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 June 30,
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
 ̈





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 August 14, 2009





THE
STEPHAN CO. AND SUBSIDIARIES


INDEX TO
QUARTERLY REPORT


ON FORM
10-Q





PagePART
      I – FINANCIAL INFORMATIONItem
      1:
                Financial
      Statements
                4Item
      2:
                Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                13Item
      3:
                Quantitative
      and Qualitative Disclosures about Market Risk
                15Item
      4T:
                Controls
      and Procedures
                15PART
      II – OTHER INFORMATIONItem
      1:
                Legal
      Proceedings
                16Item
      1A:
                Risk
      Factors
                16Item
      2:
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                16Item
      3:
                Defaults
      Upon Senior Securities
                16Item
      4:
                Submission
      of Matters to a Vote of Security Holders
                16Item
      5:
                Other
      Information
                16Item
      6:
                Exhibits
                16Signatures
                
                17Certifications
                
                18


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 June 30, 2009 and December 31,
2008


(in thousands, except share and
      per share amounts)
                      
                      
                      
                      
                      Audited2009
                      
                      
                      2008CURRENT
    ASSETSCash and cash
      equivalents
                      
                      $
                      8,202
                      
                      
                      $
                      7,967Accounts receivable,
      net
                      
                      
                      1,083
                      
                      
                      
                      976Current
      inventories
                      
                      
                      5,240
                      
                      
                      
                      5,162Prepaid expenses and other current
      assets
                      
                      
                      223
                      
                      
                      
                      248TOTAL CURRENT
      ASSETS
                      
                      
                      14,748
                      
                      
                      
                      14,353Other assets, including
      non-current inventories, net
                      
                      
                      3,100
                      
                      
                      
                      3,106Property, plant and equipment,
      net
                      
                      
                      1,333
                      
                      
                      
                      1,383Goodwill and other intangible
      assets, net
                      
                      
                      6,762
                      
                      
                      
                      6,744TOTAL
ASSETS
                      
                      $
                      25,943
                      
                      
                      $
                      25,586CURRENT
      LIABILITIESCurrent portion of long-term
      debt
                      
                      $
                      139
                      
                      
                      $
                      136Accounts payable and accrued
      expenses
                      
                      
                      2,094
                      
                      
                      
                      1,922TOTAL CURRENT
      LIABILITIES
                      
                      
                      2,233
                      
                      
                      
                      2,058Long-term debt, less current
      portion
                      
                      
                      287
                      
                      
                      
                      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 June 30, 2009 and December 31,
      2008
                      
                      
                      44
                      
                      
                      
                      44Additional paid-in
      capital
                      
                      
                      17,873
                      
                      
                      
                      17,833Retained
      earnings
                      
                      
                      5,817
                      
                      
                      
                      5,606Treasury stock, 136,936 and
      123,048 shares, at cost
                      
                      
                      (311
                      )
                      
                      
                      (281
                      )TOTAL STOCKHOLDERS'
      EQUITY
                      
                      
                      23,423
                      
                      
                      
                      23,202TOTAL LIABILITIES &
      STOCKHOLDERS' EQUITY
                      
                      $
                      25,943
                      
                      
                      $
                      25,586




See Notes
to Condensed Consolidated Financial Statements.


4


The Stephan Co.
 Condensed Consolidated Statements of
Operations
 Three and Six Months Ended June 30, 2009
and 2008
 (in thousands, except per share
data)
 Three
Months
                  
                  
                  Six Months2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Revenue
                  
                  $
                  4,420
                  
                  
                  $
                  4,289
                  
                  
                  $
                  9,002
                  
                  
                  $
                  8,709Cost of
    revenue
                  
                  
                  2,421
                  
                  
                  
                  2,133
                  
                  
                  
                  4,849
                  
                  
                  
                  4,432Gross
profit
                  
                  
                  1,999
                  
                  
                  
                  2,156
                  
                  
                  
                  4,153
                  
                  
                  
