UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 – Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 31, 2011
or
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o |
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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: 1-31643
CCA Industries Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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04-2795439 |
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(State or other jurisdiction of
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(IRS Employer Identification No.) |
incorporation or organization) |
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200 Murray Hill Parkway
East Rutherford, NJ 07073
(Address of principal executive offices)
(201) 330-1400
(Registrant’s telephone number, including area code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act
(Check one).
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
As of July 14, 2011 there were (i) 6,086,740 shares of the issuer’s common stock, par value
$0.01, outstanding; and (ii) 967,702 shares of the issuer’s Class A common stock, par value $0.01,
outstanding.
CCA INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
1
CCA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
A S S E T S
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RESTATED |
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May 31, |
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November 30, |
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2011 |
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2010 |
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(Unaudited) |
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Current Assets |
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Cash and cash equivalents |
|
$ |
9,193,336 |
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$ |
8,064,255 |
|
Short-term investments and marketable
securities |
|
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1,673,224 |
|
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4,673,848 |
|
Accounts receivable, net of allowances of
$1,036,332 and $1,263,250, respectively |
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7,869,255 |
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5,990,010 |
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Inventories, net of reserve for inventory obsolescence
of $1,017,188 and $1,372,798, respectively |
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8,859,721 |
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9,077,234 |
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Insurance claim receivable |
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— |
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361,639 |
|
Prepaid expenses and sundry receivables |
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887,959 |
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|
976,108 |
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Prepaid income taxes |
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1,002,182 |
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|
999,702 |
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Deferred income taxes |
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1,667,942 |
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|
1,755,783 |
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Total Current Assets |
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31,153,619 |
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31,898,579 |
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Property and Equipment, net of accumulated
depreciation and amortization |
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512,530 |
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550,689 |
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|
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|
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|
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Intangible Assets, net of accumulated
amortization |
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673,349 |
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673,580 |
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Other Assets |
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Marketable securities |
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2,972,780 |
|
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3,124,051 |
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Other |
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65,300 |
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65,300 |
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Total Other Assets |
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3,038,080 |
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3,189,351 |
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Total Assets |
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$ |
35,377,578 |
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$ |
36,312,199 |
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See Notes to Unaudited Consolidated Financial Statements.
2
CCA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
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RESTATED |
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May 31, |
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November 30, |
|
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2010 |
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2010 |
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(Unaudited) |
|
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Current Liabilities |
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Accounts payable and accrued liabilities |
|
$ |
8,391,506 |
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$ |
8,506,279 |
|
Capitalized lease obligation — current portion |
|
|
6,444 |
|
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|
15,197 |
|
Income taxes payable |
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|
15,000 |
|
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|
— |
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Dividends payable |
|
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493,811 |
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|
493,811 |
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Total Current Liabilities |
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8,906,761 |
|
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|
9,015,287 |
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Deferred tax liability |
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115,421 |
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|
118,717 |
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Capitalized lease obligations-long term |
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4,272 |
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8,149 |
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Total Liabilities |
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9,026,454 |
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9,142,153 |
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Shareholders’ Equity |
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Preferred stock, $1.00 par; authorized
20,000,000 shares; none issued |
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— |
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— |
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Common stock, $.01 par; authorized
15,000,000 shares; 6,086,740 shares issued and outstanding |
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60,867 |
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|
60,867 |
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Class A common stock, $.01 par; authorized
5,000,000 shares; 967,702 shares issued and outstanding |
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9,677 |
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9,677 |
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Additional paid-in capital |
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2,329,049 |
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2,329,049 |
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Retained earnings |
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23,914,689 |
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24,806,474 |
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Unrealized gain (loss) on marketable
securities |
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36,842 |
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(36,021 |
) |
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Total Shareholders’ Equity |
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26,351,124 |
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27,170,046 |
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Total Liabilities and Shareholders’ Equity |
|
$ |
35,377,578 |
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|
$ |
36,312,199 |
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|
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|
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|
See Notes to Unaudited Consolidated Financial Statements.
3
CCA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended |
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Six Months Ended |
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May 31, |
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May 31, |
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2011 |
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2010 |
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2011 |
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2010 |
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Revenues |
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Sales of health and beauty
aid products — Net |
|
$ |
12,797,773 |
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$ |
14,708,108 |
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$ |
25,208,687 |
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$ |
27,799,285 |
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Other income |
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|
87,540 |
|
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|
147,109 |
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|
247,732 |
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|
254,218 |
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|
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|
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Total Revenues |
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12,885,313 |
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14,855,217 |
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25,456,419 |
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28,053,503 |
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Costs and Expenses |
|
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Costs of sales |
|
|
4,988,813 |
|
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|
6,119,823 |
|
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|
9,719,186 |
|
|
|
11,150,922 |
|
Selling, general and
administrative expenses |
|
|
6,344,647 |
|
|
|
5,538,352 |
|
|
|
11,799,784 |
|
|
|
10,945,348 |
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Advertising, cooperative
and promotional expenses |
|
|
1,784,845 |
|
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|
2,353,530 |
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|
3,448,793 |
|
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|
3,905,037 |
|
Research and development |
|
|
203,922 |
|
|
|
156,751 |
|
|
|
343,393 |
|
|
|
303,277 |
|
Bad debt expense (recovery) |
|
|
15,920 |
|
|
|
(31,936 |
) |
|
|
1,135 |
|
|
|
14,339 |
|
Interest expense |
|
|
205 |
|
|
|
1,004 |
|
|
|
549 |
|
|
|
2,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total |
|
|
13,338,352 |
|
|
|
14,137,524 |
|
|
|
25,312,840 |
|
|
|
26,321,674 |
|
Advertising Litigation Expense |
|
|
— |
|
|
|
2,067,407 |
|
|
|
— |
|
|
|
2,129,043 |
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total Costs and Expenses |
|
|
13,338,352 |
|
|
|
16,204,931 |
|
|
|
25,312,840 |
|
|
|
28,450,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
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|
|
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|
(Loss) Income before
(Benefit from) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Income Taxes |
|
|
(453,039 |
) |
|
|
(1,349,714 |
) |
|
|
143,579 |
|
|
|
(397,214 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Benefit from) Provision for
Income Taxes |
|
|
(205,771 |
) |
|
|
(439,125 |
) |
|
|
47,742 |
|
|
|
(28,179 |
) |
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net (Loss) Income |
|
$ |
(247,268 |
) |
|
$ |
(910,589 |
) |
|
$ |
95,837 |
|
|
$ |
(369,035 |
) |
|
|
|
|
|
|
|
|
|
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|
(Loss) Earnings per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.04 |
) |
|
$ |
(0.13 |
) |
|
$ |
0.01 |
|
|
$ |
(.05 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.04 |
) |
|
$ |
(0.13 |
) |
|
$ |
0.01 |
|
|
$ |
(.05 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
Weighted Average Common
Shares Outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
7,054,442 |
|
|
|
7,054,442 |
|
|
|
7,054,442 |
|
|
|
7,054,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
7,054,442 |
|
|
|
7,054,442 |
|
|
|
7,054,442 |
|
|
|
7,054,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Consolidated Financial Statements.
4
CCA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
May 31, |
|
|
May 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income |
|
$ |
(247,268 |
) |
|
$ |
(910,589 |
) |
|
$ |
95,837 |
|
|
$ |
(369,035 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) — Unrealized gain (loss)
on investments, net of tax *
(Note 7, Note 12) |
|
|
16,570 |
|
|
|
(44,287 |
) |
|
|
72,863 |
|
|
|
139,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (Loss) Income |
|
$ |
(230,698 |
) |
|
$ |
(954,876 |
) |
|
$ |
168,700 |
|
|
$ |
(229,036 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Unrealized holding gain for the three and six months ended May 31, 2011 is net of a deferred tax
(expense) from unrealized gains of $(11,468) and $(50,425) respectively. Unrealized holding loss for
the three and six months ended May 31, 2010 is net of a deferred tax benefit from unrealized losses
of $29,402 and $49,413 respectively. |
See Notes to Unaudited Consolidated Financial Statements.
5
CCA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
May 31, |
|
|
May 31, |
|
|
|
2011 |
|
|
2010 |
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
95,837 |
|
|
$ |
(369,035 |
) |
Adjustments to reconcile net income to net
cash
(used in) provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
97,644 |
|
|
|
125,517 |
|
Bad debt expense recovery |
|
|
11,990 |
|
|
|
|
|
(Gain) loss on sale of securities |
|
|
(815 |
) |
|
|
16,780 |
|
Deferred income taxes |
|
|
34,120 |
|
|
|
(225,775 |
) |
Change in Operating Assets and Liabilities: |
|
|
|
|
|
|
|
|
(Increase) in accounts receivable |
|
|
(1,891,237 |
) |
|
|
(886,758 |
) |
Decrease (increase) in inventory |
|
|
217,512 |
|
|
|
(430,452 |
) |
Decrease (increase) in insurance claim
receivable |
|
|
361,639 |
|
|
|
(475,000 |
) |
Decrease in prepaid expenses
and miscellaneous receivables |
|
|
88,149 |
|
|
|
217,539 |
|
(Increase) in prepaid income taxes |
|
|
(2,480 |
) |
|
|
(589,626 |
) |
(Decrease) increase in accounts payable and
accrued liabilities |
|
|
(114,773 |
) |
|
|
3,550,588 |
|
Increase (decrease) in income taxes payable |
|
|
15,000 |
|
|
|
(147,153 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash (Used in) Provided by Operating
Activities |
|
|
(1,087,414 |
) |
|
|
786,625 |
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
Acquisition of property, plant and equipment |
|
|
(59,255 |
) |
|
|
(27,492 |
) |
Purchase of marketable securities |
|
|
— |
|
|
|
(9,008,164 |
) |
Proceeds from sale or maturity of
investments |
|
|
3,276,000 |
|
|
|
10,367,999 |
|
|
|
|
|
|
|
|
|
Net Cash Provided by Investing
Activities |
|
|
3,216,745 |
|
|
|
1,332,343 |
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
Payments of capital lease obligation |
|
|
(12,628 |
) |
|
|
(28,658 |
) |
Dividends paid |
|
|
(987,622 |
) |
|
|
( 987,622 |
) |
|
|
|
|
|
|
|
|
Net Cash (Used in) Financing Activities |
|
|
(1,000,250 |
) |
|
|
(1,016,280 |
) |
|
|
|
|
|
|
|
|
Net Increase in Cash |
|
|
1,129,081 |
|
|
|
1,102,688 |
|
|
Cash and Cash Equivalents at Beginning of
Period |
|
|
8,064,255 |
|
|
|
7,844,369 |
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
9,193,336 |
|
|
$ |
8,947,057 |
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow
Information: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
549 |
|
|
$ |
2,751 |
|
Income taxes |
|
|
2,670 |
|
|
|
957,768 |
|
|
Schedule of Non Cash Financing Activities: |
|
|
|
|
|
|
|
|
Dividends declared |
|
|
987,622 |
|
|
|
987,622 |
|
See Notes to Unaudited Consolidated Financial Statements.
