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: March 31, 2004
Commission File No. 1-4436
THE STEPHAN CO.
(Exact Name of Registrant as Specified in its Charter)
Florida 59-0676812
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1850 West McNab Road, Fort Lauderdale, Florida 33309
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (954) 971-0600
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
Approximate number of shares of Common Stock outstanding
as of May 10, 2004:
4,410,577
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2004
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets
as of March 31, 2004 and December 31, 2003 4-5
Unaudited Condensed Consolidated Statements
of Operations for the three months ended
March 31, 2004 and 2003 6
Unaudited Condensed Consolidated Statements
of Cash Flows for the three months ended
March 31, 2004 and 2003 7-8
Notes to Unaudited Condensed Consolidated
Financial Statements 9-16
ITEM 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 16-19
ITEM 3. Quantitative and Qualitative
Disclosure About Market Risk 19
ITEM 4. Controls and Procedures 19
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 20
ITEM 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
2
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2004
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; Stephan's ability to come into compliance
with AMEX's continued listing requirements; regulatory approvals of the
going-private transaction; 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 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
March 31, December 31,
2004 2003
____________ ____________
CURRENT ASSETS
Cash and cash equivalents $14,429,042 $ 13,302,159
Accounts receivable, net 1,795,584 1,444,508
Inventories 7,280,940 7,497,262
Prepaid expenses and
other current assets 196,110 784,601
____________ ____________
TOTAL CURRENT ASSETS 23,701,676 23,028,530
CERTIFICATES OF DEPOSIT 5,365,000 5,642,500
PROPERTY, PLANT AND EQUIPMENT, net 1,662,078 1,702,330
GOODWILL, net 5,857,980 5,857,980
TRADEMARKS, net 8,664,809 8,664,809
DEFERRED ACQUISITION COSTS, net 277,893 298,773
OTHER ASSETS, net 2,848,539 2,867,958
____________ ____________
TOTAL ASSETS $ 48,377,975 $ 48,062,880
============ ============
See notes to unaudited condensed consolidated financial statements
4
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
2004 2003
____________ ____________
CURRENT LIABILITIES
Accounts payable and
accrued expenses $ 3,164,805 $ 2,614,731
Current portion of
long-term debt 2,442,273 2,442,273
Income taxes payable 46,222 28,270
____________ ____________
TOTAL CURRENT LIABILITIES 5,653,300 5,085,274
DEFERRED INCOME TAXES, net 1,168,051 1,133,051
LONG-TERM DEBT 4,070,000 4,347,500
____________ ____________
TOTAL LIABILITIES 10,891,351 10,565,825
____________ ____________
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 20,377,001 20,387,432
____________ ____________
38,838,187 38,848,618
LESS:
125,000 CONTINGENTLY
RETURNABLE SHARES (1,351,563) (1,351,563)
____________ ____________
TOTAL STOCKHOLDERS' EQUITY 37,486,624 37,497,055
____________ ____________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 48,377,975 $ 48,062,880
============ ============
See notes to unaudited condensed consolidated financial statements
5
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31,
______________________________
2004 2003
_____________ ___________
NET SALES $ 5,958,985 $ 6,949,058
COST OF GOODS SOLD 3,455,362 3,924,193
___________ ___________
GROSS PROFIT 2,503,623 3,024,865
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,410,694 2,220,351
___________ ___________
OPERATING INCOME 92,929 804,514
OTHER INCOME(EXPENSE)
Interest income 51,091 65,218
Interest expense (25,631) (102,050)
Royalty income 12,500 12,500
___________ ___________
INCOME BEFORE INCOME TAXES 130,889 780,182
INCOME TAX EXPENSE 53,108 299,701
___________ ___________
NET INCOME $ 77,781 $ 480,481
=========== ===========
BASIC AND DILUTED
EARNINGS PER SHARE: $ .02 $ .11
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,344,220 4,301,140
=========== ===========
See notes to unaudited condensed consolidated financial statements
6
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
_______________________________
2004 2003
___________ ___________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 77,781 $ 480,481
___________ ___________
Adjustments to reconcile net income
to cash flows provided by
operating activities:
Depreciation 42,662 82,010
Amortization of intangible assets 20,880 23,358
Deferred income tax expense 35,000 246,407
Provision for doubtful accounts 33,192 14,602
Changes in operating assets and
liabilities:
Accounts receivable (384,268) (864,348)
Inventories 216,322 (402,516)
Income taxes payable/receivable 17,952 19,416
Prepaid expenses
and other current assets 588,491 162,470
Other assets 19,419 725,946
Accounts payable and accrued expenses 550,074 436,038
___________ ___________
Total adjustments 1,139,724 443,383
___________ ___________
Net cash flows provided by
operating activities 1,217,505 923,864
___________ ___________
See notes to unaudited condensed consolidated financial statements
7
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
