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, 2004
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
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
Approximate number of shares of Common Stock outstanding
as of November 8, 2004:
4,389,805
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2004
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets
as of September 30, 2004 and December 31, 2003 4-5
Unaudited Condensed Consolidated Statements
of Operations for the nine months ended
September 30, 2004 and 2003 6
Unaudited Condensed Consolidated Statements
of Operations for the three months ended
September 30, 2004 and 2003 7
Unaudited Condensed Consolidated Statements
of Cash Flows for the nine months ended
September 30, 2004 and 2003 8-9
Notes to Unaudited Condensed Consolidated
Financial Statements 10-19
ITEM 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 19-23
ITEM 3. Quantitative and Qualitative
Disclosure About Market Risk 24
ITEM 4. Controls and Procedures 24
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 25
ITEM 2. Unregistered Sales of Equity Securities
And Use of Proceeds 25
ITEM 5. Other Information 25
ITEM 6. Exhibits 25
SIGNATURES 26
2
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2004
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. ("Stephan" or 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; Stephan's ability to come into compliance
with AMEX's continued listing requirements; regulatory approvals of the
pending preliminary proxy filings in connection with the going-private
transaction discussed in this report; 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,
2004 2003
____________ ____________
CURRENT ASSETS
Cash and cash equivalents $ 3,998,495 $ 13,302,159
Accounts receivable, net 2,337,739 1,444,508
Inventories 7,330,434 7,497,262
Prepaid expenses and
other current assets 532,415 784,601
____________ ____________
TOTAL CURRENT ASSETS 14,199,083 23,028,530
RESTRICTED CASH 4,817,661 5,642,500
PROPERTY, PLANT AND EQUIPMENT, net 1,626,240 1,702,330
GOODWILL, net 5,857,980 5,857,980
TRADEMARKS, net 8,664,809 8,664,809
DEFERRED ACQUISITION COSTS, net 236,133 298,773
OTHER ASSETS, net 2,430,638 2,867,958
____________ ____________
TOTAL ASSETS $ 37,832,544 $ 48,062,880
============ ============
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,
2004 2003
_____________ ____________
CURRENT LIABILITIES
Accounts payable and
accrued expenses $ 2,382,019 $ 2,614,731
Current portion of
long-term debt 1,110,000 2,442,273
Income taxes payable 15,148 28,270
____________ ____________
TOTAL CURRENT LIABILITIES 3,507,167 5,085,274
DEFERRED INCOME TAXES, net 1,402,238 1,133,051
LONG-TERM DEBT 3,515,000 4,347,500
____________ ____________
TOTAL LIABILITIES 8,424,405 10,565,825
____________ ____________
COMMITMENTS AND CONTINGENCIES (NOTE 3)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value 43,898 44,106
Additional paid in capital 17,556,731 18,417,080
Retained earnings 11,807,510 20,387,432
____________ ____________
29,408,139 38,848,618
LESS:
125,000 CONTINGENTLY
RETURNABLE SHARES - (1,351,563)
____________ ____________
TOTAL STOCKHOLDERS' EQUITY 29,408,139 37,497,055
____________ ____________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 37,832,544 $ 48,062,880
============ ============
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,
______________________________
2004 2003
_____________ ____________
NET SALES $18,819,564 $20,048,643
COST OF GOODS SOLD 10,977,964 11,248,070
___________ ___________
GROSS PROFIT 7,841,600 8,800,573
LESS OPERATING EXPENSES:
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 7,150,841 7,285,559
COMPENSATION EXPENSE RESULTING
FROM EXERCISE OF STOCK OPTIONS 415,430 -
___________ ____________
OPERATING INCOME 275,329 1,515,014
OTHER INCOME(EXPENSE)
Interest income 145,616 178,311
Interest expense (73,176) (287,374)
Royalty and other income, net 320,245 224,500
___________ ___________
INCOME BEFORE INCOME TAXES 668,014 1,630,451
INCOME TAX EXPENSE 249,195 614,027
___________ ___________
NET INCOME $ 418,819 $ 1,016,424
=========== ===========
BASIC AND DILUTED
EARNINGS PER SHARE $ .10 $ .24
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,335,336 4,308,832
=========== ===========
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,
________________________________
2004 2003
____________ ____________
NET SALES $ 7,305,025 $ 6,698,288
COST OF GOODS SOLD 4,309,542 3,916,807
___________ ___________
GROSS PROFIT 2,995,483 2,781,481
LESS OPERATING EXPENSES:
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,564,149 2,319,991
COMPENSATION EXPENSE RESULTING
FROM EXERCISE OF STOCK OPTIONS 415,430 -
___________ ____________
OPERATING INCOME 15,904 461,490
OTHER INCOME(EXPENSE)
Interest income 46,805 50,981
Interest expense (23,243) (73,447)
Royalty and other income, net 2,100 199,500
___________ ___________
INCOME BEFORE INCOME TAXES 41,566 638,524
INCOME TAX EXPENSE 12,222 236,157