                  4,277Selling, general and
      administrative expenses
                  
                  
                  1,778
                  
                  
                  
                  1,995
                  
                  
                  
                  3,757
                  
                  
                  
                  3,936Operating
      income
                  
                  
                  221
                  
                  
                  
                  161
                  
                  
                  
                  396
                  
                  
                  
                  341Interest
    income
                  
                  
                  5
                  
                  
                  
                  67
                  
                  
                  
                  12
                  
                  
                  
                  157Interest
      expense
                  
                  
                  (1
                  )
                  
                  
                  (2
                  )
                  
                  
                  (1
                  )
                  
                  
                  (6
                  )Income before income
      taxes
                  
                  
                  225
                  
                  
                  
                  226
                  
                  
                  
                  407
                  
                  
                  
                  492Provision for income
      taxes
                  
                  
                  13
                  
                  
                  
                  90
                  
                  
                  
                  26
                  
                  
                  
                  196NET INCOME
                  
                  $
                  212
                  
                  
                  $
                  136
                  
                  
                  $
                  381
                  
                  
                  $
                  296Basic income per
      share
                  
                  $
                  0.05
                  
                  
                  $
                  0.03
                  
                  
                  $
                  0.09
                  
                  
                  $
                  0.07Diluted income per
      share
                  
                  $
                  0.05
                  
                  
                  $
                  0.03
                  
                  
                  $
                  0.09
                  
                  
                  $
                  0.07Dividends per
      share
                  
                  $
                  0.02
                  
                  
                  $
                  0.02
                  
                  
                  $
                  0.04
                  
                  
                  $
                  0.04Weighted average common shares
      outstanding
                  
                  
                  4,253
                  
                  
                  
                  4,389
                  
                  
                  
                  4,256
                  
                  
                  
                  4,389





See Notes
to Condensed Consolidated Financial Statements.




5





The Stephan Co.
 Condensed Consolidated Statements of
Cash Flows
 Six Months Ended June 30, 2009 and
2008
 (in
    thousands)
                      
                      2009
                      
                      
                      2008CASH FLOWS FROM OPERATING
      ACTIVITIESNET INCOME
                      
                      $
                      381
                      
                      
                      $
                      296Adjustments to reconcile net
      income to net cash flows provided by (used in) operating
      activities:Depreciation
                      
                      
                      59
                      
                      
                      
                      58Stock option
      compensation
                      
                      
                      40
                      
                      
                      
                      40Deferred income
      taxes
                      
                      
                      -
                      
                      
                      
                      174Changes in operating assets &
      liabilities(Increase) decrease in accounts
      receivable
                      
                      
                      (107
                      )
                      
                      
                      364Increase in current
      inventories
                      
                      
                      (78
                      )
                      
                      
                      (1,334
                      )Decrease in prepaid expenses and
      other current assets
                      
                      
                      25
                      
                      
                      
                      104Decrease in other assets,
      including non-current inventories
                      
                      
                      6
                      
                      
                      
                      2Increase (decrease) in accounts
      payable and accrued expenses
                      
                      
                      172
                      
                      
                      
                      (109
                      )Total adjustments to net
      income
                      
                      
                      117
                      
                      
                      
                      (701
                      )NET CASH FLOWS PROVIDED BY (USED
      IN) OPERATING ACTIVITIES
                      
                      
                      498
                      
                      
                      
                      (405
                      )CASH FLOWS FROM INVESTING
      ACTIVITIESAdjustment of intangibles related
      to Bowman acquisition
                      
                      
                      (18
                      )Purchase of property, plant and
      equipment
                      
                      
                      (9
                      )
                      
                      
                      (16
                      )NET CASH FLOWS (USED IN) INVESTING
      ACTIVITIES
                      
                      
                      (27
                      )
                      
                      
                      (16
                      )CASH FLOWS FROM FINANCING
      ACTIVITIESChange in restricted
      cash
                      
                      
                      -
                      
                      
                      