______________________________
2004 2003
____________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant
and equipment (2,410) (2,335)
___________ ___________
Net cash flows used in
investing activities (2,410) (2,335)
___________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (277,500) (468,508)
Dividends paid (88,212) (88,212)
Change in certificates
of deposit 277,500 277,500
___________ ___________
Net cash flows used in
financing activities (88,212) (279,220)
___________ ___________
INCREASE IN CASH AND CASH EQUIVALENTS 1,126,883 642,309
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 13,302,159 10,785,995
___________ ___________
CASH AND CASH EQUIVALENTS,
END OF PERIOD $14,429,042 $11,428,304
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 25,631 $ 145,803
=========== ===========
Income taxes paid $ - $ 21,379
=========== ===========
See notes to unaudited condensed consolidated financial statements
8
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 2004 AND 2003
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: In the opinion of management, all
adjustments (consisting only of normal accruals) necessary for a fair
presentation of The Stephan Company's (the "Company") financial position
and results of operations are reflected in these unaudited interim
financial statements.
The results of operations for the three-month period ended March 31,
2004 is not necessarily indicative of the results to be achieved for the
year ending December 31, 2004. The December 31, 2003 condensed
consolidated balance sheet was derived from the audited consolidated
financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States of America
("generally accepted accounting principles"). These interim financial
statements should be read in conjunction with the audited consolidated
financial statements and accompanying notes appearing in the Company's
Annual Report on Form 10-K for the year ended December 31, 2003, previously
filed with the Securities and Exchange Commission.
NATURE OF OPERATIONS: The Company is engaged in the manufacture,
sale, and distribution of hair and personal care grooming products
principally throughout the United States. The Company has allocated
substantially all of its business into three segments, which include
professional hair care products and distribution, retail personal care
products and manufacturing.
USE OF ESTIMATES: The preparation of consolidated financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include
cash, money market investment accounts and short-term municipal bonds
having maturities 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 March 31, 2004 and December 31, 2003 were approximately $12,802,000
and $12,698,000, respectively.
9
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 2004 AND 2003
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INVENTORIES: Inventories are stated at the lower of cost (deter-
mined on a first-in, first-out basis) or market, and are as follows:
March 31, December 31,
2004 2003
____________ ____________
Raw materials $ 1,968,928 $ 2,007,174
Packaging and components 2,620,024 2,612,798
Work in progress 275,962 257,476
Finished goods 5,114,641 5,338,369
____________ ____________
9,979,555 10,215,817
Less: Amount included in
other assets (2,698,615) (2,718,555)
____________ ____________
$ 7,280,940 $ 7,497,262
============ ============
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 is inventory not anticipated to be utilized
within one year and is comprised primarily of packaging, components and
finished goods. The Company adjusts the carrying value of slow moving
inventory, including the estimated costs of disposal, that may ultimately
become unusable or obsolete.
BASIC AND DILUTED EARNINGS PER SHARE: Basic and diluted earnings
per share are computed by dividing net income by the weighted average
number of shares of common stock outstanding. The weighted average number
of shares outstanding was 4,344,220 for the three months ended March 31,
2004 and 4,301,140 for the three months ended March 31, 2003. For the
three months ended March 31, 2004 and 2003, the Company had 597,570 and
732,120 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 months ended March 31, 2004 and 2003.
10
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 2004 AND 2003
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
STOCK-BASED COMPENSATION: The Company adopted the disclosure
requirements of Statement of Financial Accounting Standards ("SFAS") No.
148, "Accounting for Stock-Based Compensation-Transition and Disclosure".
SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternate methods of transition for a voluntary
change to the fair value based method of accounting for stock-based
compensation and to require prominent disclosures in both annual and
interim financial statements about the methods of accounting for stock-
based compensation and the effect of the method used on reported results.
As permitted by SFAS No's. 148 and 123, the Company continues to apply the
accounting provisions of APB No. 25, "Accounting for Stock Issued to
Employees," and related interpretations, with regard to the measurement of
compensation cost for options granted under the Company's existing plans.
