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

Forward-Looking Information

The Company may from time to time make written or oral "forward-looking statements" including statements contained in this report and in other communications by the Company, which are made in good faith by the Company pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include statements of the Company's plans, objectives, expectations, estimates and intentions, which are subject to change based on various important factors (some of which are beyond the Company's control). The following factors, in addition to others not listed, could cause the Company's actual results to differ materially from those expressed in forward looking statements: the strength of the domestic and local economies in which the Company conducts operations, the impact of current uncertainties in global economic conditions and the ongoing financial crisis affecting the domestic and foreign banking systems and financial markets, including the impact on the Company's supplier and customers, currency fluctuations, changes in client needs and consumer spending habits, the impact of competition and technological change on the Company, and the Company's ability to manage its growth effectively, including its ability to successfully integrate any business which it might acquire. A more detailed discussion of risk factors is set forth in Item 1A, "Risk Factors", included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008. All forward-looking statements in this report are based upon information available to the Company on the date of this report. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise, except as required by law.

Critical Accounting Policies

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

Results of Operations

Net sales

Consolidated net sales for the three months ended June 30, 2009 were $19,161,000 compared with $22,708,000 in the same period in 2008, a 16% decrease (13% at constant currency). Consolidated net sales for the six months ended June 30, 2009 were $30,458,000, compared with $36,977,000 for the same period in 2008, an 18% decrease (14% at constant currency). Net sales for the three and six months ended June 30, 2009 in the U.S. segment decreased 17% and 19%, respectively, compared with the same periods in 2008. Net sales in Canada for the three and six months ended June 30, 2009 decreased by 12% and 17%, respectively, in U.S. dollars and approximately 1% in local currency compared with the same periods in 2008. The decline in net sales for the three and six months in the U.S. and Canadian segments is primarily due to a reduction in customer orders across all of our product lines as a result of the continued economic downturn. European net sales for the three and six months ended June 30, 2009 decreased 3% and 5% in U.S. dollars but increased 11% and 9% in local currency compared with the same periods in 2008. The increase in net sales (in local currency) in Europe for the three and six months is primarily due to increased distribution of manicure products, which include scissors, clippers and other related items, partially offset by a decline in sales of office products.

Traditionally, the Company's sales are stronger in the second and third quarters, and weaker in the first and fourth quarters of the fiscal year, due to the seasonal nature of the back-to-school market.

Gross profit

Gross profit for the three months ended June 30, 2009 was $7,105,000 (37.1% of net sales) compared to $8,918,000 (39.3% of net sales) for the same period in 2008. Gross profit for the six months ended June 30, 2009 was $11,402,000 (37.4% of net sales) compared to $14,904,000 (40.3% of net sales) in the same period in 2008. The gross margin declines for the three and six months ended June 30, 2009 were primarily due to fixed costs spread over lower sales, the weaker Canadian dollar, which raised the cost of our products in the Canadian operating segment, and a product mix which consisted of a higher proportion of sales of lower margin products.

Selling, general and administrative expenses

Selling, general and administrative ("SG&A") expenses for the three months ended June 30, 2009 were $5,086,000 (26.5% of net sales) compared with $6,121,000 (27.0% of net sales) for the same period of 2008, a decrease of $1,035,000. SG&A expenses for the six months ended June 30, 2009 were $9,302,000 (30.5% of net sales) compared with $11,039,000 (29.9% of net sales) in the comparable period of 2008, a decrease of $1,737,000. The decrease in SG&A expenses for the three and six months ended June 30, 2009, compared to the same periods in 2008, was primarily the result of benefits of cost cutting initiatives, lower freight and commission cost as a result of lower sales and a lower impact from foreign currency translation as a result of a weaker Euro and Canadian dollar.

Operating income

Operating income for the three months ended June 30, 2009 was $2,019,000 compared with $2,797,000 in the same period of 2008. Operating income for the six months ended June 30, 2009 was $2,100,000 compared to $3,865,000 in the same period of 2008. Operating income in the U.S. segment decreased by $647,000 and $1,394,000 for the three and six months, respectively, compared to the same periods in 2008. Operating income in the Canadian segment decreased by $212,000 and $334,000 for the three and six months, respectively, compared to the same periods in 2008. The decline in operating income for the three and six months in the U.S. and Canadian segment is principally due to the lower sales and associated gross profits partially offset by lower selling, general and administrative costs. The operating loss in Europe decreased by $81,000 for the three months ended June 30, 2009 compared to the same period in 2008. The operating loss in Europe increased by $36,000 for the six months ended June 30, 2009 compared to the same period in 2008.

Interest expense, net

Interest expense, net for the three months ended June 30, 2009 was $13,000, compared with $90,000 for the same period of 2008, a $77,000 decrease. Interest expense, net for the six months ended June 30, 2009 was $20,000 as compared to $186,000 for the same period in 2008, a $166,000 decrease. The decrease in interest expense, net for both the three and six months ended June 30, 2009 was primarily the result of lower interest rates on the Company's debt outstanding under it revolving loan agreement.

Other income (expense), net

Net other income was $30,000 in the three months ended June 30, 2009 as compared to net other expense of $24,000 in the same period of 2008. Net other income was $19,000 in the first six months of 2009 compared to $162,000 in the first six months of 2008. The decrease in other income, net for the six months ended June 30, 2009 was primarily due to lower gains from foreign currency transactions.