___________ ___________
NET INCOME $ 29,344 $ 402,367
=========== ===========
BASIC AND DILUTED
EARNINGS PER SHARE $ .01 $ .09
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,394,385 4,308,832
=========== ===========
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,
___________________________
2004 2003
___________ ____________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 418,819 $ 1,016,424
___________ ____________
Adjustments to reconcile net income
to cash flows provided by
operating activities:
Depreciation 118,631 245,930
Amortization of intangible assets 62,640 70,092
Writedown of inventories 100,000 20,660
Compensation expense resulting from
exercise of stock options 415,430 -
Deferred income tax provision 269,187 483,109
Provision for doubtful accounts 61,323 75,249
Changes in operating assets and
liabilities:
Accounts receivable (954,554) (764,873)
Inventories 66,828 (602,480)
Income taxes payable/receivable (13,122) 11,604
Prepaid expenses
and other current assets 252,186 (213,041)
Other assets 437,320 826,688
Accounts payable and accrued expenses (232,712) 588,207
___________ ___________
Total adjustments 583,157 741,145
___________ ___________
Net cash flows provided
by operating activities 1,001,976 1,757,569
___________ ___________
See notes to unaudited condensed consolidated financial statements
8
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
____________________________
2004 2003
____________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant
and equipment (42,541) (10,213)
___________ ___________
Net cash flows used in
investing activities (42,541) (10,213)
___________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (2,164,773) (912,683)
Dividends paid (8,998,741) (264,635)
Changes in certificates of deposit 824,839 832,500
Proceeds from exercise of stock options 75,576 -
___________ ___________
Net cash flows used in
financing activities (10,263,099) (344,818)
___________ ___________
(DECREASE)/INCREASE IN CASH
AND CASH EQUIVALENTS (9,303,664) 1,402,538
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 13,302,159 10,785,995
___________ ___________
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 3,998,495 $12,188,533
=========== ===========
Supplemental Disclosures of
Cash Flow Information:
Interest paid $ 175,918 $ 220,693
=========== ===========
Income taxes paid $ 69,659 $ 88,629
=========== ===========
Supplemental Disclosure of Non-Cash
Investing and Financing Activities:
On August 20, 2004, 125,000 contingently returnable shares, carried at
$1,351,563, were retired and Common Stock and Additional Paid in Capital
was reduced by the same amount in the aggregate.
See notes to unaudited condensed consolidated financial statements
9
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED SEPTEMBER 30, 2004 AND 2003
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: In the opinion of management, all
adjustments (consisting only of normal recurring accruals) necessary for a
fair presentation of the financial position and results of operations of
The Stephan Co. and Subsidiaries (the "Company") are reflected in these
unaudited interim condensed consolidated financial statements.
The results of operations for the nine-month period ended
September 30, 2004 is not necessarily indicative of the results to be
achieved for the year ending December 31, 2004. The December 31, 2003
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 appearing in the
Company's Annual Report on Form 10-K for the year ended December 31, 2003,
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 manages its business in 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 balance sheet 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 (including restricted cash) held
in interest bearing accounts as of September 30, 2004 and December 31, 2003
were approximately $7,678,000 and $12,698,000, respectively.
10
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED SEPTEMBER 30, 2004 AND 2003
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,
2004 2003
____________ ____________
Raw materials $ 1,971,670 $ 2,007,174
Packaging and components 2,492,354 2,612,798
Work in progress 292,438 257,476
Finished goods 4,872,608 5,338,369
____________ ____________
9,629,070 10,215,817
Less: Amount included in
other assets, net (2,298,636) (2,718,555)
____________ ____________
$ 7,330,434 $ 7,497,262
============ ============
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 is inventory not anticipated to be utilized
within one year and is comprised primarily of packaging, components and
finished goods. The Company reduces the carrying value of slow moving
inventory that may ultimately become unusable or obsolete, taking into
consideration anticipated carrying costs and estimated costs of disposal.
For the nine months ended September 30, 2004, the Company recorded an
additional write-down of $100,000 for slow-moving and obsolete inventory.