No stock-based compensation cost is reflected in net income as all options
granted under the plans had an exercise price not less than the market
value of the underlying common stock on the date of grant. Had expense
been recognized using the fair value method described in SFAS No. 123,
using the Black-Scholes option-pricing model, the Company would have
reported the following results of operations (in thousands, except per
share amounts):
Three Months Ended
March 31,
____________________
2004 2003
_______ _______
Net income, as reported $ 78 $ 480
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects 30 25
_______ ______
Pro forma net income $ 48 $ 455
======= ======
Net income per share:
As reported $ .02 $ .11
Pro forma $ .01 $ .11
11
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 2004 AND 2003
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
NEW FINANCIAL ACCOUNTING STANDARDS: In January 2003, the
Financial Accounting Standards Board ("FASB") issued FASB Interpretation
No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), an
interpretation of ARB 51. FIN 46, as revised in December 2003, provides
guidance on identifying entities for which control is achieved through
means other than through voting rights, variable interest entities ("VIE"),
and how to determine when and which business enterprises should consolidate
the VIE. In addition, FIN 46 requires both the primary beneficiary and all
other enterprises with a significant variable interest in a VIE to make
additional disclosures. The consolidation provisions of FIN 46 are
effective immediately for variable interests in VIE's created after January
31, 2003. For variable interests in VIE's created before February 1, 2003,
the provisions of FIN 46 are effective for the first interim or annual
period ending after December 15, 2003. The adoption of FIN 46 did not
require a change in accounting treatment since the Company has no
investments in any VIE's.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity". This statement establishes standards for the classification and
measurement of financial instruments that possess characteristics similar
to both liability and equity instruments. SFAS No. 150 also addresses the
classification of certain financial instruments that include an obligation
to issue equity shares. On October 29, 2003, the FASB voted to defer, for
an indefinite period, the application of certain provisions of the guidance
in SFAS No. 150 until it could consider some of the resulting
implementation issues. The Company has adopted certain provisions of SFAS
No. 150 which did not have a material impact on the Company's financial
condition or results of operations. The Company does not believe the
effect of the provisions of SFAS No. 150 that have been deferred to future
periods will have a material impact on the Company's financial statements.
NOTE 2: SEGMENT INFORMATION
The Company has identified three reportable operating segments based
upon how its management evaluates its business. These segments are
Professional Hair Care Products and Distribution ("Professional"), Retail
Personal Care Products ("Retail") and "Manufacturing". The Professional
segment has a customer base consisting generally of distributors that
purchase the Company's hair products and beauty and barber supplies for
sale to salons and barbershops. The customer base for the Retail segment
consists of mass merchandisers, chain drug stores and supermarkets that
sell products to end-users. The Manufacturing segment manufactures products
for different subsidiaries of the Company and manufactures private label
brands for customers.
12
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 2004 AND 2003
NOTE 2: SEGMENT INFORMATION (continued)
The Company conducts operations principally in the United States and
sales to international customers are not material to its consolidated net
sales. Income Before Income Taxes as shown below reflects an allocation of
corporate overhead expenses (based upon sales) incurred by the Manu-
facturing segment. The following tables, in thousands, summarize Net Sales
and Income Before Income Taxes by reportable segment:
INCOME BEFORE
NET SALES INCOME TAXES
_______________ _______________
Three Months Three Months
Ended March 31, Ended March 31,
2004 2003 2004 2003
_______________ _______________
Professional $ 4,386 $ 4,565 $ 300 $ 369
Retail 1,446 2,251 34 580
Manufacturing 1,246 1,781 (111) (41)
_______ _______ ______ _______
Total 7,078 8,597 223 908
Intercompany
Manufacturing (1,119) (1,648) (92) (128)
_______ _______ ______ _______
Consolidated $ 5,959 $ 6,949 $ 131 $ 780
======= ======= ====== =======
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 March 31, 2004,
would likely, if adversely determined, have a material adverse effect on
the Company's financial position, results of operations or cash flows.
Additionally, there has been no material change in the status of any other
pending litigation since the Company's last filing of Form 10-K with the
Securities and Exchange Commission for the year ended December 31, 2003.
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
13
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 2004 AND 2003
NOTE 3: COMMITMENTS AND CONTINGENCIES (continued)
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 in connection with the remaining claims of the parties has been
postponed and settlement negotiations continue. The recorded value of
trademarks assumes the return to the Company of the shares held in escrow.
