UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For the
quarterly period ended March 31,
2009





or





 ̈ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For the
transition period from _____to______





Commission
File Number 1-4436





THE
STEPHAN CO.


(Exact
name of registrant as specified in its charter)





Florida
              59-0676812(State or other jurisdiction of incorporation or organization)
              (IRS Employer 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





Former
name, former address and former fiscal year, if changed since last report: not
applicable.





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
o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See definitions of "large accelerated filer,” “accelerated
filer" and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.





Large accelerated filer  ̈
              Accelerated filer  ̈
              Non-accelerated filer  ̈
              Smaller reporting company x(Do not check if a smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).   YES  ̈    NO
x





Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date:





4,252,675
shares of common stock, $0.01 par value, as of April 30, 2009







THE
STEPHAN CO. AND SUBSIDIARIES
 INDEX TO
QUARTERLY REPORT
 ON FORM
10-Q
 
 PagePART
      I – FINANCIAL INFORMATIONItem 1:
                  Financial
      Statements
                  3Item 2:
                  Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  13Item 3:
                  Quantitative
      and Qualitative Disclosures about Market Risk
                  14Item 4T:
                  Controls
      and Procedures
                  14PART
      II – OTHER INFORMATIONItem 1:
                  Legal
      Proceedings
                  15Item 1A:
                  Risk
      Factors
                  15Item 2:
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  15Item 3:
                  Defaults
      Upon Senior Securities
                  15Item 4:
                  Submission
      of Matters to a Vote of Security Holders
                  15Item 5:
                  Other
      Information
                  15Item 6:
                  Exhibits
                  16Signatures
                  17Certifications
  2
 
 PART
I – FINANCIAL INFORMATION
 
 Item
1 - Financial Statements
 
 Certain
statements in this Quarterly Report on Form 10-Q ("Form 10-Q") under "Item 1.
Financial Statements" and "Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations," constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, condition (financial or otherwise), performance or achievements to be
materially different from any future results, performance, condition or
achievements expressed 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 weakness 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; 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-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.
  3
 
 The
Stephan Co.
 Condensed
Consolidated Balance Sheets
 At March
31, 2009 and December 31, 2008
 (in
thousands)
 
 2009
                      
                      
                      2008CURRENT
      ASSETSCash
      and cash equivalents
                      
                      $
                      8,176
                      
                      
                      $
                      7,967Accounts
      receivable, net
                      
                      
                      1,118
                      
                      
                      
                      976Current
      inventories
                      
                      
                      5,102
                      
                      
                      
                      5,162Prepaid
      expenses and other current assets
                      
                      
                      193
                      
                      
                      
                      248TOTAL
      CURRENT ASSETS
                      
                      
                      14,589
                      
                      
                      
                      14,353Other
      assets, including non-current inventories
                      
                      
                      3,115
                      
                      
                      
                      3,106Property,
      plant and equipment, net
                      
                      
                      1,355
                      
                      
                      
                      1,383Trademarks,
      net
                      
                      
                      3,070
                      
                      
                      
                      3,070Goodwill,
      net
                      
                      
                      3,598
                      
                      
                      
                      3,598Other
      intangibles, net
                      
                      
                      76
                      
                      
                      
                      76TOTAL
      ASSETS
                      
                      $
                      25,803
                      
                      
                      $
                      25,586CURRENT
      LIABILITIESCurrent
      portion of long-term debt
                      
                      $
                      136
                      
                      
                      $
                      136Accounts
      payable and accrued expenses
                      
                      
                      2,070
                      
                      
                      
                      1,922TOTAL
      CURRENT LIABILITIES
                      
                      
                      2,206
                      
                      
                      
                      2,058Long-term
      debt, less current portion
                      
                      
                      324
                      
                      
                      
                      326COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS'
      EQUITYPreferred
      stock, $.01 par value; 1,000,000 sharesauthorized;
      none issuedCommon
      stock, $.01 par value; 25,000,000 sharesauthorized;
      4,389,611 shares issuedat
      March 31, 2009 and December 31, 2008.
                      
                      
                      44
                      
                      
                      
                      44Additional
      paid-in capital
                      
                      
                      17,853
                      
                      
                      
                      17,833Retained
      earnings
                      
                      
                      5,687
                      
                      
                      
                      5,606Treasury
      stock, 136,936 and 123,048 shares, at cost
                      
                      
                      (311
                      )
                      
                      
                      (281
                      )TOTAL
      STOCKHOLDERS' EQUITY
                      
                      
                      23,273
                      
                      
                      
                      23,202TOTAL
      LIABILITIES & STOCKHOLDERS' EQUITY
                      
                      $
                      25,803
                      
                      
                      $
                      25,586
 
 See Notes
to Condensed Consolidated Financial Statements.
  4
 
 The
Stephan Co.
 Condensed
Consolidated Statements of Operations
 Three
Months Ended March 31, 2009 and 2008
 (in
thousands, except per share data)
 
 2009
                  
                  
                  2008Revenue
                  
                  $
                  4,582
                  
                  
                  $
                  4,420Cost
      of revenue
                  
                  
                  2,428
                  
                  
                  
                  2,299Gross
      profit
                  
                  
                  2,154
                  
                  
                  
