SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended Commission File Number November 30, 2002 2-85538-B CCA INDUSTRIES, INC. (Exact Name of Registrant as specified in Charter) DELAWARE 04-2795439 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 200 Murray Hill Parkway, East Rutherford, New Jersey 07073 (Address of principal executive offices, including zip code) (201) 330-1400 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share (Title of Class) Class A Common Stock, par value $.01 per share (Title of Class) 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 requirement for the past 90 days. Yes X . No . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X]. The aggregate market value of the voting stock held by non-affiliates of the Registrant (i.e., by persons other than officers and directors of the Registrant), at the average sales price ($1.99), on December 31, 2002, was as follows: Class of Voting Stock Market Value 5,224,238 shares; Common Stock, $.01 par value $10,396,234 On December 31, 2002 there was an aggregate of 7,141,098 shares of Common Stock and Class A Common Stock of the Registrant outstanding. - ii- CROSS REFERENCE SHEET Headings in this Form Form 10-K 10-K for Year Ended Item No. November 30, 2002 1. Business Business 2. Properties Property 3. Legal Proceedings Legal Proceedings 4. Submission of Matters Submission of Matters to a to a Vote of Security Vote of Security Holders Holders 5. Market for Registrant's Market for the Company's Common Equity and Common Stock and Related Related Stockholder Shareholder Matters Matters 6. Selected Financial Data Selected Financial Data 7. Management's Discussion Management's Discussion and and Analysis of Financial Analysis of Financial Condition and Results Condition and Results of of Operation Operations 7A. Quantitative and Qualitative Quantitative and Qualitative Disclosures about Market Risk Disclosures about Market Risk 8. Financial Statements Financial Statements and Supplementary Data and Supplementary Data 9. Changes In and Dis- Changes In and Dis- agreements With agreements With Accountants On Accounting Accountants On Accounting and Financial Disclosure and Financial Disclosure 10. Risk Factors Risk Factors 11. Directors and Directors and Executive Executive Officers Officers of the Registrant - iii- Headings in this Form Form 10-K 10-K for Year Ended Item No. November 30, 2002 12. Executive Compensation Executive Compensation 13. Security Ownership Security Ownership of Certain Beneficial of Certain Beneficial Owners and Management Owners and Management 14. Certain Relationships Certain Relationships and Related Transactions and Related Transactions 15. Exhibits, Financial Exhibits, Financial Statement Schedules, Statement Schedules, and Reports on Form and Reports on Form 8-K 8-K - iv- TABLE OF CONTENTS Item Page PART I 1.Business...................................... 1 2.Property...................................... 6 3.Legal Proceedings............................. 6 4.Submission of Matters to a Vote of Security Holders............................ 7 PART II 5. Market for the Company's Common Stock and Related Shareholder Matters................. 8 6. Selected Financial Data....................... 10 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 11 7A.Quantitative And Qualitative Disclosure About Market Risk........................... 15 8. Financial Statements and Supplementary Data... 15 9. Changes In and Disagreements with Accountants On Accounting and Financial Disclosure.................................. 16 10. Risk Factors.................................. 16 PART III 11. Directors and Executive Officers.............. 18 12. Executive Compensation........................ 20 13. Security Ownership of Certain Beneficial Owners and Management....................... 28 14. Certain Relationships and Related Transactions................................ 29 PART IV 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................... 30 - v- PART I Item 1. BUSINESS (a) General CCA INDUSTRIES, INC. (hereinafter, "CCA" or the "Company") was incorporated in Delaware in 1983. The Company operates in one industry segment, in what may be generally described as the health-and-beauty aids business, selling numerous products, in several health-and-beauty aids and cosmeceutical categories. All Company products are manufactured by contract manufacturers, pursuant to the Company's specifications and formulations. The Company owns registered trademarks, or exclusive licenses to use registered trademarks, that identify its products by brand-name. Under most of the brand names, the Company markets several different but categorically-related products. The principal brand and trademark names include "Plus+White" (oral health-care products), "Sudden Change" (skin-care products), "Nutra Nail" and "Power Gel" and "Nutra Nail 60" (nail treatments), "Bikini Zone" pre and after-shave products, "Mega 14" Balanced Fiber and "Mega T" Green Tea (dietary products), "Hair Off" (depilatories), "IPR" (foot-care products), "Solar Sense" and "Kid Sense" (sun-care products), "Mood Magic" (lipsticks), "Cloud Dance" and "Cherry Vanilla" (perfumes), "Scar Zone," a scar diminishing cream. All Company products are marketed and sold to major drug and food chains, mass merchandisers, and wholesale beauty-aids distributors throughout the United States and Canada. In addition, certain of the Company's products are sold internationally. The Company recognizes sales at the time its products are shipped to customers. However, while sales are not formally subject to any contract contingency, the acceptance of returns is an industry-wide practice. The Company thus estimates `unit returns' based upon a review of the market's recent-historical acceptance of subject products as well as current market- expectations, and equates its reserves for estimated returns in the sum of the gross profits, in the five preceding months, realized upon an equivalent number of subject-product sales. (See Item 15, Financial Statements, Note 2). Of course, there can be no precise going-forward assurance in respect of return rates and gross margins, and in the event of a significant increase in the rate of returns, the circumstance could have a materially adverse affect upon the Company's operations. In or about November 2000, the Company contacted its accounts and instructed them to return its "Permathene" and "Mega 16" products, which contain phenylpropanolamine ("PPA"), as a result of a general FDA health-warning concerning PPA (a key ingredient in numerous cold-remedies and appetite suppressants, which had been `on the market' for some 50 years). The Company's 1 revenues from sales of those now discontinued products, in fiscal 2000, were approximately $2,500,000 (approximately 6.5% of sales). The Company replaced PPA - product revenue through promotion and sale of "Mega 14" Balanced Fiber, an all natural-fiber diet product, "Mega T" Green Tea, and Mega G Grapefruit. These three products accounted for $1,280,615 in net sales (2.8%) in the current fiscal year. In October 2000, the Company paid $450,000 to purchase, from Shiara Holdings, Inc., the following trademarks: "Cherry Vanilla", "Cloud Dance", "Sunset Cafe'', "Vision", "Mandarin Vanilla" and "Amber Musk." (Those trademarks had been licensed by the Company since 1998; and, until their purchase, the Company had been committed to paying 5% royalties, a minimum of $150,000 per annum minimum royalties, for mark-associated product sales.) Sales of these products were $2,004,372 (4% of sales) in the current fiscal year. The Company's total net-sales in fiscal 2002 were approximately $45,241,000 generating approximately $29,899,000 in gross profits. International sales accounted for approximately 3 % of sales. The Company experienced a net profit of approximately $3,074,000 for the current fiscal year. Its net worth is approximately $18,835,000. (See the Financial Statements and Notes.) Including the principal members of management (see Directors and Executive Officers), the Company, at November 30, 2002, had 152 sales, administrative, creative, accounting, receiving, and warehouse personnel in its employ. (b) Manufacturing and Shipping The Company creates formulations, chooses colors and mixtures, and arranges with independent contractors for the manufacture of its products pursuant to Company specifications. Manufacturing and component-supply arrangements are maintained with several manufacturers and suppliers. Almost all orders and other product shipments are delivered from the Company's own warehouse facilities, which results in more effective inventory control, more efficient shipping procedures, and the realization of related economies. (c)i Marketing The Company markets its products to major drug, food and mass-merchandise retail chains, and leading wholesalers, through an in-house sales force of employees and independent sales representatives throughout the United States. The Company sells its products to approximately 450 accounts, most of which have numerous outlets. Approximately 40,000 stores carry at least one Company product. 2 During the fiscal year ended November 30, 2002, the Company's largest customers were Wal-Mart (approximately 31% of net sales), Walgreen (approximately 13%), Rite Aid, CVS, Albertson and Eckerd (approximately 7%, 7%, 5%, and 3%, respectively). The loss of any of these principal customers, or substantial reduction of sales revenues realized from their business, could materially and negatively affect the Company's earnings. Most of the Company's products are not particularly susceptible to seasonal-sales fluctuation. However, sales of depilatory, sun-care and diet-aids products customarily peak in the Spring and Summer months, while fragrance-product sales customarily peak in the Fall and Winter months. (c)ii Advertising The Company has an in-house advertising department. The advertising staff designs point-of-purchase displays, including 'blister cards', sales brochures and packaging layouts. The production of displays, brochures, layouts and the like is accomplished through contract suppliers. The Company primarily utilizes local and national television advertisements to promote its leading brands. On occasion, print and radio advertisements are engaged. In addition, and more-or-less continuously, store-centered product promotions are co-operatively undertaken with customers. Each of the Company's brand-name products is intended to attract a particular demographic segment of the consumer market, and advertising campaigns are directed to the respective market-segments. The Company's in-house staff is responsible for the 'traffic' of its advertising. Placement is accomplished directly and through media-service companies. (d) "Wholly-Owned" Products The majority of the Company's sales revenues are from sales of the Company's "wholly-owned" product lines (i.e., products sold under trademark names owned by the Company, and not subject to any other party's interest or license), which included principally "Plus+White", "Sudden Change", "Bikini Zone", "Mood Magic", "Mega T", and "Cloud Dance" and "Cherry Vanilla," and "Scar Zone." (e) All Products Health and beauty, cosmetic and fragrance and over the counter products accounted for approximately 74%, 22% and 4%, respectively, of the Company's net-sales revenues during fiscal 2002. 