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, 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 November 1, 1999:
4,665,958
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 1999
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998 4-5
Unaudited Consolidated Statements of Operations
for the Nine months ended Sept. 30, 1999 and 1998 6
Unaudited Consolidated Statements of Operations
for the Three months ended Sept. 30, 1999 and 1998 7
Unaudited Consolidated Statements of Cash Flows
for the Nine months ended Sept. 30, 1999 and 1998 8-10
Notes to Unaudited Consolidated Financial
Statements 11-15
ITEM 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations. 16-22
ITEM 3. Quantitative and Qualitative
Disclosure About Market Risk 22
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 23
ITEM 4. Submission of matters to a vote of
Security Holders 23
ITEM 5. Other Information 24
ITEM 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
2
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 1999
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. Such forward looking statements involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
condition (financial or otherwise), performance or achievements of The
Stephan Co. and its subsidiaries to be materially different from any future
results, performance, condition or achievements projected, anticipated or
implied by such forward-looking statements.
Such factors include, but are not limited to, the following: general
economic and business conditions; competition; success of operating
initiatives; development and operating costs; advertising and promotional
efforts; brand awareness; the existence or absence of adverse publicity;
acceptance of new product offerings; changing trends in customer tastes;
the success of multi-branding; changes in business strategy or development
plans; quality of management; availability, terms and deployment of
capital; business abilities and judgment of personnel; availability of
qualified personnel; labor and employee benefit costs; availability and
cost of raw materials and supplies; changes in, or failure to comply with,
law; the ability to successfully integrate newly-acquired businesses and
the ability to reduce costs; 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; and other factors or events referenced in this
Form 10-Q. The Stephan Co. does not undertake and specifically declines
any obligation to publicly release the results of any revisions which may
be made to any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the
occurrence of anticipated or unanticipated events.
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 factors could
affect the ability of the Company to achieve its objectives and may cause
actual results to differ materially from those projected or anticipated
herein.
3
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
1999 1998
(UNAUDITED)
____________ ____________
CURRENT ASSETS
Cash and cash equivalents $ 10,920,611 $ 8,081,762
Cash on deposit with trustee 176,690 270,684
Accounts receivable, net 5,005,252 4,680,170
Inventories, net 14,167,237 15,286,370
Income taxes receivable - 83,888
Prepaid expenses and other
current assets 346,179 219,897
____________ ____________
TOTAL CURRENT ASSETS 30,615,969 28,622,771
PROPERTY, PLANT AND EQUIPMENT, net 3,031,014 3,120,658
INTANGIBLE ASSETS, net 26,182,005 27,086,358
OTHER ASSETS 2,016,517 2,432,278
____________ ____________
TOTAL ASSETS $ 61,845,505 $ 61,262,065
============ ============
See Notes to Unaudited Consolidated Financial Statements
4
THE STEPHAN CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
1999 1998
(UNAUDITED)
____________ ____________
CURRENT LIABILITIES
Accounts payable and
accrued expenses $ 2,861,434 $ 3,126,756
Note payable to bank 400,000 400,000
Current portion of
long-term debt 1,558,009 1,804,971
Income taxes payable 580,647 -
____________ ____________
TOTAL CURRENT LIABILITIES 5,400,090 5,331,727
DEFERRED INCOME TAXES 798,134 554,017
LONG-TERM DEBT 10,618,090 11,718,169
____________ ____________
TOTAL LIABILITIES 16,816,314 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 26,909,586 25,270,413
____________ ____________
46,648,888 45,009,715
LESS:125,000 Contingently
returnable shares (1,351,563) (1,351,563)
59,900 shares of
treasury stock (268,134) -
____________ ____________
TOTAL STOCKHOLDERS' EQUITY 45,029,191 43,658,152
____________ ____________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 61,845,505 $ 61,262,065
============ ============
See Notes to Unaudited Consolidated Financial Statements
5
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended Sept. 30,
===========================
1999 1998
