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 March 31, 1999
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 May 15, 1999:
4,725,858
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 1999
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998 3-4
Consolidated Statements of Operations for the
Quarter ended March 31, 1999 and 1998 5
Consolidated Statements of Cash Flows for the
Quarter ended March 31, 1999 and 1998 6-8
Notes to Consolidated Financial Statements 9-13
ITEM 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations. 14-17
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
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 gross profit margins and profitability
(or lack thereof) of acquired entities and (ii) the ability to reduce costs
and (iii) the institution and outcome of litigation commenced against the
Company in respect of its overstatement of operating results for 1998
interim periods and any risks, uncertainties and problems inherent in such
litigation. 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.
2
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
1999 1998
(UNAUDITED)
____________ ____________
CURRENT ASSETS
Cash and cash equivalents $ 8,534,131 $ 8,081,762
Cash on deposit with trustee 257,038 270,684
Accounts receivable, net 4,719,196 4,680,170
Inventories, net 14,552,509 15,286,370
Income taxes receivable 57,925 83,888
Prepaid expenses and other
current assets 258,460 219,897
____________ ____________
TOTAL CURRENT ASSETS 28,379,259 28,622,771
PROPERTY, PLANT AND EQUIPMENT, net 3,096,163 3,120,658
INTANGIBLE ASSETS, net 26,765,169 27,086,358
OTHER ASSETS 2,219,770 2,432,278
____________ ____________
TOTAL ASSETS $ 60,460,361 $ 61,262,065
============ ============
See notes to Consolidated Financial Statements
3
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
1999 1998
(UNAUDITED)
___________ ____________
CURRENT LIABILITIES
Accounts payable and
accrued expenses $ 2,276,049 $ 3,126,756
Note payable to bank 400,000 400,000
Current portion of
long-term debt 2,174,996 1,804,971
____________ ____________
TOTAL CURRENT LIABILITIES 4,851,045 5,331,727
DEFERRED INCOME TAXES 593,838 554,017
LONG-TERM DEBT 10,984,286 11,718,169
____________ ____________
TOTAL LIABILITIES 16,429,169 17,603,913
____________ ____________
STOCKHOLDERS' EQUITY
Common stock, $.01 par value 47,259 47,259
Additional paid in capital 19,692,043 19,692,043
Retained earnings 25,643,453 25,270,413
____________ ____________
45,382,755 45,009,715
LESS 125,000 CONTINGENTLY
RETURNABLE SHARES (1,351,563) (1,351,563)
____________ ____________
TOTAL STOCKHOLDERS' EQUITY 44,031,192 43,658,152
____________ ____________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 60,460,361 $ 61,262,065
============ ============
See notes to Consolidated Financial Statements
4
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Quarter Ended
March 31, 1999
===========================
1999 1998
___________ ___________
NET SALES $ 8,587,870 $ 7,650,687
COST OF GOODS SOLD 4,771,112 2,748,099
___________ ___________
GROSS PROFIT 3,816,758 4,902,588
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,998,336 2,731,704
___________ ____________
OPERATING INCOME 818,422 2,170,884
OTHER INCOME(EXPENSE)
Interest income 86,801 99,026
Interest expense (204,606) (186,430)
Other 40,000 31,250
___________ ___________
INCOME BEFORE TAXES 740,617 2,114,730
INCOME TAXES 273,060 702,050
___________ ___________
NET INCOME $ 467,557 $ 1,412,680
=========== ===========
BASIC AND DILUTED EARNINGS PER SHARE $ .10 $ .33
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,600,858 4,340,024
=========== ===========
See Notes to Consolidated Financial Statements
5
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Quarter Ended
March 31, 1999
==========================
1999 1998
__________ __________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 467,557 $ 1,412,680
__________ __________
Adjustments to reconcile net income to
cash flows used in
operating activities:
Depreciation 124,672 77,429
Amortization 294,448 288,008
Deferred income taxes 39,821 74,175
Provision for doubtful accounts 32,041 15,240
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Accounts receivable (71,067) (412,117)
Inventory 733,861 (1,047,833)
Income taxes receivable 25,963 -
Prepaid expenses
and other current assets (38,563) 14,671
Other assets 212,508 50,179
Accounts payable
and accrued expenses (823,966) (177,956)
Income taxes payable - (201,635)
___________ ___________
Total adjustments 529,718 (1,319,839)
___________ ___________
Net cash flows provided
by operating activities 997,275 92,841
___________ ___________
See Notes to Consolidated Financial Statements
6
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Quarter Ended
March 31, 1999
===========================
1999 1998
___________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired from acquisition - 5,000
Decrease in cash on deposit with trustee 13,646 -