In September 2003, in accordance with the Amended and Restated Sorbie
Products Agreement, a Demand for Arbitration was submitted by Sorbie
Acquisition Co. (Trevor Sorbie of America, Inc. "TSA") against Trevor
Sorbie International, PLC ("PLC"). PLC also filed a Demand for Arbitration
and both claims have been consolidated and will be heard together in
Pittsburgh, Pennsylvania. TSA has denied the allegations raised by PLC and
it has claimed that PLC's assertion of a right to royalty payments is
premised upon an incorrect reading of the underlying agreement, and that
damages should be awarded in favor of TSA based upon PLC's diversion of
Sorbie product and failure to support the brand in violation of the
agreement. The Company intends to defend itself against the allegations
and does not believe this action will have any material adverse effect on
our financial position or results of operations. However, it is early in
the process and the Company is unable to predict the outcome of this
matter.
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.
The acquisition group's 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%. On March 22, 2004, the Company announced that the bid was
further revised to an all cash price of $4.60 per share, to more
appropriately reflect the updated fairness opinion received from SunTrust
Robinson Humphrey. On September 19, 2003, at no cost to shareholders, the
Company entered into a Working Capital Management Account ("WCMA")
14
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2004 AND 2003
NOTE 3: COMMITMENTS AND CONTINGENCIES (continued)
agreement with Merrill Lynch Business Financial Services Inc. providing for
the creation of a WCMA line of credit not to exceed $5,000,000. Borrowings
against the line of credit will be collateralized by the Company's accounts
receivable and inventories and the debt will bear a variable interest rate
using a 1-month LIBOR rate plus 2.25%. The provisions of the credit line
include periodic accounting and reporting requirements, maintenance of
certain business and financial ratios as well as restrictions on additional
borrowings. As of March 31, 2004, the credit line remains unused.
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. On October 24, 2003, the Company executed an Amended
and Restated Merger Agreement extending certain dates and making minor
changes to the original Merger Agreement and on November 4, 2003, in
connection with the "going-private" transaction, the Company filed a
Preliminary Proxy with the Securities and Exchange Commission. In March
2004, the Company executed a further amendment to the merger agreement
which, among other things, incorporated the new consideration offered by
the acquisition group of $4.60 per share in cash.
If prior to the closing of the transactions contemplated by the Merger
Agreement, as amended, 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 circum-
stances, the Company 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. The Special Committee has agreed to extend
the closing date of the transaction to no later than August 2, 2004. As
15
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2004 AND 2003
NOTE 3: COMMITMENTS AND CONTINGENCIES (continued)
discussed above, the Company has secured a $5,000,000 line of credit with
Merrill Lynch, a portion of which may be used in the "going-private"
transaction. Company stockholder approval will be solicited by means of a
proxy statement, which will be mailed by the Company to stockholders upon
completion of the required Securities and Exchange Commission filing and
review process.
Independent legal counsel and investment banking advisors have been
retained to advise the Special Committee in connection with the
transaction. The Company incurred approximately $600,000 of expenses
through March 31, 2004, and it is estimated that the remaining costs
associated with this process will be in excess of $100,000.
As previously reported, due to 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. The Company
included annual meeting materials in its revised proxy statement, filed
with the Securities and Exchange Commission on April 13, 2004. In
addition, the Company believed it was in violation of certain AMEX rules
with respect to the composition of the Board of Directors and the Audit
Committee which could subject the Company to civil penalties and/or the
delisting of the Company's stock. The Company, based upon on-going
discussions with AMEX and the Company's legal counsel, now believes that
none of the aforementioned issues are of a material nature and any
penalties, if levied, would not be material to the Company's financial
position or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the three months ended March 31, 2004, net sales were $5,959,000,
compared to $6,949,000 for the three months ended March 31, 2003, a decline
of $990,000. Gross profit for the three months ended March 31, 2004 was
$2,504,000, compared to gross profit of $3,025,000 achieved for the
corresponding three-month period in 2003. The decline in net sales and
gross profit is substantially a result of the return to a normal level of
16
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2004 AND 2003
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
military orders for Quinsana Medicated Talc. As indicated in previous
filings, the first and second quarters of 2003 were favorably impacted by
military orders as troops were deployed to the Middle East conflict. In
addition, and for largely the same reason as above, the gross margin for
the three months ended March 31, 2004 declined to 42% as compared to 43.5%
for the three months ended March 31, 2003.
