UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended: September 30, 2002
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
Approximate number of shares of Common Stock outstanding
as of November 14, 2002:
4,410,577
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2002
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets
as of September 30, 2002 and December 31, 2001 4-5
Unaudited Condensed Consolidated Statements
of Operations for the nine months ended
September 30, 2002 and 2001 6
Unaudited Condensed Consolidated Statements
of Operations for the three months ended
September 30, 2002 and 2001 7
Unaudited Condensed Consolidated Statements
of Cash Flows for the nine months ended
September 30, 2002 and 2001 8-10
Notes to Unaudited Condensed Consolidated
Financial Statements 11-18
ITEM 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 18-25
ITEM 3. Quantitative and Qualitative
Disclosure About Market Risk 25
ITEM 4. Controls and Procedures 25
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 26-27
ITEM 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
CERTIFICATIONS 29-32
2
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2002
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This quarterly report contains certain "forward-looking" statements.
The Stephan Co. (the "Company") desires to take advantage of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995
and is including this statement for the express purpose of availing itself
of the protections of such safe harbor with respect to all such forward-
looking statements. Such forward-looking statements involve risks,
uncertainties and other factors which may cause the actual results,
condition (financial or otherwise), performance, trends or achievements of
the Company and its subsidiaries to be materially different from any
results, condition, performance, trends or achievements projected,
anticipated or implied by such forward-looking statements.
Such factors include, but are not limited to, the following: general
economic and business conditions; competition; relative success of
operating initiatives; development and operating costs; advertising and
promotional efforts; brand awareness; the existence or absence of adverse
publicity; acceptance of any new product offerings; changing trends in
customer tastes; the success of multi-branding; changes in business
strategy or development plans; quality of management; costs and expenses
incurred by the Company in pursuing strategic alternatives; 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
newly-adopted accounting principles; changes in, or failure to comply with,
law; changes in product mix and associated gross profit margins; and other
factors or events referenced in this Form 10-Q.
The Company does not undertake, subject to applicable law, any
obligation to publicly release the results of any revisions which may be
made to any forward-looking statements to reflect events or circumstances
occurring after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events. Therefore, 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 and qualifications could affect the ability of
the Company to achieve its objectives and may cause actual results to
differ materially from those projected, anticipated or implied herein.
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
2002 2001
____________ ____________
CURRENT ASSETS
Cash and cash equivalents $ 9,473,066 $ 8,409,142
Accounts receivable, net 2,138,218 1,808,828
Inventories 9,286,458 9,286,295
Income taxes receivable 284,547 345,220
Prepaid expenses and
other current assets 636,373 266,460
____________ ____________
TOTAL CURRENT ASSETS 21,818,662 20,115,945
CERTIFICATES OF DEPOSIT 7,030,000 7,585,000
PROPERTY, PLANT AND EQUIPMENT, net 2,082,065 2,308,003
PATENTS, TRADEMARKS AND OTHER
INTANGIBLE ASSETS, net 14,146,151 14,766,827
GOODWILL, net 8,665,278 8,665,278
OTHER ASSETS, net 2,560,563 3,621,103
____________ ____________
TOTAL ASSETS $ 56,302,719 $ 57,062,156
============ ============
See notes to unaudited condensed consolidated financial statements
4
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
2002 2001
____________ ____________
CURRENT LIABILITIES
Accounts payable and
accrued expenses $ 2,311,591 $ 2,560,051
Current portion of
long-term debt 1,455,884 1,507,256
____________ ____________
TOTAL CURRENT LIABILITIES 3,767,475 4,067,307
DEFERRED INCOME TAXES, net 1,804,498 1,535,285
LONG-TERM DEBT 6,654,215 7,758,370
____________ ____________
TOTAL LIABILITIES 12,226,188 13,360,962
____________ ____________
COMMITMENTS AND CONTINGENCIES (NOTE 4)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value 44,106 44,106
Additional paid in capital 18,417,080 18,417,080
Retained earnings 26,966,908 26,591,571
____________ ____________
45,428,094 45,052,757
LESS:
125,000 CONTINGENTLY
RETURNABLE SHARES (1,351,563) (1,351,563)
____________ ____________
TOTAL STOCKHOLDERS' EQUITY 44,076,531 43,701,194
____________ ____________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 56,302,719 $ 57,062,156
============ ============
See notes to unaudited condensed consolidated financial statements
5
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended September 30,
______________________________
2002 2001
____________ ____________
NET SALES $19,880,311 $21,997,742
COST OF GOODS SOLD 11,579,796 12,568,110
___________ ___________
GROSS PROFIT 8,300,515 9,429,632
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 7,292,565 8,481,498
___________ ____________
OPERATING INCOME 1,007,950 948,134
OTHER INCOME(EXPENSE)
Interest income 292,773 511,621
Interest expense (374,232) (563,373)
Royalty income 116,250 131,250
___________ ___________
INCOME BEFORE INCOME TAXES 1,042,741 1,027,632
INCOME TAX EXPENSE 402,769 414,481
___________ ___________
NET INCOME $ 639,972 $ 613,151
=========== ===========
BASIC AND DILUTED
