UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(AMENDMENT No.1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2006
Commission File No. 1-4436
THE STEPHAN CO.
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(Exact Name of Registrant as Specified in its Charter)
Florida 59-0676812
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1850 West McNab Road, Fort Lauderdale, Florida 33309
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (954) 971-0600
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Securities Registered Pursuant to Section 12(b) of the Act:
Title of Class Name of Exchange on Which Registered
-------------- ------------------------------------
Common Stock, AMERICAN STOCK EXCHANGE
$.01 Par Value
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. YES |_| NO |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. YES |_| NO |X|
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days. YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act).
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES |_| NO |X|
The aggregate market value of the voting and non-voting common equity shares
held by non-affiliates as of June 30, 2006, the last business day of the
Registrant's most recently completed second fiscal quarter was $9,742,912, based
upon the reported sale price of $3.15 per share on the American Stock Exchange
on such date.
The above amount excludes shares held by all executive officers and directors of
the Registrant
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date:
4,389,805 Shares of Common Stock, $.01 Par Value,
as of March 30, 2007
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:
NONE
2
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A (the "Amendment") amends certain
portions of the Annual Report on Form 10-K of The Stephan Co. for the fiscal
year ended December 31, 2006 as filed with the Securities and Exchange
Commission on April 18, 2007 (the "Original Filing"). We have amended Item 5. to
incorporate a stock performance chart in accordance with Section 201(e) of
Regulation S-K; the current year's discussion of Selling, General and
Administrative expenses included in Item 7. was corrected to clarify a statement
contained in the Original Filing, and Part III Items 10 - 14 were added to this
Amendment because our Original Filing had the items incorporated by reference to
portions of our definitive proxy statement which will not be filed with the SEC
by April 30, 2007.
This Amendment contains only the sections to the Original Filing which are
being amended, and those unaffected parts or exhibits are not included herein.
This Amendment continues to speak as of the date of the Original Filing and we
have not updated the disclosure contained herein to reflect events that have
occurred since the filing of the Original Filing. Accordingly, this Amendment
should be read in conjunction with our other filings, if any, made with the
United States Securities and Exchange Commission subsequent to the filing of the
Original Filing, including any amendments to those filings, if any.
THE STEPHAN CO. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT
ON FORM 10-K
Page
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PART II
Item 5: Market for the Registrant's Common Equity, Related Stock-
holder Matters and Issuer Purchases of Equity Securities....... 18
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 21
PART III
Item 10: Directors, Executive Officers and Corporate Governance.......... 30
Item 11: Executive Compensation.......................................... 33
Item 12: Security Ownership of Certain Beneficial Owners,
Management and Related Stockholder matters..................... 38
Item 13: Certain Relationships and Related Transactions, and
Director Independence.......................................... 39
Item 14: Principal Accountant Fees and Services.......................... 40
Signatures............................................................... 44
3
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) Market Information
The Company's Common Stock is listed on the American Stock Exchange (the
"Exchange"). The following table sets forth the range of high and low sales
prices for the Company's Common Stock for each quarterly period during the two
most recent fiscal years:
High Low
Quarter Ended Sales Price Sales Price
------------- ----------- -----------
March 31, 2005 $ 5.10 $ 3.87
June 30, 2005 4.70 3.45
September 30, 2005 4.70 3.85
December 31, 2005 4.10 3.14
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March 31, 2006 $ 3.75 $ 3.31
June 30, 2006 3.70 3.05
September 30, 2006 3.17 2.91
December 31, 2006 3.62 2.96
(b) Holders
As of March 30, 2007, the Company's Common Stock was held of record by
approximately 345 holders. Additionally, the Company's Common Stock is believed
to be held beneficially by approximately 695 shareholders in "street-name".
(c) Dividends
The Company declared and paid cash dividends at the rate of $.02 per share
for each quarter in 1996 through 2006. Future dividends, if any, will be
determined by the Company's Board of Directors, in its discretion, based on
various factors, including the Company's profitability, cash on hand and
anticipated capital needs. The Company paid a special dividend of $2.00 per
share on September 15, 2004, to holders of record on September 8, 2004.
There are no contractual restrictions, including any restrictions on the
ability of any of the Company's subsidiaries, to transfer funds to the Company
in the form of cash dividends, loans or advances, that currently materially
limit the Company's ability to pay cash dividends or that the Company reasonably
believes are likely to materially limit the future payment of dividends on its
Common Stock.
