UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended: September 30, 2005
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
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO 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
Approximate number of shares of Common Stock outstanding
as of November 4, 2005:
4,389,805
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2005
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets
as of September 30, 2005 and December 31, 2004 5-6
Unaudited Condensed Consolidated Statements
of Operations for the nine months ended
September 30, 2005 and 2004 7
Unaudited Condensed Consolidated Statements
of Operations for the three months ended
September 30, 2005 and 2004 8
Unaudited Condensed Consolidated Statements
of Cash Flows for the nine months ended
September 30, 2005 and 2004 9-10
Notes to Unaudited Condensed Consolidated
Financial Statements 11-16
ITEM 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 17-20
ITEM 3. Quantitative and Qualitative
Disclosure About Market Risk 20
ITEM 4. Controls and Procedures 20-21
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 22
ITEM 4. Submission of Matters to a
Vote of Security Holders 22
ITEM 6. Exhibits 22
SIGNATURES 23
2
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2005
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This quarterly report contains certain "forward-looking"
statements. The Stephan Co. ("Stephan" or the "Company") desires to take
advantage of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 and is including this statement for the
express purpose of availing itself of the protections of such safe harbor
with respect to all such forward-looking statements. Such forward-looking
statements involve risks, uncertainties and other factors which may cause
the actual results, condition (financial or otherwise), performance, trends
or achievements of the Company and its subsidiaries to be materially
different from any results, condition, performance, trends or achievements
projected, anticipated or implied by such forward-looking statements.
Words such as "projects," "believe," "anticipates," "estimate,"
"plans," "expect," "intends," and similar words and expressions are
intended to identify forward-looking statements and are based on our
current expectations, assumptions, and estimates about us and our industry.
In addition, any statements that refer to expectations, projections or
other characterizations of future events or circumstances are forward-
looking statements. Although we believe that such forward-looking
statements are reasonable, we cannot assure you that such expectations will
prove to be correct.
Our actual results could differ materially from those anticipated in
such forward-looking statements as a result of several factors, risks and
uncertainties. These factors, risks and uncertainties include, without
limitation, our ability to satisfactorily address any material weaknesses
in our financial controls; general economic and business conditions;
competition; the relative success of our operating initiatives; our
development and operating costs; our advertising and promotional efforts;
brand awareness for our product offerings; the existence or absence of
adverse publicity; acceptance of any new product offerings; changing trends
in customer tastes; the success of any multi-branding efforts; changes in
our business strategy or development plans; the quality of our management
team; costs and expenses incurred by us in pursuing strategic alternatives;
the availability, terms and deployment of capital; the business abilities
and judgment of our personnel; the availability of qualified personnel; our
labor and employee benefit costs; the availability and cost of raw
materials and supplies; changes in or newly-adopted accounting principles;
changes in, or our failure to comply with, applicable laws and regulations;
changes in our product mix and associated gross profit margins; as well as
management's response to these factors, and other factors that may be more
fully described in the Company's literature, press releases and publicly-
3
filed documents with the Securities and Exchange Commission. You are urged
to carefully review and consider these disclosures, which describe certain
factors that affect our business.
We do not undertake, subject to applicable law, any obligation to
publicly release the results of any revisions, which may be made to any
forward-looking statements to reflect events or circumstances occurring
after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events. Therefore, we caution each reader of
this report to carefully consider the specific factors and qualifications
discussed herein with respect to such forward-looking statements, as such
factors and qualifications could affect our ability to achieve our
objectives and may cause actual results to differ materially from those
projected, anticipated or implied herein.