3 (e) License-Agreements Products i. Alleghany Pharmacal In 1986, the Company entered into a license agreement with Alleghany Pharmacal Corporation (the "Alleghany Pharmacal License"). Under the terms of the Alleghany Pharmacal License, the Company was granted, and yet retains, the exclusive right to manufacture and market certain products, and to use their associated trademarks, including "Nutra Nail," "Nutra Nail 60," "Pro Perm," "Hair Off," "Permathene" and "IPR". The Alleghany Pharmacal License requires the Company (a) to pay royalties of 6% per annum on net sales of "Pro-Perm" hair-care products, the PPA-based and now discontinued dietary- product "Permathene", "IPR" foot-care products, "Nutra-Nail" nail-enamel products, and "Hair-Off" depilatories; and (b) to pay 1% royalties on net sales of a "Hair-Off" mitten that is a depilatory-product accessory, and "Nutra Nail 60", a fast-acting nail enamel, and "Nutra Nail Power Gel." The Company is required to pay not less than $360,000 per annum in order to maintain exclusive rights under the Alleghany Pharmacal License. (Royalties have always exceeded the minimum; but, if they did not, the Company would be entitled to maintain exclusive license rights by electing to pay the 'difference.' At the same time, the Company would not be required to pay any fee in excess of royalties payable in respect of realized sales if sales did not yield 'minimum royalties' and the Company chose in such circumstance to concede the license rights.) The Alleghany Pharmacal License agreement provides that if, and when, in the aggregate, $9,000,000 in royalties has been paid thereunder, the royalty-rate for those products now 'charged' at 6% will be reduced to 1%. Through November 30, 2002, the Company had paid or accrued Alleghany-Pharmacal License royalties in the sum of $8,732,641. The products subject of the Alleghany-Pharmacal License accounted for approximately $13,696,000 or 30 % of total net sales in the fiscal year ended November 30, 2002. "Nutra Nail" and the "Hair-Off" depilatory were the leaders among all of the Company's license-agreement products, producing approximately 19% and 9%, respectively, of net sales. ii. Solar Sense, Inc. CCA commenced the marketing of its sun-care products line following a May 1998 License Agreement with Solar Sense, Inc. (the "Solar Sense License"), pursuant to which it acquired the exclusive right to use the trademark names "Solar Sense" and "Kids Sense" and the exclusive right to market mark-associated products. The Solar Sense License requires the Company to pay a 5% royalty on net sales of said licensed products until $1 million total royalties are paid and 1%, thereafter; and minimum 4 per-annum royalties of $30,000. CCA realized approximately $1,494,000 in net sales of sun-care products in 2002, and paid or accrued Solar Sense the royalty of $74,698. iii. The Nail Consultants Ltd. In October of 1999, the Company entered into a License Agreement with The Nail Consultants, Ltd. for the use of an activator invented in connection with a method for applying a protective covering to fingernails. The Company's License Agreement with The Nail Consultants, Ltd. is for the use of the method and its composition in a new product kit packaged and marketed by CCA under its own name, "Nutra Nail Power Gel". The Company is required to pay a royalty of 5% of net sales of all products sold under the license, by the Company. Net sales were approximately $1,407,000 in 2002, and the Company paid or accrued the Nail Consultants a royalty of $70,362. iv. Alpha Hydroxy The Company settled a patent infringement claim for the use of Alpha Hydroxy in its Sudden Change exfoliation products for $323,927. The Company paid half in September 2001 and paid the balance in February 2002. The total expense was recorded in the fiscal year ended November 30, 2001. The Company entered into a license agreement for the future use of Alpha Hydroxy in its beauty aid products. The Company is paying a royalty of 5% of net sales of all products subject to the license. The license fees in 2002 were not material. v. Other Licenses The Company is not party to any other license agreement that is currently material to its operations. (f) Trademarks The Company's own trademarks and licensed-use trademarks serve to identify its products and proprietary interests and the Company considers these marks to be valuable assets. However, there can be no assurance, as a practical matter, that trademark registration results in marketplace advantages, or that the presumptive rights acquired by registration will necessarily and precisely protect the presumed exclusivity and asset value of the marks. (g) Competition The market for cosmetics and perfumes, and health-and-beauty aids products in general, including patent medicines, is characterized by vigorous competition among producers, many of which have substantially greater financial, technological and marketing resources than the Company. Major competitors such as Revlon, L'Oreal, Colgate, Del Laboratories, Unilever, and Procter & Gamble have Fortune 500 status, and the broadest-based public recognition of their products. Moreover, a substantial number of other health-and-beauty aids manufacturers and distributors may 5 also have greater resources than the Company. (h) Government Regulation All of the products that the Company markets are subject or potentially subject to particular regulation by government agencies, such as the U.S. Food and Drug Administration, the Federal Trade Commission, and various state and/or local regulatory bodies. In the event that any future regulation were to require new approval for any in-the-market products, or should require approval for any planned product, the Company would attempt to obtain the necessary approval and/or license, assuming reasonable and sufficient market expectations for the subject product. However, there can be no assurance, in the absence of particular circumstances, that Company efforts in respect of any future regulatory requirements would result in approvals and issuance of licenses. Moreover, if such license-requirement circumstances should arise, delays inherent in any application-and-approval process, as well as any refusal to approve, could have a material adverse affect upon existing operations (i.e., concerning in-the-market products) or planned operations. Item 2. PROPERTY The principal executive offices of the Company are located at 200 Murray Hill Parkway, East Rutherford, New Jersey. Under a new net lease, the Company occupies approximately 75,550 square feet of space. Approximately 58,000 square feet in such premises is used for warehousing and 17,500 square feet for offices. The annual rental is $327,684, with an annual CPI increase of 3% but not to exceed 15% cumulative 5 year increase. The lease expires on May 31, 2012 with a renewal option for an additional five years.. The lease requires the Company to pay for additional expenses, Common Area Maintenance ("CAM"), which includes real estate taxes, common area expense, utility expense, repair and maintenance expense and insurance expense. For the year ended November 30, 2002, CAM was $97,763. Item 3. LEGAL PROCEEDINGS The only material legal proceedings outstanding as of November 30, 2002 were related to the Company's diet suppressant products containing phenylpropanolamine ("PPA"). There are approximately 10 suits presently pending. Reference is made to Forms 8K filed on May 22, 2002 and November 20, 2002 for the background and the insurance issues relative thereto. There are approximately 5000 suits that have been brought against the numerous pharmaceutical companies that have been engaged in distributing and/or manufacturing PPA products. Almost all have been referred to the United States District Courts in the Western District of Washington (MDL 1407). Outside counsel for the Company believes that the PPA cases against the Company are defensible. However, there can be no assurance that the current PPA litigation will not have a material adverse effect upon the Company's operations. 6 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On July 11, 2002, the Company held its annual meeting of shareholders. The actions taken, and the voting results thereupon, were as follows: (1) David Edell, Ira W. Berman, Jack Polak, and Stanley Kreitman were elected as directors by the holders of Class A Common Stock. (No proxy was solicited therefor, whereas Messrs. Berman, Polak and David Edell own more than 98% of the Class A Common Stock, and they proposed themselves and Mr. Kreitman.) (2) As proposed by Management, Drew Edell, Dunnan Edell and Rami Abada were elected as directors by the holders of the Common Stock. (3) The Board's appointment of Sheft Kahn & Company LLP as the Company's independent certified public accountants for the 2002 fiscal year was approved. The Company has not submitted any matter to a vote of security holders since the 2002 Annual Meeting. 7 PART II Item 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS In June 2000, the Company filed a Schedule TO (and an Amendment No.1 thereto) with the Securities And Exchange Commission ("S.E.C."); and, contemporaneously thereafter, presented the tender offer subject of the Schedule to its shareholders. Pursuant thereto, the Company offered to purchase up to 2,500,000 shares of its own Common Stock (but not Class A Common Stock), in exchange for a $2 subordinated debenture, maturing August 1, 2005, with 6% interest, payable semi-annually. In response, 278,328 shares were tendered and accepted for payment. The tender offer closed, as provided in the Schedule TO and the Offer documents presented to all Common Stock shareholders, on July 31, 2000. (A second and final amendment to the Schedule TO, reporting the results of the tender offer, was filed with the S.E.C. on August 1, 2000.) The Company's Common Stock was traded on the NASDAQ National Market. Because, for some time (a) the Common Stock had traded at less than $1.00 per share, and (b) the total market value of shares available for public trading had been below $5,000,000, NASDAQ notified the Company that its stock was de-listed. The stock is currently trading on the National Market Bulletin Board. The range of high and low sales prices of the Common Stock during each quarter of its 2002, 2001 and 2000 fiscal years was as follows: Quarter Ended 2002 2001 2000 February 29 $1.73 - $1.25 $ .93 - $.37 $1.75 - $1.12 May 31 $1.74 - $1.38 $1.09 - $.62 $1.50 - $ .87 August 31 $2.00 - $1.55 $1.90 - $.85 $1.28 - $1.00 November 30 $1.99 - $1.55 $1.56 - $.82 $1.06 - $0.59 The high and low prices for the Company's Common Stock, on February 18, 2003, were $3.50 and $3.16 per share. The Company's only `sales' of unregistered securities were represented by its issuance, in consequence of the above described tender offer and Schedule TO, of the $2, 5-year promissory notes, 6% interest, subject of the offer's $2 subordinated debenture. (Those securities are unregistered pursuant to an exemption from registration requirements. In any event, and in addition to the form denominated by the S.E.C. as "Schedule TO", with the Schedule TO information, the following documents subject of the tender offer were filed with the S.E.C., prior to commencement of the offering: A Trust Indenture, a form of the eventually-issued Promissory Notes, and the Offering Document that was thereafter transmitted to Common Stock shareholders.) As at November 30, 2002, there were approximately 220 holders of shares of the Company's equity stock. (There are a substantial number of shares held of record in various street and 8 depository trust accounts, which represent approximately 1,000 additional shareholders.) The dividend policy is at the discretion of the Board of Directors and will depend on numerous factors, including earnings, financial requirements and general business conditions. On January 8, 2003, the Board of Directors approved the payment of the company's first cash dividend in the amount of $0.12 per share, payable to the holders of the Company's common stock, $0.06 payable on May 1, 2003 and December 1, 2003 to the shareholders of record on April 1, 2003 and November 1, 2003, respectively. 9 Item 6. SELECTED FINANCIAL DATA
Year Ended November 30, 2002 2001 2000 1999 1998 Statement of Income Sales $45,241,493 $41,364,648 $36,990,170 $37,898,563 $41,083,974 Other income 439,547 338,883 186,284 285,469 318,296 45,680,974 41,703,531 37,176,454 38,184,032 41,402,270 Costs and Expenses (excluding special charge) 40,645,418 38,522,778 36,658,875 37,370,017 38,570,096 Income Before Special Charge and Provision for Income Taxes 5,035,556 3,180,753 517,579 814,015 2,832,174 Special Charge - - ( 1,500,000) - - Net Income (Loss) from Continuing Operations 3,074,353 2,014,369 ( 654,510) 512,504 1,667,973 (Loss) Income from Discontinued Operations - - - ( 803,603) - Net Income (Loss) 3,074,353 2,014,369 ( 654,510) ( 291,099) 1,667,973 Earnings (Loss) Per Share: Basic $ .43 $ .29 ($ .09) ($ .04) $ .23 Diluted $ .41 $ . 27 ($ .09) ($ .04) $ .21 Weighted Average Number of Shares Outstanding 7,099,759 6,893,232 7,153,013 7,174,203 7,243,956 Weighted Average Number of Shares and Common Stock Equivalents Outstanding 7,579,983 7,526,157 7,153,013 7,174,203 8,075,169 Balance Sheet Data: As At November 30, 2002 2001 2000 1999 1998 Working Capital 11,264,206 $10,236,977 $12,361,305 $12,291,890 $12,067,263 Total Assets 24,805,064 20,598,917 20,312,056 21,494,987 24,010,136 Total Liabilities 5,969,641 4,674,278 6,345,508 6,328,905 8,410,687 Total Stockholders' Equity 18,835,423 15,924,639 13,966,548 15,166,082 15,599,449 (1)In January 2003, the Company declared a $.12 dividend payable to all holders of the Company's common stock, $.06 payable to shareholders of record on April 1, 2003 and November 1, 2003, respectively.
