UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended: June 30, 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
JUNE 30, 2005
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets
as of June 30, 2005 and December 31, 2004 5-6
Unaudited Condensed Consolidated Statements
of Operations for the six months ended
June 30, 2005 and 2004 7
Unaudited Condensed Consolidated Statements
of Operations for the three months ended
June 30, 2005 and 2004 8
Unaudited Condensed Consolidated Statements
of Cash Flows for the six months ended
June 30, 2005 and 2004 9-10
Notes to Unaudited Condensed Consolidated
Financial Statements 11-16
ITEM 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 17-20
ITEM 3. Quantitative and Qualitative
Disclosure About Market Risk 20
ITEM 4. Controls and Procedures 20-21
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 22
ITEM 6. Exhibits 22
SIGNATURES 23
2
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 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; 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 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;
3
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
June 30, December 31,
2005 2004
____________ ____________
CURRENT ASSETS
Cash and cash equivalents $ 4,460,537 $ 4,402,463
Restricted cash 1,110,000 1,110,000
Accounts receivable, net 1,470,486 1,753,250
Inventories 7,857,222 7,164,901
Income taxes receivable 257,769 209,203
Prepaid expenses and
other current assets 114,768 374,079
____________ ____________
TOTAL CURRENT ASSETS 15,270,782 15,013,896
RESTRICTED CASH 2,778,187 3,430,408
PROPERTY, PLANT AND EQUIPMENT, net 1,714,899 1,627,227
GOODWILL, net 4,013,458 4,013,458
TRADEMARKS, net 8,364,809 8,364,809
DEFERRED ACQUISITION COSTS, net 174,892 216,652
OTHER ASSETS, net 1,837,868 2,052,405
____________ ____________
TOTAL ASSETS $ 34,154,895 $ 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
June 30, December 31,
2005 2004
____________ ____________
CURRENT LIABILITIES
Accounts payable and
accrued expenses $ 2,417,000 $ 2,165,751
Current portion of
long-term debt 1,110,000 1,110,000
____________ ____________
TOTAL CURRENT LIABILITIES 3,527,000 3,275,751
DEFERRED INCOME TAXES, net 1,488,611 1,488,116
LONG-TERM DEBT 2,682,500 3,237,500
____________ ____________
TOTAL LIABILITIES 7,698,111 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 8,856,155 9,116,859
____________ ____________
TOTAL STOCKHOLDERS' EQUITY 26,456,784 26,717,488
____________ ____________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 34,154,895 $ 34,718,855
============ ============
See notes to unaudited condensed consolidated financial statements
6
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30,
______________________________
2005 2004
____________ ____________
NET SALES $ 10,573,491 $ 11,514,539
COST OF GOODS SOLD 6,194,990 6,668,422
___________ ___________
GROSS PROFIT 4,378,501 4,846,117
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,498,062 4,586,692
___________ ____________
OPERATING (LOSS)/INCOME (119,561) 259,425
OTHER INCOME(EXPENSE)
Interest income 51,494 98,811
Interest expense (53,197) (49,933)
Other income, net 25,000 318,145
___________ ___________
(LOSS)/INCOME BEFORE INCOME TAXES (96,264) 626,448
INCOME TAX (BENEFIT)/EXPENSE (11,154) 236,973
___________ ___________
NET (LOSS)/INCOME $ (85,110) $ 389,475
=========== ===========
BASIC AND DILUTED
(LOSS)/EARNINGS PER SHARE $ (.02) $ .09
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,389,805 4,360,043
=========== ===========
See notes to unaudited condensed consolidated financial statements
7
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30,
_____________________________
2005 2004
____________ ____________
NET SALES $ 5,056,680 $ 5,555,554
COST OF GOODS SOLD 3,037,310 3,213,060
___________ ___________
GROSS PROFIT 2,019,370 2,342,494
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,255,338 2,175,998
___________ ____________
OPERATING (LOSS)/INCOME (235,968) 166,496
OTHER INCOME(EXPENSE)
Interest income 24,422 47,720