6
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America (“GAAP”) for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements.
Operating results for the three and six month periods ended May 31, 2011 are not
necessarily indicative of the results that may be expected for the entire year ended
November 30, 2011. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company’s annual report on Form 10-K
for the year ended November 30, 2010 and to Note 13 regarding prior period adjustments.
The accompanying unaudited consolidated financial statements, in the opinion of
management, include all adjustments necessary for a fair presentation. All such
adjustments are of a normal recurring nature.
NOTE 2 — ORGANIZATION AND DESCRIPTION OF BUSINESS
CCA Industries, Inc. (“CCA”) was incorporated in the State of Delaware on March 25,
1983.
CCA manufactures and distributes health and beauty aid products.
CCA has several wholly-owned subsidiaries, CCA Cosmetics, Inc., CCA Labs, Inc., and
Berdell, Inc, all of which are currently inactive. CCA has two active wholly-owned
subsidiaries, CCA Online Industries, Inc., and CCA IND., S.A. DE C.V., a Variable
Capital Corporation organized pursuant to the laws of Mexico.
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of CCA and its wholly-owned
subsidiaries (collectively the “Company”). All significant inter-company accounts and
transactions have been eliminated.
Estimates and Assumptions:
The consolidated financial statements include the use of estimates, which management
believes are reasonable. The process of preparing financial statements in conformity
with GAAP requires management to make estimates and assumptions regarding certain types
of assets, liabilities, revenues, and expenses. Such estimates primarily relate to
unsettled transactions and events as of the date of the financial statements.
Accounting estimates and assumptions are those that management considers to be most
critical to the financial statements because they inherently involve significant
judgment and uncertainties. All of these estimates and assumptions reflect
management’s best judgment about current economic and market conditions and their
effects on the information available as of the
date of the consolidated financial statements. Accordingly, upon settlement, actual
results may differ from estimated amounts.
7
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive (Loss) Income:
Comprehensive (loss) income includes changes in equity that are excluded from the
consolidated statements of operations and are recorded directly into a separate section
of consolidated statements of comprehensive (loss) income. The Company’s accumulated
other comprehensive income (loss) shown on the consolidated balance sheets consist of
unrealized gains and losses on investment holdings, net of deferred tax expense or
benefit.
Cash and Cash Equivalents:
For purposes of the statement of cash flows, the Company considers all highly liquid
instruments purchased with an original maturity of less than three months to be cash
equivalents.
Short-Term Investments and Marketable Securities:
Short-term investments and marketable securities consist of certificates of deposits,
corporate and government bonds and equity securities. The Company has classified its
investments as Available-for-Sale securities. Accordingly, such investments are
reported at fair market value, with the resultant unrealized gains and losses reported
as a separate component of shareholders’ equity. Fair value for Available-for-Sale
securities is determined by reference to quoted market prices or other relevant
information.
Accounts Receivable:
Accounts receivable consist of trade receivables recorded at original invoice amount,
less an estimated allowance for uncollectible amounts. The accounts receivable balance
is further reduced by allowances for cooperative advertising and reserves for returns
which are anticipated to be taken as credits against the balances as of the balance
sheet date. The allowances and reserves which are anticipated to be deducted from
future invoices are included in accrued liabilities. Trade credit is generally extended
on a short term basis; thus trade receivables do not bear interest, although a finance
charge may be applied to receivables that are past due. Trade receivables are
periodically evaluated for collectability based on past credit history with customers
and their current financial condition. Changes in the estimated collectability of
trade receivables are recorded in the results of operations for the period in which the
estimate is revised. Trade receivables that are deemed uncollectible are offset
against the allowance for uncollectible accounts. The Company generally does not
require collateral for trade receivables.
8
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventories:
Inventories are stated at the lower of cost (weighted average) or market. Product
returns are recorded in inventory when they are received at the lower of their original
cost or market, as appropriate. Obsolete inventory is written off and its value is
removed from inventory at the time its obsolescence is determined.
Property and Equipment and Depreciation and Amortization:
Property and equipment are stated at cost. The Company charges to expense repairs and
maintenance items, while major improvements and betterments are capitalized.
When the Company sells or otherwise disposes of property and equipment items, the cost
and related accumulated depreciation are removed from the respective accounts and any
gain or loss is included in earnings.
Depreciation and amortization are provided utilizing the straight-line method over the
following estimated useful lives or lease terms of the assets, whichever is shorter:
|
|
|
Machinery and equipment |
|
5-7 Years |
Furniture and fixtures |
|
3-10 Years |
Tools, dies and masters |
|
3 Years |
Transportation equipment |
|
5 Years |
Leasehold improvements |
|
Remaining life of the lease (ranging from 1-12 years) |
Intangible Assets:
Intangible assets, which consist of trademarks and patents, are stated at cost.
Patents are amortized utilizing the straight-line method over a period of 17 years.
Such intangible assets are reviewed for potential impairment on a quarterly basis.
Web Site Costs:
Certain costs incurred in creating the graphics and content of the Company’s web site
have been capitalized in accordance with the Accounting Standards Codification (“ASC”)
Topic 350, “Intangibles — Goodwill and Other”, issued by the Financial Accounting
Standards Board (“FASB”). The Company had determined that these costs would be
amortized over a two-year period. Web site design and conceptual costs are expensed as
incurred.
Financial Instruments:
The carrying value of assets and liabilities considered financial instruments
approximate their respective fair value.
9
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes:
Income taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for future tax consequences attributable to the
temporary differences between the carrying amounts of assets and liabilities as
recorded on the Company’s financial statements and the carrying amounts as reflected on
the Company’s income tax return. In addition, the portion of charitable contributions
that cannot be deducted in the current period and are carried forward for future
periods are also reflected in the deferred tax assets. Deferred tax assets and
liabilities are valued using the tax rates expected to apply in the years in which
those temporary differences are expected to be recovered or settled. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management, it is
more likely than not that some portion, or all of the deferred tax asset will not be
realized.
Tax Credits:
Tax credits, when present, are accounted for using the flow-through method as a
reduction of income taxes in the years utilized.
Earnings Per Common Share:
Basic earnings per share are calculated in accordance with ASC Topic 260, “Earnings Per
Share”, which requires using the average number of shares of common stock outstanding
during the period. Diluted earnings per share is computed on the basis of the average
number of common shares outstanding plus the dilutive effect of any common stock
equivalents using the “treasury stock method”. Common stock equivalents consist of
stock options. Based on the stockholder protection rights agreement discussed in Note
No. 10, there is a potential dilution of earnings per common share if an acquirer
accumulated twenty percent (20%) or more of the outstanding common shares of the
Company.
Revenue Recognition:
The Company recognizes sales upon shipment of merchandise. Net sales comprise gross
revenues less expected returns, trade discounts, customer allowances and various sales
incentives. Although no legal right of return exists between the customer and the
Company, returns are accepted if it is in the best interests of the Company’s
relationship with the customer. The Company, therefore, records a reserve for returns
based on the historical returns as a percentage of sales in the five preceding months,
adjusting for returns that can be put back into inventory, and a specific reserve based
on customer circumstances. Those returns which are anticipated to be taken as credits
against the balances as of the balance sheet date are offset against the accounts
receivable. The reserves which are anticipated to be deducted from future invoices are
included in accrued liabilities.
10
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Sales Incentives:
In accordance with ASC Topic 605-10-S99, “Revenue Recognition”, the Company has
accounted for certain sales incentives offered to customers by charging them directly
to sales as opposed to advertising and promotional expense. These accounting
adjustments under ASC Topic 605-10-S99 do not affect net income.
Advertising Costs:
The Company’s policy for financial reporting is to charge advertising cost to expense
as incurred. Advertising, cooperative and promotional expenses for the three months
ended May 31, 2011 and May 31, 2010 were $1,784,845 and $2,353,530, respectively.
Advertising, cooperative and promotional expenses for the six months ended May 31, 2011
and May 31, 2010 were $3,448,793 and $3,905,037, respectively.
Shipping Costs:
The Company’s policy for financial reporting is to charge shipping costs as part of
selling, general and administrative expenses as incurred. Freight costs included for
the three months ended May 31, 2011 and May 31, 2010 were $803,338 and $681,604,
respectively. Freight costs included for the six months ended May 31, 2011 and 2010
were $1,400,016 and $1,317,320, respectively.
Stock Options:
In December 2004, the FASB issued ASC Topic 718, “Stock Compensation”. ASC Topic 718
requires stock grants to employees to be recognized in the consolidated statements of
operations based on their fair values.
Recent Accounting Pronouncements:
In January 2010, the FASB issued ASU 2010-06, which is an update to Topic 820, “Fair
Value Measurement and Disclosures”. This update establishes further disclosure
requirements regarding transfers in and out of levels 1 and 2, and activity in level 3
fair value measurements. The update also provides clarification as to the level of
disaggregation for each class of assets and liabilities, requires disclosures about
inputs and valuation techniques, and also includes conforming amendments to the
guidance on employers’ disclosures about postretirement benefit plan assets. ASU
2010-06 was effective for all interim and annual reporting periods beginning after
December 15, 2010. ASU 2010-06 did not have a material impact on the Company’s
financial position or results of operation.
In February 2010, the FASB issued ASU 2010-09, which is an update to Topic 855,
“Subsequent Events”. This update clarifies the date through which the Company is
required to evaluate subsequent events. SEC filers will be required to evaluate
subsequent events through the date that the financial statements are issued. ASU
2010-09 was effective
upon issuance, and did not have a material impact on the Company’s financial position
or results of operation.
11
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued):
In December 2010, the FASB issued ASU 2010-28, which is an update to Topic 350,
“Intangibles — Goodwill and Other”. This update provides additional guidance with
regard to performing goodwill impairment testing for reporting units with zero or
negative carrying amounts. ASU 2010-28 was effective for all interim and annual
reporting periods beginning after December 15, 2010. ASU 2010-28 did not have a
material impact on the Company’s financial position or results of operation.