EARNINGS PER SHARE $ .15 $ .14
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,285,577 4,285,577
=========== ===========
See notes to unaudited condensed consolidated financial statements
6
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30,
_______________________________
2002 2001
____________ ____________
NET SALES $ 6,721,107 $ 6,584,155
COST OF GOODS SOLD 4,181,708 3,725,830
___________ ___________
GROSS PROFIT 2,539,399 2,858,325
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,311,932 3,063,569
___________ ____________
OPERATING INCOME/(LOSS) 227,467 (205,244)
OTHER INCOME(EXPENSE)
Interest income 106,182 186,638
Interest expense (104,844) (157,753)
Royalty income 45,000 43,750
___________ ___________
INCOME/(LOSS) BEFORE INCOME TAXES 273,805 (132,609)
INCOME TAX EXPENSE/(BENEFIT) 129,947 (42,648)
___________ ___________
NET INCOME/(LOSS) $ 143,858 $ (89,961)
=========== ===========
BASIC AND DILUTED
EARNINGS/(LOSS) PER SHARE $ .03 $ (.02)
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,285,577 4,285,577
=========== ===========
See notes to unaudited condensed consolidated financial statements
7
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
_______________________________
2002 2001
___________ ____________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 639,972 $ 613,151
___________ ____________
Adjustments to reconcile net income to
cash flows provided by/(used in)
operating activities:
Depreciation 249,353 283,825
Amortization of intangible assets 620,676 893,514
Amortization of other assets - 101,461
Deferred income tax provision 269,213 121,855
Provision for doubtful accounts 63,925 17,068
Changes in operating assets and
liabilities:
Certificate of deposit, collateralizing
refinanced loans 555,000 (8,140,000)
Accounts receivable (393,315) 531,120
Inventories (163) 168,316
Income taxes receivable 60,673 215,655
Prepaid expenses
and other current assets (369,913) (165,833)
Other assets 1,060,540 30,253
Accounts payable and accrued expenses (248,460) (72,108)
___________ ___________
Total adjustments 1,867,529 (6,014,874)
___________ ___________
Net cash flows provided by/
(used in) operating activities 2,507,501 (5,401,723)
___________ ___________
8
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
______________________________
2002 2001
____________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant
and equipment (23,415) (104,611)
Purchase of intangible assets - (49,907)
___________ ___________
Net cash flows used in
investing activities (23,415) (154,518)
___________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (1,155,527) (9,205,506)
Proceeds from note payable to bank - 8,140,000
Dividends paid (264,635) (264,634)
___________ ___________
Net cash flows used in
financing activities (1,420,162) (1,330,140)
___________ ___________
INCREASE/(DECREASE) IN
CASH AND CASH EQUIVALENTS 1,063,924 (6,886,381)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 8,409,142 13,559,268
___________ ___________
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 9,473,066 $ 6,672,887
=========== ===========
See notes to unaudited condensed consolidated financial statements
9
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Supplemental Disclosures of Cash Flow Information:
2002 2001
________ ________
Interest paid $ 402,748 $ 550,232
=========== ===========
Income taxes paid $ 173,699 $ -
=========== ===========
For the nine months ended September 30, 2001, 16,320 shares of
treasury stock, at an aggregate cost of $60,424, were retired.
See notes to unaudited condensed consolidated financial statements
10
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED SEPTEMBER 30, 2002 AND 2001
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: In the opinion of management, all
adjustments (consisting only of normal accruals) necessary for a fair
presentation of the Company's financial position and results of operations
are reflected in these unaudited interim financial statements.
The results of operations for the three and nine-month periods ended
September 30, 2002 are not necessarily indicative of the results to be
achieved for the year ending December 31, 2002. The December 31, 2001
condensed consolidated balance sheet was derived from the audited
consolidated financial statements, but does not include all disclosures
required by accounting principles generally accepted in the United States
of America ("generally accepted accounting principles"). These interim
financial statements should be read in conjunction with the audited
consolidated financial statements and accompanying notes for the year ended
December 31, 2001 appearing in the Company's Form 10-K previously filed
with the Securities and Exchange Commission.
NATURE OF OPERATIONS: The Company is engaged in the manufacture,
sale and distribution of hair and personal care grooming products
principally throughout the United States. Statement of Financial Accounting
Standards ("SFAS") 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 its business into three segments: (1)
professional hair care products and distribution; (2) retail personal care
products; and (3) manufacturing.
USE OF ESTIMATES: The preparation of condensed 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 the disclosure of
contingent assets and liabilities as of the date of the condensed
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates and assumptions.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include
cash, money market investment accounts and short-term municipal bonds
having maturities of 90 days or less. The Company maintains cash deposits
at certain financial institutions in amounts in excess of the federally
insured limit. Cash and cash equivalents held in interest-bearing accounts
as of September 30, 2002 and December 31, 2001 were approximately
$8,568,000 and $7,257,000, respectively.