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. For the nine months ended
September 30, 2004 and 2003, the Company had 291,822 and 664,620
outstanding stock options, respectively, a significant portion of which
were non-dilutive. The inclusion of dilutive stock options in the
calculation of earnings per share did not have any significant impact on
the earnings per share amounts for the nine and three months ended
September 30, 2004 and 2003, respectively.
11
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED SEPTEMBER 30, 2004 AND 2003
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
STOCK-BASED COMPENSATION: The Company adopted the disclosure
requirements of SFAS No. 148, "Accounting for Stock-Based Compensation-
Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting
for Stock-Based Compensation," to provide alternate methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based compensation and to require prominent disclosures in both
annual and interim financial statements about the methods of accounting for
stock-based compensation and the effect of the method used on reported
results. As permitted by SFAS No. 148 and 123, the Company continues to
apply the accounting provisions of APB No. 25, "Accounting for Stock Issued
to Employees," and related interpretations, with regard to the measurement
of compensation cost for options granted under the Company's existing
plans. No stock-based compensation cost, other than as discussed below, is
reflected in net income/(loss) as all options granted under the plans had
an exercise price not less than the market value of the underlying common
stock on the date of grant. Had expense been recognized using the fair
value method described in SFAS No. 123, using the Black-Scholes option-
pricing model, the Company would have reported the following results of
operations (in thousands, except per share amounts):
Nine Months Ended Three Months
September 30, Ended Sept. 30,
__________________ _______________
2004 2003 2004 2003
_______ _______ _______ _______
Net income, as reported $ 419 $ 1,016 $ 29 $ 402
Add: Stock-based compensation
included in reported net income,
net of related tax effects 272 272
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects (371) (124) (308) (41)
________ ________ _______ _______
Pro forma net income/(loss) $ 320 $ 892 $ (7) $ 361
======== ======== ======= =======
Net income/(loss) per share:
As reported $ .10 $ .24 $ .01 $ .09
Pro forma $ .07 $ .21 $ (.00) $ .08
12
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED SEPTEMBER 30, 2004 AND 2003
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In the third quarter of 2004, officers of the Company exercised stock
options utilizing the "cashless method" of exercise. As such, the Company
recorded compensation expense in the amount of $415,430. The following
table summarizes the pro forma results of operations had the officers
exercised their options utilizing cash.
For the nine months ended September 30, 2004:
Pro Forma As Reported
___________ ___________
Operating income $ 690,759 $275,329
Income before taxes 1,083,444 668,014
Income tax expense 392,978 249,195
Net Income 690,466 418,819
Diluted earnings per share .16 .10
For the three months ended September 30, 2004:
Pro Forma As Reported
___________ ___________
Operating income $ 431,334 $ 15,904
Income before taxes 456,996 41,566
Income tax expense 156,005 12,222
Net Income 300,991 29,344
Diluted earnings per share .07 .01
NEW FINANCIAL ACCOUNTING STANDARDS: In January 2003, the FASB
issued FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities" ("FIN 46"), an interpretation of ARB 51. FIN 46, as revised in
December 2003, provides guidance on identifying entities for which control
is achieved through means other than through voting rights, variable
interest entities ("VIE"), and how to determine when and which business
enterprises should consolidate the VIE. In addition, FIN 46 requires both
the primary beneficiary and all other enterprises with a significant
variable interest in a VIE to make additional disclosures. The
consolidation provisions of FIN 46 are effective immediately for variable
interests in VIE's created after January 31, 2003. For variable interests
in VIE's created before February 1, 2003, the provisions of FIN 46 are
effective for the first interim or annual period ending after December 15,
2003. The adoption of FIN 46 did not require a change in accounting
treatment since the Company has no investments in any VIE's.
13
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED SEPTEMBER 30, 2004 AND 2003
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity". This statement establishes standards for the classification and
measurement of financial instruments that possess characteristics similar
to both liability and equity instruments. SFAS No. 150 also addresses the
classification of certain financial instruments that include an obligation
to issue equity shares. On October 29, 2003, the FASB voted to defer, for
an indefinite period, the application of certain provisions of the guidance
in SFAS No. 150 until it could consider some of the resulting
implementation issues. The Company has adopted certain provisions of SFAS
No. 150 which did not have a material impact on the Company's financial
condition or results of operations. The Company does not believe the
effect of the provisions of SFAS No. 150 that have been deferred to future
periods will have a material impact on the Company's financial statements.
