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, 2002
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
Approximate number of shares of Common Stock outstanding
as of August 9, 2002:
4,410,577
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2002
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets
as of June 30, 2002 and December 31, 2001 4-5
Unaudited Condensed Consolidated Statements
of Operations for the six months ended
June 30, 2002 and 2001 6
Unaudited Condensed Consolidated Statements
of Operations for the three months ended
June 30, 2002 and 2001 7
Unaudited Condensed Consolidated Statements
of Cash Flows for the six months ended
June 30, 2002 and 2001 8-10
Notes to Unaudited Condensed Consolidated
Financial Statements 11-17
ITEM 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 18-23
ITEM 3. Quantitative and Qualitative
Disclosure About Market Risk 23
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 24-25
ITEM 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
2
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2002
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, performance, condition, 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; success of operating
initiatives; development and operating costs; advertising and promotional
efforts; brand awareness; the existence or absence of adverse publicity;
acceptance of new product offerings; changing trends in customer tastes;
the success of multi-branding; changes in business strategy or development
plans; quality of management; 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, 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 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
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
2002 2001
____________ ____________
CURRENT ASSETS
Cash and cash equivalents $ 9,654,839 $ 8,409,142
Accounts receivable, net 2,068,094 1,808,828
Inventories 9,005,512 9,286,295
Income taxes receivable 257,031 345,220
Prepaid expenses and
other current assets 236,109 266,460
____________ ____________
TOTAL CURRENT ASSETS 21,221,585 20,115,945
CERTIFICATE OF DEPOSIT 7,307,500 7,585,000
PROPERTY, PLANT AND EQUIPMENT, net 2,161,583 2,308,003
PATENTS, TRADEMARKS AND OTHER
INTANGIBLE ASSETS, net 14,350,918 14,766,827
GOODWILL, net 8,665,278 8,665,278
OTHER ASSETS, net 3,083,300 3,621,103
____________ ____________
TOTAL ASSETS $ 56,790,164 $ 57,062,156
============ ============
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,
2002 2001
___________ ____________
CURRENT LIABILITIES
Accounts payable and
accrued expenses $ 2,393,248 $ 2,560,051
Current portion of
long-term debt 1,747,012 1,507,256
____________ ____________
TOTAL CURRENT LIABILITIES 4,140,260 4,067,307
DEFERRED INCOME TAXES, net 1,695,018 1,535,285
LONG-TERM DEBT 6,934,001 7,758,370
____________ ____________
TOTAL LIABILITIES 12,769,279 13,360,962
____________ ____________
COMMITMENTS AND CONTINGENCIES (NOTE 4)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value 44,106 44,106
Additional paid in capital 18,417,080 18,417,080
Retained earnings 26,911,262 26,591,571
____________ ____________
45,372,448 45,052,757
LESS:
125,000 CONTINGENTLY
RETURNABLE SHARES (1,351,563) (1,351,563)
____________ ____________
TOTAL STOCKHOLDERS' EQUITY 44,020,885 43,701,194
____________ ____________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 56,790,164 $ 57,062,156
============ ============
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,
_____________________________
2002 2001
____________ ____________
NET SALES $13,159,204 $15,413,587
COST OF GOODS SOLD 7,398,088 8,842,280
___________ ___________
GROSS PROFIT 5,761,116 6,571,307
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,980,633 5,417,929
___________ ____________
OPERATING INCOME 780,483 1,153,378
OTHER INCOME(EXPENSE)
Interest income 186,591 324,983
Interest expense (269,388) (405,620)
Royalty income 71,250 87,500
___________ ___________
INCOME BEFORE INCOME TAXES 768,936 1,160,241
INCOME TAX EXPENSE 272,822 457,129
___________ ___________
NET INCOME $ 496,114 $ 703,112
=========== ===========
BASIC AND DILUTED
EARNINGS PER SHARE $ .12 $ .16
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,285,577 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,
_____________________________
2002 2001
____________ ____________
NET SALES $ 6,839,288 $ 7,833,219
COST OF GOODS SOLD 3,856,915 4,619,800
___________ ___________
GROSS PROFIT 2,982,373 3,213,419
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,559,316 2,688,546
___________ ____________
OPERATING INCOME 423,057 524,873
OTHER INCOME(EXPENSE)
Interest income 94,425 148,666
Interest expense (133,766) (200,605)
Royalty income 45,000 43,750
___________ ___________
INCOME BEFORE INCOME TAXES 428,716 516,684
INCOME TAX EXPENSE 144,909 200,976
___________ ___________
NET INCOME $ 283,807 $ 315,708
