FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended May 31, 1999 Commission File Number 2-85538 CCA INDUSTRIES, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 04-2795439 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification Number) 200 Murray Hill Parkway East Rutherford, NJ 07073 (Address of principal executive offices) (Zip Code) (201) 330-1400 Registrant's telephone number, including area code Not applicable Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, $.01 Par Value - 6,246,151 shares as of May 31, 1999 Class A Common Stock, $.01 Par Value - 1,020,930 shares as of May 31, 1999 CCA INDUSTRIES, INC. AND SUBSIDIARIES INDEX Page Number PART I FINANCIAL INFORMATION: Consolidated Balance Sheets as of May 31, 1999 and November 30, 1998 . . . . . . . . . . . . . 1-2 Consolidated Statements of Operations for the three months and six months ended May 31, 1999 and 1998 . . . . . . . . . . . . . . . . . . . . 3 Consolidated Statements of Comprehensive Income for the three months and six months ended May 31, 1999 and 1998. . . . . . . . . . . . . . . . . . . . . 4 Consolidated Statements of Cash Flows for the six months ended May 31, 1999 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . 5-6 Notes to Consolidated Financial Statements . . . . . . . . .7-15 Management's Discussion and Analysis of Results of Operations and Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . 16-18 PART II OTHER INFORMATION. . . . . . . . . . . . . . . . . . . 19-20 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 CCA INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS A S S E T S
May 31, November 30, 1999 1998 Current Assets Cash and cash equivalents $ 102,076 $ 542,289 Short-term investments and marketable securities 1,937,852 1,633,452 Accounts receivable, net of allowances of $1,120,036 and $1,318,185, respectively 9,819,852 7,878,000 Inventories 8,054,564 9,059,456 Prepaid expenses and sundry receivables 412,754 317,318 Deferred income taxes 997,087 974,922 Prepaid income taxes and refunds due 448,443 72,513 Deferred advertising 1,265,960 - Total Current Assets 23,038,588 20,477,950 Property and Equipment, net of accumulated depreciation and amortization 816,976 866,663 Intangible Assets, net of accumulated amortization of $108,919 at May 31, 1999 and $71,373 at November 30, 1998 662,416 245,875 Other Assets Marketable securities 1,401,393 2,172,253 Due from officers - Non-current 64,818 65,250 Deferred income taxes 51,102 127,256 Other 55,289 54,889 Total Other Assets 1,572,602 2,419,648 Total Assets $26,090,582 $24,010,136
See Notes Consolidated to Financial Statements. -1- CCA INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY
May 31, November 30, 1999 1998 Current Liabilities Notes payable $ 1,900,000 $ 1,550,000 Accounts payable and accrued liabilities 8,355,010 6,259,967 Income taxes payable - 600,720 Total Current Liabilities 10,255,010 8,410,687 Minority (Deficiency) Interest in Consolidated Subsidiary ( 59,102) 7,798 Shareholders' Equity Common stock, $.01 par; authorized 15,000,000 shares; issued and outstanding 6,246,151 and 6,246,151 shares, respectively 62,462 62,462 Class A common stock, $.01 par; authorized 5,000,000 shares; issued and outstanding 1,020,930 and 1,020,930 shares, respectively 10,209 10,209 Additional paid-in capital 4,454,228 4,454,228 Retained earnings 11,558,403 11,238,704 Unrealized gains (losses) on marketable securities ( 25,462) ( 18,343) 16,059,840 15,747,260 Less: Treasury Stock (95,996 and 89,519 shares at May 31, 1999 and November 30, 1998, respectively) 165,166 155,609 Total Shareholders' Equity 15,894,674 15,591,651 Total Liabilities and Shareholders' Equity $26,090,582 $24,010,136
See Notes to Consolidated Financial Statements. -2- CCA INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended May 31, May 31, 1999 1998 1999 1998 Revenues Sales of Health and Beauty Aid Products - Net $11,320,784$10,770,270 $21,066,544 $20,122,701 Other income 42,629 97,272 83,607 183,526 11,363,413 10,867,542 21,150,151 20,306,227 Costs and Expenses Costs of sales 4,471,932 4,127,413 8,487,683 7,714,527 Selling, general and administrative expenses 3,517,879 3,291,583 6,858,692 6,177,049 Advertising, cooperative and promotions 2,935,419 1,947,555 5,005,491 4,108,340 Research and development 125,443 171,740 255,209 305,320 Provision for doubtful accounts 65,111 15,703 112,429 78,940 Interest expense 44,803 967 79,448 967 11,160,587 9,554,961 20,798,952 18,385,143 Income before Income Taxes 202,826 1,312,581 351,199 1,921,084 Provision for Income Taxes 21,694 529,161 98,406 761,709 Net Income Including Minority Deficiency of Consolidated Subsidiary 181,132 783,420 252,793 1,159,375 Minority Deficiency in Net Loss of Consolidated Subsidiary 75,483 21,424 64,883 21,424 Net Income $ 256,615 $ 804,844 $ 317,676 $1,180,799 Earnings per Share Basic $.04 $.11 $.04 $.16 Diluted $.03 $.10 $.04 $.15