18
STOCK PERFORMANCE CHART
The line graph below compares the cumulative stockholder return (assuming
reinvestment of dividends) on the Company's common stock over the most recent
five-year period versus the return of the Standard & Poor's Composite 500 Stock
Index and a custom composite consisting of industry peers.
CUMULATIVE TOTAL RETURN
Based upon an initial investment of $100 on December 31, 2001
with dividends reinvested
[THE PRINTED MATERIALS CONTAIN A LINE GRAPH HERE]
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Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06
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Stephan Co. $100 $117 $150 $229 $188 $204
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S&P(C)500 $100 $78 $100 $111 $117 $135
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Custom Composite Index $100 $106 $320 $352 $414 $336
-----------------------------------------------------------------------------------------------------------------------------------
The Custom Composite Index: CCA Industries Inc., Parlux Fragrances Inc. and
Inter Parfums Inc
19
YEAR ENDED DECEMBER 31, 2006 AS COMPARED TO 2005
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Era and Frances Denney, in addition to substantially all of the value assigned
to the brands acquired from CP, totaling approximately $5,295,000. The
impairment of the trademarks has been included in Selling, General and
Administrative expenses, in accordance with Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets". After taking into
consideration prior years sales trends, the Company took a conservative approach
to the sales projections used in connection with certain analysis by the
valuation firm. Management believes that the remaining carrying value of the
above-mentioned retail trademarks is less than the Company would realize if the
brands were offered to third-party buyers, based upon disclosed sales prices and
multiples of brand revenue indicated in published industry results.
In 2006, the Company's gross profit increased in spite of a decline in
overall net revenues. Net sales for the year ended December 31, 2006 was
$21,836,000, a decline of $426,000 from the previous year, but gross profit
increased to $9,041,000 when compared to $8,495,000 for the year ended December
31, 2005. This increase, as well as an increase in the gross profit margin from
38.2% in 2005 to 41.4% in 2006, was generally due to a change in the sales mix
as well as management's effective use of inventory that was previously written
off. Income from operations, before taking into consideration the impairment of
intangibles, was approximately $839,000 as a result of the increase in the gross
profit described above, as well as a decline in recurring selling, general and
administration expenses ("SG&A").
Selling, general and administrative expenses (SG&A) increased overall by
approximately $4,731,000, from $8,766,000 in 2005 to $13,497,000 in 2006 as a
result of the impairment charge discussed above. Without the impairment
write-down of $5,295,000, recurring SG&A expenses actually declined. A large
portion of this decline can be attributed to decreases in promotional expenses,
rent expense as a result of consolidation of warehouse space, a decline in legal
expenses and a reduction in overall payroll costs. These expenses were the
significant reasons that recurring SG&A expenses declined approximately $564,000
in 2006 when compared to 2005.
The Professional segment experienced a sales decline of almost $1,000,000
in 2006. A large part of this decline was in "hard goods", due to a combination
of factors including strong price consciousness by customers in addition to some
contraction of the customer base. A positive growth in net sales was shown by
our New Era and American Manicure brands which offset a decline in the "wet
goods" level of sales in 2006. The Manufacturing segment showed increased sales,
both from existing distribution channels in addition to new private label
customers. The Company is optimistic that it can continue to provide quality
products to its private label sector and increase sales in this segment. As
indicated above, while overall sales declined in 2006, this created a change in
the sales mix, since the significant decline in the Professional segment was due
to a decline in the sales of hard goods, which traditionally has a lower gross
margin than other lines. As a result, gross profit increased $546,000 for the
year ended December 31, 2006 when compared to the results achieved in 2005. 22
22
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS OF THE COMPANY
Board of Directors
Directors are elected on a staggered basis, with each class generally
standing for election for a three-year term. The Company's By-Laws provide that
the number of directors shall be set from time to time by resolution of the
Board of Directors and must be a minimum of one. The Board of Directors has set
the size of the Board at seven members.
Set forth below is certain information with respect to the members of the
Board of Directors:
Year first
Age elected as a Principal Occupation(s)
(as of Company During Past Five Years;
3/15/07) Director Other Directorships
-------- -------- -------------------
William M. Gross 83 2005 Certified Public Accountant and Attorney. For more than the
previous five years, he has served as Authorized House Counsel
for the Company on a part time basis.