                  2,121Selling,
      general and administrative expenses
                  
                  
                  1,979
                  
                  
                  
                  1,941Operating
      income
                  
                  
                  175
                  
                  
                  
                  180Interest
      income
                  
                  
                  7
                  
                  
                  
                  90Interest
      expense
                  
                  
                  -
                  
                  
                  
                  (4
                  )Income
      before income taxes
                  
                  
                  182
                  
                  
                  
                  266Provision
      for income taxes
                  
                  
                  13
                  
                  
                  
                  106NET
      INCOME
                  
                  $
                  169
                  
                  
                  $
                  160Basic
      income per share
                  
                  $
                  0.04
                  
                  
                  $
                  0.04Diluted
      income per share
                  
                  $
                  0.04
                  
                  
                  $
                  0.04Dividends
      per share
                  
                  $
                  0.02
                  
                  
                  $
                  0.02
 
 Weighted
average common shares outstanding were approximately 4.3 and 4.4 millon in 2009
and 2008, respectively.
 See Notes
to Condensed Consolidated Financial Statements.
  5
  The
Stephan Co.
 Condensed
Consolidated Statements of Cash Flows
 Three
Months Ended March 31, 2009 and 2008
 (in
thousands)
 
 2009
                      
                      
                      2008CASH
      FLOWS FROM OPERATING ACTIVITIESNET
      INCOME
                      
                      $
                      169
                      
                      
                      $
                      160Adjustments
      to reconcile net income to net cash flowsprovided
      by operating activities:Depreciation
                      
                      
                      29
                      
                      
                      
                      31Stock
      option compensation
                      
                      
                      20
                      
                      
                      
                      20Deferred
      income taxes
                      
                      
                      -
                      
                      
                      
                      96Changes
      in operating assets & liabilities(Increase)
      Decrease in accounts receivable
                      
                      
                      (142
                      )
                      
                      
                      318Decrease
      (increase) in current inventories
                      
                      
                      60
                      
                      
                      
                      (238
                      )Decrease
      in prepaid expenses and other current assets
                      
                      
                      55
                      
                      
                      
                      33(Increase)
      decrease in other assets, including non-current
inventories
                      
                      
                      (9
                      )
                      
                      
                      1Increase
      (decrease) in accounts payable and accrued expenses
                      
                      
                      148
                      
                      
                      
                      (529
                      )Total
      adjustments to net income
                      
                      
                      161
                      
                      
                      
                      (268
                      )NET
      CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
                      
                      
                      330
                      
                      
                      
                      (108
                      )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of property, plant and equipment
                      
                      
                      (1
                      )
                      
                      
                      (8
                      )NET
      CASH FLOWS (USED IN) INVESTING ACTIVITIES
                      
                      
                      (1
                      )
                      
                      
                      (8
                      )CASH
      FLOWS FROM FINANCING ACTIVITIESChange
      in restricted cash
                      
                      
                      -
                      
                      
                      
                      277Repayment
      of long-term debt
                      
                      
                      (2
                      )
                      
                      
                      (278
                      )Dividends
                      
                      
                      (88
                      )
                      
                      
                      (88
                      )Purchases
      of treasury stock
                      
                      
                      (30
                      )
                      
                      
                      -NET
      CASH FLOWS (USED IN) FINANCING ACTIVITIES
                      
                      
                      (120
                      )
                      
                      
                      (89
                      )NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                      
                      
                      209
                      
                      
                      
                      (205
                      )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF YEAR
                      
                      
                      7,967
                      
                      
                      
                      4,977CASH
      AND CASH EQUIVALENTS AT END OF THE FIRST QUARTER
                      
                      $
                      8,176
                      
                      
                      $
                      4,772Supplemental
      Disclosures of Cash Flow InformationInterest
      Paid
                      
                      $
                      -
                      
                      
                      $
                      4Income
      Taxes Paid
                      
                      $
                      7
                      
                      
                      $
                      19
 
 See Notes
to Condensed Consolidated Financial Statements.
  6
 
 The
Stephan Co. and Subsidiaries
 Notes to
Condensed Consolidated Financial Statements
 Quarters
ended March 31, 2009 and 2008
 
 NOTE
1:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 NATURE OF
OPERATIONS:  The Company is engaged in the manufacture, sale and
distribution of hair grooming and personal care products principally throughout
the United States and has allocated substantially all of its business into two
segments: Brands and Distributors.
 
 BASIS OF
PRESENTATION: In the opinion of management, the accompanying unaudited, interim
condensed consolidated financial statements have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission.
These interim financial statements do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the Company’s annual
financial statements as of December 31, 2008. These interim financial statements
have not been audited. However, management believes the accompanying unaudited,
interim financial statements contain all adjustments, consisting of only normal
recurring adjustments, necessary to present fairly the consolidated financial
position of The Stephan Co. and subsidiaries as of March 31, 2009 and the
results of their operations and cash flows for the three months then ended. The
results of operations and cash flows for the interim period are not necessarily
indicative of the results of operations or cash flows that can be expected for
the year ending December 31, 2009.
 