4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
2005 2004
____________ ____________
CURRENT ASSETS
Cash and cash equivalents $ 4,741,068 $ 4,402,463
Restricted cash 3,610,463 1,110,000
Accounts receivable, net 2,307,998 1,753,250
Inventories 6,734,431 7,164,901
Income taxes receivable 234,223 209,203
Prepaid expenses and
other current assets 286,311 374,079
____________ ____________
TOTAL CURRENT ASSETS 17,914,494 15,013,896
RESTRICTED CASH - 3,430,408
PROPERTY, PLANT AND EQUIPMENT, net 1,698,709 1,627,227
GOODWILL, net 4,013,458 4,013,458
TRADEMARKS, net 8,364,809 8,364,809
DEFERRED ACQUISITION COSTS, net 160,941 216,652
OTHER ASSETS, net 1,905,693 2,052,405
____________ ____________
TOTAL ASSETS $ 34,058,104 $ 34,718,855
============ ============
See notes to unaudited condensed consolidated financial statements
5
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
2005 2004
____________ ____________
CURRENT LIABILITIES
Accounts payable and
accrued expenses $ 2,588,196 $ 2,165,751
Current portion of
long-term debt 3,515,000 1,110,000
____________ ____________
TOTAL CURRENT LIABILITIES 6,103,196 3,275,751
DEFERRED INCOME TAXES, net 1,492,064 1,488,116
LONG-TERM DEBT - 3,237,500
____________ ____________
TOTAL LIABILITIES 7,595,260 8,001,367
____________ ____________
COMMITMENTS AND CONTINGENCIES (NOTE 3)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value 43,898 43,898
Additional paid-in capital 17,556,731 17,556,731
Retained earnings 8,862,215 9,116,859
____________ ____________
TOTAL STOCKHOLDERS' EQUITY 26,462,844 26,717,488
____________ ____________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 34,058,104 $ 34,718,855
============ ============
See notes to unaudited condensed consolidated financial statements
6
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended
September 30,
______________________________
2005 2004
____________ ____________
NET SALES $ 17,141,001 $ 18,819,564
COST OF GOODS SOLD 10,437,736 10,977,964
___________ ___________
GROSS PROFIT 6,703,265 7,841,600
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 6,712,074 7,566,271
___________ ____________
OPERATING (LOSS)/INCOME (8,809) 275,329
OTHER INCOME(EXPENSE)
Interest income 86,061 145,616
Interest expense (74,122) (73,176)
Other income, net 37,500 320,245
___________ ___________
INCOME BEFORE INCOME TAXES 40,630 668,014
INCOME TAX EXPENSE 31,884 249,195
___________ ___________
NET INCOME $ 8,746 $ 418,819
=========== ===========
BASIC AND DILUTED EARNINGS PER SHARE $ .00 $ .10
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,401,454 4,335,336
=========== ===========
See notes to unaudited condensed consolidated financial statements
7
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
September 30,
_____________________________
2005 2004
____________ ____________
NET SALES $ 6,567,510 $ 7,305,025
COST OF GOODS SOLD 4,242,746 4,309,542
___________ ___________
GROSS PROFIT 2,324,764 2,995,483
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,214,012 2,979,579
___________ ____________
OPERATING INCOME 110,752 15,904
OTHER INCOME(EXPENSE)
Interest income 34,567 46,805
Interest expense (20,925) (23,243)
Other income, net 12,500 2,100
___________ ___________
INCOME BEFORE INCOME TAXES 136,894 41,566
INCOME TAX EXPENSE 43,038 12,222
___________ ___________
NET INCOME $ 93,856 $ 29,344
=========== ===========
BASIC AND DILUTED EARNINGS PER SHARE $ .02 $ .01
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,401,454 4,394,385
=========== ===========
See notes to unaudited condensed consolidated financial statements
8
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
___________________________
2005 2004
___________ ____________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,746 $ 418,819
___________ ____________
Adjustments to reconcile net income
to cash flows provided by
operating activities:
Depreciation 108,302 118,631
Amortization of intangible assets 55,711 62,640
Write-down of inventories 60,000 100,000
Compensation expense resulting from
exercise of stock options - 415,430
Deferred income tax provision 3,948 269,187
Provision for doubtful accounts 24,414 61,323
Changes in operating assets and
liabilities:
Accounts receivable (579,162) (954,554)
Inventories 370,470 66,828
Income taxes receivable/payable (25,020) (13,122)
Prepaid expenses
and other current assets 87,768 252,186
Other assets 146,712 437,320
Accounts payable and accrued expenses 422,445 (232,712)
___________ ___________
Total adjustments 675,588 583,157
___________ ___________
Net cash flows provided
by operating activities 684,334 1,001,976
___________ ___________
See notes to unaudited condensed consolidated financial statements