Shouky A. Shaheen 76 1998 For more than the previous five years, President of Shaheen and
Co. Mr. Shaheen is also the former Owner of Morris Flamingo,
L.P., which was acquired by the Company in March 1998.
Curtis Carlson 53 1996 For more than the previous five years, partner in various law
firms. Currently a partner in the Miami-based law firm of
Carlson & Lewittes, PA.
Frank F. Ferola 63 1981 For more than the previous five years, Chairman of the Board,
President and Chief Executive Officer of the Company.
Richard Barone (1)(2)(3) 65 2005 Chairman, CEO and Portfolio Manager for Ancora Advisors, an
investment advisor based in Cleveland, OH. Additionally,
Chairman of Ancora Capital and Ancora Securities, a holding
company and broker/dealer based in Cleveland. Prior to founding
Ancora Advisors, from 2001-2003, portfolio manager for Fifth
Third Bank Invest Advisors. Prior to that, President and CEO
for Maxus Investment Group.
Elliot Ross (1)(2)(3) 61 2005 Since 2000, co-founder of MFL Group, a corporate consulting
firm. Prior to 2000, President and Director of State Industrial
Products.
(1) Member of the Audit Committee.
(2) Member of the Stock Option and Compensation Committee.
(3) Member of the Nominating Committee.
30
Committees of the Board
The Board has established three standing committees, consisting of (1) an
Audit Committee (2) a Stock Option & Compensation Committee and (3) a Nominating
Committee. Our Board may also establish such other committees as it deems
appropriate, in accordance with applicable law and regulations, our certificate
of incorporation and bylaws.
Audit Committee
The Audit Committee reviews the internal and external audit functions of
the Company and makes recommendations to the Board of Directors with respect
thereto. It also has primary responsibility for the formulation and development
of the auditing policies and procedures of the Company, and for selecting the
Company's independent auditing firm. The Audit Committee is governed by the
Company's Audit Committee Charter. The Board of Directors of the Company has
determined that the current composition of the Audit Committee satisfies the
American Stock Exchange's requirements regarding independence, financial
literacy and experience. The Chairman and financial expert of the Audit
Committee is Richard Barone, an independent director.
Stock Option & Compensation Committee
The Stock Option & Compensation Committee is composed of a majority of
independent directors. The Stock Option & Compensation Committee reviews the
base salaries of our employees (as well as our executive officers) on an annual
basis, considering factors such as corporate progress toward achieving
objectives (without reference to any specific performance-related targets) and
individual performance experience and expertise. The Compensation Committee has
primary responsibility for the administration of the Company's 1990 Key Employee
Stock Incentive Plan (the "Incentive Plan"), including principal responsibility
for the granting of options thereunder. The Stock Option & Compensation
Committee is also responsible for establishing the overall philosophy of the
Company's executive compensation program and overseeing the executive
compensation plan developed to execute the Company's compensation strategy.
Elliot Ross, Chairman, and Richard Barone comprised the Compensation Committee
in 2006.
After various informal meetings during 2006, the Stock Option &
Compensation Committee did not award any discretionary stock options to any key
employees and did not grant any discretionary salary increases or award any
bonuses. Options were granted only pursuant to Mr. Ferola's employment
agreement.
Nominating Committee
The Company's Nominating Committee Charter governs the Nominating
Committee. The Charter is on the Company's website (www.thestephanco.com).
The Charter sets forth the policies regarding the minimum standards and
the processes used to identify board candidates. During 2006, the members of the
Nominating Committee were Elliot Ross and Richard Barone. The Committee is
responsible for: (1) establishing procedures for the selection of members of the
Board of Directors, (2) evaluating current Board members and nominees and (3)
recommending new nominees.
31
In evaluating candidates for nomination to the Board of Directors, the
Nominating Committee takes into account the applicable requirements under the
AMEX rules. The Nominating Committee may also consider such other factors and
criteria as they deem appropriate, including a candidate's judgment, skill,
integrity, diversity, and business or other experience. The Nominating Committee
may (but is not required to) consider candidates suggested by management or
other members of the Board of Directors.
