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: June 30, 2003
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 files (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
Approximate number of shares of Common Stock outstanding
as of August 11, 2003:
4,410,577
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2003
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets
as of June 30, 2003 and December 31, 2002 4-5
Unaudited Condensed Consolidated Statements
of Operations for the six months ended
June 30, 2003 and 2002 6
Unaudited Condensed Consolidated Statements
of Operations for the three months ended
June 30, 2003 and 2002 7
Unaudited Condensed Consolidated Statements
of Cash Flows for the six months ended
June 30, 2003 and 2002 8-9
Notes to Unaudited Condensed Consolidated
Financial Statements 10-19
ITEM 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 19-22
ITEM 3. Quantitative and Qualitative
Disclosure About Market Risk 22
ITEM 4. Controls and Procedures 23
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 24
ITEM 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
2
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2003
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. (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.
Such factors include, but are not limited to, the following: general
economic and business conditions; competition; relative success of
operating initiatives; development and operating costs; advertising and
promotional efforts; brand awareness; the existence or absence of adverse
publicity; acceptance of any new product offerings; changing trends in
customer tastes; the success of multi-branding; changes in business
strategy or development plans; quality of management; costs and expenses
incurred by the Company in pursuing strategic alternatives; 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
newly-adopted accounting principles; changes in, or failure to comply with,
applicable law; changes in product mix and associated gross profit margins;
and other factors or events referenced in this Form 10-Q.
The Company does 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, the Company cautions 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 the ability of
the Company to achieve its objectives and may cause actual results to
differ materially from those projected, anticipated or implied herein.
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
2003 2002
____________ ____________
CURRENT ASSETS
Cash and cash equivalents $12,001,105 $ 10,785,995
Accounts receivable, net 1,684,431 1,451,299
Inventories 8,342,555 7,623,764
Income taxes receivable 60,694 65,378
Prepaid expenses and
other current assets 207,848 357,829
____________ ____________
TOTAL CURRENT ASSETS 22,296,633 20,284,265
CERTIFICATE OF DEPOSIT 6,197,500 6,752,500
PROPERTY, PLANT AND EQUIPMENT, net 1,848,327 2,004,465
GOODWILL, net 5,857,980 5,857,980
TRADEMARKS, net 8,664,809 8,664,809
DEFERRED ACQUISITION COSTS, net 344,637 391,365
OTHER ASSETS, net 3,005,410 3,699,657
____________ ____________
TOTAL ASSETS $ 48,215,296 $ 47,655,041
============ ============
See notes to unaudited condensed consolidated financial statements
4
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
2003 2002
___________ ____________
CURRENT LIABILITIES
Accounts payable and
accrued expenses $ 2,531,255 $ 2,018,236
Current portion of
long-term debt 2,313,182 1,496,147
____________ ____________
TOTAL CURRENT LIABILITIES 4,844,437 3,514,383
DEFERRED INCOME TAXES, net 941,283 655,773
LONG-TERM DEBT 4,902,500 6,395,443
____________ ____________
TOTAL LIABILITIES 10,688,220 10,565,599
____________ ____________
COMMITMENTS AND CONTINGENCIES (NOTE 3)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value 44,106 44,106
Additional paid in capital 18,417,080 18,417,080
Retained earnings 20,417,453 19,979,819
____________ ____________
38,878,639 38,441,005
LESS:
125,000 CONTINGENTLY
RETURNABLE SHARES (1,351,563) (1,351,563)
____________ ____________
TOTAL STOCKHOLDERS' EQUITY 37,527,076 37,089,442
____________ ____________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 48,215,296 $ 47,655,041
============ ============
See notes to unaudited condensed consolidated financial statements
5
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30,
______________________________
2003 2002
(As Restated,
See Note 1)
_____________ ____________
NET SALES $13,350,355 $13,159,204
COST OF GOODS SOLD 7,331,263 7,398,088
___________ ___________
GROSS PROFIT 6,019,092 5,761,116