                      555Repayment of long-term
      debt
                      
                      
                      (36
                      )
                      
                      
                      (555
                      )Dividends
                      
                      
                      (170
                      )
                      
                      
                      (176
                      )Purchases of treasury
      stock
                      
                      
                      (30
                      )
                      
                      
                      (7
                      )NET CASH FLOWS (USED IN) FINANCING
      ACTIVITIES
                      
                      
                      (236
                      )
                      
                      
                      (183
                      )NET INCREASE (DECREASE) IN CASH
      AND CASH EQUIVALENTS
                      
                      
                      235
                      
                      
                      
                      (604
                      )CASH AND CASH EQUIVALENTS AT
      BEGINNING OF YEAR
                      
                      
                      7,967
                      
                      
                      
                      4,977CASH AND CASH EQUIVALENTS AT END
      OF SECOND QUARTER
                      
                      $
                      8,202
                      
                      
                      $
                      4,373Supplemental Disclosures of Cash
      Flow InformationInterest
    Paid
                      
                      $
                      1
                      
                      
                      $
                      6Income Taxes
      Paid
                      
                      $
                      7
                      
                      
                      $
                      -
 
 See Notes
to Condensed Consolidated Financial Statements.


6


The
Stephan Co. and Subsidiaries


Notes to
Condensed Consolidated Financial Statements


Quarters
ended June 30, 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 June 30, 2009 and the results
of their operations and cash flows for the three and six 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. 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.





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. The most notable estimates included in the consolidated financial
statements include the probability of collection for the allowance for doubtful
accounts, inventory provisions, estimated useful lives of fixed assets, and
realizability of deferred taxes.





PRINCIPLES
OF CONSOLIDATION:  The consolidated financial statements include the
accounts of The Stephan Co. and its subsidiaries, all of which are wholly owned:
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., and Bowman Barber and Beauty Supply, Inc.
(collectively, the "Company").  All significant inter-Company balances
and transactions have been eliminated in consolidation.





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 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 June
30, 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
June 30, 2009.





MAJOR
CUSTOMERS:  There were no sales to any single customer in excess of
10% of revenue in the first three or six months ended June 30,
2009.  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:  The Company’s net income for the quarters ended June
30, 2009 and 2008 was reduced as a result of the recognition of stock option
compensation expense of $20,000 in each year. Year-to-date net income in 2009
and 2008 was reduced by $40,000 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 June 30 of each year
was approximately $0.005 per common share and $0.01 per share for the six month
periods. 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 ranging from 77% to 91%, dividend yield of
approximately 2.0%, risk-free rates ranging from 2.7% to 3.7% and terms ranging
from five to 10 years.  On January 1, 2009 the company granted options
to purchase 50,000 shares at $1.96, the market price just prior to grant, to our
CEO; these options vest one year from the date of
grant.  Additionally, we granted a total of 20,248 options to our
outside directors at $2.40, the market price of our stock on June 30,
2009.




7





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 June 30, 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 1% 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 $27,000 and $84,000 for the three months ended June 30, 2009 and
2008, respectively.  These costs approximated $82,000 and $160,000 for
the six months ended June 30, 2009 and 2008. The allowances for sales returns
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 June 30, 2009 and 2008, the manufacturing-related overhead included in
Selling, General and Administrative Expenses was approximately $128,000 and
$156,000, respectively. For the six-month periods ended June 30, 2009 and 2008,
the manufacturing-related overhead included in Selling, General and
Administrative Expenses was approximately $285,000 and $389,000,
respectively.


SHIPPING
AND HANDLING FEES AND COSTS: Expenses for the shipping and delivery of products
sold to customers were approximately $296,000 and $401,000 for the quarters
ended June 30, 2009 and 2008, respectively. For the six month periods ended June
30, 2009 and 2008, these costs were approximately $618,000 and $796,000,
respectively.





CASH AND
CASH EQUIVALENTS:  Cash and cash equivalents are comprised principally
of cash maintained 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 June
30, 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.