Interest expense (21,935) (24,302)
Other income, net 12,500 305,645
___________ ___________
(LOSS)/INCOME BEFORE INCOME TAXES (220,981) 495,559
INCOME TAX (BENEFIT)/EXPENSE (61,673) 183,865
___________ ___________
NET (LOSS)/INCOME $ (159,308) $ 311,694
=========== ===========
BASIC AND DILUTED
(LOSS)/EARNINGS PER SHARE $ (.04) $ .07
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,389,805 4,365,376
=========== ===========
See notes to unaudited condensed consolidated financial statements
8
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
___________________________
2005 2004
___________ ____________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)/income $ (85,110) $ 389,475
___________ ____________
Adjustments to reconcile net income
to cash flows provided by
operating activities:
Depreciation 72,628 81,007
Amortization of intangible assets 41,760 41,760
Write-down of inventories 20,000 -
Deferred income tax provision 495 266,601
Provision for doubtful accounts 22,222 39,932
Settlement of Colgate-Palmolive debt - (417,745)
Changes in operating assets and
liabilities:
Accounts receivable 260,542 (306,419)
Inventories (712,321) 119,301
Income taxes payable (48,566) 306
Prepaid expenses
and other current assets 259,311 654,246
Other assets 214,537 (176,381)
Accounts payable and accrued expenses 251,249 (164,341)
___________ ___________
Total adjustments 381,857 138,267
___________ ___________
Net cash flows provided
by operating activities 296,747 527,742
___________ ___________
See notes to unaudited condensed consolidated financial statements
9
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
____________________________
2005 2004
____________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in restricted cash 652,221 555,000
Purchase of property, plant
and equipment (160,300) (37,226)
___________ ___________
Net cash flows provided by
investing activities 491,921 517,774
___________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (555,000) (1,469,528)
Dividends paid (175,594) (176,423)
___________ ___________
Net cash flows used in
financing activities (730,594) (1,645,951)
___________ ___________
INCREASE/(DECREASE) IN CASH
AND CASH EQUIVALENTS 58,074 (600,435)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 4,402,463 13,302,159
___________ ___________
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 4,460,537 $12,701,724
=========== ===========
Supplemental Disclosures of
Cash Flow Information:
Interest paid $ 31,025 $ 152,681
=========== ===========
Income taxes paid $ 22,016 $ 46,595
=========== ===========
See notes to unaudited condensed consolidated financial statements
10
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 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 and six-month periods ended
June 30, 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 June 30, 2005 and December 31, 2004 were
approximately $4,170,000 and $3,824,000, respectively.
11
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 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:
June 30, December 31,
2005 2004
____________ ____________
Raw materials $ 1,777,060 $ 1,827,553
Packaging and components 2,425,225 2,187,901
Work in progress 217,881 429,552
Finished goods 5,173,878 4,651,422
____________ ____________
9,594,044 9,096,428
Less: Amount included in
other assets (1,736,822) (1,931,527)
____________ ____________
$ 7,857,222 $ 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 4,389,805 and 4,360,043, respectively, for the
six months ended June 30, 2005 and 2004. For the three months ended June
30, 2005 and 2004, the weighted average number of shares outstanding was
4,389,805 and 4,365,376, respectively. For the six months ended June 30,
2005 and 2004, the Company had 355,298 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 month
period ended June 30, 2004. Stock options were not included in the
calculation of earnings per share for the six and three month periods ended
June 30, 2005 because all options would be anti-dilutive as a result of
the net loss for the respective periods.
