SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended March 31, 1997 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
the filing requirements for at least the past 90 days.
YES X
NO
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 and 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.
YES
NO
(APPLICABLE ONLY TO CORPORATE ISSUERS)
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of the period covered by this report.
Common Shares outstanding as of March 31, 1997
4,147,466
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 1997
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets
March 31, 1997 and December 31, 1996 3-4
Consolidated Statements of Operations
Three months ended March 31, 1997 and 1996 5
Consolidated Statements of Cash Flows
Three months ended March 31, 1997 and 1996 6-7
Notes to Consolidated Financial Statements 8-11
ITEM 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations. 12-13
PART II. OTHER INFORMATION 14
SIGNATURE 15
2
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
1997 1996
____________ ____________
CURRENT ASSETS
Cash and cash equivalents $ 7,631,502 $ 8,276,976
Accounts receivable, net 3,618,427 3,405,547
Inventories, net 8,903,912 8,432,185
Prepaid expenses and other
current assets 259,780 293,425
____________ ____________
TOTAL CURRENT ASSETS 20,413,621 20,408,133
PROPERTY, PLANT AND EQUIPMENT, net 2,162,576 2,160,678
INTANGIBLE ASSETS, net 22,885,047 23,131,120
OTHER ASSETS 1,063,343 798,579
____________ ____________
TOTAL ASSETS $ 46,524,587 $ 46,498,510
============ ============
See notes to Consolidated Financial Statements
(UNAUDITED)
3
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
1997 1996
___________ ____________
CURRENT LIABILITIES
Accounts payable and
accrued expenses $ 1,870,098 $ 2,553,974
Note payable to bank 1,400,000 1,400,000
Current portion of
long-term debt 1,765,942 1,804,879
Income taxes payable 560,421 464,593
____________ ____________
TOTAL CURRENT LIABILITIES 5,596,461 6,223,446
DEFERRED INCOME TAXES 358,513 298,461
LONG-TERM DEBT 6,138,583 6,688,930
____________ ____________
TOTAL LIABILITIES 12,093,557 13,210,837
____________ ____________
STOCKHOLDERS' EQUITY
Common stock, $.01 par value 41,475 41,475
Additional paid in capital 12,967,462 12,967,462
Retained earnings 21,422,093 20,278,736
____________ ____________
TOTAL STOCKHOLDERS' EQUITY 34,431,030 33,287,673
____________ ____________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 46,524,587 $ 46,498,510
============ ============
See notes to Consolidated Financial Statements
(UNAUDITED)
4
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31,
===========================
1997 1996
___________ ___________
NET SALES $ 6,394,144 $ 6,739,738
COST OF GOODS SOLD 2,335,400 2,991,187
___________ ___________
GROSS PROFIT 4,058,744 3,748,551
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,275,634 1,864,115
___________ ____________
OPERATING INCOME 1,783,110 1,884,436
OTHER INCOME(EXPENSE)
Interest income 98,390 98,066
Interest expense (135,564) (30,658)
Other 31,250 -
___________ ___________
INCOME BEFORE TAXES 1,777,186 1,951,844
INCOME TAXES 550,880 732,356
___________ ___________
NET INCOME $ 1,226,306 $ 1,219,488
=========== ===========
NET INCOME PER COMMON SHARE $ .30 $ .30
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,147,466 4,130,542
=========== ===========
See Notes to Consolidated Financial Statements
(UNAUDITED)
5
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
==========================
1997 1996
__________ __________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,226,306 $ 1,219,488
__________ __________
Adjustments to reconcile net income to
cash flows provided by operating
operating activities:
Depreciation 50,114 43,447
Amortization 246,073 205,881
Deferred income taxes 60,052 28,125
Provision for doubtful accounts 4,425 7,555
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Accounts receivable (217,305) (1,023,852)
Inventory (471,727) 63
Prepaid expenses
and other current assets 33,645 (15,850)
Accounts payable
and accrued expenses (683,876) (2,240,529)
Income taxes payable 95,828 102,062
___________ ___________
Total adjustments (882,771) (2,893,098)
___________ ___________
Net cash flows provided by
operating activities 343,535 (1,673,610)
___________ ___________
See Notes to Consolidated Financial Statements
(UNAUDITED)
6
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
==========================
1997 1996
___________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of intangible assets - (30,003)
Purchase of property, plant
and equipment (52,012) (26,111)
Net changes in other assets (264,764) (189,345)
___________ ___________
Net cash flows provided by/(used in)
investing activities (316,776) (245,459)
___________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (589,284) (30,290)
Dividends paid (82,949) -
___________ ___________
Net cash flows used in
financing activities (672,233) (30,290)
___________ ___________
NET CHANGE IN CASH AND
CASH EQUIVALENTS (645,474) (1,949,359)
___________ ___________
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 8,276,976 7,711,239
___________ ___________
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 7,631,502 $ 5,761,880
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ 135,111 $ 30,852
=========== ===========
Income Taxes Paid $ 395,000 $ 400,000
=========== ===========
See Notes to Consolidated Financial Statements
(UNAUDITED)
7
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 1997 AND 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: In the opinion of management, all
adjustments necessary for a fair presentation of financial position and
results of operations are reflected in the interim financial statements.