=========== ===========
BASIC AND DILUTED
EARNINGS PER SHARE $ .07 $ .07
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,285,577 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,
___________________________
2002 2001
___________ ____________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 496,114 $ 703,112
___________ ____________
Adjustments to reconcile net income to
cash flows provided by/(used in)
operating activities:
Depreciation 166,235 193,079
Amortization of intangible assets 415,909 590,137
Amortization of other assets - 68,992
Deferred income taxes 159,733 123,588
Provision for doubtful accounts (865) 14,178
Changes in operating assets and
liabilities:
Certificate of deposit, collateralizing
refinanced loans 277,500 (8,140,000)
Accounts receivable (258,401) 160,536
Inventories 280,783 257,699
Income taxes receivable 88,189 265,690
Prepaid expenses
and other current assets 30,351 (12,687)
Other assets 537,803 (33,573)
Accounts payable and accrued expenses (166,803) (397,320)
___________ ___________
Total adjustments 1,530,434 (6,909,681)
___________ ___________
Net cash flows provided by/
(used in) operating activities 2,026,548 (6,206,569)
___________ ___________
8
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
____________________________
2002 2001
____________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant
and equipment (19,815) (66,557)
Purchase of intangible assets - (49,069)
___________ ___________
Net cash flows used in
investing activities (19,815) (115,626)
___________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (584,613) (592,768)
Dividends paid (176,423) (176,423)
___________ ___________
Net cash flows used in
financing activities (761,036) (769,191)
___________ ___________
INCREASE/(DECREASE) IN
CASH AND CASH EQUIVALENTS 1,245,697 (7,091,386)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 8,409,142 13,559,268
___________ ___________
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 9,654,839 $ 6,467,882
=========== ===========
See notes to unaudited condensed consolidated financial statements
9
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
Supplemental Disclosures of Cash Flow Information:
2002 2001
________ ________
Interest paid $ 221,518 $ 333,890
=========== ===========
Income taxes paid $ 137,574 $ -
=========== ===========
For the six months ended June 30, 2001, 16,320 shares of treasury
stock, at an aggregate cost of $60,424, were retired.
See notes to unaudited condensed consolidated financial statements
10
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2002 AND 2001
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 Company's financial position and results of operations
are reflected in these unaudited interim financial statements.
The results of operations for the six-month period ended June 30, 2002
are not necessarily indicative of the results to be achieved for the year
ending December 31, 2002. The December 31, 2001 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, 2001
appearing in the Company's Form 10-K 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. Statement of Financial Accounting
Standards ("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 has allocated 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.
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, 2002 and December 31, 2001 were approximately $8,851,000 and
$7,257,000, respectively.
11
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2002 AND 2001
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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,
2002 2001
____________ ____________
Raw materials $ 2,207,104 $ 3,180,670
Packaging and components 3,069,582 3,448,541
Work in progress 573,657 341,507
Finished goods 5,805,339 5,502,599
____________ ____________
11,655,682 12,473,317
Less: Amount included in
other assets (2,650,170) (3,187,022)
____________ ____________
$ 9,005,512 $ 9,286,295
============ ============
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 by the weighted average
number of shares of common stock outstanding. The weighted average number
of shares outstanding was 4,285,577 for each of the three and six-month
periods ended June 30, 2002 and 2001. For the six months ended June 30,
2002 and 2001, the Company had 693,648 and 809,524 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 three and
six months ended June 30, 2002.
NEW FINANCIAL ACCOUNTING STANDARDS: In June 2001, 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. 141
requires all business combinations entered into subsequent to June 30, 2001
12
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2002 AND 2001
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
to be accounted for using the purchase method of accounting. 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.