In May 2011, the FASB issued ASU 2011-04, which is an update to Topic 820, “Fair Value
Measurement”. This update establishes common requirements for measuring fair value and
related disclosures in accordance with accounting principles generally accepted in the
United Sates and international financial reporting standards. This amendment did not
require additional fair value measurements. ASU 2011-04 is effective for all interim
and annual reporting periods beginning after December 15, 2011. ASU 2011-04 is not
expected to have a material impact on the Company’s financial position or results of
operation.
In June 2011, the FASB issued ASU 2011-05, which is an update to Topic 220,
“Comprehensive Income”. This update eliminates the option of presenting the
components of other comprehensive income as part of the statement of changes in
stockholders’ equity, requires consecutive presentation of the statement of net income
and other comprehensive income and requires reclassification adjustments from other
comprehensive income to net income to be shown on the financial statements. ASU
2011-05 is effective for all interim and annual reporting periods beginning after
December 15, 2011. ASU 2011-05 is not expected to have a material impact on the
Company’s financial position or results of operation.
Management does not believe that any other recently issued, but not yet effective,
accounting standards if currently adopted would have a material effect on the
accompanying financial statements.
12
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 — INVENTORIES
The components of inventory consist of the following:
|
|
|
|
|
|
|
|
|
|
|
May 31, |
|
|
November 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
5,655,160 |
|
|
$ |
5,773,121 |
|
Finished goods |
|
|
3,204,561 |
|
|
|
3,304,113 |
|
|
|
|
|
|
|
|
|
|
$ |
8,859,721 |
|
|
$ |
9,077,234 |
|
|
|
|
|
|
|
|
At May 31, 2011 and November 30, 2010, the Company had a reserve for obsolescence of
$1,017,188 and $1,372,798, respectively.
NOTE 5 — PROPERTY AND EQUIPMENT
The components of property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
May 31, |
|
|
November 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Machinery and equipment |
|
$ |
270,160 |
|
|
$ |
261,676 |
|
Furniture and equipment |
|
|
962,475 |
|
|
|
961,378 |
|
Tools, dies, and masters |
|
|
363,775 |
|
|
|
352,276 |
|
Capitalized lease obligations |
|
|
263,067 |
|
|
|
263,067 |
|
Web Site |
|
|
20,000 |
|
|
|
20,000 |
|
Leasehold improvements |
|
|
466,933 |
|
|
|
428,761 |
|
|
|
|
|
|
|
|
|
|
|
2,346,412 |
|
|
|
2,287,158 |
|
Less: Accumulated depreciation
and amortization |
|
|
1,833,882 |
|
|
|
1,736,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment — Net |
|
$ |
512,530 |
|
|
$ |
550,689 |
|
|
|
|
|
|
|
|
Depreciation expense for the three months ended May 31, 2011 and 2010 amounted to
$45,252 and $60,757, respectively. Depreciation expense for the six months ended May
31, 2011 and 2010 amounted to $97,413 and $124,425, respectively. Furniture and
equipment includes $132,550 of costs for computer equipment and software that has been
purchased, but not placed in service as of yet. No depreciation expense for these
assets will be recorded until they are placed in service.
13
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 — INTANGIBLE ASSETS
Intangible assets consist of owned trademarks and patents for ten product lines
|
|
|
|
|
|
|
|
|
|
|
May 31, |
|
|
November 30, |
|
|
|
2010 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Patents and trademarks |
|
$ |
822,896 |
|
|
$ |
822,896 |
|
Less: Accumulated amortization |
|
|
149,547 |
|
|
|
149,316 |
|
|
|
|
|
|
|
|
Intangible Assets — Net |
|
$ |
673,349 |
|
|
$ |
673,580 |
|
|
|
|
|
|
|
|
Patents are amortized on a straight-line basis over their legal life of 17 years and
trademarks are adjusted to realizable value for each quarterly reporting period.
Amortization expense for the three months ended May 31, 2011 and 2010 were $116 and
$557, respectively. Amortization expense for the six months ended May 31, 2011 and
2010 amounted to $231 and $1,092, respectively. Estimated amortization expense for the
years ending November 30, 2011, 2012, 2013, 2014 and 2015 will be $462, $462, $462, $439
and $421 respectively.
NOTE 7 — SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES
Short-term investments and marketable securities, which consist of fully guaranteed
bank certificates of deposit, stock and various corporate and government obligations,
are stated at market value. The Company has classified its investments as
Available-for-Sale securities and considers as current assets those investments which
will mature or are likely to be sold within the ensuing twelve months. The remaining
investments are considered non-current assets. The cost and market values of the
investments at May 31, 2011 and November 30, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2011 |
|
|
November 30, 2010 |
|
|
|
COST |
|
|
MARKET |
|
|
COST |
|
|
MARKET |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed bank
certificates of deposit |
|
$ |
240,000 |
|
|
$ |
240,497 |
|
|
$ |
816,000 |
|
|
$ |
821,836 |
|
Corporate
obligations |
|
|
— |
|
|
|
— |
|
|
|
200,000 |
|
|
|
202,364 |
|
U.S. Government
obligations
(including mortgage
backed securities) |
|
|
— |
|
|
|
— |
|
|
|
2,499,185 |
|
|
|
2,499,100 |
|
Preferred stock |
|
|
454,855 |
|
|
|
429,950 |
|
|
|
250,000 |
|
|
|
216,140 |
|
Common stock |
|
|
443,815 |
|
|
|
532,672 |
|
|
|
667,188 |
|
|
|
710,023 |
|
Limited Partnership |
|
|
223,373 |
|
|
|
226,910 |
|
|
|
— |
|
|
|
— |
|
Mutual funds |
|
|
215,274 |
|
|
|
203,990 |
|
|
|
215,273 |
|
|
|
187,639 |
|
Other equity |
|
|
70,206 |
|
|
|
39,205 |
|
|
|
70,202 |
|
|
|
36,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current |
|
|
1,647,523 |
|
|
|
1,673,224 |
|
|
|
4,717,848 |
|
|
|
4,673,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 — SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2011 |
|
|
November 30, 2010 |
|
|
|
COST |
|
|
MARKET |
|
|
COST |
|
|
MARKET |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate obligations |
|
|
750,000 |
|
|
|
754,085 |
|
|
|
750,000 |
|
|
|
748,629 |
|
Preferred stock |
|
|
2,186,142 |
|
|
|
2,218,695 |
|
|
|
2,391,002 |
|
|
|
2,375,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Current |
|
|
2,936,142 |
|
|
|
2,972,780 |
|
|
|
3,141,002 |
|
|
|
3,124,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,583,665 |
|
|
$ |
4,646,004 |
|
|
$ |
7,858,850 |
|
|
$ |
7,797,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of May 31, 2011, the Company had unrealized gains on its investments of $62,339.
This amount was reduced by a deferred tax (expense) of $(25,497), of which a $24,928
benefit was recorded in prior fiscal years and an (expense) of $(50,425) was recorded
in fiscal 2011. None of the unrealized losses have been deemed to be
other-than-temporary or temporary impairments, and are accounted for under
mark-to-market rules for Available-for-Sale securities. Please see Note 3 for further
information.
Bank certificates of deposit and interest bearing accounts are insured by the Federal
Deposit Insurance Corporation up to $250,000. Non-interest bearing accounts are
insured for the full balance under the Temporary Liquidity Guarantee Program. The
Company maintains accounts with several brokerage firms. The accounts contain cash and
securities. Balances are insured up to $500,000 (with a limit of $100,000 for cash) by
the Securities Investor Protection Corporation (SIPC).
The Company adopted ASC Topic 820, “Fair Value Measurements and Disclosures” as of
December 1, 2007, which expands disclosures about investments that are measured and
reported at fair market value. ASC Topic 820 established a fair value hierarchy that
prioritizes the inputs to valuations techniques utilized to measure fair value into
three broad levels as follows:
Level 1 — Quoted market prices in active markets for the identical asset or liability
that the reporting entity has ability to access at measurement date.
Level 2 — Quoted market prices for identical or similar assets or liabilities in
markets that are not active, and where fair value is determined through the use of
models or other valuation methodologies.
Level 3 — Unobserved inputs for the asset or liability. Fair value is determined by
the reporting entity’s own assumptions utilizing the best information available, and
includes situations where there is little market activity for the investment.
15
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 — SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
Significant |
|
|
|
|
|
|
|
Market Price |
|
|
Other |
|
|
|
|
|
|
|
in Active |
|
|
Observable |
|
|
|
May 31, |
|
|
Markets |
|
|
Inputs |
|
Description |
|
2011 |
|
|
(Level 1) |
|
|
(Level 2) |
|
Bank Certificates of Deposit |
|
$ |
240,497 |
|
|
$ |
— |
|
|
$ |
240,497 |
|
Corporate obligations |
|
|
754,085 |
|
|
|
— |
|
|
|
754,085 |
|
Preferred Stock |
|
|
2,648,645 |
|
|
|
2,648,645 |
|
|
|
— |
|
Common Stock |
|
|
532,672 |
|
|
|
532,672 |
|
|
|
— |
|
Limited Partnership |
|
|
226,910 |
|
|
|
226,910 |
|
|
|
— |
|
Mutual Funds |
|
|
203,990 |
|
|
|
203,990 |
|
|
|
— |
|
Other Equity |
|
|
39,205 |
|
|
|
— |
|
|
|
39,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,646,004 |
|
|
$ |
3,612,217 |
|
|
$ |
1,033,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
Significant |
|
|
|
|
|
|
|
Market Price |
|
|
Other |
|
|
|
|
|
|
|
in Active |
|
|
Observable |
|
|
|
November 30, |
|
|
Markets |
|
|
Inputs |
|
Description |
|
2010 |
|
|
(Level 1) |
|
|
(Level 2) |
|
Bank Certificates of Deposit |
|
$ |
821,836 |
|
|
$ |
— |
|
|
$ |
821,836 |
|
Corporate obligations |
|
|
950,993 |
|
|
|
— |
|
|
|
950,993 |
|
Government Obligations |
|
|
2,499,100 |
|
|
|
2,499,100 |
|
|
|
— |
|
Preferred Stock |
|
|
2,591,562 |
|
|
|
2,591,562 |
|
|
|
— |
|
Common Stock |
|
|
710,023 |
|
|
|
710,023 |
|
|
|
— |
|
Mutual Funds |
|
|
187,639 |
|
|
|
187,639 |
|
|
|
— |
|
Other Equity |
|
|
36,746 |
|
|
|
— |
|
|
|
36,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,797,899 |
|
|
$ |
5,988,324 |
|
|
$ |
1,809,575 |
|
|
|
|
|
|
|
|
|
|
|
16
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 — ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The following items, which exceeded 5% of total current liabilities, are included in
accounts payable and accrued liabilities as of:
|
|
|
|
|
|
|
|
|
|
|
May 31, |
|
|
November 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In Thousands) |
|
|
(In Thousands) |
|
a) Media advertising |
|
$ |
1,192 |
|
|
$ |
* |
|
b) Accrued returns |
|
|
1,335 |
|
|
|
1,317 |
|
c) Coop advertising |
|
|
1,080 |
|
|
|
1,610 |
|
d) Royalties ** |
|
|
781 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,388 |
|
|
$ |
2,927 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Did not exceed 5% of total liabilities at November 30, 2010. |
|
** |
|
Includes $695,000 related to the Alleghany claim (see Note 10). |
All other liabilities individually did not exceed 5% of total current liabilities.