11
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED SEPTEMBER 30, 2002 AND 2001
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INVENTORIES: Inventories are stated at the lower of cost
(determined on a first-in, first-out basis) or market, and are as follows:
September 30, December 31,
2002 2001
____________ ____________
Raw materials $ 2,272,070 $ 3,180,670
Packaging and components 3,166,270 3,448,541
Work in progress 561,926 341,507
Finished goods 5,679,665 5,502,599
____________ ____________
11,679,931 12,473,317
Less: Amount included in
other assets (2,393,473) (3,187,022)
____________ ____________
$ 9,286,458 $ 9,286,295
============ ============
Raw materials principally include surfactants, chemicals and
fragrances used in the production process. Packaging materials include
cartons, inner sleeves and boxes used in the actual product, as well as
outer boxes and cartons used for shipping purposes. Components are the
actual bottles or containers (plastic or glass), jars, caps, pumps and
similar materials that become part of the finished product. Finished goods
include hair dryers, electric clippers, lather machines, scissors and salon
furniture. Included in other assets are raw materials, packaging and
components inventory not anticipated to be utilized in less than one year.
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 4,285,577 for each of the three and nine-month
periods ended September 30, 2002 and 2001. For the nine months ended
September 30, 2002 and 2001, the Company had 693,648 and 809,524
outstanding stock options, respectively, a significant portion of which
were anti-dilutive. The inclusion of dilutive stock options in the
calculation of earnings per share did not have any impact on the earnings
per share for the three and nine months ended September 30, 2002.
NEW FINANCIAL ACCOUNTING STANDARDS: In June 2001, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets".
These standards made changes to the accounting for business combinations,
goodwill and intangible assets. SFAS No. 141 requires all business
combinations entered into subsequent to June 30, 2001 to be accounted for
using the purchase method of accounting. SFAS No. 142 provides that
12
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED SEPTEMBER 30, 2002 AND 2001
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
goodwill and other intangible assets with indefinite lives will not be
amortized, but will be tested for impairment at least annually. SFAS No.
142 is effective for years beginning after December 15, 2001. Goodwill and
intangible assets acquired subsequent to June 30, 2001 are immediately
subject to the provisions of SFAS No. 142. The Company adopted SFAS No.
142 on January 1, 2002. SFAS No. 142 requires that goodwill be tested for
impairment at the reporting unit level upon adoption and at least annually
thereafter. The initial step requires that the Company determine the fair
value of each reporting unit and compare it to the carrying value,
including goodwill, of the reporting unit. If the fair value exceeds the
carrying value, no impairment loss would be recognized. However, if the
carrying value of the reporting unit exceeds its fair value, the goodwill
of the reporting unit may be impaired. The amount, if any, of the
impairment would then be measured in the second step.
The Company has completed step one of the impairment test, which
indicated that the carrying values of certain reporting units may have
exceeded their estimated fair values by a material amount, as determined
utilizing various valuation techniques. The Company is in the process of
completing step two of the impairment test, which will be completed by
December 31, 2002 in accordance with SFAS No. 142.
Amortization of goodwill ceased upon adoption of SFAS No. 142 on
January 1, 2002. Amortization expense of goodwill for the nine and three
month periods ended September 30, 2001 was $272,000 and $91,000
respectively. The table below reflects the impact of the implementation of
SFAS No. 142 for the nine months and three months ended September 30, 2002
and 2001:
Nine Months Three Months
Ended Sept. 30, Ended Sept. 30,
(in thousands) (in thousands)
______________ ______________
2002 2001 2002 2001
______ ______ ______ ______
Net income/(loss) (as reported) $ 640 $ 613 $ 144 $ (90)
After tax goodwill amortization - 176 - 59
______ ______ ______ ______
Adjusted net income/(loss) $ 640 $ 789 $ 144 $ (31)
====== ====== ====== ======
Net income/(loss) per share
(basic and diluted) $ .15 $ .14 $ .03 $ (.02)
After tax goodwill amortization - .04 - .01
______ ______ ______ ______
Pro forma basic and diluted
Earnings/(loss) per share $ .15 $ .18 $ .03 $ (.01)
====== ====== ====== ======
13
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED SEPTEMBER 30, 2002 AND 2001
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Amortization expense for other intangible assets for the nine months
ended September 30, 2002 was $621,000. Amortization expense for other
intangible assets, recorded as of December 31, 2001, for the years ended
December 31, 2002 through 2007 is anticipated to be as follows: 2002:
$827,000; 2003: $728,000; 2004: $624,000; 2005: $624,000; 2006: $615,000;
2007: $603,000.
In August 2001, FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which supersedes, but does
not replace, SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets to be Disposed Of", as well as other earlier related pronouncements,
either in whole or in part. SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and
interim periods within those fiscal years. The adoption of this statement
has not had a significant effect on the Company's financial position,
results of operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements 4, 44 and 64, Amendment to FASB Statement 13, and Technical
Corrections". One of the major changes of this Statement is to change the
accounting for the classification of gains and losses from the
extinguishment of debt. Upon adoption, the Company will follow APB 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" in determining whether such
extinguishment of debt may be classified as extraordinary. The provisions
of this Statement related to the rescission of SFAS No. 4 will be applied
in fiscal years beginning after May 15, 2002 with early application
encouraged. Currently, the Company does not have any circumstances that
would make this Statement relevant.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This Statement requires
recording costs associated with exit or disposal activities at their fair
values when a liability has been incurred. Under previous guidance, certain
exit costs were accrued upon management's commitment to an exit plan, which
is generally before a liability has been actually incurred. Adoption of
this Statement is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. Currently, the Company does
not have any existing circumstances that would make this Statement
relevant.