 USE OF
ESTIMATES: The preparation of consolidated financial statements in conformity
with U.S. GAAP 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 revenue and expenses during the reporting
period.  Actual results could differ significantly from those
estimates if different assumptions were used or different events ultimately
transpire. We believe that the following are the most critical accounting
policies that require management to make difficult, subjective and/or complex
judgments, often due to a need to make estimates about matters that are
inherently uncertain:
 
 PRINCIPLES
OF CONSOLIDATION:  The consolidated financial statements include the
accounts of The Stephan Co. and its wholly owned subsidiaries: Foxy Products,
Inc., Old 97 Company, Williamsport Barber and Beauty Supply Corp., Stephan &
Co., Scientific Research Products, Inc. of Delaware, Sorbie Distributing
Corporation, Stephan Distributing, Inc., Morris Flamingo-Stephan, Inc., American
Manicure, Inc., Bowman Barber and Beauty Supply, Inc., and Lee Stafford Beauty
Group, Inc.  (collectively, the "Company").  All significant
inter-Company balances and transactions have been eliminated in consolidation.
Certain reclassifications (having no net profit or loss impact) have been made
to the previously reported amounts in the 2008 financial statements to reflect
comparability with the 2009 presentation.
 
 IMPAIRMENT
OF LONG-LIVED ASSETS AND GOODWILL: The Company periodically evaluates whether
events or circumstances have occurred that would indicate that long-lived assets
may not be recoverable or that their remaining useful lives may be
impaired.  When such events or circumstances are present, the Company
assesses the recoverability of long-lived assets by determining whether the
carrying value will be recovered through the expected future cash flows
resulting from the use of the asset.  If the results of this testing
indicates an impairment of the carrying value of the asset, an impairment loss
equal to the excess of the asset's carrying value over its fair value is
recorded. The long-term nature of these assets requires the projection of their
associated cash flows and then the discounting of these projected cash flows to
their present value.
 
 In
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill
and other indefinite-lived intangible assets are to be evaluated for impairment
on an annual basis and, between annual tests, whenever events or circumstances
indicate that the carrying value of an asset may exceed its fair value. At March
31, 2009, the Company has less than $7.0 million of intangibles subject to
future impairment testing.  No events or circumstances occurred that
indicated a possible impairment of intangible assets during the quarter ended
March 31, 2009.
 
 MAJOR
CUSTOMERS:  There were no sales to any single customer in excess of
10% of revenue in 2009 or 2008.  The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral.  The Company does not believe that its customers' credit
risk represents a material risk of loss to the Company.
 
 STOCK-BASED
COMPENSATION:  Effective January 1, 2006, the Company adopted
Statement of Financial Accounting Standards No. 123 (revised), “Share-Based
Payment” (“SFAS 123(R)”), and chose to utilize the modified prospective
transition method. Under this method, compensation costs recognized in 2009 and
2008 relate to the estimated fair value at the grant date of stock options
granted each year subsequent to January 1, 2006.  Prior to the
adoption of SFAS 123(R) the Company accounted for stock options in accordance
with APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and,
using the intrinsic value of the grant to determine stock option value,
recognized no compensation expense in net income for stock options granted and
elected the “disclosure only” provisions of SFAS 123.  In accordance
with the provisions of SFAS 123(R), options granted prior to January 1,
2006 have not been restated to reflect the adoption of SFAS
123(R).  The required services for awards prior to January 1, 2006 had
been rendered prior to December 31, 2005.
  7
 
 As a
result of adopting SFAS 123(R) on January 1, 2006, the Company’s net income
for the quarters ended March 31, 2009 and 2008 was reduced as a result of the
Company's recognition of approximately $20,000 (net of income tax benefit) in
each year.  These amounts have been included in Selling, General and
Administrative Expenses.  The impact on basic and diluted earnings per
share for the three months ended March 31 of each year was approximately $0.005
per common share. The Company employed the Black-Scholes option pricing model to
estimate the fair value of stock options using assumptions consistent with past
practices.  Assumptions used in the determination of stock option
expense included volatility of 86.0%, dividends per share of 2.0%, a risk-free
rate of 1.5%  and a term of 10 years. On January 1, 2009 the company
granted additional options to purchase 50,000 shares @ $1.96, the market price
just prior to grant, to our CEO; these options vest one year from the date of
grant.
 
 FAIR
VALUE OF FINANCIAL INSTRUMENTS: The Company, using available market information
and recognized valuation methodologies, has determined the estimated fair values
of financial instruments that are presented herein.  However,
considerable judgment is required in interpreting market data to develop
estimates of fair value.  Accordingly, the estimates presented herein
are not necessarily indicative of amounts the Company could realize in a current
market sale of such instruments.
 
 The
following methods and assumptions were used to estimate fair value: 1) the
carrying amounts of cash and cash equivalents, accounts receivable and accounts
payable were assumed to approximate fair value due to their short-term nature;
2) debt service cash flows were discounted using current interest rates for
financial instruments with similar characteristics and maturity to determine the
fair value of long-term debt. As of March 31, 2009 and December 31, 2008, there
were no significant differences in the carrying values and fair market values of
financial instruments.
 