SFAS No. 142 is effective for years beginning after December 15, 2001.
Goodwill and intangible assets acquired subsequent to June 30, 2001 are
immediately subject to the provisions of SFAS No. 142. 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.
The Company has completed step one of the impairment test, which
indicated that the carrying values of certain reporting units may have
exceeded their estimated fair values, as determined utilizing various
valuation techniques. The Company is in the process of completing step two
of the impairment test, which will be completed by December 31, 2002 in
accordance with SFAS No. 142.
Amortization of goodwill ceased upon adoption on January 1, 2002. The
table below reflects the impact of the implementation of SFAS No. 142 for
the six months and three months ended June 30, 2002 and 2001:
Six Months Three Months
Ended June 30, Ended June 30,
(in thousands) (in thousands)
______________ ______________
2002 2001 2002 2001
______ ______ ______ ______
Net income (as reported) $ 496 $ 703 $ 284 $ 316
After tax goodwill amortization - 120 - 62
______ ______ ______ ______
Adjusted net income $ 496 $ 823 $ 284 $ 378
====== ====== ====== ======
Net income per share
(basic and diluted) $ .12 $ .16 $ .07 $ .07
After tax goodwill amortization - .03 - .02
______ ______ ______ ______
Adjusted basic and diluted
earnings per share $ .12 $ .19 $ .07 $ .09
====== ====== ====== ======
13
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2002 AND 2001
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Amortization expense of other intangibles for the six months ended
June 30, 2002 was $416,000. Amortization expense for other intangible
assets recorded as of December 31, 2001, for the years ended December 31,
2002 through 2007 is anticipated to be as follows: 2002: $827,000; 2003:
$728,000; 2004: $624,000; 2005: $624,000; 2006: $615,000; 2007: $603,000.
In August 2001, FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which supersedes, but does
not replace, SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets to be Disposed Of", as well as other earlier related pronouncements,
either in whole or in part. SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and
interim periods within those fiscal years. The adoption of this statement
has not had a significant effect on the Company's financial position,
results of operations or cash flows.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB
Statements 4, 44 and 64, Amendment to FASB Statement 13, and Technical
Corrections". One of the major changes of this statement is to change the
accounting for the classification of gains and losses from the
extinguishment of debt. Upon adoption, the Company will follow APB 30,
Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions in determining whether such
extinguishment of debt may be classified as extraordinary. The provisions
of this statement related to the rescission of FASB Statement 4 shall be
applied in fiscal years beginning after May 15, 2002 with early application
encouraged. The Company is currently evaluating the impact of this
Statement.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This Statement requires
recording costs associated with exit or disposal activities at their fair
values when a liability has been incurred. Under previous guidance, certain
exit costs were accrued upon management's commitment to an exit plan, which
is generally before an actual liability has been incurred. Adoption of this
Statement is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company has not yet completed its
evaluation of the impact of adopting this Statement.
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
14
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2002 AND 2001
NOTE 2: SEGMENT INFORMATION (continued)
Products ("Retail") and "Manufacturing". The Professional segment
generally has a customer base consisting 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 also 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 incurred by the Manufacturing segment. The
following tables, in thousands, summarize Net Sales and Income Before
Income Taxes by reportable segment:
NET SALES NET SALES
_______________ _______________
Six Months Three Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
_______________ _______________
Professional $ 8,844 $ 9,665 $ 4,390 $ 4,718
Retail 4,064 3,988 2,362 2,360
Manufacturing 3,858 5,444 2,119 2,799
_______ _______ _______ _______
Total 16,766 19,097 8,871 9,877
Intercompany
Manufacturing (3,607) (3,683) (2,032) (2,044)
_______ _______ _______ _______
Consolidated $13,159 $15,414 $ 6,839 $ 7,833
======= ======= ======= =======
INCOME/(LOSS) INCOME/(LOSS)
BEFORE INCOME TAXES BEFORE INCOME TAXES
_______________ _______________
Six Months Three Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
_______________ _______________
Professional $ 419 $ 538 $ 250 $ 300
Retail 408 413 258 157
Manufacturing (58) 209 (79) 60
_______ _______ ______ _______
Consolidated $ 769 $ 1,160 $ 429 $ 517
======= ======= ====== =======
15
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2002 AND 2001
NOTE 3: LONG TERM DEBT
On August 9, 2001, the outstanding debt payable to a bank was
refinanced with another bank. The loan had the same payment terms as the
previous loan, and is collateralized by certificates of deposit in an
amount equal to the loan ($8,140,000 at August 9, 2001). The new loan
bears an interest rate of 50 basis points (currently 4.03%) above the
certificate of deposit rate for the term of the loan, which is 3.53%, and
resets annually. Since the refinancing was consummated before the issuance
of the Form 10-Q for the six months ended June 30, 2001, the refinancing
was reflected in the June 30, 2001 financial statements. The certificate
of deposit that collateralizes the long-term portion of the note payable
has been classified as a non-current asset. The new loan does not have any
financial covenants that the Company has to meet.