14
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED SEPTEMBER 30, 2002 AND 2001
NOTE 2: SEGMENT INFORMATION
In accordance with the guidelines established by SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," the
Company has identified three reportable operating segments based upon how
its management evaluates its business. These segments are Professional
Hair Care Products and Distribution ("Professional"), Retail Personal Care
Products ("Retail") and "Manufacturing". The Professional segment has a
customer base consisting generally of distributors that purchase the
Company's hair products and beauty and barber supplies for sale to salons
and barbershops. The customer base for the Retail segment consists of mass
merchandisers, chain drug stores and supermarkets that sell products to
end-users. The Manufacturing segment manufactures products for different
subsidiaries of the Company and manufactures private label brands for
customers.
The Company conducts operations principally in the United States and
sales to international customers are not material to its consolidated net
sales. Income Before Income Taxes as shown below reflects an allocation of
corporate overhead expenses incurred by the Manufacturing segment. The
following tables, in thousands, summarize Net Sales and Income Before
Income Taxes by reportable segment:
NET SALES NET SALES
_______________ _______________
Nine Months Three Months
Ended Sept. 30, Ended Sept. 30,
2002 2001 2002 2001
_______________ _______________
Professional $13,926 $14,752 $ 5,081 $ 5,087
Retail 5,626 5,232 1,562 1,273
Manufacturing 5,401 7,660 1,543 2,187
_______ _______ _______ _______
Total 24,953 27,644 8,186 8,547
Intercompany
Manufacturing (5,073) (5,646) (1,465) (1,963)
_______ _______ _______ _______
Consolidated $19,880 $21,998 $ 6,721 $ 6,584
======= ======= ======= =======
15
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED SEPTEMBER 30, 2002 AND 2001
NOTE 2: SEGMENT INFORMATION (continued)
INCOME BEFORE INCOME/(LOSS)
INCOME TAXES BEFORE INCOME TAXES
_______________ _______________
Nine Months Three Months
Ended Sept. 30, Ended Sept. 30,
2002 2001 2002 2001
_______________ _______________
Professional $ 781 $ 478 $ 361 $ (42)
Retail 407 280 (1) (61)
Manufacturing (145) 270 (86) (30)
_______ _______ ______ ______
Consolidated $ 1,043 $ 1,028 $ 274 $ (133)
======= ======= ====== ======
NOTE 3: LONG TERM DEBT
On August 9, 2001, the outstanding debt payable to a bank was
refinanced with another bank. The present loan has the same payment terms
as the previous loan, and is collateralized by certificates of deposit. The
loan bears an interest rate of 50 basis points above the certificate of
deposit rate (currently 2.16%) for the term of the loan and resets
annually. The certificates of deposit that collateralize the note payable
have been classified as a non-current asset. The loan does not have any
financial covenants for the Company to meet.
NOTE 4: COMMITMENTS AND CONTINGENCIES
In addition to the matters set forth below, the Company is involved in
other litigation matters arising in the ordinary course of business. It is
the opinion of management that none of such matters, at September 30, 2002,
would likely, if adversely determined, have a material adverse effect on
the Company's financial position, results of operations or cash flows.
On March 5, 2001, the Company announced that its Board of Directors
had formed a two-person, special committee to explore various strategic
alternatives to enhance shareholder value. Four members of the Company's
management and directors, exclusive of the committee members, formed a
group to purchase all of the Company's outstanding common stock in a going-
private transaction. Independent legal counsel and investment banking
advisors were retained to advise and assist in the transaction. After
incurring approximately $175,000 of expenses through September 30, 2002, it
is estimated that the remaining costs associated with this process will be
16
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED SEPTEMBER 30, 2002 AND 2001
NOTE 4: COMMITMENTS AND CONTINGENCIES (continued)
in excess of $450,000. On April 16, 2002, the Company announced that the
special committee of its Board of Directors had, after an auction conducted
by Robinson Humphrey Company LLC, its investment banker, accepted a bid by
the four members of the Company's management and directors. Such bid was to
purchase all of the Company's common stock at $4 per share in cash. Largely
as a result of tight credit markets, in September 2002, the bid was revised
to $4.50 per share; $3.25 to be paid in cash and $1.25 to be paid in semi-
annual installments over a 42-month period, with interest payable at an
annual rate of 4 1/2%. No other viable bids were received by the committee
for the entire Company. The management group bid is subject to various
conditions, including obtaining adequate financing. The management group is
currently negotiating with lenders to obtain financing necessary for the
transaction. There can be no assurance that the bidder will be able to
obtain such financing on acceptable terms or that the transaction will be
consummated.