NOTE 9 — OTHER INCOME
Other income consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ending |
|
|
Six Months Ending |
|
|
|
May 31, |
|
|
May 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income |
|
$ |
55,594 |
|
|
$ |
83,295 |
|
|
$ |
126,990 |
|
|
$ |
141,472 |
|
Royalty income |
|
|
20,867 |
|
|
|
45,000 |
|
|
|
108,832 |
|
|
|
90,000 |
|
Realized (loss) gain on
sale
of Bonds |
|
|
— |
|
|
|
(21,264 |
) |
|
|
815 |
|
|
|
(17,368 |
) |
Miscellaneous |
|
|
11,079 |
|
|
|
40,078 |
|
|
|
11,095 |
|
|
|
40,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
87,540 |
|
|
$ |
147,109 |
|
|
$ |
247,732 |
|
|
$ |
254,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 — COMMITMENTS AND CONTINGENCIES
Litigation
The Company has a license agreement with Alleghany Pharmacal Corporation (“Alleghany”),
which it entered into in 1986 for the use of certain trademarks, including Nutra Nail
and Hair Off. The license agreement provides that if, and when, in the aggregate,
$9,000,000 in royalties had been paid thereunder, the royalty rate for those products
charged at 6% would be reduced to 1%. The Company paid an aggregate of $9,000,000 in
royalties to Alleghany as of April 2003, and commencing on May 1, 2003, the license
royalty was reduced to 1%. On March 25, 2011, the Company received a letter
on behalf of Alleghany claiming that the Company was in default of the license
agreement, and that minimum annual royalties of $360,000 per year were due to Alleghany
for fiscal
2003 and subsequent years. The Company had understood since the inception of the
license agreement, that once the royalty rate was reduced to 1%, the minimum royalties
would end. The Company has reached a tentative settlement in which it agreed to a one-time payment to Alleghany of $600,000, an increase in the royalty rate from 1% to 2.5%, and a minimum annual royalty of $250,000 in order to settle this matter in full. Although management believed that the Company had a meritorious defense and could prevail in a court of law, it was decided to settle the dispute due to the risk of loss of two profitable core brands, “Nutra Nail” and “Hair Off”, and possible substantial liabilities that the Company estimated could be as high as $1,900,000. While the settlement agreement has not been finalized, a contingent liability of $695,000 was recorded in the second quarter of fiscal 2011 to reflect the anticipated costs of settling this matter, with the expense included in selling, general and administrative expenses in the statement of operations.
We may be subject to additional various claims, complaints and legal actions that arise
from time to time in the normal course of business. Other than as described above, we
do not believe we are party to any currently pending legal proceedings that will result
in a material adverse effect on our business. There can be no assurance that existing
or future legal proceedings arising in the ordinary course of business or otherwise
will not have a material adverse effect on our business, consolidated financial
position, results of operations or cash flows.
Dividends and Capital Transactions
On January 28, 2011, the board of directors declared a $0.07 per share dividend for the
first quarter ended February 28, 2011. The dividend was payable to all shareholders of
record as of February 10, 2011 and was paid on March 10, 2011.
On February 9, 2011, the Board of Directors of the Company declared a dividend, payable
to holders of record as of the close of business on February 22, 2011 of one preferred
stock purchase right (a Right) for each outstanding share of common stock, par value
$0.01 per share, and of Class A common stock, par value $0.01 per share, of the Company
(together, the Common Stock). In addition, the Company will issue one Right with each
new share of Common Stock issued. In connection therewith, on February 9, 2011, the
Company entered into a Stockholder Protection Rights Agreement (as amended from time to
time, the Rights Agreement) with American Stock Transfer & Trust Company LLC, as Rights
Agent, which has a term of one year, unless amended by the Board of Directors (and in
certain circumstances with certain stockholder approval) in accordance with the terms
of the Rights Agreement. The Rights will initially trade with and be inseparable from
our Common Stock and will not be evidenced by separate certificates unless they become
exercisable. Each Right entitles its holder to purchase from the Company one-hundredth
of a share of participating preferred stock having economic and voting terms similar to
the Common Stock
18
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 — COMMITMENTS AND CONTINGENCIES (Continued)
Dividends and Capital Transactions (Continued)
at an exercise price of $18 per Right, subject to adjustment in accordance with
the terms of the Rights Agreement, once the Rights become exercisable. Under the
Rights Agreement, the Rights become exercisable if any person or group acquires 20% or
more of
the Common Stock or, in the case of any person or group that owned 20% or more of the
Common Stock as of February 9, 2011, upon the acquisition of any additional shares by
such person or group. The Company, its subsidiaries, employee benefit plans of the
Company or any of its subsidiaries and any entity holding Common Stock for or pursuant
to the terms of any such plan are excepted. Upon exercise of the Right in accordance
with the
Rights Agreement, the holder would be able to purchase a number of shares of Common
Stock from the Company having an aggregate market price (as defined in the Rights
Agreement) equal to twice the then-current exercise price for an amount in cash equal
to the then-current exercise price. In addition, the Company may, in certain
circumstances and pursuant to the terms of the Rights Agreement, exchange the Rights
for one share of Common Stock or an equivalent security for each Right or,
alternatively, redeem the Rights for $0.001 per Right. The Rights will not prevent a
takeover of our Company, but may cause substantial dilution to a person that acquires
20% or more of the Company’s Common Stock.
On February 28, 2011, the Board of Directors of the Company declared a $0.07 per share
dividend for the second quarter ended May 31, 2011. The dividend was payable to all
shareholders of record as of May 2, 2011, and was paid on June 2, 2011.
Change of Control Agreements
On March 15, 2011, the compensation committee of the board of directors, acting on
behalf of the Company, entered into a Change of Control Agreement (together, the “COC
Agreements”) with each of Ira W. Berman and David Edell (the “Consultants”). Each of
Mr. Berman and Mr. Edell was employed as a senior executive of the Company until
December 31, 2010, at which point they each became consultants to the Company pursuant
to the terms of their respective Amended and Restated Employment Agreements, as amended
(each, an “Employment/Consulting Agreement”), which are listed as Exhibits 10.1 and
10.2 to the Company’s Annual Report on Form 10-K for the year ended November 30, 2010.
Messrs. Berman and Edell each are directors of the Company.
The COC Agreements contained identical terms and conditions to each other and provide
that, in the event of a Change of Control of the Company, each of the Consultants is
entitled to cease performing consulting services under his respective
Employment/Consulting Agreement, and is entitled to certain payments from the Company,
including a lump sum payment of all fees under the Employment/Consulting Agreement from
the date of occurrence of the Change of Control through the end of the original term of
that Employment/Consulting Agreement. In addition, upon on Change of Control, all of
the Consultants’ unvested awards under the Company’s equity-based compensation plans,
if any, automatically vest in full.
19
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 — COMMITMENTS AND CONTINGENCIES (Continued)
Change of Control Agreements (Continued)
Under the COC Agreements, each Consultant has agreed to a non-competition and
non-solicitation restriction for two years, during which two-year period the Consultant
is entitled to continued coverage under the Company’s group health, dental, long-term
disability and life insurance plans. The foregoing summary of the COC Agreements are
qualified in their entirety by the full text of the COC Agreements, copies of which may
be found in Form 8-K, filed by the Company with the United States Securities and
Exchange Commission on March 17, 2011.
Employment Agreements
On March 21, 2011, the compensation committee of the board of directors, acting on
behalf of the Company, entered into an Employment Agreement (each, an “Employment
Agreement”) with each of Dunnan Edell, Stephen A. Heit, and Drew Edell (each, an
“Executive”). Pursuant their respective Employment Agreements, Mr. Dunnan Edell has
been engaged to continue to serve as the Company’s President and Chief Executive
Officer, Mr. Heit has been engaged to continue to serve as the Company’s Executive Vice
President
and Chief Financial Officer, and Mr. Drew Edell has been engaged to continue to serve
as the Company’s Executive Vice President, Product Development and Production.
Mr. Dunnan Edell and Mr. Drew Edell are brothers and are the sons of David Edell, who
is a member of the Board of Directors of the Company and serves as a consultant to the
Company.
Except as set forth below, the Employment Agreements contain substantially similar
terms to each other. The term of employment under each of the Employment Agreements
runs from March 21, 2011 through December 31, 2013, and will continue thereafter for
successive one-year periods unless the Company or the Executive chooses not to renew
the respective Employment Agreement.
Under the respective Employment Agreements, the base salaries of Mr. Dunnan Edell, Mr.
Heit, and Mr. Drew Edell are $350,000, $250,000, and $275,000 per annum, respectively,
and may be increased each year at the discretion of the Company’s Compensation
Committee. The Executives are eligible to receive an annual performance-based bonus
under their respective Employment Agreement, and are entitled to participate in Company
equity compensation plans. In addition, each of the Executives will receive an
automobile allowance, health insurance and certain other benefits.
In the event of termination of the respective Employment Agreement as a result of the
disability or death of the Executive, the Executive (or his estate or beneficiaries)
shall be entitled to receive all base salary and other benefits earned and accrued
until such termination as well as a single-sum payment equal to the Executive’s base
salary and a single-sum payment equal to the value of the highest bonus earned by the
Executive in the
one-year period preceding the date of termination pro-rated for the number of days
served in that fiscal year.
20
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 — COMMITMENTS AND CONTINGENCIES (Continued)
Employment Agreements (Continued)
If the Company terminates the Executive for Cause (as defined in the respective
Employment Agreement), or the Executive terminates his employment in a manner not
considered to be for Good Reason, the Executive shall be entitled to receive all base
salary and other benefits earned and accrued prior to the date of termination. If the
Company terminates the Executive in a manner that is not for Cause or due to the
Executive’s death or disability, the Executive terminates his employment for Good
Reason, or the Company does not renew the Employment Agreement after December 31, 2013,
the Executive shall be entitled to receive a single-sum payment equal to his unpaid
base salary and other benefits earned and accrued prior to the date of termination and
a single-sum payment of an amount equal to three times (a) the average of the base
salary amounts paid to Executive over the three calendar years prior to the date of
termination, (b) if less than three years have elapsed between March 21, 2011 and the
date of termination, the highest base salary paid to the Executive in any calendar year
prior to the date of termination, or (c) if less than twelve months have elapsed
between March 21, 2011 and the date of termination, the highest base salary received in
any month times twelve. In addition, each Executive is entitled to certain benefits in
connection with a Change of Control (as defined in the respective Employment
Agreements).