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,965,568 4,613,581
___________ ____________
OPERATING INCOME 1,053,524 1,147,535
OTHER INCOME(EXPENSE)
Interest income 127,330 186,591
Interest expense (213,927) (269,388)
Royalty income 25,000 71,250
___________ ___________
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 991,927 1,135,988
INCOME TAX EXPENSE 377,870 404,176
___________ ___________
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 614,057 731,812
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET OF
TAX BENEFIT OF $1,662,911 - (6,761,576)
___________ ___________
NET INCOME/(LOSS) $ 614,057 $(6,029,764)
=========== ===========
BASIC AND DILUTED EARNINGS/(LOSS) PER SHARE:
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE $ .14 $ .17
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE - (1.58)
___________ ___________
BASIC AND DILUTED EARNINGS/(LOSS) PER SHARE: $ .14 $ (1.41)
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,302,076 4,285,577
=========== ===========
See notes to unaudited condensed consolidated financial statements
6
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30,
_____________________________
2003 2002
(As Restated,
See Note 1)
____________ ____________
NET SALES $ 6,401,297 $ 6,839,288
COST OF GOODS SOLD 3,407,071 3,856,915
___________ ___________
GROSS PROFIT 2,994,226 2,982,373
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,745,217 2,375,789
___________ ____________
OPERATING INCOME 249,009 606,584
OTHER INCOME(EXPENSE)
Interest income 62,112 94,425
Interest expense (111,877) (133,766)
Royalty income 12,500 45,000
___________ ___________
INCOME BEFORE INCOME TAXES 211,744 612,243
INCOME TAX EXPENSE 78,168 207,248
___________ ___________
NET INCOME $ 133,576 $ 404,995
=========== ===========
BASIC AND DILUTED
EARNINGS PER SHARE $ .03 $ .09
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,303,254 4,285,577
=========== ===========
See notes to unaudited condensed consolidated financial statements
7
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
___________________________
2003 2002
(As Restated,
See Note 1)
___________ ____________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ 614,057 $(6,029,764)
___________ ____________
Adjustments to reconcile net income/(loss)
to cash flows provided by
operating activities:
Depreciation 163,920 166,235
Amortization of intangible assets 46,728 47,931
Deferred income tax provision/(benefit) 285,510 (1,370,898)
Provision for/(recovery of)
doubtful accounts 33,389 (865)
Impairment loss on goodwill - 8,424,487
Changes in operating assets and
liabilities:
Certificate of deposit 555,000 277,500
Accounts receivable (266,521) (258,401)
Inventories (718,791) 280,783
Income taxes receivable 4,684 88,189
Prepaid expenses
and other current assets 149,981 30,351
Other assets 694,247 537,803
Accounts payable and accrued expenses 513,019 (166,803)
___________ ___________
Total adjustments 1,461,166 8,056,312
___________ ___________
Net cash flows provided
by operating activities 2,075,223 2,026,548
___________ ___________
8
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
____________________________
2003 2002
____________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant
and equipment (7,782) (19,815)
___________ ___________
Net cash flows used in
investing activities (7,782) (19,815)
___________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (675,908) (584,613)
Dividends paid (176,423) (176,423)
___________ ___________
Net cash flows used in
financing activities (852,331) (761,036)
___________ ___________
INCREASE IN CASH AND
CASH EQUIVALENTS 1,215,110 1,245,697
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 10,785,995 8,409,142
___________ ___________
CASH AND CASH EQUIVALENTS,
END OF PERIOD $12,001,105 $ 9,654,839
=========== ===========
Supplemental Disclosures of
Cash Flow Information:
Interest paid $ 187,475 $ 221,518
=========== ===========
Income taxes paid $ 55,004 $ 137,574
=========== ===========
See notes to unaudited condensed consolidated financial statements
9
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2003 AND 2002
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: In the opinion of management, all
adjustments (consisting only of normal recurring accruals) necessary for a
fair presentation of the financial position and results of operations of
The Stephan Co. and Subsidiaries (the "Company") are reflected in these
unaudited interim financial statements.