Generally, the Nominating Committee considers candidates who have
experience as a board member or senior officer of a company or who are
recognized in a relevant field as a well-regarded practitioner, faculty member
or senior government officer. The Nominating Committee will also evaluate
whether the candidates' skills and experience complement the existing Board of
Directors' skills and experience and/or meet a need for operational, management,
financial, international, technological or other expertise. Stockholders may
nominate directors, provided such nominations comply with timing and information
requirements set forth in our bylaws.
Executive Officers
The four executive officers of the Company consist of Frank F. Ferola,
President, Chairman of the Board and Chief Executive Officer; David A. Spiegel,
Chief Financial Officer, Vice President and Treasurer; Tyler Kiester, Assistant
Secretary; and Curtis Carlson, Vice President and Secretary.
The following sets forth certain information with respect to the executive
officers of the Company who are not also directors (based solely on information
furnished by such persons):
Mr. David A. Spiegel, 58, was appointed as Chief Financial Officer in
January 1994. For more than the five years prior to 1994, Mr. Spiegel was the
independent public accountant for the Company.
Mr. Tyler Kiester, 35, was appointed Assistant Secretary in January 2003.
For more than the previous five years, Mr. Kiester has been employed by the
Company in various capacities.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors and persons owning more than 10% of the
Company's common stock to file reports of ownership and changes in ownership
with the Securities and Exchange Commission and to furnish copies of all such
reports to the Company. The Company believes, based on the Company's stock
transfer records and written representations from certain reporting persons,
that, except as set forth below, all reports required under section 16(a) were
timely filed during 2006.
Name # of Late Reports # of Late Transactions
---- ----------------- ----------------------
Richard A. Barone 1 Form 3
Elliot Ross 1 Form 3; 1 Form 4 1
William M. Gross 1 Form 3
32
Code of Ethics
The Company has adopted a Code of Ethics that applies to all officers,
employees and directors. This Code requires continued observance of high ethical
standards such as honesty, integrity and compliance with the law in the conduct
of the business. The Code is posted on the Company website,
"www.thestephanco.com".
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Our compensation program is designed to attract and retain qualified
individuals and motivating employees, including executive officers, to achieve
corporate goals. Our Compensation Committee is comprised solely of non-employee
directors and we do not currently engage consultants in connection with
executive and/or director compensation matters. The Compensation Committee
believes that the combination of a competitive salary, insurance and other
benefit programs, as well as the ability to grant stock options to both
executives and employees enables the Company to attract and retain talented
personnel. The Company's executive compensation package consists of the payment
of base salary, the potential for an annual bonus and possibility of stock
options awarded through participation in the Incentive Plan.
Base Salary
The Compensation Committee's policy is to consider salaries in relation to
industry norms, the principal job duties and responsibilities undertaken by
executives, individual performance and other relevant criteria.
Annual Bonus
An annual bonus for the Chief Executive Officer is determined by a
specific bonus formulae set forth in his written employment agreement. Other
executives may be paid bonuses at the discretion of the Compensation Committee.
Stock Options
Long-term incentive compensation of executives is granted through
participation in the Incentive Plan. The Incentive Plan permits the Company to
grant stock options to executive officers at a price not less than 100% of the
fair market value of the Common Stock on the date of the grant. In addition to
any obligations pursuant to the Chief Executive Officers' employment agreement,
stock options may be granted, in the Compensation Committee's discretion, to
executive officers based upon its appraisal of the ability of such executive
officers to influence the long-term growth and profitability of the Company. The
Compensation Committee believes that providing a portion of the executive's
compensation in the form of stock options encourages the officers to share with
the Company's stockholders the goals of increasing the value of the Company's
stock and contributing to the success of the Company.
33
The Chief Executive Officer Compensation
As set forth in more detail herein, the Compensation Committee approved an
employment agreement on January 1, 1997 for Mr. Frank F. Ferola that was renewed
for successive terms until December 31, 2008. Based on the earnings formula
described therein, Mr. Ferola received annual bonus(es) and stock options as
previously indicated in this Item 11.
Report of the Compensation Committee on Executive Compensation
The Stock Option & Compensation Committee of the Board of Directors has
reviewed the Stock Option & Compensation Discussion and Analysis and discussed
it with management, and based upon such review and discussions recommends to the
Board of Directors that the Compensation Discussion and Analysis be included in
the Form 10-K.
