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, 2005
Commission File No. 1-4436
THE STEPHAN CO.
(Exact Name of Registrant as Specified in its Charter)
Florida 59-0676812
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1850 West McNab Road, Fort Lauderdale, Florida 33309
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (954) 971-0600
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
YES NO X
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act)
YES NO X
Approximate number of shares of Common Stock outstanding
as of September 15, 2005:
4,389,805
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2005
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets
as of March 31, 2005 and December 31, 2004 5-6
Unaudited Condensed Consolidated Statements
of Operations for the three months ended
March 31, 2005 and 2004 7
Unaudited Condensed Consolidated Statements
of Cash Flows for the three months ended
March 31, 2005 and 2004 8-9
Notes to Unaudited Condensed Consolidated
Financial Statements 10-15
ITEM 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 16-17
ITEM 3. Quantitative and Qualitative
Disclosure About Market Risk 17
ITEM 4. Controls and Procedures 18
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 19
ITEM 6. Exhibits 19
SIGNATURES 20
2
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2005
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This quarterly report contains certain "forward-looking"
statements. The Stephan Co. ("Stephan" or the "Company") desires to take
advantage of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 and is including this statement for the
express purpose of availing itself of the protections of such safe harbor
with respect to all such forward-looking statements. Such forward-looking
statements involve risks, uncertainties and other factors which may cause
the actual results, condition (financial or otherwise), performance, trends
or achievements of the Company and its subsidiaries to be materially
different from any results, condition, performance, trends or achievements
projected, anticipated or implied by such forward-looking statements.
Words such as "projects," "believe," "anticipates," "estimate,"
"plans," "expect," "intends," and similar words and expressions are
intended to identify forward-looking statements and are based on our
current expectations, assumptions, and estimates about us and our industry.
In addition, any statements that refer to expectations, projections or
other characterizations of future events or circumstances are forward-
looking statements. Although we believe that such forward-looking
statements are reasonable, we cannot assure you that such expectations will
prove to be correct.
Our actual results could differ materially from those anticipated in
such forward-looking statements as a result of several factors, risks and
uncertainties. These factors, risks and uncertainties include, without
limitation, the possibility of delisting, or halt in trading of, the
Company's common stock from the American Stock Exchange and the
repercussions from any such delisting, or halt in trading; the continuing
risks associated with our failure to be in compliance with our periodic
reporting requirements with the Securities and Exchange Commission
(specifically our delinquent Form 10-Q report for the quarter ended June
30, 2005); our ability to satisfactorily address any material weaknesses in
our financial controls; general economic and business conditions;
competition; the relative success of our operating initiatives; our
development and operating costs; our advertising and promotional efforts;
brand awareness for our product offerings; the existence or absence of
adverse publicity; acceptance of any new product offerings; changing trends
in customer tastes; the success of any multi-branding efforts; changes in
our business strategy or development plans; the quality of our management
team; costs and expenses incurred by us in pursuing strategic alternatives;
the availability, terms and deployment of capital; the business abilities
and judgment of our personnel; the availability of qualified personnel; our
3
labor and employee benefit costs; the availability and cost of raw
materials and supplies; changes in or newly-adopted accounting principles;
changes in, or our failure to comply with, applicable laws and regulations;
changes in our product mix and associated gross profit margins; as well as
management's response to these factors, and other factors that may be more
fully described in the Company's literature, press releases and publicly-
filed documents with the Securities and Exchange Commission. You are urged
to carefully review and consider these disclosures, which describe certain
factors that affect our business.
We do not undertake, subject to applicable law, any obligation to
publicly release the results of any revisions, which may be made to any
forward-looking statements to reflect events or circumstances occurring
after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events. Therefore, we caution each reader of
this report to carefully consider the specific factors and qualifications
discussed herein with respect to such forward-looking statements, as such
factors and qualifications could affect our ability to achieve our
objectives and may cause actual results to differ materially from those
projected, anticipated or implied herein.