 REVENUE
RECOGNITION:  Revenue is recognized when all significant contractual
obligations, which involve the delivery of the products sold and reasonable
assurance as to the collectibility of the resulting account receivable, have
been satisfied.  The Company does not sell on a consignment basis;
returns are permitted for damaged or unsalable items only.  Revenue is
shown after deductions for prompt payment and volume discounts and
returns.  The Company estimates that these discounts and returns will
approximate between 1% and 2% of gross revenue, and we accrue for these costs
accordingly. The Company participates in various promotional activities in
conjunction with its retailers and distributors, primarily through the use of
discounts, new warehouse allowances, slotting allowances, co-op advertising and
periodic price reduction programs. These costs have been subtracted from revenue
and approximated $55,000 and $76,000 for the three months ended March 31, 2009
and 2008, respectively. The allowances for sales returns, and consumer and trade
promotion liabilities, are established based on the Company’s estimate of the
amounts necessary to settle future and existing obligations for such items on
products sold as of the balance sheet date.
 COST OF
GOODS SOLD:  This item includes the costs of raw materials, packaging,
inbound freight, direct labor and depreciation.  Other
manufacturing-related overhead, including purchasing, receiving, inspection,
internal transfer costs, warehousing and manufacturing center costs (principally
rent, real estate taxes and insurance, related to product manufacturing and
warehousing) are classified in Selling, General and Administrative Expenses in
the Condensed Consolidated Statements of Operations.  For the quarters
ended March 31, 2009 and 2008, the manufacturing-related overhead included in
Selling, General and Administrative Expenses was approximately $157,000 and
$233,000, respectively.
 SHIPPING
AND HANDLING FEES AND COSTS: Expenses for the shipping and delivery of products
sold to customers were approximately $322,000 and $395,000 for the quarters
ended March 31, 2009 and 2008, respectively.
 
 CASH AND
CASH EQUIVALENTS:  Cash and cash equivalents include cash, money
market funds, repurchase agreements and similar highly-liquid investments having
maturities of 90 days or less when acquired.  The Company’s cash is
maintained principally in FDIC-insured bank accounts.
 
 ALLOWANCE
FOR DOUBTFUL ACCOUNTS: The allowance is based upon specific identification of
customer balances that are unlikely to be collected plus an estimated amount for
potentially uncollectible amounts.
 
 INVENTORIES:  Inventories
are stated at the lower of cost (determined on the first-in, first-out basis) or
market. Other manufacturing –related costs, classified in Selling, General and
Administrative expenses, are also allocated to finished goods inventory. The
amount of these allocations to inventory was approximately $750,000 at both
March 31, 2009 and December 31, 2008. We periodically evaluate our inventory
composition, giving consideration to factors such as the probability and timing
of anticipated usage and the physical condition of the items, and then estimate
an allowance (reducing the inventory) to be provided for slow moving, obsolete
or damaged inventory.  These estimates could vary significantly,
either favorably or unfavorably, from actual requirements based upon future
economic conditions, customer inventory levels or competitive factors that were
not foreseen or did not exist when the inventory write-downs were
established.
  8
  At March
31, 2009 and December 31, 2008, we classified as Other Assets approximately $5.1
million of slow moving and potentially obsolete inventories.  We have
subtracted obsolescence reserves of $2.0 million from Other Assets in both
periods.  The net non-current inventory amount in Other Assets was
$3.1 million at March 31, 2009 and December 31, 2008, respectively.
 
 PROPERTY,
PLANT AND EQUIPMENT:  Property, plant and equipment are recorded at
cost.  Routine repairs and maintenance are expensed as
incurred.  Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets as follows:
 
 Buildings
      and improvements
                    
                    15-30 yearsMachinery
      and equipment
                    
                    5-10 yearsFurniture
      and office equipment
                    
                    3-5 years
 
 INCOME
TAXES:  Income taxes are calculated using the asset and
liability method of accounting.  Deferred income taxes are recognized
by applying the enacted  statutory  rates  applicable 
to estimated future year differences between  the 
financial  statement  and  tax  basis  carrying 
amounts.  At December 31, 2008, the Company had a full valuation
allowance of $806,000 against its
net deferred tax assets.  Gross Federal net operating
loss carryforwards at December 31, 2008 were in excess of $3
million.  The valuation allowance was recorded because management
determined that it was not “more likely than not” that the deferred tax
assets would be utilized to offset future taxable income. 
The  Company is recording current tax expense  for 
the  first  quarter  of 2009 stemming from tax liabilities
in states  where  certain  profitable  subsidiaries
file returns on a separate basis.  The Company has not recorded
deferred Federal income tax expense for the first quarter of 2009, as
it expects to realize a respective proportion of the deferred tax assets
previously reserved through the valuation allowance.
 
 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 during the quarter (4.26 million in 2009 and 4.39
million in 2008). The Company had approximately 400,000 exercisable options
outstanding of which none had exercise prices that were less than the Company’s
stock price at March 31, 2009.  Consequently, no additional equivalent
shares, in addition to the actual weighted average outstanding shares, were
assumed to be outstanding for purposes of calculating diluted net income per
share.
 
 NOTE 2:
NEW FINANCIAL ACCOUNTING STANDARDS:
 
 In
December 2007, the FASB issued SFAS No. 141 (revised 2008), “Business
Combinations.” SFAS No. 141(R) amends the principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any noncontrolling interest in the
acquiree and the goodwill acquired.  SFAS No. 141(R) also establishes
disclosure requirements to enable the evaluation of the nature and financial
effects of the business combination.  SFAS No. 141(R) was effective
for us on January 1, 2009, and we will apply its provisions prospectively to all
business combinations in the future.
 