STOCK OPTION & COMPENSATION COMMITTEE:
Elliot Ross, Chairman
Richard Barone
2006 Summary Compensation Table
The following table sets forth information for the fiscal years ended
December 31, 2006, 2005 and 2004 as to the compensation earned by the Company's
Chief Executive Officer and the other most highly compensated executive officers
and/or other employees of the Company whose total annual salary and bonus
exceeded $100,000 for services rendered by them in all capacities to the Company
and its subsidiaries during fiscal year 2006.
Name and
Principal Option All Other Total
Position(s) Year Salary Awards Compensation Compensation (6)
----------- ---- ------ ------ ------------ ----------------
Frank F. Ferola 2006 $594,000 $ 64,323 (1) $183,121 (2),(3),(4) $ 841,444
Pres., CEO & Board 2005 $695,475 $ 59,528 (1) $ 94,989 (2),(3),(4) $ 849,992
Chair 2004 $828,139 $ 88,515 (1) $ 37,984 (3),(4) $ 954,638
David Spiegel, CFO 2006 $184,375 $ 0 $ 26,458 (5) $ 210,833
2005 $180,437 $ 0 $ 26,458 (5) $ 206,895
2004 $188,781 $ 0 $ 26,458 (5) $ 215,239
(1) Reflects cost of annual grant, in accordance with employment agreement, of
50,000 shares computed in accordance with the provisions of Statement of
Financial Accounting Standards No. 123 (R), Share-Based Payment.
(2) Includes compensation for vacation time not taken, amounting to $153,690
in 2006 and $46,697 in 2005.
(3) Includes insurance reimbursements of $8,191, $27,176 and $18,515 in 2006,
2005 and 2004, respectively.
(4) Includes automobile benefits of $14,188, $13,316 and $13,066 in 2006, 2005
and 2004 respectively.
(5) Includes insurance reimbursements of $20,458 and automobile benefits of $
6,000 in 2006, 2005 and 2004.
(6) In 2004, Mr. Ferola was paid a bonus of $630,000 that was expensed in 2003
and is not included in Total Compensation for 2004.
34
Grants of Plan-Based Awards
The following table sets forth certain information concerning stock
options granted to those individuals named in the Summary Compensation Table who
were granted stock options in fiscal year 2006.
Number of
Securities % of Total Exercise Potential Realizable
Underlying Options Price Value At Assumed Annual
Options Granted to Per Exp. Rates of Stock Price
Name Granted Employees in Year Share Date Appreciation (2)
---- ------- ----------------- ----- ---- ----------------
5% 10%
-- ---
Frank F.Ferola 50,000(1) 100% $3.54 1/1/2016 $288,314 $459,092
(1) Reflects Stock Options granted pursuant to employment agreement.
(2) Potential realizable value is based on the assumption that the
Common Stock appreciates at the annual rates shown (compounded
annually) from the date of grant until the expiration of the option
term. These numbers are calculated based on the requirements
promulgated by the Commission and do not reflect any estimate or
prediction by the Company of future Common Stock trading prices.
Employment and Termination Arrangements
Frank F. Ferola
On January 1, 1997, the Company entered into an employment agreement with
Mr. Frank F. Ferola. The agreement provides for a three year term, which may be
renewed for successive terms of three years if, at least thirty days prior to
the end of each term, Mr. Ferola gives notice of his election to renew. Mr.
Ferola renewed the agreement at the end of 1999, 2002 and 2005, terminating
December 31, 2008.
Under the agreement, Mr. Ferola receives an annual base salary which is
increased annually by an amount equal to 10% of the previous years' base salary.
For the year ending December 31, 2006, Mr. Ferola's contractual annual base
salary would have been $1,002,048, however, by letter dated July 6, 2005, to the
Company, Mr. Ferola unilaterally reduced his salary to $540,000 per annum,
subject to 10% annual increases. (See discussion under Certain Relationships and
Related Transactions.)
In addition, Mr. Ferola is entitled to receive an annual performance bonus
based on increases of at least 10% in the Company's earnings per share,
calculated by comparison to a base year (currently, 2005) and pursuant to a
formula set forth in his employment agreement. For the year ending December 31,
2006, Mr. Ferola was not due a bonus.
Further, Mr. Ferola's employment agreement provides that he will receive
stock options with ten year terms, under the 1990 Key Employee Stock Incentive
Plan or under a substitute plan directly from the Company, on each anniversary
date of the agreement of not less than 50,000 shares based on the closing price
of the stock on the last business day before the anniversary date.
