-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DRSWK2QT1PZ+Pdy3PXfNP2TcPXN/sh8xMcxEOGAqG5ppbl9ULBVi9HPMS3dQVePU uTJS0tW/8fknUHzDamUxGA== 0000094056-97-000006.txt : 19970416 0000094056-97-000006.hdr.sgml : 19970416 ACCESSION NUMBER: 0000094056-97-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970415 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: STEPHAN CO CENTRAL INDEX KEY: 0000094056 STANDARD INDUSTRIAL CLASSIFICATION: PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS [2844] IRS NUMBER: 590676812 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04436 FILM NUMBER: 97580828 BUSINESS ADDRESS: STREET 1: 1850 W MCNAB RD CITY: FORT LAUDERDALE STATE: FL ZIP: 33309 BUSINESS PHONE: 9549710600 MAIL ADDRESS: STREET 1: 1850 WEST MCNAB ROAD CITY: FORT LAUDERDALE STATE: FL ZIP: 33309 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark one) ___ | X | ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE |___| SECURITIES EXCHANGE ACT OF 1934 {FEE REQUIRED} For the Fiscal Year Ended December 31, 1996 OR ___ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) |___| OF THE SECURITIES EXCHANGE ACT OF 1934 {NO FEE REQUIRED} For the transition period from _______ to ______ Commission File No. 1-4436 THE STEPHAN CO. _______________________________________________________________ (Exact Name of Registrant as Specified in its Charter) Florida 59-0676812 ________________________________ _________________ (State or Other Jurisdiction of (I.R.S Employer Incorporation or Organization) Identification No.) 1850 West McNab Road, Fort Lauderdale, Florida 33309 _______________________________________________________________ (Address of principal executive offices) (Zip Code) Registrant's Telephone Number, including Area Code: (954) 971-0600 _____________ Securities Registered Pursuant to Section 12 (b) of the Act: Title of Each Class Name of Each Exchange on Which Registered ___________________ _________________________________________ Common Stock, $.01 AMERICAN STOCK EXCHANGE Par Value Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. YES X NO ____ _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or Information statements incorporated by reference in Part III of this form 10-K. (X) State the aggregate market value of the voting stock held by non-affiliates of the Registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. $ 45,622,000 as of March 31, 1997 Indicate the number of shares outstanding of each of the Registrant's classes of Common Stock, as of the latest practicable date: 4,147,466 Shares of Common Stock, $.01 Par Value, as of March 31, 1997 List hereunder the following documents if incorporated by reference and the part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any Annual Report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933: Portions of the Company's proxy statement for the 1997 annual meeting to be filed no later than 120 days after the Company's fiscal year are incorporated by reference in Part III. 2 THE STEPHAN CO. AND SUBSIDIARIES INDEX TO ANNUAL REPORT ON FORM 10-K Page PART I ______ Item 1: Business................................................... 4 Item 2: Properties................................................. 7 Item 3: Legal Proceedings.......................................... 8 Item 4: Submission of Matters to a Vote of Security Holders......... 8 PART II Item 5: Market for the Registrant's Common Equity and Related Stockholder Matters........................... 9 Item 6: Selected Financial Data.................................... 10 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 11 Item 8: Financial Statements and Supplementary Data................ 13 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................... 13 PART III Item 10: Directors and Executive Officers of the Registrant......... 14 Item 11: Executive Compensation..................................... 14 Item 12: Security Ownership of Certain Beneficial Owners and Management..................................... 14 Item 13: Certain Relationships and Related Transactions............. 14 PART IV Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................. 15 Signatures.......................................................... 17 3 PART I Certain statements in this Annual Report on Form 10-K("Form 10-K") under "Item 1. Business" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," constitute "forward- looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of The Stephan Co. and its subsidiaries to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the following: general economic and business conditions; competition; success of operating initiatives; development and operating costs; advertising and promotional efforts; brand awareness; the existence or absence of adverse publicity; acceptance of new product offerings; changing trends in customer tastes; the success of multi-branding; changes in business strategy or development plans; quality of management; availability, terms and deployment of capital; business abilities and judgment of personnel; availability of qualified personnel; labor and employee benefit costs; availability and cost of raw materials and supplies; changes in, or failure to comply with, proceedings; and other factors referenced in the Form 10-K. The Stephan Co. will not undertake and specifically declines any obligation to publicly release the results of any revisions which may be made to any forward- looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Item 1. Business GENERAL The Stephan Co.(the "Registrant" or the "Company"), founded in 1897 and incorporated in the State of Florida in 1952, is engaged in the manufacture, sale and distribution of hair care and personal care products on both a wholesale and retail level. The Registrant is comprised of The Stephan Co. ("Stephan") and its wholly-owned subsidiaries, Foxy Products, Inc., Old 97 Company, Williamsport Barber and Beauty Corp., Stephan & Co., Scientific Research Products, Inc. of Delaware, and Trevor Sorbie of America, Inc. The Company considers itself to be in a single line of business for reporting purposes. The Stephan Co. Located in Fort Lauderdale, Florida, Stephan is engaged in the manufacturing and distribution of hair and skin care products, as well as the manufacturing of custom "private label" products, which is the manufacturing of products marketed and sold under the brand names of customers. In addition, the Fort Lauderdale location serves as the Registrant's corporate headquarters, providing general management services to its subsidiaries. In 1996, only one customer accounted for more than 10% of the Company's net sales, down from three in 1995 due to the acquisition of Trevor Sorbie of America, Inc. on June 28, 1996 and the loss of the private label manufacturing business of Martin Himmel, Inc. Sales of products acquired from Colgate on December 31, 1995 were $5,600,000 in 1996, which also had a significant effect of reducing the Registrant's dependency on major customers. 4 Changes started in 1995 to distribution methods and channels used by the Frances Denney line of cosmetics, a division of The Stephan Co., continued in 1996, decreasing sales to J.C. Penney, and other retailers. The Company continues to circulate a full color mail-order catalog as well as actively advertising and appearing on television shop-at-home programs. In addition, the Company also signed a Trademark License and Supply Agreement in the first quarter of 1996 that gives exclusive rights to a company to market and distribute certain Denney products to several retail chains, including J.C. Penney, in the United States and Canada. Stephan also manufactures and sells products under the name "STEPHAN'S". Such products consist of different types of shampoos, hair treatments, after shave lotion, dandruff lotion, hair conditioners and hair spray which are distributed throughout the United States to approximately 350 beauty and barber distributors. The Registrant's trademark "STEPHAN'S" and the design utilized thereby has been registered with the United States Patent and Trademark Office, which registration is not due for renewal until 2001. Sales of Stephan and Denney products, combined with the private label manufacturing sales of the Stephan Co., accounted for approximately 33% of consolidated revenues. Old 97 Company. Old 97 Company ("Old 97"), located in Tampa, Florida, was purchased in 1988 by the Registrant. Old 97 markets products under brand names such as OLD 97, KNIGHTS, and TAMMY. In addition to selling more than 100 different products, including hair and skin care products, fragrances, personal grooming aids and household items, Old 97 serves as the Company's second manufacturing facility. The Tampa facility manufactures most of the products sold by the Frances Denney line, all the talc manufactured for the Cashmere Bouquet and Quinsana brands, as well as all the other hair and skin care brands acquired from Colgate on December 31, 1995, in addition to a significant amount of private label manufacturing. Old 97 is also responsible for distributing the Frances Denney products, as well as the distribution of the brands acquired from Colgate. Williamsport Barber and Beauty Corp. Williamsport Barber and Beauty Corp. was acquired in January, 1992 and is located in Williamsport, Pa. Williamsport is one of the nation's largest mail order beauty and barber supply companies and accounted for over 12% of consolidated revenues for the year ended December 31, 1996. Stephan & Co. Formerly known as Heads or Nails, Inc. and acquired in August, 1993, Stephan & Co. has focused its attention on the manufacture and supply of personal care amenity products for cruise ships, with production and shipping commencing in December, 1995. Consolidated revenues for the year ended December 31, 1996 were not material. 5 Scientific Research Products, Inc. of Delaware. Purchased by the Company in April, 1994, Scientific Research Products was one of the Registrant's largest private label customers and is a leading distributor of ethnic hair care products. Scientific Research Products accounted for 30% of the Registrant's consolidated revenues, with sales approximating $8,100,000. In addition to the above, Scientific is responsible for the distribution of the "Magic Wave" product line, formerly marketed by Foxy Products, Inc., a Company acquired by the Registrant in 1986. Consolidated revenues for Foxy Products, Inc. for the year ended December 31, 1996 were not material. Trevor Sorbie of America, Inc. In June, 1996, the Registrant acquired all of the outstanding capital stock of Sorbie Acquisition Co. (Trevor Sorbie of America, Inc. (TSA)), a distributor of a professional line of hair care products manufactured by the Registrant and sold by TSA to salons in the United States through a network of distributors. TSA, prior to the acquisition, was a major customer of the Registrant accounting for $3,600,000 of sales in 1995 and $1,100,000 through the date of acquisition in 1996. TSA was acquired for stock valued at $518,000, the termination of a Secured Subordinated Debenture held by the Company in the amount of $500,000 and the assumption of liabilities totaling approximately $3,000,000, as more fully described in Note 2 to the consolidated financial statements in Item 14. RAW MATERIALS AND INVENTORY The raw materials utilized by the Registrant and its subsidiaries in the manufacture of its products consist primarily of chemicals, alcohol, perfumes, paper labels, plastic bottles and caps. All materials are readily available at competitive prices from numerous sources and have been purchased from domestic suppliers. Neither the Registrant nor any of its subsidiaries has ever experienced any shortage in supplies thereof nor are any such shortages anticipated by the Registrant and its subsidiaries in the reasonably foreseeable future. The Registrant and its subsidiaries have followed the practice of maintaining a level of inventory of their products sufficient for a period of not less than two months. The Registrant does not anticipate any change in such practice during the reasonably foreseeable future. BACKLOG As of March 31, 1997, the dollar amount of backlog orders was not material. RESEARCH AND DEVELOPMENT During each of the three fiscal years ending December 31, 1996, expenditures by the Registrant and its subsidiaries on Company sponsored research relating to the development of new products, services or techniques or the improvement of existing products, services or techniques as determined in accordance with generally accepted accounting principles were not material and were expensed as incurred. 6 COMPETITION The hair care and personal grooming business is highly competitive in terms of price and product quality. Products manufactured by the Registrant and its subsidiaries compete with numerous varieties of other such products, many of which bear well known, respected and heavily advertised brand names and are produced by companies having substantially greater financial, technical, personnel and other resources than does the Registrant. Products produced by the Registrant and its subsidiaries account for a relatively insignificant portion of the total hair care and personal grooming products manufactured and sold annually in the United States. EMPLOYEES As of March 31, 1997, in addition to its 6 officers, the Registrant and its subsidiaries employed approximately 150 people engaged in the production, warehousing, and distribution of their products. Although the Registrant and its subsidiaries do not anticipate the need to hire a material number of additional employees during the remainder of 1997, the Company believes that any such employees, if needed, would be readily available. The employees are not covered by any collective bargaining agreement and the Company believes its employee relationships are satisfactory. Item 2. Properties The Registrant's administrative, manufacturing and warehousing facilities are located in a building of approximately 33,000 square feet, which it owns, located at 1850 West McNab Road, Fort Lauderdale, Florida 33309. Approximately two-thirds of the space is utilized by the Registrant for the manufacture and warehousing of its products. The remainder of the space is utilized by the Registrant for its administrative offices. The Registrant also owns certain machinery and equipment suitable for the manufacture of its products which are housed in its facility in Fort Lauderdale, Florida. The Registrant believes that such facilities and equipment are adequate for its needs in the reasonably foreseeable future. Old 97 owns three buildings totaling approximately 42,000 square feet of space, located at 2306 35th Street at 12th Avenue, Tampa, Florida 33605. Such facilities are utilized by Old 97 in the manufacture of its various product lines. In October, 1994, Old 97 acquired land and two buildings located at 4829 East Broadway Avenue, Tampa, Florida 33605. One building comprising 12,500 square feet is being used for office facilities and order fulfillment for the Frances Denney line. The second building, with approximately 30,000 square feet, is used as a warehouse and distribution facility. In connection with the acquisition of Scientific Research Products, the Registrant assumed the leased interest in the office, warehouse and distribution facility located at 1601 SW 5th Court, Pompano Beach, Florida 33069, under a lease expiring in October, 1997, with annual rental payments of approximately $180,000. In connection with the acquisition of Williamsport Barber Supply, the Company entered into a two year lease, which expired in January, 1994, for 7 office and warehouse space of approximately 6,000 square feet. Subsequent to January, 1994, the Registrant leased the premises on a month to month basis and commencing in February, 1997, the lease was extended five years, expiring January 31, 2002. Monthly rent in the amount of $1,800 is payable to the former owner of Williamsport Barber Supply, currently the manager of the Williamsport operations. Item 3. Legal Proceedings There are no material pending legal proceedings to which the Registrant or any of its subsidiaries is a party or of which any of their property is the subject. Neither the Registrant nor any of its subsidiaries is aware of any such proceedings known to be contemplated by governmental authorities. Item 4. Submission of Matters to a Vote of Security Holders The Company has not submitted any matters to a vote of security holders since the June 1996 Annual Meeting. 