9
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
____________________________
2005 2004
____________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in restricted cash 929,945 824,839
Purchase of property, plant
and equipment (179,784) (42,541)
___________ ___________
Net cash flows provided by
investing activities 750,161 782,298
___________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (832,500) (2,164,773)
Dividends paid (263,390) (8,998,741)
Proceeds from exercise of stock options - 75,576
___________ ___________
Net cash flows used in
financing activities (1,095,890) (11,087,938)
___________ ___________
INCREASE/(DECREASE) IN CASH
AND CASH EQUIVALENTS 338,605 (9,303,664)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 4,402,463 13,302,159
___________ ___________
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 4,741,068 $ 3,998,495
=========== ===========
Supplemental Disclosures of
Cash Flow Information:
Interest paid $ 45,387 $ 175,918
=========== ===========
Income taxes paid $ 45,771 $ 69,659
=========== ===========
Supplemental Disclosure of Non-Cash
Investing and Financing Activities:
On August 20, 2004, 125,000 contingently returnable shares, carried at
$1,351,563, were retired and Common Stock and Additional Paid in Capital
were reduced by the same amount in the aggregate.
See notes to unaudited condensed consolidated financial statements
10
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED SEPTEMBER 30, 2005 AND 2004
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: In the opinion of management, all
adjustments (consisting only of normal accruals) necessary for a fair
presentation of The Stephan Company's (the "Company") financial position
and results of operations are reflected in these unaudited interim
financial statements.
The results of operations for the nine and three-month periods ended
September 30, 2005 is not necessarily indicative of the results to be
achieved for the year ending December 31, 2005. The December 31, 2004
condensed consolidated balance sheet was derived from the audited
consolidated financial statements, but does not include all disclosures
required by accounting principles generally accepted in the United States
of America ("generally accepted accounting principles"). These interim
financial statements should be read in conjunction with the audited
consolidated financial statements and accompanying notes appearing in the
Company's Annual Report on Form 10-K for the year ended December 31, 2004,
previously filed with the Securities and Exchange Commission.
NATURE OF OPERATIONS: The Company is engaged in the manufacture,
sale, and distribution of hair and personal care grooming products
principally throughout the United States. The Company has allocated
substantially all of its business into three segments, which include
professional hair care products and distribution, retail personal care
products and manufacturing.
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.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include
cash, money market investment accounts and short-term municipal bonds
having maturities after 90 days or less when acquired. The Company
maintains cash deposits at certain financial institutions in amounts in
excess of the federally insured limit. Cash and cash equivalents held in
interest-bearing accounts as of September 30, 2005 and December 31, 2004
were approximately $4,020,000 and $3,824,000, respectively.
11
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED SEPTEMBER 30, 2005 AND 2004
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INVENTORIES: Inventories are stated at the lower of cost (deter-
mined on a first-in, first-out basis) or market, and are as follows:
September 30, December 31,
2005 2004
____________ ____________
Raw materials $ 1,591,855 $ 1,827,553
Packaging and components 2,450,865 2,187,901
Work in progress 266,413 429,552
Finished goods 4,229,472 4,651,422
____________ ____________
8,538,605 9,096,428
Less: Amount included in
other assets (1,804,174) (1,931,527)
____________ ____________
$ 6,734,431 $ 7,164,901
============ ============
Raw materials include surfactants, chemicals and fragrances used in
the production process. Packaging materials include cartons, inner sleeves
and boxes used in the actual product, as well as outer boxes and cartons
used for shipping purposes. Components are the actual bottles or
containers (plastic or glass), jars, caps, pumps and similar materials that
become part of the finished product. Finished goods include hair dryers,
electric clippers, lather machines, scissors and salon furniture.