35
Moreover, in the event of a "change in control" (as defined in the
employment agreement) of the Company, Mr. Ferola is entitled to receive an
amount equal to his base salary for the remaining term of his employment
agreement plus an additional 24 months' salary, plus a lump-sum payment in an
amount equal to the most recent annual bonus paid, multiplied by the sum of the
number of years (including any fraction thereof) remaining in the term of his
agreement, plus two. If a change in control were deemed to have taken place on
December 31, 2006, under the terms of his contract, Mr. Ferola would be entitled
to receive a lump-sum payment of approximately $7,800,000. In accordance with
current Internal Revenue Service regulations, a significant portion of the
aforementioned change in control payment would not be tax deductible.
David Spiegel
Mr. Spiegel has an arrangement with the Company where the Company pays him
a severance payment upon a "change in control" (as defined in a letter agreement
dated April 29, 2004, by and between Mr. Spiegel and the Company) in an amount
equal to his then-current monthly base salary, multiplied by twelve, plus a
lump-sum payment equal to his most recent annual bonus. If a change in control
were deemed to have taken place on December 31, 2006, under the terms of his
termination agreement, Mr. Spiegel would be entitled to receive a lump-sum
payment of approximately $184,000.
Tyler Kiester
Mr. Kiester has an arrangement whereby the Company pays him a severance
payment upon a "change in control" (as defined in a letter agreement dated May
19, 2003, by and between Mr. Kiester and the Company) in an amount equal to his
then-current monthly base salary multiplied by twelve. If a change in control
were deemed to have taken place on December 31, 2006, under the terms of his
termination agreement, Mr. Kiester would be entitled to receive a lump-sum
payment of approximately $95,000.
Potential Payments Upon Termination or Change of Control
Please refer to the above Employment and Termination Arrangements for a
discussion of potential payments upon termination or change in control.
Outstanding Equity Awards at Fiscal Year End
The following table sets forth information with respect to the number of
shares acquired upon exercise of stock options and the value realized upon
exercise of such stock options by the individuals named in the Summary
Compensation Table during 2006. The table also contains information regarding
the number of shares covered by both exercisable and unexercisable stock options
held by the same individuals as of December 31, 2006. Also reported are the
values for "in-the-money" stock options that represent the positive spread
between the respective exercise prices of outstanding stock options and the fair
market value of our common stock as of December 31, 2006 ($3.62 per share).
36
Number of
Securities Underlying Value of
Unexercised Options Unexercised In-the-
Shares Held at Money Options at
Acquired December 31,2006 December 31, 2006
On $ Value ---------------- -----------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
-------- -------- ----------- ------------- ----------- -------------
Frank F. Ferola -- -- 200,000 50,000 -- --
Compensation of Directors
All directors of the Company are compensated for their services by payment
of $300 for each Board meeting attended. During fiscal year 2006, options to
purchase shares of Common Stock, were granted by the Company to the four
directors of the Company who were not employees or regularly retained
consultants of the Company (each, an "Outside Director") pursuant to the
Company's 1990 Outside Directors' Stock Option Plan.
Under the Plan, each Outside Director is automatically granted, upon such
person's election or re-election to serve as a director of the Company, an
option exercisable over five years, to purchase shares of Common Stock. Upon
initial election to the Board of Directors, an Outside Director is granted an
option to purchase 5,062 shares of Common Stock at an exercise price equal to
the fair market value of the Common Stock on the date of grant. An option to
purchase an additional 5,062 shares of Common Stock (at an exercise price equal
to the fair market value of the Common Stock on the date of such grant) is
granted to each incumbent Outside Director during each fiscal year of the
Company thereafter on the earlier of (i) June 30 or (ii) the date on which the
stockholders of the Company elect directors at an annual meeting of such
stockholders or any adjournment thereof. The aggregate number of shares of
Common Stock reserved for grant under the Outside Directors' Stock Option Plan
is 202,500, of which options covering 96,178 shares are outstanding.