The United States Court of Appeals for the Ninth Circuit entered an
order on April 29, 2002 that, among other things, reversed the judgment of
the United States District Court granting summary judgment in favor of New
Image Laboratories, Inc. ("New Image") against the Company on New Image's
contract claim for a price adjustment and on New Image's claim of breach of
the implied covenant of good faith and fair dealing. In addition, the
Ninth Circuit's opinion affirmed the lower court's ruling that on the
present record New Image is not entitled to (i) damages equal to the
diminution in the value of the Company's common stock price between the
scheduled and actual disbursement dates or (ii) any attorney's fees. As a
consequence of the Ninth Circuit's decision, the judgment granting New
Image all 125,000 shares of the Company's common stock being held in escrow
has been reversed and the case has been remanded back to the United States
District Court for further proceedings. On May 28, 2002, New Image filed a
Motion for Rehearing with the Ninth Circuit Court of Appeals and on June
26, 2002, the Court denied the petition for rehearing. A pretrial hearing
has been scheduled for January 2003 in connection with the remaining claims
of the parties to the litigation.
Old 97 Company ("Old 97") commenced an action against Todd Christopher
International, Inc. d/b/a Vogue International ("Vogue") in the Hillsborough
County, Florida Circuit Court and Vogue counterclaimed against Old 97. The
parties reached a settlement pursuant to which, among other things, the
parties have mutually released each other from all causes of action, have
agreed to the disposition of certain old Vogue inventory held by Old 97 and
have agreed to have Old 97 manufacture private label goods for Vogue if the
parties can reach an understanding on a mutually agreeable pricing
structure. Any cost associated with the disposition of the inventory is
not considered to be material.
17
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2002 AND 2001
NOTE 4: COMMITMENTS AND CONTINGENCIES (continued)
On November 1, 2001, a private label customer filed a lawsuit against
the Company alleging causes of action for breach of contract, declaratory
judgment, and trademark infringement. The Company denied the allegations
and has counter-claimed against the customer. The counterclaim seeks
unspecified compensatory damages, interest, attorneys fees, costs and other
relief on the breach of contract and anticipatory breach claims and, in
excess of $400,000 on the account stated claim. At a mediation hearing
held in May 2002, the Company rejected a settlement offer from the private
label customer due to the insufficiency of the offer. Subsequently, the
Court issued a preliminary injunction enjoining the Company from use of the
private label customer's trademarks. The Company has appealed the
injunction to the Florida Third District Court of Appeals. No decision has
yet been rendered by the Court. At this time, the Company is unable to
predict the outcome of this matter.
In November 2001, the Company filed a claim with the U.S. Department
of Transportation ("DOT") in connection with the DOT's widening of
Interstate Highway 4, which the Company alleges will result in the loss of
an adjacent rental facility utilized by one of the Company's subsidiaries.
At a hearing held on August 2, 2002, the Company was successful in
asserting a position that would allow for damages to be paid to the Company
by the DOT. The case will be scheduled for mediation where it is
anticipated that the Company could receive a material damage award. After
consultation with legal counsel at this time, the Company is presently
unable to accurately predict the amount or type of recovery that will
result therefrom.
Other than the above, there has been no material change in the status
of any other pending litigation since the Company's last filed Form 10-Q or
Form 10-K, which was filed with the Securities and Exchange Commission for
the year ended December 31, 2001.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the nine months ended September 30, 2002, net sales were
$19,880,000, compared to $21,998,000 achieved in the corresponding nine
months of 2001. The sales decline was principally due to a sales decrease
in the Professional segment, as well as a sales decrease in private label
manufacturing. Retail sales increased $394,000, with a continued increase
in sales to new customers but Professional sales declined $826,000,
primarily as a result of a decrease in sales of Image and Sorbie products.
As a result of the decline in net sales, gross profit for the nine months
18
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2002 AND 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
ended September 30, 2002, was $8,301,000 compared to gross profit of
$9,430,000 achieved for the corresponding nine-month period in 2001. Cost
of sales for the nine months ended September 30, 2002 was $11,580,000, when
compared to the cost of sales of $12,568,000 for the nine months ended
September 30, 2001. Gross profit declined overall due to a lower sales
volume, and there was also a slight decrease in the gross profit margin,
which declined to 41.75% for the nine months ended September 30, 2002 from
42.87% for the nine months ended September 30, 2001. This decrease was
principally due to more aggressive pricing of the retail brands in an
attempt to increase product visibility.
Selling, general and administrative expenses for the nine months ended
September 30, 2002 decreased $1,188,000, to $7,293,000, when compared to
the corresponding 2001 nine-month period total of $8,481,000. Part of the
decline was due to the discontinuation of goodwill amortization in
accordance with SFAS No. 142 ($273,000 in the prior nine-month period), as
well as significant decreases in other expense categories such as
promotional costs, freight and shipping expenses and office expenses. The
Company continues to try to control selling, general and administrative
expenses even with increased spending for professional fees as a result of
the Company's decision to evaluate strategic alternatives to enhance
shareholder value, as discussed in Note 4 of the unaudited condensed
consolidated financial statements; however, no assurance can be given that
the Company can continue to reduce these expenses.
Interest expense for the nine months ended September 30, 2002 was
$374,000, a decrease of approximately $189,000 from the $563,000 incurred
in the corresponding period of 2001, as a result of lower outstanding
indebtedness and lower interest rates. It is anticipated that interest
expense will continue to decline through the end of 2002 as a result of the
refinancing of the Company's debt, completed in the third quarter of 2001,
as more fully discussed in Note 3 to the unaudited condensed consolidated
financial statements.
