UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K/A
Amendment
No. 1
x ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
Fiscal Year Ended December
31, 2008
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)
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Florida
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59-0676812
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(State
or other jurisdiction of incorporation or organization)
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(IRS
Employer Identification No.)
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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:
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Title of each class
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Name of each exchange on which
registered
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Common
stock,
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$0.01
par value
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NYSE
- AMEX
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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 ¨ 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 ¨ 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
¨
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 ¨
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.
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Large accelerated filer ¨
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Accelerated filer ¨
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Non-accelerated filer ¨
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Smaller reporting company x
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(Do not check if a smaller reporting company)
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Indicate
by check mark whether the registrant is a shell Company (as defined in Rule
12b-2 of the Exchange Act). YES ¨ 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.
EXPLANATORY
NOTE
We are
filing this amendment to our Annual Report on Form 10-K for the year ended
December 31, 2008 to reflect changes made in response to comments received by us
from the Staff of the Securities and Exchange Commission in connection with the
Staff’s review of our Annual Report on Form 10-K for the year ended December 31,
2008. Pursuant to their comments we have amended Item 7 (Management’s
Discussion and Analysis of Financial Condition and Results of Operations) to
expand our disclosure about a non-GAAP measure: EBITDA and to expand our
disclosure (under Critical Accounting Policies and Estimates) to include a
discussion of our methodology, results and assumptions relating to our testing
of intangible assets for potential impairment. Additionally, we
have expanded Item 9A (Controls and Procedures) to discuss our disclosure
controls. No other changes have been made to the report as originally filed on
April 1, 2009. Finally, we have included currently-dated management
certifications from our Chief Executive Officer and Chief Financial Officer
required by Sections 302 and 909 of the Sarbanes-Oxley Act of 2002, and they are
attached to this Form 10-K/A as Exhibits 31.1, 31.2, 32.1 and 32.2.
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 $0.3 million. Capital expenditures were not
significant.
EBITDA is
a frequently-used, non-GAAP term that means Earnings Before Interest, Taxes, Depreciation and
Amortization.
EBITDA is
reconciled to NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES per the Company’s
2008 Consolidated Statements of Cash Flows as follows:
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(in
thousands)
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2008
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EBITDA
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$ |
941 |
(1) |
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Stock option
compensation
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97 |
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Current income
taxes
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(26 |
) |
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Changes in operating assets &
liabilities, net of Bowman acquisition:
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Decrease in accounts
receivable
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494 |
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(Increase) decrease in current
inventories
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(715 |
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Decrease in prepaid expenses and
other current assets
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66 |
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(Increase) in other assets,
including non-current inventories
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(260 |
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(Decrease) in accounts payable and
accrued expenses
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(543 |
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Interest
expense
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(7 |
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Interest
income
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211 |
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NET CASH FLOWS PROVIDED BY
OPERATING ACTIVITIES
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$ |
258 |
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(1)
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$900,000 was reported for 2008;
the difference was rounding of
$41,000.
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EBITDA is
reconciled to net income for the last three years as follows:
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(in
thousands)
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2008
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2007
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2006
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Net income
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$ |
698 |
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$ |
968 |
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$ |
(3,602 |
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Provision for income
taxes
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303 |
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629 |
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(2,129 |
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Interest
expense
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7 |
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24 |
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39 |
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Interest
income
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(211 |
) |
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(381 |
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(233 |
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Depreciation &
Amortization
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144 |
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182 |
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209 |
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Rounding
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(41 |
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(22 |
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10 |
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Impairment
loss
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0 |
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0 |
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6,706 |
(2) |
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EBITDA
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$ |
900 |
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$ |
1,400 |
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$ |
1,000 |
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(2)
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2006
EBITDA excluded intangibles impairment charges of $6.7
million.
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Management
has included the EBITDA metric in its Form 10-K because of its wide and recognized
existing use. EBITDA is a useful corporate valuation
metric. Further, its focus is on operating, not on financial, cash
flows such as interest expense and interest income. It factors out
short-term changes in working capital that could vary substantially from
period-to-period, thus giving the investor a more stable metric by which to
judge cash flow changes over time.
The
limitations of EBITDA include its exclusion of working capital changes that
affect cash flow during the period. Further, it excludes interest
expense, interest income, income taxes, depreciation and amortization from
earnings (net income or loss). It also excludes capital expenditures which, in
the Company’s case, are usually immaterial.
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.
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 of the valuation allowance resulting from the
implementation of FIN 48. This adjustment related to accelerated
deductions for tax purposes that may or may not be sustained upon
audit. If they were disallowed, the effect would be to accelerate the
utilization of the Company’s NOLs.
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.
Effective
about June 1, 2009, the CEO plans to unilaterally reduce his current salary by
30%, subject to the terms and conditions as outlined in NOTE 12. RELATED
PARTIES.
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 $900,000
of manufacturing-related costs.
Our
Company sells thousands of different items to various distributors, beauty
schools and individuals. In the distributor segment, we generally buy and resell
several thousand beauty and barber items. In the brands segment, we
produce and sell more than one thousand items.
Revenue
was soft in both of our segments (brands and distributors) as general economic
conditions, lower beauty school enrollments and distributor consolidation were
factors in our overall 9.4% revenue decline from that in 2006. Revenue in our
brands segment, which accounted for 33.0% of consolidated revenue in 2007, was
8.8% down from that in 2006. Within our brands segment, we did see growth
compared to 2006 in our Frances Denney cosmetics line and in the ethnic markets.
Revenue in our distributors segment, which accounted for 67.0% of consolidated
revenue in 2007, was 9.7% lower than that in 2006.