NOTE 4: 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, 2002,
would likely, if adversely determined, have a material adverse effect on
the Company's financial position, results of operations or cash flows.
On March 5, 2001, the Company announced that its Board of Directors
had formed a two-person, special committee to explore various strategic
alternatives to enhance shareholder value. Four members of the Company's
management and directors, exclusive of the committee members, formed a
group to purchase all of the Company's outstanding capital stock in a going
private transaction. Independent legal counsel and investment banking
advisors were retained to advise and assist in the transaction. After
incurring approximately $175,000 of expenses through June 30, 2002, it is
estimated that the remaining costs associated with this process will be in
excess of $450,000. On April 16, 2002, the Company announced that the
special committee of its Board of Directors had, after an auction conducted
by Robinson Humphrey Company LLC, its investment banker, accepted a bid by
the four members of the Company's management and directors. Such bid was to
purchase all of the Company's common stock at $4 per share in cash. No
other viable bids were received by the committee for the entire Company.
The management bid is subject to various conditions, including obtaining
adequate financing. The Company's management is currently in the process of
negotiating with lenders to obtain financing necessary for the transaction.
There can be no assurance that the bidder will be able to obtain such
financing on acceptable terms or that the transaction will be consummated.
On filed on April 29, 2002, the United States Court of Appeals for the
Ninth Circuit, entered an order, among other things, reversing 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
16
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2002 AND 2001
NOTE 4: COMMITMENTS AND CONTINGENCIES (continued)
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) damage 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.
Old 97 Company ("Old 97") commenced an action against Todd Christopher
International, Inc. d/b/a Vogue International ("Vogue") in the Hillsborough
County, Florida Circuit Court and Vogue counterclaimed against Old 97. The
parties reached a settlement pursuant to which, among other things, the
parties have mutually released each other from prior causes of action, have
agreed to the disposition of certain old Vogue inventory held by Old 97 and
have agreed to have Old 97 manufacture private label goods for Vogue if the
parties can reach an understanding on a mutually agreeable pricing
structure. Any cost associated with the disposition of the inventory is
not considered to be material.
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 the account stated claim. At a mediation hearing held in May
2002, the Company rejected a settlement offer from the private label
customer due to the insufficiency of the offer. At this time, the Company
is still unable to predict the outcome of this matter.
In November 2001, the Company filed a claim with the Department of
Transportation ("DOT") in connection with the DOT's widening of Interstate
Highway 4, which the Company alleges will result in the loss of an adjacent
rental facility utilized by one of the Company's subsidiaries. At a
hearing 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.
The case will be scheduled for mediation where it is 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 of recovery that will result therefrom.
Other than the foregoing, there has been no change in the status of
other pending litigation since last reported in the consolidated financial
statements for the year ended December 31, 2001.
17
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2002 AND 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the six months ended June 30, 2002, net sales were $13,159,000,
compared to $15,414,000 achieved in the corresponding six months of 2001.