Interest income was $293,000 for the nine months ended September 30,
2002 compared to the $512,000 earned in the corresponding nine months of
2001. Although the Company had more cash invested in 2002, it received
lower interest rates on its investments as overall interest rates continued
to decline. Other income was also comprised of royalty fees received from
the licensing of Frances Denney products, and a new licensing agreement for
New Era products.
The provision for income taxes decreased $11,000, to $403,000 from the
$414,000 incurred for the corresponding period in 2001, even though pre-tax
19
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2002 AND 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
income increased $15,000, due to small increases in the utilization of
estimated tax benefits from previous periods. Net income for the nine
months ended September 30, 2002 was $640,000, compared to $613,000 achieved
for the nine months ended September 30, 2001. Basic and diluted earnings
per share were $0.15 for the nine months ended September 30, 2002, compared
to $.14 for the nine months ended September 30, 2001, based on a weighted
average of 4,285,577 shares outstanding for both periods.
For the three months ended September 30, 2002, net sales were
$6,721,000, compared to $6,584,000 for the three months ended September 30,
2001, an increase of $137,000. A strong increase in retail brand sales was
offset by a decline in the Manufacturing segment. The increase was
principally the result of substantial promotional pricing in an attempt to
obtain greater visibility for the retail brands utilizing mass marketers
and, as such, the gross profit margin in the third quarter declined to
37.78% when compared to the 43.41% achieved in the corresponding quarter of
2001. Management feels that in the long run, this additional exposure of
the retail brands will ultimately enhance sales and gross profit.
Principally as a result of the decline in the gross profit margin for the
three months ended September 30, 2002, gross profit was $2,539,000,
compared to gross profit of $2,858,000 achieved for the corresponding
three-month period in 2001, a decrease of $319,000.
Selling, general and administrative expenses for the three months
ended September 30, 2002 decreased by $752,000, from $3,064,000 to
$2,312,000, when compared to the corresponding three-month period of 2001.
The reduction was due, in large part, to a decline in promotional expenses,
freight-out costs and amortization, as discussed above.
Interest income for the three-month period ended September 30, 2002
was $106,000, a decrease of approximately $81,000 from the $187,000 earned
in the corresponding three-month period of 2001, directly as a result of
significantly lower interest rates. For the same reason, and as a result
of the refinancing of the Company's debt in August 2001, interest expense
for the three-month period ended September 30, 2002 was $105,000, a
decrease of $53,000 from the $158,000 paid in the corresponding three-month
period of 2001. Other income was also comprised of a $26,250 quarterly
royalty fee from the licensing of Frances Denney products and a $18,750
quarterly royalty fee from the licensing of New Era products.
Income taxes for the three months ended September 30, 2002 was
$130,000 compared to an income tax benefit of $43,000 for the corresponding
period in 2001, as a result of the loss experienced in that quarter. Net
20
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2002 AND 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
income of $144,000 for the three months ended September 30, 2002, improved
from the net loss of $90,000 for the three months ended September 30, 2001,
largely as a result of a decrease in selling, general and administrative
expenses discussed above. Basic and diluted earnings per share were $.03
for the three months ended September 30, 2002 and a net loss of $.02 per
share for the corresponding period in 2001.
LIQUIDITY & CAPITAL RESOURCES
Cash and cash equivalents increased $1,064,000 from December 31, 2001,
to $9,473,000 at September 30, 2002. Total cash of $16,503,000 at
September 30, 2002 included $7,030,000 of cash invested in certificates of
deposit pledged as collateral for the Company's bank loan. Accounts
receivable were $2,138,000 at September 30, 2002, an increase of $329,000
from the $1,809,000 at December 31, 2001; current inventories were
relatively constant when compared to December 31, 2001, however inventory
included in other assets decreased $794,000 as the Company attempted to
utilize older inventory for promotional purposes. Prepaid expenses at
September 30, 2002 increased to $636,000, an increase of $370,000 from the
$266,000 at December 31, 2001. As a direct result the events of September
11, 2001 and lower interest rates, the majority of the Company's insurance
carriers no longer offer monthly installments for premium payments, and are
passing on substantial policy increases. As a consequence of the
foregoing, the Company paid a substantial amount of insurance premiums in
the third quarter of 2002.
Total current assets at September 30, 2002 were $21,819,000 compared
to $20,116,000 at December 31, 2001. Working capital increased slightly
more than $2,000,000 when compared to December 31, 2001, due in a large
part to an increase in total cash, accounts receivable and prepaid expenses
referred to above. The Company does not anticipate any significant capital
expenditures in the near term and management believes that there is
sufficient cash on hand and working capital to satisfy upcoming
requirements, including any funds that may be needed in connection with the
going-private transaction.
The Company does not have any off-balance sheet financing or similar
arrangements.