See Notes to Consolidated Financial Statements. -3- CCA INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended Six Months Ended May 31, May 31, 1999 1998 1999 1998 Net Income $256,615 $804,844 $317,676 $1,180,799 Other Comprehensive Income Unrealized holding gains (loss) on investments 6,461 1,465 ( 7,119) 7,648 Provision (Benefit) for Taxes 2,650 500 ( 2,850) 3,000 Other Comprehensive Income (Loss) - Net 3,811 965 ( 4,269) 4,648 Comprehensive Income $260,426 $805,809 $313,407 $1,185,447 Earnings Per Share: Basic $.04 $.11 $.04 $.16 Diluted $.03 $.10 $.04 $.15
See Notes to Consolidated Financial Statements. -4- CCA INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Six Months Ended Ended May 31, May 31, 1999 1998 Cash Flows from Operating Activities: Net income $ 317,676 $1,180,799 Adjustments to reconcile net income to net cash (used in) operating activities: Depreciation and amortization 173,795 155,328 Minority deficiency in consolidated subsidiaries ( 64,883) ( 21,424) Amortization of bond premium 948 942 Loss (gain) on sale of marketable securities 16,766 ( 4,727) Decrease (increase) in deferred income taxes 53,989 ( 77,600) (Increase) in accounts receivable - Net ( 1,941,852) ( 2,506,687) Decrease (increase) in inventory 1,004,892 ( 2,116,699) (Increase) in prepaid expenses and miscellaneous receivables ( 95,436) ( 231,740) (Increase) in deferred advertising ( 1,265,960) ( 889,090) Increase in accounts payable and accrued liabilities 2,095,043 1,678,715 (Decrease) increase in taxes payable ( 976,650) 604,661 (Increase) in security deposits ( 400) ( 820) Net Cash (Used in) Operating Activities ( 682,072) ( 2,228,342) Cash Flows from Investing Activities: Acquisition of property, plant and equipment( 86,562) ( 306,762) Acquisition of intangible assets ( 454,087) - Proceeds of money due from officers 432 - Purchase of marketable securities ( 122,150) ( 1,076,706) Proceeds from sale and maturity of investments 563,783 1,036,404 Purchase of treasury stock ( 9,557) - Net Cash (Used in) Investing Activities ( 108,141) ( 347,064) Cash Flows from Financing Activities: Proceeds from borrowings 2,250,000 1,083,539 Payment on debt ( 1,900,000) ( 386,159) Net Cash Provided by Financing Activities 350,000 697,380 Net (Decrease) in Cash ( 440,213) ( 1,878,026) Cash at Beginning of Period 542,289 3,649,774 Cash at End of Period $ 102,076 $1,771,748
See Notes to Consolidated Financial Statements. -5- CCA INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED)
Six Months Six Months Ended Ended May 31, May 31, 1999 1998 Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest $ 76,573 $ 967 Income taxes 1,018,068 150,000 Supplemental Schedule of Noncash Investing and Financing Activities: The Company issued common stock in exchange for exercise of options and surrender of options and surrender of outstanding shares of stock: Common stock retired $ - $ 35,000 Common stock issued - ( 35,000) $ - $ -
See Notes to Consolidated Financial Statements. -6- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial state- ments have been prepared in accordance with generally accepted ac- counting principles for interim financial information and with the instruc- tions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended May 31, 1999 are not necessarily indicative of the results that may be expected for the year ended November 30, 1999. For further information, refer to the consoli- dated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended November 30, 1998. NOTE 2 - ORGANIZATION AND DESCRIPTION OF BUSINESS CCA Industries, Inc. ("CCA") was incorporated in the State of Delaware on March 25, 1983. CCA manufactures and distributes health and beauty aid products. CCA has several wholly-owned subsidiaries (CCA Cosmetics, Inc., CCA Labs, Inc., 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. which manufactures and distributes perfume products. NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include the accounts of CCA and its wholly-owned subsidiaries (collectively the "Company"). All significant intercompany 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. -7- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. During fiscal 1998, two officers/shareholders exercised in the aggregate 70,000 options in exchange for 16,470 shares previously issued common stock. The common shares were put into treasury and were subsequently cancelled. 