SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 September 30, 1998
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
(APPLICABLE ONLY TO CORPORATE ISSUERS)
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Shares of Common Stock outstanding as of October 31, 1998:
4,725,858
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 1998
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997 4-5
Consolidated Statements of Operations for the
Nine months ended September 30, 1998 and 1997 6
Consolidated Statements of Operations for the
Quarter ended September 30, 1998 and 1997 7
Consolidated Statements of Cash Flows for the
Nine months ended September 30, 1998 and 1997 8-10
Notes to Consolidated Financial Statements 11-14
ITEM 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations. 15-17
PART II. OTHER INFORMATION
ITEM 4. Submission of matters to a vote of
Security Holders 18
ITEM 5. Other information 18
ITEM 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 1998
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains certain "forward-looking" statements. The
Stephan Co. (the "Company") desires to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 and is
including this statement for the express purpose of availing itself of the
protections of such safe harbor with respect to all such forward-looking
statements. Forward-looking statements contained herein include statements
with respect to the (i) anticipated levels of debt, and (ii) anticipated
gross profit margins and profitability (or lack thereof) of acquired
entities. The Company's ability to predict any such occurrences or the
effect of other events on the Company's financial condition or operations
is inherently uncertain. Therefore, the Company cautions each reader of
this report to carefully consider the specific factors and qualifications
discussed herein with respect to such forward-looking statements, as such
could affect the ability of the Company to achieve its objectives and may
cause actual results to differ materially from those anticipated herein.
3
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
1998 1997
____________ ____________
CURRENT ASSETS
Cash and cash equivalents $ 7,770,603 $ 8,491,174
Cash on deposit with trustee 530,019 610,126
Accounts receivable, net 5,208,673 4,696,248
Inventories, net 19,773,837 11,667,672
Prepaid expenses and other
current assets 375,972 269,304
____________ ____________
TOTAL CURRENT ASSETS 33,659,104 25,734,524
PROPERTY, PLANT AND EQUIPMENT, net 3,371,931 2,760,011
INTANGIBLE ASSETS, net 27,575,817 26,443,911
OTHER ASSETS 2,927,071 2,525,948
____________ ____________
TOTAL ASSETS $ 67,533,923 $ 57,464,394
============ ============
See notes to Consolidated Financial Statements
(UNAUDITED)
4
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
1998 1997
___________ ____________
CURRENT LIABILITIES
Accounts payable and
accrued expenses $ 3,225,537 $ 3,704,383
Note payable to bank 400,000 400,000
Note payable to trustee - 1,199,700
Current portion of
long-term debt 2,209,338 1,773,788
Income taxes payable 1,884,693 1,390,104
____________ ____________
TOTAL CURRENT LIABILITIES 7,719,568 8,467,975
DEFERRED INCOME TAXES 687,907 268,166
LONG-TERM DEBT 11,291,183 9,078,114
____________ ____________
TOTAL LIABILITIES 19,698,658 17,814,255
____________ ____________
STOCKHOLDERS' EQUITY
Common stock, $.01 par value 47,259 44,188
Additional paid in capital 19,596,870 15,979,709
Retained earnings 29,542,699 24,977,805
____________ ____________
49,186,828 41,001,702
LESS 125,000 CONTINGENTLY
RETURNABLE SHARES (1,351,563) (1,351,563)
____________ ____________
TOTAL STOCKHOLDERS' EQUITY 47,835,265 39,650,139
____________ ____________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 67,533,923 $ 57,464,394
============ ============
See notes to Consolidated Financial Statements
(UNAUDITED)
5
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended Sept. 30,
===========================
1998 1997
___________ ___________
NET SALES $26,877,396 $21,080,517
COST OF GOODS SOLD 10,345,268 7,266,564
___________ ___________
GROSS PROFIT 16,532,128 13,813,953
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 8,953,360 7,235,013
___________ ____________
OPERATING INCOME 7,578,768 6,578,940
OTHER INCOME(EXPENSE)
Interest income 294,552 279,400
Interest expense (719,246) (444,467)
Other 93,750 93,750
___________ ___________
INCOME BEFORE TAXES 7,247,824 6,507,623
INCOME TAXES 2,411,661 2,213,931
___________ ___________
NET INCOME $ 4,836,163 $ 4,293,692
=========== ===========
BASIC AND DILUTED EARNINGS PER SHARE $ 1.07 $ 1.01
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,513,913 4,235,921
=========== ===========
See Notes to Consolidated Financial Statements
(UNAUDITED)
6
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Quarter Ended Sept. 30,
===========================
1998 1997