8 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters (a) Market Information The Registrant's Common Stock is traded on the American Stock Exchange ("AMEX"). The following table sets forth the range of high and low sales prices for the Registrant's common stock for each quarterly period within the Registrant's two most recent fiscal years: High Low Quarter Ended Sales Price Sales Price _____________ ___________ ___________ March 31, 1995 $ 17.00 $ 12.00 June 30, 1995 19.38 15.25 September 30, 1995 17.00 14.13 December 31, 1995 16.75 14.00 ___________________________________________________________________________ March 31, 1996 $ 17.13 $ 14.25 June 30, 1996 16.88 14.25 September 30, 1996 16.00 12.25 December 31, 1996 13.00 11.50 (b) Holders As of March 31, 1997, the Registrant's Common Stock was held of record by approximately 430 holders thereof; however, the Registrant's stock is believed to be held in approximately 2,000 brokerage accounts ("street-name shareholders"). (c) Dividends The Company declared and paid cash dividends for the first time in August, 1995, at the rate of $ .02 per share, and each quarter thereafter at the rate of $ .02 per share. Future dividends, if any, will be determined by the Company's Board of Directors, at their discretion, based on various factors, including the Company's profitability and anticipated capital needs. There are no contractual restrictions, including any restrictions on the ability of any of the Registrant's subsidiaries, to transfer funds to the Registrant in the form of cash dividends, loans or advances, that currently materially limit the Registrant's ability to pay cash dividends or that the Registrant reasonably believes are likely to materially limit the future payment of dividends on its Common Stock. 9 Item 6. Selected Financial Data (a) 1996 1995 1994 1993 1992 (in thousands, except per share data) ____________________________________________________ Net sales $25,779 $26,197 $24,341 $16,719 $14,683 Income before income taxes 7,093 6,426 6,200 4,350 3,673 Net Income 4,679 4,315 4,076 2,776 2,374 Current assets 20,408 20,438 17,342 12,258 7,030 Total assets 46,499 42,463 29,074 19,606 8,884 Current liabilities 6,223 4,674 3,525 2,687 1,033 Long term debt 6,689 9,112 811 950 1,093 PER COMMON SHARE: (b) Net Income 1.13 1.05 1.00 .84 .75 Cash dividends .08 .04 None None None Notes to Selected Financial Data (a) The selected financial data includes the operations of the Company and its wholly-owned subsidiaries, Foxy Products, Inc. (acquired in 1986), Old 97 Company (acquired in 1988), Williamsport Barber and Beauty Corp. (acquired in 1992), Stephan & Co., formerly Heads or Nails, Inc. (acquired in 1993), Scientific Research Products, Inc. of Delaware (acquired April 15, 1994), and Trevor Sorbie of America, Inc. and Subsidiaries (acquired June 28, 1996). (b) Earnings per share is based upon the weighted average number of common shares and common share equivalents (stock options) outstanding after giving effect to stock splits in 1992 and 1993. The weighted average number of shares outstanding were 4,138,629 for 1996, 4,127,765 for 1995, 4,067,819 for 1994, 3,314,274 for 1993, and 3,146,266 for 1992. This data should be read in conjunction with the audited consolidated financial statements and related notes included in this Annual Report. 10 Selected Quarterly Financial Information (unaudited) (in thousands, except per share data) 3/31/96 6/30/96 9/30/96 12/31/96 _______ _______ _______ ________ Net sales $ 6,740 $ 6,468 $ 7,011 $ 5,560 Gross profit 3,749 4,136 4,274 3,163 Net income 1,219 1,332 1,452 676 Per share .30 .32 .35 .16 3/31/95 6/30/95 9/30/95 12/31/95 _______ _______ _______ ________ Net sales $ 6,873 $ 7,289 $ 7,160 $ 4,875 Gross profit 3,639 3,969 4,437 1,499 Net income 1,068 1,191 1,386 670 Per share .26 .29 .34 .16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. OVERVIEW Net income for the year ended December 31, 1996 was $4,679,000, or $1.13 per share, on revenues of $25,779,000, as compared to net income of $4,315,000, or $1.05 per share, on revenues of $26,197,000 for 1995. With the acquisition of Trevor Sorbie of America, Inc. (Sorbie) at the end of the second quarter of 1996 and the integration of the brands purchased from Colgate-Palmolive (C-P) on December 31, 1995, the Company not only replaced the majority of the sales decline from the loss of the Martin Himmel, Inc. ("Gold Bond") talc production, but was also able to decrease its historical dependency on major customers. The Company was able to increase net income on slightly lower sales due to the better profit margins achieved with the new product mix. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO 1995 ________________________________________________ As indicated above, net income rose in 1996 by over $360,000 when compared to 1995, representing an 8% increase; however for the year, sales declined approximately $400,000. Although private label production by the Tampa facility, Old 97, increased in 1996, sales for the year decreased slightly because revenue from the newly acquired C-P brands and the Trevor Sorbie line were less than the sales lost as a result of the loss of Martin Himmel Inc.'s private label talc production. Gross profit for the year increased from 52% in 1995 to 59% in 1996 as a result of the above and a change in the product mix and marketing strategy in connection with the Denney cosmetic line. The acquisition of the brands from C-P, as well as the Sorbie acquisition, increased selling, general and administrative expenses significantly in 1996. The C-P brands put the Company in more of a retail environment than previous products manufactured by the Company and this 11 increased marketing costs after the transition period with C-P ended in July, 1996. The Sorbie line, sold in professional salons nationwide, also requires significant marketing and education expenses not previously experienced by the Company. These increased costs are more than offset by the significantly higher gross margins generated by these products. Interest expense increased as a result of the debt incurred in connection with the acquisitions made in 1995 and 1996 and other income of $75,000 was attributable to the royalty from the Color-Me-Beautiful Trademark and Licensing Agreement signed in the first quarter of 1996. YEAR ENDED DECEMBER 31,1995 AS COMPARED TO 1994 _______________________________________________ While overall sales and profit increased in 1995, the gross margin showed a decline in 1995, primarily due to a change in the product mix. Results for the fourth quarter of 1995 declined considerably as compared to the quarter ended December 31, 1994. Sales in the fourth quarter of 1995 were down approximately $1,950,000, or 29%, and net income declined approximately $370,000, or 36%, principally due to management's decision to change the distribution channels for the Frances Denney product line and to upgrade the talc producing facility at Old 97, which resulted in the ceasing of talc production at that location for most of the fourth quarter. At the beginning of the third quarter of 1995, management reevaluated the Denney sales, profit level and customer base in connection with existing distribution through one major retailer and developed a new marketing strategy that involved several new methods of distribution, including the development of a mail order catalog business for the Denney products and a trademark and licensing agreement to market specific Denney products through selected major retail chains. Aggressive advertising in known markets where Denney sales are strong, as well as appearing on a national television marketing channel also had a positive impact on sales and profitability. In connection with the acquisition of the Colgate-Palmolive brands and a reevaluation of required inventory levels by the Company's major talc customer, talc production was shut down in the middle of the fourth quarter so that renovations and repairs could be made to the talc production lines at Old 97. Extensive remodeling and improvements were made, both in anticipation of the production of the new Colgate-Palmolive brands and because of the desire to have increased capacity to produce for other customers. Talc production resumed in the second quarter of 1996. LIQUIDITY AND CAPITAL RESOURCES: Working capital was approximately $14,200,000 at December 31, 1996, a decrease of $1,600,000 from 1995, due in large part to the required payments made in connection with the Colgate acquisition refinancing and the amount owed on the line of credit utilized to acquire Trevor Sorbie of America, Inc. Cash and cash equivalents increased almost $600,000 to $8,300,000 from 1995, even after the down payment to Colgate of $2,000,000 paid on January 2, 1996, the reduction of outstanding debt on the Colgate acquisition loan ($600,000) and the retirement of the outstanding mortgage obligation on the Fort Lauderdale facility ($600,000). There are no material capital commitments for the upcoming year. 12 In June, 1996, the Registrant refinanced the existing $6,000,000 notes payable to the Colgate/Mennen companies by securing a 5 year term loan with NationsBank N.A.(South). As a result, the Company reduced the interest rate on the debt from 8.00% to 7.85%. The new loan provides for monthly principal reductions of $100,000, plus interest, commencing in July, 1996. In addition to the above, the Company also secured a $2,000,000 line of credit with NationsBank N.A.(South) in anticipation of funds required in connection with the acquisition of TSA. The Company has not experienced any adverse impact from the effects of inflation in the past. Management maintains the flexibility to increase prices and does not have any binding contract pricing with either customers or vendors. Many of the Company's products, as well as the components used, are petroleum-based products, and in the past, prices can be subject to various political or economic pressures. The Company does not foresee any increase in its raw material or component costs but believes it has the flexibility of multiple vendors and the ability to increase prices to offset any price changes. Item 8. Financial Statements and Supplementary Data Reference is made to the financial statements and supplementary data contained elsewhere in this Annual Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure On October 12, 1995, the Registrant's independent accountants, Kaufman Rossin & Co., CPAs, resigned as certifying auditors. On November 29, 1995 the Company retained the firm of Deloitte & Touche LLP for the purpose of performing the audit for the year ended December 31, 1995. None of the reportable events as described in Item 304 (a)(1)(ii) occurred with respect to the Company within the last two fiscal years reported on by Kaufman Rossin & Co. or in the subsequent interim periods. In addition, the Company did not consult Deloitte & Touche LLP regarding any of the matters or events set forth in Item 304 (a)(2)(i) and (ii) of Regulation S-K. 13 PART III The information required by Part III Items 10-13 of Form 10-K will be incorporated by reference from the Registrant's Proxy Statement for its 1997 annual meeting of stockholders which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the Registrant's fiscal year. 14 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Exhibits 10.1 Settlement Agreement and Amendment dated December 5, 1996, between The Stephan Co., The Mennen Company and Colgate-Palmolive Company. 10.2 Trademark License and Supply Agreement dated March 7, 1996, between Color Me Beautiful, Inc. and The Stephan Co., included with the Form 8-K filed March 20, 1996, is incorporated herein by reference. 10.3 Agreement dated June 28, 1996 for the acquisition of Sorbie Acquisition Co. and Subsidiaries, with exhibits, included with the Form 8-K filed July 15, 1996, and as amended on August 21, September 16 and October 9, 1996, is incorporated herein by reference. (b) Financial Statements and Financial Statement Schedules (i) Financial Statements Independent Auditors' Report for the years ended December 31, 1996 and 1995. Independent Auditors' Report for the year ended December 31, 1994. Consolidated Balance Sheets as of December 31, 1996 and 1995. Consolidated Statements of Operations for the years ended December 31, 1996, 1995, and 1994. Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1996, 1995, and 1994. Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995, and 1994. Notes to Consolidated Financial Statements. (ii) Financial Statement Schedules All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. 15 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (Continued) (c) Reports on Form 8-K (i) Form 8-K, filed January 16, 1996, in connection with the acquisition of certain brands from Colgate-Palmolive Company, and as amended on January 22, 1996. (ii) Form 8-K, filed March 20, 1996, in connection with the Trademark License and Supply Agreement between the Registrant and Color Me Beautiful, Inc. (iii)Form 8-K, filed July 15, 1996, in connection with the acquisition of Sorbie Acquisition Company and Subsidiaries, and as amended on August 21, September 16 and October 9, 1996. 16 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of The Stephan Co.: We have audited the accompanying consolidated balance sheets of The Stephan Co. and subsidiaries (the "Company") as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Stephan Co. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Certified Public Accountants Miami, Florida April 4, 1997 F-1 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders The Stephan Co. Fort Lauderdale, Florida We have audited the accompanying consolidated statement of operations, changes in stockholders' equity, and cash flows of The Stephan Co. and Subsidiaries for the year ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows for the year ended December 31, 1994 of The Stephan Co. and Subsidiaries in conformity with generally accepted accounting principles. KAUFMAN, ROSSIN & CO. Miami, Florida March 30, 1995 F-2 THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31,1996 AND 1995 ASSETS 1996 1995 ____________ ____________ CURRENT ASSETS Cash and cash equivalents $ 8,276,976 $ 7,711,239 Accounts receivable, less allowance for doubtful accounts of $56,171 and $46,401 in 1996 and 1995, respectively 3,405,547 5,414,530 Inventories 8,432,185 7,059,536 Prepaid expenses and other current assets 293,425 252,205 ____________ ____________ TOTAL CURRENT ASSETS 20,408,133 20,437,510 PROPERTY, PLANT AND EQUIPMENT, net 2,160,678 2,097,757 INTANGIBLE ASSETS, net 23,131,120 18,948,428 NOTE RECEIVABLE - 500,000 OTHER ASSETS 798,579 478,848 ____________ ____________ TOTAL ASSETS $ 46,498,510 $ 42,462,543 ============ ============ See notes to consolidated financial statements. F-3 THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31,1996 AND 1995 LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 ___________ ___________ CURRENT LIABILITIES Initial payment - Colgate-Palmolive $ - $ 2,000,000 Accounts payable and accrued expenses 2,553,974 1,661,654 Notes payable to bank 1,400,000 400,000 Current portion of long-term debt 1,804,879 612,757 Income taxes payable 464,593 - ___________ ___________ TOTAL CURRENT LIABILITIES 6,223,446 4,674,411 DEFERRED INCOME TAXES, net 298,461 120,121 LONG-TERM DEBT, less current maturities 6,688,930 9,112,129 ___________ ___________ TOTAL LIABILITIES 13,210,837 13,906,661 ___________ ___________ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, $.01 par value; 25,000,000 shares authorized; 4,147,466 and 4,122,484 shares issued and outstanding at December 31, 1996 and 1995, respectively 41,475 41,225 Additional paid in capital 12,967,462 12,583,995 Retained earnings 20,278,736 15,930,662 ___________ ____________ TOTAL STOCKHOLDERS' EQUITY 33,287,673 28,555,882 ___________ ____________ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $46,498,510 $42,462,543 =========== =========== See notes to consolidated financial statements. F-4 THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1996 1995 1994 ____________ ____________ ____________ NET SALES $ 25,778,618 $ 26,196,516 $ 24,340,903 COST OF GOODS SOLD 10,558,919 12,652,546 10,707,863 ____________ ____________ ___________ GROSS PROFIT 15,219,699 13,543,970 13,633,040 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 8,239,386 7,432,929 7,555,969 ____________ ____________ ___________ OPERATING INCOME 6,980,313 6,111,041 6,077,071 OTHER INCOME(EXPENSE) Interest income 392,314 404,631 216,951 Interest expense (354,362) (92,416) (98,189) Other 75,000 2,540 3,748 ____________ ___________ ____________ INCOME BEFORE INCOME TAXES 7,093,265 6,425,796 6,199,581 INCOME TAXES 2,414,105 2,110,385 2,123,245 ____________ ___________ ____________ NET INCOME $ 4,679,160 $ 4,315,411 $ 4,076,336 ============ =========== ============ NET INCOME PER COMMON SHARE $ 1.13 $ 1.05 $ 1.00 ============ =========== ============ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 4,138,629 4,127,765 4,067,819 ============ =========== ============ See notes to consolidated financial statements. F-5 THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Common Stock _______________________ Additional Paid in Retained Treasury Shares Par Value Capital Earnings Stock _________ _________ __________ __________ _________ Balances, Jan. 1, 1994 3,674,622 $ 36,746 $8,210,399 $7,703,814 Stock issued for acquisition 500,000 5,000 5,495,000 - - Stock options exercised 8,626 86 9,920 - - Purchase of treasury stock - - - - $ (884,000) Net income for 1994 - - - 4,076,336 - _________ _________ __________ __________ __________ Balances, Dec. 31, 1994 4,183,248 41,832 13,715,319 11,780,150 (884,000) Treasury stock retired (80,000) (800) (883,200) - 884,000 Retirement of stock received in settlement with former stockholder(16,105) (161) (309,860) - - Stock options exercised 35,341 354 61,736 - - Dividends paid - - - (164,899) - Net income for 1995 - - - 4,315,411 - _________ _________ __________ __________ __________ Balances, Dec. 31, 1995 4,122,484 41,225 12,583,995 15,930,662 - Stock issued for acquisition 32,632 326 517,707 - - Stock options exercised 6,750 68 49,941 - - Purchase of treasury stock - - - - (184,325) Treasury stock retired (14,400) (144) (184,181) - 184,325 Dividends paid - - - (331,086) - Net income for 1996 - - - 4,679,160 - _________ _________ __________ __________ __________ Balances, Dec. 31, 1996 4,147,466 $ 41,475 $12,967,462 $20,278,736 $ - ========= ========= ========== ========== ========== See notes to consolidated financial statements. F-6 THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 _____________________________________________ 1996 1995 1994 __________ ___________ ___________ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,679,160 $ 4,315,411 $4,076,336 ___________ ___________ ___________ Adjustments to reconcile net income to cash flows provided by operating activities: Depreciation 221,867 166,046 100,221 Amortization 889,944 476,815 386,651 Write-off of Goodwill 123,016 127,991 - Deferred income taxes 178,340 35,121 67,000 Provision for doubtful accounts 10,978 78,951 47,011 Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable 586,073 (1,182,627) 806,015 Inventories (555,425) (809,948) (483,653) Prepaid expenses and other current assets (28,740) (82,462) (27,163) Other assets (319,731) (372,729) - Accounts payable and accrued expenses (2,340,331) (851,196) (1,269,959) Income taxes payable 464,593 (468,334) 36,775 __________ __________ __________ Total adjustments (769,416) (2,882,372) (337,102) __________ __________ __________ Net cash flows provided by operating activities 3,909,744 1,433,039 3,739,234 __________ __________ __________ See notes to consolidated financial statements. F-7 THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 _____________________________________________ 1996 1995 1994 __________ __________ __________ CASH FLOWS FROM INVESTING ACTIVITIES: Cash acquired from acquisition 128,445 - - Return of escrow funds - - 428,124 Purchase of debenture - - (500,000) Colgate purchase price adjustment 331,000 - - Purchase of property, plant and equipment (229,238) (185,763) (836,853) Purchase of marketable securities - - (108,427) Purchase of intangible assets (75,284) - - Maturities of marketable securities - 417,237 254,750 Net changes in other assets - - (92,646) __________ __________ __________ Net cash flows provided by/(used in) investing activities 154,923 231,474 (855,052) __________ __________ __________ CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of long-term debt (10,033,528) (143,002) (241,411) Proceeds from notes payable to bank 7,000,000 - 400,000 Proceeds from issuance of stock - - 119,289 Acquisition of treasury stock (184,325) - (884,000) Dividends paid (331,086) (164,899) - Proceeds from exercise of stock options 50,009 62,090 10,006 __________ __________ __________ Net cash flows used in financing activities (3,498,930) (245,811) (596,116) __________ __________ __________ NET INCREASE IN CASH AND CASH EQUIVALENTS 565,737 1,418,702 2,288,066 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,711,239 6,292,537 4,004,471 __________ __________ __________ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,276,976 $ 7,711,239 $ 6,292,537 ========== ========== ========== See notes to consolidated financial statements. F-8 THE STEPHAN CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Supplemental Disclosures of Cash Flow Information: 1996 1995 1994 __________ _________ __________ Interest paid $ 354,445 $ 96,452 $ 94,489 ========== ========= ========== Income taxes paid $ 1,612,417 $ 2,488,598 $ 2,011,952 ========== ========= ========== Supplemental Disclosure of Non-Cash Investing and Financing Activities: In connection with the acquisition of Sorbie Acquisition Company and Subsidiaries on June 28, 1996, the Company acquired inventory, accounts receivable, fixed and intangible assets and assumed certain liabilities by issuance of common stock with an approximate net value of $518,000. In connection with the acquisition of the Colgate-Palmolive Brands on December 31, 1995, the Company acquired inventory, molds and tooling equipment and intangible assets for cash, notes, and contingent consideration to be paid over an 8 year period. In connection with the acquisition of Scientific Research Products, Inc., in 1994, the Company acquired inventory, accounts receivable, fixed and intangible assets and assumed certain liabilities by issuance of common stock with an approximate net value of $5,500,000. See notes to consolidated financial statements. F-9 THE STEPHAN CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of The Stephan Co. and its wholly-owned subsidiaries, Foxy Products, Inc., Old 97 Company, Williamsport Barber and Beauty Supply Corp., Stephan & Co. (formerly Heads or Nails, Inc.), Scientific Research Products, Inc. of Delaware and Trevor Sorbie of America, Inc. (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. NATURE OF OPERATIONS: The Company is engaged in the manufacture, sale, and distribution of personal care grooming products throughout the United States. The Company's business activity constitutes a single reportable segment for purposes of Statement of Financial Accounting Standards No 14. USE OF ESTIMATES: The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. MAJOR CUSTOMERS: Sales to unaffiliated customers in excess of 10% of net sales for the years ended December 31, 1996, 1995 and 1994 were as follows: 1996 1995 1994 __________ __________ __________ Customer A $ - $ 3,572,000 $ 1,012,000 Customer B - 4,265,000 5,256,000 Customer C - 3,128,000 3,786,000 Customer D 3,056,000 - - __________ __________ __________ $ 3,056,000 $10,965,000 $10,054,000 ========== ========== ========== The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral. The Company does not believe that the credit risk represents a material risk of loss to the Company. However, the loss of major customers mentioned above could have a material adverse effect on the Company. F-10 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) LONG-LIVED ASSETS: The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" in the year ended December 31, 1996. SFAS No. 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used, and for long-lived assets and certain identifiable intangibles to be disposed of. The adoption of SFAS No. 121 did not have a significant effect on the Company's financial position or results of operations. STOCK-BASED COMPENSATION: On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation", which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows entities to continue to measure compensation cost for stock- based awards using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees", and to provide pro forma net income and pro forma earnings per share disclosures as if the fair value method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. See Note 11 to the financial statements. FAIR VALUE OF FINANCIAL INSTRUMENTS: Statement of Financial Accounting Standards No. 107, "Disclosure about Fair Value of Financial Instruments," requires disclosure of the fair value of financial instruments, both assets and liabilities, recognized and not recognized in the consolidated balance sheets of the Company, for which it is practicable to estimate fair value. The estimated fair values of financial instruments which are presented herein have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of amounts the Company could realize in a current market exchange. The following methods and assumptions were used to estimate fair value: - the carrying amounts of cash and cash equivalents, receivables and accounts payable approximate fair value due to their short term nature; - discounted cash flows using current interest rates for financial instruments with similar characteristics and maturity were used to determine the fair value of notes receivable, notes payable and debt. There were no significant differences as of December 31, 1996 and 1995 in the carrying value and fair market value of financial instruments. CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash, certificates of deposit, United States Treasury Bills, and municipal bonds having maturities of 35 days or less. Also included in cash and cash equivalents is a $400,000 certificate of deposit pledged as collateral against a $400,000 note payable to bank. The Company maintains cash deposits at certain financial institutions in amounts in excess of F-11 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) federally insured limits of $100,000. Cash and cash equivalents held in interest-bearing accounts as of December 31, 1996 and 1995 were approximately $7,023,000 and $5,342,000, respectively. INVENTORIES: Inventories are stated at the lower of cost (determined on the first-in, first-out basis) or market. Capitalized overhead costs charged to inventory for the year ended December 31, 1996 and 1995 were approximately $2,037,000 and $2,835,000, respectively. Capitalized overhead costs included in inventory as of December 31, 1996 and 1995 were approximately $893,000 and $1,649,000 respectively. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are recorded at cost. Routine repairs and maintenance are expensed as incurred. Depreciation is provided on a straight line basis over the estimated useful lives of the assets as follows: Buildings and improvements 15-30 years Machinery and equipment 5-7 years Furniture, fixtures and office equipment 3-5 years INTANGIBLE ASSETS: Intangible assets are amortized using the straight-line method based on the following estimated useful lives: Goodwill 20-40 years Covenant not to compete 7 years Trademarks 20-40 years The amount of impairment, if any, in unamortized Goodwill is measured based on projected future results of operations. To the extent future results of operations of those subsidiaries to which the Goodwill relates through the period such Goodwill is being amortized are sufficient to absorb the amortization of Goodwill, the Company has deemed there to be no impairment of Goodwill. INCOME TAXES: Income taxes are calculated under the asset and liability method of accounting. Deferred income taxes are recognized by applying the enacted statutory rates applicable to future year differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. A valuation allowance is recorded when it is more likely than not that some portion or all of the deferred tax asset will not be realized. NET INCOME PER SHARE: Net income per share is computed by dividing net income by the sum of the weighted average number of shares of common stock and common stock assumed to be outstanding upon exercise of all stock options, utilizing the treasury stock method. Fully diluted earnings per share is not presented as it is not materially different. F-12 NOTE 2. SIGNIFICANT TRANSACTIONS On June 28, 1996, the Company entered into a Stock Purchase Agreement with Sorbie Acquisition Co. and Subsidiaries (Sorbie), and all the stockholders of Sorbie, including the President and principal stockholder, as well as related agreements described below with the President, Trevor Sorbie International, Trevor Sorbie, Samson Arms, Inc. and Redken Laboratories. Pursuant to the agreements, the Company exchanged 13,733 shares of restricted common stock, valued at approximately $218,000, and additional consideration as described below, for all the outstanding common and preferred stock of Sorbie. In addition, the Company issued an additional 18,899 shares of restricted stock, valued at approximately $300,000, to terminate an existing royalty agreement between Samson Arms, Inc. and Sorbie. Additionally, and as further consideration for the acquisition, the Company has (i) terminated a Secured Subordinated Debenture of Sorbie, dated July 20, 1994, held by the Company in the principal amount of $500,000, (ii) assumed liabilities due to the President of Sorbie under a pre-existing employment contract of approximately $500,000 and (iii) replaced a certain Secured Promissory Note of Sorbie in favor of Redken Laboratories in the principal amount of $3,250,000 with a cash payment of $2,500,000. In separate agreements, the Company amended the existing royalty contract between Sorbie, Trevor Sorbie International, Sorbie Trading Limited and Trevor Sorbie. In accordance with the amended agreement, the royalty payment percentage rate payable upon future sales was reduced. Sorbie, formerly a major customer of the Company, is engaged in the distribution of professional hair care products sold in beauty salons in the United States and Canada. The transaction was recorded using the purchase method and, accordingly, the purchase price was allocated to assets and liabilities based on their estimated fair values as of the date of acquisition. The cost in excess of identifiable net assets acquired was approximately $5,700,000 and is being amortized over 30 years on a straight- line basis. Unaudited pro-forma results of operations, assuming the acquisition of Sorbie occurred as of the beginning of 1995, after giving effect to certain adjustments such as the elimination of intercompany sales and amortization of goodwill resulting from the acquisition is summarized as follows (in thousands, except per share data): 1996 1995 __________ __________ Net sales $ 27,076 $ 30,315 ========== ========== Income before income taxes $ 6,699 $ 5,195 ========== ========== Net Income $ 4,431 $ 3,539 ========== ========== Earnings per share $ 1.07 $ .85 ========== ========== F-13 NOTE 2. SIGNIFICANT TRANSACTIONS (Continued) On December 31, 1995, the Company entered into asset purchase agreements with Colgate-Palmolive Company and its subsidiary, The Mennen Company, to acquire certain consumer product brands, as well as a licensing agreement for the domestic distribution of the Cashmere Bouquet Talc product line. The combined purchase price for the brands and licensing agreement, as amended, was $12,000,000, comprised of a $2,000,000 cash down payment; 5 year, 8% notes in an aggregate amount of $6,000,000; and a royalty payment of $4,000,000 payable semi-annually over a period of 8 years. Approximately $600,000 of the purchase price was allocated to inventory, $200,000 was allocated to molds and other tooling equipment acquired and the balance of approximately $10,200,000 (after giving consideration to the net present value of the royalty stream) was allocated to trademarks and licenses which are being amortized over 30 years. Concurrent with the acquisition of the brands and the licensing agreement, the parties signed a seven-month transition agreement to facilitate the orderly transition of sales, production and distribution functions. In accordance with the Acquisition Agreement between the Company and Colgate- Palmolive, a purchase price adjustment was made at the end of the transition period which had the effect of reducing goodwill recorded on the acquisition by approximately $570,000. In May, 1994, the Company filed suit against the former stockholder of Pennys Heads or Nails, Inc. The suit alleged certain breaches of representations and warranties in connection with the purchase of the company's common stock in August, 1993 for $357,116 cash and 23,007 restricted shares of Stephan common stock. In August, 1995, the litigation was terminated by a settlement between the parties, resulting in a return of 16,105 shares. Also, as a result of the settlement, goodwill and additional paid in capital have been reduced by approximately $300,000. NOTE 3. ACCOUNTS RECEIVABLE Accounts Receivable at December 31, 1996 and 1995 consisted of the following: 1996 1995 ___________ ___________ Accounts Receivable: Trade $ 3,362,126 $ 4,863,120 Other 99,592 597,811 ___________ ___________ 3,461,718 5,460,931 Less: Allowance for doubtful accounts (56,171) (46,401) ___________ ___________ $ 3,405,547 $ 5,414,530 =========== =========== F-14 NOTE 3. ACCOUNTS RECEIVABLE (Continued) The following is an analysis of the allowance for doubtful accounts for the year ended December 31: 1996 1995 1994 __________ __________ __________ Balance, beginning of year $ 46,401 $ 41,819 $ 36,331 Provision for doubtful accounts 10,978 78,951 47,011 Uncollectible accounts written off ( 1,208) (74,369) (41,523) __________ __________ __________ Balance, end of year $ 56,171 $ 46,401 $ 41,819 ========== ========== ========== NOTE 4. INVENTORIES Inventories at December 31, 1996 and 1995 consisted of the following: 1996 1995 ____________ ____________ Raw materials $ 1,087,257 $ 1,078,275 Packaging and components 2,341,759 2,000,850 Work in progress 1,019,317 596,391 Finished goods 3,983,852 3,384,020 ____________ ____________ $ 8,432,185 $ 7,059,536 ============ ============ NOTE 5. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment at December 31, 1996 and 1995 consisted of the following: 1996 1995 ____________ ____________ Land $ 379,627 $ 379,627 Buildings and improvements 1,610,191 1,514,599 Machinery and equipment 834,435 754,511 Furniture and office equipment 381,213 284,864 ____________ ___________ 3,205,466 2,933,601 Less: accumulated depreciation (1,044,788) (835,844) ____________ ___________ $ 2,160,678 $ 2,097,757 ============ =========== F-15 NOTE 6. INTANGIBLE ASSETS Intangible assets at December 31, 1996 and 1995 consisted of the following: 1996 1995 ____________ ____________ Goodwill-Williamsport Barber Supply $ 501,000 $ 501,000 Covenant not to compete- Williamsport Barber Supply 275,000 275,000 Goodwill-Stephan & Co. 278,054 278,054 Goodwill-Scientific Research Products, Inc. 2,200,022 2,311,810 Trademarks-Scientific Research 1,758,343 1,758,343 Trademarks-Frances Denney 4,541,802 4,541,802 Trademarks-Colgate/Mennen 9,608,070 10,174,832 Goodwill-Trevor Sorbie 5,700,902 - Other 157,960 112,679 ___________ ____________ 25,021,153 19,953,520 Less: accumulated amortization (1,890,033) (1,005,092) ____________ ____________ $ 23,131,120 $ 18,948,428 ============ ============ Goodwill arising from the acquisition of Scientific Research Products of Delaware, Inc. in April, 1994 was reduced by the tax effect of the Net Operating Loss carryforward utilized subsequent thereto. See Note 9. NOTE 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses at December 31, 1996 and 1995 consisted of the following: 1996 1995 ____________ ____________ Accounts payable $ 1,353,889 $ 859,304 Accrued marketing expenses 140,000 195,681 Accrued payroll and bonuses 834,246 433,717 Other accrued expenses 225,839 172,952 ____________ ____________ $ 2,553,974 $ 1,661,654 ============ ============ NOTE 8. LONG-TERM DEBT Long-term debt at December 31, 1996 and 1995 consisted of the following: 1996 1995 ____________ ____________ 10% mortgage payable to former owner of land and building. $ - $ 104,496 Variable rate mortgage payable to bank. - 484,867 F-16 NOTE 8. LONG-TERM DEBT (Continued) 7.7% note payable to former owner of Williamsport Barber Supply; principal and interest due in monthly install- ments of $5,403, through January, 1999; collateralized by operating assets of Williamsport Barber and Beauty Supply with a carrying value of approximately $1,250,000. 124,431 177,448 Non-interest bearing note payable to the seller of the Massimo Faust product line; payable in annual installments of $15,000, through December 1997; unsecured. 30,000 45,000 Guaranteed royalty payments to former owner of Sorbie brand, payable in quarterly installments of $22,401, through December 31, 1999, discounted at an 8% rate; unsecured. 262,067 - 8% notes payable to The Colgate/Mennen Co.; due January 2, 2001 interest payable semi-annually. - 6,000,000 7.85% note payable to bank, principal of $100,000 plus interest, due monthly, through June 26, 2001; collateralized by a secondary security interest in the brands acquired from Colgate-Palmolive with a carrying value of approximately $9,250,000. 5,400,000 - Guaranteed payments of $250,000 due semi- annually to Colgate-Palmolive over an 8 year period discounted at an 8% rate; collateralized by a security interest in the brands acquired with a carrying value of approximately $9,250,000. 2,677,311 2,913,075 ____________ ____________ 8,493,809 9,724,886 Less: current portion (1,804,879) (612,757) ____________ ____________ Long-term debt $ 6,688,930 $ 9,112,129 ============ ============ In June, 1996, the Company refinanced the existing notes payable to Colgate- Palmolive by securing a 5 year term loan with a bank. The Company entered into a $2,000,000 revolving credit line with a variable interest rate at LIBOR plus 1.5%. At December 31, 1996, the outstanding obligation under this line of credit was $1,000,000, with an interest rate of 7.16%. At December 31, 1996 and 1995, the Company has a $400,000 note payable to a bank due October 9, 1997, with interest at 3/4% above the certificate of deposit rate (5.5% in 1996 and 4.75% in 1995) that is pledged as collateral against the note. F-17 NOTE 8. LONG-TERM DEBT (Continued) In December, 1996, the Company retired the two outstanding mortgages on the Fort Lauderdale facility, without penalty. At December 31, 1996, approximate maturities of long-term debt are $1,805,000 for 1997, $1,775,000 for 1998, $1,675,000 for 1999, $1,580,000 for 2000, $930,000 for 2001, and $725,000 thereafter. NOTE 9. INCOME TAXES The provision for income taxes is comprised of the following for the years ended December 31: 1996 1995 1994 ___________ ___________ ___________ Current Tax: Federal $ 1,872,701 $ 1,843,532 $ 1,776,481 State 363,064 231,732 279,764 ___________ ___________ ___________ Total Current 2,235,765 2,075,264 2,056,245 ___________ ___________ ___________ Deferred Tax: Federal 154,374 23,487 67,000 State 23,966 11,634 - ___________ ___________ ___________ Total Deferred 178,340 35,121 67,000 ___________ ___________ ___________ Total provision for income taxes $ 2,414,105 $ 2,110,385 $ 2,123,245 =========== =========== =========== Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. The net deferred tax liability in the accompanying balance sheets includes deferred tax assets and liabilities attributable to the following items: 1996 1995 ___________ ___________ Accounts receivable allowances $ (20,952) $ (17,307) Goodwill 324,916 137,428 Other reserves (5,503) - Net operating loss carryforward (510,000) (204,000) ___________ ___________ (211,539) (83,879) Less: Valuation allowance 510,000 204,000 ___________ ___________ Net deferred tax liability $ 298,461 $ 120,121 =========== =========== F-18 NOTE 9. INCOME TAXES (Continued) The provision for federal and state income taxes differs from statutory tax expense (computed by applying the U.S. Federal corporate tax rate to income before taxes) as follows: 1996 1995 1994 ________ ________ ________ Amount computed on pretax income 35.0% 35.0% 35.0% Increase(decrease) in taxes: State income taxes, net of federal tax benefit 3.6 2.5 3.6 Charitable contributions of inventory (2.9) (2.9) - Benefit of graduated rates (1.0) (1.0) (1.0) Other ( .3) ( .8) (3.4) ________ ________ ________ Total income tax 34.4% 32.8% 34.2% ======== ======== ======== The Company had available a net operating loss carryforward approximating $300,000 at December 31, 1996, arising from the acquisition of Scientific Research Products, Inc. of Delaware and approximately $1,200,000 arising from the purchase of Sorbie Acquisition Company. Due to limitations imposed by current tax laws, it is anticipated that a significant portion of the Sorbie net operating loss carryforward will not be able to be utilized. NOTE 10. COMMITMENTS AND CONTINGENCIES The Company is involved in litigation matters arising in the normal course of business. It is the opinion of management that any such matters, at December 31, 1996, would not have a material adverse effect on the Company's financial position or results of operations. Scientific Research Products is committed to an operating lease of office, warehouse and distribution facilities through October 1997 for an annual rental of $180,000. The Company has entered into employment agreements with certain officers and employees. These agreements, which expire on various dates through June, 2001, provide for incentive bonuses based on consolidated income before taxes, earnings per share, or earnings of a subsidiary. In the aggregate, such bonuses were $694,000, $350,000 and $696,000 in 1996, 1995 and 1994, respectively, and are included in selling, general and administrative expenses. NOTE 11. CAPITAL STOCK AND STOCK OPTIONS 1,000,000 shares of preferred stock, $0.01 par value are authorized, however, no shares have been issued. In 1990, the shareholders of the Company approved the 1990 Key Employee Stock Incentive Plan and the 1990 Outside Directors Plan. The aggregate number of shares currently authorized pursuant to the Key Employee Plan, as adjusted for stock splits and a shareholder approved increase in 1994, is 470,000 shares. The number of shares and terms of F-19 NOTE 11. CAPITAL STOCK AND STOCK OPTIONS (Continued) each grant are determined by the Compensation Committee of the Board of Directors, in accordance with the 1990 Key Employee Plan, as amended. The Outside Directors Plan provides for annual grants, as adjusted for stock splits, of 5,062 shares to non-employee directors. Such grants are granted on the earlier of June 30 or the date of the Company's Annual Meeting of Shareholders, at the fair market value at the date of grant. The aggregate number of shares reserved for granting under this plan, as adjusted for stock splits, is 202,500. Stock options are granted at the discretion of the Board of Directors. The options become exercisable one year from the grant date and must be exercised within six years of the grant date. Stock option activity for 1996, 1995, and 1994 is set forth below: Key Employee Outside Option Avg. Directors Avg. Plan Price Plan Price __________________________________________________________________________ Outstanding at December 31, 1993.. 134,150 $10.88 17,625 $11.26 Granted........................... 80,000 16.71 10,124 15.38 Exercised......................... (8,626) 1.16 - __________ __________ Outstanding at December 31, 1994.. 205,524 13.52 27,749 12.76 Granted........................... - 10,124 15.50 Canceled.......................... (1,758) 1.16 - Exercised......................... (31,966) 1.16 (3,375) 7.41 __________ __________ Outstanding at December 31, 1995.. 