Net income was $78,000 for the three months ended March 31, 2004
compared to net income of $480,000 for the comparable three months ended
March 31, 2003. Basic and diluted earnings per share were $.02 for the
three months ended March 31, 2004, compared to $.11 for the three months
ended March 31, 2003.
As a result of the decline in net sales noted above, significantly all
of the sales decline for the quarter ended March 31, 2004 can be attributed
to the Retail segment of the business. Professional hard goods experienced
a small increase; however, this was offset by a decline in Professional wet
goods sales.
Selling, general and administrative ("SG&A") expenses for the three
months ended March 31, 2004 increased $190,000 when compared to the
corresponding three-month period of 2003. The Company experienced across
the board increases in SG&A, with advertising and catalog costs, business
insurance and expenses in connection with the "going-private" transaction
accounting for a substantial portion of these increases.
Interest expense for the three months ended March 31, 2004 decreased
approximately $76,000 when compared to the corresponding three-month period
of 2003 as interest on the outstanding obligation to Colgate-Palmolive
ceased to accrue as of December 31, 2003. On April 7, 2004, the Company
and Colgate-Palmolive mutually agreed to settle all outstanding claims and
issues between them. The net result of this settlement was a reduction of
the outstanding obligation by approximately $418,000. This amount will be
reflected as a gain in the second quarter of 2004. Interest income for the
three months ended March 31, 2004 decreased approximately $14,000 when
compared to the corresponding three-month period of 2003, as a result of
lower interest rates. Although the Company had more cash invested in 2004,
it received lower interest rates on its investments as overall interest
rates continue to decline.
LIQUIDITY & CAPITAL RESOURCES
Cash and cash equivalents increased $1,127,000 to $14,429,000 as of
17
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2004 AND 2003
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
March 31, 2004 from $13,302,000 as of December 31, 2003. Total cash of
$19,794,000 includes $5,365,000 of cash invested in certificates of deposit
pledged as collateral for a bank loan. Total current assets at March 31,
2004 were $23,702,000 compared to $23,029,000 at December 31, 2003.
As a result of continuing efforts to increase sales, the Company has
tried to enhance product exposure by increasing the frequency of catalog
distribution for Professional hard goods as well as taking on new product
lines. In 2004, the Morris-Flamingo Stephan subsidiary was successful in
becoming a distributor for a well-known and frequently used text book
series for beauty schools. While this commitment required a substantial
opening order, the addition of this line is already having a positive
impact on sales and the Company is optimistic that this line will aid in
increasing overall sales in 2004. This commitment represents a significant
portion of the increase in accounts payable as of March 31, 2004.
Other than the amounts required to pay the officers bonuses and to
retire the Colgate-Palmolive debt (representing an aggregate amount of
approximately $1,681,000), the Company does not anticipate any other
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 accounting principles generally accepted in the United States of
America ("generally accepted accounting principles") requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results would
differ significantly from those estimates if different assumptions were
used or unexpected events transpire. Please see Item 7 in the Company's
18
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2004 AND 2003
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Annual Report on Form 10-K for the year ended December 31, 2003 filed with
the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not participate in derivative or other financial
instruments for which fair value disclosure would be required under SFAS
No. 107. In addition, the Company does not invest in securities that would
require disclosure of market risk, nor does it have floating rate loans or
foreign currency exchange rate risks.
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES: Based upon an
evaluation of the Company's disclosure controls and procedures, which was
completed as of March 31, 2004 (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.
19
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2004 AND 2003
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:
10.17 Second Amended and Restated Agreement and Plan of Merger,
dated March 24, 2004, by and among The Stephan Co., Gunhill Enterprises and
Eastchester Enterprises, including exhibits, included with Form 8-K filed
March 30, 2004, is incorporated herein by reference.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer.
32.1 Certification by the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
32.2 Certification by the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
(b) Reports on Form 8-K during the quarter ended March 31, 2004
Current report on Form 8-K filed on March 30, 2004, in connection
with a Second Amended and Restated Agreement and Plan of Merger signed on
March 24, 2004, between The Stephan Co., Eastchester Enterprises, Inc. and
Gunhill Enterprises, Inc.
20
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
May 14, 2004
/s/ David A. Spiegel
____________________________________
David A. Spiegel
Principal Financial and
Accounting Officer
May 14, 2004
21