12
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 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):
Six Months Three Months
Ended June 30, Ended June 30,
_________________ _______________
2005 2004 2005 2004
_______ _______ _______ _______
Net (loss)/income,
as reported $ (85) $ 389 $ (159) $ 312
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects 50 63 30 33
_______ _______ _______ _______
Pro forma net (loss)/income $ (135) $ 326 $ (189) $ 279
======= ======= ======= =======
Net (loss)/income per share:
As reported $ (.02) $ .09 $ (.04) $ .07
Pro forma $ (.03) $ .07 $ (.05) $ .06
13
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 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 used in investing
activities in the aforementioned Statements decreased by $555,000 with a
corresponding increase in cash flows used in financing activities for the
six months ended June 30, 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. (Loss)/Income Before Income Taxes as shown below reflects an
allocation of corporate overhead expenses (based upon sales) incurred by
the Manufacturing segment. The following tables, in thousands, summarize
Net Sales and (Loss)/Income Before Income Taxes by reportable segment:
14
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2005 AND 2004
NOTE 2: SEGMENT INFORMATION (continued)
NET SALES NET SALES
_______________ _______________
Six Months Three Months
Ended June 30, Ended June 30,
2005 2004 2005 2004
_______________ _______________
Professional $ 8,311 $ 8,604 $ 4,056 $ 4,218
Retail 1,953 2,624 826 1,177
Manufacturing 2,416 2,763 1,262 1,519
_______ _______ _______ _______
Total 12,680 13,991 6,144 6,914
Intercompany
Manufacturing (2,107) (2,476) (1,087) (1,358)
_______ _______ _______ _______
Consolidated $10,573 $11,515 $ 5,057 $ 5,556
======= ======= ======= =======
(LOSS)/INCOME (LOSS)/INCOME
BEFORE INCOME BEFORE INCOME
TAXES TAXES
_______________ _______________
Six Months Three Months
Ended June 30, Ended June 30,
2005 2004 2005 2004
_______________ _______________
Professional $ 456 $ 630 $ 140 $ 330
Retail (13) 378 (48) 344
Manufacturing (539) (382) (313) (178)
_______ _______ ______ ______
Consolidated $ (96) $ 626 $ (221) $ 496
======= ======= ====== ======
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 June 30, 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.
15
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2005 AND 2004
NOTE 3: COMMITMENTS AND CONTINGENCIES (continued)
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
period ended March 31, 2005. On June 7, 2005, The Company received
notification that the AMEX was proceeding with delisting procedures.
Following a delisting 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 held an annual meeting of
shareholders on 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.
16
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2005 AND 2004
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Six months ended June 30, 2005:
For the six months ended June 30, 2005, net sales were $10,573,000,
compared to $11,515,000 achieved in the corresponding six months of 2004.
Gross profit for the six months ended June 30, 2005 was $4,379,000,
compared to gross profit of $4,846,000 achieved for the corresponding six-
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
overall gross margin for the six months ended June 30, 2005 was 41.4% as
compared to 42.1% for the six months ended June 30, 2004.
Selling, general and administrative expenses for the six months ended
June 30, 2005 decreased by $89,000, to $4,498,000, when compared to the
corresponding 2004 six-month period total of $4,587,000. This decrease was
due to an across the board decline in selling expenses, offset by an
increase in general and administrative expenses, and in particular, legal
and professional fees in connection with various SEC, AMEX and audit
matters.
Interest expense for the six months ended June 30, 2005 was $53,000, a
decrease of approximately $3,000 from the $50,000 incurred in the
corresponding period of 2004. The Company continues to accrue interest on
the Sorbie arbitration award, offsetting any decline in interest expense on
our bank debt. Interest income of $51,000 for the six months ended June
30, 2005 was lower than the $99,000 earned in the corresponding six months
of 2004 due to a decline in invested cash as a result of the special $2.00
per share dividend distributed to shareholders in September 2004. Other
income includes royalty fees received from the licensing of Frances Denney
products.
The net loss for the six-month period ended June 30, 2005 was $85,000,
compared to net income of $389,000 for the six months ended June 30, 2004.
This difference is a result of several unique circumstances that occurred
and were reflected in "other income" in the first half of fiscal 2004. As
indicated in previously filed reports, 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
an outstanding debt obligation by approximately $418,000. This amount is
reflected in other income in the second quarter of 2004. In addition to
the Colgate-Palmolive settlement, other income was also impacted by the
17
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2005 AND 2004
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
settlement of another lawsuit. In one case, the Company received $150,000
in connection with a customer's failure to perform on a purchase order
issued by them to the Company.
