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, 2006
Commission File No. 1-4436
THE STEPHAN CO.
(Exact Name of Registrant as Specified in its Charter)
Florida 59-0676812
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1850 West McNab Road, Fort Lauderdale, Florida 33309
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (954) 971-0600
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act).
Large accelerated filer[ ] Accelerated filer[ ] Non-accelerated filer[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 August 1, 2006:
4,389,805
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2006
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets
as of June 30, 2006 and December 31, 2005 5-6
Unaudited Condensed Consolidated Statements
of Operations for the six months ended
June 30, 2006 and 2005 7
Unaudited Condensed Consolidated Statements
of Operations for the three months ended
June 30, 2006 and 2005 8
Unaudited Condensed Consolidated Statements
of Cash Flows for the six months ended
June 30, 2006 and 2005 9-10
Notes to Unaudited Condensed Consolidated
Financial Statements 11-15
ITEM 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 16-18
ITEM 3. Quantitative and Qualitative
Disclosure About Market Risk 18
ITEM 4. Controls and Procedures 19
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 20
ITEM 6. Exhibits 20
SIGNATURES 21
2
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2006
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, 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;
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-
3
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2006
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,
2006 2005
____________ ____________
CURRENT ASSETS
Cash and cash equivalents $ 5,897,001 $ 5,602,762
Restricted cash 2,872,998 3,335,557
Accounts receivable, net 1,853,180 1,431,650
Inventories 6,305,225 6,148,267
Income taxes receivable - 22,893
Prepaid expenses and
other current assets 148,589 311,905
____________ ____________
TOTAL CURRENT ASSETS 17,076,993 16,853,034
PROPERTY, PLANT AND EQUIPMENT, net 1,634,660 1,682,951
GOODWILL, net 4,013,458 4,013,458
TRADEMARKS, net 8,364,809 8,364,809
DEFERRED ACQUISITION COSTS, net 109,173 142,185
OTHER ASSETS, net 1,641,134 1,721,169
____________ ____________
TOTAL ASSETS $ 32,840,227 $ 32,777,606
============ ============
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,
2006 2005
____________ ____________
CURRENT LIABILITIES
Accounts payable and
accrued expenses $ 2,444,588 $ 2,002,728
Current portion of
long-term debt 2,682,500 3,237,500
____________ ____________
TOTAL CURRENT LIABILITIES 5,127,088 5,240,228
DEFERRED INCOME TAXES, net 1,439,467 1,343,257
____________ ____________
TOTAL LIABILITIES 6,566,555 6,583,485
____________ ____________
COMMITMENTS AND CONTINGENCIES (NOTE 3)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value 43,898 43,898
Additional paid in capital 17,598,639 17,556,731
Retained earnings 8,631,135 8,593,492
____________ ____________
TOTAL STOCKHOLDERS' EQUITY 26,273,672 26,194,121
____________ ____________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 32,840,227 $ 32,777,606
============ ============
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,
______________________________
2006 2005
____________ ____________
NET SALES $ 10,956,917 $ 10,573,491
COST OF GOODS SOLD 6,385,410 6,194,990
___________ ___________
GROSS PROFIT 4,571,507 4,378,501
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,286,077 4,498,062
___________ ____________
OPERATING INCOME/(LOSS) 285,430 (119,561)
OTHER INCOME(EXPENSE)
Interest income 106,393 51,494
Interest expense (67,976) (53,197)
Other income, net 25,000 25,000
___________ ___________
INCOME/(LOSS) BEFORE INCOME TAXES 348,847 (96,264)
INCOME TAX EXPENSE/(BENEFIT) 135,612 (11,154)
___________ ___________
NET INCOME/(LOSS) $ 213,235 $ (85,110)
=========== ===========
BASIC AND DILUTED
EARNINGS/(LOSS) PER SHARE $ .05 $ (.02)
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,392,041 4,389,805
=========== ===========
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,
_____________________________
2006 2005
____________ ____________
NET SALES $ 5,360,520 $ 5,056,680
COST OF GOODS SOLD 3,006,828 3,037,310
___________ ___________
GROSS PROFIT 2,353,692 2,019,370
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,207,745 2,255,338
___________ ____________
OPERATING INCOME/(LOSS) 145,947 (235,968)
OTHER INCOME(EXPENSE)
Interest income 62,930 24,422
Interest expense (36,178) (21,935)
Other income, net 12,500 12,500
___________ ___________
INCOME/(LOSS) BEFORE INCOME TAXES 185,199 (220,981)
INCOME TAX EXPENSE/(BENEFIT) 69,020 (61,673)
___________ ___________
NET LOSS/(INCOME) $ 116,179 $ (159,308)
=========== ===========
BASIC AND DILUTED
EARNINGS/(LOSS) PER SHARE $ .03 $ (.04)
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,392,041 4,389,805
=========== ===========
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,
___________________________
2006 2005