Under the Employment Agreements, each Executive has agreed to non-competition
restrictions for a period of six months following the end of the term of his Employment
Agreement, during which period the Executive will be paid an amount equal to his base
salary for a period of six months, and an amount equal to the pro rata share of any
bonus attributable to the portion of the year completed prior to the date of
termination. The Executives have also agreed to confidentiality and non-solicitation
restrictions under the Employment Agreements.
The foregoing summary of the Employment Agreements are qualified in their entirety by
the full text of the Employment Agreements, copies of which may be found in Form 8-K
that was filed by Company on March 21, 2011 with the United States Securities and
Exchange Commission.
The Company also entered into an Employment Agreement with another Company executive,
who is not a “named executive officer” within the meaning of the Securities Exchange
Act of 1934, as amended and related regulations. The additional Employment Agreement
referred to in the preceding sentence contains substantially similar terms as the
Employment Agreements discussed above, except that the employee’s base salary is
$135,000 per annum.
21
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 — COMMITMENTS AND CONTINGENCIES (Continued)
Employment Agreements (Continued)
As a result of the execution of the Employment Agreements referred to above, the
Amended and Restated Employment Agreement, by and between Mr. Dunnan Edell and the
Company, effective as of December 1, 2002 and amended on February 10, 2007 and May 17,
2007, has been terminated. Similarly, as a result of the execution of the Employment
Agreement referred to above, the Amended and Restated Employment Agreement, by and
between Mr. Drew Edell and the Company, effective as of December 1, 2002 and amended on
February 10, 2007 and May 17, 2007, has also been terminated.
Collective Bargaining Agreement
The Company signed a collective bargaining agreement with Local 108, L.I.U. of N.A.,
AFL-CIO that became effective January 1, 2011. The agreement is effective for a one
year term expiring December 31, 2011. Other than standard wage, holiday, vacation and
sick day provisions, the agreement calls for CCA to contribute to the Recycling and
General Industrial Union Local 108 Welfare Fund (“Welfare Fund”) certain benefit costs.
The Welfare Fund provides medical, dental and life insurance for the Company’s
employees covered under the collective bargaining agreement. This agreement pertains
to 28% of the CCA labor force.
NOTE 11 — 401(K) PLAN
The Company has adopted a 401(K) Profit Sharing Plan that all employees with over one
year of service and have attained age 21 are eligible to join. Employees may make
salary reduction contributions up to twenty-five percent of compensation not to exceed
the federal government limits. The Plan allows for the Company to make discretionary
contributions. For all fiscal periods to date, the Company did not make any
contributions.
NOTE 12 — INCOME TAXES
CCA and its subsidiaries file a consolidated federal income tax return.
The Company previously adopted the provisions of ASC Subtopic 740-10-25, “Uncertain Tax
Positions”. Management believes that there were no unrecognized tax benefits, or tax
positions that would result in uncertainty regarding the deductions taken, as of May
31, 2011 and May 31, 2010. ASC Subtopic 740-10-25 prescribes a recognition threshold
and a measurement attribute for the financial statement recognition and measurement of
tax positions taken or expected to be taken in a tax return. For those benefits to be
recognized, a tax position must be more-likely-than-not to be sustained upon
examination by taxing authorities. There were no penalties or related interest for the
fiscal year to date ended May 31, 2011 or for the fiscal year to date ended May 31,
2010. The Company had no officer salaries that were not deductible for tax purposes
during the three months and six months ended May 31, 2011. During the three and six
months ended May 31, 2010, the Company had $214,139 and $381,872, respectively of
officer salaries that were not deductible for tax purposes in calculating the income
tax provision.
22
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 — INCOME TAXES (Continued)
As of May 31, 2011, the Company had unrealized gains on its investments of $62,339.
This amount was reduced by a deferred tax (expense) of $(25,497), of which a $24,928
benefit was recorded in prior fiscal years and an expense of ($50,425) was recorded
during fiscal 2011. The deferred tax expense has been recorded as part of the deferred
tax asset, and offset against the unrealized gains on marketable securities reported on
the consolidated balance sheets.
At May 31, 2011 and November 30, 2010, respectively, the Company had temporary
differences arising from the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
Classified As |
|
|
|
|
|
|
|
Deferred |
|
|
Short-Term |
|
|
Long- Term |
|
Type |
|
Amount |
|
|
Tax |
|
|
Asset |
|
|
(Liability) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
$ |
(282,202 |
) |
|
$ |
(115,421 |
) |
|
$ |
— |
|
|
$ |
(115,421 |
) |
Unrealized gain on
investments |
|
|
(62,339 |
) |
|
|
(25,497 |
) |
|
|
(25,497 |
) |
|
|
|
|
Reserve for bad debts |
|
|
36,731 |
|
|
|
15,023 |
|
|
|
15,023 |
|
|
|
— |
|
Reserve for returns |
|
|
999,601 |
|
|
|
408,837 |
|
|
|
408,837 |
|
|
|
— |
|
Reserve for obsolete
inventory |
|
|
1,017,188 |
|
|
|
416,030 |
|
|
|
416,030 |
|
|
|
— |
|
Vacation accrual |
|
|
354,818 |
|
|
|
145,121 |
|
|
|
145,121 |
|
|
|
— |
|
Net Operating Loss |
|
|
1,205,533 |
|
|
|
493,062 |
|
|
|
493,062 |
|
|
|
|
|
Charitable Contributions |
|
|
302,364 |
|
|
|
123,667 |
|
|
|
123,667 |
|
|
|
— |
|
Section 263A costs |
|
|
224,203 |
|
|
|
91,699 |
|
|
|
91,699 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred income taxes |
|
|
|
|
|
$ |
1,552,521 |
|
|
$ |
1,667,942 |
|
|
$ |
(115,421 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
Classified As |
|
|
|
|
|
|
|
Deferred |
|
|
Short-Term |
|
|
Long-Term |
|
Type |
|
Amount |
|
|
Tax |
|
|
Asset |
|
|
(Liability) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
$ |
(290,262 |
) |
|
$ |
(118,717 |
) |
|
$ |
— |
|
|
$ |
(118,717 |
) |
Unrealized loss on
investments |
|
|
60,950 |
|
|
|
24,929 |
|
|
|
24,929 |
|
|
|
— |
|
Reserve for bad debts |
|
|
24,739 |
|
|
|
10,119 |
|
|
|
10,119 |
|
|
|
— |
|
Reserve for returns |
|
|
1,238,510 |
|
|
|
506,551 |
|
|
|
506,551 |
|
|
|
— |
|
Reserve for obsolete
inventory |
|
|
1,372,798 |
|
|
|
561,474 |
|
|
|
561,474 |
|
|
|
— |
|
Vacation accrual |
|
|
251,083 |
|
|
|
102,693 |
|
|
|
102,693 |
|
|
|
— |
|
Net Operating Loss
(Restated) |
|
|
774,736 |
|
|
|
316,866 |
|
|
|
316,866 |
|
|
|
— |
|
Charitable Contributions |
|
|
285,221 |
|
|
|
116,655 |
|
|
|
116,655 |
|
|
|
— |
|
Section 263A costs |
|
|
284,831 |
|
|
|
116,496 |
|
|
|
116,496 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax |
|
|
|
|
|
$ |
1,637,066 |
|
|
$ |
1,755,783 |
|
|
$ |
(118,717 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 — INCOME TAXES (Continued)
Income tax expense consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Current tax (benefit) — Federal |
|
$ |
— |
|
|
$ |
(177,373 |
) |
Current tax (benefit) — State & Local |
|
|
(4,763 |
) |
|
|
(51,136 |
) |
Deferred tax (benefit) |
|
|
(201,006 |
) |
|
|
(210,616 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax (benefit) |
|
$ |
(205,769 |
) |
|
$ |
(439,125 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Current tax expense — Federal |
|
$ |
— |
|
|
$ |
152,308 |
|
Current tax expense — State & Local |
|
|
13,622 |
|
|
|
45,289 |
|
Deferred tax expense (benefit) |
|
|
34,120 |
|
|
|
(225,776 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax expense (benefit) |
|
$ |
47,742 |
|
|
$ |
(28,179 |
) |
|
|
|
|
|
|
|
Prepaid income taxes consist of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State & |
|
|
|
|
|
|
Federal |
|
|
Local |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2011 |
|
$ |
519,825 |
|
|
$ |
482,357 |
|
|
$ |
1,002,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2010 |
|
$ |
519,825 |
|
|
$ |
479,877 |
|
|
$ |
999,702 |
|
|
|
|
|
|
|
|
|
|
|
Income tax payable consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State & |
|
|
|
|
|
|
Federal |
|
|
Local |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2011 |
|
$ |
— |
|
|
$ |
15,000 |
|
|
$ |
15,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2010 |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
24
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 — INCOME TAXES (Continued)
A reconciliation of (benefit from) provision for income taxes computed at the statutory
rate to the effective rate for the three months ended May 31, 2011 and 2010 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
May 31, 2011 |
|
|
May 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
of Pretax |
|
|
|
Amount |
|
|
Amount |
|
|
Amount |
|
|
Income |
|
(Benefit from) Income taxes
at federal statutory rate |
|
$ |
(154,033 |
) |
|
|
(34.00 |
)% |
|
$ |
(458,903 |
) |
|
|
(34.00 |
)% |
Increases in taxes
resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal
income tax benefit |
|
|
(31,260 |
) |
|
|
(6.90 |
) |
|
|
(80,173 |
) |
|
|
(5.94 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-deductible expenses and
other adjustments |
|
|
(20,476 |
) |
|
|
(4.52 |
) |
|
|
99,951 |
|
|
|
7.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Benefit from) Income taxes
at effective rate |
|
$ |
(205,769 |
) |
|
|
(45.42 |
)% |
|
$ |
(439,125 |
) |
|
|
(32.53 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Six Months Ended |
|
|
|
May 31, 2011 |
|
|
May 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
of Pretax |
|
|
|
Amount |
|
|
Amount |
|
|
Amount |
|
|
Income |
|
Provision for (Benefit from)
Income taxes
at federal statutory rate |
|
$ |
48,817 |
|
|
|
34.00 |
% |
|
$ |
(135,053 |
) |
|
|
(34.00 |
)% |
Increases in taxes
resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal
income tax benefit |
|
|
9,907 |
|
|
|
6.90 |
|
|
|
(23,595 |
) |
|
|
(5.94 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-deductible expenses and
other adjustments |
|
|
(10,982 |
) |
|
|
(7.65 |
) |
|
|
130,469 |
|
|
|
32.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for (Benefit from)
Income taxes
at effective rate |
|
$ |
47,742 |
|
|
|
33.25 |
% |
|
$ |
(28,179 |
) |
|
|
(7.09 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
25
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 — PRIOR PERIOD ADJUSTMENT
An error was discovered in the November 2010 financial statements, whereby accounts
payable was overstated by $595,087. This error occurred over several years originating
prior to fiscal 2006, and was not material in any one year. This error has also
resulted in a reduction of the current deferred tax asset by $243,391 due to the
decrease in the net operating loss carried forward. The cumulative effect of the
change resulted in an increase of $351,695 to retained earnings as of November 30,
2010. Management reviewed this adjustment from both a quantitative and qualitative
basis, and does not believe this adjustment is material to the financial statements.
