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: March 31, 2006
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 a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act).
Large accelerated filer[ ] Accelerated filer[ ] Non-accelerated filer[X]
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act)
YES NO X
Approximate number of shares of Common Stock outstanding
as of April 30, 2006:
4,389,805
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2006
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets
as of March 31, 2006 and December 31, 2005 5-6
Unaudited Condensed Consolidated Statements
of Operations for the three months ended
March 31, 2006 and 2005 7
Unaudited Condensed Consolidated Statements
of Cash Flows for the three months ended
March 31, 2006 and 2005 8-9
Notes to Unaudited Condensed Consolidated
Financial Statements 10-14
ITEM 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 15-16
ITEM 3. Quantitative and Qualitative
Disclosure About Market Risk 16
ITEM 4. Controls and Procedures 17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 18
ITEM 5. Other Information 18
ITEM 6. Exhibits 18
SIGNATURES 19
2
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2006
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.
Words such as "projects," "believe," "anticipates," "estimate,"
"plans," "expect," "intends," and similar words and expressions are
intended to identify forward-looking statements and are based on our
current expectations, assumptions, and estimates about us and our industry.
In addition, any statements that refer to expectations, projections or
other characterizations of future events or circumstances are forward-
looking statements. Although we believe that such forward-looking
statements are reasonable, we cannot assure you that such expectations will
prove to be correct.
Our actual results could differ materially from those anticipated in
such forward-looking statements as a result of several factors, risks and
uncertainties. These factors, risks and uncertainties include, without
limitation, our ability to satisfactorily address any material weaknesses
in our financial controls; general economic and business conditions;
competition; the relative success of our operating initiatives; our
development and operating costs; our advertising and promotional efforts;
brand awareness for our product offerings; the existence or absence of
adverse publicity; acceptance of any new product offerings; changing trends
in customer tastes; the success of any multi-branding efforts; changes in
our business strategy or development plans; the quality of our management
team; costs and expenses incurred by us in pursuing strategic alternatives;
the availability, terms and deployment of capital; the business abilities
and judgment of our personnel; the availability of qualified personnel; our
labor and employee benefit costs; the availability and cost of raw
materials and supplies; changes in or newly-adopted accounting principles;
changes in, or our failure to comply with, applicable laws and regulations;
changes in our product mix and associated gross profit margins; as well as
management's response to these factors, and other factors that may be more
fully described in the Company's literature, press releases and publicly-
3
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2006
filed documents with the Securities and Exchange Commission. You are urged
to carefully review and consider these disclosures, which describe certain
factors that affect our business.
We do 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, we caution 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 our ability to achieve our
objectives and may cause actual results to differ materially from those
projected, anticipated or implied herein.
4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
2006 2005
____________ ____________
CURRENT ASSETS
Cash and cash equivalents $ 5,934,540 $ 5,602,762
Restricted cash 3,150,087 3,335,557
Accounts receivable, net 1,850,952 1,431,650
Inventories 6,111,130 6,148,267
Income taxes receivable - 22,893
Prepaid expenses and
other current assets 200,909 311,905
____________ ____________
TOTAL CURRENT ASSETS 17,247,618 16,853,034
PROPERTY, PLANT AND EQUIPMENT, net 1,654,213 1,682,951
GOODWILL, net 4,013,458 4,013,458
TRADEMARKS, net 8,364,809 8,364,809
DEFERRED ACQUISITION COSTS, net 125,679 142,185
OTHER ASSETS, net 1,693,422 1,721,169
____________ ____________
TOTAL ASSETS $ 33,099,199 $ 32,777,606
============ ============
See notes to unaudited condensed consolidated financial statements
5
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
2006 2005
____________ ____________
CURRENT LIABILITIES
Accounts payable and
accrued expenses $ 2,562,113 $ 2,002,728
Current portion of