PRINCIPLES OF CONSOLIDATION: The consolidated financial
statements include the accounts of The Stephan Co. and its wholly-owned
subsidiaries, Foxy Products, Inc., Old 97 Company, Williamsport Barber and
Beauty Supply Corp., Stephan & Co. (formerly Heads or Nails, Inc.),
Scientific Research Products, Inc. of Delaware and Trevor Sorbie of
America, Inc. (collectively, the "Company"). All significant intercompany
balances and transactions have been eliminated in consolidation.
NATURE OF OPERATIONS: The Company is engaged in the manufacture,
sale, and distribution of personal care and grooming products throughout
the United States. The Company's business activity constitutes a single
reportable segment for purposes of Statement of Financial Accounting
Standards No 14.
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.
MAJOR CUSTOMERS: The Company performs ongoing credit evaluations
of its customers' financial condition and, generally, requires no
collateral. The Company does not believe that the credit risk represents a
material risk of loss to the Company. However, the loss of any major
customer could have a material adverse effect on the Company.
LONG-LIVED ASSETS: The Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" in the year ended December 31, 1996. SFAS No. 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held
and used, and for long-lived assets and certain identifiable intangibles to
be disposed of. The adoption of SFAS No. 121 did not have a significant
effect on the Company's financial position or results of operations.
STOCK-BASED COMPENSATION: On January 1, 1996, the Company adopted
SFAS No. 123, "Accounting for Stock-Based Compensation", which permits
entities to recognize as expense over the vesting period the fair value of
all stock-based awards on the date of grant. Alternatively, SFAS No. 123
allows entities to continue to measure compensation cost for stock-based
awards using the intrinsic value based method of accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to
8
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 1997 AND 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Employees", and to provide pro forma net income and pro forma earnings per
share disclosures as if the fair value method defined in SFAS No. 123 had
been applied. The Company has elected to continue to apply the provisions
of APB No. 25 and provide the pro forma disclosure provisions of SFAS No.
123.
FAIR VALUE OF FINANCIAL INSTRUMENTS: Statement of Financial
Accounting Standards No. 107, "Disclosure about Fair Value of Financial
Instruments," requires disclosure of the fair value of financial
instruments, both assets and liabilities, recognized and not recognized in
the consolidated balance sheets of the Company, for which it is practicable
to estimate fair value. The estimated fair values of financial instruments
which are presented herein have been determined by the Company using
available market information and appropriate valuation methodologies.
However, considerable judgment is required in interpreting market data to
develop estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of amounts the Company could realize
in a current market exchange.
The following methods and assumptions were used to estimate fair
value:
- the carrying amounts of cash and cash equivalents, receivables and
accounts payable approximate fair value due to their short term nature;
- discounted cash flows using current interest rates for financial
instruments with similar characteristics and maturity were used to
determine the fair value of notes receivable, notes payable and debt.
There were no significant differences as of March 31, 1997 and December 31,
1996 in the carrying value and fair market value of financial instruments.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include
cash, certificates of deposit, United States Treasury Bills, and municipal
bonds having maturities of two months or less. Also included in cash and
cash equivalents is a $400,000 certificate of deposit pledged as collateral
against a $400,000 note payable to bank. The Company maintains cash
deposits at certain financial institutions in amounts in excess of
federally insured limits of $100,000. Cash and cash equivalents held in
interest-bearing accounts as of March 31, 1997 and 1996 were approximately
$7,207,000 and $5,760,000 respectively.
INVENTORIES: Inventories stated at the lower of cost
(approximate actual cost on the first-in, first-out basis) or market.
9
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 1997 AND 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventories were as follows:
March 31, December 31,
1997 1996
___________ ____________
Raw Materials $ 1,333,070 $ 1,087,257
Packaging and components 2,539,786 2,341,759
Work in progress 576,487 1,019,317
Finished goods 4,454,569 3,983,852
___________ ____________
Total Inventories $ 8,903,912 $ 8,432,185
=========== ============
PROPERTY AND EQUIPMENT: Property and equipment are recorded at
cost. Routine repairs and maintenance are expenses as incurred.
Depreciation is provided on a straight line basis over the estimated useful
lives of the assets as follows:
Buildings and improvements 15-30 years
Machinery and equipment 5-7 years
Furniture, fixtures and office equipment 3-5 years
INTANGIBLE ASSETS: Intangible assets are amortized using the
straight-line method based on the following estimated useful lives:
Goodwill 20-40 years
Covenant not to compete 7 years
Trademarks 20-40 years
The amount of impairment, if any, in unamortized Goodwill is measured
based on projected future results of operations. To the extent future
results of operations of those subsidiaries to which the Goodwill relates
through the period such Goodwill is being amortized are sufficient to
absorb the amortization of Goodwill, the Company has deemed there to be no
impairment of Goodwill.