10 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for historical information contained herein, this "Management's Discussion and Analysis of Financial Condition and Results of Operations" 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. 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. On March 3, 1986, the Company entered into a License Agreement with Alleghany Pharmacal Corporation under the terms of which the Company was granted the exclusive right to use the licensed products & trademarks for the manufacture and distribution of the products subject to the License Agreement. Under the terms of the Alleghany Pharmacal License (see "Business-License Agreements"), the royalty-rate for those Alleghany Pharmacal License products now 'charged' at 6% will be reduced to 1% after the sum of $9,000,000 in royalties has been paid thereunder. (Certain products, subject of the license, are, even now, 'charged' at only 1%. See "Business-License Agreements".) As at November 30, 2002, the Company had paid or accrued $8,732,641 in royalty payments. The Company expects to reach $9,000,000 in March or April of 2003. Comparison of Results for Fiscal Years 2002 and 2001 The Company's revenues increased from $41,703,531 in fiscal 2001 to $45,680,974 in the current fiscal year. Gross profit margins were 66% this year as compared to 64% last year. Net income was $3,074,353 as compared to $2,014,369 in fiscal 2001. In accordance with GAAP, the Company reclassified certain advertising expenditures as a reduction of sales rather than report them as advertising expenses. The reclassification is the adoption by the Company of the EITF 90-16 GAAP standard. The reclassification reflects a reduction in sales for the year ended November 30, 2002 by $1,169,755 and $1,154,879 respectively. The reclassification reduces the gross profit margin but does not affect the net income. For the current fiscal year, advertising, cooperative and promotional allowance expenditures were $9,239,249 as compared to $8,776,470. Advertising expenditures were 20.4% of sales vs. 21.2% last year. SG&A expenses increased 11.4% to $15,389,528 (this includes $492,045 in legal fees as settlement from two outstanding lawsuits during the year) from $13,812,890 in 2001. The increase was due mainly to SG&A expenses, which vary in relation to additional sales volume (i.e. payroll, freight-out, royalties, etc.). Sales returns and allowances decreased to 10.4% of gross sales from 11.5% last year. Research and development expenses increased to $741,974 this year from $687,731 last year. 11 On January 22, 2002, K-Mart filed for bankruptcy under Chapter XI. Sales to K-Mart for the year ended November 30, 2001 were approximately $2,352,000. As at November 30, 2002, after adjustments for charge-backs, there was $256,236 due and outstanding for pre-petition receivables for which the Company has set up a reserve of $230,612 (90%). The Company's sales to K- Mart, as a debtor-in-possession, during 2002, were $989,5581. As at February 18, 2003, there was $147,647 due as administrative receivables from K-Mart as debtor -in-possession, all of which are current. Currently there is no indication as to what percentage of the payables owed by K-Mart will be paid to suppliers for the indebtedness, prior to the filing of the Chapter XI petition, or is there the absolute assurance that all administrative priorities (receivables owed) to suppliers under sales to K-Mart as a debtor-in-possession, will be paid in full. Comparison of Results for Fiscal Years 2001 and 2000 The Company's revenues increased from $37,176,454 in fiscal 2000 to $41,703,531 in the current fiscal year. Gross profit margins were 64% this year as compared to 61.3% last year. Net income was $2,014,369 as compared to a loss of $654,510. Operations on an ongoing basis were similar to last year. Last year the Company incurred a loss of $1,500,000 as a result of the FDA's position with regard to the use of phenylpropanolamine as an appetite suppressant. The Company's Mega 16 diet products contained this ingredient. (See "Comparison of 2000 and 1999".) For the current fiscal year, advertising, cooperative and promotional allowance expenditures were $8,776,470 as compared to $8,837,665. Advertising expenditures were 21.2% of sales vs. 23.9% last year. SG&A expenses increased 10% to $13,812,890 from $12,557,064 in 2000, but actually decreased slightly as a percentage of current sales. The increase was due mainly to SG&A expenses which vary in relation to additional sales volume (i.e. payroll, freight-out, royalties, etc.). Research and development expenses were increased from $555,462 last year to $687,731 this year. This was due to the additional costs of formulating its "Mega T" brand product as well as a larger budget for their research department. Bad debt expense increased from $249,279 to $299,254 due to the large reserve set up for the K-Mart receivable; but offset by the reduction in its typical reserve due to the overall decrease in the amount of total receivables. Interest expense decreased from $159,477 to $69,012 due to the reduction in the Company's borrowing. On January 22, 2002, one of our customers, K-Mart, filed for bankruptcy under Chapter 11. Sales to K-Mart for the year ended November 30, 2001 were approximately $2.5 million. Accounts receivable from K-Mart at November 30, 2001 were approximately $502,000. A reserve of approximately $300,000 was set up against the receivable, anticipating a possible Chapter 11 filing by K- Mart. From December 1, 2001 through January 22, 2002, we collected $173,000 of the $502,000 balance and invoiced $95,000. As at January 30, 2002, there was $424,000 outstanding against which we maintained a reserve of approximately $300,000 (70%). Currently, we have no indication what percentage of the payables owed by K-Mart will be paid to its suppliers. 12 Liquidity and Capital Resources As at November 30, 2002, the Company had working capital of $11,264,206 as compared to $10,236,977 at November 30, 2001. The increase would have been higher had the Company not allocated an additional $1,800,000 of their investments into longer term fixed income instruments. All of the investments can be liquidated at any time. The ratio of total current assets to current liabilities is 3.1 to 1 as compared to a ratio of 3.5 to 1 for the prior year. Stockholders' equity increased to $18,835,423 from $15,924,639 primarily due to the net income from operations. The Company's cash position and short-term triple A investments at year-end was $5,065,191, up from $2,911,283 as at November 30, 2001. Inventories were $3,743,131 vs. $4,783,530 and accounts receivable ($6,265,955 vs. $4,464,991) increased $1,800,964 due to increased sales. Current liabilities are $5,462,799 vs. $4,163,622 in the prior year, which increased by $1,299,177. At year-end, the Company had long and short-term triple A investments and cash of $11,788,709 as compared to $7,891,041. As of November 30, 2002, the Company was not utilizing any of the funds available under its $7,000,000 credit line. The Company has issued a security agreement, which would be used in connection with any bank financing. Inventory, Seasonality, Inflation and General Economic Factors The Company attempts to keep its inventory for every product at levels that will enable shipment against orders within a three- week period. However, certain components must be inventoried well in advance of actual orders because of time-to-acquire circumstances. For the most part, purchases are based upon projected quarterly requirements, which are projected based upon sales indications received by the sales and marketing departments, and general business factors. All of the Company's contract-manufacture products and components are purchased from non-affiliated entities. Warehousing is provided at Company facilities, and all products are shipped from the Company's warehouse facilities. None of the Company's products are particularly seasonal, but sales of its sun-care, depilatory and diet-aid products usually peak during the Spring and Summer seasons, and perfume sales usually peak in Fall and Winter. The Company does not have a product that can be identified as a `Christmas item.' Because its products are sold to retail stores (throughout the United States and, in small part, abroad), sales are particularly affected by general economic conditions. Accordingly, any adverse change in the economic climate can have an adverse impact on the Company's sales and financial condition. The Company does not believe that inflation or other general economic circumstance that would negatively affect operations can be predicted at present, but if such circumstances should occur, they could have material and negative impact on the Company's net sales and revenues; and, more particularly, unless the Company 13 were able to pass along related cost increases to its customers. There was no significant impact on operations as a result of inflation during the current fiscal year. Contractual Obligations The following table sets forth the contractual obligations in total for each year of the next five years as at November 30, 2002. Such obligations include the current lease for the Company's premises, written employment contracts and License Agreements. 2003 2004 2005 2006 2007 Lease on Premises (1) 427,684 427,684 427,684 427,684 427,684 Royalty Expense (2) 309,359 42,000 31,000 30,000 30,000 Employment Contracts (3) 1,430,000 1,430,000 1,430,000 1,430,000 1,430,000 Total Contractual Obligations 2,167,043 1,899,684 1,888,684 1,887,684 1,887,684 (1) The Lease is a net, net lease requiring a yearly rental of $327,684 plus Common Area Maintenance "CAM". See Section Part I, Item 2. The rental provided above is the base rental and estimated CAM. CAM for 2002 was $97,763. The figures above do not include adjustments for the CPI. The lease has an annual CPI adjustment of 3% not to exceed 15% cumulative for five years. (2) See Section Part I, Item 1(e). The Company is not required to pay any royalty in excess of realized sales if the Company chooses not to continue under the license. The figures set forth above refer to the minimum royalties the Company must pay to maintain its license to market the licensed product. (3) The Company has executed Employment Contracts with its President, David Edell and its Chairman of the Board, Ira W. Berman. The contracts for both are exactly the same. The contracts expire on December 31, 2010. The contracts provide for a base salary which commenced in 1994 in the amount of $300,000, with a year-to-year CPI or 6%, plus 2.5% of the Company's pre-tax income less depreciation and amortization (EBTDA) (The "2.5% measure in the bonus provision of the Edell/Berman contracts was amended so as to calculate it against earnings before income taxes, less depreciation, amortization and expenditures for media and cooperative advertising in excess of $8,000,000. On May 24, 2001, the contract was amended increasing the base salary to $400,000. The figures above include the total salaries for fiscal 2002 and only the base salaries for the five years (plus 20% of the base salary), without adjustment for CPI, and without estimating bonuses, as the bonus is contingent upon future earnings. David Edell's sons, Dunnan Edell and Drew Edell have 5- year employment contracts in the amounts of $270,000 and $200,000 respectively, which expire on November 30,2007 (See Item 11, Summary Comprehensive Table). Dunnan Edell is a director and the Vice President of Sales and Marketing. Drew Edell is a director and the Vice President of Research and Product Development and Product Manager of certain products. 14 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company's financial statements (See Item 15) 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 "Government Obligations" and "Corporate Obligations" (which, primarily, are intended to be held to maturity) and "Equity". $952,000 of the Company's $10,203,000 portfolio of investments (approximate, as at Nov. 30, 2002) is invested in the "Equity" category, and approximately $759,000 in that category are Preferred Stock holdings. Whereas 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, thus the company does not believe that its investment-market risk is material. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements are listed under Item 15 in this Form 10-K. The following financial data is a summary of the quarterly results of operations (unaudited) during and for the years ended November 30, 2002 and 2001: Three Months Ended Fiscal 2002 Feb. 28 May 31 Aug. 31 Nov. 30 Net Sales 10,158,386 13,213,844 11,391,258 10,478,005 Total Revenue 10,247,194 13,312,347 11,511,314 10,610,119 Cost of Products Sold 3,764,904 4,399,740 3,559,990 3,617,683 Net Income 300,063 1,217,986 722,822 833,482 Earnings Per Share: Basic .04 .17 .10 .12 Diluted .04 .16 .10 .11 Three Months Ended Fiscal 2001 Feb. 28 May 31 Aug. 31 Nov. 30 Net Sales $10,096,529 $12,787,878 $10,024,875 $8,455,366 Total Revenue 10,178,085 12,864,483 10,114,197 8,546,766 Cost of Products Sold 4,244,147 4,372,263 3,368,589 2,892,422 Net Income 336,846 1,137,779 304,125 $235,619 Earnings Per Share: Basic .05 .17 .04 .03 Diluted .05 .16 .04 .03 15 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company did not change its accountants within the twenty-four months prior to the date of the most recent financial statements (nor since), and had no reported disagreement with its accountants on any matter of accounting principles or practices. Item 10. RISK FACTORS Cautionary Statements Regarding Forward-Looking Statements This annual report contains forward-looking statements based upon current expectations of management that involve risks and uncertainty. Actual risks could differ materially from those anticipated. Additional risks and uncertainties not presently known may possibly impair business operations. If any of these risks actually occur, the business, financial conditions and operating results could be materially adversely affected. The cautionary statements made in this Annual Report on Form 10K should be read as being applicable to all forward-looking statements whenever they appear in this Annual Report. Concentration of Risk The Company relies on mass merchandisers and major drug chains for the sales of its products. The loss of any one of those accounts could have a substantive negative impact upon its financial operations. {See Business - General, Item 1(c)i Marketing.