4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
2005 2004
____________ ____________
CURRENT ASSETS
Cash and cash equivalents $ 4,901,267 $ 4,402,463
Restricted cash 1,110,000 1,110,000
Accounts receivable, net 1,575,679 1,753,250
Inventories 7,403,377 7,164,901
Income taxes receivable 219,884 209,203
Prepaid expenses and
other current assets 227,239 374,079
____________ ____________
TOTAL CURRENT ASSETS 15,437,446 15,013,896
RESTRICTED CASH 3,441,616 3,430,408
PROPERTY, PLANT AND EQUIPMENT, net 1,697,765 1,627,227
GOODWILL, net 4,013,458 4,013,458
TRADEMARKS, net 8,364,809 8,364,809
DEFERRED ACQUISITION COSTS, net 195,772 216,652
OTHER ASSETS, net 1,846,305 2,052,405
____________ ____________
TOTAL ASSETS $ 34,997,171 $ 34,718,855
============ ============
See notes to unaudited condensed consolidated financial statements
5
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
2005 2004
____________ ____________
CURRENT LIABILITIES
Accounts payable and
accrued expenses $ 2,698,968 $ 2,165,751
Current portion of
long-term debt 1,110,000 1,110,000
____________ ____________
TOTAL CURRENT LIABILITIES 3,808,968 3,275,751
DEFERRED INCOME TAXES, net 1,524,316 1,488,116
LONG-TERM DEBT 2,960,000 3,237,500
____________ ____________
TOTAL LIABILITIES 8,293,284 8,001,367
____________ ____________
COMMITMENTS AND CONTINGENCIES (NOTE 3)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value 43,898 43,898
Additional paid in capital 17,556,731 17,556,731
Retained earnings 9,103,258 9,116,859
____________ ____________
TOTAL STOCKHOLDERS' EQUITY 26,703,887 26,717,488
____________ ____________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 34,997,171 $ 34,718,855
============ ============
See notes to unaudited condensed consolidated financial statements
6
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31,
______________________________
2005 2004
_____________ ___________
NET SALES $ 5,516,811 $ 5,958,985
COST OF GOODS SOLD 3,157,680 3,455,362
___________ ___________
GROSS PROFIT 2,359,131 2,503,623
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,242,724 2,410,694
___________ ___________
OPERATING INCOME 116,407 92,929
OTHER INCOME(EXPENSE)
Interest income 27,072 51,091
Interest expense (31,262) (25,631)
Royalty income 12,500 12,500
___________ ___________
INCOME BEFORE INCOME TAXES 124,717 130,889
INCOME TAX EXPENSE 50,519 53,108
___________ ___________
NET INCOME $ 74,198 $ 77,781
=========== ===========
BASIC AND DILUTED
EARNINGS PER SHARE: $ .02 $ .02
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,418,630 4,344,220
=========== ===========
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,
_______________________________
2005 2004
___________ ___________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 74,198 $ 77,781
___________ ___________
Adjustments to reconcile net income
to cash flows provided by
operating activities:
Depreciation 36,659 42,662
Amortization of intangible assets 20,880 20,880
Write-down of inventories 20,000 80,607
Deferred income tax expense 36,200 35,000
Provision for doubtful accounts 9,835 33,192
Changes in operating assets and
liabilities:
Accounts receivable 167,736 (384,268)
Inventories (258,476) 135,715
Income taxes payable/receivable (10,681) 17,952
Prepaid expenses
and other current assets 146,840 588,491
Other assets 206,100 19,419
Accounts payable and accrued expenses 533,217 550,074
___________ ___________
Total adjustments 908,310 1,139,724
___________ ___________
Net cash flows provided by
operating activities 982,508 1,217,505
___________ ___________
See notes to unaudited condensed consolidated financial statements
8
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
______________________________
2005 2004
____________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in restricted cash (11,208) 277,500
Purchase of property, plant
and equipment (107,197) (2,410)
___________ ___________
Net cash flows (used in)/provided by
investing activities (118,405) 275,090
___________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (277,500) (277,500)
Dividends paid (87,799) (88,212)
___________ ___________
Net cash flows used in
financing activities (365,299) (365,712)
___________ ___________
INCREASE IN CASH AND CASH EQUIVALENTS 498,804 1,126,883
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 4,402,463 13,302,159
___________ ___________
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 4,901,267 $14,429,042
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 15,960 $ 25,631
=========== ===========
Income taxes paid $ - $ -
=========== ===========
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, 2005 AND 2004
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: In the opinion of management, all
adjustments (consisting only of normal accruals) necessary for a fair
presentation of The Stephan Company's (the "Company") financial position
and results of operations are reflected in these unaudited interim
financial statements.