long-term debt 2,960,000 3,237,500
____________ ____________
TOTAL CURRENT LIABILITIES 5,522,113 5,240,228
DEFERRED INCOME TAXES, net 1,373,705 1,343,257
____________ ____________
TOTAL LIABILITIES 6,895,818 6,583,485
____________ ____________
COMMITMENTS AND CONTINGENCIES (NOTE 3)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value 43,898 43,898
Additional paid in capital 17,556,731 17,556,731
Retained earnings 8,602,752 8,593,492
____________ ____________
TOTAL STOCKHOLDERS' EQUITY 26,203,381 26,194,121
____________ ____________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 33,099,199 $ 32,777,606
============ ============
See notes to unaudited condensed consolidated financial statements
6
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31,
______________________________
2006 2005
_____________ ___________
NET SALES $ 5,596,397 $ 5,516,811
COST OF GOODS SOLD 3,378,582 3,157,680
___________ ___________
GROSS PROFIT 2,217,815 2,359,131
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,078,332 2,242,724
___________ ___________
OPERATING INCOME 139,483 116,407
OTHER INCOME(EXPENSE)
Interest income 43,463 27,072
Interest expense (31,798) (31,262)
Royalty income 12,500 12,500
___________ ___________
INCOME BEFORE INCOME TAXES 163,648 124,717
INCOME TAX EXPENSE 66,592 50,519
___________ ___________
NET INCOME $ 97,056 $ 74,198
=========== ===========
BASIC AND DILUTED
EARNINGS PER SHARE: $ .02 $ .02
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,391,747 4,418,630
=========== ===========
See notes to unaudited condensed consolidated financial statements
7
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
_______________________________
2006 2005
___________ ___________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 97,056 $ 74,198
___________ ___________
Adjustments to reconcile net income
to cash flows provided by
operating activities:
Depreciation 37,454 36,659
Amortization of intangible assets 16,506 20,880
Write-down of inventories - 20,000
Deferred income tax expense 30,448 36,200
Provision for doubtful accounts 27,177 9,835
Changes in operating assets and
liabilities:
Accounts receivable (446,479) 167,736
Inventories 37,137 (258,476)
Income taxes payable/receivable 22,893 (10,681)
Prepaid expenses
and other current assets 110,996 146,840
Other assets 27,747 206,100
Accounts payable and accrued expenses 559,385 533,217
___________ ___________
Total adjustments 423,264 908,310
___________ ___________
Net cash flows provided by
operating activities 520,320 982,508
___________ ___________
See notes to unaudited condensed consolidated financial statements
8
THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
______________________________
2006 2005
____________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in restricted cash 185,470 (11,208)
Purchase of property, plant
and equipment (8,716) (107,197)
___________ ___________
Net cash flows provided by/(used in)
investing activities 176,754 (118,405)
___________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (277,500) (277,500)
Dividends paid (87,796) (87,799)
___________ ___________
Net cash flows used in
financing activities (365,296) (365,299)
___________ ___________
INCREASE IN CASH AND CASH EQUIVALENTS 331,778 498,804
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 5,602,762 4,402,463
___________ ___________
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 5,934,540 $ 4,901,267
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 11,798 $ 15,960
=========== ===========
Income taxes paid $ - $ -
=========== ===========
See notes to unaudited condensed consolidated financial statements
9
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 2006 AND 2005
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
NATURE OF OPERATIONS: The Stephan Company (the "Company") is
engaged in the manufacture, sale, and distribution of hair and personal
care grooming products principally throughout the United States. The
Company has allocated substantially all of its business into three
segments, which include professional hair care products and distribution,
retail personal care products and manufacturing.
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-month period ended March 31,
2006 is not necessarily indicative of the results to be achieved for the
year ending December 31, 2006. The December 31, 2005 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, 2005, previously
filed with the Securities and Exchange Commission.
USE OF ESTIMATES: The preparation of consolidated financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
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 when acquired. 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 March 31, 2006 and December 31, 2005 were
approximately $ 5,498,000 and $5,095,000, respectively.