___________ ___________
NET SALES $ 9,926,122 $ 7,580,618
COST OF GOODS SOLD 3,948,229 2,540,924
___________ ___________
GROSS PROFIT 5,977,893 5,039,694
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 3,303,142 2,532,287
___________ ____________
OPERATING INCOME 2,674,751 2,507,407
OTHER INCOME(EXPENSE)
Interest income 92,866 88,906
Interest expense (272,440) (175,062)
Other 31,250 31,250
___________ ___________
INCOME BEFORE TAXES 2,526,427 2,452,501
INCOME TAXES 798,809 845,456
___________ ___________
NET INCOME $ 1,727,618 $ 1,607,045
=========== ===========
BASIC AND DILUTED EARNINGS PER SHARE $ .38 $ .37
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,600,858 4,398,603
=========== ===========
See Notes to Consolidated Financial Statements
(UNAUDITED)
7
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended Sept. 30,
==========================
1998 1997
__________ __________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,836,163 $ 4,293,692
__________ __________
Adjustments to reconcile net income to
cash flows used in
operating activities:
Depreciation 236,451 198,832
Amortization 886,497 738,613
Deferred income taxes 419,741 203,402
Provision for doubtful accounts 44,190 15,616
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Accounts receivable 643,385 (1,967,411)
Inventory (5,421,765) (1,869,997)
Prepaid expenses
and other current assets (32,968) 56,814
Accounts payable
and accrued expenses (1,359,546) (2,685,057)
Income taxes payable (494,589) 640,529
___________ ___________
Total adjustments (5,078,604) (4,668,659)
___________ ___________
Net cash flows used in
operating activities (242,441) (374,967)
___________ ___________
See Notes to Consolidated Financial Statements
(UNAUDITED)
8
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended Sept. 30,
===========================
1998 1997
___________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired from acquisition 5,000 -
Change in cash on deposit with trustee 80,107 -
Purchase of property, plant
and equipment (539,081) (444,812)
Change in intangible assets 574,428 -
Net changes in other assets 107,447 91,017
___________ ___________
Net cash flows provided by/(used in)
investing activities 227,901 (353,795)
___________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (1,357,125) (1,447,737)
Repayment of notes payable (3,077,637) -
Acquisition of treasury stock - (130,610)
Proceeds from note payable to bank 4,000,000 2,000,000
Dividends paid (271,269) (253,564)
___________ ___________
Net cash flows (used in)/provided by
financing activities (706,031) 168,089
___________ ___________
NET CHANGE IN CASH AND
CASH EQUIVALENTS (720,571) (560,673)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 8,491,174 8,276,976
___________ ___________
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 7,770,603 $ 7,716,303
=========== ===========
See Notes to Consolidated Financial Statements
(UNAUDITED)
9
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ 684,624 $ 456,442
=========== ===========
Income Taxes Paid $ 1,354,424 $ 1,336,000
=========== ===========
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
In connection with the acquisition of certain assets of Morris-Flamingo,
L.P., and related parties, on March 18, 1998, the Company acquired cash,
accounts receivable, inventory, prepaid expenses, fixed and intangible
assets in exchange for the issuance of Common Stock with an approximate
value of $3,700,000 and the assumption of certain liabilities.
See Notes to Consolidated Financial Statements
(UNAUDITED)
10
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997
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., Scientific Research Products, Inc. of
Delaware, Trevor Sorbie of America, Inc., Stephan Distributing, Inc. and
Morris Flamingo-Stephan, 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 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 credit risk represents a
material risk of loss to the Company. However, the loss of one or more
significant customers 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 has not had 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
11
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
APB Opinion No. 25, "Accounting for Stock Issued to 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 Opinion No.
25 and provide the pro forma disclosure provisions in accordance with 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 what is considered to be appropriate
valuation methodologies. However, considerable judgment is often 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, accounts
receivable and accounts payable approximate fair value due to their short
term nature; and
- discounted cash flows using current interest rates for financial
instruments with similar characteristics and maturities were used to
determine the fair value of notes receivable, notes payable and debt.