Included in other assets is inventory not anticipated to be utilized
within one year and is comprised primarily of packaging, components and
finished goods. The Company reduces the carrying value of inventory to
provide for these slow moving goods that includes the estimated costs of
disposal of inventory that may ultimately become unusable or obsolete.
BASIC AND DILUTED EARNINGS PER SHARE: Basic and diluted earnings
per share are computed by dividing net income by the weighted average
number of shares of common stock outstanding. The weighted average number
of shares outstanding was 4,401,454 and 4,335,336, respectively, for the
nine months ended September 30, 2005 and 2004. For the three months ended
September 30, 2005 and 2004, the weighted average number of shares
outstanding was 4,401,454 and 4,394,385, respectively. For the nine
months ended September 30, 2005 and 2004, the Company had 351,240 and
291,822 outstanding stock options, respectively, a significant portion of
which were anti-dilutive. The inclusion of dilutive stock options in the
calculation of earnings per share did not have any impact on the earnings
per share for the nine and three month periods ended September 30, 2005.
12
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED SEPTEMBER 30, 2005 AND 2004
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
STOCK-BASED COMPENSATION: The Company adopted the disclosure
requirements of Statement of Financial Accounting Standards ("SFAS") No.
148, "Accounting for Stock-Based Compensation-Transition and Disclosure".
SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternate methods of transition for a voluntary
change to the fair value based method of accounting for stock-based
compensation and to require prominent disclosures in both annual and
interim financial statements about the methods of accounting for stock-
based compensation and the effect of the method used on reported results.
As permitted by SFAS No's. 148 and 123, the Company continues to apply the
accounting provisions of APB No. 25, "Accounting for Stock Issued to
Employees," and related interpretations, with regard to the measurement of
compensation cost for options granted under the Company's existing plans.
No stock-based compensation cost is reflected in net income as all options
granted under the plans had an exercise price not less than the market
value of the underlying common stock on the date of grant. Had expense
been recognized using the fair value method described in SFAS No. 123,
using the Black-Scholes option-pricing model, the Company would have
reported the following results of operations (in thousands, except per
share amounts):
Nine Months Ended Three Months Ended
September 30, September 30,
_________________ __________________
2005 2004 2005 2004
_______ _______ _______ _______
Net income, as reported $ 9 $ 419 $ 94 $ 29
Add: Stock-based compensation
included in reported net income,
net of related tax effects - 272 - 272
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects (100) (371) (50) (308)
_______ _______ _______ _______
Pro forma net (loss)/income $ ( 91) $ 320 $ 44 $ (7)
======= ======= ======= =======
Net (loss)/income per share:
As reported $ .00 $ .10 $ .02 $ .01
Pro forma $ (.02) $ .07 $ .01 $ .00
13
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED SEPTEMBER 30, 2005 AND 2004
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
NEW FINANCIAL ACCOUNTING STANDARDS: In December 2004, the
Financial Accounting Standards Board ("FASB") issued a revised Statement of
Financial Accounting Standards ("SFAS") No. 123 impacting the accounting
treatment for share-based payments. The revised statement requires
companies to reflect in the income statement compensation expense related
to the grant-date fair value of stock options and other equity-based
compensation issued to employees over the period that such awards are
earned. The statement is effective for the Company's 2006 fiscal year.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections". This statement replaces previous issued guidance and
changes the requirements for the accounting and reporting of voluntary
changes in accounting principles.
