature; 2) debt service cash flows were not discounted, considering
the short duration of the debt. Management believes that the carrying amounts of
these financial instruments approximate their fair values in accordance with
Statement of Financial Accounting Standard No. 157, Fair Value Measurements
(“SFAS No. 157”) at December 31, 2008.
REVENUE
RECOGNITION: Revenue is recognized when all significant contractual
obligations have been satisfied, which involve the delivery of the products sold
and reasonable assurance that any account receivable will be
collected. 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 $0.2 million and $0.3 million for the years ended December 31,
2008 and 2007, respectively. The allowances for sales returns and
promotional 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 dates. 27
COST OF
GOODS SOLD: This item includes the cost of raw materials, packaging,
direct labor and applicable direct overhead. Indirect overhead
related to manufacturing is included in Selling, General and Administrative
Expenses in the Consolidated Statements of Operations. For the years
ended December 31, 2008 and 2007, the manufacturing-related overhead included in
Selling, General and Administrative Expenses was approximately $0.8 million and
$0.9 million, respectively.
SHIPPING
AND HANDLING FEES AND COSTS: Expenses for the shipping and delivery
of products sold to customers were approximately $1.6 million in 2008 and 2007
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 maintained
cash deposits at certain financial institutions in amounts in excess of
federally insured limits of $250,000 but, as of March 2009, maintains
principally all of its cash into bank accounts that are
FDIC-insured.
SHORT-TERM
INVESTMENTS: We have no auction rate securities at December 31, 2008; all such
short-term investments totaling $3.9 million at December 31, 2007 were sold, at
par, during 2008.
ALLOWANCE
FOR DOUBTFUL ACCOUNTS: The allowances are 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. Indirect labor and other manufacturing-related costs, classified in
Selling, General and Administrative expenses, are allocated to finished goods
inventories. The amount of these allocations to inventories was approximately
$0.7 million and $0.5 million at December 31, 2008 and 2007,
respectively.
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, 2008 and 2007 we classified as
Other Assets approximately $5.1 million and $4.8 million, respectively, of
estimated slow moving and potentially obsolete inventories. From this
amount we have subtracted slow-moving and obsolescence reserves of $2.0 million
in both 2008 and 2007. The net non-current inventory amounts
classified in Other Assets were $3.1 million and $2.8 million at the end of 2008
and 2007, 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:
The
Company’s capital expenditures in recent years have not been
significant.
INCOME
TAXES: Income taxes are calculated using 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, due primarily to net operating loss carryforwards, have
already been recorded for book purposes but not for tax purposes; therefore, we
have recorded a deferred tax asset. A valuation allowance (reducing
this 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 10 to the Consolidated Financial Statements.
BASIC AND
DILUTED EARNINGS PER SHARE: Basic and diluted earnings per share are
computed by dividing net income by the weighted average number of shares of
common stock outstanding. For the years ended December 31, 2008 and
2007, the Company had approximately 400,000 options outstanding that were
“out-of-the-money.” Consequently, no additional shares were assumed
to be outstanding for purposes of calculating earnings per share. The weighted
average outstanding common shares were approximately 4.4 million shares in both
2008 and 2007. 28
NOTE 2:
NEW FINANCIAL ACCOUNTING STANDARDS
In
December 2007, the FASB issued SFAS No. 141 (revised 2008), “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 159, "The Fair Value Option for
Financial Assets and Financial Liabilities". Under SFAS 159, the
Company may elect to report most financial instruments and certain other items
at fair value on an instrument-by-instrument basis with changes in fair value
reported in earnings. After the initial adoption, the election is
made at the acquisition of an eligible financial asset, financial liability, or
firm commitment or when certain specified reconsideration events
occur. The fair value election may not be revoked once an election is
made. SFAS 159 was effective for the Company’s fiscal year
beginning January 1, 2008; however, the Company has elected not to measure
eligible financial assets and liabilities at fair value. Accordingly,
the adoption of SFAS 159 did not have a significant impact on the Company’s
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 was effective for our fiscal year
ended December 31, 2008. In February 2008, the FASB issued FASB Staff
Position (“FSP”) FAS 157-2, “Effective Date of FASB Statement No. 157,” provides
a one-year deferral of the effective date of SFAS 157 for non-financial assets
and non-financial liabilities to years beginning after November 15, 2008, those
that are recognized or disclosed in the financial statements at fair value at
least annually. SFAS 157 was effective for the Company’s fiscal year
beginning January 1, 2008, excluding the effect of the deferral granted in FSP
FAS 157-2. See “Fair Value Measurements” above. The
Company is currently evaluating the impact of adopting SFAS 157 with respect to
non-financial assets and non-financial liabilities on the Company’s financial
statements, which will be effective beginning January 1, 2009. The
Company is currently evaluating the impact FSP FAS 157-2 may have on its
financial statements.
In
September 2007, 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, 2007. The adoption of SAB No. 108 by
our Company in the fourth quarter of 2007 did not have a material impact on our
consolidated financial statements.
In July
2007, 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, 2007. FIN 48 did not have an adverse effect on our financial
statements in 2008. See Note 10 to the Consolidated Financial
Statements.
In April
2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of
Intangible Assets,” which amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets.” The objective of FSP FAS 142-3 is to improve the consistency between
the useful life of a recognized intangible asset under SFAS 142 and the period
of expected cash flows used to measure the fair value of the asset under SFAS
141, “Business Combinations,” and other U.S. GAAP. FSP FAS 142-3
applies to all intangible assets, whether acquired in a business combination or
otherwise, and should be applied prospectively to intangible assets acquired
after the effective date. The Company is currently evaluating the
impact FSP FAS 142-3 may have on its financial statements. 29
NOTE
3. ACQUISITION
On August
14, 2008, we acquired 100% of the outstanding common stock of Bowman Beauty and
Barber Supply, Inc., a distributor located in Wilmington, NC. The
acquiree reported unaudited revenue of approximately $3.0 million in
2007. The purchase price was approximately $1.0 million, comprised of
cash of $0.5 million and notes issued and assumed aggregating approximately $0.5
million. The disclosure below also shows the estimated results of the
entire Company for 2008 and 2007 if Bowman had been acquired at the beginning of
2008 and 2007, instead of its actual August 14, 2008 acquisition
date.
The
results of operations of the acquired entity have been included in the
consolidated results of operations of the Company since August 14, 2008, the
date of acquisition.
NOTE 4.
ACCOUNTS RECEIVABLE
30
NOTE
5. INVENTORIES
Inventories
at December 31, 2008 and 2007 consisted of the following:
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.
Other
Assets includes 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 estimate of the
amount that may ultimately become unusable or obsolete. See Note 1 to
the Consolidated Financial Statements.
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, 2008 and 2007 we classified as
Other Assets approximately $5.1 million and $4.8 million of estimated slow
moving and potentially obsolete inventories. From this amount we have
subtracted slow-moving and obsolescence reserves of $2.0 million in both 2008
and 2007. The net non-current inventory amounts classified in Other
Assets were $3.1 million and $2.8 million at the end of 2008 and
2007.
NOTE
6. PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment at December 31, 2008 and 2007 consisted of the
following:
31
NOTE
7. GOODWILL, TRADEMARKS AND OTHER INTANGIBLE ASSETS
The
Company’s intangible assets by segment were as follows. The increase
in 2008 was associated with the Bowman acquisition. See Note 1 to the
Consolidated Financial Statements.
NOTE
8. LONG-TERM DEBT
Long-term
debt at December 31, 2008 and 2007 consisted of the following:
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