} The Company does not manufacture any of its products. All of the products are manufactured for the Company by independent contract manufacturers. There can be no assurance that the failure of a supplier to deliver the products ordered by the Company when requested will not cause burdensome delays in the Company's shipments to accounts. The Company does constantly seek alternative suppliers should a major supplier fail to deliver as contracted. A failure of the Company to ship as ordered by its accounts could cause penalties and/or cancellations. There is No Assurance That Business Will Continue to Operate Profitably. In the current year, net sales were $45,241,493. Almost all of the products were able to maintain the projected gross profit margins. Net income is $3,074,353. There were no FDA policies that affected the Company's brands. In 2000, the FDA suggested the discontinuance of the Company's products containing PPA. As a result, revenues that year were reduced by $1,245,000 due to returns. In addition, the Company also wrote down $255,000 in inventory causing the Company to incur a loss of $654,510 for the year. 16 The Pending Litigations in Connection with the Sale of the Company's Products Containing PPA May Entail Significant Uncertainty and Expense. As described in "Legal Proceedings" and referenced 8Ks filed on May 23, 2002 and November 20, 2002, this matter was fully discussed. As previously advised, it is independent counsel opinion that the Company has a defensible position. Competition in the Cosmetic, Health and Beauty Aid Industry is Highly Competitive. Reference is made to "Business ` Sub-section' of Competition." CLASS A Shareholders Retain Control of Board of Directors. See "Voting" in the Proxy Statement dated May 24, 2002. Class A Shareholders, David Edell, President and Ira W. Berman, Chairman of the Board of Directors, have the right to elect 4 members to the Board of Directors. Common stockholders have the right to elect 3 members to the Board of Directors. Future Success Depends on Management's Ability. The Company is not financially as strong to compete with the major companies against whom it competes. The ability to successfully introduce new products and increase the growth and profitability of its brand products relies upon the skills and creativity of the Edell family, David Edell, President, Dunnan Edell, Vice-President of Sales and Marketing, and Drew Edell, Vice-President of Research and Development of new products and the maintenance of the quality of the current products being marketed. Ira W. Berman, Esq. is the director of legal and financial planning. The loss of any of these executives could materially adversely affect the business and prospects of the future of the Company. 17 PART III Item 11. DIRECTORS AND EXECUTIVE OFFICERS The Executive Officers and Directors of the Company are as follows: YEAR OF FIRST NAME POSITION COMPANY SERVICE David Edell President and Chief Executive Officer, Director 1983 Ira W. Berman Chairman of the Board of Directors, Secretary, Executive Vice President 1983 Dunnan Edell Executive Vice Pres.- Sales, Director 1984 Drew Edell Vice President- Manufacturing and New Product Development Director 1983 John Bingman Treasurer 1986 Stanley Kreitman Director 1996 Jack Polak Director 1983 Rami G. Abada Director 1997 David Edell, age 70, is a director, and the Company's President and Chief Executive Officer. Prior to his association with the Company he was a marketing and financial consultant; and, by 1983, he had extensive experience in the health and beauty aids field as an executive director and/or officer of Hazel Bishop, Lanolin Plus and Vitamin Corporation of America. In 1954, David Edell received a Bachelor of Arts degree from Syracuse University. 18 Ira W. Berman, age 71, is the Company's Executive Vice President and Corporate Secretary. He is also Chairman of the Board of Directors. Mr. Berman is an attorney who has been engaged in the practice of law since 1955. He received a Bachelor of Arts Degree (1953) and Bachelor of Law Degree (1955) from Cornell University, and is a member of the American Bar Association. Dunnan Edell is the 47 year-old son of David Edell. He is a graduate of George Washington University. He has been a director since 1994, and currently holds the position of Senior Vice President-Sales. He joined the Company in 1984 and was appointed Divisional Vice-President in 1986. He was employed by Alleghany Pharmacal Corporation from 1982 to 1984, and by Hazel Bishop from 1977 to 1981. Drew Edell, the 45 year-old son of David Edell, is a graduate of Pratt Institute, where he received a Bachelor's degree in Industrial Design. He has been a director since 2000. He joined the Company in 1983, and in 1985, he was appointed Vice President-Product Development and Production. John Bingman, age 51, received a Bachelor of Science degree from Farleigh Dickenson University in 1973. He is a certified public accountant who practiced with the New Jersey accounting firm of Zarrow, Zarrow & Klein from 1976 to 1986. Jack Polak, age 90, has been a private investment consultant and a banker since April 1982. He is a certified Dutch Tax Consultant and a member of The Netherlands. He was knighted on his 80th birthday by Queen Beatrix of the Netherlands for his untiring efforts on behalf of the Anne Frank Center USA for which he is still actively working as the "Chairman-Emeritus." Stanley Kreitman, age 71, has been Vice Chairman of the Board of Manhattan Associates, an equity - investment firm, since 1994. He is also a director of Medallion Financial Corp., an SBIC. Mr. Kreitman is Chairman of the Board of Trustees of the New York Institute of Technology since 1989, and of Crime-Stoppers Nassau County (NY), since 1994. Since February 1999 and June 1999, respectively, he has been a member of the Board of Directors of K.S.W. Corp. and P.M.C.C. Mortgage Corp. He is also a director and/or executive committee member of the following organizations: The New York City Board of Corrections, Bank Hapdalim USA (Signature Bank), The New York College of Osteopathic Medicine, and the Police Athletic League. From 1975 until 1993, he was President of United States Banknote Corporation, a securities printer. Rami G. Abada, age 43, is the President, Chief Financial Officer and Chief Operating Officer of the publicly-owned Jennifer Convertibles, Inc. Mr. Abada, who is Ira Berman's son-in-law, earned a B.B.A. in 1981 upon his graduation from Bernard Baruch College of The City University of New York. . However, because Mr. Abada is the son-in-law of the Chairman of the Board of Directors, as a result of the new regulations, he is not deemed "independent" and in order to comply with the regulations, he will voluntarily resign as a director on April 1, 2003. At that time an independent financial professional, Robert A. Lage, will join the Audit Committee and he will be appointed as an interim director until the annual meeting of shareholders in July 2003. 19 Item 12. EXECUTIVE COMPENSATION i. Summary Compensation Table The following table summarizes compensation earned in the 2002, 2001 and 2000 fiscal years by all of the executive officers whose fiscal 2002 compensation exceeded $100,000, including the Chief Executive Officer (the "Named Officers"). Annual Compensation Long-Term Compensation Number All of Shares Other Covered Other Name and Annual by Stock Long-Term Principal Compen- Options Compen- Position Year Salary Bonus sation(1) Granted(2) sation David Edell, 2002 $584,155 $332,060 $38,176 - 0 President 2001 514,399 247,806 35,985 - 0 and Chief 2000 425,372 132,221 12,552 - 0 Executive Officer Ira. W. Berman, 2002 $584,155 $332,060 $23,372 - 0 Secretary and 2001 514,399 247,806 24,117 - 0 Executive 2000 425,372 132,221 11,775 - 0 Vice President Dunnan Edell, 2002 $253,172 $ 45,000 $ 1,626 - 0 Executive 2001 232,595 4,231 2,914 - 0 Vice President 2000 218,076 4,194 2,723 - 0 - - Sales Drew Edell 2002 $203,845 $ 25,000 $ 1,178 - 0 Vice President 2001 187,596 3,365 816 - 0 Manufacturing 2000 175,000 3,365 577 - 0 John Bingman 2002 $ 99,843 $ 20,000 $ 948 - 0 Treasurer 2001 101,354 1,862 821 - 0 2000 98,662 - 855 - 0 20 - ------------------------- (1) Includes the personal-use value of Company-leased automobiles, the value of Company-provided life insurance, and health insurance that is made available to all employees. (2) Information in respect of stock option plans appears below in the sub-topic, Employment Contracts/Executive Compensation Program. ii. Fiscal 2002 Option Grants and Option Exercises, Year-End Option Valuation, Option Repricing No new options were issued to any of the Named Officers in fiscal 2002. The next table identifies 2002 fiscal-year option exercises by Named Officers, and reports a valuation of their options. Fiscal 2002 Aggregated Option Exercises and November 30, 2002 Option Values Number of Number of Shares Shares Covered by Un- Value of Unexercised Acquired Value exercised Options In-the-Money Options On Exercise Realized at November 30, 2002 at November 30, 2002 David Edell 100,000 $ 150,000 157,500 $193,725 Ira W. Berman 100,000 $ 150,000 202,000 $248,460 Dunnan Edell - - 75,000 $ 92,250 Drew Edell - - 75,000 $ 92,250 - --------------------- (1) Represents the difference between market price and the respective exercise prices of options at November 30, 2002. 21 Repriced Options The following table identifies the stock options held by the Named Officers and all other officers and directors, the exercise prices of which have been reduced during the past 10 years. Original Number Grant Original Date New of Shares Date Price Repriced Price David Edell (1) 100,000 Aug. 1, 1997 $2.50 May 24, 2001 .50 Ira W. Berman (1) 100,000 Aug. 1, 1997 2.50 May 24, 2001 .50 Dunnan Edell (1) 50,000 Aug. 1, 1997 2.50 May 24, 2001 .50 Stanley Kreitman (1) 25,000 Aug. 1, 1997 2.50 May 24, 2001 .50 Jack Polak (1) 25,000 Aug. 1, 1997 2.50 May 24, 2001 .50 Rami Abada (1) 25,000 Aug. 1, 1997 2.50 May 24, 2001 .50 Dunnan Edell (1)(2)25,000 Jun. 10, 1995 4.50 May 24, 2001 .50 Drew Edell (1)(2) 25,000 Jun. 10, 1995 4.50 May 24, 2001 .50 - ------------------- (1) On November 3, 1998, the full Board of Directors authorized the repricing in consequence of a declining market valuation, inconsistent with the Company's realizable value. The market price of the Common Stock at the date of repricing was $1.00; and, at that date, the original option terms (10 years from August 1, 1997) had approximately 8 years and 10 months to run. When the options were originally issued, on August 1, 1997, the market price of the Company's Common Stock was $2.50. On May 24, 2001, the company repriced the options again when the market price was $.50. (2) On June 10, 2000, the full Board of Directors authorized the repricing in consequence of a declining market valuation, inconsistent with the Company's realizable value. The market price of common stock at the date of repricing was $1.10; and at that date the original terms (5 years from June 10, 1995) were extended for an additional 5 years. When the options were originally issued on June 10, 1995, the market price of the Company's common stock was $3. On May 24, 2001, the Company repriced the options again when the market price was $.50, and changed the expiration date to August 1, 2007. iii. Compensation of Directors Each outside director was paid $3,000 per meeting for attendance of board meetings in fiscal 2002 (without additional compensation for committee meetings). No new options were granted to any director in 2002. The full Board of Directors met three times in fiscal 2002. 22 iv. Executive Compensation Principles Audit and Compensation Committee The Company's Executive Compensation Program is based on guiding principles designed to align executive compensation with Company values and objectives, business strategy, management initiatives, and financial performance. In applying these principles the Audit and Compensation Committee of the Board of Directors, comprised of Ira W. Berman, Stanley Kreitman, Jack Polak and Rami Abada, which met three times in fiscal 2002, has established a program to: . Reward executives for long-term strategic management and the enhancement of shareholder value. . Integrate compensation programs with both the Company's annual and long-term strategic planning. . Support a performance-oriented environment that rewards performance not only with respect to Company goals but also Company performance as compared to industry performance levels. Stanley Kreitman, former president of a national bank, qualifies as a "financial expert" as defined by the SEC in Instruction 1 to proposed Item 309 of Regulation S-K, which is set forth in the SEC Release No. 34 - 46701 dated October 22, 2002. Mr. Kreitman is an "independent" as that term is used in Section 10A(m)(3) of the Exchange Act. Jack Polak was knighted by the Dutch government in 1993. He is a certified Dutch tax consultant and a member of the association of certified tax accountants. The Board has deemed that he is both "independent" and qualifies as a "financial advisor." Rami Abada, President of Jennifer Convertibles, although the son-in-law of one of the directors, had been deemed "independent" by the Board of Directors prior to the new regulations. However, because Mr. Abada is the son-in-law of the Chairman of the Board of Directors, he will voluntarily resign as a director on April 1, 2003. At that time an independent financial professional, Robert A. Lage, will join the Audit Committee and he will be appointed as an interim director until the annual meeting of shareholders in July 2003. Robert A. Lage, age 66, a retired CPA., was a partner at PricewaterhouseCoopers Management Consulting Service prior to his retirement in 1997. He has been engaged in the practice of public accounting and management consulting since 1959. He received a BBA from Bernard Baruch College of the City University of New York in 1958. 