RECLASSIFICATIONS: Restricted cash collateralizing the current
portion of long-term debt was reclassified as a current asset at December
31, 2004. Changes in restricted cash balances have been presented as cash
flows from investing activities in the accompanying Consolidated Statements
of Cash Flows. Such amounts were previously classified as cash flows from
financing activities. As a result, net cash flows used in investing
activities in the aforementioned Statements decreased by $825,000 with a
corresponding increase in cash flows used in financing activities for the
nine months ended September 30, 2004.
NOTE 2: SEGMENT INFORMATION
The Company has identified three reportable operating segments based
upon how its management evaluates its business. These segments are
Professional Hair Care Products and Distribution ("Professional"), Retail
Personal Care Products ("Retail") and "Manufacturing". The Professional
segment has a customer base consisting generally of distributors that
purchase the Company's hair products and beauty and barber supplies for
sale to salons and barbershops. The customer base for the Retail segment
consists of mass merchandisers, chain drug stores and supermarkets that
sell products to end-users. The Manufacturing segment manufactures products
for different subsidiaries of the Company and manufactures private label
brands for customers.
The Company conducts operations principally in the United States and
sales to international customers are not material to its consolidated net
sales. Income Before Income Taxes as shown below reflects an allocation of
corporate overhead expenses (based upon sales) incurred by the
Manufacturing segment. The following tables, in thousands, summarize Net
Sales and Income Before Income Taxes by reportable segment:
14
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED SEPTEMBER 30, 2005 AND 2004
NOTE 2: SEGMENT INFORMATION (continued)
NET SALES NET SALES
_______________ _______________
Nine Months Three Months
Ended Sept. 30, Ended Sept. 30,
2005 2004 2005 2004
_______________ _______________
Professional $13,377 $13,897 $ 5,065 $ 5,293
Retail 3,221 4,435 1,269 1,811
Manufacturing 4,058 4,194 1,642 1,431
_______ _______ _______ _______
Total 20,656 22,526 7,976 8,535
Intercompany
Manufacturing (3,515) (3,706) (1,408) (1,230)
_______ _______ _______ _______
Consolidated $17,141 $18,820 $ 6,568 $ 7,305
======= ======= ======= =======
INCOME BEFORE INCOME BEFORE
INCOME TAXES INCOME TAXES
_______________ _______________
Nine Months Three Months
Ended Sept. 30, Ended Sept. 30,
2005 2004 2005 2004
_______________ _______________
Professional $ 702 $ 485 $ 246 $ 18
Retail (25) 366 (12) 20
Manufacturing (636) (183) (97) 4
_______ _______ ______ ______
Consolidated $ 41 $ 668 $ 137 $ 42
======= ======= ====== ======
NOTE 3: COMMITMENTS AND CONTINGENCIES
In addition to the matters set forth below, the Company is involved in
other litigation matters arising in the ordinary course of business. It is
the opinion of management that none of these matters, at September 30,
2005, would likely, if adversely determined, have a material adverse effect
on the Company's financial position, results of operations or cash flows.
Additionally, there has been no material change in the status of any other
pending litigation since the Company's last filing of Form 10-K with the
Securities and Exchange Commission for the year ended December 31, 2004.
15
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED SEPTEMBER 30, 2005 AND 2004
NOTE 3: COMMITMENTS AND CONTINGENCIES (continued)
Shouky A. Shaheen, a minority owner of Shaheen & Co., Inc., who owns
the building the Company leases in Danville, IL, is currently a member of
the Board of Directors and a significant shareholder of the Company. On
May 4, 2005, the Company entered into a Second Amendment of Lease Agreement
(the "Amendment") for the Danville facility. The Amendment extends the
term of the lease to June 30, 2015, with a five year renewal option. The
base rent is adjustable annually, in accordance with the existing master
lease, whose terms, including a 90-day right of termination by the Company,
remain in full force and effect; however, the enforceability of this
termination clause is the subject of a recent legal action (see below). In
addition, the Company has a purchase option, during the term of the lease,
to purchase the premises at the then fair market value of the building, or
to match any bona fide third-party offer to purchase the premises. On July
6, 2005, the landlord notified the Company that its interpretation of the
Amendment differs from that of the Company as to the existence of the 90-
day right of termination. On October 14, 2005, in the Circuit Court of the
17th Judicial Circuit for Broward County, Florida, Shaheen & Co., Inc.
commenced a lawsuit seeking a declaratory judgment with respect to the
cancellation rights contained in the Amendment, in addition to an
unspecified amount for damages. This matter is currently unresolved and
the Company is unable, at this time, to determine the outcome of the
litigation.