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 (in thousands):
14
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED SEPTEMBER 30, 2004 AND 2003
NOTE 2: SEGMENT INFORMATION (continued)
NET SALES NET SALES
_______________ _______________
Nine Months Three Months
Ended Sept. 30, Ended Sept 30,
2004 2003 2004 2003
_______________ _______________
Professional $13,897 $13,806 $ 5,293 $ 5,174
Retail 4,435 5,971 1,811 1,461
Manufacturing 4,194 5,198 1,431 1,538
_______ _______ _______ _______
Total 22,526 24,975 8,535 8,173
Intercompany
Manufacturing (3,706) (4,926) (1,230) (1,475)
_______ _______ _______ _______
Consolidated $18,820 $20,049 $ 7,305 $ 6,698
======= ======= ======= =======
INCOME BEFORE INCOME BEFORE
INCOME TAXES INCOME TAXES
_______________ _______________
Nine Months Three Months
Ended Sept. 30, Ended Sept. 30,
2004 2003 2004 2003
_______________ _______________
Professional $ 485 $ 1,162 $ 18 $ 412
Retail 366 604 20 179
Manufacturing (183) (136) 4 48
_______ _______ ______ ______
Consolidated $ 668 $ 1,630 $ 42 $ 639
======= ======= ====== ======
NOTE 3: 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 these other matters, at September
30, 2004, would likely, if adversely determined, have a material adverse
effect on the Company's financial position, results of operations or cash
flows. Additionally, other than as indicated below, there has been no
material change in the status of any other pending litigation since the
Company's filing of its Annual Report on Form 10-K with the Securities and
Exchange Commission for the year ended December 31, 2003.
15
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED SEPTEMBER 30, 2004 AND 2003
NOTE 3: COMMITMENTS AND CONTINGENCIES (continued)
In the action commenced by New Image Laboratories, Inc. against the
Company in the United States District Court for the Central District of
California, the parties reached a settlement pursuant to a stipulation of
settlement and amendments thereto which provided, among other things, as
follows: (i) New Image relinquished title to 65,000 of the 125,000 shares
of the Company's common stock held in escrow and received 60,000 shares.
Subsequently, New Image elected to sell the Company its 60,000 shares for
$285,000, (ii) Stephan will receive $44,000 in damages from New Image,
(iii) dividends, and interest accrued thereon, held in the escrow account
(which is currently estimated to be in excess of $70,000) will be
distributed with Stephan receiving 52% of such funds and New Image
receiving 48% of such funds. As a result of this settlement, the Company
recorded an expense of approximately $275,000 for the quarter ended June
30, 2004. In the third quarter of 2004, the amount of the contingently
returnable shares carried on the books of the Company was reflected as
treasury stock when the shares were received by the Company and then offset
against additional paid in capital when the shares were retired. New
Image's claim for diminution of the value of the shares held in escrow, in
the amount of $547,800, plus interest, was heard before a special master in
late October 2004 and the parties are awaiting the special master's
decision. In connection with the diminution claim, the parties have agreed
that any recovery recommended by the special master shall be limited to the
diminution in the value of 60,000 shares of the Company's stock. The
parties have reserved the right to challenge and appeal the recommendation
of the special master in the federal court.
In the fourth quarter of 2003, Sorbie Acquisition Co. ("SAC"), a
wholly-owned subsidiary of the Company, and Trevor Sorbie International,
Plc. ("TSI") commenced arbitration proceedings against each other before
the American Arbitration Association in Pittsburgh, Pennsylvania. In TSI's
statement of claim, TSI alleged claims for breach of contract, trademark
infringement and breach of certain implied covenants. Specifically, TSI
alleged that SAC owes past due royalty payments and interest. TSI also
alleged that SAC breached the contract between the parties by various acts
and omissions which diminished sales of Sorbie products and the value of
the Sorbie trademarks. TSI further alleged that SAC has diverted product
outside of SAC's territory. TSI sought damages in the amount of the
royalties allegedly due, termination of the agreement between the parties
and cancellation and forfeiture of SAC's rights in the Sorbie Trademarks.