INCOME TAXES: Income taxes are calculated under the asset and
liability method of accounting. Deferred income taxes are recognized by
applying the enacted statutory rates applicable to future year differences
between the financial statement carrying amounts and the tax basis of
existing assets and liabilities. A valuation allowance is recorded when it
is more likely than not that some portion or all of the deferred tax asset
will not be realized.
10
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 1997 AND 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (con't)
NET INCOME PER COMMON SHARE: Net income per common share is
computed by dividing net income by the sum of the weighted average number
of shares of common stock and common stock assumed to be outstanding upon
exercise of all stock options, utilizing the treasury stock method. The
weighted average number of shares outstanding was 4,147,466 for the three
months ended March 31, 1997 and 4,130,542 for the three months ended
March 31, 1996. Fully diluted earnings per share is not presented as it is
not materially different.
11
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 1997 AND 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Sales for the first quarter of 1997 declined 5%, to $6,394,000, when
compared to sales of $6,740,000 for the quarter ended March 31, 1996. The
decrease in sales can be attributed to a decline in revenues related to the
brands acquired from Colgate-Palmolive Company, partly as a result of the
termination of the transition agreement, but more significantly due to the
higher level of sales of Quinsana Medicated Talc as a result of a non-
recurring order from the United States Armed Forces in February, 1996, of
approximately $325,000.
Despite the decline in sales, gross profit increased by slightly more than
$300,000, to $4,059,000, due to the favorable product mix, which was
enhanced by the inclusion of the Sorbie product line, acquired in June,
1996. The line, however, also brings with it higher selling expenses and
as a result, selling, general and administrative expenses increased by
$400,000 to $2,276,000 when compared to last year's first quarter total of
$1,864,000. The integration of the Sorbie line has progressed better than
anticipated, with the division contributing positively to the net income of
the Company. Additionally, interest expense for the quarter increased over
$100,000 as a result of interest paid on debt used to acquire Trevor Sorbie
of America, Inc. and the liquidation of obligations incurred in the
acquisition of the Colgate-Palmolive brands.
Net income of $1,226,000 was benefited from by the royalty of $31,250
received in connection with the Frances Denney/Color Me Beautiful licensing
agreement entered into in January, 1996. Additionally, first quarter
results include the sales and expenses of the Trevor Sorbie line of hair
care products, acquired in June, 1996.
Tax advantages of merchandise donated to a charitable organization in the
first quarter of 1997 had the effect of reducing the provision for income
taxes for the quarter ended March 31, 1997.
Earnings per share was $.30 for both this first quarter ended March 31,
1997 as well as for the first quarter of 1996.
12
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 1997 AND 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (con't).
LIQUIDITY & CAPITAL RESOURCES
Cash declined approximately $650,000, to $7,600,000, in the first quarter
as a result of payments made under existing long-term debt agreements as
well as the payment of dividends. Expenditures for new equipment as well
as other additions to fixed assets were offset by positive cash flow
provided by operating activities. Accounts receivable increased slightly
and inventory increased almost $500,000 due to an effort to increase
inventory levels for line extensions, bonus size promotions and upcoming
second quarter trade shows.
Total current assets at March 31, 1997 was $20,400,000 compared to a
similar amount at December 31, 1996, and approximately $900,000 higher than
the comparable period March 31, 1996.
Working capital declined from the first quarter of 1996 when compared to
the comparable period in 1997 due to the current portion of long-term debt
arising from the acquisition of the Colgate-Palmolive brands. Working
capital remained strong, at $14,800,000, or just over 3.6 to 1, which
represents an increase of over $600,000 from the beginning of the year.
13
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 1997 AND 1996
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule
14
SIGNATURE
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 Chairman of the Board
May 14, 1997
/s/ David A. Spiegel
___________________________
David A. Spiegel
Principal Financial Officer
May 14, 1997
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 7,631,502
<SECURITIES> 0
<RECEIVABLES> 3,679,023
<ALLOWANCES> 60,596
<INVENTORY> 8,903,912
<CURRENT-ASSETS> 20,413,621
<PP&E> 3,244,226
<DEPRECIATION> 1,081,650
<TOTAL-ASSETS> 46,524,587
<CURRENT-LIABILITIES> 5,596,461
<BONDS> 6,138,583
0
0
<COMMON> 41,475
<OTHER-SE> 34,389,555
<TOTAL-LIABILITY-AND-EQUITY> 46,524,587
<SALES> 6,394,144
<TOTAL-REVENUES> 6,523,784
<CGS> 2,335,400
<TOTAL-COSTS> 2,335,400
<OTHER-EXPENSES> 2,411,198
<LOSS-PROVISION> 5,326
<INTEREST-EXPENSE> 135,564
<INCOME-PRETAX> 1,777,186
<INCOME-TAX> 550,880
<INCOME-CONTINUING> 1,226,306
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,226,306
<EPS-PRIMARY> .30
<EPS-DILUTED> .30
</TABLE>