Information presented for the quarter and six-month periods ended June
30, 2002 have been restated to reflect the adoption of a change in
accounting principle, in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 142 (See NEW FINANCIAL ACCOUNTING STANDARDS else-
where in Note 1).
The results of operations for the six-month period ended June 30, 2003
is not necessarily indicative of the results to be achieved for the year
ending December 31, 2003. The December 31, 2002 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 for the year ended December 31, 2002
appearing in the Company's Annual Report on Form 10-K previously filed with
the Securities and Exchange Commission.
Certain amounts previously reported in the 2002 financial statements
and notes thereto were reclassified to conform to the 2003 presentation.
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. SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information", requires the reporting
of segment information using a "management approach" as it relates to the
operating segments of a business. The Company manages its business into
three segments: (1) professional hair care products and distribution; (2)
retail personal care products; and (3) manufacturing.
USE OF ESTIMATES: The preparation of condensed 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 the disclosure of
contingent assets and liabilities as of the date of the condensed
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates and assumptions.
10
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2003 AND 2002
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include
cash, money market investment accounts and short-term municipal bonds
having maturities of 90 days or less. 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 June 30, 2003 and December 31, 2002 were approximately $11,196,000
and $10,121,000, respectively.
INVENTORIES: Inventories are stated at the lower of cost
(determined on a first-in, first-out basis) or market, and are as follows:
June 30, December 31,
2003 2002
____________ ____________
Raw materials $ 2,216,660 $ 2,162,273
Packaging and components 3,129,086 3,100,917
Work in progress 343,134 328,976
Finished goods 5,505,510 5,579,290
____________ ____________
11,194,390 11,171,456
Less: Amount included in
other assets, net (2,851,835) (3,547,692)
____________ ____________
$ 8,342,555 $ 7,623,764
============ ============
Raw materials principally 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 are raw materials, packaging and
components inventory not anticipated to be utilized in less than one year.
BASIC AND DILUTED EARNINGS PER SHARE: Basic and diluted earnings
per share are computed by dividing net income/(loss) by the weighted
average number of shares of common stock outstanding. The weighted average
number of shares outstanding for the six-month period ended June 30, 2003
and 2002, were 4,302,076 and 4,285,577, respectively. The weighted average
number of shares outstanding for the three-month period ended June 30, 2003
and 2002, were 4,303,254 and 4,285,577, respectively. For the six months
ended June 30, 2003 and 2002, the Company had 669,682 and 693,648
outstanding stock options, respectively, a significant portion of which
11
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2003 AND 2002
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 amount for the six and three months ended June 30, 2003 and 2002.
STOCK-BASED COMPENSATION: The Company adopted the disclosure
requirements of 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. 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/(loss)
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):
Six Months Three Months
Ended June 30, Ended June 30,
_________________ _______________
2003 2002 2003 2002
_______ _______ _______ _______
Net income/(loss), as reported $ 614 $(6,030) $ 134 $ 405
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects 83 156 41 78
________ ________ _______ _______
Pro forma net income/(loss) $ 531 $(6,186) $ 93 $ 327
======== ======== ======= =======
Net income/(loss) per share:
As reported $ .14 $ (1.41) $ .03 $ .09
Pro forma $ .12 $ (1.44) $ .02 $ .08
12
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2003 AND 2002
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
NEW FINANCIAL ACCOUNTING STANDARDS: In June 2001, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets."