SAC denied the allegations raised in the TSI statement of claim. In SAC's
statement of claim against TSI, SAC alleged causes of action for
declaratory relief, diversion, breach of contract for failure to support
the brand, trademark infringement and injunctive relief. SAC alleged that
TSI had been engaged in diversion of TSI product into SAC's territory and
that TSI and Trevor Sorbie failed to render assistance to SAC in violation
16
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED SEPTEMBER 30, 2004 AND 2003
NOTE 3: COMMITMENTS AND CONTINGENCIES (continued)
of the parties' agreement. SAC further alleged that TSI and Trevor Sorbie
engaged in intentional and detrimental infringement of SAC's exclusive
rights in the Sorbie Trademarks and rights to publicity to the name,
likeness and image of Trevor Sorbie in SAC's territory. Among other
things, SAC alleged that Trevor Sorbie and TSI infringed SAC's rights by
appearing at shows in North and South America that promoted Trevor Sorbie
and non-SAC products. SAC sought damages for the diversion, infringement
and permanent injunctive relief. In addition, SAC further alleged that
TSI's claim for royalties is premised upon an incorrect reading of the
agreement and is at odds with the method by which the parties have
calculated royalties since the inception of the agreement. SAC has also
filed a claim against Trevor Sorbie individually, premised upon his
involvement in certain of the acts alleged above. On October 25, 2004, the
arbitration panel returned an award in favor of TSI with respect to the
royalties due, including interest, and in favor of SAC with respect to the
infringement of SAC's rights to exclusive publicity in their territory.
The panel did not affirm any of the other claims alleged by either of the
parties to the action. The Company intends to appeal the decision on
certain grounds, including an improper computation of the interest due on
additional royalties, however the financial statements for the nine months
ended September 30, 2004 reflect a liability of approximately $720,000 for
payment of the award. Also, SAC may incur additional interest from the
date of the award. Due to the complexities of the issues involved,
however, the Company is currently unable to predict the outcome of the
appeal, including whether or not the appeal will be heard.
On April 30, 2003, the Board of Directors approved a definitive merger
agreement (the "Merger Agreement") pursuant to which the Company would be
acquired, in a "going-private" transaction, by Gunhill Enterprises, Inc., a
wholly-owned subsidiary of Eastchester Enterprises, Inc. Eastchester
Enterprises, Inc. is owned by Frank F. Ferola, Thomas M. D'Ambrosio, John
DePinto and Shouky A. Shaheen (all of whom are current Board members)
together with their affiliates (the "Acquisition Group"). The Company
entered into the Merger Agreement following approval by its Board of
Directors based in part upon the unanimous recommendation of the Special
Committee comprised of two non-management and disinterested directors of
the Company's Board of Directors. The Special Committee had received an
opinion from SunTrust Robinson Humphrey that the consideration to be paid
pursuant to the Merger Agreement was fair from a financial point of view to
the stockholders other than the Acquisition Group.
On November 4, 2003, in connection with the "going-private" trans-
action, the Company filed a Preliminary Proxy with the Securities and
Exchange Commission ("SEC"). The Company is currently in the process of
responding to comment letters issued by the SEC as a result of its review
17
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED SEPTEMBER 30, 2004 AND 2003
NOTE 3: COMMITMENTS AND CONTINGENCIES (continued)
of the Preliminary Proxy. When its review is complete, the SEC may require
the Company to file an amended Form 10-K to enhance disclosures with
respect to the non-current inventory. On August 25, 2004, the Merger
Agreement was terminated and the Acquisition Group withdrew its offer to
acquire the shares of Stephan common stock not owned by it and informed
Stephan that it has decided not to pursue such an acquisition at this time.
Independent legal counsel and investment banking advisors were
retained to advise the Special Committee in connection with the
transaction. The Company incurred over $650,000 of expenses through June
30, 2004. For the quarter ended September 30, 2004, the Company accrued
an additional $155,000 for expenses previously incurred by Eastchester
Enterprises, in accordance with the terms of the Merger Agreement. In
connection with the "going-private" transaction, the Company had previously
entered into a Working Capital Management Account ("WCMA") agreement with
Merrill Lynch Business Financial Services Inc., providing for the creation
of a WCMA line of credit not to exceed $5,000,000. Borrowings against the
line of credit are to be collateralized by the Company's accounts
receivable and inventories and the debt will bear a variable interest rate
using a 1-month LIBOR rate plus 2.25%. The provisions of the credit line
included periodic accounting and reporting requirements, maintenance of
certain business and financial ratios as well as restrictions on additional
borrowings. The credit line remains unused, and has been extended pending
the satisfactory renegotiation of the terms, use of proceeds and amount of
the credit line.