On September 29, 2005, the Company held its Annual Meeting of
Stockholders and filed its Form 10-Q for the three months ended March 31,
2005. On September 30, 2005, the Company filed its Form 10-Q for the six
and three month periods ended June 30, 2005. Accordingly, the Company has
complied with the August 3, 2005 decision of the Listing Qualifications
Panel of the American Stock Exchange ("AMEX") Committee on Securities,
which required the Company to regain compliance with all AMEX listing
standards by September 30, 2005, or face immediate delisting. On October
31, 2005, the Company received notice from AMEX confirming the above and
that the Hearings Department considers the matters resolved in a
satisfactory manner. The AMEX letter also indicated that the Company was
now subject to the provisions of Section 1009(h) of the AMEX Company
Guide, which subjects the Company to accelerated procedures in connection
with the initiation of delisting procedures should the Company again fall
below continued listing standards within one year.
16
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2005 AND 2004
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Nine months ended September 30, 2005:
For the nine months ended September 30, 2005, net sales were
$17,141,000, compared to $18,820,000 achieved in the corresponding nine
months of 2004. Gross profit for the nine months ended September 30, 2005
was $6,703,000, compared to gross profit of $7,842,000 achieved for the
corresponding nine-month period in 2004. The decline in net sales and
gross profit is largely a result of a decrease in the net sales of the
Professional segment as well as a decline in net sales of the Retail
segment. These declines were a result of an overall decrease in demand.
The overall gross margin for the nine months ended September 30, 2005 was
39.1% as compared to 41.7% for the nine months ended September 30, 2004.
This decline in the gross profit margin can be attributed to the change in
the sales mix, however the Company is also beginning to see some
deterioration of gross margin as a result of the recent significant
increase in oil prices, which impacted not only our delivery costs, but
also our raw material and componentry costs.
Selling, general and administrative expenses for the nine months ended
September 30, 2005 decreased by $854,000, to $6,712,000, when compared to
the corresponding 2004 nine-month total of $7,566,000. This decrease was
due to an across the board decline in selling expenses, and a decrease in
general and administrative expenses. Selling expenses in 2004 also
included additional expenses due to the impact of a one-time adjustment for
the loss in connection with the previously disclosed Sorbie arbitration and
general and administrative expenses were adversely impacted by the expense
attributed to the cashless exercise of stock options by certain officers.
These two specific items in 2004 represented over $600,000 of the total
decrease noted above.
Interest expense for the nine months ended September 30, 2005 was
$74,000, an increase of $1,000 from the $73,000 incurred in the corre-
sponding period of 2004. The Company continues to accrue interest on the
Sorbie arbitration award, offsetting any decline in interest expense on our
bank debt resulting from the reduced amount outstanding. Interest income
of $86,000 for the nine months ended September 30, 2005 was lower than the
$146,000 earned in the corresponding nine months of 2004 due to a decline
in invested cash as a result of the special $2 per share dividend
distributed to shareholders in September 2004. Other income represents
royalty fees received from the licensing of Frances Denney products.
17
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2005 AND 2004
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Net income for the nine-month period ended September 30, 2005 was
$9,000, compared to $419,000 for the nine months ended September 30, 2004.