At June
30, 2009 and December 31, 2008, we classified as Other Assets approximately $5.1
million of slow moving inventories of chemicals and components that may not
be used in upcoming production.  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 June 30, 2009
and December 31, 2008, respectively.




8





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:  Incometaxes are calculated using the asset and
liability method of accounting.Deferred income taxes are recognized by
applying the enactedstatutoryratesapplicableto estimated future year differences
betweenthefinancialstatementandtaxbasiscarrying
amounts.At December31, 2008, the Company had a full
valuation allowance of $806,000againstits netdeferredtaxassets.Gross Federal net operating loss
carryforwards at December31, 2008werein excess of $3 million.The valuationallowance was recorded because
management determined that it was not “more likely than not” that the deferred
tax assets would be utilized tooffset future taxableincome.TheCompany recorded current tax expense
stemming from tax liabilities in statesin which certain profitablesubsidiaries file returns on a
nonconsolidated basis.The Company has not recorded deferred
Federal income tax expense for 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 quarters (4.3 million in 2009 and 4.4
million in 2008) and for the year-to-date periods (4.3 million in 2009 and 4.4
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 June 30, 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.





SUBSEQUENT
EVENTS: For the three and six months ended June 30, 2009, the Company evaluated,
for potential recognition and disclosure, events that occurred prior to the
filing of the Company’s Quarterly Report on Form 10-Q for the quarter ended June
30, 2009 on August 18, 2009.





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.  There are no noncontrolling
interests held in the Company’s consolidated subsidiaries.





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. The Company does not have significant assets
or liabilities subject to the provisions of these pronouncements.




9





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.





On April
1, 2009, the Company adopted the provisions of FASB Statement No. FAS 165,
Subsequent Events (“FAS 165”), on a prospective basis. The provisions of FAS 165
provide guidance related to the accounting for and disclosure of events that
occur after the balance sheet date but before the financial
statements   are   issued   or
are   available to be issued. Additionally, FAS  165
requires the Company to disclose the date through
which  subsequent  events have been evaluated, as well as
whether that date is  the date the financial statements were issued or
the date the financial statements  were available to be issued. The
adoption of the provisions of FAS 165 did not affect the Company’s historical
consolidated financial statements.





In April 2009, the FASB issued FASB
Staff Position FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of
Financial Instruments” (“FSP FAS 107-1 and APB 28-1”).  This staff
position amends existing U.S. GAAP to require publicly traded companies to
present disclosures about fair value of financial instruments in interim
reporting periods.  The staff position became effective for the
Company during the quarter ended June 30, 2009.  The adoption of FSP
FAS 107-1 and APB 28-1 did not have a material effect on the Company’s financial
statements.





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”).  If Bowman had been acquired at the beginning of 2008, pro
forma estimated revenue for the Company for the quarter and year-to-date period
ended June 30, 2008 would have been $5.0 million and $10.0 million,
respectively.  Pro forma net income and net income per share for the
periods in 2008 previously referred to would not have been materially impacted
by the inclusion of Bowman results.   In the second quarter of
2009, intangible assets were adjusted by $18,000 to reflect a true-up
reclassification of certain minor assets and liabilities acquired in the Bowman
stock purchase in 2008.





NOTE
4:  INVENTORIES





Inventories at June 30, 2009 and
December 31, 2008 consisted of the following:





(in
    thousands)
            
            2009
            
            
            2008Raw
    materials
            
            $
            1,085
            
            
            $
            1,151Packaging and
      components
            
            
            2,159
            
            
            
            2,008Work-in-process
            
            
            504
            
            
            
            523Finished
    goods
            
            
            6,553
            
            
            
            6,541Total
      inventories
            
            
            10,301
            
            
            
            10,223Less: estimated non-current
      inventories
            
            
            (5,061
            )
            
            
            (5,061
            )Current
      inventories
            
            $
            5,240
            
            
            $
            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.