10
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 2006 AND 2005
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
INVENTORIES: Inventories are stated at the lower of cost (deter-
mined on a first-in, first-out basis) or market, and are as follows:
March 31, December 31,
2006 2005
____________ ____________
Raw materials $ 1,612,291 $ 1,692,277
Packaging and components 2,193,836 2,238,763
Work in progress 461,040 454,217
Finished goods 3,457,568 3,402,742
____________ ____________
7,724,735 7,787,999
Less: Amount included in
other assets (1,613,605) (1,639,732)
____________ ____________
$ 6,111,130 $ 6,148,267
============ ============
Raw materials include surfactants, chemicals and fragrances used in
the production process. Packaging materials include cartons, inner sleeves
and boxes used in the actual product, as well as outer boxes and cartons
used for shipping purposes. Components are the actual bottles or
containers (plastic or glass), jars, caps, pumps and similar materials that
become part of the finished product. Finished goods also 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 inventory to
provide for these slow moving goods that includes the estimated costs of
disposal of inventory that may ultimately become unusable or obsolete.
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 4,391,747 for the three months ended March 31,
2006 and 4,418,630 for the three months ended March 31, 2005. For the
three months ended March 31, 2006 and 2005, the Company had 391,116 and
341,822 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 months ended March 31, 2006 and 2005.
11
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 2006 AND 2005
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
STOCK-BASED COMPENSATION: Effective January 1, 2006, the Company
adopted Statement of Financial Accounting Standards No. 123 (revised),
"Share-Based Payment" ("FAS 123R"), and chose to utilize the modified
prospective transition method. Under this method, compensation costs
recognized at March 31, 2006 relate to the estimated fair value at the
grant date of 50,000 stock options granted subsequent to January 1, 2006 in
accordance with FAS 123R. Prior to the adoption of FAS 123R the Company
accounted for stock options in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and recognized no compensation
expense in net income for stock options granted and has elected the disclosure
only provisions of FAS 123. In accordance with the provisions of FAS 123R,
options granted prior to January 1, 2006, have not been restated to reflect
the adoption of FAS 123R. The required services for awards prior to
January 1, 2006 had been rendered prior to December 31, 2005.
As a result of adopting FAS 123R on January 1, 2006, the Company's net
income for the period ended March 31, 2006 was lower because the Company
recognized approximately $21,000 of compensation expense (included in
Selling, General and Administrative Expenses) in the period for the stock
options granted. The impact on basic and diluted earnings per share for
the quarter ended March 31, 2006 was not material and the per share
earnings remained at $.02. For the quarter ended March 31, 2005, no
compensation expense was recorded for options granted in the period, as
indicated above. The Company has used the Black-Scholes option pricing
model to estimate the fair value of stock options using the following
assumptions as at March 31, 2006:
Life expectancy 10 years
Risk-free interest rate 4.4%
Expected volatility 61.2%
Dividends per share 2.3%
Weighted average fair
value at grant date $1.98
The above assumptions are based on a number of factors as follows:
(i) expected volatility was determined using the historical volatility of
the Company's stock price, (ii) the expected term of the options is based
on the period of time that the options granted are expected to be
outstanding, and (iii) the risk free rate is the U.S. Treasury rate
effective at the time of grant for the duration of the options granted.
Compensation cost is recognized on a straight-line basis over the vesting
period.
12
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 2006 AND 2005
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
NEW FINANCIAL ACCOUNTING STANDARDS: In May 2005, the FASB issued SFAS
No. 154, "Accounting Changes and Error Corrections, a replacement of APB
Opinion No. 20 and FASB Statement No. 3", effective for accounting changes
and corrections of errors made in fiscal year 2006 and beyond. The effect
of this statement on the Company's consolidated financial statements will
be determined based upon the nature and significance of future accounting
changes or errors that would be subject to this statement.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4", effective for fiscal years beginning
after June 15, 2005. SFAS No. 151 requires that the costs associated with
certain abnormal expenditures be recognized in the current period. It also
requires that the amount of fixed production overhead allocated to
inventory be based upon normal capacity of production facilities. The
effect this statement would have on the Company's consolidated financial
statements is not expected to be material.