There were no significant differences in the carrying value and fair market
value of financial instruments as of September 30, 1998 or December 31,
1997.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include
cash, certificates of deposit, and short-term municipal bonds having
maturities of 90 days 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 September 30, 1998 and 1997 were approximately $ 7,579,000
and $7,258,000, respectively.
INVENTORIES: Inventories are stated at the lower of cost
(determined on a first-in, first-out basis) or market.
12
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventories were as follows:
September 30, December 31,
1998 1997
___________ ____________
Raw Materials $ 4,589,772 $ 2,880,011
Packaging and components 5,870,132 4,060,389
Work in progress 464,738 437,965
Finished goods 8,849,195 4,289,307
___________ ____________
Total Inventories $19,773,837 $ 11,667,672
=========== ============
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
will be part of the finished product. Finished goods also includes hair
dryers, electric clippers, lather machines, scissors and salon furniture.
Included in Other Assets is packaging and components inventory not
anticipated to be utilized in less than one year.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment
are recorded at cost. Routine repairs and maintenance are expensed 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 5-10 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
Deferred acquisition costs 10 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
over 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.
13
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
BASIC AND DILUTED EARNINGS PER SHARE: Effective December 31, 1997,
the Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS No. 128). The provisions of SFAS No. 128
establish standards for computing and presenting earnings per share (EPS)
and require the Company to restate all prior years' EPS data presented.
The adoption of SFAS No. 128 has not had a material effect on the Company's
previously reported EPS. Basic and diluted EPS are computed by dividing
net income by the sum of the weighted average number of shares of Common
Stock outstanding. The weighted average number of shares outstanding was
4,513,913 for the nine months ended September 30, 1998 and 4,235,921 for
the nine months ended September 30, 1997. For the quarter ended September
30, 1998, the weighted average number of shares outstanding was 4,600,858
and such number was 4,398,603 for the quarter ended September 30, 1997.
NEW FINANCIAL ACCOUNTING STANDARDS: In June, 1997, SFAS No. 130,
"Reporting Comprehensive Income" and SFAS. No. 131, "Disclosures about
Segments of an Enterprise and Related Information" were issued. The
provisions of SFAS No. 130 were adopted by the Company in the first quarter
of 1998. This statement establishes standards for the reporting of
comprehensive income and its components. Implementation of this disclosure
standard has not affected the Company's financial position, results of
operations or the manner in which financial information is currently
presented. In accordance with SFAS No. 131, the Company may be required to
modify or expand its financial statement disclosure for operating segments,
products and services, and geographic areas. Implementation of this
disclosure standard, which must be adopted by December 31, 1998, is not
expected to materially affect the Company's financial position or results
of operations or its' financial presentation.
14
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 1998 AND 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Net sales for the quarter ended September 30, 1998 were up 31% to over
$9,900,000 when compared to the $7,600,000 achieved in the third quarter of
1997. For the nine months ended September 30, 1998, net sales increased
27%, to $26,877,000 from $21,081,000 for the corresponding period in 1997.
The increase in sales can be principally attributed to revenues generated
from the Image and Modern lines acquired from New Image Laboratories, Inc.
in June, 1997 and the revenues provided from the acquisition of the
business of Morris-Flamingo on March 18, 1998.
Net income for the third quarter of 1998 increased 8%, to $1,728,000
compared to the $1,607,000 for the quarter ended September 30, 1997.
Earnings per share for the third quarter was $.38 compared to $.37 for the
quarter ended September 30, 1997. For the nine months ended September 30,
1998, net income was up about 13% when compared with the corresponding nine
month period in 1997, increasing approximately $540,000, to $4,836,000
while earnings per share rose $.06 cents a share to $1.07, even with the
additional 307,058 shares issued as a result of the acquisition of Morris
Flamingo.
Gross profit for the quarter ended September 30, 1998 increased
$938,000, to $5,978,000, and for the nine months ended September 30, 1998,
gross profit increased to $16,532,000 from $13,814,000 in the corresponding
period for 1997. The increase for both the quarter and nine months
represented a 19% increase over the corresponding periods in 1997 and was
not only a result of the increased revenues generated from the New Image
brands and Morris-Flamingo, but also continuing profits generated by the
retail, ethnic and professional brands. However, as anticipated and
discussed in prior reports, the overall gross profit margin of the Company
decreased as a result of the Morris-Flamingo acquisition. For the quarter
ended September 30, 1998, the gross profit margin decreased from 66% to 60%
and for the nine month period ended September 30, 1998, it declined from
66% to 62% when compared to the corresponding period of 1997. For the most
part, Morris-Flamingo has operated at a loss for the past few years.