In addition to a decline in net sales for the nine months ended September
30, 2005, the difference is also attributable to several unique
circumstances that occurred and were reflected in "other income" in the
first half of fiscal 2004. As indicated in previously filed reports, on
April 7, 2004, the Company and Colgate-Palmolive mutually agreed to settle
all outstanding claims and issues between them. The net result of this
settlement was a reduction of an outstanding debt obligation by
approximately $418,000. This amount is reflected in other income in the
second quarter of 2004. In addition to the Colgate-Palmolive settlement,
other income was also impacted by the settlement of another lawsuit. In
one case, the Company received $150,000 in connection with a customer's
failure to perform on a purchase order issued by them to the Company.
Income tax expense for the nine months ended September 30, 2005 was
$32,000 including state income taxes approximating $23,000, significantly
lower than the corresponding period last year as a result of lower taxable
income.
The basic and diluted earnings per share was $0.00 for the nine months
ended September 30, 2005, compared to $0.10 for the nine months ended
September 30, 2004, based on a weighted average number of shares
outstanding of 4,401,454 and 4,335,336, respectively.
Three months ended September 30, 2005:
For the three months ended September 30, 2005, net sales were
$6,568,000, compared to $7,305,000 for the three months ended September 30,
2004, a decline of $737,000. Gross profit for the three months ended
September 30, 2005 was $2,325,000, compared to gross profit of $2,995,000
achieved for the corresponding three-month period in 2004. As indicated
above, similarly to the nine-month period, the decline in net sales and
gross profit is a result of a decrease in net sales of the Professional
segment as well as a decline in net sales of the Retail segment. The gross
margin for the three months ended September 30, 2005 was 35.4% as compared
to 41.0% for the three months ended September 30, 2004, due in most part to
the change in the sales mix as discussed previously.
Selling, general and administrative expenses for the three months
ended September 30, 2005 decreased by $765,000, from $2,980,000 to
$2,215,000, when compared to the corresponding three-month period of 2004,
18
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2005 AND 2004
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
as a result of incurring certain "one-time" expenses in 2004, as discussed
above.
Interest income for the three-month period ended September 30, 2005
was $35,000, a decrease of approximately $12,000 when compared to $47,000
earned in the corresponding three-month period of 2004, as a result of less
invested cash.
Income tax expense for the three months ended September 30, 2005 was
$43,000 compared to $12,000 for the three-month period ended September 30,
2004, based upon higher earnings for the 2005 period when compared to the
corresponding 2004 period.
Basic and diluted earnings per share was $0.02 for the three months
ended September 30, 2005 and $0.01 for the three months ended September 30,
2004, based on a weighted average number of shares of 4,401,454 and
4,394,385, respectively.
LIQUIDITY & CAPITAL RESOURCES
Cash and cash equivalents increased $339,000 from December 31, 2004,
to $4,741,000 at September 30, 2005. Total cash of $8,352,000 at September
30, 2005 includes $3,610,000 of cash invested in a restricted money market
account pledged as collateral for a bank loan. All of the restricted
cash, as well as the entire balance of the loan payable, are reflected in
current assets and current liabilities due to the August 2006 maturity date
of the note and related collateral. The Company is in the process of
negotiating for the August 2006 balloon payment to be converted into a term
loan on similar terms and upon the completion of the process the collateral
and balance due will be appropriately reclassified. Accounts receivable
were $2,308,000 at September 30, 2005, an increase of $555,000 from the
$1,753,000 at December 31, 2004; inventories decreased approximately
$431,000 from $7,165,000 at December 31, 2004 to $6,734,000 at September
30, 2005, as inventory levels declined and receivables increased as a
result of historically higher sales in the third quarter.
Total current assets at September 30, 2005 were $17,914,000 compared
to $15,014,000 at December 31, 2004. Working capital increased $73,000 when
compared to December 31, 2004. The Company currently anticipates
construction of additional warehouse facilities on the Tampa, Florida
manufacturing property, estimated to cost approximately $1,000,000. The
Company continues to review construction designs and site plans, obtain the
necessary permits and expects to begin construction in the first quarter
19
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2005 AND 2004
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
of 2006. Other than the above, the Company does not anticipate any
significant capital expenditures in the near term and management believes
that there is sufficient cash on hand and working capital to satisfy
upcoming requirements.