10





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:





Quarters ended June
30,
 
 2009
                  
                  
                  2008(in
    thousands)
                  
                  Distributors
                  
                  
                  Brands
                  
                  
                  Total
                  
                  
                  Distributors
                  
                  
                  Brands
                  
                  
                  TotalRevenue
                  
                  $
                  3,390
                  
                  
                  $
                  1,030
                  
                  
                  $
                  4,420
                  
                  
                  $
                  3,129
                  
                  
                  $
                  1,160
                  
                  
                  $
                  4,289Operating
      Income
                  
                  
                  (77
                  )
                  
                  
                  298
                  
                  
                  
                  221
                  
                  
                  
                  (170
                  )
                  
                  
                  331
                  
                  
                  
                  161Net interest
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  65Income
taxes
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (13
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (90
                  )Net income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  212
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  136
 
 Year-to-Date Periods Ended June
30,
 
 2009
                        
                        
                        2008(in
    thousands)
                        
                        Distributors
                        
                        
                        Brands
                        
                        
                        Total
                        
                        
                        Distributors
                        
                        
                        Brands
                        
                        
                        TotalRevenue
                        
                        $
                        7,068
                        
                        
                        $
                        1,934
                        
                        
                        $
                        9,002
                        
                        
                        $
                        6,491
                        
                        
                        $
                        2,218
                        
                        
                        $
                        8,709Operating
      Income
                        
                        
                        (137
                        )
                        
                        
                        533
                        
                        
                        
                        396
                        
                        
                        
                        (223
                        )
                        
                        
                        564
                        
                        
                        
                        341Net interest
      income
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        11
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        151Income
taxes
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (26
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (196
                        )Net income
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        381
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        296Segment assets (at June 30, 2009
      and December 31, 2008)
                        
                        
                        7,390
                        
                        
                        
                        10,377
                        
                        
                        
                        17,767
                        
                        
                        
                        7,407
                        
                        
                        
                        10,403
                        
                        
                        
                        17,810Not allocated to
      segments:Cash and cash
      equivalents
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        8,202
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        7,967Eliminations/other
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (26
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (191
                        )Consolidated
      assets
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        25,943
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        25,586
 
 Note1: Corporate overhead was allocated
to the segments based upon revenue.
 Note 2: Capital expenditures and
depreciation expense were immaterial.


11


NOTE
6:  CONTINGENCIES AND COMMITMENTS





The
Company has an employment agreement with its Chief Executive
Officer.  The agreement expires on December 31, 2011, but provides for
the unilateral renewal by the CEO.  The agreement includes an
incentive bonus award based on consolidated earnings per share in excess of the
applicable base year as defined in the employment agreement.





In July
2005, the CEO took a voluntary, unilateral reduction in base compensation to
$540,000 annually.  In accordance with his employment agreement this
amount was subject to annual increases of 10%.  In June 2009, the CEO
took another voluntary, unilateral reduction in base compensation to
$519,900.  For the approximately two-and-one-half years remaining
under the CEO’s current contract, the Company will save over $700,000 from the
CEO’s action to reduce his base compensation. Additionally, the CEO
conditionally waived payment of bonuses earned in 2005 and 2007. See Item 11 of
the Company's Annual Report on Form 10-K for the year ended December 31,
2008.





The terms
of the waiver of compensation allow the CEO to retain the right to his original
employment agreement compensation, retroactive to the level in effect before the
July 2005 reduction, if certain events occur.  These events include
the occurrence of certain specified events relating to a change in control of,
or reasonable likelihood thereof, the Company as defined in letters relating to
the voluntary, unilateral reductions referred to above.





In the
event of a change in control as referred to above, the CEO would currently be
entitled to a payment of approximately $15.0 million.


12


Item
2.Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





Liquidity and Capital
Resources





As of
June 30, 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 $235,000 during the
first six months of 2009.  The increase was due principally to cash
flow from operations of $498,000 exceeding spending for dividends ($170,000),
repayment of Bowman debt ($36,000) 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 special
dividend of $2.00 per share, or about $9.0 million.