The results of operations for the three-month period ended March 31,
2005 is not necessarily indicative of the results to be achieved for the
year ending December 31, 2005. The December 31, 2004 condensed
consolidated balance sheet was derived from the audited consolidated
financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States of America
("generally accepted accounting principles"). These interim financial
statements should be read in conjunction with the audited consolidated
financial statements and accompanying notes appearing in the Company's
Annual Report on Form 10-K for the year ended December 31, 2004, previously
filed with the Securities and Exchange Commission.
NATURE OF OPERATIONS: The Company is engaged in the manufacture,
sale, and distribution of hair and personal care grooming products
principally throughout the United States. The Company has allocated
substantially all of its business into three segments, which include
professional hair care products and distribution, retail personal care
products and manufacturing.
USE OF ESTIMATES: The preparation of consolidated financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include
cash, money market investment accounts and short-term municipal bonds
having maturities after 90 days or less when acquired. The Company
maintains cash deposits at certain financial institutions in amounts in
excess of the federally insured limit. Cash and cash equivalents held in
interest-bearing accounts as of March 31, 2005 and December 31, 2004 were
approximately $ 3,270,000 and $3,824,000, respectively.
10
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 2005 AND 2004
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INVENTORIES: Inventories are stated at the lower of cost (deter-
mined on a first-in, first-out basis) or market, and are as follows:
March 31, December 31,
2005 2004
____________ ____________
Raw materials $ 1,821,033 $ 1,827,553
Packaging and components 2,357,839 2,187,901
Work in progress 291,748 429,552
Finished goods 4,681,037 4,651,422
____________ ____________
9,151,657 9,096,428
Less: Amount included in
other assets (1,748,280) (1,931,527)
____________ ____________
$ 7,403,377 $ 7,164,901
============ ============
Raw materials include surfactants, chemicals and fragrances used in
the production process. Packaging materials include cartons, inner sleeves
and boxes used in the actual product, as well as outer boxes and cartons
used for shipping purposes. Components are the actual bottles or
containers (plastic or glass), jars, caps, pumps and similar materials that
become part of the finished product. Finished goods include hair dryers,
electric clippers, lather machines, scissors and salon furniture.
Included in other assets is inventory not anticipated to be utilized
within one year and is comprised primarily of packaging, components and
finished goods. The Company reduces the carrying value of inventory to
provide for these slow moving goods that includes the estimated costs of
disposal of inventory that may ultimately become unusable or obsolete.
BASIC AND DILUTED EARNINGS PER SHARE: Basic and diluted earnings
per share are computed by dividing net income by the weighted average
number of shares of common stock outstanding. The weighted average number
of shares outstanding was 4,418,630 for the three months ended March 31,
2005 and 4,344,220 for the three months ended March 31, 2004. For the
three months ended March 31, 2005 and 2004, the Company had 341,822 and
597,570 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, 2005 and 2004.
11
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 2005 AND 2004
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
STOCK-BASED COMPENSATION: The Company adopted the disclosure
requirements of Statement of Financial Accounting Standards ("SFAS") No.