As a result of the loss for the six-month period ended June 30, 2005,
there is a net benefit for income taxes of $11,000, after taking into
account state income taxes of $19,000.
The basic and diluted loss per share was $0.02 for the six months
ended June 30, 2005, compared to earnings per share of $0.09 for the six
months ended June 30, 2004, based on a weighted average number of shares
outstanding of 4,389,805 and 4,360,043, respectively.
Three months ended June 30, 2005:
For the three months ended June 30, 2005, net sales were $5,057,000,
compared to $5,556,000 for the three months ended June 30, 2004, a decline
of $499,000. Gross profit for the three months ended June 30, 2005 was
$2,019,000, compared to gross profit of $2,342,000 achieved for the
corresponding three-month period in 2004. As indicated above, similarly to
the six-month period, 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. The gross margin for
the three months ended June 30, 2005 was 39.9% as compared to 42.2% for the
three months ended June 30, 2004, due in most part to the change in the
sales mix.
Selling, general and administrative expenses for the three months
ended June 30, 2005 increased by $79,000, from $2,176,000 to $2,255,000,
when compared to the corresponding three-month period of 2004, primarily as
a result of increase professional fees as discussed above.
Interest income for the three-month period ended June 30, 2005 was
$24,000, a decrease of approximately $24,000 when compared to $48,000
earned in the corresponding three-month period of 2004, as a result of less
invested cash.
The income tax benefit for the three months ended June 30, 2005 was
$62,000 compared to net income taxes of $184,000 for the three-month period
ended June 30, 2004. For the three months ended June 30, 2005, there was a
net loss of $159,000 compared to net income of $312,000 for the
corresponding period in 2004, due largely to other income items explained
above. Basic and diluted loss per share was $0.04 for the three months
18
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2005 AND 2004
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
ended June 30, 2005 and earnings per share of $0.07 for the three months
ended June 30, 2004, based on a weighted average number of shares of
4,389,805 and 4,365,376, respectively.
LIQUIDITY & CAPITAL RESOURCES
Cash and cash equivalents increased $58,000 from December 31, 2004, to
$4,460,000 at June 30, 2005. Total cash of $8,349,000 at June 30, 2005
includes $3,888,000 of cash invested in a restricted money market account
pledged as collateral for a bank loan. Accounts receivable were $1,470,000
at June 30, 2005, a decrease of $283,000 from the $1,753,000 at December
31, 2004; inventories increased approximately $692,000 from $7,165,000 at
December 31, 2004 to $7,857,000 at June 30, 2005, as the Company increased
inventory levels for anticipated third-quarter sales.
Total current assets at June 30, 2005 were $15,271,000 compared to
$15,014,000 at December 31, 2004. Working capital increased $6,000 when
compared to December 31, 2004. The Company currently anticipates
construction of additional warehouse facilities on the Tampa, Florida
manufacturing property, estimated to cost approximately $1,000,000. The
Company continues to review construction designs and site plans, obtained
the necessary permits and expects to begin construction in the fourth
quarter of 2005. As has been the case in the past, the bulk of the
Company's insurance policies renew in July, so it is anticipated that
approximately $250,000 will be paid in the third quarter of 2005 for these
renewals. 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.
In June 2005, the Company acquired the "American Manicure" nail care
line for approximately $150,000. This product line offers a less toxic
alternative to "French" manicures. Under the terms of the agreement, a
substantial portion of the purchase price was for existing inventory, and
the former owner of the business will receive a monthly royalty on sales of
the product line; this monthly royalty is not considered material at the
present time.
The Company does not have any off-balance sheet financing or similar
arrangements.
19
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2005 AND 2004
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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.
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.
20
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2005 AND 2004
ITEM 4. CONTROLS AND PROCEDURES (continued)
The material weakness in our internal controls over financial
reporting as of June 30, 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 June 30, 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.
21
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 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.
22
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 30, 2005
/s/ David A. Spiegel
____________________________________
David A. Spiegel
Principal Financial and
Accounting Officer
September 30, 2005
23