These standards made changes to the accounting for business combinations,
goodwill and intangible assets. SFAS No. 142 provides that goodwill and
other intangible assets with indefinite lives will not be amortized, but
will be tested for impairment at least annually. The Company adopted SFAS
No. 142 on January 1, 2002. SFAS No. 142 requires that goodwill be tested
for impairment at the reporting unit level upon adoption and at least
annually thereafter. The initial step requires that the Company determine
the fair value of each reporting unit and compare it to the carrying value,
including goodwill, of the reporting unit. If the fair value exceeds the
carrying value, no impairment loss would be recognized. However, if the
carrying value of the reporting unit exceeds its fair value, the goodwill
of the reporting unit may be impaired. The amount, if any, of the
impairment would then be measured in the second step. As a result of the
impairment review mandated by SFAS No. 142, the Company determined that the
carrying value of certain goodwill and other intangible assets with
indefinite lives was impaired, decreasing the carrying value of goodwill
and other such intangible assets by approximately $8,424,000 ($6,762,000,
net of taxes), effective in the quarter ended March 31, 2002. The above
impairment charge impacted several different subsidiaries and divisions.
Based upon information available to the Company, in general, goodwill and
trademark valuations were performed using present value techniques
involving estimates of future cash flows.
Amortization expense for deferred acquisition costs recorded as of
December 31, 2002 is anticipated to be as follows: 2003: $93,000; 2004:
$84,000; 2005: $82,000; 2006: $66,000; 2007: $66,000.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others," an interpretation
of SFAS Nos. 5, 57 and 107 and rescission of FASB Interpretation No. 34.
The interpretation requires certain disclosures to be made by a guarantor
about its obligations under certain guarantees that it has issued. The
Company does not have existing circumstances that would make this
Interpretation relevant.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities," clarifying certain
implementation guidelines and incorporating clarifications of the
definition of a derivative. The Company does not have existing
circumstances that would make this Statement relevant.
13
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 3, 2003 AND 2002
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
This standard establishes guidelines to classify a financial instrument
more appropriately as a liability (or an asset in certain circumstances),
rather than as equity. This statement is part of the FASB's liabilities
and equities project relative to financial instruments. The Company does
not have existing circumstances that would make this Statement relevant.
In January 2003, the FASB issued FIN No. 46, "Consolidation of
Variable Interest Entities." FIN No. 46 provides accounting guidance for
consolidating of off-balance sheet entities with certain characteristics
(variable interest entities). The consolidation requirements apply to
variable interest entities created after January 31, 2003 and to variable
interest entities in which the Company maintains an interest after June 30,
2003. The Company does not have existing circumstances that would make
this Statement relevant.
NOTE 2: SEGMENT INFORMATION
In accordance with the guidelines established by SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related 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 and Cumulative Effect of Change in
Accounting Principle as shown below reflects an allocation of corporate
overhead expenses incurred by the Manufacturing segment. The following
tables, in thousands, summarize Net Sales and Income Before Income Taxes
and Cumulative Effect of Change in Accounting Principle by reportable
segment (in thousands):
14
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2003 AND 2002
NOTE 2: SEGMENT INFORMATION (continued)
NET SALES NET SALES
_______________ _______________
Six Months Three Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
_______________ _______________
Professional $ 8,632 $ 8,844 $ 4,067 $ 4,390
Retail 4,510 4,064 2,259 2,362
Manufacturing 3,660 3,858 1,879 2,119
_______ _______ _______ _______
Total 16,802 16,766 8,205 8,871
Intercompany
Manufacturing (3,452) (3,607) (1,804) (2,032)
_______ _______ _______ _______
Consolidated $13,350 $13,159 $ 6,401 $ 6,839
======= ======= ======= =======
INCOME/(LOSS) BEFORE
INCOME TAXES AND
CUMULATIVE EFFECT INCOME/(LOSS)
OF CHANGE IN BEFORE
ACCOUNTING PRINCIPLE INCOME TAXES
____________________ _______________
Six Months Three Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
_______________ _______________
Professional $ 624 $ 476 $ 255 $ 278
Retail 551 718 99 413
Manufacturing (183) (58) (142) (79)
_______ _______ ______ ______
Consolidated $ 992 $ 1,136 $ 212 $ 612
======= ======= ====== ======
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 such matters, at June 30, 2003,
would likely, if adversely determined, have a material adverse effect on
the Company's financial position, results of operations or cash flows.