148, "Accounting for Stock-Based Compensation-Transition and Disclosure".
SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternate methods of transition for a voluntary
change to the fair value based method of accounting for stock-based
compensation and to require prominent disclosures in both annual and
interim financial statements about the methods of accounting for stock-
based compensation and the effect of the method used on reported results.
As permitted by SFAS No's. 148 and 123, the Company continues to apply the
accounting provisions of APB No. 25, "Accounting for Stock Issued to
Employees," and related interpretations, with regard to the measurement of
compensation cost for options granted under the Company's existing plans.
No stock-based compensation cost is reflected in net income as all options
granted under the plans had an exercise price not less than the market
value of the underlying common stock on the date of grant. Had expense
been recognized using the fair value method described in SFAS No. 123,
using the Black-Scholes option-pricing model, the Company would have
reported the following results of operations (in thousands, except per
share amounts):
Three Months Ended
March 31,
____________________
2005 2004
_______ _______
Net income, as reported $ 74 $ 78
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects 20 30
_______ ______
Pro forma net income $ 54 $ 48
======= ======
Net income per share:
As reported $ .02 $ .02
Pro forma $ .01 $ .01
12
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 2005 AND 2004
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
NEW FINANCIAL ACCOUNTING STANDARDS: In December 2004, the
Financial Accounting Standards Board ("FASB") issued a revised Statement of
Financial Accounting Standards ("SFAS") No. 123 impacting the accounting
treatment for share-based payments. The revised statement requires
companies to reflect in the income statement compensation expense related
to the grant-date fair value of stock options and other equity-based
compensation issued to employees over the period that such awards are
earned. The statement is effective for the Company's 2006 fiscal year.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections". This statement replaces previous issued guidance and
changes the requirements for the accounting and reporting of voluntary
changes in accounting principles.
RECLASSIFICATIONS: Restricted cash collateralizing the current
portion of long-term debt was reclassified as a current asset at December
31, 2004. Changes in restricted cash balances have been presented as cash
flows from investing activities in the accompanying Consolidated Statements
of Cash Flows. Such amounts were previously classified as cash flows from
financing activities. As a result, net cash flows provided by investing
activities in the aforementioned Statements increased by $277,500 with a
corresponding decrease in cash flows used in financing activities for the
quarter ended March 31, 2004.
NOTE 2: SEGMENT INFORMATION
The Company has identified three reportable operating segments based
upon how its management evaluates its business. These segments are
Professional Hair Care Products and Distribution ("Professional"), Retail
Personal Care Products ("Retail") and "Manufacturing". The Professional
segment has a customer base consisting generally of distributors that
purchase the Company's hair products and beauty and barber supplies for
sale to salons and barbershops. The customer base for the Retail segment
consists of mass merchandisers, chain drug stores and supermarkets that
sell products to end-users. The Manufacturing segment manufactures products
for different subsidiaries of the Company and manufactures private label
brands for customers.
The Company conducts operations principally in the United States and
sales to international customers are not material to its consolidated net
sales. Income Before Income Taxes as shown below reflects an allocation of
corporate overhead expenses (based upon sales) incurred by the Manu-
facturing segment. The following tables, in thousands, summarize Net Sales
and Income Before Income Taxes by reportable segment:
13
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 2005 AND 2004
NOTE 2: SEGMENT INFORMATION (continued)
INCOME BEFORE
NET SALES INCOME TAXES
_______________ _______________
Three Months Three Months
Ended March 31, Ended March 31,
2005 2004 2005 2004
_______________ _______________
Professional $ 4,255 $ 4,386 $ 316 $ 300
Retail 1,127 1,446 34 34
Manufacturing 1,155 1,246 (181) (111)
_______ _______ ______ _______
Total 6,537 7,078 169 223
Intercompany
Manufacturing (1,020) (1,119) (44) (92)
_______ _______ ______ _______
Consolidated $ 5,517 $ 5,959 $ 125 $ 131
======= ======= ====== =======
NOTE 3: COMMITMENTS AND CONTINGENCIES
In addition to the matters set forth below, the Company is involved in
other litigation matters arising in the ordinary course of business. It is
the opinion of management that none of these matters, at March 31, 2005,
would likely, if adversely determined, have a material adverse effect on
the Company's financial position, results of operations or cash flows.