Name Fees earned Option awards Total
---- ----------- ------------- -----
Richard Barone $1,800 $5,003 $6,803
Curtis Carlson $1,200 $5,003 $6,203
William Gross $1,800 $5,003 $6,803
Elliot Ross $ 900 $5,003 $5,903
Shouky Shaheen $1,200 $5,003 $6,203
Compensation Committee Interlocks and Insider Participation
The members of the Stock Option & Compensation Committee as of December
31, 2006, were Messrs. Ross and Barone. No member of the Compensation Committee
was at any time during the fiscal year ended December 31, 2006, or formerly, an
officer or employee of the company, nor has any member of the Stock Option &
Compensation Committee had any relationship with us during the fiscal year ended
December 31, 2006, requiring disclosure under Item 404 of Regulation S-K under
the Exchange Act.
None of our executive officers has served as a member of the compensation
committee (or other committee serving an equivalent function) of any other
entity, with respect to which any executive officer served as a director or
member of our Stock Option & Compensation Committee.
37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Equity Compensation Plans
As of December 31, 2006, an aggregate of 562,700 options had been granted
to executive officers under the 1990 Key Employee Stock Incentive Plan and an
aggregate of 596,330 options had been granted to all employees under the Plan.
Included in the above totals are options that have been granted and subsequently
cancelled and/or expired.
Non-employee directors of the Company are not granted options under the
1990 Key Employee Stock Incentive Plan, but are granted options under the 1990
Outside Directors' Stock Option Plan, discussed above under "Compensation of
Directors."
The tabular information required by Item 201(d) of Regulation SK is
incorporated by reference to Footnote 11 of the consolidated financial
statements contained elsewhere in this Form 10-K.
Stock Ownership by Certain Beneficial Owners
The following table sets forth, as of March 31, 2007, certain information
as to the stockholders (other than directors and executive officers of the
Company) known by the Company to own beneficially more than 5% of the Common
Stock (based solely upon filings by said holders with the Securities and
Exchange Commission on Schedule 13D, pursuant to the Securities Exchange Act of
1934, as amended).
Number of Shares
Name and Address Beneficially Percent
of Beneficial Owner Owned * of Class
------------------- ------- --------
Merlin Partners, L.P., et al. 332,783 7.6
2000 Auburn Drive, Suite 420
Cleveland, OH 44122
Yorktown Avenue Capital, et al. 714,295 16.3
124 E. 4th Street
Tulsa, OK 74103
David M. Knott, et al. 382,800 8.7
485 Underhill Blvd., Suite 205
Syosset, NY 11791
Richard L. Scott 443,600 10.1
Boult Cummings Conners & Berry,PLC
414 Union Street, Suite 1600
Nashville, TN 37219
*Beneficial ownership, as reported in the above table, has been determined in
accordance with Rule 13d-3 Under the Exchange Act. Unless otherwise indicated,
beneficial ownership includes both sole voting and sole dispositive power.
Stock Ownership by Management and Directors
The following table sets forth, as of February 28, 2007, certain information
concerning the beneficial ownership of Common Stock by each of
38
the seven directors of the Company, the executive officers, and all current
directors and executive officers of the Company as a group (based solely upon
information furnished by such persons):
Number of Shares
Name of Beneficially Percent
Beneficial Owner (1) Owned(2) of Class
---------------- -------- --------
Curtis Carlson ................................ 20,248 (5)
William M. Gross .............................. 5,062 (5)
Frank F. Ferola ............................... 846,028(3) 19.27%
Shouky Shaheen ................................ 342,492 7.80%
David Spiegel ................................. 700 (5)
Richard Barone ................................ 332,783(4) 7.58%
Elliot Ross ................................... 5,062 (5)
All executive officers and directors
as a group .................................. 1,552,375 35.36%
(1) Beneficial ownership, as reported in the above table, has been
determined in accordance with Rule 13d-3 under the Exchange Act.
Unless otherwise indicated, beneficial ownership includes both sole
voting and sole dispositive power. Unless otherwise indicated, the
address of each person listed is c/o The Stephan Co., 1850 W. McNab
Rd., Ft. Lauderdale, FL 33309.
(2) Includes the following shares that may be acquired upon the exercise
of options held by the specified person within 60 days of the Record
Date: Mr. Curtis Carlson - 20,248; Mr. William Gross - 5,062; Mr.
Frank Ferola - 200,000; Mr. Shouky Shaheen - 10,124; Mr. Richard
Barone - 5,062; Mr. Elliot Ross - 5,062 and all executive officers
and directors as a group - 245,558.
(3) Includes 43,174 shares owned by Mr. Frank Ferola's personal
Charitable Foundation, of which Mr. Ferola is a co-trustee.