The sales decline was principally due to a sales decrease in the
Professional segment, as well as a sales decrease in private label
manufacturing. Retail sales increased slightly over $75,000 on the
strength of sales to new customers but Professional sales declined over
$821,000, primarily as a result of a decrease in sales of wet goods. As a
result of the decline in sales, gross profit for the six months ended June
30, 2002, was $5,761,000 compared to gross profit of $6,571,000 achieved
for the corresponding six-month period in 2001. Cost of sales for the six
months ended June 30, 2002 was $7,398,000, when compared to the cost of
sales of $8,842,000 for the six months ended June 30, 2001. While gross
profit declined overall due to a lower sales volume, there was a slight
increase in the gross profit margin, which increased to 43.78% for the six
months ended June 30, 2002 from 42.63% for the six months ended June 30,
2001. This increase was principally due to a change in the sales mix, as
lower margin private label sales decreased while higher margin retail sales
increased.
Selling, general and administrative expenses for the six months ended
June 30, 2002 decreased by $437,000, to $4,981,000, when compared to the
corresponding 2001 six-month period total of $5,418,000. Part of the
decline was due to the discontinuing of goodwill amortization in accordance
with SFAS No. 142 ($174,000 in the prior six-month period), and a decrease
of $69,000 in connection with the amortization of other assets. In
addition, as a result of larger volume sales to new retail customers,
outgoing freight expenses decreased almost $110,000. The Company continues
to try to control selling, general and administrative expenses even with
increased spending for professional fees as a result of the Company's
decision to evaluate strategic alternatives to enhance shareholder value,
as discussed in Note 4 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, 2002 was $269,000,
a decrease of approximately $137,000 from the $406,000 incurred in the
corresponding period of 2001, as a result of lower outstanding indebtedness
and lower interest rates. It is anticipated that interest expense will
continue to decline as a result of the refinancing of the outstanding debt
completed in the third quarter of 2001, as more fully discussed in Note 3
to the unaudited condensed consolidated financial statements.
18
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2002 AND 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Interest income of $187,000 for the six months ended June 30, 2002 was
lower than the $325,000 earned in the corresponding six months of 2001.
Although the Company had more cash invested in 2002, it received lower
interest rates on its investments as overall interest rates continued to
decline. Other income is comprised of royalty fees received from the
licensing of Frances Denney products, as well as a new licensing agreement
for New Era products.
As a result of reduced income for the six-month period ended June 30,
2002, the provision for income taxes decreased $184,000, to $273,000 from
the $457,000 incurred for the corresponding period in 2001. Net income for
the six months ended June 30, 2002 was $496,000, compared to $703,000
achieved for the six months ended June 30, 2001. Basic and diluted
earnings per share were $0.12 for the six months ended June 30, 2002,
compared to $.16 for the six months ended June 30, 2001, based on a
weighted average of 4,285,577 shares outstanding for both periods.
For the three months ended June 30, 2002, net sales were $6,839,000,
compared to $7,833,000 for the three months ended June 30, 2001, a decline
of $994,000. Except for the retail segment, which was relatively flat for
the second quarter of 2002, sales of the segments declined, with more than
half of the sales decline in private label manufacturing. In addition,
sales of cruise ship amenities (included in the Manufacturing segment) also
declined. Principally as a result of the decline in net sales, gross
profit for the three months ended June 30, 2002 was $2,982,000, compared to
gross profit of $3,213,000 achieved for the corresponding three-month
period in 2001, a decrease of $231,000. The gross profit margin increased
to 43.6% for the three months ended June 30, 2002, from 41.0% for the
corresponding period in 2001 as a result in the change in the business mix,
as discussed above.
Selling, general and administrative expenses for the three months
ended June 30, 2002 decreased by $130,000, from $2,559,000 to $2,542,000,
when compared to the corresponding three-month period of 2001. The
reduction in expenses was due, in part, to a decline in advertising and
freight out costs and amortization, as discussed above.
Interest income for the three-month period ended June 30, 2002 was
$94,000, a decrease of approximately $55,000 when compared to the $149,000
earned in the corresponding three-month period of 2001, as a direct result
of significantly lower interest rates. For the same reason, and as a
result of the refinancing of debt in August 2001, interest expense for the
three-month period ended June 30, 2002 was $134,000, a decrease of $67,000
19
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2002 AND 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
from the $201,000 paid in the corresponding three-month period of 2001.