Additionally, there has been no material change in the status of any other
pending litigation since the Company's last filing of Form 10-K with the
Securities and Exchange Commission for the year ended December 31, 2004.
As previously reported, 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.
Specifically, the Company was not in compliance with Section 704 of
the AMEX Company Guide in that it has not held an annual meeting of
stockholders since September 1, 2000. In addition, the Company was not in
compliance with Sections 134, 1101 and 1003(d) of the AMEX Company guide
due to the failure to file a timely Annual Report on Form 10-K for the year
ended December 31, 2004 and the Quarterly Report on Form 10-Q for the
14
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 2005 AND 2004
NOTE 3: COMMITMENTS AND CONTINGENCIES (continued)
period ended March 31, 2005. On June 7, 2005, The Company received
notification that the AMEX was proceeding with delisting procedures.
Following a hearing before an AMEX Listing Qualifications Panel held on
July 27, 2005, on August 3, 2005, the Company received the Panel's
unanimous written decision granting the Company an extension of time until
September 30, 2005, to regain compliance with AMEX listing standards.
However, the Panel also unanimously agreed that should the Company not be
in complete compliance with AMEX listing standards by September 30, 2005,
the AMEX could then immediately move to delist the Company's common stock.
The Panel based its decision upon the Company's representations at the
hearing and its public filings. The Company has an annual meeting of
shareholders scheduled for September 29, 2005, and with the filing of this
Report and its Form 10-Q for the quarter ended June 30, 2005, expects to be
current with all of its periodic filings with the SEC and in compliance
with applicable AMEX rules.
The Company believes that if its common stock is delisted from AMEX,
such delisting is not expected to have a direct impact on the financial
condition or operations of the Company, but it could adversely affect the
liquidity and price of the Company's common stock, as well as the Company's
ability to raise additional capital.
15
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2005 AND 2004
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the three months ended March 31, 2005, net sales were $5,517,000
compared to $5,959,000 for the three months ended March 31, 2004, a decline
of $442,000. Gross profit for the three months ended March 31, 2005 was
$2,359,000, compared to gross profit of $2,504,000 achieved for the
corresponding three-month period in 2004. The decline in net sales and
gross profit is a result of a decrease in net sales of the Professional Wet
Goods segment as well as a decline in net sales of the Retail brands
segment. These declines were largely a result of an overall decrease in
demand. The gross margin for the three months ended March 31, 2005 was
42.8% as compared to 42% for the three months ended March 31, 2004.
Net income was $74,000 for the three months ended March 31, 2005
compared to net income of $78,000 for the comparable three months ended
March 31, 2004. Basic and diluted earnings per share were $.02 for both
the three months ended March 31, 2005 and 2004.
Selling, general and administrative ("SG&A") expenses for the three
months ended March 31, 2005 decreased $168,000 when compared to the
corresponding three-month period of 2004. The Company experienced across
the board decreases 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 decreases. These very same
expenses had, in the corresponding periods, spiked upward when comparing
the first quarter of 2004 with the first quarter of 2003.
Interest expense for the three months ended March 31, 2005 increased
approximately $6,000 when compared to the corresponding three-month period
in 2004 as a result of increased interest accruals on the Trevor Sorbie
debt resulting from the adverse arbitration decision in 2004. Interest
income for the three months ended March 31, 2005 decreased approximately
$24,000 when compared to the corresponding three-month period in 2004, as a
result of having less cash on hand primarily due to the payment of the
special $2.00 per share dividend in September 2004.