Purchase of property, plant
and equipment (100,177) (216,707)
Purchase of intangible assets - (85,291)
___________ ___________
Net cash flows used in
investing activities (86,531) (296,998)
___________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (363,858) (505,224)
Repayment of notes payable - (3,077,637)
Proceeds from note payable to bank - 4,000,000
Dividends paid (94,517) (88,376)
___________ ___________
Net cash flows (used in)/provided by
financing activities (458,375) 328,763
___________ ___________
NET CHANGE IN CASH AND
CASH EQUIVALENTS 452,369 124,606
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 8,081,762 8,491,174
___________ ___________
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 8,534,131 $ 8,615,780
=========== ===========
See Notes to Consolidated Financial Statements
7
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
QUARTER MONTHS ENDED MARCH 31, 1999 AND 1998
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ 246,330 $ 194,220
=========== ===========
Income Taxes Paid $ 317,440 $ 810,000
=========== ===========
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, inventories, prepaid expenses, fixed and intangible
assets in exchange for the issuance of Common Stock with the approximate
value of $3,700,000 and the assumption of certain liabilities.
See Notes to Consolidated Financial Statements
8
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED MARCH 31, 1999 AND 1998
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 hair and personal care grooming products
throughout the United States. Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related
Information" requires the reporting of segment information using a
"management approach" as it relates to the operating segments of a
business. 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.
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: SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
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. SFAS No. 121 did not have a material
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
9
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED MARCH 31, 1999 AND 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 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 recognized 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 sale of such instrument.
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 payable and debt.
There were no significant differences as of March 31, 1999 and December 31,
1998 in the carrying value and fair market value of financial instruments.
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 March 31, 1999 and December 31, 1998 were approximately
$7,955,000 and $7,121,000, respectively.
INVENTORIES: Inventories are stated at the lower of cost
(determined on a first-in, first-out basis) or market.
10
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED MARCH 31, 1999 AND 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories were as follows:
March 31, December 31,
1999 1998
____________ ____________
Raw Materials $ 3,814,437 $ 4,042,217
Packaging and components 4,363,109 4,375,596
Work in progress 948,570 959,057
Finished goods 7,137,777 7,848,046
____________ ____________
$ 16,263,893 $ 17,224,916
Less: Amount included in
other assets (1,711,384) (1,938,546)
____________ ____________
$ 14,552,509 $ 15,286,370
============ ============
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 include hair
dryers, electric clippers, lather machines, scissors and salon furniture.
Included in other assets are raw materials, 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
11
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED MARCH 31, 1999 AND 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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: 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 4,600,858 for the quarter ended March 31, 1999
and 4,340,024 for the quarter ended March 31, 1998.
NEW FINANCIAL ACCOUNTING STANDARDS: In June, 1997, the Financial
Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting
Comprehensive Income" and SFAS. No. 131, "Disclosures about Segments of an
Enterprise and Related Information". 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 did not affect 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 is required to modify or expand the financial statement
disclosures for operating segments, products and services, and geographic
areas. Implementation of this disclosure standard, which was adopted in
the year ended December 31, 1998, did not affect the Company's financial
position or results of operations.
In June, 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". The Statement provides
guidance for the recognition and measurement of derivatives and hedging
activities. This statement is not expected to have a material impact on
the Company's financial position, results of operations or cash flows.