The Company does not have any off-balance sheet financing or similar
arrangements.
NEW FINANCIAL ACCOUNTING STANDARDS
See Note 1 to the Financial Statements included in Part I, Item 1 for
a discussion of new financial accounting standards.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States of
America ("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 would
differ significantly from those estimates if different assumptions were
used or unexpected events transpire. Please see Item 7 in the Company's
Annual Report on Form 10-K for the year ended December 31, 2004 filed with
the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not participate in derivative or other financial
instruments for which fair value disclosure would be required under SFAS
No. 107. In addition, the Company does not invest in securities that would
require disclosure of market risk, nor does it have floating rate loans or
foreign currency exchange rate risks.
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES: As of the end
of the period covered by this quarterly report, an evaluation of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures was performed under the supervision and with the
participation of our management, including our principal executive officer
and principal financial officer. Based upon that evaluation, our Chief
20
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2005 AND 2004
ITEM 4. CONTROLS AND PROCEDURES (continued)
Executive Officer and Chief Financial Officer concluded that a material
weakness existed in our internal controls over financial reporting and
consequently our disclosure controls and procedures were not effective, as
of the end of the period covered by this quarterly report, in timely
alerting them as to material information relating to our Company (including
our consolidated subsidiaries) required to be included in this quarterly
report.
The material weakness in our internal controls over financial
reporting as of September 30, 2005 related to the fact that as a small
public company, we have an insufficient number of personnel with clearly
delineated and fully documented responsibilities and with the appropriate
level of accounting expertise and we have insufficient documented
procedures to identify and prepare a conclusion on matters involving
material accounting issues and to independently review conclusions as to
the application of generally accepted accounting principles. The lack of a
sufficient number of accounting personnel is not considered appropriate for
an internal control structure designed for external reporting purposes.
The principal factors management considered in determining whether a
material weakness existed in this regard was based upon management's
evaluation discussed above and advice from our previous independent
registered public accounting firm. As a result, management has determined
that a material weakness in the effectiveness of the Company's internal
controls over financial reporting existed as of September 30, 2005.
(b) CHANGES IN INTERNAL CONTROLS: No change in the Company's internal
control over financial reporting occurred during the Company's first fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting. However,
management of the Company, as well as the Audit Committee, recognizes that
current staffing levels will have to be enhanced and/or institute
arrangements with other accounting firms to act in a consulting capacity in
an effort to satisfy our reporting obligations and over-all standards of
disclosure controls and procedures.
21
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2005 AND 2004
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 3 to the Financial Statements included in Part I, Item 1 for
a discussion of legal proceedings.
Other than the above, there has been no material change in the status
of any other pending litigation since our last periodic report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 29, 2005, the Company held an Annual Meeting of Stock-
holders to elect a Board of Directors and transact such other business as
may properly come before the Meeting. The results of the election for
members of the Board were as follows:
Board Member Class Votes For Votes withheld
_________________ _____ _____________ ______________
William M. Gross I 3,420,906 195,574
Shouky A. Shaheen II 3,417,516 198,964
Curtis Carlson II 3,426,616 189,864
David Pawl II 3,609,505 6,975
Elliot Ross II 3,610,405 6,075
Richard Barone III 3,610,515 5,965
Frank F. Ferola III 3,435,015 181,465
No other business was presented for consideration at the Meeting.
ITEM 6. EXHIBITS
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer.
32.1 Certification by the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification by the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
22
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.
/s/ Frank F. Ferola
_____________________________________
Frank F. Ferola
President and Chief Executive Officer
November 21, 2005
/s/ David A. Spiegel
____________________________________
David A. Spiegel
Principal Financial and
Accounting Officer
November 21, 2005
23