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 7-10 Years Furniture and fixtures 5-7 Years Tools, dies and masters 2-7 Years Transportation equipment 7 Years Leasehold improvements 7-10 Years or life of lease, whichever is shorter Intangible Assets: Intangible assets are stated at cost. Intangible assets represents the excess of cost over the fair value of the net assets acquired and is amortized over 60 months. Patents and trademarks are amortized on the straight-line method over a period of 17 years. -8- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Financial Instruments: The carrying value of assets and liabilities considered financial instru- ments approximate their respective fair value. 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 at the time delivery occurs. 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. NOTE 4 - INVENTORIES The components of inventory consist of the following: May 31, November 30, 1999 1998 Raw materials $4,586,203 $5,828,257 Finished goods 3,468,361 3,231,199 $8,054,564 $9,059,456 At May 31, 1999 and November 30, 1998, the Company had a reserve for obsolescence of $834,131 and $836,805, respectively. -9- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 - PROPERTY AND EQUIPMENT The components of property and equipment consisted of the following: May 31, November 30, 1999 1998 Machinery and equipment $ 299,528 $ 297,615 Furniture and equipment 742,547 721,296 Transportation equipment 10,918 10,918 Tools, dies, and masters 1,882,372 1,819,974 Leasehold improvements 109,474 108,474 3,044,839 2,958,277 Less: Accumulated depreciation and amortization 2,227,863 2,091,614 Property and Equipment - Net $ 816,976 $ 866,663 Depreciation expense for the six months ended May 31, 1999 amounted to $136,249 and for the year ended November 30, 1998 amounted to $318,715. NOTE 6 - INTANGIBLE ASSETS Intangible assets consist of the following: May 31, November 30, 1999 1998 Intangibles $529,739 $ 75,652 Patents and trademarks 241,596 241,596 771,335 317,248 Less: Accumulated amortization 108,919 71,373 Intangible Assets - Net $662,416 $245,875 Amortization expense for the six months ended May 31, 1999 amounted to $37,546 and for the year ended November 30, 1998 amounted to $23,417. In March 1998, the Company acquired, through its newly formed 80% owned subsidiary, Fragrance Corporation of America, Ltd. (FCA), certain intangibles (consisting of trademarks, licenses, customer lists, know-how, etc.) from Shiara, Inc. as well as certain inventory. The costs incurred to date ($529,739) with regard to the acquisition, in excess of the fair market of the inventory obtained, has been recorded as intangible assets on FCA's books and is being amortized over 60 months. -10- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 - DEFERRED ADVERTISING In accordance with APB 28 Interim Financial Reporting the Company expenses its advertising and related costs proportionately over the interim periods based on its total expected costs per its various advertising programs. Consequently a deferral of $1,265,960 is accordingly reflected in the balance sheet for the interim period. This deferral is the result of the Company's $6,000,000 media budget for the year which contemplates lower spending in the 4th quarter than in the other three quarters; as well as the Company's Co-op advertising commitments which also anticipates a lower expenditure in the 4th quarter. The table below sets forth the calculation: May May 1999 1998 (In Millions)(In Millions) Media advertising budget for the fiscal year $6.00 $5.00 Pro-rata portion for six months $3.00 $2.50 Media advertising spent 3.32 3.03 Accrual (deferral) ($ .32) ($ .53) Anticipated Co-op advertising commitments $3.50 $3.00 Pro-rata portion for six months $1.75 $1.50 Co-op advertising spent 2.70 1.86 Accrual (deferral) ($ .95) ($ .36) NOTE 8 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES The following items which exceeded 5% of total current liabilities are included in accounts payable and accrued liabilities as of: May 31, November 30, 1999 1998 (In 000's) (In 000's) a) Media advertising $1,333 $ 820 b) Coop advertising 755 494 c) Accrued returns 1,439 1,107 -11- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES (Continued) All other liabilities were for trade payables or individually did not exceed 