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 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 common stock of
Bowman Barber and Beauty Supply, Inc., a distributor in Wilmington,
NC.





We have
no significant off-balance sheet financing arrangements, except for an operating
lease related to the Danville, IL warehouse.  The annual lease payment
is approximately $320,000 subject to CPI changes.  The lease is also
the subject of a lawsuit referred to in Legal Proceedings, Item 1,
Part II of this report on Form 10-Q.





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





SECOND QUARTER 2009 v.
SECOND QUARTER 2008





Net
income increased to $212,000 in the second quarter of 2009 compared to $136,000
in the comparable period of 2008. Earnings per share were $0.05 in 2009 compared
to $0.03 in 2008. Revenue for the second quarter of calendar 2009 was $4.4
million compared to $4.3 million in the comparable period of
2008.  Expenses declined to $1,778,000 (this amount included Bowman
expenses of approximately $200,000) from $1,995,000.  The total
expense decline, excluding Bowman in 2009, was over $400,000 versus the prior
year amount.





Operating
income increased $60,000, or 37%, versus the second quarter of 2008. Income
before income taxes remained steady from quarter-to-quarter, but net income
increased by $76,000, or 56%, due to effect of a lower tax
provision.  See Note 1.




13





In our
Distributors segment revenue for the second quarter of 2009 exceeded that in the
second quarter of 2008 by about $260,000.  Distributor revenue in 2009
for Bowman, acquired in August 2008, was approximately $680,000. Bowman’s
operating income in the second quarter was not significant.  In our
Brands segment revenue was $130,000 less than that in the second quarter of
2008.  Our Distributor and Brands segments represented approximately
77% and 23% of consolidated revenue, respectively.





Gross
profit as a percentage of revenue was 45.2% in the quarter ended June 30, 2009
compared to 50.3% in the second quarter of 2008. The lower-margin Distributor
segment accounted for a higher proportion of total Company revenue in 2009 than
in the second quarter of 2008, largely due to the inclusion of Bowman in 2009.
Margins are generally lower in the Distributor segment relative to those in the
Brands segment because our branded items are manufactured, but our Distributor
items are purchased and resold.  The shift in the revenue mix from
Brands to Distributors also contributed to the gross profit percentage variance
due to the operating leverage inherent in the Brands segment.





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.  If the Company were to invest its cash in interest-bearing,
but uninsured, accounts then the annual savings would amount to approximately
$60,000.  The Company does not believe this modest return from such
investing is worth the risk of loss at this point in time.  We will
continue to monitor the situation and may change our position if market
conditions and rates of return improve sufficiently.





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 income rates received by our
Company.  Consequently, our interest income in the first three
quarters of 2008 was, and in our future 2009 Form 10-Q reports will continue to
be, comparatively unfavorable to that in 2008.





The Company has a full valuation
allowance against its net deferred tax assets at June 30, 2009 and December 31,
2008.   We did not record deferred tax expense through the second
quarter of 2009 due to net operating loss carryforwards, a portion of which
management expects the Company 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 a portion of its net operating loss carryforwards tax
assets will be realized, given its continued profitability. If not for the full
valuation allowance against its deferred tax assets, deferred expense of
$130,000 would have been recorded.  Total net operating loss
carryforwards were approximately $3.2 million as of December 31,
2008.





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
took 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. See Note 6 to these Condensed
Consolidated Financial Statements.





YEAR-TO-DATE 2009 v.
YEAR-TO-DATE 2008





Net
income increased to $381,000 for the six months ended June 30, 2009, compared to
$296,000 in the comparable period of 2008. Earnings per share were $0.09 in 2009
compared to $0.07 in 2008. Revenue for the six-month period of calendar 2009 was
$9.0 million compared to $8.7 million during the comparable period of
2008.  Expenses declined to $3,757,000 (this amount included Bowman
expenses of approximately $400,000) from $3,936,000.  The total
expense decline, excluding Bowman in 2009, was over $550,000 versus the prior
year amount.