171,800 15.95 34,498 14.09 Granted........................... 112,500 17.81 15,186 15.75 Canceled.......................... (5,000) 14.33 (2,500) 7.41 Exercised......................... - (6,750) 7.41 __________ __________ Outstanding at December 31, 1996.. 279,300 $16.77 40,434 $16.24 ========== ====== ========== ====== The number of shares and average price of options exercisable at December 31, 1996, 1995 and 1994 were 174,800 shares at $15.95, 171,800 shares at $15.95 and 134,150 at $10.88 for the Key Employee Option Plan and 25,248 at $16.54, 24,374 at $13.50 and 17,625 at $11.26 for the Outside Directors Plan, respectively. At December 31, 1996 and 1995, 192,300 shares and 304,800 shares, respectively, were available for future grants under the terms of the Key Employee Option Plan and 138,066 shares and 153,252 shares, respectively, were available for future grants under the terms of the Outside Directors Plan. The Company continues to apply the provisions of Accounting Principles Board Opinion No. 25, and related Interpretations in accounting for stock- based compensation plans. Accordingly, no compensation expense has been recorded in the accompanying consolidated statements of operations for F-20 NOTE 11. CAPITAL STOCK AND STOCK OPTIONS (Continued) options granted in 1996 and 1995, however pro forma disclosures of net earnings and earnings per share must be made as if SFAS No. 123 had been adopted. Had compensation costs for options granted been determined on the basis of the fair value of the awards at the date of grant, consistent with the treatment prescribed by SFAS No. 123, the Company's net income and earnings per share, on a pro forma basis, would be as follows: (Dollars in thousands, except per share data) 1996 1995 ___________ __________ Net income: As reported $ 4,679 $ 4,315 Pro forma $ 4,418 $ 4,276 Earnings per share: As reported $ 1.13 $ 1.05 Pro forma $ 1.07 $ 1.04 The above pro forma effect only takes into consideration options granted since January 1, 1995 and is likely to increase in future years as additional options are granted and amortized ratably over the vesting period. The average fair value of options granted during 1996 and 1995 was $3.32 and $5.68, respectively. The fair value of stock options granted in 1996 and 1995 was estimated using the Black-Scholes option-pricing model and included the following assumptions: a grant life expectancy of 3 years for 1996 and 1995, a risk-free interest rate of 5.9% for 1996 and 6.9% for 1995 and volatility of 46% for 1996 and 1995. Since the Company did not start paying dividends until August, 1995, at an annual yield of less than 1%, dividends paid was not material to the determination of the fair value of options granted. The exercise price range of options outstanding and exercisable for both the Key Employee and Outside Directors plans is as follows: Outstanding Exercisable ______________________________ ___________________ Exercise Number Average Average Number Average Price Range of shares Life Price of shares Price _______________ __________ ________ ________ _________ _______ $14.00 - $16.99 182,734 3.17 $15.45 133,048 $15.30 $17.00 - $18.99 67,000 3.17 $17.28 67,000 $17.28 $19.00 - $19.99 70,000 5.25 $19.18 - - __________ _________ 319,734 200,048 ========== ========= The above table reflects the weighted average contractual life remaining in years and the weighted average exercise price. F-21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto, duly authorized. THE STEPHAN CO. By: /s/ Frank F. Ferola ___________________________________ Frank F. Ferola President and Chairman of the Board April 15, 1997 By: /s/ David A. Spiegel ___________________________________ David A. Spiegel Principal Financial Officer April 15, 1997 Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: By: /s/ Frank F. Ferola By: /s/ Thomas M. D'Ambrosio ______________________________ ____________________________ Frank F. Ferola, Principal Thomas M. D'Ambrosio Executive Officer and Director Vice President and Director Date: April 15, 1997 Date: April 15, 1997 By: /s/ John DePinto By: /s/ Curtis Carlson ______________________________ ____________________________ John DePinto, Director Curtis Carlson, Director Date: April 15, 1997 Date: April 15, 1997 17 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1996 DEC-31-1996 8,276,976 0 3,461,718 56,171 8,432,185 20,408,133 3,205,466 1,044,788 46,498,510 6,223,446 6,688,930 0 0 41,475 33,246,198 46,498,510 25,778,618 26,245,932 10,558,919 10,558,919 8,593,748 10,978 354,362 7,093,265 2,414,105 4,679,160 0 0 0 4,679,160 1.13 1.13
EX-10 3 SETTLEMENT AGREEMENT AND AMENDMENT THIS AGREEMENT, made and entered into this 5th day of December, 1996 (the "Settlement Agreement") by and among The Stephan Co. (the "Buyer"), The Mennen Company ("Mennen") and Colgate-Palmolive Company ("Colgate" and together with Mennen, the "Sellers"), is as follows: WHEREAS, each of the Sellers has entered into an Acquisition Agreement with the Buyer dated as of December 31, 1995 (respectively, the "Mennen Acquisition Agreement" and the "Colgate Acquisition Agreement", and collectively, the "Acquisition Agreements"; all capitalized terms used herein without definition shall, unless the context otherwise requires, have the respective meanings ascribed to them in the Acquisition Agreements); and WHEREAS, in connection with the closing of the Acquisition Agreements Colgate and the Buyer entered into the Transition Agreement and the Sellers and the Buyer entered into that certain side letter dated December 31, 1995, relating to minimum sales (the "Minimum Sales Agreement"); and WHEREAS, pursuant to the Minimum Sales Agreement the Buyer had the right to cause the Sellers to repurchase one or more of the Products under certain circumstances; and WHEREAS, the Buyer has made certain allegations relating to certain of the Products and has described certain states of facts which it alleges gives rise to claims under the Acquisition Agreements; and WHEREAS, the parties wish to settle outstanding issues and disputes between and among them and amend the Acquisition Agreements accordingly; NOW, THEREFORE, the parties hereto, intending to be legally bound hereby, and in consideration of the mutual covenants and promises contained herein, agree as follows: 1. Termination of Minimum Sales Agreement. Upon the execution of this Settlement Agreement, the Minimum Sales Agreement shall be deemed terminated and of no further force and effect and none of the parties shall have any further rights or obligations thereunder. As a result of the foregoing, the Sellers shall not be required to repurchase any of the Products from the Buyer and the Buyer shall, subject to the Security Agreements and the Trademark Security Agreements, retain all right, title and interest in and to the Products. 2. Purchase Price Adjustment. Simultaneously with the execution of this Settlement Agreement, the Sellers shall deliver, or cause to be delivered, to the Buyer, by wire transfer to an account designated by the Buyer, a portion of the Purchase Price in the aggregate amount of $500,000. 3. Trademark Matters. 3.1 License of CB Mark in Canada. Simultaneously with the execution of this Settlement Agreement, Colgate- Palmolive Canada, Inc., a subsidiary of Colgate, and the Buyer shall enter into a trademark license agreement in the form annexed as Exhibit A hereto, pursuant to which Colgate- Palmolive Canada, Inc. shall grant to the Buyer a royalty free, perpetual license to the trademarks listed on Schedule B of Exhibit A and related trade dress solely in connection with the manufacture, marketing and sale by the Buyer of the CB Talc Product Line in Canada (the "Canadian Trademark License"). 3.2 Transfer of Additional Foreign Trademarks. Simultaneously herewith, Mennen shall sell, assign and deliver to the Buyer, and the Buyer shall acquire from Mennen, the trademarks listed on Exhibit B hereto ("Additional Foreign Trademarks"). The Buyer acknowledges that the Additional Foreign Trademarks are being sold to the Buyer "as is" and in no event shall the Sellers be liable for any damages to the Buyer of any type whatsoever, including, without limitation, special, indirect, collateral or consequential damages in connection with or arising out of the existence or use by the Buyer of any of the Additional Foreign Trademarks including without limitation, anticipated profits or other economic loss. The foregoing notwithstanding, the Sellers represent that Mennen has not granted rights to any other person with respect to the Additional Foreign Trademarks. 3.3 Transfer Documents. Mennen shall, simultaneously herewith, execute and deliver assignment documents (Foreign Assignment Documents) in substantially the forms collectively annexed hereto as Exhibit C. The Buyer shall record the Foreign Assignment Documents or substantially similar documents and such further documents of transfer in such foreign jurisdictions, and the Buyer shall bear all of the fees and expenses related to the recordal of such foreign assignments. 3.4 License of Trademark BALM BARR a) The Buyer hereby grants to the Sellers the non- assignable, non-exclusive right and license to use in Trinidad and Tobago the trademark BALM BARR solely in connection with the distribution and sale of existing inventory bearing such BALM BARR trademark (the "BALM BARR Inventory"). Said license shall terminate on December 31,1996. b) During the term of this license, the Sellers shall use commercially reasonable efforts to cause the BALM BARR Inventory and the advertising used therefor to be of comparable quality with those similar products and advertising therefor which were manufactured, distributed, marketed and sold by the Sellers as of the date of this Settlement Agreement. c) The Sellers acknowledge that all such us, of the BALM BARR trademark in Trinidad and Tobago shall inure to the benefit of the Buyer. d) Upon the termination of the license granted by this Section 3.4, the Sellers shall immediately discontinue the production, distribution and use of promotional materials, advertising and any, other materials (s) which utilize the BALM BARR trademark in Trinidad and Tobago. 3.5 Waiver of Trademark Rights. Notwithstanding the provisions contained in Section 8.4 of the Mennen Acquisition Agreement, the Sellers hereby irrevocably waive their rights to file trademark applications to register the Mennen Marks in the territories ("Waived Territories") listed on the schedule annexed hereto as Exhibit D. The Sellers make no representations regarding the Mennen Marks in the Waived Territories. 4. Amendments to Acquisition Agreements; Deferred Payment Modification. Article III of each of the Colgate Acquisition Agreement and the Mennen Acquisition Agreement is hereby deleted in its entirety and in lieu thereof, the parties agree as follows: 4.1 Deferred Payment. In addition to the Base Purchase Price (as adjusted pursuant to Section 2 above) and as additional consideration for the purchase of the Trademarks under each of the Acquisition Agreements, the license of the Domestic CB Marks and the Canadian Trademark License, the Buyer shall pay the Sellers an amount equal to eight (8%) percent of the Buyer's net sales of the Products (the "Deferred Payment") through December 31, 2003 subject to a maximum of $4,000,000 (the "Aggregate Deferred Payment Obligation"); (the earlier of the receipt by the Sellers of the Aggregate Deferred Payment Obligation and December 31, 2003 hereinafter the "Deferred Payment Period"). As used herein, "net sales" shall mean the Buyer's total worldwide gross sales of the Products in all markets, during the Deferred Payment Period, determined on an accrual basis, less actual freight allowances permitted by the Buyer to be taken by its trade customers, returns, trade allowances, trade rebates, and trade and cash discounts. For purposes of determining the Buyer's total worldwide gross sales of the Products, there shall be included sales of all currently sold Products as well as the following products: (a) new products using the Wildroot Trademarks in the hair care category, (b) new products using the Domestic CB Marks in the talc category, (c) new products using the Protein 21 or Protein 29 Trademarks in the hair care category and (d) new products using the Balm Barr, Quinsana or Stretch Mark Trademarks in the body and personal care category (the products described in clauses (a) through (d), each an "Extension Product"). No other new products will be included. Notwithstanding the foregoing, sales of an Extension Product shall not be included in the determination of net sales for a period of eighteen (18) months following the first sale by the Buyer of such Extension Product but shall be included thereafter for the duration of the Deferred Payment Period. Additionally, for purposes of determining the Buyer's total worldwide gross sales of the Products, there will be included sales made by any licensee or sublicensee of the Buyer or any other party to whom the Buyer shall otherwise transfer title (or a lesser interest therein) to any of the Products, including any subsequent licensee, sublicensee or transferee of any such party (collectively the "Transferees"). 4.2 Deferred Payment Statements. Statements as to net sales of the Products by the Buyer or any Transferee during each calendar quarter shall be delivered to the appropriate Seller within 30 days following the end of such calendar quarter. Each such statement shall be in reasonable detail and shall set forth the Buyer's (and each Transferee's, if any) gross sales of the Products, on a Product by Product basis, for the period to which it relates and the deductions therefrom. 4.3 Delivery of Deferred Payments. (a) Deferred Payments shall be made by the Buyer to the Sellers on or before July 31 for the semi-annual period ending the preceding June 30 and on or before January 31 for the semi-annual period ending the preceding December 31. (b) Each Deferred Payment shall be payable as follows: an amount equal to the greater of $150,000 or 50% of the Deferred Payment shall be payable by wire transfer in immediately available funds to an account designated by Colgate. The balance, if any, shall be payable by wire transfer, as aforesaid, or, at the option of the Buyer and provided the Buyer has delivered to the Sellers a "Compliance Certificate" reasonably satisfactory in form and substance to the Sellers, by the delivery to Colgate, on behalf of the Sellers, of a promissory note in an amount equal to such balance, which note shall bear interest at the base rate of Citibank, N.A., New York, New York in effect from time to time, shall be due and payable the earlier of five (5) years from the date of issuance or January 31, 2004, and which shall otherwise be in the form of Exhibit C to the Colgate Acquisition Agreement (the "Deferred Payment Note"). (c) If the Buyer elects to deliver a Deferred Payment Note in lieu of cash, the Buyer shall send written notice the "Election Notice") thereof to the Sellers within 10 business days following the end of the semi-annual period to which the Deferred Payment relates, together with (i) a copy of the Buyer's most recent financial statements as filed with the Securities and Exchange Commission (the"SEC") (or, if the Buyer is no longer required to file its financial statements with the SEC, the Buyer's most recently prepared balance sheet and income statement which shall be within the previous 90 days prior to the end of the semi-annual period to which the Deferred Payment relates and shall have been prepared in accordance with generally accepted accounting principles consistently applied) and (ii) a certificate (the "Compliance Certificate"), signed by the Buyer's Chief Financial Officer, certifying that (A) the Buyer's net worth and ratios of debt to equity and debt to total capitalization as at the date of the balance sheet contained in such financial statements (the "Balance Sheet") are not less favorable than as reflected on the Buyer's balance sheet as filed with the SEC for the quarter ended September 30, 1995, (B) since the date of the Balance Sheet, there has been no material adverse change in the financial condition or affairs of the Buyer and (C) there is not existing any "default" under and as defined in the Security Agreement referred to in Section 4.1 of the Acquisition Agreements. 