5% of total current liabilities. NOTE 9 - OTHER INCOME Other income consists of the following at May 31: 1999 1998 Interest income $84,424 $173,734 Dividend income 19,742 1,137 Miscellaneous ( 20,559) 8,655 $83,607 $183,526 NOTE 10 - 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 May 31, 1999 and November 30, 1998 were as follows: May 31, November 30, 1999 1998 Current: COST MARKET COST MARKET Corporate obligations $1,430,820 $1,440,134$ 780,776$ 786,233 Government obligations (including mortgage backed securities) 495,508 497,718 841,067 847,219 Total 1,926,328 1,937,852 1,621,843 1,633,452 Non-Current: Corporate obligations 285,000 285,000 1,030,044 1,038,450 Government obli- gations 179,817 177,725 298,600 298,931 Preferred stock 512,561 500,485 512,561 511,500 Other equity investments 461,000 438,183 361,000 323,372 Total 1,438,378 1,401,393 2,202,205 2,172,253 Total $3,364,706 $3,339,245$3,824,048$3,805,705 -12- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES (CONTINUED) The market value at May 31, 1999 was $3,339,245 as compared to $3,805,705 at November 30, 1998. The cost and market values of the investments at May 31, 1999 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 2/22/00 5.450% $200,000 $ 199,226 $ 199,780 $ 199,780 GTE Southwest Deb 12/01/99 5.820% 100,000 99,851 100,119 100,119 Florida Power & Light 7/01/99 5.500% 300,000 295,776 300,033 300,033 Virginia Electric & Power 4/01/00 5.875% 250,000 246,117 250,368 250,368 GMAC Smartnotes 10/15/99 5.950% 200,000 200,000 200,272 200,272 Florida Power & Light 4/01/00 5.375% 200,000 199,850 199,562 199,562 Mid American-NB & TC-CD 8/07/01 5.600% 95,000 95,000 95,000 95,000 Mid First Bank-CD 8/14/00 5.550% 95,000 95,000 95,000 95,000 MBNA-CD 8/13/01 5.650% 95,000 95,000 95,000 95,000 Flagstar Bank 10/21/99 4.900% 95,000 95,000 95,000 95,000 Progress Fed Svgs Bank 10/25/99 4.800% 95,000 95,000 95,000 95,000 1,715,820 1,725,134 1,725,134
-13- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - 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: US Treasury Note 11/15/99 5.875% 250,000 $ 249,141 $251,015 $ 251,015 US Treasury Zero Coupon 8/15/99 5.920 148,000 146,484 146,551 146,551 Federal Nat. Mtg. Note 7/30/99 5.860 100,000 99,883 100,152 100,152 FHLMC 1628-N 12/15/2023 6.500 50,000 37,774 37,712 37,712 FNMA 93-224-D 11/25/2023 6.500 104,000 101,873 99,166 99,166 FNMA 92-2-N 1/25/2024 6.500 52,000 40,170 40,847 40,847 675,325 675,443 675,443
-14- CCA INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - 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: Tennessee Valley Authority (QIDS) Qtrly Income Debt Secs - Matures 3/31/2045 3/31/00 8.00% 13,600 $ 362,561 $ 349,357 $ 349,567 Merrill Lynch Trust 9/30/08 7.28% 6,000 150,000 151,128 151,128 Other Equity Investments: First Australia Prime 100,000 100,000 100,000 Dreyfus Premier Limited Term High Income CL B 121,000 115,282 115,282 Dreyfus High Yield Strategies Fund 240,000 222,901 222,901 973,561 938,668 938,668 $3,364,706 $3,339,245 $3,339,245 -15- CCA INDUSTRIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (UNAUDITED) For the six month period ended May 31, 1999, the Company had revenues of $21,150,151 and net income of $317,676 (net of consolidated subsidiary's deficiency in net loss of $64,883) after a provision for income taxes of $98,406, as compared to revenues of $20,306,227 and net income of $1,180,799 after a provision for income taxes of $761,709 for the six month period ended May 31, 1998. Net sales for the six months ended May 31, 1999 ($21,066,544) were up approximately $944,000 from the 1998 sales for six months ($20,122,701) primarily due to the sales of the Company's new subsidiary, Fragrance Corporation of America, Inc. (FCA), whose sales consist of newly licensed per- fumes. FCA's net sales for the six months were $1.3 million. Although con- solidated sales returns continue to run approximately 7% to 8% of consolidated gross sales, CCA's returns were only $1,015,000 on gross sales of approximately $21,822,000 (approximately 5%) while FCA's returns were $416,000 on gross sales of approximately $1,807,000 (approximately 23%). The large percentage of returns on FCA was due primarily to the large return of Christmas merchandise coupled with some returns of product of Shiara Inc. (the Company which licensed its perfume to FCA). Other income ($84,000 vs. $184,000) was less due to the decrease in the Company's interest income due to their use of cash in the formation of FCA. Gross margins of 60% for the six months were down from