NOTE 2: SEGMENT 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 (based upon sales) incurred by the Manu-
facturing segment. The following tables, in thousands, summarize Net Sales
and Income Before Income Taxes by reportable segment:
13
THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 2006 AND 2005
NOTE 2: SEGMENT INFORMATION (continued)
INCOME BEFORE
NET SALES INCOME TAXES
_______________ _______________
Three Months Three Months
Ended March 31, Ended March 31,
2006 2005 2006 2005
_______________ _______________
Professional $ 4,252 $ 4,255 $ 345 $ 316
Retail 1,009 1,127 47 34
Manufacturing 1,241 1,155 (185) (181)
_______ _______ ______ _______
Total 6,502 6,537 207 169
Intercompany
Manufacturing (906) (1,020) (43) (44)
_______ _______ ______ _______
Consolidated $ 5,596 $ 5,517 $ 164 $ 125
======= ======= ====== =======
NOTE 3: COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation matters arising in the ordinary
course of business. It is the opinion of management that none of these
matters, at March 31, 2006, would likely, if adversely determined, have a
material adverse effect on the Company's financial position, results of
operations or cash flows. Additionally, there has been no material change
in the status of any other pending litigation since the Company's last
filing of Form 10-K with the Securities and Exchange Commission for the
year ended December 31, 2005.
14
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2006 AND 2005
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the three months ended March 31, 2006, net sales were $5,596,000
compared to $5,517,000 for the three months ended March 31, 2005, an
increase of $79,000. Gross profit for the three months ended March 31,
2006 was $2,218,000, compared to gross profit of $2,359,000 achieved for
the corresponding three-month period in 2005. The increase in net sales
was due to an increase in amenity sales as well as the inclusion of sales
from American Manicure and Lee Stafford, two of the Company's newest
subsidiaries, offsetting declines in net sales of both the Retail and
Professional segments. Gross profit declined as a result of a continuing
change in the sales mix and increased costs associated with the increase in
the cost of petroleum-based products. The gross margin for the three
months ended March 31, 2006 was 39.6% as compared to 42.8% for the three
months ended March 31, 2005.
Net income was $97,000 for the three months ended March 31, 2006
compared to net income of $74,000 for the comparable three months ended
March 31, 2005. Basic and diluted earnings per share were $.02 for both
the three months ended March 31, 2006 and 2005.
Selling, general and administrative ("SG&A") expenses for the three
months ended March 31, 2006 decreased $165,000 when compared to the
corresponding three-month period of 2005. The Company experienced savings
in rent expense as some consolidation of warehouse space took place in the
latter part of 2005 and also effected decreases in payroll expenditures and
professional expenses.
Interest expense for the three months ended March 31, 2006 increased
slightly when compared to the corresponding three-month period in 2005 as a
result of increased interest accruals on the Trevor Sorbie debt resulting
from the adverse arbitration decision in 2004. Interest income for the
three months ended March 31, 2006 increased approximately $16,000 when
compared to the corresponding three-month period in 2005, as a result of
having more cash on hand for investment purposes and an overall increase in
the interest rates on invested funds.
LIQUIDITY & CAPITAL RESOURCES
Cash and cash equivalents increased $332,000 to $5,935,000 as of March
31, 2006 from $5,603,000 as of December 31, 2005. Total cash of $9,085,000
includes $3,150,000 of cash invested in a restricted money market account
pledged as collateral for a bank loan. The Company has continued to secure
its outstanding long-term debt with Wachovia Bank with restricted cash. In
15
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2006 AND 2005
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
the first quarter of 2006, the Company and Wachovia Bank have agreed, in
principle, to convert the balloon payment due in August 2006 to monthly
principal payments under the same terms and conditions as the original
obligation, through 2008. Total current assets at March 31, 2006 were
$17,248,000 compared to $16,853,000 at December 31, 2005. Working capital
increased $113,000 from December 31, 2005, and was approximately
$11,726,000 at March 31, 2006.
The Company is currently engaged in the construction of
additional warehouse facilities on the Tampa, Florida manufacturing
property, estimated to cost approximately $1,000,000. The Company has
reviewed construction designs and site plans, and has initiated procedures
for obtaining the necessary permits. Other than the above, the Company
does not anticipate any significant capital expenditures in the near term
and management believes that there is sufficient cash on hand, working
capital and borrowing capacity 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, 2005 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.