On March 5, 2001, the Company announced that its Board of Directors
had formed a two-person, special committee to explore various strategic
alternatives to enhance shareholder value. Four members of the Company's
21
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2002 AND 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
management and directors, exclusive of the committee members, formed a
group to purchase all of the Company's outstanding common stock in a going-
private transaction. Independent legal counsel and investment banking
advisors were retained to advise and assist in the transaction. After
incurring approximately $175,000 of expenses through September 30, 2002, it
is estimated that the remaining costs associated with this process will be
in excess of $450,000. On April 16, 2002, the Company announced that the
special committee of its Board of Directors had, after an auction conducted
by Robinson Humphrey Company LLC, its investment banker, accepted a bid by
the four members of the Company's management and directors. Such bid was to
purchase all of the Company's common stock at $4 per share in cash. Largely
as a result of tight credit markets, in September 2002, the bid was revised
to $4.50 per share; $3.25 to be paid in cash and $1.25 to be paid in semi-
annual installments over a 42-month period, with interest payable at an
annual rate of 4 1/2%. No other viable bids were received by the committee
for the entire Company. The management group bid is subject to various
conditions, including obtaining adequate financing. The management group is
currently negotiating with lenders to obtain financing necessary for the
transaction. There can be no assurance that the bidder will be able to
obtain such financing on acceptable terms or that the transaction will be
consummated.
NEW FINANCIAL ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and
Other Intangible Assets". These standards made changes to the accounting
for business combinations, goodwill and intangible assets. SFAS No. 141
requires all business combinations entered into subsequent to June 30, 2001
to be accounted for using the purchase method of accounting. SFAS No. 142
provides that goodwill and other intangible assets with indefinite lives
will not be amortized, but will be tested for impairment at least annually.
SFAS No. 142 is effective for years beginning after December 15, 2001.
Goodwill and intangible assets acquired subsequent to June 30, 2001 are
immediately subject to the provisions of SFAS No. 142. The Company adopted
SFAS No. 142 on January 1, 2002. SFAS No. 142 requires that goodwill be
tested for impairment at the reporting unit level upon adoption and at
least annually thereafter. The initial step requires that the Company
determine the fair value of each reporting unit and compare it to the
carrying value, including goodwill, of the reporting unit. If the fair
value exceeds the carrying value, no impairment loss would be recognized.
However, if the carrying value of the reporting unit exceeds its fair
value, the goodwill of the reporting unit may be impaired. The amount, if
any, of the impairment would then be measured in the second step.
22
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2002 AND 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
The Company has completed step one of the impairment test, which
indicated that the carrying values of certain reporting units may have
exceeded their estimated fair values by a material amount, as determined
utilizing various valuation techniques. The Company is in the process of
completing step two of the impairment test, which will be completed by
December 31, 2002 in accordance with SFAS No. 142.
Amortization of goodwill ceased upon adoption of SFAS No. 142 on
January 1, 2002. Amortization expense of goodwill for the nine and three
month periods ended September 30, 2001 was $272,000 and $91,000
respectively. The table below reflects the impact of the implementation of
SFAS No. 142 for the nine months and three months ended September 30, 2002
and 2001:
Nine Months Three Months
Ended Sept. 30, Ended Sept. 30,
(in thousands) (in thousands)
______________ ______________
2002 2001 2002 2001
______ ______ ______ ______
Net income/(loss) (as reported) $ 640 $ 613 $ 144 $ (90)
After tax goodwill amortization - 176 - 59
______ ______ ______ ______
Adjusted net income/(loss) $ 640 $ 789 $ 144 $ (31)
====== ====== ====== ======
Net income/(loss) per share
(basic and diluted) $ .15 $ .14 $ .03 $ (.02)
After tax goodwill amortization - .04 - .01
______ ______ ______ ______
Pro forma basic and diluted
Earnings/(loss) per share $ .15 $ .18 $ .03 $ (.01)
====== ====== ====== ======
Amortization expense for other intangible assets for the nine months
ended September 30, 2002 was $621,000. Amortization expense for other
intangible assets recorded as of December 31, 2001, for the years ended
December 31, 2002 through 2007 is anticipated to be as follows: 2002:
$827,000; 2003: $728,000; 2004: $624,000; 2005: $624,000; 2006: $615,000;
2007: $603,000.
In August 2001, FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which supersedes, but does
not replace, SFAS No. 121, "Accounting for the Impairment of Long-Lived
23
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2002 AND 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Assets to be Disposed Of", as well as other earlier related pronouncements,
either in whole or in part. SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and
interim periods within those fiscal years. The adoption of this Statement
has not had a significant effect on the Company's financial position,
results of operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements 4, 44 and 64, Amendment to FASB Statement 13, and Technical
Corrections". One of the major changes of this statement is to change the
accounting for the classification of gains and losses from the
extinguishment of debt. Upon adoption, the Company will follow APB 30,
"Reporting the Results of Operations--Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" in determining whether such
extinguishment of debt may be classified as extraordinary. The provisions
of this Statement related to the rescission of FASB Statement 4 will be
applied in fiscal years beginning after May 15, 2002 with early application
encouraged. Currently, the Company does not have any circumstances that
would make this Statement relevant.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This Statement requires
recording costs associated with exit or disposal activities at their fair
values when a liability has been incurred. Under previous guidance, certain
exit costs were accrued upon management's commitment to an exit plan, which
is generally before a liability has actually been incurred. Adoption of
this Statement is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. Currently, the Company does
not have any existing circumstances that would make this Statement
relevant.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States of
America ("generally accepted accounting principles") requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results would
differ significantly from those estimates if different assumptions were
24
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2002 AND 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
used or unexpected events transpire. Please refer to Item 7 in the
Company's Form 10-K for the year ended December 31, 2001 filed with the
Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not participate in derivative or other financial
instruments for which fair value disclosure would be required under SFAS
No. 107. In addition, the Company does not invest in securities that would
require disclosure of market risk, nor does it have floating rate loans or
foreign currency exchange rate risks.