23 v. Employment Contracts/Compensation Program The total compensation program consists of both cash and equity based compensation. The Audit and Compensation Committee (the "Committee") determines the level of salary and bonuses, if any, for key executive officers of the Company. The Committee determines the salary or salary range based upon competitive norms. Actual salary changes are based upon performance, and bonuses were awarded by the Committee in consideration of the Company's performance during the 2002 fiscal year. The Company has executed Employment Contracts with its President, David Edell and its Chairman of the Board, Ira W. Berman. The contracts for both are exactly the same. The contracts expire on December 31, 2010. The contracts provide for a base salary which commenced in 1994 in the amount of $300,000, with a year-to-year CPI or 6% plus 2.5% of the Company's pre-tax income less depreciation and amortization (EBTDA), plus 20% of the base salary for the fiscal year. (The "2.5% measure" in the bonus provision of the Edell/Berman contracts was amended so as to calculate it against earnings before income taxes, less depreciation, amortization and expenditures for media and cooperative advertising in excess of $8,000,000. On May 24, 2001, the contract was amended increasing the base salary to $400,000. David Edell's sons, Dunnan Edell and Drew Edell have 5- year employment contracts in the amounts of $270,000 and $200,000 respectively, which expire on November 30, 2007 (See Item 11, Summary Comprehensive Table). Dunnan Edell is a director and the Vice President of Sales and Marketing. Drew Edell is a director and the Vice President of Research and Product Development and Product Manager of certain products. vi. Stock Option Plans Long-term incentives are provided through the issuance of stock options. (The 1984 Stock Option Plan covered 1,500,000 shares of its Common Stock, and the 1986 Stock Option Plan covered 1,500,000 shares of its Common Stock.) The Company's 1994 Stock Option Plan covers 1,000,000 shares of its Common Stock. The 1994 Option Plan provides (as had the 1984 and 1986 plans) for the granting of two (2) types of options: "Incentive Stock Options" and "Nonqualified Stock Options". The Incentive Stock Options (but not the Nonqualified Stock Options) are intended to qualify as "Incentive Stock Options" as defined in Section 422(a) of The Internal Revenue Code. The Plans are not qualified under Section 401(a) of the Code, nor subject to the provisions of the Employee Retirement Income Security Act of 1974. Options may be granted under the Options Plans to employees (including officers and directors who are also employees) and consultants of the Company, provided, however, that Incentive Stock Options may not be granted to any non-employee director or consultant. 24 Option plans are administered and interpreted by the Board of Directors. (Where issuance to a Board member is under consideration, that member must abstain.) The Board has the power, subject to plan provisions, to determine the persons to whom and the dates on which options will be granted, the number of shares subject to each option, the time or times during the term of each when options may be exercised, and other terms. The Board has the power to delegate administration to a Committee of not less than two (2) Board members, each of whom must be disinterested within the meaning of Rule 16b-3 under the Securities Exchange Act, and ineligible to participate in the option plan or in any other stock purchase, option or appreciation right under plan of the Company or any affiliate. Members of the Board receive no compensation for their services in connection with the administration of option plans. Option Plans permit the exercise of options for cash, other property acceptable to the Board or pursuant to a deferred payment arrangement. The 1994 Plan specifically authorizes that payment may be made for stock issuable upon exercise by tender of Common Stock of the Company; and the Executive Committee is authorized to make loans to option exercisers to finance optionee tax-consequences in respect of option exercise, but such loans must be personally guaranteed and secured by the issued stock. The maximum term of each option is ten (10) years. No option granted is transferable by the optionee other than upon death. Under the plans, options will terminate three (3) months after the optionee ceases to be employed by the Company or a parent or subsidiary of the Company unless (i) the termination of employment is due to such person's permanent and total disability, in which case the option may, but need not, provide that it may be exercised at any time within one (1) year of such termination (to the extent the option was vested at the time of such termination); or (ii) the optionee dies while employed by the Company or a parent or subsidiary of the Company or within three (3) months after termination of such employment, in which case the option may, but need not provide that it may be exercised (to the extent the option was vested at the time of the optionee's death) within eighteen (18) months of the optionee's death by the person or persons to whom the rights under such option pass by will or by the laws of descent or distribution; or (iii) the option by its terms specifically provides otherwise. The exercise price of all nonqualified stock options must be at least equal to 85% of the fair market value of the underlying stock on the date of grant. The exercise price of all Incentive Stock Options must be at least equal to the fair market value of the underlying stock on the date of grant. The aggregate fair market value of stock of the Company (determined at the date of the option grant) for which any employee may be granted Incentive Stock Options in any calendar year may not exceed $100,000, plus certain carryover allowances. The exercise price of an Incentive Stock Option granted to any participant who owns stock possessing more than ten (10%) of the voting rights of the Company's outstanding capital stock must be at least 110% of the fair market value on the date of grant and the maximum term may not exceed five (5) years. 25 Consequences to the Company: There are no federal income tax consequences to the Company by reason of the grant or exercise of an Incentive Stock Option. As at November 30, 2002, 584,500 stock options, yet exercisable, to purchase 584,500 shares of the Company's Common Stock, were outstanding. vii. Performance Graph Set forth below is a line graph comparing cumulative total shareholder return on the Company's Common Stock, with the cumulative total return of companies in the NASDAQ Stock Market (U.S.) and the cumulative total return of Dow Jones's Cosmetics/Personal Care Index. 26 COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* AMONG CCA INDUSTRIES, INC, THE DOW JONES US COSMETICS INDEX AND THE DOW JONES US TOTAL MARKET INDEX GRAPH Cumulative Total Return* 12/97 12/98 12/99 12/00 12/01 12/02 CCA Industries, Inc. 100 57 51 26 59 91 DJ US Cosmetics Index 100 104 92 88 80 77 DJ US Total Market Index 100 125 153 139 122 95 - --------------------- * $100 invested on December 31, 1997 in stock and indices, including reinvestment of dividends. 27 Item 13. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the ownership of the Company's Common Stock and/or Class A Common Stock as of November 30, 2002 by (i) all those known by the Company to be owners of more than five percent of the outstanding shares of Common Stock or Class A Common Stock; (ii) each officer and director; and (iii) all officers and directors as a group. Unless otherwise indicated, each of the shareholders has sole voting and investment power with respect to the shares owned (subject to community property laws, where applicable), and is beneficial owner of them. Ownership, As A Percentage of All Shares Out- Number of "Option Standing/Assuming Name and Address Shares Owned (1): Shares" (1) Option Share Exercise (1) Common Stock Class A (2) David Edell 444,685 484,615 157,500 13.0/14.9% c/o CCA Industries, Inc. 200 Murray Hill Parkway East Rutherford, NJ 07073 Ira W. Berman 393,745 473,615 202,000 12.1/14.6% c/o CCA Industries, Inc. Jack Polak 27,700 - 25,000 .4/.7% 90 Park Avenue New York, NY 10016 Rami G. Abada - - 25,000 .0/.3% c/o CCA Industries, Inc. Stanley Kreitman - - 25,000 .0/.3% c/o CCA Industries, Inc. Dunnan Edell 41,250 - 75,000 .6/1.6% c/o CCA Industries, Inc. Drew Edell 51,250 - 75,000 .7/1.7% c/o CCA Industries, Inc. 28 John Bingman - - - - c/o CCA Industries, Inc. Officers and Directors 958,630 958,230 584,500 26.8%/34.2 as a group (8 persons) _______________________ (1) The number of "Option Shares" represents the number of shares that could be purchased by and upon exercise of unexercised options exercisable within 60 days; and the percentage ownership figure denominated "Assuming Option Share Exercise" assumes, per person, that unexercised options have been exercised and, thus, that subject shares have been purchased and are actually owned. In turn, the "assumed" percentage ownership figure is measured, for each owner, as if each had exercised such options, and purchased subject `option shares,' and thus increased total shares actually outstanding, but that no other option owner had `exercised and purchased.' (2) David Edell, Ira Berman and Jack Polak own over 98% of the outstanding shares of Class A Common Stock. Messrs. David Edell, Dunnan Edell, Drew Edell and Ira Berman are officers and directors. Mr. Bingman is an officer. Messrs. Abada, Kreitman and Polak are directors. Item 14. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The law firm of Post, Polak, Goodsell, MacNeil & Strauchler represented the Company in two lawsuits in the current year, both of which have been satisfied during litigation. Frederick B. Polak, a partner in the firm, is the son of a director of the Company, Jack Polak. The law firm received fees of $142,045 during the year. There is no litigation currently outstanding with the firm. 29 PART IV Item 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K Financial Statements: Table of Contents, Independent Auditors' Report, Consolidated Balance Sheets as of November 30, 2002 and 2001 Consolidated Statements of Income (Loss) for the years ended November 30, 2002, 2001 and 2000. Consolidated Statements of Comprehensive Income (Loss), Consolidated Statements of Shareholders' Equity for the years ended November 30, 2002, 2001 and 2000, Consolidated Statements of Cash Flows for the years ended November 30, 2002, 2001 and 2000, Notes to Consolidated Financial Statements. Financial Statement Schedules: Schedule II: Valuation Accounts; Years Ended Nov. 30, 2002, 2001 and 2000. Exhibits: (3) The Company's Articles of Incorporation and Amendments thereof, and its By-Laws, are incorporated by reference to their filing with the Form 10-K A filed April 5, 1995. (Exhibit pages 000001-23). (4) The Indenture (and the Promissory note exhibited therewith) defining the rights of former shareholders who tendered Common Stock to the Company for its $2 per share, 5 year, 6% debenture, is filed by reference to the filing of such documents with the Schedule TO filed with the S.E.C., on June 5, 2001. (10) (a) The Following Material Contracts are incorporated by reference to their filing with the Form 10-KA filed April 5, 1995: Amended and Restated Employment Agreements of 1994, with David Edell and Ira Berman; License Agreement made February 12, 1986 with Alleghany Pharmacal Corporation. (b) The February 1999 Amendments to the Amended and Restated Employment Agreements of David Edell and Ira Berman (1994) are incorporated by reference to the 1998 10-K. (Exhibit pages 00001-00002) (c) The Forms 8K, filed on May 22, 2002 and November 20, 2002, are incorporated by reference to this 2002 10K. 30 (d) The following contracts are annexed hereto. (i) Amended and restored Employment Contract of David Edell - October 2002. (ii) Amended and restored Employment Contract of Ira W. Berman - October 2002. (iii)Employment Agreement with Dunnan Edell - October 2002. (iv) Employment Agreement with Drew Edell - October 2002. (11) Statement re Per Share Earnings (included in Item 15, Financial Statements) Two Forms 8-K were filed during the 2002 fiscal year. Shareholders may obtain a copy of any exhibit not filed herewith by writing to CCA Industries, Inc., 200 Murray Hill Parkway, East Rutherford, New Jersey 07073. Moreover, exhibits may be inspected and copied at prescribed rates at the Commission's public reference facilities at Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C. 20549; Jacob K. Javits Federal Building, 26 Federal Plaza, New York, New York 10278; and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials may also be obtained by mail at prescribed rates from the Public Reference Branch of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and one is available at the Commission's Internet website (http://www.sec.gov). 31 SIGNATURES Pursuant to the requirements of Section 13 or 15(A) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned thereunto duly authorized. CCA INDUSTRIES, INC. By: s/ David Edell DAVID EDELL, President Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons in the capacities and on the dates indicated. Signature Title Date s/ David Edell President, Director, DAVID EDELL Chief Executive Officer, and Chief Financial Officer February 28, 2003 s/ Ira W. Berman Chairman of the Board IRA W. BERMAN of Directors, Executive Vice President, Secretary February 28, 2003 s/ Dunnan Edell Vice President, February 28, 2003 DUNNAN EDELL Director s/ Drew Edell Vice President, February 28, 2002 DREW EDELL Director s/ Stanley Kreitman Director February 28, 2003 STANLEY KREITMAN s/ Rami Abada Director February 28, 2003 RAMI ABADA s/ Jack Polak Director February 28, 2003 JACK POLAK s/John Bingman Treasurer February 28, 2003 JOHN BINGMAN 32 CCA INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 2002 AND 2001 C O N T E N T S INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS . . . . . . . . . .1 FINANCIAL STATEMENTS: CONSOLIDATED BALANCE SHEETS . . . . . . . . . . . . . . . . . . . . .2-3 CONSOLIDATED STATEMENTS OF INCOME (LOSS). . . . . . . . . . . . . . . .4 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) . . . . . . . .5 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY . . . . . . . . . . . .6 CONSOLIDATED STATEMENTS OF CASH FLOWS . . . . . . . . . . . . . . . . .7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. . . . . . . . . . . . . 8-31 SUPPLEMENTARY INFORMATION INDEPENDENT AUDITORS' REPORT Board of Directors CCA Industries, Inc. East Rutherford, New Jersey We have audited the consolidated balance sheets of CCA Industries, Inc. and Subsidiaries as of November 30, 2002 and 2001, and the related consolidated statements of income (loss), comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period ended November 30, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain a reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and related schedules. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of CCA Industries, Inc. and Subsidiaries as of November 30, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended November 30, 2002, in conformity with accounting principles generally accepted in the United States of America. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The supplemental schedules listed in the index to Item 14 are presented for purposes of complying with the Securities and Exchange Commission's rules and are not a required part of the basic consolidated financial statements. The supplemental schedules have been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, is fairly stated, in all material respects in relation to the basic consolidated financial statements taken as a whole. SHEFT KAHN & COMPANY LLP CERTIFIED PUBLIC ACCOUNTANTS February 3, 2003 Jericho, New York -1- CCA INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