NOTE 2: SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", effective for the year ended December
31, 1998. In accordance with the guidelines established by SFAS No. 131,
the Company has identified three reportable operating segments, based upon
how management evaluates its business. These segments are Professional
12
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED MARCH 31, 1999 AND 1998
NOTE 2: SEGMENT INFORMATION (continued)
Hair Care Products and Distribution ("Professional"), Retail Personal Care
Products ("Retail"), and Manufacturing. The Professional segment generally
has as a customer base distributors who purchase the Company's hair
products and beauty and barber supplies for sale to salons and barber
shops. The customer base for the Retail segment is mass merchandisers,
chain drug stores and supermarkets who sell the product to the end user.
The Manufacturing segment manufactures products for the different
subsidiaries of the Company, as well as manufacturing private label brands
for customers.
The Company conducts operations primarily in the United States and
sales to international customers are not material to consolidated revenues.
The following table, in thousands, summarizes Net Sales and Income Before
Income Taxes by reportable segment:
INCOME BEFORE
NET SALES INCOME TAXES
_______________ _______________
Quarter Ended Quarter Ended
March 31, March 31,
1999 1998 1999 1998
_______________ _______________
Professional $ 5,317 $ 4,245 $ (153) $ 902
Retail 2,455 2,583 770 830
Manufacturing 2,797 3,306 301 611
_______ _______ ______ _______
Total 10,569 10,134 918 2,343
Intercompany
Manufacturing (1,981) (2,483) (177) (228)
_______ _______ ______ _______
Consolidated $ 8,588 $ 7,651 $ 741 $ 2,115
======= ======= ====== =======
13
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 1999 AND 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW
The first quarter of 1999, while disappointing when compared to the
first quarter of 1998, was encouraging in light of the poor performance the
Company had for the year ended December 31, 1998. Sales, gross profit
margins and selling, general and administrative expenses showed improvement
when compared to the fourth quarter of 1998. The Company is aggressively
working to control costs in order to return to higher profit margins and
higher net income.
RESULTS OF OPERATIONS
Sales for the first quarter of 1999 increased 12%, to $8,588,000,
compared to sales of $7,651,000 for the quarter ended March 31, 1998. The
increase in sales can be principally attributed to revenues provided from
the Morris-Flamingo acquisition.
While sales increased over the corresponding quarter of 1998, largely
as a result of the Morris-Flamingo, L.P. acquisition, the Morris Flamingo
sales had a significantly lower gross profit level than other divisions or
subsidiaries of the Company. Gross profit decreased by approximately
$1,100,000, to $3,817,000, due to the change in the overall sales mix
discussed above and a decline in the sales and gross profit margins of
certain other retail and professional brands.
Overall, the gross profit margin decreased to 44.4% for the quarter
ended March 31, 1999 when compared to the 64.1% achieved in the first
quarter of 1998. This decline was a result of the factors mentioned above.
However, the gross profit margin has increased from the overall gross
profit of 1998, when it dropped to 38.2%. While the Company is optimistic
that it can continue to improve the gross profit margin, it is still
expected to be adversely impacted in future quarters as a result of the
lower gross margins generated by Morris-Flamingo sales. Efforts and
initiatives to reduce costs of sales continue with extensive line reviews
and evaluations of suppliers in an effort to improve the gross margin and
the overall profitability of Morris-Flamingo, as well as the Company as a
whole.
Net income was $468,000, decreasing 67%, or $945,000, from the first
quarter of 1998, when it was approximately $1,413,000. Basic earnings per
share, computed on a higher weighted average number of shares outstanding
due to the Morris-Flamingo acquisition, decreased 69% to $.10 for the first
quarter ended March 31, 1999 when compared to $.33 for the first quarter of
1998.
Selling, general and administrative expenses increased by
approximately $267,000, to $2,998,000 when compared to last year's first
quarter total of $2,732,000. When compared, however, to the selling,
14
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 1999 AND 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued).
general and administrative expenses incurred in the fourth quarter of 1998,
the Company was able to reduce these expenses by approximately $290,000.