Operating
income for the six-month period increased $55,000, or 16%, over that in the
comparable period of 2008. Income before income taxes was less than that in 2008
due to lower interest income.  However, net income increased by
$85,000, or 29%, due to effect of a lower tax provision.  See Note
1.





Our
Distributors segment revenue for the first six months of 2009 exceeded that in
the comparable period of 2008 by about $580,000.  Distributor revenue
in 2009 for Bowman, acquired in August 2008, was approximately $1.3
million.  Bowman’s operating profit was approximately $75,000 for the
six months ended June 30, 2009.  Our Brands segment revenue was
approximately $280,000 less than that in the first six months of
2008.





Gross
profit as a percentage of revenue was 46.1% in the six-month period ended June
30, 2009 compared to 49.1% in the comparable period of 2008. The lower-margin
Distributor segment accounted for a higher proportion of total Company revenue
in 2009 than in the six months of 2008, largely due to the inclusion of Bowman
in 2009. Margins are generally lower in the Distributor segment relative to
those in the Brands segment because our branded items are manufactured, but our
Distributor items are purchased and resold.  The shift in the revenue
mix from Brands to Distributors also contributed to the gross profit percentage
variance due to the operating leverage inherent in the Brands
segment.




14





Contributing
to improved earnings, selling, general and administrative expenses (“SGA”),
without Bowman in 2009, were nearly 15% lower than those in the comparable
period of 2008.  Bowman SGA expenses for the six months of 2009
totaled about $400,000.  When Bowman’s expenses are included in 2009
the condensed consolidated SGA decreased 11% from year-to-year.





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 income rates received by our
Company.  Consequently, our interest income in the first three
quarters of 2008 was, and in our future 2009 Form 10-Q reports will continue to
be, comparatively unfavorable to that in 2008.





The Company has a full valuation
allowance against its net deferred tax assets at June 30, 2009 and December 31,
2008.   We did not record deferred tax expense through the second
quarter of 2009 due to net operating loss carryforwards, a portion of which
management expects the Company 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 a portion of its net operating loss carryforwards tax
assets will be realized, given its continued profitability. If not for the full
valuation allowance against its deferred tax assets, deferred expense of
$130,000 would have been recorded.  Total net operating loss
carryforwards were approximately $3.2 million as of December 31,
2008.





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
took 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.





We
anticipate softness in our Distributor segment in the third quarter of 2009 due
primarily to lower beauty school enrollments affecting our Morris Flamingo –
Stephan, Inc. subsidiary.  We will, however, increase our
direct-to-salon marketing efforts with a new campaign for salon-only
distribution of our Image and Sorbie brands. Further, Distributor revenue is
expected to decline on a relative basis as we cycle the August 14, 2008 Bowman
acquisition.





Item
3.                   Quantitative
and Qualitative Disclosures 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, we have not had a
chance to fully document our procedures and assess risk, and we continue to
enhance controls over inventory. Therefore, we believe it prudent to report that
our Company did not have effective internal control over financial reporting
(“ICFR”) at June 30, 2009.  Management plans to complete its
Sarbanes-Oxley requirements in accordance with Securities and Exchange
Commission regulations.





(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.


15


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 June 30, 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 June 30, 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.  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 $480,000 thereafter, subject to adjustments for
increases in the Consumer Price Index. We believe that we will prevail in this
matter since the lease has a specific clause stating that it 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.





Item
6:                   Exhibits


Exhibit
31.1            Certification
of Chief Executive Officer


Exhibit
31.2            Certification
of Chief Financial Officer


Exhibit
32.1            Certification
of Chief Executive Officer


Exhibit
32.2            Certification
of Chief Financial Officer


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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 BoardAugust
      18, 2009By:
                  /s/ Robert C. SpindlerRobert
      C. SpindlerChief
      Financial OfficerAugust
      18, 2009


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