As previously reported, because the anticipated "going private"
transaction commenced on or about March 2001 but subsequently withdrawn,
the Company has not submitted any matters to a vote of its security holders
since the Company's September 1, 2000 Annual Meeting. In accordance with
the rules and regulations of the American Stock Exchange (AMEX), the
Company was required to promptly notify its stockholders and AMEX, in
writing, indicating the reasons for the failure to have a meeting and to
use good faith efforts to ensure that an annual meeting is held as soon as
reasonably practicable. The Company included annual meeting materials in
its revised proxy statement, filed with the Securities and Exchange
Commission on April 13, 2004. In a press release issued by the Company on
October 29, 2004, the Company indicated that the next annual meeting of
shareholders, previously set for November 10, 2004, has been delayed, and
the Company expects to formally notify all shareholders of the definitive
date and location of such meeting in the near future. The Company was
required by AMEX to file a Corporate Governance Certification by October
31, 2004, but has been unable to do so because the composition of the Board
of Directors and the Audit Committee does not meet the enhanced independent
requirements of AMEX. On November 19, 2004, the Company received a warning
18
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2004 AND 2003
NOTE 3: COMMITMENTS AND CONTINGENCIES (continued)
letter from AMEX indicating that the Company was deficient with respect to
the above, in addition to not being in compliance with nominating committee
requirements and a web-site posting (or other public notice) of a code of
conduct and ethics for all directors, officers and employees. The Company
has until December 31, 2004 to become compliant and as such, has been
engaged in discussions and has been active in the process of re-
constituting the Board of Directors to bring it into compliance with
current AMEX guidelines, as well as formulating and implementing the
appropriate policies and rules. As disclosed in previous filings, the
above could subject the Company to civil penalties and/or the delisting of
the Company's stock. The Company, based upon past discussions with AMEX
and the Company's legal counsel, believes that none of the aforementioned
issues are of a material nature and any penalties, if levied, would not be
material to the Company's financial position or results of operations.
However, if the Company's common stock is delisted from AMEX, it could
adversely affect the liquidity and price of the Company's common stock, as
well as the Company's ability to raise additional capital.
NOTE 4: SPECIAL DIVIDEND
On August 25, 2004, the Company announced that its Board of Directors
approved the payment of a special dividend of $2.00 per share to all
shareholders of record as of September 8, 2004, paid on September 15, 2004
and amounting to $8,779,606.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Nine months ended September 30, 2004 compared to nine months ended
September 30, 2003.
RESULTS OF OPERATIONS
For the nine months ended September 30, 2004, net sales were
$18,820,000, compared to $20,049,000 achieved in the corresponding nine
months of 2003. The overall decrease in sales was principally due to the
return to a normal level of military orders for Quinsana Medicated Talc.
As indicated in previous filings, the first and second quarters of 2003
were favorably impacted by military orders as troops were deployed to the
Middle East conflict. In addition, and for largely the same reason as
above, the gross margin for the nine months ended September 30, 2004
declined to 41.7% as compared to 43.9% for the nine months ended September
30, 2003. Sales of the other retail products also declined, but sales of
19
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2004 AND 2003
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
the Professional segment were up slightly, due to strong sales of hard
goods offsetting declines in wet goods sales for the nine-month period
ended September 30, 2004, when compared to the sales achieved for the
corresponding nine-month period ended September 30, 2003. Sales of hotel
and spa amenities (included in the Manufacturing and Other segment) also
increased in this corresponding period.
Gross profit for the nine months ended September 30, 2004, was
$7,842,000 compared to gross profit of $8,801,000 achieved for the
corresponding nine-month period in 2003. Cost of sales for the nine months
ended September 30, 2004 was $10,978,000, when compared to the cost of
sales of $11,248,000 for the nine months ended September 30, 2003. Gross
profit decreased overall for the reasons discussed above.
Selling, general and administrative expenses for the nine months ended
September 30, 2004 decreased by $135,000, to $7,151,000, when compared to
the corresponding 2003 nine-month period total of $7,286,000. This
decrease was due, in large part, to a decrease in expenses in connection
with the "going-private" transaction, which was withdrawn on August 24,
2004, as well as a decline in officer payroll costs. The Company continues
its efforts to control selling, general and administrative expenses;
however, no assurance can be given that it can continue to keep reducing
these expenses.
In the third quarter of 2004, officers of the Company exercised stock
options utilizing the "cashless method" of exercise. As such, the Company
recorded compensation expense in the amount of $415,430 in conformity with
accounting principles generally accepted in the United States of America
("GAAP").
Interest expense for the nine months ended September 30, 2004 was
$73,000, a decrease of approximately $214,000 from the $287,000 incurred in
the corresponding period of 2003, primarily because the Company's
obligation to Colgate-Palmolive was paid in full on April 2, 2004. As
indicated in previously filed reports, on April 7, 2004, the Company and
Colgate-Palmolive mutually agreed to settle all outstanding claims and
issues between them. The net result of this settlement was a reduction of
the outstanding obligation by approximately $418,000. This amount is
reflected in other income. Interest income of $146,000 for the nine months
ended September 30, 2004 was lower than the $178,000 earned in the
corresponding nine months of 2003. Although the Company had more cash
invested in 2004, prior to the payment of the $2.00 special dividend on
September 15, 2004, it received lower interest rates on its investments as
20
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2004 AND 2003
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
overall interest rates remained low.