approximately 61.5% the prior year. This was primarily due to the lower gross profit margins on FCA's sales. Gross margins are expected to improve in the future. Advertising, cooperative and promotional allowance expenditures increased during the six month period from $4,108,000 to $5,005,000. Advertising expenditures were 23.75% of sales for the six months ended May 31, 1999 as compared with 20.5% for the period ended May 31, 1998. As part of the registrant's business it is necessary to enter into co-operative advertising agreements and other promotional activities with its accounts, especially upon the introduction of a new product. Both co-op advertising and promotions have a material effect on the Company's operations. If the advertising and promo- tions are successful, revenues will be increased accordingly. Should the co- op and promotions not be successful, it will have a negative impact on the ompany's promotional cost per sale, and have a negative effect on income. The Company attempts to anticipate its advertising and promotional commitments as a percent of gross sales in order to attempt to control its effect on its net income. In accordance with APB 28 Interim Financial Reporting the Company ex- penses its advertising and related costs proportionately over the interim Consequently, a deferral of $1,266,000 is accordingly reflected in the balance sheet for the interim period, as compared to $889,000 at May 31, 1998. This deferral is the result of the Company's $6 million media budget for the year which contemplates lower spending in the 4th quarter than in the other three quarters; as well as the Company's co-op advertising commitments which also anticipates lower expenditures in the 4th quarter. Specifically, the Company spent approximately $3.32 million in the six months on media ad- vertising and, therefore,expensed $3 million and deferred $.32 million as of May 31,1999. Similarly, as of May 31, 1999, the Company's co-op advertising commitments for the year ended November 30, 1999 are anticipated to be approximately $3.5 million of which approximately $2.7 million was spent in the first six months resulting in an expense of $1.75 million and a deferral of approximately $.95 million as of May 31, 1999. Comparatively as of May 31, 1998, the Company had anticipated media advertising expense in fiscal year 1998 of $5 million and spent approximately $3.03 million in the first six months resulting in a deferral of approximately $.53 million. The anticipated Co-op commitments as of May 31, 1998 were $3 million for the year of which $1.86 million were spent for the six months resulting in a $.36 million deferral. -16- CCA INDUSTRIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (UNAUDITED) Selling, general and administrative expenses ("SG&A") increased compared to the prior year. The increase to $6,859,000 from $6,177,000 was due mostly to the "SG&A" expenses ($564,000) incurred by the Company's newly formed sub- sidiary. For the three month period ended May 31, 1999, net sales were $11,320,784 as compared to $10,770,270 for May 31, 1998. Income for the quarter before taxes decreased to $256,615 from $804,844. Gross margins of 60.5% for the three months ended May 31, 1999 were down from 61.7% in 1998. Advertising, co- operative and promotional allowance expense during the quarter increased to $2,935,000 from $1,947,000. Advertising expenses were 26% of sales for the quarter in 1999 as compared to 18% in 1998. Selling, general and administra- tive expenses were approximately 31% in the current quarter as compared to 30.5% in 1998. During the three month period ended May 31, 1999, the Company donated a substantial amount of inventory to charity which resulted in a relatively large tax deduction and decreased its provision for taxes by approximately $51,000. Research and development expenses for the three and six months were less due to the economies of utilizing the services of more in-house staff rather than outside consultants. Bad debt expense for the periods increased due to the necessary reserves on the increasing accounts receivable. Actual write-offs were approximately $32,000 in 1999 as compared to none in 1998. The Company's interest expense increased to $79,000 from $1,000 due to the borrowing caused by the use of cash to start up the FCA business. The Company's sales were primarily to drugstore chains, food chains and mass merchandisers. The Company's financial position as at May 31, 1999 consists of current assets of $23,038,588 and current liabilities of $10,255,010. The