___________ ____________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ 213,235 $ (85,110)
___________ ___________
Adjustments to reconcile net income/(loss)
to cash flows provided by
operating activities:
Depreciation 76,030 72,628
Stock option compensation 41,908 -
Amortization of intangible assets 33,012 41,760
Write-down of inventories - 20,000
Deferred income tax provision 96,210 495
Provision for doubtful accounts 44,316 22,222
Changes in operating assets and
liabilities:
Accounts receivable (465,846) 260,542
Inventories (156,958) (712,321)
Income taxes receivable/payable 22,893 (48,566)
Prepaid expenses
and other current assets 163,316 259,311
Other assets 80,035 214,537
Accounts payable and accrued expenses 441,860 251,249
___________ ___________
Total adjustments 376,776 381,857
___________ ___________
Net cash flows provided
by operating activities 590,011 296,747
___________ ___________
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,
____________________________
2006 2005
____________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in restricted cash 462,559 652,221
Purchase of property, plant
and equipment (27,739) (160,300)
___________ ___________
Net cash flows provided by
investing activities 434,820 491,921
___________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (555,000) (555,000)
Dividends paid (175,592) (175,594)
___________ ___________
Net cash flows used in
financing activities (730,592) (730,594)
___________ ___________
INCREASE IN CASH
AND CASH EQUIVALENTS 294,239 58,074
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 5,602,762 4,402,463
___________ ___________
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 5,897,001 $ 4,460,537
=========== ===========
Supplemental Disclosures of
Cash Flow Information:
Interest paid $ 22,789 $ 31,025
=========== ===========
Income taxes paid $ 33,381 $ 22,016
=========== ===========
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, 2006 AND 2005
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
NATURE OF OPERATIONS: The Stephan Company (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.
BASIS OF PRESENTATION: In the opinion of management, all
adjustments (consisting only of normal accruals) necessary for a fair
presentation of the Company's financial position and results of operations
are reflected in these unaudited interim financial statements.
The results of operations for the three and six month periods ended
June 30, 2006 is not necessarily indicative of the results to be achieved
for the year ending December 31, 2006. The December 31, 2005 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, 2005, previously
filed with the Securities and Exchange Commission.
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, 2006 and December 31, 2005 were
approximately $5,329,000 and $5,095,000, respectively.
INVENTORIES: Inventories are stated at the lower of cost (deter-
mined on a first-in, first-out basis) or market, and are as follows:
11
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2006 AND 2005
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
June 30, December 31,
2006 2005
____________ ____________
Raw materials $ 1,612,424 $ 1,692,277
Packaging and components 2,178,230 2,238,763
Work in progress 570,421 454,217
Finished goods 3,499,836 3,402,742
____________ ____________
7,860,911 7,787,999
Less: Amount included in
other assets (1,555,686) (1,639,732)
____________ ____________
$ 6,305,225 $ 6,148,267
============ ============
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 4,392,041 and 4,389,805, respectively, for the
six months ended June 30, 2006 and 2005. For the three months ended June
30, 2006 and 2005, the weighted average number of shares outstanding was
4,392,041 and 4,389,805, respectively. For the six months ended June 30,
2006 and 2005, the Company had 396,178 and 355,298 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, 2006. 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, 2006 AND 2005
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
STOCK-BASED COMPENSATION: Effective January 1, 2006, the Company
adopted Statement of Financial Accounting Standards No. 123 (revised),
"Share-Based Payment" ("FAS 123R"), and chose to utilize the modified
prospective transition method. Under this method, compensation costs
recognized at June 30, 2006 relate to the estimated fair value at the grant
date of 75,310 stock options granted subsequent to January 1, 2006 in
accordance with FAS 123R. Prior to the adoption of FAS 123R the Company
accounted for stock options in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and recognized no compensation
expense in net income for stock options granted and has elected the
disclosure only provisions of FAS 123. In accordance with the provisions
of FAS 123R, options granted prior to January 1, 2006, have not been
restated to reflect the adoption of FAS 123R. The required services for
awards prior to January 1, 2006 had been rendered prior to December 31,
2005.