15
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2003 AND 2002
NOTE 3: COMMITMENTS AND CONTINGENCIES (continued)
The United States Court of Appeals for the Ninth Circuit entered an
order on April 29, 2002 that, among other things, reversed the judgment of
the United States District Court granting summary judgment in favor of New
Image Laboratories, Inc. ("New Image") against the Company on New Image's
contract claim for a price adjustment and on New Image's claim of breach of
the implied covenant of good faith and fair dealing. In addition, the
Ninth Circuit's opinion affirmed the lower court's ruling that on the
present record New Image is not entitled to (i) damages equal to the
diminution in the value of the Company's common stock price between the
scheduled and actual disbursement dates or (ii) any attorney's fees. As a
consequence of the Ninth Circuit's decision, the judgment granting New
Image all 125,000 shares of the Company's common stock being held in escrow
has been reversed and the case has been remanded back to the United States
District Court for further proceedings. On May 28, 2002, New Image filed a
Motion for Rehearing with the Ninth Circuit Court of Appeals and on June
26, 2002, the Court denied the petition for rehearing. A pretrial hearing
scheduled for June 16, 2003 in connection with the remaining claims of the
parties has been indefinitely postponed while settlement negotiations
continue.
On November 1, 2001, a private label customer filed a lawsuit against
the Company alleging causes of action for breach of contract, declaratory
judgment, and trademark infringement. The Company denied the allegations
and has counter-sued the customer. The counterclaim seeks unspecified
compensatory damages, interest, attorneys fees, costs and other relief on
the breach of contract and anticipatory breach claims and, in excess of
$400,000 on an account stated claim. On April 16, 2003, the District Court
of Appeals for the 4th District of Florida reversed a ruling by the lower
trial court granting the customer a temporary injunction. The customer has
moved for a rehearing of the issue. At this time, the Company is unable to
predict the outcome of this matter.
In November 2001, the Company filed a claim with the U.S. Department
of Transportation ("DOT") in the 13th Judicial Circuit Court of
Hillsborough County, Florida, in connection with the DOT's widening of
Interstate Highway 4, which the Company alleged will result in the loss of
an adjacent rental facility utilized by one of the Company's subsidiaries.
At a hearing held on August 2, 2002, the Company was successful in
asserting a position that would allow for damages to be paid to the Company
by the DOT. Court ordered mediation held in May 2003 has not been
finalized and it is still anticipated that the Company could receive a
material damage award. After consultation with legal counsel at this time,
the Company is presently unable to accurately predict the amount or type of
recovery that will result therefrom.
16
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2003 AND 2002
NOTE 3: COMMITMENTS AND CONTINGENCIES (continued)
In November 2002, a stockholder filed a lawsuit in the Circuit Court
for the 17th Circuit of Florida in and for Broward County, styled Joan
Rosoff ("Plaintiff") v. Frank F. Ferola, Shouky Shaheen, Leonard A.
Genovese, Curtis Carlson, John DePinto, Thomas M. D'Ambrosio and The
Stephan Co., Case Number 0222253, against the Company alleging certain
breaches of fiduciary duties and responsibilities. On July 15, 2003, the
Plaintiff filed a notice of voluntary dismissal without prejudice.
Other than the above, there has been no material change in the status
of any other pending litigation since the Company's last filing of its
Annual Report on Form 10-K with the Securities and Exchange Commission for
the year ended December 31, 2002.
As previously reported, on April 16, 2002, the Company announced that
the previously-formed Special Committee (consisting of two outside
directors) had accepted a bid by a management-led group to purchase all of
the shares of common stock of the Company not already owned by such group.
This initial bid was to purchase all of the Company's common stock at $4
per share in cash, which offer was later revised to $4.50 per share with
$3.25 to be paid in cash, and $1.25 to be paid by a 42-month, unsecured
debt instrument providing for interest at an annual rate of 4 1/2%. To
fund its payment obligations thereunder, the management group, utilizing
its best efforts, intends to establish a separate payment fund in an amount
equal to 50% of the aggregate principal and interest amount due under the
debt instrument. The management group bid is subject to various conditions,
including obtaining adequate financing. The management group is currently
negotiating with lenders to obtain financing necessary for the transaction.