Accordingly the previously filed 10-K for the year ended November 30, 2010 will not be
amended. If the 10-K was amended, it would have reflected an additional expense in
fiscal 2010 of $13,796, additional income of $53,266 in fiscal 2009, and an additional
expense of $6,441 for fiscal 2008. No adjustment to earnings (loss) per share would
have been required for the fiscal years 2010, 2009, and 2008. The following are the
original and revised amounts:
CONSOLIDATED BALANCE SHEETS
As of November 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original |
|
|
Revised |
|
|
Change |
|
Deferred Income Tax |
|
$ |
1,999,174 |
|
|
$ |
1,755,783 |
|
|
$ |
(243,391 |
) |
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
|
36,555,590 |
|
|
|
36,312,199 |
|
|
|
(243,391 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Payable |
|
|
9,101,365 |
|
|
|
8,506,279 |
|
|
|
(595,086 |
) |
Retained Earnings |
|
|
24,454,779 |
|
|
|
24,806,474 |
|
|
|
351,695 |
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders’ Equity |
|
$ |
36,555,590 |
|
|
$ |
36,312,199 |
|
|
$ |
(243,391 |
) |
|
|
|
|
|
|
|
|
|
|
NOTE 14 — SUBSEQUENT EVENTS
On July 5, 2011, the Board of Directors of the Company approved a $0.07 per share
dividend for the third quarter ending August 31, 2011, payable to all shareholders as
of August 2, 2011 and to be paid on September 2, 2011.
The Company had received a letter from Alleghany on March 25, 2011,
in which Alleghany claimed that the Company was in default of the license
agreement and that the Company owed a minimum royalty of $360,000 per year
for the fiscal 2003 and subsequent years. It had been the Company’s understanding that the former
management of Alleghany had agreed to eliminate any minimum annual royalty payments when the
royalty rate was reduced from six percent (6%) to one percent (1%) in April 2003.
The Company has reached a tentative settlement in which it agreed to a one-time payment
to Alleghany of $600,000, an increase in the royalty rate from 1% to 2.5%, and a minimum
annual royalty of $250,000 in order to settle this matter in full.
26
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 — SUBSEQUENT EVENTS (continued)
Although management
believed that the Company had a meritorious defense and could prevail in a court of law, it was decided to
settle the dispute due to the risk of loss of two profitable core brands, “Nutra Nail” and “Hair Off”, and possible substantial liabilities that the Company estimated could be as high as $1,900,000. While the settlement agreement has not been finalized, a contingent liability of $695,000 was recorded in the second quarter of fiscal 2011 to reflect the anticipated costs of settling this matter, with the expense included in selling, general and administrative expenses in the statement of operations.
27
|
|
|
ITEM 2. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (UNAUDITED) |
Except for historical information contained herein, this “Management’s Discussion and Analysis
of Results of Operations and Financial Condition” contains forward-looking statements. These
statements involve known and unknown risks and uncertainties that may cause actual results or
outcomes to be materially different from any future results, performances or achievements expressed
or implied by such forward-looking statements, and statements which explicitly describe such
issues. Investors are urged to consider any statement labeled with the terms “believes,”
“expects,” “intends’” or “anticipates” to be uncertain and forward-looking. No assurance can be
given that the results in any forward-looking statement will be achieved and actual results could
be affected by one or more factors, which could cause them to differ materially. For these
statements, we claim the protection of the safe harbor for forward-looking statements contained in
the Private Securities Litigation Reform Act.
OVERVIEW
The Company had, for the three month period ended May 31, 2011, a net loss of $(247,268) as
compared to a net loss of $(910,589) for the same period in 2010. The second quarter financial
results were materially impacted by the recording of a contingent liability in the amount of
$695,000 as a result of the settlement of the Alleghany claim (see Note 10, Commitments and
Contingencies, and Note 14, Subsequent Events, for further information). The second quarter
results were further impacted by the allocation of consulting expense pursuant to the employment
agreements of David Edell and Ira Berman (see operating results analysis below for further
details). This resulted in an additional expense to the Company of $215,312 during the second
quarter of 2011, to be offset by a lower expense in the second half of 2011. Net sales for the
second quarter of fiscal 2011 were $12,797,773 as compared to $14,708,108 for the same period in
fiscal 2010. The Company had, for six month period ended May 31, 2011, net income of $95,837, as
compared to a net loss of $(369,035) for the same period in 2010. As mentioned above, the results
for the first six months of 2011 were materially impacted by the Alleghany claim, as well as the
allocation of consulting expense pursuant to the employment agreements of David Edell and Ira
Berman resulting in an extra expense of $645,936, which will be offset by a lower expense in the
second half of 2011. The Company’s balance sheet as of May 31, 2011 reflects $31,153,619 in
current assets and $8,906,761 in current liabilities. The Company does not have any loan or line
of credit bank debt.
OPERATING RESULTS FOR THE THREE MONTHS ENDED MAY 31, 2011
For the three-month period ended May 31, 2011, the Company had total revenues of $12,885,313
and a net loss of $(247,268) after (benefit from) income taxes of $(205,771). For the same three
month period in 2010, total revenues were $14,855,217 and the net loss was $(910,589) after a
(benefit from) income taxes of $(439,125). Basic and fully diluted losses per share were $(0.04)
for the second quarter of 2011 as compared to basic and fully diluted losses per share of $(0.13)
for the second quarter of 2010. In accordance with ASC Topic 605-10-S99, “Revenue Recognition”,
the Company has accounted for certain sales incentives offered to customers by charging them
directly to sales as opposed to advertising and promotional expenses. Net sales for the second
quarter of 2011 were reduced by $1,383,690 and offset by an equal reduction of trade promotional
expenses, which were included in the Company’s advertising expense budget. In the same period of
the prior year, net sales were reduced by $1,858,394 and trade promotion was credited by that
amount. These accounting adjustments under ASC Topic 605-10-S99 do not affect net income.
28
|
|
|
ITEM 2. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (UNAUDITED)
(CONTINUED) |
The Company’s net sales decreased to $12,797,773 for the three-month period ended May 31, 2011
from $14,708,108 for the three-month period ended May 31, 2010. The following were factors that
affected net sales:
|
• |
|
Gross sales were impacted by lower sales of the Company’s diet and nail care products
offset by higher sales of oral care products. |
|
|
• |
|
Sales of the Company’s diet products continued to decrease as compared to the second
quarter of 2010. This is consistent with the impact of the economic recession that has
resulted in a continued nation-wide trend of lower sales for all diet brands. |
|
|
• |
|
Oral care gross sales were higher in the second quarter of 2011 as compared to the same
period in 2010 due to a manufacturing problem that resulted in the voluntary recall of the
Plus White whitening gel which affected the second quarter 2010 sales. The Company
believes that the manufacturing problem has now been corrected. |
|
|
• |
|
Sales returns and allowances, not including sales incentives, were 9.97% of gross sales
for the three-month period ended May 31, 2011 as compared to 11.88% for the same period
last year. |
|
|
• |
|
Sales incentives, consisting of co-operative advertising with the Company’s retail
partners and coupons, decreased by $474,703 for the second quarter of 2011 as compared to
the same period in 2010. |
Included in sales incentives is the cost of the coupons issued by the Company, which was
$245,983 in the second quarter of 2011 as compared to $245,005 in the second quarter of 2010. The
Company uses a national clearing house for the receipt and processing of coupons from our retail
partners. The national clearing house renders invoices to the Company on a weekly basis for
coupons that they have processed which are recorded as an expense in the period for which the
invoice is dated. The Company also records an expense accrual at the end of each period equal to
the prior six weeks of invoices rendered based on information from the national clearing house that
there is an average lag time of six weeks between the time that the retailer receives the coupon
and when the Company receives the invoice. The amount recorded as an expense or an accrual
includes the retailer cost of the coupon in addition to any processing charges by the national
coupon clearing house. Coupons are issued by the Company to be used with the purchase of specific
products, with an expiration date noted on the coupon.
The following table is the Company’s net sales by category for the second quarter of 2011 as
compared to the second quarter of 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
May 31, 2011 |
|
|
May 31, 2010 |
|
Category |
|
Net Sales |
|
|
|
|
|
|
Net Sales |
|
|
|
|
|
|
Skin Care |
|
$ |
4,647,005 |
|
|
|
36.3 |
% |
|
$ |
4,749,930 |
|
|
|
32.3 |
% |
Dietary Supplement |
|
|
3,438,148 |
|
|
|
26.8 |
% |
|
|
5,517,103 |
|
|
|
37.5 |
% |
Oral Care |
|
|
3,207,422 |
|
|
|
25.2 |
% |
|
|
1,966,020 |
|
|
|
13.4 |
% |
Nail Care |
|
|
936,234 |
|
|
|
7.3 |
% |
|
|
1,757,105 |
|
|
|
11.9 |
% |
Fragrance |
|
|
218,232 |
|
|
|
1.7 |
% |
|
|
393,398 |
|
|
|
2.7 |
% |
Analgesic |
|
|
168,688 |
|
|
|
1.3 |
% |
|
|
232,267 |
|
|
|
1.6 |
% |
Hair Care and Misc. |
|
|
182,044 |
|
|
|
1.4 |
% |
|
|
92,285 |
|
|
|
0.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,797,773 |
|
|
|
100.00 |
% |
|
$ |
14,708,108 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
ITEM 2. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (UNAUDITED)
(CONTINUED) |
The Company makes every effort to control the cost of manufacturing and has had no substantial
cost increases. The Company outsources its manufacturing to outside contract manufacturers. The
gross margin for the second quarter of 2011 was 61.0%, as compared to 58.4% for the second quarter
of 2010. The gross margin was higher due to lower sales returns and allowances and lower sales
incentives during the second quarter of 2011 as compared to the same period in 2010.