 In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of Accounting Research Bulletin
No. 51.” SFAS No. 160 establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 also establishes disclosure requirements that clearly
identify and distinguish between controlling and noncontrolling interests and
requires the separate disclosure of income attributable to controlling and
noncontrolling interests.  SFAS No. 160 is effective for fiscal years
beginning after December 15, 2008.  The Company currently does not
have a noncontrolling interest in any other entity.
 
 In
February 2007, the FASB issued SFAS 159, "The Fair Value Option for
Financial Assets and Financial Liabilities".  Under SFAS 159, the
Company may elect to report most financial instruments and certain other items
at fair value on an instrument-by-instrument basis with changes in fair value
reported in earnings.  After the initial adoption, the election is
made at the acquisition of an eligible financial asset, financial liability, or
firm commitment or when certain specified reconsideration events
occur.  The fair value election may not be revoked once an election is
made.   SFAS 159 was effective for the Company’s fiscal year
beginning January 1, 2008; however, the Company has elected not to measure
eligible financial assets and liabilities at fair value.  Accordingly,
the adoption of SFAS 159 did not have a significant impact on the Company’s
financial statements.
 
 In
September 2006, the FASB issued SFAS 157 “Fair Value
Measurements.”  SFAS 157 does not expand the use of fair value
measurements in financial statements but standardizes their definition and
guidance by defining fair value as used in numerous accounting pronouncements,
establishes a framework for measuring fair value and expands disclosure related
to the use of fair value measures. SFAS 157 was effective for our fiscal year
ended December 31, 2008.  In February 2008, the FASB issued FASB Staff
Position (“FSP”) FAS 157-2, “Effective Date of FASB Statement No. 157,”
providing a one-year deferral of the effective date of SFAS 157 for
non-financial assets and non-financial liabilities, to years beginning after
November 15, 2008, that are recognized or disclosed in the financial statements
at fair value at least annually.  SFAS 157 was effective for the
Company’s fiscal year beginning January 1, 2008, excluding the effect of the
deferral granted in FSP FAS 157-2.  See “Fair Value Measurements”
above.  The Company does not have significant assets or liabilities
subject to the provisions of these pronouncements.
  9
 
 In
September 2007, the Securities and Exchange Commission staff published
Staff Accounting Bulletin ("SAB") No. 108, "Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements." SAB No. 108 addresses quantifying the financial
statement effects of misstatements, and, specifically, how the effects of prior
year uncorrected errors must be considered in quantifying misstatements in the
current year financial statements. SAB No. 108 is effective for fiscal
years ending after November 15, 2007. The adoption of SAB No. 108 by
our Company in the fourth quarter of 2007 did not have a material impact on our
consolidated financial statements.
 
 In July
2007, the FASB issued FASB Interpretation No. 48, ("FIN 48") "Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No.
109".  FIN 48 requires that we recognize in our financial statements
the impact of a tax position, taken or expected to be taken in a tax return,
provided that the position is more likely than not of being sustained on
audit.  FIN 48 is effective for fiscal years beginning after December
15, 2007.  FIN 48 did not have a material effect on our financial
statements in 2008 or 2009.
 
 In April
2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of
Intangible Assets,” which amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets.” The objective of FSP FAS 142-3 is to improve the consistency between
the useful life of a recognized intangible asset under SFAS 142 and the period
of expected cash flows used to measure the fair value of the asset under SFAS
141, “Business Combinations,” and other U.S. GAAP.  FSP FAS 142-3
applies to all intangible assets, whether acquired in a business combination or
otherwise, and should be applied prospectively to intangible assets acquired
after the effective date.  The Company does not have significant
assets subject to the provisions of this pronouncement.
 
 NOTE
3.  ACQUISITION
 
 On August
14, 2008, we acquired 100% of the outstanding common stock of Bowman Beauty and
Barber Supply, Inc., a distributor located in Wilmington, NC
(“Bowman”).  The purchase price was approximately $1.0 million,
comprised of cash of $0.5 million and notes issued and assumed aggregating
approximately $0.5 million.  The disclosure below also shows the
estimated results of the entire Company for the first quarter of 2008 as if
Bowman had been acquired at the beginning of 2008, instead of August 14,
2008.
 
 Bowman
      purchase price allocation:(000)Accounts
      receivable, net
                    
                    $
                    40Inventories
                    
                    
                    207Prepaid
      expenses and other current assets
                    
                    
                    8Property,
      plant and equipment, net
                    
                    
                    87Accounts
      payable and accrued expenses
                    
                    
                    (309
                    )Long-term
      debt assumed
                    
                    
                    (28
                    )Net
      assets of Bowman
                    
                    
                    5Intangible
      assets
                    
                    
                    995Purchase
      price ($500 cash plus $500 note payable)
                    
                    $
                    1,000
 
 Pro
      forma results as if Bowman had been acquired on:
                    
                    Jan.
      1, 2008Revenue
      (in thousands)
                    
                    $
                    5,110Net
      income (in thousands)
                    
                    
                    160Net
      income per share
                    
                    $
                    0.04
  10
 
 The
results of operations of Bowman have been included in the consolidated results
of operations of the Company since August 14, 2008, the date of
acquisition.  Consequently, Bowman’s results are included in the
results of operations for the first quarter of 2009 but not for the comparable
quarter in 2008.
 