___________ ___________
NET SALES $26,887,897 $26,877,396
COST OF GOODS SOLD 14,671,898 15,477,012
___________ ___________
GROSS PROFIT 12,215,999 11,400,384
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 9,183,847 8,953,360
___________ ____________
OPERATING INCOME 3,032,152 2,447,024
OTHER INCOME(EXPENSE)
Interest income 308,247 294,552
Interest expense (698,509) (719,246)
Other 470,000 93,750
___________ ___________
INCOME BEFORE TAXES 3,111,890 2,116,080
INCOME TAXES 1,189,166 704,394
___________ ___________
NET INCOME $ 1,922,724 $ 1,411,686
=========== ===========
BASIC AND DILUTED EARNINGS PER SHARE $ .42 $ .31
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,581,345 4,513,913
=========== ===========
See Notes to Unaudited Consolidated Financial Statements
6
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Sept.30,
===========================
1999 1998
___________ ___________
NET SALES $ 9,195,244 $ 9,926,122
COST OF GOODS SOLD 5,134,550 7,157,585
___________ ___________
GROSS PROFIT 4,060,694 2,768,537
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,996,080 3,303,142
___________ ____________
OPERATING INCOME 1,064,614 (534,605)
OTHER INCOME(EXPENSE)
Interest income 118,791 92,866
Interest expense (264,484) (272,440)
Other 40,000 31,250
___________ ___________
INCOME BEFORE TAXES 958,921 (682,929)
INCOME TAXES 380,140 (225,380)
___________ ___________
NET INCOME $ 578,781 $ (457,549)
=========== ===========
BASIC AND DILUTED EARNINGS PER SHARE $ .13 $ (.10)
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,549,003 4,600,858
=========== ===========
See Notes to Unaudited Consolidated Financial Statements
7
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended Sept. 30,
===========================
1999 1998
__________ __________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,922,724 $ 1,411,686
__________ __________
Adjustments to reconcile net income to
cash flows used in
operating activities:
Depreciation 375,795 236,451
Amortization 893,033 886,497
Deferred income taxes 244,117 139,498
Provision for doubtful accounts 119,640 41,112
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Accounts receivable (444,722) 643,385
Inventory 1,119,133 (410,523)
Income taxes receivable 83,888 -
Prepaid expenses
and other current assets (126,282) (32,968)
Other assets 415,761 (174,109)
Accounts payable
and accrued expenses (206,338) (1,359,546)
Income taxes payable 580,647 (1,027,606)
___________ ___________
Total adjustments 3,054,672 (1,057,809)
___________ ___________
Net cash flows provided
by operating activities 4,977,396 353,877
___________ ___________
See Notes to Unaudited Consolidated Financial Statements
8
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended Sept. 30,
===========================
1999 1998
___________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired from acquisition - 5,266
Decrease in cash on deposit with trustee 93,994 80,107
Purchase of property, plant
and equipment (286,151) (539,081)
Purchase of intangible assets (47,664) 85,291
___________ ___________
Net cash flows used in
investing activities (239,821) (368,417)
___________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (1,347,041) (1,357,125)
Repayment of notes payable - (3,077,637)
Acquisition of treasury stock (268,134) -
Proceeds from note payable to bank - 4,000,000
Dividends paid (283,551) (271,269)
___________ ___________
Net cash flows used in
financing activities (1,898,726) (706,031)
___________ ___________
NET CHANGE IN CASH AND
CASH EQUIVALENTS 2,838,849 (720,571)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 8,081,762 8,491,174
___________ ___________
CASH AND CASH EQUIVALENTS,
END OF PERIOD $10,920,611 $ 7,770,603
=========== ===========
See Notes to Unaudited Consolidated Financial Statements
9
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental Disclosures of Cash Flow Information:
Nine Months Ended Sept. 30,
============================
Interest Paid $ 798,829 $ 684,624
=========== ===========
Income Taxes Paid $ 317,440 $ 1,354,424
=========== ===========
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
In connection with the acquisition of Morris-Flamingo, L.P. on March 18,
1998, the Company acquired inventories, accounts receivable, fixed and
intangible assets and assumed certain liabilities by issuance of shares of
common stock with an approximate value, at the time of acquisition, of
$3,700,000.
See Notes to Unaudited Consolidated Financial Statements
10
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED SEPTEMBER 30, 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 the financial position and
results of operations of The Stephan Co. are reflected in the interim
financial statements.