LIQUIDITY & CAPITAL RESOURCES
Cash and cash equivalents increased $499,000 to $4,901,000 as of March
31, 2005 from $4,402,000 as of December 31, 2004. Total cash of $9,453,000
includes $4,552,000 of cash invested in a restricted money market account
pledged as collateral for a bank loan. The Company has continued to secure
its outstanding long-term debt with Wachovia Bank with restricted cash.
16
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2005 AND 2004
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
The long-term portion of restricted cash is classified as non-current and
not included in working capital or cash and cash equivalents. Total
current assets at March 31, 2005 were $15,437,000 compared to $15,014,000
at December 31, 2004. Working capital decreased $110,000 from December 31,
2004, and was approximately $11,628,000 at March 31, 2005.
The Company is currently considering construction of additional
warehouse facilities on the Tampa, Florida manufacturing property,
estimated to cost approximately $1,000,000. The Company is reviewing
construction designs and site plans, and has obtained the necessary
permits. Other than the above, the Company does not anticipate any
significant capital expenditures in the near term and management believes
that there is sufficient cash on hand and working capital to satisfy
upcoming requirements.
The Company does not have any off-balance sheet financing or similar
arrangements.
NEW FINANCIAL ACCOUNTING STANDARDS
See Note 1 to the Financial Statements included in Part I, Item 1 for
a discussion of new financial accounting standards.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States of
America ("generally accepted accounting principles") requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results would
differ significantly from those estimates if different assumptions were
used or unexpected events transpire. Please see Item 7 in the Company's
Annual Report on Form 10-K for the year ended December 31, 2004 filed with
the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not participate in derivative or other financial
instruments for which fair value disclosure would be required under SFAS
No. 107. In addition, the Company does not invest in securities that would
require disclosure of market risk, nor does it have floating rate loans or
foreign currency exchange rate risks.
17
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2005 AND 2004
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES: As of the end
of the period covered by this quarterly report, an evaluation of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures was performed under the supervision and with the
participation of our management, including our principal executive officer
and principal financial officer. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that a material
weakness existed in our internal controls over financial reporting and
consequently our disclosure controls and procedures were not effective, as
of the end of the period covered by this quarterly report, in timely
alerting them as to material information relating to our Company (including
our consolidated subsidiaries) required to be included in this quarterly
report.
The material weakness in our internal controls over financial
reporting as of March 31, 2005 related to the fact that as a small public
company, we have an insufficient number of personnel with clearly
delineated and fully documented responsibilities and with the appropriate
level of accounting expertise and we have insufficient documented
procedures to identify and prepare a conclusion on matters involving
material accounting issues and to independently review conclusions as to
the application of generally accepted accounting principles. The lack of a
sufficient number of accounting personnel is not considered appropriate for
an internal control structure designed for external reporting purposes.
The principal factors management considered in determining whether a
material weakness existed in this regard was based upon management's
evaluation discussed above and advice from our previous independent
registered public accounting firm. As a result, management has determined
that a material weakness in the effectiveness of the Company's internal
controls over financial reporting existed as of March 31, 2005.
(b) CHANGES IN INTERNAL CONTROLS: No change in the Company's internal
control over financial reporting occurred during the Company's first fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting. However,
management of the Company, as well as the Audit Committee, recognizes that
current staffing levels will have to be enhanced and/or institute
arrangements with other accounting firms to act in a consulting capacity in
an effort to satisfy our reporting obligations and over-all standards of
disclosure controls and procedures.
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THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2005 AND 2004
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 3 to the Financial Statements included in Part I, Item 1 for
a discussion of legal proceedings.
Other than the above, there has been no material change in the status
of any other pending litigation since our last periodic report.
ITEM 6. EXHIBITS
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer.
32.1 Certification by the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
32.2 Certification by the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
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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
September 29, 2005
/s/ David A. Spiegel
____________________________________
David A. Spiegel
Principal Financial and
Accounting Officer
September 29, 2005
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