There is no assurance that the group will be able to obtain such financing
on acceptable terms or that the transaction will be consummated.
In late 2001 and during 2002 the Special Committee received from
Curtis Rudolph, a shareholder of the Company, an indication of his interest
in acquiring the Company; however, no offer was forthcoming. In November
2002, Mr. Rudolph initiated an action in Florida state court (Broward
County, Florida) seeking to obtain a review of certain "books and records"
of the Company to which he claimed he was entitled as a shareholder of the
Company. The Company had previously denied him access to those books and
records due to his unwillingness to sign a non-disclosure agreement
relating to the Company's non-public information in the standard form
required of other potential bidders for the Company. In January 2003,
pursuant to a settlement agreement with the Company, Mr. Rudolph agreed to
execute the non-disclosure agreement.
By letter dated January 13, 2003, Mr. Rudolph reiterated his interest
in making a proposal to acquire the Company. On or about February 14,
17
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2003 AND 2002
NOTE 3: COMMITMENTS AND CONTINGENCIES (continued)
2003, Mr. Rudolph submitted an unexecuted proposal to acquire substantially
all of the assets and assume certain liabilities of the Company. The
Special Committee rejected this proposal as it was unexecuted, contained
certain unacceptable terms, was subject to unacceptable conditions, and was
structured as an asset purchase rather than a stock purchase. In
particular, the asset purchase structure presented substantial negative tax
consequences to the Company and its shareholders and was deemed
impractical. Under the circumstances, the Special Committee determined Mr.
Rudolph's proposal to not be in the best interests of the Company's
shareholders. The Board of Directors, through its Special Committee, has
continued to negotiate with Mr. Rudolph, but no further offer has been
forthcoming.
On April 30, 2003, the Board of Directors approved a definitive merger
agreement (the "Merger Agreement") pursuant to which the Company will be
acquired by Gunhill Enterprises, Inc., a wholly-owned subsidiary of
Eastchester Enterprises, Inc. Eastchester Enterprises, Inc. is owned by
Frank F. Ferola, Thomas M. D'Ambrosio, John DePinto and Shouky A. Shaheen
(all of whom are current Board members) together with their affiliates (the
"Acquisition Group"). The Company entered into the Agreement following
approval by its Board of Directors based in part upon the unanimous
recommendation of the Special Committee comprised of non-management and
disinterested directors of the Company's Board of Directors. The Special
Committee has received an opinion from SunTrust Robinson Humphrey that the
merger consideration to be paid pursuant to the Merger Agreement is fair
from a financial point of view to the stockholders other than the
Acquisition Group.
If prior to the closing of the transactions contemplated by the Merger
Agreement, the Special Committee concludes that its failure to provide
information to, or engage in discussions with, third parties who are
interested in acquiring the Company, would be inconsistent with its
fiduciary duties to Stephan's stockholders, then the Special Committee may
thereafter continue to provide information to, and engage in discussions
and negotiations with, such interested parties. Under specified
circumstances, Stephan has the right to terminate the Agreement and to
enter into an agreement with a party proposing a competing transaction
which is deemed superior to the transaction proposed by the Acquisition
Group.
Completion of the merger is subject to customary closing conditions,
including stockholder approval, and the Agreement does include a financing
contingency. Company stockholder approval will be solicited by means of a
proxy statement, which will be mailed by Stephan to stockholders upon
completion of the required Securities and Exchange Commission filing and
review process.
18
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2003 AND 2002
NOTE 3: COMMITMENTS AND CONTINGENCIES (continued)
Independent legal counsel and investment banking advisors have been
retained to advise the Special Committee in connection with the
transaction. After incurring approximately $450,000 of expenses through
June 30, 2003, it is estimated that the remaining costs associated with
this process will be in excess of $250,000.