While the Company is continuing in its efforts to control selling, general
and administrative expenses, however there are no assurances that these
expenses will continue to decline in the future. Interest expense for the
quarter increased approximately $18,000 as a result of interest paid on
incremental long-term borrowings used to acquire Morris-Flamingo, L.P.
Income taxes for the first quarter of 1999 decreased almost $430,000 as a
result of significantly lower operating income.
LIQUIDITY & CAPITAL RESOURCES
Cash and cash equivalents increased slightly more than $450,000, to
$8,534,000. Inventory decreased $734,000 from 1998. The reduction in
inventory is indicative of the Company's efforts to reduce the amount of
inventory on hand, especially as it relates to Morris Flamingo. The
Company still finds it necessary, however, to carry a larger inventory than
in past years due to the significant amount of Stock Keeping Units (SKU's)
the Company must manufacture and carry. As such, many more chemicals, raw
materials, components, packaging and finished goods are required to be kept
in stock in order to ensure product availability. It is also anticipated
that inventory may rise in the near term due to changing regulations in
California as it relates to the alcohol content of certain products.
Inventory manufactured prior to June 1, 1999 will not be subject to the
more stringent regulations.
Expenditures for new equipment, as well as other additions to fixed
assets, continued in the first quarter of 1999 in an effort to increase
production capabilities to meet product and customer requirements. As
indicated in the Company's annual report for the year ended December 31,
1998, the Company anticipates that it will spend approximately $1,000,000
to construct new warehousing on existing land adjacent to the Tampa
manufacturing facility in an effort to consolidate off-site locations and
reduce rental expense. These improvements will either be funded from
existing cash resources or new borrowings, depending upon available cash
and current interest rates.
Total current assets at March 31, 1999 was $28,379,000 compared to
$28,623,000 at December 31, 1998. Working capital increased approximately
$237,000 when compared to December 31, 1998. 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 a
bank. At March 31, 1999, the Company was in compliance with the modified
requirements of the covenants, under the terms of waiver received
subsequent to the year ended December 31, 1998.
Subsequent to the year ended December 31, 1998, the Company discovered that
the method used to estimate interim inventory figures resulted in the
15
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 1999 AND 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued).
use of incorrect inventory amounts and cost of sales in the financial
information of the second and third quarters of 1998. This error was
caused, in part, by the change in sales mix of the business as a result of
the Morris Flamingo acquisition and a decline in the sales and historical
gross profit margins of certain retail and professional brands. Subsequent
to the Company's April 1, 1999 press release referencing the foregoing, the
Company has learned that it has been named in two lawsuits seeking to
recover damages by shareholders who may have been adversely affected by
these inaccurate interim financial statements. The Company has agreed to
indemnify its officers and directors and believes it has meritorious
defenses against these allegations. However, it is impossible to predict
the outcome of any such matters as many unknown factors exist such as the
likelihood of future claims, insurance limits, and the outcome of jury
trial.
YEAR 2000 COMPUTER SYSTEMS COMPLIANCE
The Year 2000, or Y2K problem, relates to the inability of computer
systems to properly recognize and process date sensitive information. Many
older computer software programs refer to years by their final two digits,
thus some computer systems may interpret the year 2000 as 1900, and cause
date related or operational failures. The problems caused by these
potential system failures may have a more significant impact on certain
types of businesses or industries than others, and these factors must be
taken into consideration when assessing the overall risk that a company may
be exposed to. Management has determined that the Company's Year 2000
compliance project takes all relevant factors into consideration when
determining that the risk of business disruption would be limited due to
the nature of the business the Company is involved in, the degree of
sophistication of customers and suppliers, and the financial stability of
the Company itself.
While it is the Company's assessment that its risk of exposure to Y2K
problems are low, certain Year 2000 risk factors could have a material
adverse effect on results of operations, liquidity and financial condition.
For the most part, these risks are not within the Company's control. These
risk factors include, but are not limited to, unexpected failures by
significant business suppliers and/or customers, extended failures by
public utility companies or common carriers supplying goods or services to
the Company or delivering finished product manufactured by the Company, or
failures in the banking system and/or capital markets.