16
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2006 AND 2005
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES: As of the end
of the period covered by this quarterly report, an evaluation of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures was performed under the supervision and with the
participation of our management, including our principal executive officer
and principal financial officer. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that a material
weakness existed in our internal controls over financial reporting and
consequently our disclosure controls and procedures were not effective, as
of the end of the period covered by this quarterly report, in timely
alerting them as to material information relating to our Company (including
our consolidated subsidiaries) required to be included in this quarterly
report.
The material weakness in our internal controls over financial
reporting as of March 31, 2006 related to the fact that as a small public
company, we have an insufficient number of personnel with clearly
delineated and fully documented responsibilities and with the appropriate
level of accounting expertise and we have insufficient documented
procedures to identify and prepare a conclusion on matters involving
material accounting issues and to independently review conclusions as to
the application of generally accepted accounting principles. The lack of a
sufficient number of accounting personnel is not considered appropriate for
an internal control structure designed for external reporting purposes.
The principal factors management considered in determining whether a
material weakness existed in this regard was based upon management's
evaluation discussed above and advice from our independent registered
public accounting firm. As a result, management has determined that a
material weakness in the effectiveness of the Company's internal controls
over financial reporting existed as of March 31, 2006.
(b) CHANGES IN INTERNAL CONTROLS: No change in the Company's internal
control over financial reporting occurred during the Company's first fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting. However,
management of the Company, as well as the Audit Committee, recognizes that
current staffing levels will have to be enhanced and/or institute
arrangements with other accounting firms to act in a consulting capacity in
an effort to satisfy our reporting obligations and over-all standards of
disclosure controls and procedures.
17
THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2006 AND 2005
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 3 to the Financial Statements included in Part I, Item 1 for
a discussion of legal proceedings. There has been no significant change in
the status of litigation since the issuance of the Annual Report on Form
10-K for the year ended December 31, 2005.
ITEM 5. OTHER INFORMATION
On May 25, 2006, the Company received a notification letter from
the American Stock Exchange ("AMEX") that the failure to file its Quarterly
Report on Form 10-Q for the quarter ended March 31, 2006 ("10-Q"), as
required by Sections 134 and 1101 of the AMEX Company Guide, is a material
violation of its continued listing agreement with AMEX. Pursuant to
Section 1003(d) of the AMEX Company Guide, the Company is subject to
suspension of trading and possibly, delisting.
In order to maintain its listing, the Company is required to submit a
plan by June 8, 2006, advising the AMEX how the Company intended to bring
the Company into compliance with the above-mentioned Sections 134 and 1101
by July 6, 2006.
The Company believes that the filing of this Form 10-Q satisfies the
continued listing deficiency referenced in the above mentioned letter of
May 25, 2006 and precludes the need to submit a plan to the AMEX.
ITEM 6. EXHIBITS
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.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE STEPHAN CO.
/s/ Frank F. Ferola
_____________________________________
Frank F. Ferola
President and Chief Executive Officer
May 26, 2006
/s/ David A. Spiegel
____________________________________
David A. Spiegel
Principal Financial and
Accounting Officer
May 26, 2006
19
Exhibit 31.1
CERTIFICATION
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 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the Registrant and we have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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 report is being
prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER (continued)
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
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 and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: May 26, 2006
/s/ Frank F. Ferola
__________________________________
Frank F. Ferola
Chief Executive Officer
2
Exhibit 31.2
CERTIFICATION
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 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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 report is being
prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
1
CERTIFICATION OF CHIEF FINANCIAL OFFICER (continued)
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
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 and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: May 26, 2006
/s/ David A. Spiegel
__________________________________
David A. Spiegel
Chief Financial Officer
2
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of The Stephan Co. (the "Company)
on Form 10-Q for the period ended March 31, 2006 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I,
Frank F. Ferola, Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
/s/ Frank F. Ferola
__________________________________
Frank F. Ferola
Chief Executive Officer
May 26, 2006
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of The Stephan Co. (the "Company)
on Form 10-Q for the period ended March 31, 2006 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I,
David Spiegel, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
/s/ David A. Spiegel
__________________________________
David A. Spiegel
Chief Financial Officer
May 26, 2006