PRINCIPLES OF CONSOLIDATION: The consolidated financial
statements include the accounts of The Stephan Co. and its eight 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 identified and allocated substantially all of
its business into three segments, which include professional hair care
products 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
11
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED SEPTEMBER 30, 1999 AND 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 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 disclosures 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 would actually
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 other debt.
There were no significant differences as of Sept. 30, 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 usually
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 a 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, 1999 and December 31, 1998
were approximately $9,844,000 and $7,121,000, respectively.
INVENTORIES: Inventories are stated at the lower of cost
(determined on a first-in, first-out basis) or market.
12
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED SEPTEMBER 30, 1999 AND 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories were as follows:
September 30, December 31,
1999 1998
____________ ____________
Raw Materials $ 2,844,129 $ 4,042,217
Packaging and components 4,764,154 4,375,596
Work in progress 1,057,689 959,057
Finished goods 6,993,105 7,848,046
____________ ____________
$ 15,659,077 $ 17,224,916
Less: Amount included in
other assets (1,491,840) (1,938,546)
____________ ____________
$ 14,167,237 $ 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
13
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED SEPTEMBER 30, 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 4,581,345 for the nine months ended September 30,
1999 and 4,513,913 for the nine months ended September 30, 1998. For the
quarter ended September 30, 1999, the weighted average number of shares
outstanding was 4,549,003 and 4,600,858 for the quarter ended September 30,
1998.
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
Hair Care Products 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 generally mass
merchandisers, chain drug stores and supermarkets who sell the product to
the end user. The Manufacturing segment manufactures products for
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:
14
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED SEPTEMBER 30, 1999 AND 1998
NOTE 2: SEGMENT INFORMATION (continued)
NET SALES NET SALES
_______________ _______________
Nine Months Three Months
Ended Sept. 30, Ended Sept. 30,
1999 1998 1999 1998
_______________ _______________
Professional $17,021 $16,429 $ 6,248 $ 6,233
Retail 7,416 7,697 2,241 2,619
Manufacturing 9,940 11,258 3,269 3,900
_______ _______ _______ _______
Total 34,377 35,384 11,758 12,752
Intercompany
Manufacturing (7,489) (8,507) (2,563) (2,826)
_______ _______ _______ _______
Consolidated $26,888 $26,877 $ 9,195 $ 9,926
======= ======= ======= =======
INCOME BEFORE INCOME BEFORE
INCOME TAXES INCOME TAXES
_______________ _______________
Nine Months Three Months
Ended Sept. 30, Ended Sept. 30,
1999 1998 1999 1998
_______________ _______________
Professional $ 1,450 $ 1,181 $ 920 $ 52
Retail 1,388 656 28 (372)
Manufacturing 274 279 11 (363)
_______ _______ ______ _______
Consolidated $ 3,112 $ 2,116 $ 959 $ (683)
======= ======= ====== =======
Income Before Income Taxes as shown above reflects an allocation of
corporate overhead expenses incurred by the Manufacturing segment.
15
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW
Net sales for the quarter were approximately 7% lower than the
comparable quarter in 1998, declining $731,000 for the quarter ended
September 30, 1999 as a result of lower ethnic hair care sales and private
label manufacturing. However, net sales for the nine months ended
September 30, 1999, when compared to the nine months ended September 30,
1998, were level, at just under $26,900,000. These results actually reflect
continued efforts to increase the profit margins of the various business
lines by reducing the number of low margin SKU's carried by the Company and
continued diversification of suppliers to obtain the best pricing
available. Management of the Company has placed emphasis on increasing net
income in an effort to position itself to return to profitability levels
achieved in prior years. As a result, the level sales experienced through
the third quarter of 1999 is not expected to be enhanced by historically
lower fourth quarter sales and it is not anticipated that sales for 1999
will be as high as those experienced in 1998.
The Company's efforts to reduce selling, general and administrative
expenses continues to benefit overall performance. With improvements shown
in the third quarter of 1999, the Company is on track to maintain these
expenses at a level equal to last year's total of $12,240,000, in spite of
the increased legal costs associated with the class action lawsuit (as
described more fully elsewhere in this quarterly report) and the related
increase in bank fees. Additionally, selling general and administrative
expenses in 1999 include the operations of Morris Flamingo (acquired on
March 18, 1998) for the whole year, which made efforts to control costs
more difficult. In an effort to improve overall performance, the Company
will persist to work aggressively to control these costs, as well as
maintain a focus on improving the gross profit margin in order to achieve
higher profit margins and higher net income.