4.4 Annual Minimum Deferred Payment. Notwithstanding anything to the contrary otherwise contained herein and irrespective of the net sales of the Products, the Buyer shall, until such time as the Aggregate Deferred Payment Obligation has been satisfied in full, pay the Sellers a minimum of $150,000 by wire transfer as aforesaid in respect of Deferred Payments for each semi-annual period during the Deferred Payment Period. Further in the event that the Buyer has not paid the Sellers the Aggregate Deferred Payment Obligation on or before January 31, 2004, then on such date the Buyer shall pay the Sellers, by wire transfer as aforesaid, an amount equal to the difference between the Aggregate Deferred Payment Obligation and the aggregate Deferred Payments theretofore paid by the Buyer to the Sellers hereunder, whether by wire transfer or by Deferred Payment Notes. 4.5 Foreign Currency Conversion. All payments due hereunder shall be paid in United States Dollars. If the Buyer (or any Transferee) has sales of the Products in a currency other than the U.S. Dollar, for purposes of determining the Deferred Payment due to the Sellers on account of such sales, such sales shall be converted into U.S. Dollars in accordance with the exchange rate in effect during the period in which such sales were made in accordance with U.S. generally accepted accounting principles. 4.6 Books of Account. The Buyer agrees to maintain complete, true and correct books of account concerning the sale of the Products in sufficient detail to enable the Deferred Payment to be readily computed and verified. The Buyer undertakes to provide the Sellers with equivalent supporting data from each Transferee, if any. The Buyer further agrees to permit the Sellers, its agents and/or independent public accountants, to have full access to such books of account (including the right to make copies thereof) during normal business hours and upon reasonable notice to the Buyer for the term of the Deferred Payment Period plus three (3) years thereafter. The Buyer shall use commercially reasonable efforts to cause its Transferees to allow the Sellers to review their books for the purpose of confirming sales. The Sellers hereby agree to keep confidential all such information and to use it only in accordance with and for the purposes of this Section 4. 4.7 Arbitration. If the Sellers conclude, after review of the Buyer's books of account, that additional payments are owing to the Sellers with respect to the period(s) reviewed, then the Seller shall notify the Buyer in writing of its determination, which notice (the"Deficiency Notice") shall set forth in detail the basis for the Sellers' determination that additional amounts are due and owing and the amount thereof. If the Sellers and the Buyer are unable to resolve the disputed items within ten(10) business days after the Buyer receives the Deficiency Notice, the parties shall refer the dispute to a partner in the New York offices of a firm of certified public accountants mutually agreeable to the parties (the"Arbiter"), as an arbitrator to finally determine, as soon as practicable, and in any event within ninety (90) days after such reference, the amounts, if any, owing to the Seller for the period(s) under consideration; provided that if the parties are unable to mutually agree upon an Arbiter, the Arbiter shall be designated by mutual agreement between the parties' respective certified public accountants. Amounts, if any, determined to be owing by the Arbiter shall bear interest at the rate of eight (8%) percent per annum from the date the amounts should originally have been paid. The Arbiter shall otherwise conduct the arbitration under such procedures as the parties may agree or, failing such agreement, under the applicable Commercial Arbitration Rules of the American Arbitration Association. The fees and expenses of the arbitration and the Arbiter incurred in connection with the arbitration shall be allocated between the parties by the Arbiter in proportion to the extent either party did not prevail on items in dispute; provided that such fees and expenses shall not include, so long as a party complies with the procedures of this Section 4.7, the other party's outside counsel or accounting fees. All determinations by the Arbiter shall be final, binding and conclusive with respect to (a) amounts owing to the Seller for the period(s) in dispute, including interest thereon, and (b) the allocation of arbitration fees and expenses. Judgment upon the award rendered by the Arbiter may be entered in any court having jurisdiction thereof. 4.8 Security Agreements. The parties agree that for purposes of the Acquisition Agreements, Security Agreements and all other documents executed by the parties at the Closing, any references therein to Deferred Payments and Deferred Payment Notes shall be deemed to mean the Deferred Payments and Deferred Payment Notes referred to in this Section 4. The Buyer acknowledges and agrees that its obligations under this Settlement Agreement shall continue to be secured by the Security Agreements. 4.9 Deferred Payment Adjustment. The parties agree that the aggregate Deferred Payment for the semi- annual period ended June 30, 1996 amounts to $264,897 and that such Deferred Payment shall be deemed to have been waived by the Sellers and credited in reduction of the Aggregate Deferred Payment Obligation. For all purposes of this Agreement, full effect shall be given to this credit in determining whether the Aggregate Deferred Payment obligation has been satisfied. 5. Delivery by Sellers of Profits. Simultaneously with the execution of this Settlement Agreement, Colgate shall, subject to the pricing adjustment provided for in Section 6.2 below, deliver to the Buyer, by wire transfer to an account designated by the Buyer, the aggregate sum of $173,664, which the Buyer acknowledges and agrees represents any and all unpaid Profits (as defined in the Transition Agreement) due the Buyer from Colgate under the Transition Agreement through October 31, 1996. 6. Delivery of Minimum Guaranteed Inventory. 6.1 The Buyer acknowledges that the Sellers have satisfied their obligations under Section 6.1(n) of the Acquisition Agreements with respect to the delivery to the Buyer of the Minimum Guaranteed Quantity of Inventory except as to 4,689 cases of Inventory. The Buyer agrees that the Sellers' obligation to deliver the remaining 4,689 cases shall be satisfied in full (based upon and as of an October 31, 1996 determination date) by the Sellers making a cash payment to the Buyer in the amount of $57,152 payable upon execution of this Settlement Agreement by wire transfer to an account designated by the Buyer. 6.2 The Buyer acknowledges that the Sellers, at the request of, and solely as an accommodation to, the Buyer, have been filling orders and distributing certain of the Products to Wal-Mart on behalf of the Buyer for a service fee in the amount of 5% of net sales to Wal-Mart. The accrued service fee through November 30, 1996 amounts to $13,549 and shall be paid by means of a credit against funds payable by Colgate pursuant to Section 5 above. The Buyer expressly acknowledges and agrees that Sellers have no obligation to continue to service Wal-Mart as aforesaid and have the right, in their sole and absolute discretion, and without prior notice to the Buyer, to discontinue such services at any time. Service fees accruing subsequent to November 30, 1996 shall be payable upon the discontinuation of such services. The Buyer agrees that the Sellers are not, and shall not be, liable in any manner whatsoever for any damages sustained by the Buyer as a result of the Sellers' services as aforesaid or termination of such services, whether such services have been performed prior to the date hereof or after the date hereof; provided, however, that the foregoing shall not relieve the Sellers from any liability arising out of defective Product manufactured by or on behalf of Sellers and delivered to Wal-Mart for the account of the Buyer. 7. Release by Buyer. 7.1 In consideration of this Settlement Agreement and other good and valuable consideration, including receipt of the release from the Sellers set forth below in favor of the Buyer, the Buyer hereby releases and discharges the Sellers and each of them, and their respective shareholders, officers, directors, agents, attorneys, agents, successors, assigns and anyone employed by, affiliated with or duly acting on behalf of any of them (collectively, the "Seller Releasees") from any and all actions, causes of actions, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages and judgments, extents, executions, claims and demands (whether or not heretofore known, suspected or asserted) whatsoever in law or equity, which against the Seller Releasees and each of them the Buyer and its shareholders, officers, directors, agents, attorneys, agents, successors, assigns and anyone employed by, affiliated with or acting on behalf of any of them ever had, now has or hereafter can, shall or may have, whether known, or unknown, for or by reason of any matter, cause or thing whatsoever from the beginning of the world to the date of this Settlement Agreement arising out of, relating to or in connection with the Acquisition Agreements, the Transition Agreement or the Minimum Sales Agreement, or the transactions contemplated thereby; provided, however, that subject to the provisions of Section 7.2 below, this release does not pertain to or include (a) this Settlement Agreement, (b) the following Sections and Articles of the respective Acquisition Agreements: Sections 1.3, 1.5, 6.1 (a)-(l), 6.1 (n) (as to the second sentence only), 6.1 (p), 6.1(q) and 12.4 and Articles IV, VIII and X thereof (all other provisions of the Acquisition Agreements being hereinafter collectively referred to as the "Released Provisions"); (c) Sections 4.5 and Articles V and VI of the Transition Agreement; (d) the Trademark License Agreement and (e) the respective Security Agreements with each Seller dated December 31, 1995. 7.2 The provisions of Clauses (b)-(e) of Section 7.1 above notwithstanding, the release provided for in Section 7.1 shall constitute a complete release of any and all claims Buyer may have against the Seller Releasees(a) to the extent the claim is based upon information known to the Buyer as of the date hereof and/or (b) with respect to Section 6.1 (q) of the Acquisition Agreements, to the extent the information upon which a claim may be based, whether or not known to the Buyer today, would also reasonably form the basis for a claim under one or more of the Released Provisions of either Acquisition Agreement. 8. Release by Sellers. In consideration of this Settlement Agreement and other good and valuable consideration, including receipt of the release from the Buyer set forth above in favor of the Sellers, the Sellers hereby release and discharge the Buyer and its shareholders, officers, directors, agents, attorneys, agents, successors, assigns and anyone employed by, affiliated with or acting on behalf of any of them (the "Buyer Releasees") from any and all actions, causes of actions, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages and judgments, extents, executions, claims and demands (whether or not heretofore known, suspected or asserted) whatsoever in law or equity, which against the Buyer Releasees the Sellers or any of their respective shareholders, officers, directors, agents, attorneys, agents, successors, assigns and anyone employed by, affiliated with or acting on behalf of any of them ever had, now has or hereafter can, shall or may have, whether known, or unknown, for or by reason of any matter, cause or thing whatsoever from the beginning of the world to the date of this Settlement Agreement arising out of, relating to or in connection with the Acquisition Agreements, the Transition Agreement or the Minimum Sales Agreement, or the transactions contemplated thereby; provided, however, that this release does not pertain to or include the obligations of the Buyer Releasees pursuant to (a) this Settlement Agreement, (b) Section 6.2 and Articles IV, VIII and X of the respective Acquisition Agreements, (c) Articles V and VI of the Transition Agreement, (d) the Trademark License Agreement, (e) the respective Security Agreements with each of the Sellers dated December 31, 1995, (f) the respective Security Interest in Trademarks from the Buyer to each Seller dated December 31, 1995, and (g) the Assumption Agreement. 9. Litigation Costs. In any litigation, whether brought before a court or alternative dispute resolution body, which is based upon an alleged breach or default by a party under this Settlement Agreement or under any agreement referred to in this Settlement Agreement, the losing party shall reimburse the prevailing party for all attorney's fees and disbursements as well as all other costs incurred by the prevailing party in connection with the prosecution or defense of such litigation, whether same are incurred prior to or after the commencement of litigation (collectively the "Expenses"). 10. Survival of Acquisition Agreements. Except as amended hereby, the Acquisition Agreements shall remain in full force and effect. 11. Further Assurances. The parties shall do and perform or cause to be done and performed all such further acts and things and shall execute and deliver all such other agreements, certificates, instruments and documents as any party may reasonably request in order to carry out the intent and accomplish the purposes of this Settlement Agreement and the consummation of the transactions contemplated hereby. 12. Publicity and Disclosures. Except as required by law or a party's listing agreement with a securities exchange or association, no press release or other public disclosure, either written or oral, of the transactions contemplated by this Settlement Agreement, shall be made without the prior mutual written consent of the Buyer and the Sellers; provided that if a party is required as aforesaid to publicly disclose this Agreement, then it shall first give the other party written notice thereof and an opportunity to comment on such proposed disclosure. 