Income taxes

The effective tax rate for each of the three and six month periods ended June 30, 2009 was 34% compared to 36% and 35%, respectively, in the same periods of 2008. The decrease in the effective tax rate for the three and six months ended June 30, 2009 was primarily caused by a higher proportion of earnings in foreign jurisdictions with a lower tax rate.

Financial Condition

Liquidity and Capital Resources

The Company continues to experience the effects of the ongoing global recession. This economic downturn has softened demand for the Company's products and caused our customers to reduce their inventory levels which have negatively impacted our sales and earnings. In response to these circumstances, management has cut expenses where possible, including incentive pay, travel, professional service fees and other discretionary spending. The Company has also implemented a freeze on salary increases and hiring employees. To date, the Company does not believe that it has material excess inventory issues, potentially unrecoverable accounts receivable balances or supply issues with its third party manufacturers as a result of the current economic crisis. Despite the weak economic conditions, we continue to have sufficient access to the credit market. However, the Company has not pursued its current options to renew its revolving loan agreement in order to continue to take advantage of the low interest rate it has today. Management will explore its options later in 2009. However, there can be no assurance that the terms of a new loan agreement will be as favorable as the current agreement.

During the first six months of 2009, working capital decreased by approximately $10.4 million compared to December 31, 2008. Inventory decreased by approximately $2.5 million at June 30, 2009 compared to December 31, 2008. The inventory decline is principally related to the Company managing inventory levels to compensate for lower sales in the trailing twelve months ended June 30, 2009 as compared to the twelve months ended December 31, 2008. Inventory turnover, calculated using a twelve month average inventory balance, decreased to 1.8 at June 30, 2009 from 2.0 at December 31, 2008. Receivables increased approximately $7.9 million at June 30, 2009 compared to December 31, 2008 primarily as a result of the seasonal nature of the back to school business where sales are typically higher in the second and third quarters as compared to the first and fourth quarters. The average number of days sales outstanding in accounts receivable was 65 days at June 30, 2009 compared to 64 days at December 31, 2008. Also impacting working capital at June 30, 2009 was the reclassification of all bank debt, due June 30, 2010 (approximately $12.1 million) as short-term, compared to long-term at December 31, 2008.

The Company's working capital, current ratio and long-term debt to equity ratio follow:

(000's omitted)                              June 30, 2009    December 31, 2008
                                            ------------------------------------
    Working capital                            $    19,426          $    29,820
    Current ratio                                     1.86                 4.38
    Long term debt to equity ratio                    0.0%                51.1%

During the first six months of 2009, total debt outstanding under the Company's Modified Loan Agreement, (referred to below) increased by $403,000 compared to total debt at December 31, 2008. As of June 30, 2009, $12,122,000 was outstanding and $7,878,000 was available for borrowing under the Modified Loan Agreement.

On June 23, 2008, the Company modified its revolving loan agreement (the "Modified Loan Agreement") with Wachovia Bank. The Modified Loan Agreement amends certain provisions of the original revolving loan agreement. The amendments include (a) an increase in the maximum borrowing amount from $15 million to $20 million; (b) an extension of the maturity date of the loan from June 30, 2009 to June 30, 2010; (c) a decrease in the interest rate to LIBOR plus 7/8% (from LIBOR plus 1.0%) and (d) modification of certain covenant restrictions. Funds borrowed under the Modified Loan Agreement are used for working capital, general operating expenses, share repurchases and certain other purposes.

As discussed in Note 2, the Company has accrued and expects to pay $1.8 million for remediation costs related to the sale of the Bridgeport property. Through June 30, 2009, the Company had paid approximately $200,000 for legal and pre-remediation costs related to the Bridgeport property. The Company plans to begin the remediation work on the property in the second half of 2009 and expects to pay approximately $1.2 million over the next twelve months. The Company will use cash flow from operations or borrowings under its loan agreement to pay for these costs. The Company does not believe that payment of such remediation costs will have a material adverse affect on the Company's ability to implement its business plan. In addition, the buyer of the property has financed the purchase by providing the Company with a $2.0 million mortgage at 6 percent interest. Payments on the mortgage are due monthly and will also help fund the remediation.

Cash expected to be generated from operating activities, together with funds available under the revolving loan agreement are expected, under current conditions, to be sufficient to finance the Company's planned operations over the next twelve months.

Recently Issued Accounting Standards

In April 2009, the Financial Accounting Standards Board (the "FASB") issued Staff Position ("FSP) FAS No. 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments." This FSP amends Statement of Financial Accounting Standards No. 107, "Disclosures about the Fair Value of Financial Instruments" to require disclosure about the fair value of financial instruments in interim financial statements. This FSP is effective for interim reporting periods ending after June 15, 2009. The adoption of FSP 107-1 did not have a material impact on the Company's consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165") which establishes accounting and disclosure requirements for subsequent events. SFAS 165 details the period after the balance sheet date during which the Company should evaluate events or transactions that occur for potential recognition or disclosure in the financial statements, the circumstances under which the Company should recognize events or transactions occurring after the balance sheet date in its financial statements and the required disclosures for such events. SFAS 165 is effective for interim and annual financial statement periods ending after June 15, 2009. The adoption of SFAS 165 did not have a material impact on the Company's consolidated financial statements.