RESULTS OF OPERATIONS
Net sales for the quarter ended September 30, 1999 were $9,195,000
compared to the $9,926,000 achieved in the comparable third quarter of
1998. As indicated above, this decline in net sales is due to a decrease
in the net sales of the ethnic hair care line included in the Retail
segment as well as a decline in private label manufacturing. While retail
mail order sales of Frances Denney product line improved almost 30% over
the second quarter of 1999 and 10% over the comparable third quarter of
1998, sales to major retail stores (in connection with the existing Color
Me Beautiful contract) did not experience the same level of Christmas
"sell-in" in the third quarter of 1999 when compared to 1998. Professional
sales were relatively level, with an increase in the Sorbie line offsetting
slower sales of the Image line and the New Era line, which is currently
under redesign and reintroduction stages with full implementation
16
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued).
anticipated in the year 2000. Overall, professional distribution sales
were also level when compared to the third quarter of 1998. With increased
spending for advertising and promotions planned for the rest of the year
and through the year 2000, management is optimistic that professional sales
will be enhanced by education programs, updated packaging and new,
innovative product line extensions. Net sales of the Manufacturing segment
were lower for the quarter ended September 30, 1999 when compared to the
comparable period in 1998, due to a decline in private label production.
For the quarter ended September 30, 1998, the Company was manufacturing a
new, additional product for a private label customer who was introducing a
new line and was thus experiencing a higher than normal increase due to
this "sell-in".
Largely as a result of controlling expenses by diligent sourcing of
purchases and moderate price increases, gross profit in the third quarter
of 1999 improved to $4,061,000, or 44.2%, compared to restated gross profit
of $2,769,000, or 27.9%, for the quarter ended September 30, 1998. The
increase continues to be encouraging to management as it shows that efforts
to improve gross profit and margins are having an impact.
For the quarter ended September 30, 1999, selling, general and
administrative expenses decreased in excess of $300,000 over the
corresponding third quarter of 1998 and almost $200,000 over the second
quarter of 1999. When the September 30, 1999 quarter's selling, general and
administrative expenses are compared to the selling, general and
administrative expenses incurred in the previous four quarters, the Company
was able to reduce these expenses substantially. Following the acquisition
of Morris-Flamingo in mid-March, 1998, selling, general and administrative
expenses had increased to approximately $3,300,000 in each of the third and
fourth quarters of 1998, so management is pleased with its efforts to
reduce these expenses. While the Company is continuing its efforts to
control these expenses, there can be no assurances that these expenses will
continue to decline in the future, especially in light of the class action
litigations mentioned above and as more fully described later herein and in
the Company's annual report filed on Form 10-K for the year ended December
31, 1998.
Interest expense for the quarter and nine months ended September 30,
1999 decreased approximately $8,000 and $21,000, respectively, from the
corresponding periods in 1998, as a result of the favorable refinancing (in
November, 1998) of debt incurred for various acquisitions, and the
continued reduction in the amount of outstanding debt. Income taxes for
the three and nine month periods ended September 30, 1999 increased as a
result of higher net income.
Net income for the quarter ended September 30, 1999 was $579,000, as
compared to a restated net loss of $458,000 for the third quarter of 1998.
17
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued).
Basic earnings per share for the third quarter was $.13, compared to a
restated net loss of $.10 for the comparable quarter in 1998. Other income
includes a $40,000 royalty fee, received in each quarter of 1999, from the
licensing of Frances Denney products. This minimum fee increased in 1999
from the $31,250 received in each quarter of 1998.
Net sales of $26,888,000 is level with the net sales of $26,877,000
for the nine months ended September 30, 1998. The net sales of the
Professional segment increased, largely as a result of the Morris-Flamingo,
L.P. acquisition, which was consummated in mid-March, 1998. Although sales
for the nine months ended September 30, 1999 were level when compared to
the corresponding period in 1998, gross profit for the period increased
over $800,000, or 7%, to $12,216,000, compared to the restated $11,400,000
achieved for the nine months ended September 30, 1998. The gross profit
margin increased to 45.4% for the nine months ended September 30, 1999 when
compared to the restated 42.4% achieved in the nine months ended September
30, 1998. The gross profit margin for the nine months ended September 30,
1999 was comparable to the gross profit margin for the six months ended
June 30, 1999, but for the quarter ended September 30, 1999 there was a
slight decrease from the quarter ended June 30, 1999. This decrease is the
result of a change in the mix of the business in the third quarter, with
Morris Flamingo comprising a larger overall portion of third quarter sales.