Other income is comprised of a $26,250 quarterly royalty fee from the
licensing of Frances Denney products and a $18,750 quarterly royalty fee
from the licensing of New Era products.
Income taxes for the three months ended June 30, 2002 was $145,000
compared to $201,000, a decrease of $56,000 for the corresponding period in
2001. Net income of $284,000 for the three months ended June 30, 2002,
declined from the $316,000 achieved in the three months ended June 30,
2001, largely as a result of a decrease in net sales as discussed above.
Basic and diluted earnings per share were $.07 for the three months ended
June 30, 2002 and 2001.
LIQUIDITY & CAPITAL RESOURCES
Cash and cash equivalents increased $1,246,000 from December 31, 2001,
to $9,655,000 at June 30, 2002. Total cash of $16,962,000 at June 30, 2002
includes $7,308,000 of cash invested in certificates of deposit pledged as
collateral for a bank loan. Accounts receivable were $2,068,000 at June
30, 2002, an increase of $259,000 from the $1,809,000 at December 31, 2001;
inventories decreased approximately $280,000 from $9,286,000 at December
31, 2001 to $9,006,000 at June 30, 2002, principally as a result of
increased sales and manufacturing of retail brands the Company experienced
in the latter part of the second quarter of 2002.
Total current assets at June 30, 2002 were $21,222,000 compared to
$20,116,000 at December 31, 2001. Working capital increased $1,033,000 when
compared to December 31, 2001, due in a large part to the increase in total
cash 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.
On March 5, 2001, the Company announced that its Board of Directors
had formed a two-person, special committee to explore various strategic
alternatives to enhance shareholder value. Four members of the Company's
management and directors, exclusive of the committee members, formed a
group to purchase all of the Company's outstanding capital stock in a
going-private transaction. Independent legal counsel and investment
banking advisors were retained to advise and assist in the transaction.
After incurring approximately $175,000 of expenses through June 30, 2002,
it is estimated that the remaining costs associated with this process will
be in excess of $450,000. On April 16, 2002, the Company announced that the
special committee of its Board of Directors had, after an auction conducted
20
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2002 AND 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
by Robinson Humphrey Company LLC, its investment banker, accepted a bid by
the four members of the Company's management and directors. Such bid was to
purchase all of the Company's common stock at $4 per share in cash. No
other viable bids were received by the committee for the entire Company.
The management bid is subject to various conditions, including obtaining
adequate financing. The Company's management is currently in the process of
negotiating with lenders to obtain financing necessary for the transaction.
There can be no assurance that the bidder will be able to obtain such
financing on acceptable terms or that the transaction will be consummated.
NEW FINANCIAL ACCOUNTING STANDARDS
In June 2001, 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. 141 requires all business combinations entered
into subsequent to June 30, 2001 to be accounted for using the purchase
method of accounting. 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. SFAS No. 142 is effective for
years beginning after December 15, 2001. Goodwill and intangible assets
acquired subsequent to June 30, 2001 are immediately subject to the
provisions of SFAS No. 142. 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.
The Company has completed step one of the impairment test, which
indicated that the carrying values of certain reporting units may have
exceeded their estimated fair values, as determined utilizing various
valuation techniques. The Company is in the process of completing step two
of the impairment test, which will be completed by December 31, 2002 in
accordance with SFAS No. 142.