Company's cash position decreased due to the significant increase in its accounts receivable partially due to the sales of its new subsidiary and mostly due to a general slow down in payments by the major retailers. The Company's accounts payable also increased due to FCA's new business and the Company's extension of its own payment terms. During the six month period ended May 31, 1999, share- holders' equity increased from $15,591,651 at November 30, 1998 to $15,894,674 at May 31, 1999. This was due primarily to the net income generated for the period. During the six months, the Company used $682,000 in operations, $454,000 to pay for costs incurred relating to the acquisition of Shiara Inc's assets in excess of their fair market value and $86,000 to purchase new fixed assets; and generated, $350,000 from new borrowings and approximately $430,000 from the net liquidations of securities. These factors resulted in a net decrease in the Company's cash of about $440,000. -17- CCA INDUSTRIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (UNAUDITED) The year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Based on a 1998 assessment, the Company determined that it had to substan- tially modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The Company presently believes that with these modifications to existing soft- ware and conversions to new software, the Year 2000 Issue will not pose sig- nificant operational problems for its computer systems. However, if such modi- fications and conversions are not made, or are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Company. The Company has initiated formal communications with all of its significant service providers and suppliers, including its clearing broker, to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 issues. The Company's estimate to complete includes the estimated time associated with the impact of third party's Year 2000 Issues based on presently available information. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted and would not have an ad- verse effect on the Company's systems. The Company does not believe that the Year 2000 issue will have a material effect on any of the embedded technology in its manufacturing, warehousing or distribution equipment. The Company will utilize both internal and external resources to reprogram, or replace, and test the software for Year 2000 modifications. The Company believes it will complete the Year 2000 modifications in a timely fashion based on management's best estimate, which was derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that this estimate will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. The cost of addressing the Company's Year 2000 issues is expected to be approximately $400,000 to $500,000. However, some of these costs should be offset by a grant received from the State of New Jersey to help pay for the retraining of the Company's staff. The net cost should not have a material adverse effect on the Company's cash flow or financial position. It could possibly, however adversely effect the Company's earnings in the year the majority of costs are incurred. The Company is executing its Year 2000 plan through its own employees as well as various computer consultants and vendors. The Year 2000 testing and reprogramming is being done in conjunction with other ongoing maintenance and reprogramming efforts. The Company has a contingency plan in place in the event their Year 2000 issue is not resolved timely. -18- PART II, ITEM 6. (Continued) EXHIBIT 11 CCA INDUSTRIES, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (UNAUDITED) Three Months Ended Six Months Ended May 31, May 31, 1999 1998 1999 1998 Item 6. Weighted average shares outstanding - Basic 7,171,085 7,259,581 7,171,157 7,242,323 Net effect of dilutive stock options--based on the treasury stock method using average market price 815,352 930,907 643,326 826,929 Weighted average shares outstanding - Diluted 7,986,437 8,190,488 7,814,483 8,069,252 Net income $ 256,615 $ 804,844$ 317,676 $1,180,799 Per share amount Basic $.04 $.11 $.04 $.16 Diluted $.03 $.10 $.04 $.15 -19- CCA INDUSTRIES, INC. PART II OTHER INFORMATION All information pertaining to Part II is omitted pursuant to the instructions pertaining to that part. The Company did not file any reports on Form 8-K during the six months ended May 31, 1999. -20- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the under- signed, thereunto duly authorized. CCA INDUSTRIES, INC. By: David Edell, President By: Ira W. Berman, Secretary -21-