A S S E T S (Note 7) November 30, 2002 2001 Current Assets Cash and cash equivalents (Note 14) $ 1,585,647 $ 2,555,938 Short-term investments and marketable securities (Notes 2 and 6) 3,479,544 355,345 Accounts receivable, net of allowances of $1,222,408 and $1,295,086, respectively 6,265,955 4,464,991 Inventories (Notes 2 and 3) 3,743,131 4,783,530 Prepaid expenses and sundry receivables 363,457 401,403 Prepaid income taxes and refunds due 1,703 221,989 Deferred income taxes (Note 8) 1,287,568 1,617,403 Total Current Assets 16,727,005 14,400,599 Property and Equipment, net of accumulated depreciation and amortization (Notes 2 and 4) 720,739 482,261 Intangible Assets, net of accumulated amortization (Notes 2 and 5) 577,414 618,933 Other Assets Marketable securities (Notes 2 and 6) 6,723,518 4,979,758 Due from officers - 20,598 Deferred income taxes (Note 8) - 40,105 Other 56,388 56,663 Total Other Assets 6,779,906 5,097,124 Total Assets $24,805,064 $20,598,917
See Notes to Consolidated Financial Statements. -2- CCA INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY November 30, 2002 2001 Current Liabilities Accounts payable and accrued liabilities (Note 10) $ 5,284,109 $ 4,154,256 Income tax payable 178,690 9,366 Total Current Liabilities 5,462,799 4,163,622 Subordinated Debentures (Note 7) 501,656 510,656 Deferred Income Taxes (Note 8) 5,186 - Commitments and Contingencies (Note 12) Shareholders' Equity Preferred stock, $1.00 par; authorized 20,000,000 shares; none issued - - Common stock, $.01 par; authorized 15,000,000 shares; issued and outstanding 6,440,523 and 6,242,823 shares, respectively 64,405 62,428 Class A common stock, $.01 par; authorized 5,000,000 shares; issued and outstanding 973,230 and 1,020,930 shares, respectively 9,732 10,209 Additional paid-in capital 3,832,796 3,834,296 Retained earnings 15,389,415 12,315,062 Unrealized (losses) on marketable securities ( 107,990) ( 50,151) 19,188,358 16,171,844 Less: Treasury Stock (271,155 and 218,196 shares at November 30, 2002 and 2001, respectively) 352,935 247,205 Total Shareholders' Equity 18,835,423 15,924,639 Total Liabilities and Shareholders' Equity $24,805,064 $20,598,917
See Notes to Consolidated Financial Statements. -3- CCA INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Years Ended November 30, 2002 2001 2000 Revenues Sales of health and beauty aid products, net $45,241,493 $41,364,648 $36,990,170 Other income 439,481 338,883 186,284 45,680,974 41,703,531 37,176,454 Costs and Expenses Cost of sales 15,342,317 14,877,421 14,299,928 Selling, general and administrative expenses 15,389,528 13,812,890 12,557,064 Advertising, cooperative and promotions 9,239,249 8,776,470 8,837,665 Research and development 741,974 687,731 555,462 Provision for doubtful accounts ( 105,724) 299,254 249,279 Interest expense 38,074 69,012 159,477 40,645,418 38,522,778 36,658,875 Income before Special Charge and Provision for Income Taxes 5,035,556 3,180,753 517,579 Special Charge (Note 15) - - (1,500,000) Income (Loss) before Provision (Benefit) for Income Taxes 5,035,556 3,180,753 ( 982,421) Provision (Benefit) for Income Tax 1,961,203 1,166,384 ( 327,911) Net Income (Loss) $ 3,074,353 $ 2,014,369 ($ 654,510) Weighted Average Shares Outstanding Basic 7,099,759 6,893,232 7,153,013 Diluted 7,579,983 7,526,157 7,153,013 Earnings (Loss) Per Common Share (Note 2): Basic $.43 $.29 ($.09) Diluted $.41 $.27 ($.09)
See Notes to Consolidated Financial Statements. -4- CCA INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended November 30, 2002 2001 2000 Net Income (Loss) $3,074,353 $2,014,369 ($ 654,510) Other Comprehensive Income (Loss) Unrealized holding gain (loss) on investments ( 57,839) 14,696 86,008 Provision (Benefit) for Income Taxes ( 22,527) 5,555 13,742 Other Comprehensive Income (Loss) - Net ( 35,312) 9,141 72,266 Comprehensive Income (Loss) $3,039,041 $2,023,510 ($ 582,244) Earnings (Loss) Per Share: Basic $.43 $.29 ($.08) Diluted $.40 $.27 ($.08)
See Notes to Consolidated Financial Statements. -5- CCA INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED NOVEMBER 30, 2002, 2001 AND 2000 Unrealized Additional Gain (Loss) on Common Stock Paid-In Retained Marketable Treasury Shares Amount Capital Earnings Securities Stock Balance - November 30, 1999 7,342,081 $73,420 $4,453,478 $10,955,203 ($150,855) ($ 165,166) Issuance of debentures for acquisition of 278,328 shares of common stock - - - - - ( 619,965) Purchase of 11,500 shares of treasury stock - - - - - ( 11,066) Net income for the year - - - ( 654,510) - - Unrealized gain on marketable securities - - - - 86,008 - Retirement of treasury stock ( 278,328) ( 2,783) ( 617,182) - - ( 619,965) Balance - November 30, 2000 7,063,753 70,637 3,836,296 10,300,693 ( 64,847) ( 176,232) Issuance of common stock 200,000 2,000 ( 2,000) - - - Net income for the year - - - 2,014,369 - - Unrealized gain on marketable securities - - - - 14,696 - Purchase of 110,700 shares of treasury stock - - - - - ( 70,973) Balance - November 30, 2001 7,263,753 72,637 3,834,296 12,315,062 ( 50,151) ( 247,205) Issuance of common stock 150,000 1,500 ( 1,500) - - - Net income for the year - - - 3,074,353 - - Unrealized (loss) on marketable securities - - - - ( 57,839) - Purchase of 52,959 shares of treasury stock - - - - - ( 105,730) Balance - November 30, 2002 7,413,753 $74,137 $3,832,796 $15,389,415 ($107,990) ($352,935)
See Notes to Consolidated Financial Statements. -6- CCA INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 2002 2001 2000 Cash Flows from Operating Activities: Net income (loss) $3,074,353 $2,014,369 ($ 654,510) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 357,627 374,953 372,881 (Gain) loss on sale of securities ( 119) 5,559 119,877 Decrease (increase) in deferred income taxes 375,126 ( 93,469) ( 343,495) Loss on disposal of property and equipment 27,629 - - (Increase) decrease in accounts receivable (1,800,964) 1,864,764 1,041,777 Decrease in inventory 1,040,399 951,897 499,843 Decrease (increase) in prepaid expenses and sundry receivables 37,946 ( 76,423) 497,836 Decrease (increase) in prepaid income taxes and refunds due 220,286 555,702 ( 62,856) Decrease (increase) in miscellaneous assets 275 ( 1,137) ( 537) Increase (decrease) in accounts payable and accrued liabilities 1,129,853 ( 134,596) ( 640,053) Increase in income taxes payable 169,324 9,366 - Net Cash Provided by Operating Activities 4,631,735 5,470,985 830,763 Cash Flows from Investing Activities: Acquisition of property and equipment ( 575,923) ( 134,247) ( 283,863) Acquisition of intangible assets ( 6,292) ( 24,700) ( 496,734) Purchase of available for sale securities (6,767,658) (7,036,015) (2,682,631) Proceeds from sale of available for sales securities 1,839,729 5,068,493 2,567,555 Proceeds of money due from officers 20,598 887 36,433 Net Cash (Used in) Investing Activities (5,489,546) (2,125,582) ( 859,240) Cash Flows from Financing Activities: Proceeds from borrowings - - 3,900,000 Payment on debt - (1,500,000) (3,800,000) Repurchase of outstanding debentures ( 6,750) ( 23,000) - Purchase of treasury stock ( 105,730) ( 70,973) ( 74,375) Net Cash (Used in) Provided by Financing Activities ( 112,480) (1,593,973) 25,625 Net (Decrease) Increase In Cash ( 970,291) 1,751,430 ( 2,852) Cash at Beginning of Year 2,555,938 804,508 807,360 Cash at End of Year $1,585,647 $2,555,938 $ 804,508 Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest $ 38,239 $ 69,958 $161,895 Income taxes 1,310,593 801,950 97,629
See Notes to Consolidated Financial Statements. -7- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - 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., Berdell, Inc., Nutra Care Corporation, and CCA Online Industries, Inc.), all of which are currently inactive. In March of 1998 CCA acquired 80% of the newly organized Fragrance Corporation of America, Ltd. (FCA) which manufactured and distributed perfume products. In 1999, CCA adopted a formal plan to discontinue the operations of the subsidiary. As of November 30, 2001, the CCA had completed its plan of dissolution. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include the accounts of CCA and its majority-owned subsidiaries (collectively the "Company"). All significant inter-company accounts and transactions have been eliminated. Use of Estimates: The consolidated financial statements include the use of estimates, which management believes are reasonable. The process of preparing financial statements in conformity with generally accepted accounting principles requires the use of 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. Accordingly, upon settlement, actual results may differ from estimated amounts. Short-Term Investments and Marketable Securities: Short-term investments and marketable securities consist of 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. Statements of Cash Flows Disclosure: 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. -8- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Statements of Cash Flows Disclosure (Continued): During fiscal 2000, the Company repurchased 278,328 shares of common stock in exchange for the issuance of subordinated debentures totaling $556,656. The total cost of the acquisition (including associated costs incurred of $63,309) was charged to capital upon its retirement. During fiscal 2001, two officers/shareholders exercised in the aggregate 400,000 options in exchange for 200,000 shares of previously issued common stock. The common shares were put into treasury and were subsequently cancelled. During fiscal 2002, two officers/shareholders exercised in the aggregate 200,000 options in exchange for 50,000 shares of previously issued common stock. Inventories: Inventories are stated at the lower of cost (first-in, first-out) 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 on the straight-line method over the following estimated useful lives or lease terms of the assets: Machinery and equipment 5-7 Years Furniture and fixtures 3-10 Years Tools, dies and masters 3 Years Transportation equipment 5 Years Leasehold improvements 4-10 Years or life of lease, whichever is shorter Intangible Assets: Intangible assets are stated at cost. Patents and trademarks are amortized on the straight-line method over a period of 17 years. 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 CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Income Taxes: Income tax expense includes federal and state taxes currently payable and deferred taxes arising from temporary differences between income for financial reporting and income tax purposes. 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: The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" in 1998. Basic earnings per share is calculated using the average number of shares of common stock outstanding during the year. Diluted earnings per share is computed on the basis of the average number of common shares outstanding plus the effect of outstanding stock options using the "treasury stock method" and convertible debentures using the "if- converted" method. Common stock equivalents consist of stock options. 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, it is an industry-wide practice to accept returns from customers. The Company, therefore, records a reserve for returns equal to its gross profit on its historical percentage of returns on its last five months sales. Reclassifications In 1999, the Company formalized a plan to discontinue the operations of FCA, terminated all FCA employees, closed its Chicago facility, abandoned the majority of its inventory and discontinued almost all of the marketing of its product line. However, in 2000, after noting that there was still demand for the "Cherry Vanilla" and "Cloud Dance" perfumes, the Company decided to retain those product lines and purchased the trademarks owned by Shiara Holdings, Inc. Therefore, in accordance with EITF 90-16, certain prior year amounts have been reclassified to conform to the 2000 presentation. In accordance with EITF 00-14, the Company has accounted for certain sales incentives offered to customers by charging them directly to sales as opposed to "advertising and promotional" expense. Prior years' amounts have been reclassified to conform to the 2002 and 2001 presentation. Had EITF 00-14 not been adopted, sales for the years ended November 2002, 2001 and 2000 would have been $46,850,507, $42,527,229 and $38,451,980, respectively. -10- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Advertising Costs: The Company's policy for fiscal financial reporting is to charge advertising cost to operations as incurred. Shipping Costs: The Company's policy for fiscal financial reporting is to charge shipping cost to operations as incurred. For the years ended November 30, 2002, 2001 and 2000, included in selling, general and administrative expenses is shipping costs amounting to $2,120,645, $2,296,585 and $2,047,656, respectively. NOTE 3 - INVENTORIES At November 30, 2002 and 2001, inventories consist of the following: 2002 2001 Raw materials $3,251,338 $3,610,432 Finished goods 1,468,581 2,225,814 $4,719,919 $5,836,246 At November 30, 2002 and 2001, the Company had a reserve for obsolete inventory of $976,788 and $1,052,716 respectively. In 2001, the Company had $519,986 of old FCA inventory which it had completely written off but had not yet disposed of. In 2002, the Company disposed of the FCA inventory. NOTE 4 - PROPERTY AND EQUIPMENT At November 30, 2002 and 2001, property and equipment consisted of the following: 2002 2001 Machinery and equipment $ 97,003 $ 168,421 Office furniture and equipment 552,615 741,414 