Management is encouraged, however, by the fact that this was the first
quarter that the gross profit margin of Morris Flamingo was over 30%.
While the Company believes in time it will be able to improve its
gross profit margin, the margin is still expected to be adversely impacted
in future quarters as a result of the lower gross margin generated by
Morris-Flamingo sales and the continued reduction of non-profitable or slow
moving SKU's. Efforts and initiatives to reduce cost 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, but given the current mix of sales, it
is not anticipated that the Company will return to the higher gross profit
margins experienced before the Morris-Flamingo acquisition in the near
future, however the Company does expect to eventually achieve a gross
profit margin that is more in line with the historical gross profit margins
of the Company.
Selling, general and administrative expenses for the nine months ended
September 30, 1999 increased $231,000, to $9,184,000, when compared to last
year's comparable nine month period total of $8,953,000, primarily due to
the inclusion of Morris Flamingo expenses for a full nine month period this
year (the subsidiary was not acquired until mid-March, 1998).
Net income for the nine months ended September 30, 1999 was
$1,923,000, increasing 36%, or $511,000, from net income for the restated
18
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued).
nine months ended September 30, 1998 of approximately $1,412,000. Basic
earnings per share increased 35% to $.42 for the nine months ended
September 30, 1999, when compared to the restated $.31 for the nine months
ended September 30, 1998. Net income was favorably impacted for the nine
month period ended September 30, 1999 by a one-time license fee in the
amount of $350,000 (received in the second quarter of 1999) for the use of
the Image trademark on certain fragrances marketed in all countries in
which Image has trademark rights. This license agreement had the effect of
increasing basic earnings per share by approximately $.05, net of taxes,
for the nine months ended September 30, 1999.
LIQUIDITY & CAPITAL RESOURCES
Cash and cash equivalents increased over $2,800,000 from December 31,
1998, to just under $11,000,000. Inventory decreased $1,119,000 from the
amount of inventory on hand at December 31, 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 help ensure product availability.
Expenditures for new equipment, as well as other additions to fixed
assets, continued through the third quarter of 1999 in an effort to
increase production capabilities to meet product and customer requirements.
In connection with computer system upgrades, Y2K expenditures, primarily
for Morris Flamingo, were over $50,000 and it is anticipated that the
completion of the upgrade will cost less than $100,000. The Company
anticipates that it will spend approximately $1,000,000 to construct new
warehousing on existing land adjacent to its Tampa manufacturing facility
and or purchase additional warehouse space in the proximate location of the
existing manufacturing facility in an effort to consolidate off-site
locations and reduce rental expense. The improvements and or purchase will
either be funded from existing cash resources or new borrowings, depending
upon available cash and current interest rates. No material expenditures
have been made through September 30, 1999 on any such construction or
purchase.
In April, 1999, the Board of Directors authorized the repurchase of up
to 1,000,000 shares of the Company's outstanding common stock. As at
September 30, 1999, the Company had repurchased 59,900 shares, for a total
cost of $268,000. Management of the Company will continue to evaluate
market and other conditions to determine the extent of any future stock
repurchases.
19
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued).
Total current assets at September 30, 1999 were $30,616,000 compared
to $28,623,000 at December 31, 1998. Working capital increased $1,925,000,
to $25,216,000, 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 its loan agreement with a
bank. At September 30, 1999, the Company was in compliance with the
original, as well as the modified requirements of these covenants, under
the terms of the waiver obtained. In accordance with the terms of that
waiver, the interest rate charged on the outstanding indebtedness will
return to the original, lower rate, effective in the fourth quarter of
1999.