13. Binding Effect; Benefits. This Settlement Agreement shall inure to the benefit of and shall be binding upon the parties, the Seller Releases, the Buyer Releasees and their respective successors and permitted assigns. Nothing in this Settlement Agreement, expressed or implied, is intended to or shall (a) confer on any person other than the parties, the Seller Releases, the Buyer Releasees or their respective successors or permitted assigns, any rights, remedies, obligations or liabilities under or by reason of this Settlement Agreement, or (b) constitute the parties partners or participants in a joint venture. 14. Amendments and Waivers. This Settlement Agreement may not be modified or amended except by an instrument in writing signed by the party against whom enforcement of any such modification or amendment is sought. Any party may, by an instrument in writing, waive compliance by any other party with any term or provision of this Settlement Agreement on the part of such other party to be performed or complied with. The waiver by a party of a breach of any term or provision of this Settlement Agreement shall not be construed as a waiver of any subsequent breach. 15. Governing Law. This Settlement Agreement shall be construed and governed in accordance with the laws of the State of New York, without giving effect to the choice of law principles thereof. 16. Consent to Jurisdiction. (a) With respect to any action commenced by the Sellers against the Buyer hereunder or under any other document delivered pursuant to this Settlement Agreement, the Buyer (i) consents and submits to the jurisdiction of the Courts of the State of New York or of the Courts of the United States of America for the Southern District of New York for all purposes of this Settlement Agreement, including, without limitation, any action or proceeding instituted for the enforcement of any right, remedy, obligation and liability arising under or by reason of this Settlement Agreement and (ii) consents and submits to the venue of such action or proceeding in the City and County of New York (or such judicial district of a Court of the United States as shall include the same). (b) With respect to any action commenced by the Buyer against the Sellers hereunder or under any other document delivered pursuant to this Settlement Agreement, the Sellers (i) consent and submit to the jurisdiction of the Courts of the State of Florida or of the Courts of the United States of America for the Southern District of Florida for all purposes of this Settlement Agreement, including, without limitation, any action or proceeding instituted for the enforcement of any right, remedy, obligation and liability arising under or by reason of this Settlement Agreement and (ii) consents and submits to the venue of such action or proceeding in the City and County of Broward (or such judicial district of a Court of the United States as shall include the same). 17. Separability. Any term or provision of this Settlement Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Settlement Agreement or affecting the validity or enforceability of any of the terms or provisions of this Settlement Agreement in any other jurisdiction. 18. Counterparts. This Settlement Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 19. No Admission. Nothing contained in this Settlement Agreement shall be deemed an admission of any wrongdoing or liability on the part of any of the parties hereto. IN WITNESS WHEREOF, the Sellers and the Buyer have caused this Settlement Agreement to be signed in their respective names by one of their officers thereunto duly authorized, as of the date first above written. THE MENNEN COMPANY By: Lois Juliber, President COLGATE-PALMOLIVE COMPANY By: Lois Juliber, President - Colgate-North America THE STEPHAN CO. By: Frank Ferola, Sr. President and CEO EXHIBIT A TRADEMARK LICENSE AGREEMENT TRADEMARK LICENSE AGREEMENT THIS TRADEMARK LICENSE AGREEMENT (hereinafter referred to as the "LICENSE AGREEMENT") is made by and entered into as of December 5, 1996 between COLGATE-PALMOLIVE, CANADA INC., a corporation incorporated under the laws of the Province of Ontario, Canada, having its principal place of business at 99 Vanderhoof Avenue, Toronto, Ontario, Canada M4G 2H6 (hereinafter referred to as the "LICENSOR"), and THE STEPHAN CO., a Florida corporation, having its principal place of business at 1850 West McNab Road, Ft. Lauderdale, Florida 33309 (hereinafter referred to as the "LICENSEE"). WHEREAS, Licensor is the owner of the U.S. trademarks listed on Schedule A and the trade dress related thereto (hereinafter collectively referred to as the "LICENSED TRADEMARKS"); and WHEREAS, on December 31, 1995, Colgate-Palmolive Company, parent company of Licensor, and Licensee entered into an Acquisition Agreement (hereinafter referred as the "ACQUISITION AGREEMENT") providing for Licensee to acquire Assets and a trademark license to use the Licensed Trademarks solely in connection with the manufacture, sale and distribution of the CB Talc Product Line in the United States (hereinafter referred to as the "U.S. TRADEMARK LICENSE AGREEMENT"), as the terms "Assets" and "CB Talc Product Line" are defined in the Acquisition Agreement; and WHEREAS, Licensor is the owner of the Canadian trademarks listed on Schedule B and the trade dress related thereto (hereinafter collectively referred to as "CANADIAN LICENSED TRADEMARKS"; and WHEREAS, Licensee desires to use the Canadian Licensed Trademarks in connection with the manufacture, sale and distribution of the products listed on Schedule C (hereinafter referred to as the "LICENSED PRODUCTS") in Canada pursuant to the terms and conditions of this License Agreement; NOW, THEREFORE, in consideration of the mutual covenants and promises contained in the Acquisition Agreement and this License Agreement, the parties hereto agree as follows: 1. License. (a) Licensor hereby grants to Licensee, during the term of this License Agreement, the exclusive right and license to use the Canadian Licensed Trademarks on and in connection with the manufacture, packaging, sale, marketing and distribution of the Licensed Products in Canada only, subject to the terms and conditions hereinafter set forth. (b) Licensee represents and agrees that the Canadian Licensed Trademarks shall be used only as permitted by paragraph (a) of this Section, and that the Canadian Licensed Trademarks shall not be used on any products other than the Licensed Products or in any other way whatsoever. 2. Consideration. The consideration provided by Section 2 of the U.S. Trademark License Agreement shall constitute consideration for the license granted hereby. No royalty shall be charged in connection with the exercise by Licensee of any rights hereunder. 3. Term. The term of this License Agreement (hereinafter referred to as the "TERM") shall commence on the date hereof and shall continue for an initial period of ten (10) years and shall automatically be renewed for consecutive, additional periods of ten (10) years unless terminated in accordance with the provisions of Section 8 hereof. 4. Licensee's Obligation. Licensee agrees that during the Term: (a) Licensee shall ensure that all of the Licensed Products bearing one or more of the Canadian Licensed Trademarks and the labels and advertising used therefor shall be fit for their intended purpose(s), and Licensee shall use its best efforts to cause the Licensed Products to be produced, packaged, sold, distributed, and marketed in compliance with all applicable Federal, Provincial and local laws and regulations, including but not limited to any Canadian laws and regulations regulating food, drugs and cosmetics, and with good manufacturing practices. (b) The Licensed Products shall be of comparable quality with those similar products which are manufactured, distributed, marketed and sold by or on behalf of Licensor in the United States as of the date of the Acquisition Agreement and such quality shall be maintained on a consistent basis. (c) Licensee shall continuously use the Canadian Licensed Trademarks on the Licensed Products in order to maintain the Canadian Licensed Trademarks in full force free from any claim or abandonment for nonuse, subject to paragraph 8 (f) hereof. (d) Licensee shall notify Licensor immediately of any non-routine inquiry, investigation, inspection or any other action by any governmental body or other person or entity, with respect to the production, promotion, sale or distribution of any Licensed Products bearing any Canadian Licensed Trademarks, which pertains to product quality and/or safety. (e) Upon request by Licensor, Licensee agrees to furnish Licensor at reasonable times with representative samples of the Licensed Products produced from time to time bearing the Canadian Licensed Trademarks. In addition to the foregoing, Licensor may purchase Licensed Products through retail outlets in order to ascertain that such Licensed Products are of high quality. In the event that Licensor reasonably believes that any samples of the Licensed Products bearing the Canadian Licensed Trademarks sold or distributed under the Canadian Licensed Trademarks violate the provisions of Section 4(a) or 4 (b) above, Licensor shall promptly notify Licensee and shall specify the basis for this belief. Upon receipt of such notice, Licensee agrees to review the basis for this belief promptly and to engage promptly in discussions with Licensor to resolve such concerns to a mutually acceptable conclusion. If no mutually acceptable resolution can be achieved within ten (10) days from commencement of such discussions between Licensor and Licensee, then Licensee shall immediately stop production of the nonconforming Licensed Products until a production sample is submitted to Licensor which Licensor determines is in compliance with the provisions of Section 4(a) and 4(b) above. (f) Licensor and its duly authorized representatives shall have the right, during normal business hours and upon reasonable notice, but not more frequently than twice per year during the Term, to inspect all Manufacturing facilities utilized by Licensee (and its contractors and suppliers to the extent Licensee may use the same) and to examine all processes and records relating to the manufacturing, packaging, warehousing and distribution of the Licensed Products at such times that do not unreasonably disrupt the day to day operations of the business of Licensee, including, without limitation, the right to open and inspect shipping cartons, and make such other tests and inspections as it shall deem necessary to insure the quality of the Licensed Products. Licensee shall take all necessary steps requested by Licensor to correct any deficiencies that might significantly affect the quality of the Licensed Products. (g) Licensee shall submit mechanical artwork for all new label(s) and/or packaging bearing the Licensed Canadian Trademarks to Licensor for approval. In the event Licensee has not received a detailed explanation as to why Licensor has reasonably decided not to approve such mechanical artwork for the Licensed Products within ten (10) business days of submission, such change shall be deemed to be approved. Licensor's approval of Licensee's label(s), however, shall not constitute a waiver of Licensor's rights or Licensee's duties under any other provisions of this License Agreement. Licensee may, however, change its labels in the future, without approval from Licensor, if such change(s) does not materially affect the size, placement and/or color of the Canadian Licensed Trademarks and legend(s) on the Licensed Products. Copies of such label(s) shall be sent to Licensor promptly after market introduction of the Licensed Products using the new label or packaging. (b) Licensee shall submit to Licensor for review by Licensor prior to publication all advertising and promotional materials bearing or related to the Canadian Licensed Trademarks. If Licensor objects to any portion of such materials(s) such objection will state a reason(s) related to the materials submitted and shall be forwarded in writing to Licensee (or by oral communication confirmed in writing promptly thereafter) within ten (10) business days of Licensor's receipt of such advertising and/or promotional materials(s) and Licensee agrees to revise such materials accordingly or not to use such materials. If Licensor fails to respond within ten (10) business days of receipt of such material(s), Licensor shall be deemed to have no objections to such materials(s). Licensor's review of such advertising and promotional materials shall be conducted in good faith and shall not constitute a waiver of Licensor's rights or Licensee's duties under any provisions of this License Agreement. 5. Use of Canadian Licensed Trademarks. (a) Licensee agrees and undertakes to use the Canadian Licensed Trademarks in compliance with any and all applicable trademark and other laws and to use such legends, markings or notices in connection therewith as are required by law or otherwise reasonably required by Licensor to protect Licensor's rights. Upon expiration or termination of this License Agreement for any reason whatsoever, Licensee will execute and file any and all documents required by Licensor regarding the Canadian Licensed Trademarks which Licensor shall require. Licensor shall bear all expenses reasonably incurred in preparing and recording any such documents. (b) Whenever Licensee uses the Canadian Licensed Trademarks in accordance with this License Agreement, Licensee shall clearly identify the use of the Canadian Licensed Trademarks as licensed use and identify Licensor as the owner of the Canadian Licensed Trademarks in the manner specified by Licensor, including but not limited to the following legend: CASHMERE BOUQUET is a registered trademark owned by Colgate-Palmolive Canada Inc. and used under license. (c) Licensee shall not at any time use the Canadian Licensed Trademarks or the Licensed Products, or any material utilizing or reproducing the Canadian Licensed Trademarks or Licensed Products in a manner that derogates the value, reputation or good will associated with the Canadian Licensed Trademarks. (d) Licensee shall not use the Canadian Licensed Trademarks, in whole or in part, in close proximity with Licensee's or a third party's trademark, trade name or corporate name or any new trademark, trade name or corporate name so as reasonably to create a net impression that a Canadian Licensed Trademark is modified or a part of any new trademark, trade name or that a Canadian Licensed Trademark is the property of the Licensee. (e) Licensee shall not use any other trademark, trade names or corporate names which are confusingly or deceptively similar to the Canadian Licensed Trademarks during the Term or thereafter. (f) Licensee acknowledges that Licensor has reserved the right to modify the Canadian Licensed Trademarks and Licensee agrees to incorporate any such modifications in connection with all use by it of the Canadian Licensed Trademarks and Licensee shall immediately cease its use of the original Canadian Licensed Trademarks, provided that Licensee shall be permitted to use all inventory of packaging materials bearing the original Canadian Licensed Trademarks. Any artwork and designs involving the Canadian Licensed Trademarks shall, at all times, be and remain the property of Licensor. 