Amortization of goodwill ceased upon adoption on January 1, 2002. The
table below reflects the impact of the implementation of SFAS No. 142 for
the six months and three months ended June 30, 2002 and 2001:
21
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2002 AND 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Six Months Three Months
Ended June 30, Ended June 30,
(in thousands) (in thousands)
______________ ______________
2002 2001 2002 2001
______ ______ ______ ______
Net income (as reported) $ 496 $ 703 $ 284 $ 316
After tax goodwill amortization - 120 - 62
______ ______ ______ ______
Adjusted net income $ 496 $ 823 $ 284 $ 378
====== ====== ====== ======
Net income per share
(basic and diluted) $ .12 $ .16 $ .07 $ .07
After tax goodwill amortization - .03 - .02
______ ______ ______ ______
Adjusted basic and diluted
earnings per share $ .12 $ .19 $ .07 $ .09
====== ====== ====== ======
Amortization expense of other intangibles for the six months ended
June 30, 2002 was $416,000. Amortization expense for other intangible
assets recorded as of December 31, 2001, for the years ended December 31,
2002 through 2007 is anticipated to be as follows: 2002: $827,000; 2003:
$728,000; 2004: $624,000; 2005: $624,000; 2006: $615,000; 2007: $603,000.
In August 2001, FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which supersedes, but does
not replace, SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets to be Disposed Of", as well as other earlier related pronouncements,
either in whole or in part. SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and
interim periods within those fiscal years. The adoption of this statement
has not had a significant effect on the Company's financial position,
results of operations or cash flows.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB
Statements 4, 44 and 64, Amendment to FASB Statement 13, and Technical
Corrections". One of the major changes of this statement is to change the
accounting for the classification of gains and losses from the
extinguishment of debt. Upon adoption, the Company will follow APB 30,
Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions in determining whether such
extinguishment of debt may be classified as extraordinary. The provisions
22
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2002 AND 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
of this statement related to the rescission of FASB Statement 4 shall be
applied in fiscal years beginning after May 15, 2002 with early application
encouraged. The Company is currently evaluating the impact of this
Statement as of June 30, 2002.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This Statement requires
recording costs associated with exit or disposal activities at their fair
values when a liability has been incurred. Under previous guidance, certain
exit costs were accrued upon management's commitment to an exit plan, which
is generally before an actual liability has been incurred. Adoption of this
Statement is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. We have not yet completed our evaluation
of the impact of adopting this Statement.
The Company does not have any off-balance sheet financing.
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 ultimately transpire. Please refer to Item 7 in
the Company's Form 10-K for the year ended December 31, 2001 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.
23
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2002 AND 2001
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 29, 2002, the United States Court of Appeals for the Ninth
Circuit, entered an order, among other things, reversing 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 covenants of good faith and fair dealing. In addition, the
Ninth Circuit opinion affirmed the lower court's ruling that on the present
record New Image is not entitled to (i) damage 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 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.
Old 97 Company ("Old 97") commenced an action against Todd Christopher
International, Inc. d/b/a Vogue International ("Vogue") in the Hillsborough
County, Florida Circuit Court and Vogue counterclaimed against Old 97. The
parties reached a settlement pursuant to which, among other things, the
parties have mutually released each other from prior causes of action, have
agreed to the disposition of certain old Vogue inventory held by Old 97 and
have agreed to have Old 97 manufacture private label goods for Vogue if the
parties can reach an understanding on a mutually agreeable pricing
structure. Any cost associated with the disposition of the inventory is
not considered to be material.
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 the account stated claim. At a mediation hearing held in May
2002, the Company rejected a settlement offer from the private label
customer due to the insufficiency of the offer. At this time, the Company
is still unable to accurately predict the outcome of this matter.
24
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2002 AND 2001
ITEM 1. LEGAL PROCEEDINGS (continued)
In November 2001, the Company filed a claim with the Department of
Transportation ("DOT") in connection with the DOT's widening of Interstate
Highway 4, which the Company alleges will result in the loss of an adjacent
rental facility utilized by one of the Company's subsidiaries. At a
hearing 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.
The case will be scheduled for mediation where it is 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 of recovery that will result therefrom.
Other than the above, there has been no material change in the status
of any other pending litigation since the date that the Company's Form 10-K
was filed with the Securities and Exchange Commission for the year ended
December 31, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 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 99.2 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, 2002:
None
25
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 14, 2002
/s/ David A. Spiegel
____________________________________
David A. Spiegel
Chief Financial Officer
August 14, 2002
26
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.
_____________________________________
Frank F. Ferola
President and Chief Executive Officer
August 14, 2002
_____________________________________
David A. Spiegel
Chief Financial Officer
August 14, 2002
26