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, 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 May 10, 2002:
4,410,577
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2002
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets
as of March 31, 2002 and December 31, 2001 4-5
Unaudited Condensed Consolidated Statements
of Operations for the three months ended
March 31, 2002 and 2001 6
Unaudited Condensed Consolidated Statements
of Cash Flows for the three months ended
March 31, 2002 and 2001 7-9
Notes to Unaudited Condensed Consolidated
Financial Statements 10-14
ITEM 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 15-18
ITEM 3. Quantitative and Qualitative
Disclosure About Market Risk 18
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 19
SIGNATURES 20
2
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 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 known and
unknown 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, laws; 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
March 31, December 31,
2002 2001
____________ ____________
CURRENT ASSETS
Cash and cash equivalents $ 8,865,983 $ 8,409,142
Certificate of deposit 277,500 -
Accounts receivable, net 1,684,476 1,808,828
Inventories 8,855,103 9,286,295
Income taxes receivable 296,552 345,220
Prepaid expenses and
other current assets 288,071 266,460
____________ ____________
TOTAL CURRENT ASSETS 20,267,685 20,115,945
CERTIFICATE OF DEPOSIT 7,307,500 7,585,000
PROPERTY, PLANT AND EQUIPMENT, net 2,237,114 2,308,003
INTANGIBLE ASSETS, net 23,225,213 23,432,105
OTHER ASSETS, net 3,525,187 3,621,103
____________ ____________
TOTAL ASSETS $ 56,562,699 $ 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
March 31, December 31,
2002 2001
___________ ____________
CURRENT LIABILITIES
Accounts payable and
accrued expenses $ 2,361,148 $ 2,560,051
Current portion of
long-term debt 1,548,384 1,507,256
____________ ____________
TOTAL CURRENT LIABILITIES 3,909,532 4,067,307
DEFERRED INCOME TAXES, net 1,628,948 1,535,285
LONG-TERM DEBT 7,198,930 7,758,370
____________ ____________
TOTAL LIABILITIES 12,737,410 13,360,962
____________ ____________
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 26,715,666 26,591,571
____________ ____________
45,176,852 45,052,757
LESS:
125,000 CONTINGENTLY
RETURNABLE SHARES (1,351,563) (1,351,563)
____________ ____________
TOTAL STOCKHOLDERS' EQUITY 43,825,289 43,701,194
____________ ____________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 56,562,699 $ 57,062,156
============ ============
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,
_____________________________
2002 2001
____________ ____________
NET SALES $ 6,319,916 $ 7,580,368
COST OF GOODS SOLD 3,541,173 4,222,480
___________ ___________
GROSS PROFIT 2,778,743 3,357,888
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,421,318 2,729,383
___________ ____________
OPERATING INCOME 357,425 628,505
OTHER INCOME(EXPENSE)
Interest income 92,166 176,317
Interest expense (135,622) (205,015)
Royalty income 26,250 43,750
___________ ___________
INCOME BEFORE INCOME TAXES 340,219 643,557
INCOME TAX EXPENSE 127,912 256,152
___________ ___________
NET INCOME $ 212,307 $ 387,405
=========== ===========
BASIC AND DILUTED
EARNINGS PER SHARE $ .05 $ .09
=========== ===========
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 CASH FLOWS
Three Months Ended March 31,
___________________________
2002 2001
___________ ____________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 212,307 $ 387,405
___________ ____________
Adjustments to reconcile net income to
cash flows used in operating activities:
Depreciation 83,118 96,744
Amortization 206,892 297,558
Amortization of other assets - 29,174
Deferred income taxes 93,663 59,240
Provision for doubtful accounts 2,164 5,915
Changes in operating assets and
liabilities:
Accounts receivable 122,188 427,012
Inventories 431,192 (2,973)
Income taxes receivable 48,668 196,439
Prepaid expenses
and other current assets (21,611) (56,196)
Other assets 95,916 38,661
Accounts payable and accrued expenses (198,903) (533,425)
___________ ___________
Total adjustments 863,287 558,149
___________ ___________
Net cash flows provided
by operating activities 1,075,594 945,554
___________ ___________
7
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
____________________________
2002 2001
____________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant
and equipment (12,229) (22,026)
Purchase of intangible assets - (49,069)
___________ ___________
Net cash flows used in
investing activities (12,229) (71,095)
___________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (518,312) (389,636)
Dividends paid (88,212) (88,212)
___________ ___________
Net cash flows used in
financing activities (606,524) (477,848)
___________ ___________
INCREASE IN CASH AND
CASH EQUIVALENTS 456,841 396,611
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 8,409,142 13,559,268
___________ ___________
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 8,865,983 $13,955,879
=========== ===========
See notes to unaudited condensed consolidated financial statements
8
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 150,134 $ 189,268
=========== ===========
Income taxes paid $ 72,987 $ -
=========== ===========
For the three months ended March 31, 2001, 16,320 shares of treasury
stock, with an aggregate cost of $60,424, were retired.