Management took this into consideration when evaluating the acquisition and
while it is expected that in the short term, overall gross profit margins
will continue to decrease and selling, general and administrative expenses
will increase, the distribution opportunities the acquisition affords the
Company are expected to have a positive impact on future operations.
Efforts and initiatives have been implemented to increase the gross margin
of this new subsidiary and management believes that a profitability level
compatible with the Company's other existing results of operations may
(although there can be no such assurances) be achieved in 12-15 months.
Selling, general and administrative expenses increased $771,000, or
30%, for the quarter ended September 30, 1998 when compared to the quarter
ended September 30, 1997 and for the nine months ended September 30, 1998,
15
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 1998 AND 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (con't).
it increased $1,718,000, an increase of almost 24%. These increases were
principally due to the additional expenses generated by our recent
acquisitions. While there has been an increase from an absolute dollar
amount in the selling, general and administrative expenses, these expenses
have actually declined as a percent of net sales.
Interest expense for the quarter and nine months ended September 30,
1998 increased $97,000 and $275,000, to $272,000 and $719,000,
respectively, as a result of interest paid on debt used to acquire the
Image lines and the Morris-Flamingo acquisition. Interest expense has also
increased as a result of income tax audits concluded in the third quarter
of 1998. The Internal Revenue Service and the State of Florida completed
audits of the Company's income tax returns filed for the tax years ended
December 31, 1996 and 1995. As a result of the net audit adjustments, and
the filing of the 1997 Corporate tax returns due in September, 1998, the
provision for Federal and State income taxes was favorably impacted in the
third quarter. Interest income increased slightly for the quarter and nine
month period. Other income of $31,250 and $93,750, respectively,
represents the royalty received in connection with the Frances Denney/Color
Me Beautiful licensing agreement entered into in January, 1996.
LIQUIDITY & CAPITAL RESOURCES
Cash and cash equivalents decreased to $7,770,000, exclusive of funds
on deposit with the trustee of the Liquidating Trust created in connection
with the acquisition of the Image brands. In the first quarter of 1998,
the Company borrowed an additional $1,000,000 to fund the last payment to
the Trust, in addition to borrowing $3,000,000 in connection with the
Morris-Flamingo acquisition, as explained more fully below. Cash on deposit
with the trustee decreased to $530,000 from $610,000 at December 31, 1997.
In accordance with the terms of the Liquidating Trust, these funds are to
be held by the Trustee to settle the remaining liabilities assumed in the
New Image acquisition.
Accounts receivable and inventory have increased significantly from
December 31, 1997 as a result of acquisitions made by the Company. In
addition to the increase in accounts receivable acquired in the Morris-
Flamingo acquisition, increased sales of retail brands acquired from Image
to large, national drug chains and other major retailers has increased the
outstanding accounts receivable both from an actual dollar amount due to
sales, as well as the length of time the receivables remain outstanding.
Net inventories increased substantially from December 31, 1997 compared to
September 30, 1998. This increase is principally due to the Image and
Morris-Flamingo acquisitions, which have added a significant number of
Stock Keeping Units (SKU's) the Company manufactures and carries. As a
result, many more chemicals, raw materials, components, packaging and
finished goods are required to be kept in stock in order to ensure product
availability, however management is attempting to reduce inventory levels
16
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 1998 AND 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (con't).
by reducing lead times and eliminating Skis.
Expenditures for new equipment, as well as other additions to fixed assets,
continued through the third quarter of 1998 in an effort to increase
production capabilities to meet product and customer requirements.
Total current assets at September 30, 1998 was $33,659,000 compared to
$25,735,000 at December 31, 1997, and approximately $7,500,000 higher than
the total current assets on September 30, 1997. Working capital increased
over $8,650,000 when compared to December 31, 1997. The Company is subject
to various financial covenants with respect to working capital, current
maturity coverage and funded debt ratios under the loan agreements with
NationsBank, N.A. At September 30, 1998, the Company significantly
exceeded the minimum requirements of the covenants.