Selling, general and administrative expenses were $806,295 higher in the second quarter of
2011 as compared to the same period in 2010. The following are factors that resulted in the higher
expense:
|
• |
|
The Company recorded an expense in the amount of $695,000 reflecting the
contingent liability related to the Alleghany claim (see Note 10, Commitments and
Contingencies, and Note 14, Subsequent Events, for information regarding the
claim). |
|
|
• |
|
The Company incurred legal and other expenses of $142,211 as a result of the
Company’s response to the SEC filings of Biglari Holdings, Inc. and related parties.
The Company does not expect to have any further legal costs in connection with this
matter. |
|
|
• |
|
Health insurance costs were $61,955 higher in the second quarter of 2011 as
compared to the same period in 2010. |
The Company incurred consulting expense of $538,280 in the second quarter of 2011. The
payments were made pursuant to the employment contracts of Ira Berman and David Edell that expired
on December 31, 2011. The contracts provided for consulting payments to be made for a five year
period, after expiration of the respective employment agreements. The payments for fiscal 2011
were to be equal to fifty percent (50%) of the prior year salary and bonus, plus certain other
benefits. In accordance with GAAP, the payments due for the entire fiscal 2011 year were recorded
as an expense during the first and second quarter of 2011, and accordingly, no expense will be
recorded in the third and fourth quarter of 2011.
Advertising expense was $1,784,845 for the quarter ended May 31, 2011 as compared to
$2,353,530 for the quarter ended May 31, 2010, or a decrease of $568,685. This was due to lower
media expenditures, and lower expenditures for co-operative advertising with the Company’s retail
partners that is classified as an advertising expense rather than a sales incentive. The
Company’s advertising expense changes from quarter to quarter based on the timing of the Company’s
promotions.
The Company recorded an advertising litigation expense of $2,067,407 for the three month
period ended May 31, 2010. This expense was a result of the class action lawsuit, “Wally v. CCA”,
alleging false and misleading advertisement of the Company’s dietary supplement, which was
commenced in the Superior Court of the State of California, County of Los Angeles, on September 29,
2009. This matter was settled in fiscal 2010, with no further expense other than minor legal costs
for follow up anticipated.
30
|
|
|
ITEM 2. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (UNAUDITED)
(CONTINUED) |
The loss before taxes was $(453,039) for the quarter ended May 31, 2011 as compared to a
pre-tax loss of $(1,349,714) for the same quarter in 2010. As previously disclosed, the expense of
$695,000 for the Alleghany claim, together with $142,211 of excess legal
costs related to a potential shareholder action had a material effect on the second quarter
results. The effective tax rate for the (benefit from) income taxes for the second quarter of 2011
was (45.4)% versus (32.5)% for the second quarter of 2010. The (benefit from) income taxes
included non-deductible expenses and adjustments that increased the (benefit from) income taxes by
$(20,476) or (4.5)% of the pre-tax loss for the second quarter of 2011 as compared to an adjustment
that decreased the (benefit from) income taxes by $99,951 or 7.4% of pre-tax income for the same
period in fiscal 2010. During the second quarter ended May 31, 2011 and 2010, there was $0 and
$214,139, respectively of officer salaries incurred that were not deductible for tax purposes in
calculating the income tax provision.
OPERATING RESULTS FOR THE SIX MONTHS ENDED MAY 31, 2011
For the six month period ended May 31, 2011, the Company had total revenues of
$25,456,419 and net income of $95,837 after provision for income taxes of $47,742. For the same
six month period in 2010, total revenues were $28,053,503 and the net loss was $(369,035) after a
(benefit from) income taxes of $(28,179). Basic and fully diluted earnings per share were $0.01
for the six months ended May 31, 2011 as compared to basic and fully diluted losses per share of
$(0.05) for the same period in 2010. In accordance with ASC Topic 605-10-S99, “Revenue
Recognition”, the Company has accounted for certain sales incentives offered to customers by
charging them directly to sales as opposed to advertising and promotional expenses. Net sales for
the first six months of 2011 were reduced by $2,633,552 and offset by an equal reduction of trade
promotional expenses, which were included in the Company’s advertising expense budget. In the same
period of the prior year, net sales were reduced by $3,508,863 and trade promotion was credited by
that amount. These accounting adjustments under ASC Topic 605-10-S99 do not affect net income.
The Company’s net sales decreased $2,590,598 to $25,208,687 for the six month period ended May
31, 2011 from $27,799,285 for the six month period ended May 31, 2010. The Company’s gross sales
and net sales of its diet products were $2,737,789 and $2,230,688, respectively, lower in the first
six months of 2011 as compared to the same period in 2010. This is consistent with a nation-wide
trend of lower sales for all diet brands in the United States and the continuing economic
recession. In addition, the Company has experienced decreased sales in its nail care products
offset by increased sales of its oral care products. Sales returns and allowances, not including
sales incentives, were 8.0% of gross sales for the six month period ended May 31, 2011 as compared
to 9.6% for the same period last year. Sales incentives consist of co-operative advertising with
the Company’s retail partners and coupons. The amount of co-operative advertising included in sales
incentives decreased by $875,311 for the first half of 2011 as compared to the same period in 2010.
The cost of the coupons issued by the Company was $424,572 for the first six months of 2011 as
compared to $339,798 for the same period in 2010. The increased coupon expense took place in the
first quarter of 2011.
31
|
|
|
ITEM 2. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (UNAUDITED)
(CONTINUED) |
The following table is the Company’s net sales by category for the first six months of 2011 as
compared to the first six months of 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Six Months Ended |
|
|
|
May 31, 2011 |
|
|
May 31, 2010 |
|
Category |
|
Net Sales |
|
|
|
|
|
|
Net Sales |
|
|
|
|
|
Skin Care |
|
$ |
8,333,607 |
|
|
|
33.1 |
% |
|
$ |
8,459,792 |
|
|
|
30.4 |
% |
Dietary Supplement |
|
|
8,266,825 |
|
|
|
32.8 |
% |
|
|
10,497,513 |
|
|
|
37.8 |
% |
Oral Care |
|
|
5,443,914 |
|
|
|
21.6 |
% |
|
|
4,473,071 |
|
|
|
16.1 |
% |
Nail Care |
|
|
2,039,370 |
|
|
|
8.1 |
% |
|
|
3,095,115 |
|
|
|
11.1 |
% |
Fragrance |
|
|
548,201 |
|
|
|
2.1 |
% |
|
|
656,369 |
|
|
|
2.4 |
% |
Analgesic |
|
|
252,211 |
|
|
|
1.0 |
% |
|
|
460,354 |
|
|
|
1.7 |
% |
Misc. |
|
|
324,559 |
|
|
|
1.3 |
% |
|
|
157,071 |
|
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,208,687 |
|
|
|
100.00 |
% |
|
$ |
27,799,285 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company makes every effort to control the cost of manufacturing and has had no
substantial cost increases. The gross margin for the six months ended May 31, 2011 was 61.4%, as
compared to 59.9% for the same period in 2010. The gross margin increase was a result of lower
returns and sales incentives.
Selling, general and administrative expenses were $854,436 higher in the first six months of
2011 as compared to the same period in 2010. The following are factors that resulted in the higher
expense:
|
• |
|
The Company recorded an expense in the amount of $695,000 reflecting the contingent liability related to
the Alleghany claim in the second quarter of 2011 (see Note 10,
Commitment and Contingencies, and Note 14, Subsequent Events, for information
regarding the claim). |
|
|
• |
|
The Company incurred legal and other expenses of $303,975 as a result of the
Company’s response to the SEC filings of Biglari Holdings, Inc. and related parties.
The Company does not expect to have any further legal costs in connection with this
matter. |
|
|
• |
|
Health insurance costs were $111,050 higher in the first half of 2011 as compared
to the same period in 2010. |
The Company incurred consulting expense of $1,291,871 in the first half of 2011. The payments
were made pursuant to the employment contracts of Ira Berman and David Edell that expired on
December 31, 2011. The contracts provided for consulting payments to be made for a five year
period, after expiration of the respective employment agreements. The payments for fiscal 2011
were to be equal to fifty percent (50%) of the prior year salary and bonus, plus certain other
benefits. In accordance with GAAP, the payments due for the entire fiscal 2011 year were recorded
as an expense during the first and second quarter of 2011, and accordingly, no expense will be
recorded in the third and fourth quarter of 2011.
32
|
|
|
ITEM 2. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (UNAUDITED)
(CONTINUED) |
Advertising expense was $3,448,793 for the six months ended May 31, 2011 as compared to
$3,905,037 for the six months ended May 31, 2010. Of this amount, $598,695 was due to lower
co-operative advertising that is classified as a selling expense. The Company’s advertising
expense changes from quarter to quarter based on the timing of the Company’s promotions.
The Company recorded an advertising litigation expense of $2,129,043 for the six month period
ended May 31, 2010, of which $2,067,407 was incurred in the second quarter of 2010. This expense
was a result of the class action lawsuit, “Wally v. CCA”, alleging false and misleading
advertisement of the Company’s dietary supplement, which was commenced in the Superior Court of the
State of California, County of Los Angeles, on September 29, 2009. This matter was settled in
fiscal 2010, with no further expense other than minor legal costs anticipated.
Income before the provision for income taxes was $143,579 for the six months ended May 31,
2011 as compared to a pre-tax loss of $(397,214) for the same period in 2010. As previously
disclosed, the expense of $695,000 for the Alleghany claim, together with
$303,975 of excess legal costs related to a potential shareholder action had a material effect on
the results for the six months ended May 31, 2011. The effective tax rate for the six months
ended May 31, 2011 was 33.3% versus (7.1) % for the six months ended May 31, 2010. The provision
for income taxes included non-deductible expenses and adjustments that decreased the provision for
income taxes by $11,082 or (7.6)% of pre-tax income for the first six months of 2011 as compared to
a decrease in the (benefit from) income taxes of $130,469 or 32.85% of the pre-tax loss for the
same period in fiscal 2010. During the six months ended May 31, 2011 and 2010, there was $0 and
$381,873, respectively of officer salaries incurred that were not deductible for tax purposes in
calculating provision for (benefit from) income taxes.