See notes to unaudited condensed consolidated financial statements
9
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 2002 AND 2001
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: In the opinion of management, all
adjustments 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 three-month period ended March 31,
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 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 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, certificates of deposit (not pledged as collateral), 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 of $100,000. Cash and cash
equivalents held in interest bearing accounts as of March 31, 2002 and
December 31, 2001 were approximately $7,269,000 and $7,257,000,
respectively.
10
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 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:
March 31, December 31,
2002 2001
____________ ____________
Raw materials $ 2,225,555 $ 3,180,670
Packaging and components 3,308,432 3,448,541
Work in progress 333,752 341,507
Finished goods 6,086,830 5,502,599
____________ ____________
11,954,569 12,473,317
Less: Amount included in
other assets (3,099,466) (3,187,022)
____________ ____________
$ 8,855,103 $ 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 months ended
March 31, 2002 and 2001. For the three months ended March 31, 2002 and
2001, the Company had 813,648 and 809,524 outstanding stock options,
respectively. None of these options were included in the calculation of
earnings per share because their inclusion would be anti-dilutive.
NEW FINANCIAL ACCOUNTING STANDARDS: In July 2001, FASB issued
SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and
Other Intangible Assets". These standards make 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
11
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 2002 AND 2001
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 and is in the initial phase of testing for
the impairment of existing goodwill. For the three months ended March 31,
2002, implementation of SFAS No. 142 resulted in a decrease of pretax
goodwill amortization of approximately $91,000, or $.01 per basic and
diluted earnings per share. The table below reflects the impact of the
implementation of SFAS No. 142 for the three months ended March 31, 2002
and 2001:
Three Months
Ended March 31,
(in thousands)
_______________
2002 2001
______ ______
Net income (as reported) $ 212 $ 387
After tax goodwill amortization - 58
______ ______
Adjusted net income $ 212 $ 445
====== ======
Net income per share
(basic and diluted) $ .05 $ .09
After tax goodwill amortization - .01
______ ______
Adjusted basic and diluted
earnings per share $ .05 $ .10
====== ======
Amortization expense of other intangibles for the three months ended
March 31, 2002 was $207,000. 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
did not have a significant effect on the Company's financial position,
results of operations or cash flows.
12
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 2002 AND 2001
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
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 barber shops. 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 primarily 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:
INCOME BEFORE
NET SALES INCOME TAXES
_______________ _______________
Three Months Three Months
Ended March 31, Ended March 31,
2002 2001 2002 2001
_______________ _______________
Professional $ 4,454 $ 4,948 $ 204 $ 239
Retail 1,702 1,628 244 256
Manufacturing 1,740 2,644 28 311
_______ _______ _______ _______
Total 7,896 9,220 476 806
Intercompany
Manufacturing (1,576) (1,640) (136) (162)
_______ _______ _______ _______
Consolidated $ 6,320 $ 7,580 $ 340 $ 644
======= ======= ======= =======
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, 2002,
would likely, if adversely determined, have a material adverse effect on
the Company's financial position, results of operations or cash flows.
13
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 2002 AND 2001
NOTE 3: COMMITMENTS AND CONTINGENCIES (Continued)
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 $154,000 of expenses through March 31, 2002, it is
estimated that the remaining costs associated with this process will be in
excess of $475,000. 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 is to
purchase all of the Company's common stock at $4 per share. 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.
Pursuant to an opinion filed on April 29, 2002, the United States
Court of Appeals for the Ninth Circuit, 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 Registrant
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 rulings
that New Image is not entitled to (i) damages equal to the diminution in
the value of the Registrant's common stock price between the scheduled and
actual disbursement dates or (ii) attorney fees. As a consequence of the
Ninth Circuit's decision, the judgment granting New Image all 125,000
shares of Registrant'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.
Other than the foregoing, there has been no change in the status of
other pending litigation since last reported in the financial statements
for the year ended December 31, 2001.
14
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2002 AND 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the three months ended March 31, 2002, net sales were $6,320,000,
compared to $7,580,000 for the three months ended March 31, 2001, a decline
of $1,260,000. Principally as a result of the decline in net sales, gross
profit for the three months ended March 31, 2002 was $2,779,000, compared
to gross profit of $3,358,000 achieved for the corresponding three-month
period in 2001. Net income of $212,000 for the three months ended March
31, 2002, declined from the $387,000 achieved in the three months ended
March 31, 2001, largely as a result of a decrease in net sales as discussed
below. Basic and diluted earnings per share were $.05 for the three months
ended March 31, 2002, compared to $.09 for the three months ended March 31,
2001.