As a result of adopting FAS 123R on January 1, 2006, the Company's net
income for the six and three month periods ended June 30, 2006 was reduced
because the Company recognized approximately $42,000 and $21,000,
respectively, of compensation expense (included in Selling, General and
Administrative Expenses) in the periods that stock options were granted.
The impact on basic and diluted earnings per share for the six months and
quarter ended June 30, 2006 was not material and the per share earnings
remained at $.05 and $.03, respectively. For the six months and quarter
ended June 30, 2005, no compensation expense was recorded for options
granted in the period, as indicated above. The Company has used the Black-
Scholes option pricing model to estimate the fair value of stock options
using the following assumptions as at June 30, 2006:
Life expectancy - Key Employee 10 years
Life expectancy - Outside Director 5 years
Risk-free interest rate 5.2%
Expected volatility 61.1%
Dividends per share 2.1%
Weighted average fair
value at grant date $1.88
The above assumptions are based on a number of factors as follows:
(i) expected volatility was determined using the historical volatility of
the Company's stock price, (ii) the expected term of the options is based
on the period of time that the options granted are expected to be
outstanding, and (iii) the risk free rate is the U.S. Treasury rate
effective at the time of grant for the duration of the options granted.
Compensation cost is recognized on a straight-line basis over the vesting
period.
13
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2006 AND 2005
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
NEW FINANCIAL ACCOUNTING STANDARDS: In May 2005, the FASB issued SFAS
No. 154, "Accounting Changes and Error Corrections, a replacement of APB
Opinion No. 20 and FASB Statement No. 3", effective for accounting changes
and corrections of errors made in fiscal year 2006 and beyond. The effect
of this statement on the Company's consolidated financial statements will
be determined based upon the nature and significance of future accounting
changes or errors that would be subject to this statement.
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/(Loss) 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 Income/(Loss) Before Income Taxes by reportable segment:
NET SALES NET SALES
_______________ _______________
Six Months Three Months
Ended June 30, Ended June 30,
2006 2005 2006 2005
_______________ _______________
Professional $ 8,208 $ 8,311 $ 3,956 $ 4,056
Retail 2,168 1,953 1,159 826
Manufacturing 2,324 2,416 1,083 1,262
_______ _______ _______ _______
Total 12,700 12,680 6,198 6,144
Intercompany
Manufacturing (1,743) (2,107) (837) (1,087)
_______ _______ _______ _______
Consolidated $10,957 $10,573 $ 5,361 $ 5,057
======= ======= ======= =======
14
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2006 AND 2005
NOTE 2: SEGMENT INFORMATION (continued)
INCOME/(LOSS) INCOME/(LOSS)
BEFORE INCOME BEFORE INCOME
TAXES TAXES
_______________ _______________
Six Months Three Months
Ended June 30, Ended June 30,
2006 2005 2006 2005
_______________ _______________
Professional $ 657 $ 456 $ 312 $ 140
Retail 350 (13) 303 (48)
Manufacturing (658) (539) (430) (313)
_______ _______ ______ ______
Consolidated $ 349 $ (96) $ 185 $ (221)
======= ======= ====== ======
NOTE 3: COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation matters arising in the ordinary
course of business. It is the opinion of management that none of these
matters, at June 30, 2006, 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, 2005.
15
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2006 AND 2005
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Six months ended June 30, 2006:
For the six months ended June 30, 2006, net sales were $10,957,000,
compared to $10,573,000 achieved in the corresponding six months of 2005.
Gross profit for the six months ended June 30, 2006 was $4,572,000,
compared to gross profit of $4,379,000 achieved for the corresponding six-
month period in 2005. The increase in net sales and gross profit is the
result of an increase in net sales of the Retail brands segment in addition
to an increase in net sales of amenities. The overall gross profit for the
six months ended June 30, 2006 was 41.7% as compared to 41.4% for the six
months ended June 30, 2005.
Selling, general and administrative ("SGA") expenses for the six
months ended June 30, 2006 decreased by $212,000, to $4,286,000, when
compared to the corresponding 2005 six-month period total of $4,498,000.
This decrease can be attributed to a decline in rent expense as warehouse
facilities were consolidated and/or reduced, as well as a decline in
professional fees.
Interest expense for the six months ended June 30, 2006 was $68,000,
an increase of approximately $15,000 from the $53,000 incurred in the
corresponding period of 2005. For the six months ended June 30, 2006, the
Company accrued $45,000 in interest expense related to the Sorbie judgment,
more than offsetting any decline in interest expense on our bank debt.