Transportation equipment 10,918 10,918 Tools, dies, and masters 213,188 550,825 Leasehold improvements 222,646 162,283 1,096,370 1,633,861 Less: Accumulated depreciation and amortization 375,631 1,151,600 Property and Equipment - Net $ 720,739 $ 482,261 Depreciation and amortization expense for the years ended November 30, 2002, 2001 and 2000 amounted to $309,816, $327,777 and $347,801, respectively. During the years ended November 30, 2002 and 2001, the Company wrote off and disposed of all of their obsolete property and equipment. -11- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 -INTANGIBLE ASSETS Intangible assets consist of the following at November 30, 2002 and 2001: 2002 2001 Patents and trademarks $756,548 $750,256 Less: Accumulated amortization 179,134 131,323 Intangible Assets - Net $577,414 $618,933 Amortization expense for the years ended November 30, 2002, 2001 and 2000 amounted to $47,811, $47,176 and $25,080, respectively. NOTE 6 - SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES Short-term investments and marketable securities, which consist of 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 in the next fiscal year. The remaining investments are considered non-current assets. The cost and market values of the investments at November 30, 2002 and November 30, 2001 were as follows: November 30, November 30, 2002 2001 Current: COST MARKET COST MARKET Corporate obligations $ 2,066,040 $2,071,603 $ - $ - Government obligations (including mortgage backed securities) 1,330,345 1,314,604 247,330 248,330 Mutual funds 169,589 93,337 159,805 107,015 Total 3,565,974 3,479,544 407,135 355,345 Non-Current: Corporate obligations 1,025,806 1,016,715 2,416,846 2,434,080 Government obli- gations 4,867,627 4,848,293 2,311,273 2,294,058 Preferred stock 751,645 758,510 150,000 151,620 Other equity investments 100,000 100,000 100,000 100,000 Total 6,745,078 6,723,518 4,978,119 4,979,758 Total $10,311,052 $10,203,062 $5,385,254 $5,335,103 -12- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES (CONTINUED) The market value at November 30, 2002 was $10,203,062 as compared to $5,335,103 at November 30, 2001. The gross unrealized gains and losses were $58,411 and ($166,401) for November 30, 2002 and $35,542 and ($85,693) for November 30, 2001. The cost and market values of the investments at November 30, 2002 were as follows: COL. A COL. B COL. C COL.D COL.E Amount at Which Each Portfolio Number of Market Of Equity Security Units-Principal Value of Issues and Each Amount of Each Issue Other Security Name of Issuer and Maturity Interest Bonds and Cost of at Balance Issue Carried in Title of Each Issue Date Rate Notes Each Issue Sheet Date Balance Sheet CORPORATE OBLIGATIONS: GMAC Smartnotes 10/15/03 4.600% 250,000 $ 250,000 $ 250,730 $ 250,730 GMAC Smartnotes 10/15/03 4.750 325,000 325,000 326,333 326,333 GMAC Smartnotes 1/15/03 5.550 250,000 250,000 250,763 250,763 GMAC Smartnotes 2/15/03 5.750 140,000 140,000 140,711 140,711 GMAC Smartnotes 6/15/03 4.750 300,000 300,000 300,894 300,894 GMAC Smartnotes 7/15/03 4.650 200,000 200,000 200,540 200,540 GMAC Smartnotes 8/15/03 4.250 499,000 499,000 499,075 499,075 GMAC Smartnotes 5/15/04 4.250 250,000 250,000 246,598 246,598 GMAC Smartnotes 5/15/05 5.000 175,000 175,000 171,922 171,922 Household Finance Corp. Internotes 5/15/04 4.250 250,000 250,000 248,615 248,615 International Business Machines 9/22/03 5.370 100,000 102,040 102,557 102,557 Colgate-Palmolive 12/1/03 5.270 100,000 100,860 102,912 102,912 Ford Motor Credit 3/20/04 6.125 245,000 249,946 246,668 246,668 3,091,846 3,088,318 3,088,318
-13- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES (CONTINUED) COL. A COL. B COL. C COL.D COL.E Amount at Which Each Portfolio Number of Market Of Equity Security Units-Principal Value of Issues and Each Amount of Each Issue Other Security Name of Issuer and Maturity Interest Bonds and Cost of at Balance Issue Carried in Title of Each Issue Date Rate Notes Each Issue Sheet Date Balance Sheet GOVERNMENT OBLIGATIONS: FHLMC 1628-N 12/15/2023 6.500% 255 $ - $ 255 $ 255 FHLB 9/15/2003 5.125 255,000 266,200 262,214 262,214 FHLMC 6/27/06 3.500 200,000 200,000 202,126 202,126 FHLMC 11/15/2017 4.250 200,000 200,000 196,770 196,770 US Treasury Note 11/15/2003 4.250 200,000 199,891 203,136 203,136 US Treasury Note 11/15/2003 4.250 250,000 250,169 258,537 258,537 FNMA 11/6/2009 4.250 250,000 250,000 246,978 246,978 FNMA 11/6/2009 4.250 500,000 500,000 493,955 493,955 FHLMC 2/27/12 4.000 225,000 225,000 229,289 229,289 FNMA 9/15/04 3.500 250,000 249,805 255,860 255,860 FHLMC 10/15/09 3.000 250,000 250,000 243,908 243,908 FNMA Global 10/15/06 4.375 200,000 199,559 207,938 207,938 FNMA 2/24/05 4.100 200,000 200,000 201,188 201,188 FNMA 4/28/06 3.080 250,000 250,000 250,000 250,000 FNMA 11/15/05 4.250 200,000 200,000 201,986 201,986 FNMA 5/16/06 4.000 200,000 200,000 202,062 202,062 FNMA 8/15/12 4.000 250,000 250,000 248,125 248,125 Federal Home Loan Bank 8/8/2006 3.375 250,000 250,000 250,783 250,783 Tennessee Valley Authority Power Bonds 5/1/2029 6.500 26,000 688,530 676,000 676,000 Tobacco Settlement Fin Corp. N 6/1/2015 5.000 200,000 198,500 190,966 190,966 NJ EDA Trans Sublease RV Lightrail 199A FSA 5/1/2004 5.000 300,000 317,444 314,169 314,169 Port Authority NY & NJ Cons 88th SR BE 10/1/2004 4.500 225,000 238,789 235,935 235,935 CLOSED END MUNICIPAL BONDS/MUTUAL FUNDS: Muniyield New Jersey Insd Frd Inc. 5,500 81,350 78,650 78,650 Muniholdings New Jersey Insd FD Inc. 5,900 79,896 79,001 79,001 Nuveen New Jersey Invt Quality Municipal Fund 5,200 79,507 78,416 78,416 Nuveen New Jersey Prem Inc Municipal Fund 5,200 78,639 78,104 78,104 Van Kamp Amer Cap Inv Gr NJ 4,800 80,502 79,920 79,920 Blackrock New Jersey Municipal Inc. 5,000 73,820 67,500 67,500 Eaton Vance New Jersey Municipal Inc. 4,600 70,481 66,240 66,240 Nuveen New Jersey Dividend Advantage 4,700 69,890 62,886 62,886 6,197,972 6,162,897 6,162,897
-14- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES (CONTINUED) COL. A COL. B COL. C COL.D COL.E Amount at Which Each Portfolio Number of Market Of Equity Security Units-Principal Value of Issues and Each Amount of Each Issue Other Security Name of Issuer and Maturity Interest Bonds and Cost of at Balance Issue Carried in Title of Each Issue Date Rate Notes Each Issue Sheet Date Balance Sheet EQUITY: Preferred Stock: Public Income NTS General Electric Cap Corp. 11/15/32 6.10% 11,800 $ 301,645 $ 296,450 $ 296,450 Merrill Lynch Trust 9/30/08 7.28 6,000 150,000 154,560 154,560 Corporate Backed Trust Certificates For AIG Sun America 5/17/07 6.70 6,000 150,000 154,500 154,500 Corporate Backed Trust Certificates For Bristol Myers Squibb 5/23/07 6.80 6,000 150,000 153,000 153,000 751,645 758,510 758,510 Other Equity Investments: Aberdeen Asia Pacific Income Fund 100,000 100,000 100,000 Dreyfus Premier Limited Term High Income CL B 14,862.540 169,589 93,337 93,337 269,589 193,337 193,337 $10,311,052 $10,203,062 $10,203,062
-15- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES (Continued) During the years ended November 30, 2002, 2001 and 2000, available- for-sale securities were liquidated and proceeds amounting to $1,839,729, $5,068,493 and $2,567,555 were received, with resultant realized (losses) totaling ($2,131), ($28,559) and ($119,877) respectively. Cost of available-for-sale securities includes unamortized premium or discount. NOTE 7 - NOTES PAYABLE AND SUBORDINATED DEBENTURES The Company has an available line of credit of $7,000,000. Interest is calculated on the outstanding balance at prime minus 1% or Libor plus 150 basis points. The line of credit is collateralized by all the Company's assets. The Company was not utilizing their available credit line at November 30, 2002 and 2001. On August 1, 2000, the Company repurchased (pursuant to a tender offer) 278,328 shares of its outstanding common stock by issuing subordinated debentures equal to $2 per share, which accrue interest at 6% and are due to mature on August 1, 2005. The interest is payable semi-annually. During the year 2001, the Company repurchased $46,000 of debentures for $23,000 resulting in a gain of $23,000. During the year 2002, the Company repurchased $9,000 of debentures for $6,750 resulting in a gain of $2,250. NOTE 8 - INCOME TAXES CCA and its subsidiaries file a consolidated federal income tax return. No returns have been examined by the Internal Revenue Service. At November 30, 2002 and 2001, respectively, the Company has temporary differences arising from the following: November 30, 2002 Classified As Deferred Short- Long- Type Amount Tax Term Term Asset (Liability) Depreciation ($ 13,024) ($ 5,186) $ - ($5,186) Reserve for bad debts 695,824 277,100 277,100 - Reserve for returns 526,584 209,703 209,703 - Reserve for obsolete inventory 976,788 388,989 388,989 - Section 263A costs 290,000 115,487 115,487 - Charitable contributions 744,010 296,289 296,289 - Net deferred income tax $1,282,382 $1,287,568 ($5,186) -16- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - INCOME TAXES (Continued) November 30, 2001 Classified As Deferred Short- Long- Type Amount Tax Term Term Asset (Liability) Depreciation $ 98,139 $ 40,105 $ - $40,105 Reserve for bad debts 481,399 196,729 196,729 - Reserve for returns 813,686 332,521 332,521 - Reserve for obsolete inventory 1,052,716 430,203 430,203 - Section 263A costs 370,741 151,507 151,507 - Deferred tax benefit from discontinued operations 519,986 212,497 212,497 - Charitable contributions 719,293 293,946 293,946 - Net deferred income tax $1,657,508 $1,617,403 $40,105 Income tax expense (benefit) is made up of the following components: November 30, 2002 State & Federal Local Total Current tax expense $1,116,198 $507,307 $1,623,505 Tax credits ( 37,428) - ( 37,428) Deferred tax expense 341,365 33,761 375,126 $1,420,135 $541,068 $1,961,203 -17- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - INCOME TAXES (Continued) November 30, 2001 State & Federal Local Total Current tax benefit $976,295 $170,755 $1,147,050 Tax credits ( 35,000) - ( 35,000) Deferred tax benefit ( 77,369) 131,703 54,334 $863,926 $302,458 $1,166,384 November 30, 2000 State & Federal Local Total Current tax expense ($229,509) ($35,097) ($264,606) Deferred tax expense ( 54,416) ( 8,889) ( 63,305) ($283,925) ($43,986) ($327,911) Prepaid income taxes and refund due are made up of the following components: State & Federal Local Total November 30, 2002 $ - $ 1,703 $ 1,703 November 30, 2001 $ 88,210 $133,779 $221,989 Income taxes payable are made up of the following components: State & Federal Local Total November 30, 2002 $ 35,873 $142,817 $178,690 November 30, 2001 $ 4,803 $ 4,563 $ 9,366 -18- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES (Continued) A reconciliation of income tax expense (benefit) computed at the statutory rate to income tax expense at the effective rate for each of the three years ended November 30, 2002 is as follows: 2002 2001 2000 Percent Percent Percent Of Pretax of Pretax of Pretax Amount Income Amount Income Amount Income Income tax expense (benefit) at statutory rate $1,712,089 34.00% $1,081,456 34.00% ($334,023) (34.00%) Increases (decreases) in taxes resulting from: State income taxes, net of federal income tax benefit 541,068 10.74 199,622 6.27 ( 58,355) ( 5.94 ) Non-deductible expenses and other adjustments ( 254,526) ( 5.05 ) ( 79,694) ( 2.50 ) 64,467 6.56 Utilization of tax credits ( 37,428) ( 0.74 ) ( 35,000) ( 1.10 ) - - Income tax expense (benefit) at effective rate $1,961,203 38.95% $1,166,384 36.67% ($327,911) (33.38%)
-19- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - STOCK OPTIONS On November 15, 1984, the Company authorized the granting of incentive stock options as well as non-qualified options. The plan was amended in 1986 and again in 1994. The following summarizes the stock options outstanding under these plans as of November 30, 2002: Number Per Share Of Option Date Granted Shares Price Expiration January 1990 (1)(5) 159,500 .50 2007 June 1995 (2)(5) 50,000 .50(3)(5) 2007 August 1997 (5) 375,000 .50(4)(5) 2007 584,500 (1) These options were originally scheduled to expire January 2000 but were extended for an additional five years. (2) These options were originally scheduled to expire June 2000 but were extended for an additional five years. (3) These stock options were repriced from $4.50 to $1.50 in June of 2000 when they were extended. (4) These stock options were repriced from $2.50 on November 3, 1998. (5) On May 24, 2001, the Board of Directors repriced all the outstanding options to $.50 and changed their expiration date to August 1, 2007. The following summarizes the activity of shares under option for the two years ended November 30, 2001: Number Per Share Of Option Shares Price Value Balance - November 30, 2000 1,184,500 $.50 - $1.50 $1,109,875 Granted - - - Repriced - ( .05) - ( 1.00) ( 517,125) Exercised 400,000 ( .50) ( 200,000) Expired - - - Cancelled - - - Balance - November 30, 2001 784,500 $.50 $ 392,250 Granted - - - Repriced - - - Exercised 200,000 ( .50) ( 100,000) Expired - - - Cancelled - - - Balance - November 30, 2002 584,500 $.50 $ 292,250 -20- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - STOCK OPTIONS (Continued) Pro Forma Disclosure The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation", issued in October 1995. Accordingly, compensation cost has been recorded based on the intrinsic value of the option only. The Company recognized no compensation cost in 1999 and 1998, respectively, for stock-based employee compensation awards. The pro forma compensation cost for stock-based employee compensation awards was $1 million, $.5 million and $.8 million in 2002, 2001 and 2000, respectively. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, net income and earnings per share would have been changed to the pro forma amounts indicated in the table below: 2002 2001 2000 As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma Net income $3,074,353 $2,063,168 $2,014,369 $1,470,083 ($654,510) ($1,447,726) Diluted earnings per share $.41 $.27 $.27 $.20 ($.09) ($.20) The above pro forma amounts, for purposes of SFAS No. 123, reflect the portion of the estimated fair value of awards earned in 2002, 2001 and 2000. For purposes of pro forma disclosures, the estimated fair value of the options is amortized over the options' vesting period (for stock options). The effects on pro forma disclosures of applying SFAS 123 are not likely to be representative of the effects on pro forma disclosures of future years.