 NOTE
4:  INVENTORIES
 
 Inventories
at March 31, 2009 and December 31, 2008 consisted of the following:
 
 (in
      thousands)
                    
                    2009
                    
                    
                    2008Raw
      materials
                    
                    $
                    1,106
                    
                    
                    $
                    1,151Packaging
      and components
                    
                    
                    2,006
                    
                    
                    
                    2,008Work-in-process
                    
                    
                    487
                    
                    
                    
                    523Finished
      goods
                    
                    
                    6,564
                    
                    
                    
                    6,541Total
      inventories
                    
                    
                    10,163
                    
                    
                    
                    10,223Less:
      estimated non-current inventories
                    
                    
                    (5,061
                    )
                    
                    
                    (5,061
                    )Current
      inventories
                    
                    $
                    5,102
                    
                    
                    $
                    5,162
 
 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 bottles or containers (plastic or glass),
jars, caps, pumps and similar materials that will become part of the finished
product. Finished goods also include hair dryers, electric clippers, lather
machines, scissors and salon furniture.
 
 Other
Assets include non-current inventory not anticipated to be utilized within one
year based on estimation methods established by the Company.  We
reduce the carrying value of this slower moving inventory to provide for an
estimated amount that may ultimately become unusable or obsolete.  See
Note 1 to these Condensed Consolidated Financial Statements.
 
 NOTE
5:  SEGMENT INFORMATION
 
 We have
identified two reportable operating segments based upon how we evaluate our
business: Distributors and Brands.  The Distributors segment generally
has a customer base of distributors that purchase the Company's hair products
and beauty and barber supplies for sale to salons and
barbershops.  Our sales to beauty schools are also classified in this
segment.  The Brands segment includes sales to mass merchandisers,
chain drug stores and distributors.  The Company conducts operations
primarily in the United States; sales to international customers are not
material to consolidated revenue. The following table summarizes significant
items by reportable segment:
  11
 
 2009
                    
                    
                    2008(in
      thousands)
                    
                    Distributors
                    
                    
                    Brands
                    
                    
                    Total
                    
                    
                    Distributors
                    
                    
                    Brands
                    
                    
                    TotalRevenue
                    
                    $
                    3,570
                    
                    
                    $
                    1,012
                    
                    
                    $
                    4,582
                    
                    
                    $
                    3,250
                    
                    
                    $
                    1,170
                    
                    
                    $
                    4,420Operating
      Income
                    
                    
                    (60
                    )
                    
                    
                    235
                    
                    
                    
                    175
                    
                    
                    
                    (53
                    )
                    
                    
                    233
                    
                    
                    
                    180Net
      interest income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    7
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    86Income
      taxes
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (13
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (106
                    )Net
      income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    169
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    160Segment
      assets:
                    
                    
                    7,260
                    
                    
                    
                    10,355
                    
                    
                    
                    17,615
                    
                    
                    
                    7,407
                    
                    
                    
                    10,402
                    
                    
                    
                    17,809Not
      allocated to segments:Cash
      and cash equivalents
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    8,176
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    7,967Eliminations/other
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    12
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (190
                    )Consolidated
      assets
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    25,803
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    25,586Depreciation
                    
                    
                    3
                    
                    
                    
                    26
                    
                    
                    
                    29
                    
                    
                    
                    2
                    
                    
                    
                    29
                    
                    
                    
                    31Capital
      expenditures
                    
                    $
                    -
                    
                    
                    $
                    1
                    
                    
                    $
                    1
                    
                    
                    $
                    -
                    
                    
                    $
                    8
                    
                    
                    $
                    8
 
 NOTE 6.
SUBSEQUENT EVENT
 
 In
accordance with a letter dated April 29, 2009 to the Secretary of the Company,
the Chairman of the Board & CEO of the Company, Frank F. Ferola,
unilaterally further reduced his base salary by 35%.  This reduction
shall take effect June 3, 2009.  In July 2005, Mr. Ferola unilaterally
first reduced his salary from the amounts set forth in his Employment Agreement
with the Company.  All other terms and conditions of his Employment
Agreement will remain in full force and effect.
  12
 
 Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
 
 Liquidity and Capital
Resources
 
 As of
March 31, 2009, we had cash and cash equivalents of approximately $8.2
million.  Our long-term debt was less than $0.5 million and was
comprised primarily of that issued to the former owner of
Bowman.  Cash and cash equivalents increased by $209,000 during the
first quarter of 2009.  The increase was due principally to cash flow
from operations of $330,000 exceeding spending for dividends ($88,000) and
treasury stock purchases ($30,000).
 
 We have
adequate liquidity and do not foresee the need for additional capital for
day-to-day operations in the next twelve months.
 
 Our cash
balance will vary with growth or decline in operating income and changes in
non-cash, non-debt working capital. Our cash flow will also benefit from the
utilization of net operating loss carryforwards eliminating or reducing future
federal income tax payments.  At December 31, 2008, we had
approximately $3.2 million of net operating loss carryforwards to offset future
taxable income.
 