In addition to the Colgate-Palmolive settlement above, other income
was impacted by the settlement of two lawsuits. In one case, the Company
received payment of $150,000 in connection with a customer's failure to
perform on a purchase order issued by them to the Company. In July 2004,
the Company also settled a portion of the New Image litigation by agreeing
to pay New Image $285,000 for 60,000 of the 125,000 shares of stock held in
escrow. All 125,000 shares of stock were retired in the third quarter of
2004. Other income also includes royalty fees received from the licensing
of Frances Denney products.
As a result of decrease in income for the nine-month period ended
September 30, 2004, the provision for income taxes decreased $365,000, to
$249,000 from the $614,000 incurred for the corresponding period in 2003.
Net income for the nine-month period ended September 30, 2004 was $419,000,
compared to $1,016,000 for the nine months ended September 30, 2003. Basic
and diluted earnings per share were $0.10 for the nine months ended
September 30, 2004, compared to $0.24 for the nine months ended September
30, 2003, based on a weighted average number of shares of 4,335,336 and
4,308,832 for the nine months ended September 30, 2004 and 2003,
respectively.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 142, "Goodwill and Other Intangible Assets". 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.
The Company adopted SFAS No. 142 on January 1, 2002. SFAS No. 142 requires
that goodwill and other intangible assets be tested for impairment upon
adoption and at least annually thereafter. Additionally, SFAS No. 142
dictates testing for impairment between annual tests if an event (as
defined) occurs or circumstances change. The Company does not currently
believe that any qualifying event or circumstance has occurred. However,
one of the Company's reporting units has experienced a decline in sales
during 2004. The reporting unit is actively developing various marketing
alternatives, which are expected to result in sales and earnings beginning
in the latter half of 2005 that the Company believes will eventually more
than offset the decline in sales. The timing of such sales and earnings
are primarily based upon the negotiation of certain distribution and sales
agreements. Should the reporting unit incur a significant delay in
developing the expanded marketing alternatives, the Company could be
required to recognize an impairment of all or a portion of the reporting
unit's goodwill or other intangible assets when the Company performs its
annual test for impairment.
21
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2004 AND 2003
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Three months ended September 30, 2004 compared to three months ended
September 30, 2003.
For the three months ended September 30, 2004, net sales were
$7,305,000, compared to $6,698,000 for the three months ended September 30,
2003, an increase of $607,000. Sales for both the Professional and Retail
segments were up in the third quarter, as were sales of hotel and spa
amenities (included in the Manufacturing and Other segment). Gross profit
for the three months ended September 30, 2004 was $2,995,000, compared to
gross profit of $2,781,000 achieved for the corresponding three-month
period in 2003. The gross profit margin, however, for the third quarter,
decreased from 41.5% in 2003 to 41.0% in 2004. Although the gross profit
increased as indicated above, the gross profit margin for this third
quarter was adversely impacted by a $100,000 additional write down of slow-
moving and obsolete goods, on the basis of the Company's on-going and
continuing evaluation of inventory.
Selling, general and administrative expenses for the three months
ended September 30, 2004 increased by $244,000, to $2,564,000, from
$2,320,000 when compared to the corresponding three-month period of 2003.
This increase is a result of going-private expenses incurred in the third
quarter of 2004 and the award by the arbitration panel with respect to the
SAC litigation. As discussed above, the exercise of options obligated the
Company to record compensation expense in the amount of $415,430 for the
quarter ended September 30, 2004.
Interest income for the three-month period ended September 30, 2004
was $47,000, a decrease of approximately $4,000 when compared to $51,000
earned in the corresponding three-month period of 2003. Interest expense
for the three-month period ended September 30, 2004 was $23,000, a decrease
of $50,000 from the $73,000 charged in the corresponding three-month period
of 2003, due in large part to the retirement of the Colgate debt discussed
earlier. Other income was significantly lower in the third quarter of 2004
when compared to the quarter ended September 30, 2003 as a result of a
settlement in 2003 with the Dept. of Transportation with respect to the
Company's claim in connection with the widening of Interstate Highway 4.
Income tax expense for the three months ended September 30, 2004 was
$12,000 compared to $236,000, a decrease of $224,000 for the corresponding
period in 2003. Net income of $29,000 for the three months ended September
30, 2004, was a $373,000 decrease from net income of $402,000 achieved in
the three months ended September 30, 2003. Basic and diluted earnings per
share were $0.01 for the three months ended September 30, 2004 and 2003,
22
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2004 AND 2003
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
based on a weighted average number of shares 4,394,385 and 4,308,832 for
the three months ended September 30, 2004 and 2003, respectively.