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES: Based upon an
evaluation of the Company's disclosure controls and procedures, which was
completed as of September 30, 2002 (the "Evaluation Date"), the Company's
principal executive officer and chief financial officer have concluded that
the disclosure controls and procedures in place were effective as of the
Evaluation Date.
(b) CHANGES IN INTERNAL CONTROLS: To the best of the Company's
knowledge and belief, there have been no significant changes in the
Company's internal controls or in other factors that could significantly
affect these controls subsequent to the Evaluation Date.
25
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2002 AND 2001
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The United States Court of Appeals for the Ninth Circuit entered an
order on April 29, 2002 that, among other things, reversed the judgment of
the United States District Court granting summary judgment in favor of New
Image Laboratories, Inc. ("New Image") against the Company on New Image's
contract claim for a price adjustment and on New Image's claim of breach of
the implied covenants of good faith and fair dealing. In addition, the
Ninth Circuit opinion affirmed the lower court's ruling that on the present
record New Image is not entitled to (i) damages equal to the diminution in
the value of the Company's common stock price between the scheduled and
actual disbursement dates or (ii) any attorney's fees. As a consequence of
the Ninth Circuit decision, the judgment granting New Image all 125,000
shares of the Company's common stock being held in escrow has been reversed
and the case has been remanded back to the United States District Court for
further proceedings. On May 28, 2002, New Image filed a Motion for
Rehearing with the Ninth Circuit Court of Appeals and on June 26, 2002, the
Court denied the petition for rehearing. A pretrial hearing has been
scheduled for January 2003 in connection with the remaining claims of the
parties to the litigation.
Old 97 Company ("Old 97") commenced an action against Todd Christopher
International, Inc. d/b/a Vogue International ("Vogue") in the Hillsborough
County, Florida Circuit Court and Vogue counterclaimed against Old 97. The
parties reached a settlement pursuant to which, among other things, the
parties have mutually released each other from all causes of action, have
agreed to the disposition of certain old Vogue inventory held by Old 97 and
have agreed to have Old 97 manufacture private label goods for Vogue if the
parties can reach an understanding on a mutually agreeable pricing
structure. Any cost associated with the disposition of the inventory is
not considered to be material.
On November 1, 2001, a private label customer filed a lawsuit against
the Company alleging causes of action for breach of contract, declaratory
judgment, and trademark infringement. The Company denied the allegations
and has counter-claimed against the customer. The counterclaim seeks
unspecified compensatory damages, interest, attorneys fees, costs and other
relief on the breach of contract and anticipatory breach claims and, in
excess of $400,000 on the account stated claim. At a mediation hearing
held in May 2002, the Company rejected a settlement offer from the private
label customer due to the insufficiency of the offer. Subsequently, the
Court issued a preliminary injunction enjoining the Company from use of the
26
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2002 AND 2001
ITEM 1. LEGAL PROCEEDINGS (continued)
private label customer's trademarks. The Company has appealed the
injunction to the Florida Third District Court of Appeals. No decision has
yet been rendered by the Court. At this time, the Company is still unable
to accurately predict the outcome of this matter.
In November 2001, the Company filed a claim with the U.S. Department
of Transportation ("DOT") in connection with the DOT's widening of
Interstate Highway 4, which the Company alleges will result in the loss of
an adjacent rental facility utilized by one of the Company's subsidiaries.
At a hearing on August 2, 2002, the Company was successful in asserting a
position that would allow for damages to be paid to the Company by the DOT.
The case will be scheduled for mediation, where it is anticipated that the
Company could receive a material damage award. After consultation with
legal counsel at this time, the Company is presently unable to accurately
predict the amount or type of recovery that will result therefrom.
Other than the above, there has been no material change in the status
of any other pending litigation since the Company's last filed Form 10-Q or
Form 10-K, which was filed with the Securities and Exchange Commission for
the year ended December 31, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 10. Credit Agreement, in the amount of $8,140,000, dated
August 3, 2001, between The Stephan Co. and First Union National
Bank, renewed as of August 5, 2002 in the principal amount of
$7,030,000.
Exhibit 99.1 Certification by the Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification by the Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K during the quarter ended September 30, 2002
None.
27
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 14, 2002
/s/ David A. Spiegel
____________________________________
David A. Spiegel
Principal Financial and
Accounting Officer
November 14, 2002
28
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Frank F. Ferola, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Stephan Co.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
29
CERTIFICATION OF CHIEF EXECUTIVE OFFICER (continued)
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Frank F. Ferola
__________________________________
Frank F. Ferola
Chief Executive Officer
November 14, 2002
30
CERTIFICATION OF CHIEF FINANCIAL OFFICER
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, David A. Spiegel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Stephan Co.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
31
CERTIFICATION OF CHIEF FINANCIAL OFFICER (continued)
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ David A. Spiegel
__________________________________
David A. Spiegel
Chief Financial Officer
November 14, 2002
32