As a result of the length of time for the going private transaction to
be consummated, the Company has not submitted any matters to a vote of its
security holders since the Company's September 1, 2000 Annual Meeting. In
accordance with the rules and regulations of the American Stock Exchange
(AMEX), the Company was required to promptly notify its stockholders and
AMEX, in writing, indicating the reasons for the failure to have a meeting
and to use good faith efforts to ensure that an annual meeting is held as
soon as reasonably practicable. In addition, the current composition of
the Board of Directors and the current composition of the Audit Committee
are in violation of AMEX rules. The continuing non-compliance with these
AMEX rules could subject the Company to civil penalties, in addition to the
possibility that the stock of the Company could be removed from listing.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the six months ended June 30, 2003, net sales were $13,350,000,
compared to $13,159,000 achieved in the corresponding six months of 2002.
The overall increase in sales was principally due to increased sales of
Quinsana Medicated Talc to the military as a result of the conflict in the
Middle East. As indicated in previous filings, we anticipated that this
high level of talc sales would decline as the number of troops in the
region stabilized and the war with Iraq ended. Talc sales to the military
through April 2003 was over $1,500,000, or slightly over 11% of total sales
for the six months ended June 30, 2003. Since April 2003, sales of
Quinsana Medicated Talc have returned to normal levels. Sales of other
Retail products, as well as sales of the Professional and Manufacturing
segments, declined for the six-month period ended June 30, 2003, when
compared to the sales achieved for the corresponding six-month period ended
June 30, 2002.
Gross profit for the six months ended June 30, 2003, was $6,019,000
compared to gross profit of $5,761,000 achieved for the corresponding six-
month period in 2002. Cost of sales for the six months ended June 30, 2003
was $7,331,000, when compared to the cost of sales of $7,398,000 for the
six months ended June 30, 2002. Gross profit increased overall principally
due to a higher sales volume and a change in the sales mix, with an overall
19
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2003 AND 2002
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
increase in Retail sales as previously indicated. As a result, there was
a small increase in the gross profit margin, to 45.1% for the six months
ended June 30, 2003 from 43.8% for the six months ended June 30, 2002.
Selling, general and administrative expenses for the six months ended
June 30, 2003 increased by $352,000, to $4,966,000, when compared to the
corresponding 2002 six-month period total of $4,614,000. This increase was
due, in large part, to expenses incurred in connection with the "going-
private" transaction, and included a payment to SunTrust Robinson Humphrey
for its fairness opinion. The Company continues its efforts to control
selling, general and administrative expenses even with increased spending
as a result of the Company's decision to evaluate strategic alternatives to
enhance shareholder value, as discussed in Note 3 of the unaudited
condensed consolidated financial statements; however, no assurance can be
given that it can continue to keep reducing these expenses.
Interest expense for the six months ended June 30, 2003 was $214,000,
a decrease of approximately $55,000 from the $269,000 incurred in the
corresponding period of 2002, as a result of lower outstanding indebtedness
and lower interest rates. Interest income of $127,000 for the six months
ended June 30, 2003 was lower than the $187,000 earned in the corresponding
six months of 2002. Although the Company had more cash invested in 2003,
it received lower interest rates on its investments as overall interest
rates continue to decline. Other income is comprised of royalty fees
received from the licensing of Frances Denney products.
As a result of reduced income for the six-month period ended June 30,
2003, the provision for income taxes decreased $26,000, to $378,000 from
the $404,000 incurred for the corresponding period in 2002. Income before
the cumulative effect of a change in accounting principle for the six
months ended June 30, 2003 was $614,000, compared to $732,000 achieved for
the six months ended June 30, 2002. Basic and diluted earnings per share,
before the cumulative effect of a change in accounting principle, were
$0.14 for the six months ended June 30, 2003, compared to $0.17 for the six
months ended June 30, 2002, based on a weighted average number of shares of
4,301,895 and 4,285,577 for the six months ended June 30, 2003 and 2002,
respectively.