The Company experienced a decline in net sales for the Professional
and Manufacturing segments of its business in the three-month period ended
March 31, 2002, with such segments declining a total of approximately
$1,340,000 in the aggregate. Net sales from private label manufacturing
declined by almost $790,000 from the corresponding three-month period in
2001 because the Company is no longer manufacturing for a large private
label customer. The net sales decline of almost $490,000 in the
Professional segment was primarily due to continued industry-wide
consolidation described in previously filed reports. The gross profit
margin for the three months ended March 31, 2002 declined slightly, from
44.30% for the three months ended March 31, 2001 to 43.97% for the three
months ended March 31, 2002, but has increased when compared to both the
entire 2001 fiscal year. Management believes that it will be able to
replace lost sales with new customers and/or increased sales to existing
customers as a result of the sales initiatives started in 2001, and would
anticipate that these sales will have a positive impact by the third
quarter of 2002 and thereafter.
Selling, general and administrative expenses for the three months
ended March 31, 2002 decreased by $308,000, from $2,729,000 to $2,421,000,
when compared to the corresponding three-month period of 2001. The
reduction in expenses was due, in part, to a decline in amortization of
over $120,000, largely as a result of the implementation of SFAS No. 142
and decreases in office expenses and freight charges.
Interest income for the three months ended March 31, 2002 decreased
over $84,000 when compared to 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 months ended March 31, 2002 decreased
approximately $69,000 from the corresponding three-month period of 2001.
15
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2002 AND 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Other income is comprised of a $26,250 quarterly royalty fee from the
licensing of Frances Denney products.
LIQUIDITY & CAPITAL RESOURCES
Cash and cash equivalents increased $457,000 from December 31, 2001,
to $8,866,000 at March 31, 2002. Total cash of $16,451,000 includes
$7,585,000 of cash invested in certificates of deposit pledged as
collateral for a bank loan. Accounts receivable decreased $124,000 and
inventories decreased by approximately $431,000 from the amounts at
December 31, 2001 as the result of a decrease in sales.
Total current assets at March 31, 2002 were $20,268,000 compared to
$20,116,000 at December 31, 2001. Working capital increased $310,000 when
compared to December 31, 2001.
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 $154,000 of expenses through March 31, 2002, it is
estimated that the remaining costs associated with this process will be in
excess of $475,000. 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 is to
purchase all of the Company's common stock at $4 per share. 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 July 2001, FASB issued SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". These standards make
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
16
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2002 AND 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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 and is in the initial phase of testing for the impairment of existing
goodwill. For the three months ended March 31, 2002, implementation of
SFAS No. 142 resulted in a decrease of pretax goodwill amortization of
approximately $91,000, or $.01 per basic and diluted earnings per share.
The table below reflects the impact of the implementation of SFAS No. 142
for the three months ended March 31, 2002 and 2001:
Three Months
Ended March 31,
(in thousands)
_______________
2002 2001
______ ______
Net income (as reported) $ 212 $ 387
After tax goodwill amortization - 58
______ ______
Adjusted net income $ 212 $ 445
====== ======
Net income per share
(basic and diluted) $ .05 $ .09
After tax goodwill amortization - .01
______ ______
Adjusted basic and diluted
earnings per share $ .05 $ .10
====== ======
Amortization expense of other intangibles for the three months ended
March 31, 2002 was $207,000. 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,
17
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2002 AND 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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
did not have a significant effect on the Company's financial position,
results of operations or cash flows.
The Company does not have any off-balance sheet financings.
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.
18
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2002 AND 2001
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Pursuant to an opinion filed on April 29, 2002, the United States
Court of Appeals for the Ninth Circuit, 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 Registrant
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 opinion affirmed the lower court's rulings that
New Image is not entitled to (i) damages equal to the diminution in the
value of the Registrant's common stock price between the scheduled and
actual disbursement dates or (ii) attorney fees. As a consequence of the
Ninth Circuit decision, the judgment granting New Image all 125,000 shares
of Registrant'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.
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.
19
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, 2002
/s/ David A. Spiegel
____________________________________
David A. Spiegel
Principal Financial and
Accounting Officer
May 14, 2002
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.
_____________________________________
Frank F. Ferola
President and Chief Executive Officer
May 14, 2002
_____________________________________
David A. Spiegel
Principal Financial and
Accounting Officer
May 14, 2002
20