While the Company believes it may ultimately prevail and/or settle for an
amount substantially below the amount already accrued, management continues
to accrue interest on the entire obligation because it can not predict the
outcome of the litigation. Interest income of $106,000 for the six months
ended June 30, 2006 was higher than the $51,000 earned in the corresponding
six months of 2005 due to an increase in invested cash and the overall
increase in interest rates. Other income includes royalty fees received
from the licensing of Frances Denney products.
Net income for the six-month period ended June 30, 2006 was $213,000,
compared to a net loss of $85,000 for the six months ended June 30, 2005.
Increased sales, an increased gross profit and a reduction in SGA expenses
all contributed to income from operations of $285,000 for the six months
ended June 30, 2006, compared to a loss from operations of $120,000 for the
comparable period in 2005. Income taxes for the six months ended June 30,
2006 were $136,000, comprised of a net current state income tax provision
of $28,000 and a deferred Federal income tax provision of $108,000.
16
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2006 AND 2005
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Basic and diluted earnings per share was $0.05 for the six months
ended June 30, 2006, compared to a loss per share of $0.02 for the six
ended June 30, 2005, based on a weighted average number of shares
outstanding of 4,392,041 and 4,389,805, respectively.
Three months ended June 30, 2006:
For the three months ended June 30, 2006, net sales were $5,361,000,
compared to $5,057,000 for the three months ended June 30, 2005, an
increase of $304,000. Gross profit for the three months ended June 30,
2006 was $2,354,000, compared to gross profit of $2,019,000 achieved for
the corresponding three-month period in 2005. As indicated above,
similarly to the six-month period ended June 30, 2006, the increase in net
sales and gross profit is a result of an increase in net sales of the
Retail brands segment. The gross profit for the three months ended June
30, 2006 was 43.9% as compared to 39.9% for the three months ended June 30,
2005, due in a large part to the favorable change in the sales mix.
Selling, general and administrative expenses for the three months
ended June 30, 2006 decreased by $47,000, from $2,255,000 to $2,208,000,
when compared to the corresponding three-month period of 2005.
Interest income for the three-month period ended June 30, 2006 was
$63,000, an increase of approximately $39,000 when compared to $24,000
earned in the corresponding three-month period of 2005, primarily as a
result of rising interest rates.
The income tax expense for the three months ended June 30, 2006 was
$69,000 compared to a net income tax benefit of $62,000 for the three-month
period ended June 30, 2005. For the three months ended June 30, 2006, net
income was $116,000 compared to a net loss of $159,000 for the
corresponding period in 2005. Basic and diluted earnings per share was
$0.03 for the three months ended June 30, 2006 and a net loss per share of
$0.04 for the three months ended June 30, 2005, based on a weighted average
number of shares of 4,392,041 and 4,389,805, respectively.
LIQUIDITY & CAPITAL RESOURCES
Cash and cash equivalents increased $294,000 from December 31, 2005,
to $5,897,000 at June 30, 2006. Total cash of $8,770,000 at June 30, 2006
includes $2,873,000 of cash invested in a restricted money market account
pledged as collateral for a bank loan. Accounts receivable were $1,853,000
at June 30, 2006, an increase of $421,000 from the $1,432,000 at December
31, 2005 due to the increased level of sales; inventories increased
17
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2006 AND 2005
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
approximately $157,000 from $6,148,000 at December 31, 2005 to $6,305,000
at June 30, 2006, as the Company increased inventory levels for anticipated
third-quarter sales.
Total current assets at June 30, 2006 were $17,077,000 compared to
$16,853,000 at December 31, 2005. Working capital increased $337,000 when
compared to December 31, 2005. The Company is still negotiating
construction of additional warehouse facilities on the Tampa, Florida
manufacturing property, estimated to cost approximately $1,000,000. As has
been the case in the past, the bulk of the Company's insurance policies
renew in July; as a result, it is anticipated that approximately $350,000
will be paid in the third quarter of 2006 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.
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, 2005 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
JUNE 30, 2006 AND 2005
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 June 30, 2006 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, 2006.
(b) CHANGES IN INTERNAL CONTROLS: No change in the Company's internal
control over financial reporting occurred during this reporting period 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.
19
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2006 AND 2005
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.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE STEPHAN CO.
/s/ Frank F. Ferola
_____________________________________
Frank F. Ferola
President and Chief Executive Officer
August 14, 2006
/s/ David A. Spiegel
____________________________________
David A. Spiegel
Principal Financial and
Accounting Officer
August 14, 2006
21