(4) Through his beneficial interest in connection with Merlin Partners,
L.P.
(5) Represents less than 1%.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In fiscal year 2006, the Company paid $35,486 to Carlson & Lewittes, P.A.,
a law firm of which Curtis Carlson, an officer and director of the Company, is a
partner, for legal services rendered by such firm to the Company. In addition,
the Company pays Mr. Carlson $2,000 per month for his services as Vice-President
and Secretary.
In fiscal year 2006, the Company paid $321,000 in rent to Shaheen & Co.,
Inc., a corporation in which Mr. Shaheen has an ownership interest, for a
building the Company leases in Danville, Illinois. On May 4, 2005, the Company
entered into a Second Amendment of Lease Agreement for the Danville facility
which, among other things, increases the annual rental to $303,000 (See Item 2.
Properties, for pending legal proceedings regarding this lease).
By way of letter dated July 6, 2005, Frank F. Ferola, President, CEO and
Chairman of the Board, unilaterally reduced, on a temporary basis, his salary
from $910,953 in 2005 to $540,000 per annum, subject to the contractual annual
10% increase ($594,000 in 2006). In the event of a "change of control" in the
Company (as defined in the July 6, 2005 letter) Mr. Ferola's salary, as set
forth in his employment contract, shall automatically resume.
39
Director Independence
Our independent directors, Richard Barone and Elliot Ross, qualify as
"independent" pursuant to SEC rules and regulations and the independence
standards of the listing requirements of The American Stock Exchange. Under
these standards, a director is not considered independent if he has certain
specified relationships with the company or any other relationships that, in the
opinion of the Board, would interfere with his exercise of independent judgment
as a director.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Principal Accountant Fees and Services
The following table sets forth the fees billed to us by Goldstein Lewin &
Co. and Deloitte & Touche, our independent registered accounting firms, as of
and for the years ended December 31, 2006, 2005 and 2004.
For the Years Ended
December 31,
2006 2005
---- ----
Audit fees(1) ............................ $189,557 $316,080
Audit - related fees ..................... $ -- $ --
Tax fees ................................. $ -- $ --
All other fees ........................... $ -- $ --
-------- --------
$189,557 $316,080
======== ========
(1) Audit fees billed by Goldstein Lewin & Co. in 2006 related to the
review of our interim consolidated financial statements included in
our Quarterly Reports on Form 10-Q for the periods ended March 31,
June 30 and September 30, 2006 and the audit of our annual
consolidated financial statements for the year ended December 31,
2005. Audit fees billed by Goldstein Lewin & Co. in 2005 related to
the review of our interim consolidated financial statements included
in our Quarterly Reports on Form 10-Q for the periods ended March
31, June 30 and September 30, 2005 and partial billing in connection
with the audit of our annual consolidated financial statements for
the year ended December 31, 2005. Audit fees billed by Deloitte &
Touche, LLP in 2005 related to the audit of our annual consolidated
financial statements for the year ended December 31, 2004 and
services performed in connection with "comment letters" received
from the Securities and Exchange Commission.
Audit Committee Pre-Approval Policies and Procedures
The Audit Committee on an annual basis reviews audit and non-audit
services performed by the independent auditors. All audit and non-audit services
must be approved in advance by the Audit Committee, which considers, among other
things, the possible effect of the performance of such services on the auditors'
independence.
40
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto, duly authorized.
THE STEPHAN CO.
By: /s/ Frank F. Ferola
----------------------------------
Frank F. Ferola
President and Chairman of the Board
May 1, 2007
By: /s/ David A. Spiegel
-----------------------------------
David A. Spiegel
Principal Financial Officer
Principal Accounting Officer
May 1, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
By: /s/ Frank F. Ferola By: /s/ Shouky Shaheen
------------------------------ ----------------------------
Frank F. Ferola, Principal Shouky Shaheen, Director
Executive Officer and Director Date: May 1, 2007
Date: May 1, 2007
By: /s/ Curtis Carlson By: /s/ Richard A. Barone
------------------------------ ----------------------------
Curtis Carlson, Director Richard A. Barone, Director
Date: May 1, 2007 Date: May 1, 2007
By: /s/ William Gross By: /s/ Elliot Ross
------------------------------ ----------------------------
William Gross, Director Elliot Ross, Director
Date: May 1, 2007 Date: May 1, 2007
44