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Four directors of Fort Lauderdale, Fla.-based Stephan Co. who tried to take over the company could be replaced due to corporate governance problems and pressure from institutional investors. Stephan has acknowledged it faces a possible delisting of its stock by the American Stock Exchange due to a lack of outside directors and other violations of Amex rules. Among the violations: Its failure to put any matter to a vote of the company’s shareholders since Sept. 1, 2000. In an Aug. 31 filing with the Securities and Exchange Commission, the company said it “believed it was in violation of certain Amex rules with respect to the composition of the board of directors and the audit committee, which could subject the company to civil penalties and/or the delisting of the company’s stock.” Institutional investors in Stephan stock have promised to push for new blood on the board that governs Stephan, a manufacturer, distributor and marketer of personal hygiene and grooming products. Richard L. Scott Investments LLC, which is based in Naples, Fla., and owns 9.9 percent of Stephan, served notice in mid-June that it would nominate two new directors for the Stephan board after its bid to buy control of the company was rebuffed. The firm earlier had offered to buy Stephan stock it didn’t already own for $5 per share, but it was turned down by the Stephan board. Last week, Ancora Capital of Cleveland, which holds 5.5 percent of Stephan on behalf of a group of investors, notified Stephan’s management that it intended to nominate five new candidates for Stephan’s board. The stance by Ancora Capital was outlined in a letter dated Sept. 8, two weeks after a long-running insider attempt to purchase control of Stephan was abandoned. In late August, four members of the company’s six-man board of directors withdrew their twice-raised offer to buy out the rest of the shareholders for $4.60 per share and take the public company private. Ancora Capital and Richard L. Scott Investments have neither identified the Stephan board members they would replace nor excluded from possible exile the foursome behind the insider buyout offer. But both shareholders considered the proposed price too cheap. In a regulatory filing, Ancora denigrated it as a “low-ball” offer. The Stephan board members who made the $4.60-per-share buyout bid, together with other investment partners, include Frank Ferola, chairman of the board, chief executive and president of Stephan; Thomas D’Ambrosio, the vice president and treasurer and a practicing attorney; and retired businessmen Shouky Shaheen and John DePinto. The other two directors are Leonard Genovese, former chairman and chief executive of an American Stock Exchange company called Genovese Drug Inc., and Curtis Carlson, a shareholder in the Miami law firm Payton & Carlson. The insiders’ proposed takeover and makeover of Stephan would have required approval by owners of a majority of the company’s common shares. The proposal needed affirmative votes from about one-third of the Stephan shares not controlled by the four directors who proposed the buyout. Because the buyout offer put the interests of the four Stephan directors behind it in conflict with the interests of other Stephan shareholders, the company solicited a fairness opinion from investment banking firm SunTrust Robinson Humphrey. It concluded the offer of $4.60 per share was fair to Stephan shareholders. Stephan said the fairness opinion prompted the insiders to raise their buyout offer to $4.60 per share in cash in March, from $3.25 in cash and an interest-bearing note valued at $1.25. The attempted buyout by the insiders began with an all-cash offer of $4 per share in April 2002. Yet, despite amendments to the insiders’ buyout offer over the past 17 months, a shareholder meeting to vote on the buyout offer never was convened. One reason may have been rancor on the part of institutional investors. In July, for example, Ancora Capital said in an SEC filing that the fairness opinion was wrong, the insider buyout offer too low, and executive pay at Stephan too high. “The proposed management-led buyout at $4.60 per share severely undervalues the shares of the company,” Ancora said in a Form 13D filed on July 22. “Stockholders would receive substantially more value with a sizable dividend of $2.50 to $4 a share rather than accept this offer.” Ancora also said “the compensation of top management is in excess of what is reasonable for a company this size.” The annual revenue of Stephan, about $25 million in 2003, is down from $34 million in 1999. Yet there has been no lack of growth in the compensation of the chairman, chief executive and president, Ferola. His salary and bonus income added up to $1.4 million in 2003, more than double his pay of $514,250 in 1999. While no pay cut for Ferola has been announced, the pressure by institutional investors appears to have contributed to other developments at the company. Stephan announced on Aug. 25 that the insider buyout plan was aborted, that the board approved a special cash dividend of $2 per share, which will be paid today, and that its next meeting of shareholders is tentatively set for Nov. 10. That news sent the closing price Stephan stock flying from $4.92 on Aug. 24 to $5.83 on Aug. 25 and ultimately to $7.03 in intraday trading on Sept. 3, its highest point in the past year. The stock (AMEX: TSC) traded Tuesday at $5.60, down 7 cents from the prior closing price. The price is up from its 2004 starting point, around $4.50, but remains well below its $10-$15 range during most of the late 1990s. If the company’s financial performance so far this year is any indication, the stock price is likely to remain below $10 for a while. Stephan said its net revenue fell to $11.5 million in the first half of 2004, down from $13.4 million during the January-June period in 2003, and its net income dropped to $389,475 from $614,057 last year. The company said one reason for the financial decline was a sharp reduction in military foot-powder orders for U.S. soldiers deployed in the Middle East.

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