 Since
mid-1995, we have paid dividends every quarter. In 2004, we paid a dividend of
$2.00, or about $9.0 million.  This caused a significant, one-time,
reduction in cash.
 
 Beginning
in mid-2008, we began the purchase of our stock in the open
market.  Since then we have purchased treasury stock of $311,000,
including $30,000 in the first quarter of 2009.
 
 Cash flow
is driven by operating income which we endeavor to manage by 1) keeping expenses
low, 2) competitively bidding purchases and freight costs, 3) developing new
products, 4) searching out new markets or expanding existing markets through new
product offerings to existing customers, 5) updating technology in critical
customer service areas, 6) reducing purchases by utilizing existing inventory
when possible, 7) increasing selling prices to the extent possible and 8)
centralizing administrative functions.  Capital expenditures generally
are not significant for daily operations.
 
 As the
overall economy expands and contracts, or as we gain or lose customers, our cash
flow will vary because we have, especially in the Brands Segment, high variable
gross margins, and an increase or decrease in this segment could be significant
to overall results.  We expect soft demand in 2009 due to current
economic conditions resulting in the probability of lower operating
income.  Cash and cash equivalents may be adversely impacted by these
events.
 
 Cash may
also be used to acquire other related businesses. In 2008, we paid $500,000 as
part of the total consideration for all of the outstanding stock of Bowman
Barber and Beauty Supply, Inc., a distributor in Wilmington, NC.
 
 We have
no off-balance sheet financing arrangements.
 
 Effective
June 3, 2009, the Company’s CEO unilaterally reduced his salary by
35%.  For the remainder of 2009, this action is expected to result in
a decrease in SGA expense of approximately $150,000 relative to his previous
contractual salary.  See Note 6 to these Condensed Consolidated
Financial Statements.
 
 Results of
Operations
 
 FIRST QUARTER 2009 v. FIRST
QUARTER 2008
 
 Revenue
for the first quarter of calendar 2009 was $4.6 million compared to $4.4 million
in the comparable period of 2008.
 
 In our
Brands segment revenue rebounded after a soft fourth quarter in
2008.  First quarter 2009 revenue was slightly under that in the first
quarter of 2008 for this segment.  In our Distributors segment revenue
for the first quarter of 2009 exceeded that in the first quarter of 2008 by
about $300,000.  Bowman revenues were included in 2009 and
approximated $700,000.
  13
 
 Gross
profit as a percentage of revenue was 47.0% in the quarter ended March 31, 2009
compared to 48.0% in the first quarter of 2008. The Distributor segment
accounted for a higher proportion of total Company revenue in 2009 than in the
first quarter of 2008 principally because of the acquisition of
Bowman.  Margins are generally lower in the Distributor segment
relative to those in the Brands segment; this slightly higher proportion of
lower margin business in the total revenue mix accounted principally for the
overall percentage gross profit decline.
 
 Selling,
general and administrative expenses (“SGA”), without Bowman in 2009, were nearly
9.0% lower than those in the comparable period of 2008.  Bowman SGA
expenses for the first quarter of 2009 totaled about $200,000.  When
Bowman’s expenses are included in 2009 the condensed consolidated SGA increased
nominally from quarter-to-quarter.
 
 The
Company’s cash is maintained largely in FDIC, non interest-bearing accounts as a
precaution in this uncertain economic environment.  By doing so, the
Company reduces its costs of banking activity and maintains liquidity and
safety.
 
 During
most of 2008 we invested in auction rate securities that we sold, at par, in the
fourth quarter of 2008 and the proceeds of those sales are reflected as cash and
cash equivalents.  In the first quarter of 2008 the auction of these
investments, of which we held about $4.0 million, began to “fail,” resulting in
higher “penalty” interest rates due to our Company.  Consequently, our
interest income in the first quarter of 2009 was less than that in the
comparable period of 2008. We anticipate that this unfavorable comparison will
continue through most of 2009.
 
 The
shortfall in interest income was a principal contributor to our bottom line
results.  While operating income remained steady from
quarter-to-quarter income before income taxes and net income declined largely
due to lower interest income.
 
 The
Company has a full valuation allowance against its net deferred tax assets
at March 31, 2009 and December 31, 2008.   We did not
record deferred tax expense for the first quarter of 2009 due to net
operating loss carryforwards which management expects to utilize.
Through its continual evaluation of the realizability of its deferred tax
assets, the Company concluded that it is more likely than not that an
additional $60,000 (deferred income taxes that would have been recorded in the
first quarter of 2009 absent the full valuation allowance against its deferred
tax assets) will be realized, given its continued profitability.
 
 Item
      3.
              Quantitative
      and Qualitative Disclosure about Market
Risk
 
 Not
required.
 
