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.

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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.