The Company has completed an assessment of its Information Technology
(IT) systems in conjunction with the integration of the software and
hardware currently in use and has determined that sales and accounts
receivable comprise the more significant IT systems that might be affected
by the Y2K problem. The Company believes that there currently is in place
sufficient collateral or alternative methods of maintaining information
16
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 1999 AND 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (con't).
should other IT systems fail. Costs related to the overall assessment of
the Company's Y2K readiness are not material.
The Company purchases all of its raw materials, components and
packaging from third party suppliers, and as such, may be at risk from
suppliers who may not be Y2K compliant. The inability or failure of
suppliers to be Y2K compliant may result in shortages that could adversely
impact the operations and condition of the Company. While it is difficult
to accurately project the disruptions that may occur under these
circumstances, the Company believes that it maintains a sufficient level of
inventory that would mitigate the disruption caused by an inability of one
or more current suppliers to fulfill the Company's orders. On the basis of
communications and correspondence with existing suppliers, the Company has
determined that most suppliers are attempting to be, or are already, Y2K
compliant.
In addition to the above, the Company has determined that there may
also be a risk arising from the inability of customers who are not Y2K
compliant to pay their invoices in a timely manner. The Company believes
it has adequate resources to lessen any disruption in sales and or cash
flow that may occur as a result of this and will continue to assess this
risk through Y2K readiness inquiries with customers.
As it relates specifically to the Company's and its subsidiaries'
computer systems and software, the Company is in the process of converting
all of its existing computer systems. The software in use is anticipated
to be updated by the third quarter of 1999 (at no additional cost other
than the normal quarterly software maintenance fee paid by the Company), at
which time the Company believes such software will be Year 2000 compliant.
The Company currently uses a consultant to assist in the implementation of
the hardware and software system, and he is also monitoring the Y2K upgrade
procedures and related Company upgrade and integration plans. Based upon
the Company's current readiness and the procedures that have been
implemented, the Company does not anticipate costs relating to Year 2000
problems to have any material adverse effect on its financial condition,
results of operations or cash flows. While there are no specific
contingency plans, the Company feels that its overall financial stability,
the ability to maintain excess inventory quantities, and back-up production
capabilities will enable the Company to deal with Y2K problems as they
arise.
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
Statement of Financial Accounting Standards No. 107. In addition, the
Company does not invest in securities that would require disclosure of
market risk, nor does it have floating rate loans or foreign currency
exchange rate risks.
17
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 1999 AND 1998
PART II. OTHER INFORMATION
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 Chief Executive Officer
May 21, 1999
/s/ David A. Spiegel
___________________________
David A. Spiegel
Principal Financial and
Accounting Officer
May 21, 1999
19
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.
_____________________________________
Frank F. Ferola
President and Chief Executive Officer
May 21, 1999
___________________________
David A. Spiegel
Principal Financial and
Accounting Officer
May 21, 1999
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 8,791,169
<SECURITIES> 0
<RECEIVABLES> 4,918,952
<ALLOWANCES> 199,756
<INVENTORY> 14,552,509
<CURRENT-ASSETS> 28,379,259
<PP&E> 4,837,785
<DEPRECIATION> 1,741,622
<TOTAL-ASSETS> 60,460,361
<CURRENT-LIABILITIES> 4,851,045
<BONDS> 10,984,286
0
0
<COMMON> 47,259
<OTHER-SE> 44,031,192
<TOTAL-LIABILITY-AND-EQUITY> 60,460,361
<SALES> 8,587,870
<TOTAL-REVENUES> 8,714,671
<CGS> 4,771,112
<TOTAL-COSTS> 4,771,112
<OTHER-EXPENSES> 3,202,942
<LOSS-PROVISION> 32,041
<INTEREST-EXPENSE> 204,606
<INCOME-PRETAX> 740,617
<INCOME-TAX> 273,060
<INCOME-CONTINUING> 467,557
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 467,557
<EPS-PRIMARY> .10
<EPS-DILUTED> 0
</TABLE>