For the three months ended June 30, 2003, net sales were $6,401,000,
compared to $6,839,000 for the three months ended June 30, 2002, a decline
of $438,000. Sales of all segments declined, with a majority of this
decline in the professional segment. However, gross profit for the three
months ended June 30, 2003 was $2,994,000, compared to gross profit of
20
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2003 AND 2002
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
$2,982,000 achieved for the corresponding three-month period in 2002 due to
the favorable sales mix. The gross profit margin increased to 46.8% for
the three months ended June 30, 2003, from 43.6% for the corresponding
period in 2002 as discussed above.
Selling, general and administrative expenses for the three months
ended June 30, 2003 increased by $369,000, from $2,376,000 to $2,745,000,
when compared to the corresponding three-month period of 2002, largely as a
result of the "going-private" expenses discussed previously.
Interest income for the three-month period ended June 30, 2003 was
$62,000, a decrease of approximately $32,000 when compared to $94,000
earned in the corresponding three-month period of 2002, as a direct result
of significantly lower interest rates. For the same reason, interest
expense for the three-month period ended June 30, 2003 was $112,000, a
decrease of $22,000 from the $134,000 paid in the corresponding three-month
period of 2002. Other income is comprised of a $12,500 quarterly royalty
fee from the licensing of Frances Denney products.
Income taxes for the three months ended June 30, 2003 was $78,000
compared to $207,000, a decrease of $129,000 for the corresponding period
in 2002. Net income of $134,000 for the three months ended June 30, 2003,
declined from $405,000 achieved in the three months ended June 30, 2002,
largely as a result of a decrease in net sales and an increase in general
and administrative expenses as discussed above. Basic and diluted earnings
per share were $0.03 for the three months ended June 30, 2003 and $0.09 for
the three months ended June 30, 2002.
LIQUIDITY & CAPITAL RESOURCES
Cash and cash equivalents increased $1,215,000 from December 31, 2002,
to $12,001,000 at June 30, 2003. Total cash of $18,199,000 at June 30,
2003 includes $6,198,000 of cash invested in a certificate of deposit
pledged as collateral for a bank loan. Accounts receivable were $1,684,000
at June 30, 2003, an increase of $233,000 from the $1,451,000 at December
31, 2002; inventories increased approximately $719,000 from $7,624,000 at
December 31, 2002 to $8,343,000 at June 30, 2003, principally as a result
of increased purchases and manufacturing in the latter part of the second
quarter of 2003 in anticipation of third quarter sales.
Total current assets at June 30, 2003 were $22,297,000 compared to
$20,284,000 at December 31, 2002. Working capital increased $682,000 when
compared to December 31, 2002, due in large part to the increase in total
21
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2003 AND 2002
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
cash and inventory referred to 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, including any funds that may be needed in connection
with the going-private transaction.
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 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, 2002 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.
22
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2003 AND 2002
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES: Based upon an
evaluation of the Company's disclosure controls and procedures, which was
completed as of June 30, 2003 (the "Evaluation Date"), the Company's
principal executive officer and chief financial officer have concluded that
the disclosure controls and procedures in place were effective as of the
Evaluation Date.
(b) CHANGES IN INTERNAL CONTROLS: To the best of the Company's
knowledge and belief, there have been no significant changes in the
Company's internal controls or in other factors that could significantly
affect these controls subsequent to the Evaluation Date.
23
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2003 AND 2002
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31.1 Certification by the Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification by the Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
Exhibit 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.
Exhibit 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.
(b) Reports on Form 8-K during the quarter ended June 30, 2003:
Current report on Form 8-K filed on May 8, 2003, in connection with a
definitive merger agreement signed on April 30, 2003, between The
Stephan Co., Eastchester Enterprises, Inc. and Gunhill Enterprises,
Inc.
24
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
August 13, 2003
/s/ David A. Spiegel
____________________________________
David A. Spiegel
Chief Financial Officer
August 13, 2003
25