The
following table sets forth certain information regarding future contractual
obligations of the Company as of December 31, 2008:
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Contractual
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Obligations
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More than
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(in
thousands)
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Total
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1 Year
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2-3 Years
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4-5 Years
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5 Years
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Operating
leases
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$ |
2,548 |
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$ |
414 |
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$ |
827 |
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$ |
827 |
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$ |
480 |
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Employment
Contracts
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3,588 |
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|
|
1,070 |
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|
|
2,450 |
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|
68 |
|
|
|
- |
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Long-term
debt
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|
|
462 |
|
|
|
136 |
|
|
|
261 |
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|
|
65 |
|
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|
- |
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Total
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$ |
6,598 |
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|
$ |
1,620 |
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|
$ |
3,538 |
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|
$ |
960 |
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$ |
480 |
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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.
Goodwill,
Trademarks and Other Intangible Assets
We tested
the recorded goodwill, trademarks and other intangibles of both reporting units
(segments) for impairment at December 31, 2008 using several methods: discounted
cash flow, break-up value and comparable transactions.
In all
cases, the computed fair value of the intangible assets per our testing exceeded
the recorded intangible asset amounts in each reporting unit. We,
therefore, concluded that no impairment of intangible assets had
occurred. In the case of the Distributors reporting unit the range of
the excess of computed over recorded intangible assets was between 23% and 806%,
depending upon the method employed. For the Brands reporting unit the
range of the excess of computed over recorded intangible assets was between 91%
and 298%, depending upon the method employed.
At
December 31, 2008, the recorded amounts of goodwill, trademarks and other
intangible assets were $3.6 million and $3.1 million for the Distributors and
Brands reporting units, respectively.
Principal
assumptions used in the discounted cash flow method testing at the end of 2008
included: 0% growth in cash flows and 15.0% cost of capital; cash flows were
computed before allocation of corporate overhead. Because the Company’s
business units are relatively small and may be sold separately, corporate
overhead (consisting primarily of officer and staff salaries, benefits,
accounting, legal, insurance and other costs) would most likely be eliminated or
reduced substantially since a potential buyer or buyers of the Company, as a
whole or piecemeal, who would likely already have established overhead bases
that would be capable of absorbing the additional volume generated by the
products currently sold by the Company. For 2008, the corporate overhead
allocated based upon reporting unit revenues was $0.7 million for the Brands and
$2.1 million for the Distributors. For 2007, the corporate overhead allocated
based upon reporting unit revenues was $1.0 million for the Brands and $2.0
million for the Distributors. These amounts were subtracted in arriving at
operating income (loss) for the reporting units. See NOTE 11. SEGMENT
INFORMATION.
Revenue
multiples from other transactions were used to test recorded goodwill based upon
available comparable transactions; management estimates were used to test
goodwill based upon the estimated break-up value of the reporting
units.
The
year-end market value of the Company’s common stock ($1.96 per share) was
considered as a potential indicator of overall corporate value. With
4.3 million shares outstanding, the market value of the entire Company
(approximately $8.4 million) would be just slightly more than the Company’s cash
and cash equivalents at December 31, 2008. This valuation would imply
that the other assets and businesses of the Company had little or no
value. Consequently, we did not use the Company’s year-end stock
price as a valid metric in our valuation analysis.
The
discounted cash flow testing assumed that the 2008 cash flow level would
continue indefinitely and that this cash flow stream would be discounted to its
present value using a 15.0% cost of capital. The cost of capital
assumed the continuity of current interest rates, a capital structure of 70%
equity and 30% debt, and included premiums for company size and specific risk
aggregating 10.3%. The Capital Asset Pricing Model and the Build-Up
Method results were averaged to arrive at a cost of capital of
15.0%.
Our
methodologies are based upon various assumptions that are subject to
uncertainties including: our assumption that cash flows in 2008 will continue
indefinitely, that interest rates will not increase materially and that the
Company will be sold to a buyer with an established corporate overhead and,
possibly, if the buyer were an industry participant, an established production
overhead base. Based upon current worldwide economic uncertainties,
we are unable to predict the effect of such economic issues will have on our
assumptions.
If our
assumptions do not prove correct or economic conditions affecting future
operations change, our goodwill could become impaired and result in a material
adverse effect on our results of operations and financial position.
Item
9A: Controls and Procedures
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(a)
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Evaluation
of Disclosure Controls and
Procedures
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We
maintain disclosure controls and procedures designed to provide reasonable
assurance that information required to be disclosed in our reports filed under
the Securities Exchange Act of 1934 is recorded, processed, summarized, and
reported within the time periods specified by the SEC’s rules and forms, and
that such information is accumulated and communicated to our management,
including our CEO and CFO, as appropriate, to allow for timely decisions
regarding required disclosure. We recognize that any controls and procedures, no
matter how well designed and operated, can only provide reasonable assurance of
achieving desired control objectives. Judgment is required when designing and
evaluating the cost-benefit relationship of potential controls and
procedures.
As of the
end of the period covered by this report, with the supervision and participation
of management, including our CEO and CFO, we evaluated the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our CEO and CFO have concluded that, as of the end of such period,
our disclosure controls and procedures were effective at the reasonable
assurance level.
Evaluation
of Internal Control over Financial Reporting
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.
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(b)
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Change
in Internal Control over Financial
Reporting
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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.
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.
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THE
STEPHAN CO.
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By:
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/s/
Frank F. Ferola
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Frank
F. Ferola
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President
and Chairman of the Board
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December
7, 2009
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By:
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/s/
Robert C. Spindler
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Robert
C. Spindler
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Principal
Financial Officer
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Principal
Accounting Officer
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December
7, 2009
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