On March 18, 1998, the Company signed an Asset Purchase Agreement (the
"Agreement") with Morris-Flamingo, L.P., Morris-Flamingo Beauty Products,
Inc., Shaheen & Co., Inc. and Shouky A. Shaheen, for the acquisition of
certain assets and liabilities (including the immediate payment of a note
payable to Fleet Capital Corp. approximating $1,880,000) of Morris-
Flamingo, L.P., in exchange for 307,058 shares of the Company's restricted
(as provided for by Rule 144 of the Securities Act of 1933) common stock.
The transaction was recorded as a purchase, and, based upon the net assets
received, goodwill of approximately $2,400,000 was recorded. The agreement
also provides for 30% of the shares issued to be held in escrow, pending
the final determination of the value of the net assets acquired. Morris-
Flamingo, L.P. is a large barber and beauty supply distributor. In
connection with the acquisition of Morris-Flamingo, L.P., and the related
agreement to retire its outstanding Fleet Capital Corp. debt, the Company
secured additional financing from NationsBank, N.A. in the amount of
$3,000,000, and pledged all of the issued common stock of Morris Flamingo-
Stephan, Inc. to the bank as collateral for the loan. The principal on the
loan is payable in equal monthly installments through March, 2005 and bears
interest at the rate of 6.92% per annum.
In September, 1998, the Company decided not to pursue a contemplated
acquisition of the assets of Rex Chemical Corp. (RCC) pursuant to a non-
binding letter of intent signed in July, 1998,
YEAR 2000 ISSUES
Included in the Asset Purchase Agreement with Image, the Company
acquired the computer system used by Image and is in the process of
converting its existing computer systems to that system. The software in
use will be updated by the end of 1998 and is expected to be Year 2000
compliant. Management of the Company does not expect costs relating to
Year 2000 problems to have any material effect on its financial condition,
results of operations or cash flows.
17
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 1998 AND 1997
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on Friday,
August 21, 1998. The following individuals, constituting all of the
Company's continuing directors, were nominated and duly elected to be
directors of the Company by the holders of a majority of the outstanding
common stock of the Company.
Votes
__________________________
For Withheld
___________ ___________
Frank F. Ferola 3,955,081 463,247
Thomas M. D'Ambrosio 3,947,581 470,747
Leonard Genovese 3,956,086 462,242
John DePinto 3,947,609 470,719
Curtis Carlson 3,956,086 462,242
Shouky A. Shaheen 3,952,086 466,242
In addition to the above, the shareholders approved (1,911,998
shares of Common Stock voted in favor of the amendment, 1,722,659 shares
voted against, and 10,113 shares abstained, excluding 773,558 non-voted
Broker shares) an amendment to the Company's By-Laws that provides for the
classification of the Board of Directors into three classes in order to
allow staggered three-year terms for Directors.
ITEM 5. OTHER INFORMATION
In accordance with Rules 14a-4(c) and 14a-5(e) promulgated under the
Securities Exchange Act of 1934, the Registrant hereby again notifies its
stockholders that if the Company does not receive notice by January 19,
1999 of a proposed matter to be submitted for stockholder vote at the
Company's 1999 Annual Meeting, then any proxies held by members of the
Company's management in respect of such Meeting may be voted in the
discretion of such management members on such matter, without any
discussion of such proposed matter in the proxy statement to be distributed
in respect of such Meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27: Financial Data Schedule
18
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 Chairman of the Board
November 13, 1998
/s/ David A. Spiegel
___________________________
David A. Spiegel
Principal Financial and
Accounting Officer
November 13, 1998
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 8,300,622
<SECURITIES> 0
<RECEIVABLES> 5,351,222
<ALLOWANCES> 142,549
<INVENTORY> 19,773,837
<CURRENT-ASSETS> 33,659,104
<PP&E> 4,921,698
<DEPRECIATION> 1,549,767
<TOTAL-ASSETS> 67,533,923
<CURRENT-LIABILITIES> 7,719,568
<BONDS> 11,291,183
0
0
<COMMON> 47,259
<OTHER-SE> 47,788,006
<TOTAL-LIABILITY-AND-EQUITY> 67,533,923
<SALES> 26,877,396
<TOTAL-REVENUES> 27,265,698
<CGS> 10,345,268
<TOTAL-COSTS> 10,345,268
<OTHER-EXPENSES> 9,672,606
<LOSS-PROVISION> 41,112
<INTEREST-EXPENSE> 719,246
<INCOME-PRETAX> 7,247,824
<INCOME-TAX> 2,411,661
<INCOME-CONTINUING> 4,836,163
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,836,163
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.07
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