LIQUIDITY & CAPITAL RESOURCES
Cash and cash equivalents decreased $9,304,000 from December 31, 2003,
to $3,998,000 at September 30, 2004. Total cash of $8,816,000 at September
30, 2004 includes restricted cash of $4,818,000 pledged as collateral for a
bank loan. Accounts receivable were $2,338,000 at September 30, 2004, a
net increase of $955,000 from the $1,445,000 at December 31, 2003, due
largely as a result of normally strong third quarter sales of Morris
Flamingo-Stephan. Overall, inventories decreased $587,000 from $10,216,000
at December 31, 2003 to $9,629,000 at September 30, 2004. Inventory not
anticipated to be utilized within one year made up a significant portion of
the total decrease in inventory.
Total current assets at September 30, 2003 were $14,199,000 compared
to $23,029,000 at December 31, 2003. Working capital decreased $7,251,000
when compared to December 31, 2003, as a result of the payment of a special
dividend of $2.00 per share, paid on September 15, 2004. The Company does
not anticipate any significant capital expenditures in the near term, other
than the exposure in connection with the Sorbie litigation matter discussed
previously, and management believes that there is sufficient cash on hand
and working capital to satisfy upcoming requirements.
The Company does not have any off-balance sheet financing or similar
arrangements.
NEW FINANCIAL ACCOUNTING STANDARDS
See Note 1 to the Financial Statements included in Part I, Item 1 for
a discussion of new financial accounting standards.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
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 would
differ significantly from those estimates if different assumptions were
used or unexpected events transpire. Please see Item 7 in the Company's
Annual Report on Form 10-K for the year ended December 31, 2003 filed with
the Securities and Exchange Commission.
23
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2004 AND 2003
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) DISCLOSURE CONTROLS AND PROCEDURES: The Company's management,
with the participation of the Company's chief executive officer and chief
financial officer, has evaluated the effectiveness of the Company's
disclosure controls and procedures (as such term is defined in Rules 13a-
15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) as of the end of the period covered by this report.
Based on such evaluation, the Company's chief executive officer and chief
financial officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis, information
required to be disclosed by the Company in the reports that it files or
submits under the Exchange Act.
(b) CHANGES IN INTERNAL CONTROLS: There have not been any changes in
the Company's internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d - 15(f) under the Exchange Act) during
the fiscal quarter to which this report relates that have materially
affected, or are reasonably likely to materially affect, the Company's
internal control over financial reporting.
24
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2004 AND 2003
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The disclosure of the Company's legal proceedings set forth in Note 3
to the Financial Statements included in Part I, Item 1 are incorporated
herein by reference.
Other than the above, there has been no material change in the status
of any other pending litigation since our last periodic report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Repurchase of Equity Securities: In connection with a settlement
agreement entered into in July 2004, with New Image Laboratories, Inc., as
set forth in Note 3 to the Financial Statements included in Part I, Item 1,
the Company repurchased 60,000 shares (at $4.75 per share) of the Company's
common stock for an aggregate amount of $285,000 in August 2004.
The Company did not repurchase any shares of its common stock pursuant
to publicly announced plans or programs and the Company does not presently
have any such plans or programs
ITEM 5. OTHER MATTERS
The Company was required by the American Stock Exchange ("AMEX") to
file a Corporate Governance Certification by October 31, 2004, but has been
unable to do so because the composition of the Board of Directors and the
Audit Committee does not meet the enhanced independent requirements of
AMEX. On November 19, 2004, the Company received a warning letter from
AMEX indicating that the Company was deficient with respect to the above,
in addition to not being in compliance with nominating committee
requirements and a web-site posting (or other public notice) of a code of
conduct and ethics for all directors, officers and employees. The Company
has until December 31, 2004 to become compliant and as such, has been
engaged in discussions and has been active in the process of re-
constituting the Board of Directors to bring it into compliance with
current AMEX guidelines, as well as formulating and implementing the
appropriate policies and rules.
ITEM 6. EXHIBITS
The exhibits required by this item are listed on the Exhibit Index
attached hereto.
25
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 22, 2004
/s/ David A. Spiegel
____________________________________
David A. Spiegel
Chief Financial Officer
November 22, 2004
26
EXHIBIT INDEX
Exhibit
Number Exhibit Title
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief
Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief
Financial Officer.
32.1 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.
32.2 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.