-21- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - STOCK OPTIONS The Company used the Black-Scholes model to value stock options for pro forma presentation. The assumptions used to estimate the value of the options included in the pro forma amounts and the weighted average estimated fair value of options granted are as follows: Stock Option Plan Shares 2002 2001 2000 Average expected life (years) 5.10 5.67 3.76 Expected volatility 210.19% 204.59% 193.18% Risk-free interest rate 2.88% 4.25% 6.3% Weighted average fair value at grant - Exercise price equal to market price $1.73 $.69 $.66 The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, the Black- Scholes model requires the input of highly subjective assumptions, including the expected stock price volatility and option life. Because the Company's stock options granted to employees have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, existing models do not necessarily provide a reliable measure of the fair value of its stock options granted to employees. For purposes of this model, no dividends have been assumed. -22- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - ACCRUED EXPENSES AND OTHER ACCOUNTS PAYABLE The following items which exceeded 5% of total current liabilities are included in accounts payable and accrued liabilities as of: November 30, 2002 2001 (In Thousands) Media advertising $ * $ 424 Coop advertising 804 392 Accrued returns 878 301 Vacation accrual 320 254 Accrued bonuses 467 510 $2,469 $1,881 All other liabilities were for trade payables or individually did not exceed 5% of total current liabilities. * under 5% NOTE 11 - OTHER INCOME Other income was comprised of the following: November 30, 2002 2001 2000 Interest income $383,569 $265,240 $222,459 Dividend income 11,780 16,057 42,461 Realized gain on sale of debentures 2,250 25,342 6,262 Realized (loss) on sale of securities ( 2,131) ( 30,901) (126,139) Royalty income 41,820 57,385 37,500 Miscellaneous 2,193 5,760 3,741 $439,481 $338,883 $186,284 -23- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - COMMITMENTS AND CONTINGENCIES Leases The Company leased approximately 62,500 square feet of office and warehouse space at an annual rental of $267,684 and an additional 51,000 square feet of warehouse space in Paterson, NJ on a month to month basis. Under a new net lease starting June 1, 2002, the Company currently occupies approximately 75,550 square feet of space. Approximately 58,000 square feet in such premises is used for warehousing and 17,500 square feet for offices. The annual rental is $327,684, with an annual CPI increase of 3%, but not to exceed 15% cumulative five year increase. The lease requires the Company to pay for additional expenses "Expense Rent" (Common Area Maintenance "CAM"), which includes real estate taxes, common area expense, utility expense, repair and maintenance expense and insurance expense. The lease expires on May 31, 2012 with a renewal option for an additional five years. Rent expense for the years ended November 30, 2002, 2001 and 2000 was $433,983, $531,062 and $498,227, respectively. In addition, the Company has entered into various property and equipment operating leases with expiration dates ranging through November 2006. Future commitments under noncancellable operating lease agreements having a remaining term in excess of one year for each of the next five (5) years and in the aggregate are as follows: Year Ending November 30, 2003 $ 389,254 2004 362,253 2005 338,201 2006 328,346 2007 327,684 Royalty Agreements On March 3, 1986, the Company entered into a License Agreement (the "Agreement") with Alleghany Pharmacal Corporation ("Allegheny"). Under the terms of which the Company was granted the exclusive right to use the licensed products and trademarks for the manufacture and distribution of the products subject to the license. Under the terms of the Agreement, on July 5, 1986, the Company paid to Alleghany a non-refundable advance payment of $1,015,000. The license runs for an indeterminate period. An additional $525,000 non-refundable advance payment was paid to Alleghany on July 5, 1987. -24- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued) From the period March 3, 1986 to June 3, 1986, the Company was required to pay a 7% royalty on all net sales. Thereafter, it is required to pay a 6% royalty on net sales but no less than $360,000 per annum to maintain its license. After the sum of $9,000,000 in royalties has been paid to Alleghany, the royalty is reduced to 1% of net sales. The Company has expanded the lines licensed from Alleghany and pays only 1% royalty on various new products created by the Company. As of November 30, 2002, $8,732,641 of royalties have been paid or accrued and only $267,359 still remains until the $9,000,000 level is reached. In March 1998, the Company entered into a License Agreement with Shiara Holdings, Inc., pursuant to which the Company acquired exclusive license to use the trademark names used by Fragrance Corporation of America, Ltd. (FCA). The Shiara-Holdings, Inc. license requires the Company to pay royalties of 5% per annum on net sales of all products sold under the "Cherry Vanilla", "Mandarin Vanilla", and "Cloud Dance" trademarks until royalties totaling $2,000,000 are paid, and royalties of one-half of 1% thereafter. (No royalties are payable in respect of sales of products under these Shiara license trademarks: "Vision", "Sunset Cafe", and "Amber Musk".) A minimum of $100,000 was required to be paid for the period from commencement (April 1998) through June 1999, and a minimum of $150,000 for each subsequent twelve-month period, in order to retain the exclusive license-rights. On October 26, 2000, the Company purchased the Trademarks of Shiara Holding, Inc. for $450,000. Effectively, any future royalties which would have been payable under the FCA License agreements above were cancelled. See Note 5. In May of 1998, the Company entered into a License Agreement with Solar Sense, Inc. for the marketing of sun care products under trademark names. The Company's License Agreement with Solar Sense, Inc. is for the exclusive use of the trademark names "Solar Sense" and "Kids Sense", in connection with the commercial exploitation of sun care products. The Company is required to pay a 5% royalty on net sales of the licensed products until $1 million total royalties are paid and 1% thereafter; and minimum per-annum royalties of $30,000. The Company realized $1,493,955 in net sales of sun-care products in 2002, and paid or accrued Solar Sense the royalty of $74,698. In October of 1999, the Company entered into a License Agreement with The Nail Consultants, Ltd. for the use of an activator invented in connection with a method for applying a protective covering to fingernails. The Company's License Agreement with The Nail Consultants, Ltd. is for the exclusive use of the method and its composition in a new product kit packaged and marketed by CCA under its own name, "Nutra Nail Power Gel". The Company will pay a royalty of 5% of net sales of all licensed product sold by the Company. Net sales were $1,407,247 in 2002, and paid or accrued The Nail Consultants, Ltd. the royalty of $70,362. -25- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued) The Company settled a patent infringement claim for the use of Alpha Hydroxy in its Sudden Change exfoliation products for $323,927. The Company paid half in September 2001 and paid the balance in February 2002. The total expense was recorded in the fiscal year ended November 30, 2001. The Company entered into a license agreement for the future use of Alpha Hydroxy in its beauty aid products. The Company will pay a 5% royalty of net sales of all such licensed product sold by the Company. The license fees in 2002 were not material. The Company has entered into various other License Agreements, none of which materially affect the Company's sales, financial results, financial condition, or should materially affect its future results of operations. Employment Contracts During fiscal 1994, the Board of Directors approved contracts for two officers/shareholders. Pursuant thereto, each was provided a base salary of $300,000 in fiscal 1994, with yearly increases of the higher of CPI or 6%, and each is paid 2.5% of the Company's pre-tax income, less depreciation and amortization, plus 20% of the adjusted base salary, as a bonus. During 1998 the contracts were amended, commencing in fiscal 1999, to limit the amount of advertising expense charged against pre-tax income for purposes of the 2.5% calculation to $8,000,000. In May 2001 an amendment increased the base salary to $400,000. The contract expires on December 31, 2010. The two sons of the President of the Company have five year contracts in the amounts of $270,000 and $200,000 which expire on November 30, 2007. Collective Bargaining Agreement On December 1, 1998, the Company signed a collective bargaining agreement with Local 734, L.I.U. of N.A., AFL-CIO. Other than standard wage, holiday, vacation and sick day provisions, the agreement calls for CCA to provide certain medical and dental benefits and to contribute to the Local 734 Educational Fund $.01 per hour for each hour the employees are paid. The agreement expired on November 30, 2001. A new collective bargaining agreement with similar provisions is in effect for December 1, 2001 through November 30, 2004. This agreement pertains to 29% of the CCA labor force. Litigation The Company has been named as a defendant in 10 lawsuits alleging that the plaintiffs were injured as a result of their purchasing and ingesting our diet suppressant containing phenylpropanolamine (PPA), which the Company utilized as its active ingredient in its products prior to November 2000. The lawsuits brought against the Company are for unspecified amount of compensatory and exemplary damages. -26- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued) Litigation (Continued) The Company is insured for three of the 10 cases. CCA has not renewed the product liability policy covering possible additional lawsuits that might commence against the Company in connection with PPA. Outside counsel has advised CCA that as a general matter the PPA cases are defensible, and the Company plans to vigorously defend its positions. However, there can be no assurances the current PPA litigations will not have a material adverse effect on the Company's operations. Dividends CCA announced its first dividend of $0.12 per share payable to all holders of the Company's common stock, $0.06 payable to shareholders of record on April 1, 2003 and $0.06 payable to shareholders of record on November 1, 2003. NOTE 13 - PENSION PLANS The Company has adopted a 401(K) Profit Sharing Plan that covers most of their non-union employees with over one year of service and attained Age 21. Employees may make salary reduction contributions up to twenty-five percent of compensation not to exceed $11,000, and may make additional discretionary contributions. NOTE 14 - RELATED PARTY TRANSACTION During fiscal 2002, the Company retained legal services from a firm where a partner is the son of a Director of the Company. Total legal fees amounted to approximately $142,000. -27- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 - CONCENTRATION OF RISK All of the Company's products are sold to major drug and food chains merchandisers, and wholesale beauty-aids distributors throughout the United States and Canada. During the years ended November 30, 2002, 2001 and 2000, certain customers each accounted for more than 5% of the Company's net sales, as follows: Customer 2002 2001 2000 A 31% 28% 26% B 13 12 13 C 7 7 6 D 7 5 6 E 5 4 6 F * 7 6 Foreign Sales 2.40% 2.85% 2.50% The loss of any one of these customers could have a material adverse affect on the Company's earnings and financial position. During the years November 30, 2002, 2001 and 2000, certain products within the Company's product lines accounted for more than 10% of the Company's net sales as follows: Product 2002 2001 2000 Health and Beauty 75% 69% 65% Cosmetic and Fragrance 19 19 14 The Company maintains cash balances at several banks. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $100,000. In addition, 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. -28- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15 - SPECIAL CHARGE During the fourth quarter of 2000, the Company contacted its accounts and instructed them to return its "Permathene" and "Mega 16" products, which contain phenylpropanolimine ("PPA"), as a result of a general FDA health-warning concerning PPA (a key ingredient in numerous cold-remedies and appetite suppressants, which had been "on the market" for some 50 years). The Company's revenues from sales of those now discontinued products, in fiscal 2000, were approximately $2,500,000 (6.5% of sales). In conjunction with the recall, the Company recorded $1,500,000 in costs ($255,000 for inventory on hand and $1,245,000 for returns, allowances, and other costs related to the recall). -29- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - EARNINGS PER SHARE Basic earnings per share is calculated using the average number of common shares outstanding. Diluted earnings per share is computed on the basis of the average number of common shares outstanding plus the effect of outstanding stock options using the "treasury stock method". Year Ended November 30, 2002 2001 2000 Net income (loss) available for common shareholders, basic and diluted $3,074,353 $2,014,369 ($654,510) Weighted average common stock outstanding- Basic 7,099,759 6,893,232 7,153,013 Net effect of dilutive stock options 480,224 632,925 * Weighted average common stock and common stock equivalents - Diluted 7,579,983 7,526,157 7,153,013 Basic earnings per share $.43 $.29 ($.09) Diluted earnings per share $.41 $.27 ($.09) *Antidilutive
-30- SCHEDULE II CCA INDUSTRIES, INC. AND SUBSIDIARIES VALUATION ACCOUNTS
YEARS ENDED NOVEMBER 30, 2002, 2001 AND 2000 COL. A COL. B COL. C COL. D COL. E Additions Balance at Charged To Balance Beginning Costs and At End Description Of Year Expenses Deductions Of Year Year Ended November 30, 2002: Allowance for doubtful accounts $ 481,399 $ 283,954 $ 69,529 $ 695,824 Reserve for returns and allowances $ 813,686 $4,094,332 $4,381,434 $ 526,584 Reserve of inventory obsolescence $1,052,716 $ 397,643 $ 473,571 $ 976,788 Year Ended November 30, 2001: Allowance for doubtful accounts $ 323,257 $ 299,254 $ 141,112 $ 481,399 Reserve for returns and allowances $1,056,167 $2,833,405 $3,075,886 $ 813,686 Reserve for inventory obsolescence $1,050,714 $ 548,815 $ 546,813 $1,052,716 Year ended November 30, 2000: Allowance for doubtful accounts $ 327,919 $ 249,279 $ 253,941 $ 323,257 Reserve for returns and allowances $ 855,657 $4,758,078 $4,557,568 $1,056,167 Reserve for inventory obsolescence $1,056,709 $ 839,702 $ 845,697 $1,050,714
-31-