Subsequent to the year ended December 31, 1998, the Company discovered
that the method used to estimate interim inventory figures resulted in the
use of incorrect inventory and cost of sales amounts 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 of the Company's other retail and
professional brands. Subsequent to the Company's April 1, 1999 press
release referencing the foregoing, the Company and several of its officers
were named in several lawsuits seeking to recover damages for shareholders
who may have been adversely affected by these inaccurate interim financial
statements. The Company has agreed to indemnify its officers in respect of
this matter, and believes it has meritorious defenses against these
allegations. However, it is impossible to predict the outcome of any such
litigation and any future effect upon liquidity and capital resources that
may occur, as many unknown factors exist, such as the likelihood of future
claims, insurance limits, the costs of litigation, 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.
20
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued).
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 current Information
Technology (IT) systems 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 alternative methods of maintaining information 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 any 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 to become Y2K compliant. The software
in use by the Florida facilities is anticipated to be completely updated by
the fourth 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. Included in
this process was the Y2K upgrade of both the hardware operating system and
the application software, however not all modules of the software have been
21
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued).
implemented at this time. While the Y2K compliant application software for
the subsidiaries located in Florida was purchased from the Company's
software developer, the Y2K compliant software for Morris Flamingo-Stephan
and Williamsport Barber and Beauty Supply Corp. is being modified by
outside sources and is progressing as scheduled. All testing of installed
Y2K compliant operating and application system software has been completed
and no problems have been encountered to date. The Company currently uses
a consultant to assist in the implementation of the hardware and software
system, who 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 formal 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 hold any 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.
22
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 1999
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As more fully described elsewhere in this quarterly report and in
the Company's annual report as filed on Form 10-K for the year ended
December 31, 1998, the Company, as well as certain of its officers, were
named as defendants in class action law suits filed in the United States
Federal District Court, Southern District of Florida. The lawsuits allege,
among other things, certain violations of Federal securities laws and seek
an unspecified amount of damages. Based upon information currently
available to the Company, an amended complaint has been filed, a
consolidation of the different class actions is anticipated and no
additional assessment of exposure can be determined at this time. The
Company has agreed to indemnify its officers in respect of this matter and
believes it has meritorious defenses against these allegations and intends
to defend itself. However, it is not possible at this time to predict the
outcome of any such lawsuits as many unknown factors exist such as the
likelihood of future claims, insurance limits, the costs of litigation, and
the outcome of any jury trial.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on Friday,
August 27, 1999. The following individuals, representing the two Class I
directors, were duly elected by the vote indicated below to be directors of
the Company by the holders of a majority of the outstanding common shares
of stock of the Company, until the annual meeting of stockholders in 2002.
Votes
__________________________
For Withheld
___________ ___________
John DePinto 3,691,274 202,711
Shouky A. Shaheen 3,798,674 95,311
23
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 1999
ITEM 5. OTHER INFORMATION
In accordance with Rules 14a-4(c) and 14a-5(e) promulgated under the
Securities Exchange Act of 1934, the Company hereby notifies its
stockholders that if the Company does not receive notice by June 4, 2000 of
a proposed matter to be submitted for stockholder vote at the Company's
2000 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
24
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
November 15, 1999
/s/ David A. Spiegel
___________________________
David A. Spiegel
Principal Financial and
Accounting Officer
November 15, 1999
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM
FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 10,920,611
<SECURITIES> 0
<RECEIVABLES> 5,271,065
<ALLOWANCES> 265,813
<INVENTORY> 14,167,237
<CURRENT-ASSETS> 30,615,969
<PP&E> 4,986,053
<DEPRECIATION> 1,955,039
<TOTAL-ASSETS> 61,845,505
<CURRENT-LIABILITIES> 5,400,090
<BONDS> 10,618,090
0
0
<COMMON> 47,259
<OTHER-SE> 44,981,932
<TOTAL-LIABILITY-AND-EQUITY> 61,845,505
<SALES> 26,887,897
<TOTAL-REVENUES> 27,666,144
<CGS> 14,671,898
<TOTAL-COSTS> 14,671,898
<OTHER-EXPENSES> 9,882,356
<LOSS-PROVISION> 119,640
<INTEREST-EXPENSE> 698,509
<INCOME-PRETAX> 3,111,890
<INCOME-TAX> 1,189,166
<INCOME-CONTINUING> 1,922,724
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,922,724
<EPS-BASIC> .42
<EPS-DILUTED> .42
</TABLE>