 Item
      4T:
              Controls
      and Procedures
 
 (a)
              Evaluation
      of Disclosure Controls and
Procedures
 
 We are
responsible for establishing and maintaining adequate internal control over
financial reporting for the Company.  During 2008 we reviewed
procedures at all of our subsidiaries and evaluated the control structure of the
Company as a whole. However, because of organization changes recently made in
our company, including the acquisition of Bowman in 2008 that we have not had a
chance to fully document, and in an abundance of caution, we believe it prudent
to report that our Company did not have effective internal control over
financial reporting (“ICFR”) at March 31, 2009.  Later in 2009, we
will again review our controls and determine the effectiveness of our ICFR, and
our auditors will attest to our ICFR determination.
  This
quarterly report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in this quarterly report.
  (b)
              Internal
      Control over Financial Reporting
 
 There
were no significant changes in our internal control over financial reporting to
the knowledge of our management, or in other factors that have materially
affected or are reasonably likely to materially affect these internal controls
over financial reporting subsequent to the evaluation date.
  14
 
 PART
II – OTHER INFORMATION
 
 Item
      1.
              Legal
      Proceedings
 
 In
addition to the matters set forth below, the Company is involved in other
litigation arising in the normal course of business.  It is the
opinion of management that none of such matters, at March 31, 2009, would
likely, if adversely determined, have a material adverse effect on the Company's
financial position or results of operations.
 
 1) In
March 2006, in a case styled Trevor Sorbie International, Plc. v. Sorbie
Acquisition Co. (CASE NO. 05-14908-09), filed in the Circuit Court of the
17th
Judicial Circuit in and for Broward County, Florida, Trevor Sorbie
International, Plc. (“TSI”) instituted efforts to collect on a judgment it has
against Sorbie Acquisition Co. (“SAC,” a subsidiary of the
Company).  The judgment derives from an October 25, 2004, Pennsylvania
arbitration award in favor of TSI and against SAC with respect to certain
royalties and interest due.  The financial statements for the Company
for the quarter ended March 31, 2009, reflected a liability that, in
management’s opinion, was adequate to cover the likely liability in the case.
Among other things, the Florida lawsuit alleges fraud and names as additional
defendants The Stephan Co., Trevor Sorbie of America, Inc. and Sorbie
Distributing Corporation, also subsidiaries of the Company. This matter is
currently unresolved and the Company is unable, at this time, to determine the
outcome of the litigation. The Company is vigorously defending this legal action
against TSI.  While we believe that we may ultimately prevail and/or
settle for an amount substantially less than that accrued, due to the limited
discovery taken and the complexities of the issues involved, the Company cannot
predict the outcome of the litigation.
 
 2)
On May 4, 2005, the Company entered into a Second Amendment of Lease Agreement
(the "Amendment") with respect to the Danville, IL facility, Morris Flamingo –
Stephan, Inc., extending the term of the lease to June 30, 2015, with a
five-year renewal option, and increasing the annual rental to approximately
$320,000.  The base rent is adjustable annually, in accordance with
the existing master lease, the terms of which, including a 90-day right of
termination by the Company, remain in full force and effect.  The
Amendment provides a purchase option, effective during the term of the lease, to
purchase the premises at the then fair market value of the building, or to match
any bona fide third-party offer to purchase the premises.
 
 On
July 6, 2005, the landlord, Shaheen & Co., Inc., the former owner of Morris
Flamingo, notified the Company that its interpretation of the Amendment differed
from that of the Company as to the existence of the 90-day right of
termination.  In October 2005, the landlord filed a lawsuit in the
Circuit Court for the 17th Circuit of Florida in and for Broward County, FL,
styled Shaheen & Co., Inc. (Plaintiff) v. The Stephan Co., Case number
05-15175 seeking a declaratory judgment with respect to the validity of the
90-day right of termination.  In addition, the lawsuit alleges damages
with respect to costs incurred and the weakening marketability of the
property.  This matter is currently unresolved and the Company is
unable, at this time, to determine the outcome of the
litigation.  However, if it is ultimately determined that the early
termination provision has been eliminated with the Amendment, the Company’s
minimum lease obligation would amount to $320,000 in each of the years 2009
through 2013 and approximately $4800,000 thereafter, subject to adjustments for
increases in the Consumer Price Index. We believe that we will prevail in this
matter since the lease has been and is cancelable upon 90 days’ notice of
termination to the landlord. Shouky A. Shaheen, a minority owner of Shaheen
& Co., Inc., is currently a member of the Board of Directors and a
significant shareholder of the Company.
 
 Item
      1A:
              Risk
      Factors
 Not required.
 
 Item
      2:
              Unregistered
      Sales of Equity Securities and Use of
Proceeds
 None.
 
 Item
      3:
              Defaults
      upon Senior Securities
 None.
 
 Item
      4:
              Submission
      of Matters to a Vote of Security
Holders
 None.
 
 Item
      5:
              Other
      Information
 None.
  15
 
 Item
      6:
              Exhibits
 Exhibit
      10.26
                      
                      Supplemental
      Letter from Frank F. Ferola to the Company’s Secretary dated April 27,
      2009, together with attachment.Exhibit
      31.1
                      
                      Certification
      of Chief Executive OfficerExhibit
      31.2
                      
                      Certification
      of Chief Financial OfficerExhibit
      32.1
                      
                      Certification
      of Chief Executive OfficerExhibit
      32.2
                      
                      Certification
      of Chief Financial
Officer
  16
 
 SIGNATURES
 
 Pursuant
to the requirements of Section 13 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.By:
                    /s/
      Frank F. FerolaFrank
      F. FerolaPresident
      and Chairman of the BoardMay
      20, 2009By:
                    /s/
      Robert C. SpindlerRobert
      C. SpindlerChief
      Financial OfficerMay
      20, 2009
  17