6. Exclusivity (a) Except as otherwise expressly provided in this License Agreement, nothing in this License Agreement shall be construed to prevent Licensor from granting to third parties any other licenses for the use of the Canadian Licensed Trademarks on any products other than the Licensed Products. (b) Licensee shall not have the right to sublicense or assign this License Agreement or the licenses granted hereunder, in whole or in part, without the prior written consent of Licensor, which consent shall not be unreasonably withheld; provided that Licensee may sublicense or assign this License Agreement without the consent of Licensor to an existing affiliate of Licensee as of the date of this License Agreement. 7. Indemnification and Insurance. (a) Licensee hereby agrees to indemnify Licensor and undertakes to defend and hold Licensor, its affiliates and their respective officers, directors, agents, and employees, harmless from and against: (i) any and all claims, suits, losses, damages and/or expenses, including but not limited to attorneys' fees and disbursements, arising out of any and all product liability claims or any other actions or recall expense to the extent involving the Licensed Product, except to the extent that such claims, suits or other actions arise out of the ownership, use or distribution of the Licensed Products prior to the date hereof, or involve claims that Licensee's use of the Canadian Licensed Trademarks infringes a third party's proprietary rights, in which case Licensor shall defend and hold Licensee harmless for, and Licensor shall have exclusive control over, the defense, satisfaction and resolution of same, including any expenses and fees related to such defense; and (ii) any and all fines, penalties or the like arising out of any and all civil and/or administrative proceedings brought by federal, provincial or local agencies in connection with the Licensed Product(s) together with any and all costs incurred by Licensor in connection therewith, except to the extent that such fines, penalties or the like arise out of the ownership, use or distribution of the Licensed Products prior to the date hereof, or involve claims that Licensee's use of the Canadian Licensed Trademarks infringes a third party's proprietary rights, in which case Licensor shall defend and hold Licensee harmless for, and Licensor shall have exclusive control over, the defense, satisfaction and resolution of same, including any expenses and fees related to such defense; and (iii) any and all claims, suits, loss, liability, damage, deficiency, costs and expenses, including, without limitation, interest, penalties and reasonable attorneys' fees and disbursements, arising out of or otherwise in respect of any material breach of any representation, warranty, covenant or agreement by Licensee contained in this License Agreement. (b) Licensee agrees to maintain at its own expense through purchased insurance throughout the Term of this License Agreement and for a period six (6) years thereafter, comprehensive general liability insurance, including product liability insurance, in a minimum amount of Two Million Dollars ($2,000,000) combined single limit for each single occurrence, for bodily injury and property damage. Licensee shall have Licensor named as an additional insured on such policies. Licensee shall, within thirty (30) days after the date hereof, provide to Licensor a certificate of such insurance from the insurance carrier which sets forth the scope of coverage and the limits of liability stated above without any provision for material deductibles or self- insured retention's, and further provides that the policies may not be materially changed or canceled without at least (30) days' prior written notice to Licensor. Prior to any such cancellation, Licensee shall provide Licensor with a certificate of insurance evidencing that a new insurance policy with the same coverage and terms described above will be in place prior to such termination. Upon reasonable request by Licensor, Licensee shall deliver to Licensor evidence in form and substance reasonably satisfactory to Licensor, of the maintenance and renewal of the required insurance, including without limitation, renewal certificates and copies of those portions of policies, riders and endorsements pertaining to this License Agreement. 8. Termination. The License hereby granted pursuant to this License Agreement may be terminated; (a) By Licensor without notice in the event that(i) Licensee (I) files a petition in bankruptcy or a petition in bankruptcy is filed against Licensee, (II) becomes insolvent under applicable state insolvency law, makes an assignment for the benefit of its creditors, (III) makes an arrangement pursuant to any bankruptcy law, or (IV) discontinues its business, or (ii) a receiver is appointed for Licensee or for its business; (b) By Licensor if there is a material breach by Licensee of any provision of this License Agreement or the U.S. Trademark License Agreement and a failure by Licensee to cure such breach within thirty (30) days after written notice from Licensor; (c) By Licensor in the event of a "default" continuing and as defined under the Security Agreement between Colgate- Palmolive Company, parent of Licensor, and Licensee identified as Exhibit D of the Acquisition Agreement (hereinafter referred to as the "SECURITY AGREEMENT"); (d) By Licensor if a material amount of Licensed Product bearing the Canadian Licensed Trademark(s) shall be subject to a product recall or market withdrawal by the Licensee; (e) By mutual written agreement duly executed by both parties; or (f) By Licensee upon written notice to Licensor. 9. Effect of Termination. (a) Licensee agrees that upon expiration or earlier termination of this License Agreement for any reason other than stated in Section 8(d), Licensee will, as of a mutually agreed upon date (but in no event later than one hundred twenty (120) days after the date of expiration or earlier termination of this License Agreement): (i)remove all Canadian Licensed Trademarks from the packaging of Licensed Products; (ii) refrain from further production or sale of Licensed Products bearing the Canadian Licensed Trademarks; and (iii) discontinue production, distribution and use of promotional materials, advertising, packaging, signs, billboards and any other material(s) which utilize the Canadian Licensed Trademarks. (b) If this License Agreement is terminated pursuant to Section 8(d), Licensee shall immediately: (i) remove the Canadian Licensed Trademarks from the packaging of the Licensed Products, (ii) refrain from further production of Licensed Products bearing the Canadian Licensed Trademarks; (iii) discontinue production, distribution and use of promotional materials, advertising, packaging, signs, billboards and any other materials which utilize the Canadian Licensed Trademarks; (iv) cooperate with Licensor in any action or investigation deemed necessary or appropriate by Licensor and (v) comply with Licensor's reasonable instructions regarding the disposal and/or depletion of all Licensed Products bearing the Canadian Licensed Trademarks and all packaging inventory for finished Licensed Products which utilize the Canadian Licensed Trademarks. 10. Licensor's Title and Protection of Canadian Licensed Trademarks (a) Licensee acknowledges Licensor's exclusive right, title and interest in and to the Canadian Licensed Trademarks and in and to any registrations thereof in Canada and elsewhere and agrees that it will not at any time do, or cause to be done, any act or thing contesting or in any way intending to impair the validity of or Licensor's exclusive right, title and interest in and to the Canadian Licensed Trademarks. Licensee will make no applications nor seek any registration or ownership rights in or to the Canadian Licensed Trademarks in Canada or elsewhere. (b) Licensee will not in any manner represent that it owns the Canadian Licensed Trademarks, and hereby acknowledges that its use of the Canadian Licensed Trademarks shall not create any right, title, or interest in or to the Canadian Licensed Trademarks, but that all such use shall inure to the benefit of Licensor. (c) Licensee shall, at Licensor's cost and expense, cooperate with Licensor to do all acts necessary or desirable for maintaining, renewing, protecting, strengthening, and/or enforcing the Canadian Licensed Trademarks and associated goodwill and for vesting title thereto in Licensor, its successor and assigns. (d) Licensee shall not contest Licensor's ownership of the Canadian Licensed Trademarks, any registrations of the Canadian Licensed Trademarks by Licensor, or bring any act to cancel any such registrations thereof or contest the validity thereof. (e) Licensee shall give prompt written notice to Licensor of any infringement, imitation or act inconsistent with Licensor's ownership of the Canadian Licensed Trademarks by third parties, or any act of unfair competition by third parties relating to the Canadian Licensed Trademarks, wherever and whenever such infringement or act shall come to Licensee's attention. After receipt of such notice from Licensee, Licensor shall in its sole discretion decide whether to take action with respect to such infringement or act, and Licensee shall fully cooperate with Licensor in such action and, if so requested by Licensor shall join with Licensor as a party to any such action brought by Licensor. Licensor shall bear all expenses in connection with the foregoing. Any recovery as a result of such action shall belong solely to Licensor. Licensee agrees that Licensor shall have the sole power to take legal or other action before any court or governmental authority with respect to the infringement and the protection of the Canadian Licensed Trademarks. 11. Miscellaneous. (a) This License Agreement and all rights and duties hereunder are personal to Licensee and, subject to the provisions of Section 6(b), shall not, without the written consent of Licensor, be assigned, mortgaged, sublicensed or otherwise encumbered by Licensee or by operation of law. A change in the control of Licensee shall be deemed an assignment hereunder. (b) No failure of Licensor or Licensee to strictly enforce any of their respective rights under this License Agreement shall be deemed a continuing waiver and Licensor or Licensee may thereafter strictly enforce any such rights. (c) All notices requests, demands and other communications required or permitted to be given under this License Agreement ("Communications") shall be in writing and shall be deemed to have been duly given if delivered personally with receipt acknowledged or sent by registered or certified mail, return receipt requested, or by overnight courier for next day delivery, to the parties at their respective addresses set forth below or to such other or additional address as either party shall hereafter specify by Communication to the other, or by telecopier to the parties at their respective telecopier numbers set forth below or to such other or additional numbers as either party shall hereafter specify by Communication to the other party: If to Licensor to: Colgate-Palmolive Canada Inc. 99 Vanderhoof Avenue Toronto, Ontario, Canada M4G 2H6 Telecopier No.: (416) 421-6913 Attn: Doris Fielding, Esq. Secretary and General Counsel with a copy to: Warshaw Burstein Cohen Schlesinger & Kuh, LLP 555 Fifth Avenue New York, New York 10017 Telecopier No.: (212) 972-9150 Attn: Phillip England, Esq. If to Licensee to: The Stephan Co. 1850 West McNab Road Fort Lauderdale, Florida 33309 Telecopier No.: (954) 971-9903 Attn: Mr. Frank Ferola, Sr. Chairman, President and CEO with a copy to: Hertzog, Calamari and Gleason 100 Park Avenue New York, New York 10016 Telecopier No.: (212) 213-1199 Attn: Stephen Connoni, Esq. Notice of change of address or telecopier number shall be deemed given when actually received or upon refusal to accept delivery thereof; all other Communications shall be deemed to have been given and received on the earliest of: (a) when actually received or upon refusal to accept delivery thereof, (b) on the date when delivered personally or sent by telecopier, (c) one (1) business day after sending by recognized overnight courier, or (d) four (4) business days after mailing, as aforesaid. (d) The obligations of Licensee and Licensor under Sections 7 and 10 herein shall survive expiration or earlier termination of this License Agreement. (e) This License Agreement together with the Acquisition Agreement, the Security Agreement and the U.S. Trademark License Agreement expresses fully the understanding of both parties and all prior understanding, agreements or representations, oral or written, are hereby superseded and canceled, and no changes in the terms of this License Agreement shall be valid except when and if reduced to writing and signed by both Licensor and Licensee. (f) Subject to the terms of Section 11(a) above, this License Agreement shall inure to the benefit of, and be binding upon, Licensor and Licensee and their respective successors and assigns. (g) The headings and titles to the paragraphs of this License Agreement are not a part this License Agreement and shall have no effect upon the construction or interpretation hereof. (h) Nothing contained in this License Agreement shall in any way be construed to create an agency relationship, partnership or joint venture between the parties, and Licensee shall have no power to obligate or bind Licesor in any manner whatsoever. In any review or consultation conducted by or on behalf of Licensor hereunder, Licensor is acting in an advisory capacity only and shall have no responsibility for the operations of Licensee's business or its manufacturing, distribution, sales or facility used in connection therewith, whether upon the recommendation of Licensor or otherwise. (i) The recitals set forth at the beginning of this License Agreement shall be deemed to be incorporated within this License Agreement as if fully set forth herein. (j) If Licensee is prevented from complying, either totally or in part, with any of the terms or provisions of this License Agreement by reason of fire, flood, storm, strike, lockout or other labor trouble, riot, war, rebellion, accident, acts of God and/or any other cause or casualty beyond Licensee's reasonable control, then upon written notice to Licensor, the requirements of this License Agreement, or the affected provisions hereof to the extent affected, shall be suspended during the period of such disability. Licensee shall make all reasonable efforts to remove such disability as soon as practicable under the circumstances. (k) This Agreement shall be governed by and construed pursuant to the laws of Canada. IN WITNESS WHEREOF, the parties hereto have duly executed this License Agreement. LICENSOR: COLGATE-PALMOLIVE, CANADA INC. By: Doris R. Fielding Secretary and General Counsel LICENSEE: THE STEPHAN CO. By: Frank Ferola, Sr. President and CEO -----END PRIVACY-ENHANCED MESSAGE-----