FINANCIAL POSITION AS OF MAY 31, 2011
The Company’s financial position as of May 31, 2011 consisted of current assets of $31,153,619
and current liabilities of $8,906,761, or a current ratio of 3.5 to 1. The Company’s cash and cash
equivalents were $9,193,336 as of May 31, 2011, an increase of $1,129,081 from November 30, 2010.
Included in this increase was net cash (used in) operating activities of $(1,087,414) and net cash
provided by investing activities of $3,216,745 offset by net cash (used in) financing activities of
$(1,000,250). Included in the net cash used in financing activities was $987,622 of dividends paid
to shareholders.
As of May 31, 2011, the Company had $1,673,224 of short term marketable securities and
$2,972,780 of non-current securities. The Company’s cash and cash equivalents together with both
short and long term marketable securities, net of current liabilities were $4,932,579 as of May 31,
2011. Please refer to Note 7 of our consolidated financial statements of this Quarterly report on
Form 10-Q for further information regarding the Company’s investments.
33
|
|
|
ITEM 2. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (UNAUDITED)
(CONTINUED) |
Accounts receivable increased to $7,869,255 as of May 31, 2011 from $5,990,010 as of November
30, 2010. Included in net accounts receivable are reserves for returns and allowances of $999,601
and allowances for doubtful accounts of $36,731. In addition, accrued liabilities include
$1,080,438 which
is an estimate of co-operative advertising expense relating to fiscal 2011 sales which are
anticipated to be deducted from future invoices rather than against the current accounts
receivable. Any changes in this accrued liability are recorded as a debit or credit to the reserve
for returns and allowances account. The gross accounts receivable as of May 31, 2011 was higher as
compared to the balance on November 30, 2009 due to the timing of the Company’s sales.
Inventory decreased to $8,859,721 as of May 31, 2011 from $9,077,234 as of November 30, 2010.
The inventory obsolescence reserve decreased to $1,017,188 as of May 31, 2011 from $1,372,798 as
of November 30, 2010. Changes to the inventory obsolescence reserves are recorded as an increase
or decrease to the cost of goods.
The Company had an insurance claim receivable of $361,639 as of November 30, 2010 as result of
a settlement between the Company and its insurance carrier in regard to liability insurance
coverage of the advertising litigation, “Wally vs. CCA”. The insurance claim was paid during the
first quarter of 2011.
Prepaid income taxes increased to $1,002,182 as of May 31, 2011 from $999,702 as of November
30, 2010. Due to the net operating loss carry forward from fiscal 2010, the Company has not been
required to make any estimated tax payments other than certain minimum tax payments required by
certain states.
The deferred income tax asset decreased to $1,667,942 as of May 31, 2011 from $1,755,783 as of
November 30, 2010. The decrease was mainly due to the utilization of a portion of the net
operating loss during fiscal 2011 and changes in tax estimates. The Company expects that all of
the deferred tax assets will be realized within the next twelve month period subsequent to May 31,
2011. The deferred tax assets include $25,497 of deferred tax liability related to the Company’s
unrealized gains of $62,339 on its investments as of May 31, 2011. The unrealized gains reported
on the balance sheet were $36,842, which is net of the deferred tax liability. The long-term
deferred tax liability decreased to $115,421 at May 31, 2011 as compared to $118,717 as of November
30, 2010. The liability is due to the difference in depreciation between the Company’s books and
income tax returns.
Accounts payable and accrued liabilities decreased to $8,391,506 as of May 31, 2011 from
$8,506,279 as of November 30, 2010. Included in this balance was the recording of a liability of
$695,000 during the second quarter of 2011 as a result of the Alleghany claim. Please see
Note 10, Commitment and Contingencies, and Note 14, Subsequent Events for further information
regarding the claim.
Shareholders’ equity decreased to $26,351,124 as of May 31, 2011 from $27,170,046 as of
November 30, 2010. The decrease was due to the dividends declared of $987,622 during the first six
months ended May 31, 2011, offset partially by net income of $95,837 and unrealized gains on its
investments of $72,863 during the same period. Unrealized holding gains or losses are recorded as
other comprehensive income.
34
|
|
|
ITEM 2. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (UNAUDITED)
(CONTINUED) |
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is defined as the ability to generate adequate amounts of cash to meet short-term
and long-term business needs. We assess our liquidity in terms of our total cash flow and the
amounts of cash, short-term and long-term marketable securities on hand. Significant factors that
could affect our liquidity include the following:
|
• |
|
Cash flow generated or used by operating activities; |
|
|
• |
|
Dividend payments; |
|
|
• |
|
Capital expenditures; |
|
|
• |
|
Acquisitions. |
Our primary capital needs are seasonal working capital requirements and dividend payments. In
addition, funds are kept on hand for any potential acquisitions, which the Company continues to
explore. As of May 31, 2011, the Company had $9,193,336 of cash and cash equivalents, $1,673,224
of short term marketable securities and $2,972,780 of non-current securities. Total liabilities
were $9,026,454 as of May 31, 2011. Please refer to Note No. 7 of the financial statements for
further information regarding the Company’s investments. The Company’s long term liabilities as of
May 31, 2011, consisted of deferred tax liability of $115,421 and long-term capitalized lease
obligations of $4,272. The Company does not have any bank debt or a bank line of credit. Due to
the amount of cash and marketable securities on-hand, the Company does not believe that it needs
the availability of a bank line of credit at this time.
|
|
|
ITEM 3. |
|
QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK |
The Company’s financial statements record the Company’s investments under the “mark to market”
method (i.e., at date-of-statement market value). The investments are, categorically listed, in
“Fully Guaranteed Bank Certificates of Deposit”, “Common Stock”, “Mutual Funds”, “Other Equity”,
“Preferred Stock”, “Government Obligations” and “Corporate Obligations.” $798,787 of the Company’s
$4,646,004 portfolio of investments (approximate, as at May 31, 2011) is invested in the “Common
Stock”, “Limited Partnership” and “Other Equity” categories, and approximately $2,648,645 in the
Preferred Stock holdings category. The Company invests in various investment securities.
Investment securities are exposed to various risks such as interest rates, market and credit risks.
Due to the level of risk associated with certain investment securities, it is at least reasonably
possible that changes in the values of investment securities will occur in the near term. The
Company does not take positions or engage in transactions in risk-sensitive market instruments in
any substantial degree, nor as defined by SEC rules and instructions, however, due to current
securities market conditions, the Company cannot ascertain the risk of any future change in the
market value of its’ investments.
35
|
|
|
ITEM 4. |
|
CONTROLS AND PROCEDURES |
An evaluation was performed under the supervision of the Company’s management, including the
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Company’s disclosure controls and procedures (as defined in the Exchange Act Rules
13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based on that
evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial
Officer, concluded that, as of May 31, 2011, the Company’s disclosure controls and procedures were
effective to ensure that information we are required to disclose in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms, and is accumulated and
communicated to our management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.
Notwithstanding the foregoing, there can be no assurance that the Company’s disclosure
controls and procedures will detect or uncover all failures of persons within the Company to
disclose material information otherwise required to be set forth in the Company’s periodic reports.
There are inherent limitations to the effectiveness of any system of disclosure controls and
procedures, including the possibility of human error and the circumvention or overriding of the
controls and procedures. Accordingly, even effective disclosure controls and procedures can only
provide reasonable, not absolute, assurance of achieving their control objectives.
There have been no changes in the Company’s internal control over financial reporting during
the quarterly period ended May 31, 2011 that have materially affected, or is reasonably likely to
materially affect, the Company’s internal control overall financial reporting.
36
CCA INDUSTRIES, INC.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company had received a letter from Alleghany on March 25, 2011, in which Alleghany claimed
that the Company was in default of the license agreement and that the Company owed a minimum
royalty of $360,000 per year for the fiscal 2003 and subsequent years. It had been the Company’s
understanding that the former management of Alleghany had agreed to eliminate any minimum annual
royalty payments when the royalty rate was reduced from six percent (6%) to one percent (1%) in
April 2003. The Company has reached a tentative settlement in which it agreed to a one-time
payment to Alleghany of $600,000, an increase in the royalty rate from 1% to 2.5%, and a minimum
annual royalty of $250,000 in order to settle this matter in full. Although management believed
that the Company had a meritorious defense and could prevail in a court of law, it was decided to
settle the dispute due to the risk of loss of two profitable core brands, “Nutra Nail” and “Hair
Off”, and possible substantial liabilities that the Company estimated could be as high as
$1,900,000. While the settlement agreement has not been finalized, a contingent liability of
$695,000 was recorded in the second quarter of fiscal 2011 to reflect the anticipated costs of
settling this matter, with the expense included in selling, general and administrative expenses in
the statement of operations.
In reviewing the agreements included as exhibits to this Form 10-Q, please remember that they
are included to provide you with information regarding their terms and are not intended to provide
any other factual or disclosure information about the Company or the other parties to the
agreements. The agreements may contain representations and warranties by each of the parties to the
applicable agreement. These representations and warranties have been made solely for the benefit of
the parties to the applicable agreement and:
|
• |
|
should not in all instances be treated as categorical statements of fact, but rather as
a way of allocating the risk to one of the parties if those statements prove to be
inaccurate; |
|
|
• |
|
have been qualified by disclosures that were made to the other party in connection with
the negotiation of the applicable agreement, which disclosures are not necessarily
reflected in the agreement; |
|
|
• |
|
may apply standards of materiality in a way that is different from what may be viewed
as material to you or other investors; and |
|
|
• |
|
were made only as of the date of the applicable agreement or such other date or dates
as may be specified in the agreement and are subject to more recent developments. |
Accordingly, these representations and warranties may not describe the actual state of affairs
as of the date they were made or at any other time. Additional information about the Company may be
found elsewhere in this Form 10-Q and the Company’s other public filings, which are available
without charge through the SEC’s website at http://www.sec.gov.
37
The following exhibits are included as part of this report:
|
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
|
|
11 |
|
|
Computation of Unaudited Earnings Per Share |
|
|
|
|
|
|
31.1 |
|
|
Certification of Chief Executive Officer pursuant to Section 302 the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
31.2 |
|
|
Certification of Chief Financial Officer pursuant to Section 302 the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
32.1 |
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
32.2 |
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
SIGNATURES
Pursuant to the requirements 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.
Date: July 15, 2011
|
|
|
|
|
|
CCA INDUSTRIES, INC.
|
|
|
By: |
/s/ STEPHEN A. HEIT
|
|
|
|
Stephen A. Heit |
|
|
|
Executive Vice President and Chief Financial Officer, and
duly authorized signatory on
behalf of Registrant |
|
38