Attached files
file | filename |
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EX-11 - EXHIBIT 11 - CCA INDUSTRIES INC | c03449exv11.htm |
EX-10.1 - EXHIBIT 10.1 - CCA INDUSTRIES INC | c03449exv10w1.htm |
EX-31.1 - EXHIBIT 31.1 - CCA INDUSTRIES INC | c03449exv31w1.htm |
EX-10.2 - EXHIBIT 10.2 - CCA INDUSTRIES INC | c03449exv10w2.htm |
EX-31.2 - EXHIBIT 31.2 - CCA INDUSTRIES INC | c03449exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - CCA INDUSTRIES INC | c03449exv32w1.htm |
EX-32.2 - EXHIBIT 32.2 - CCA INDUSTRIES INC | c03449exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 31, 2010
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 1-31643
CCA Industries Inc.
(Exact name of registrant as specified in its charter)
Delaware | 04-2795439 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
200 Murray Hill Parkway
East Rutherford, NJ 07073
East Rutherford, NJ 07073
(Address of principal executive offices)
(201) 330-1400
(Registrants telephone number, including area code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act
(Check one).
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of July 14, 2010 there were (i) 6,086,740 shares of the issuers common stock, par value
$0.01, outstanding; and (ii) 967,702 shares of the issuers Class A common stock, par value $0.01,
outstanding.
CCA INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page | ||||||||
Number | ||||||||
PART I FINANCIAL INFORMATION: |
||||||||
Item 1. Financial Statements: |
||||||||
2-3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7 - 25 | ||||||||
26 - 31 | ||||||||
32 | ||||||||
32 | ||||||||
33 - 34 | ||||||||
35 | ||||||||
EXHIBITS |
36-65 | |||||||
Exhibit 10.1 | ||||||||
Exhibit 10.2 | ||||||||
Exhibit 11 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
1
Table of Contents
CCA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
A S S E T S
May 31, | November 30, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 8,947,057 | $ | 7,844,369 | ||||
Short-term investments and marketable
securities |
8,574,360 | 9,636,103 | ||||||
Accounts receivable, net of allowances of
$1,808,900 and $1,584,814, respectively |
8,500,031 | 7,613,273 | ||||||
Inventories, net of reserve for inventory obsolescence
of $1,029,377 and $760,001, respectively |
8,757,728 | 8,327,277 | ||||||
Insurance claim receivable |
475,000 | | ||||||
Prepaid expenses and sundry receivables |
521,600 | 739,139 | ||||||
Prepaid and refundable income taxes |
679,161 | 89,535 | ||||||
Deferred income taxes |
1,509,158 | 1,193,745 | ||||||
Total Current Assets |
37,964,095 | 35,443,441 | ||||||
Property and Equipment, net of accumulated
depreciation and amortization |
585,990 | 682,921 | ||||||
Intangible Assets, net of accumulated
Amortization |
696,414 | 697,506 | ||||||
Other Assets |
||||||||
Marketable securities |
2,675,748 | 2,900,035 | ||||||
Other |
65,300 | 65,300 | ||||||
Total Other Assets |
2,741,048 | 2,965,335 | ||||||
Total Assets |
$ | 41,987,547 | $ | 39,789,203 | ||||
See Notes to Unaudited Consolidated Financial Statements.
2
Table of Contents
CCA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS EQUITY
May 31, | November 30, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
Current Liabilities |
||||||||
Accounts payable and accrued liabilities |
$ | 12,326,264 | $ | 8,775,676 | ||||
Capitalized lease obligation current portion |
35,789 | 53,233 | ||||||
Income taxes payable |
| 147,153 | ||||||
Dividends payable |
493,811 | 493,811 | ||||||
Total Current Liabilities |
12,855,864 | 9,469,873 | ||||||
Deferred tax liability |
117,154 | 76,929 | ||||||
Capitalized lease obligations-long term |
11,339 | 22,553 | ||||||
Total Liabilities |
12,984,357 | 9,569,355 | ||||||
Shareholders Equity |
||||||||
Preferred stock, $1.00 par; authorized
20,000,000 shares; none issued |
| | ||||||
Common stock, $.01 par; authorized
15,000,000 shares; 6,086,740 shares issued and outstanding |
60,867 | 60,867 | ||||||
Class A common stock, $.01 par; authorized
5,000,000 shares; 967,702 shares issued and outstanding |
9,677 | 9,677 | ||||||
Additional paid-in capital |
2,329,049 | 2,329,049 | ||||||
Retained earnings |
26,738,126 | 28,094,783 | ||||||
Unrealized (loss) on marketable
securities |
(134,529 | ) | (274,528 | ) | ||||
Total Shareholders Equity |
29,003,190 | 30,219,848 | ||||||
Total Liabilities and Shareholders Equity |
$ | 41,987,547 | $ | 39,789,203 | ||||
See Notes to Unaudited Consolidated Financial Statements.
3
Table of Contents
CCA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(UNAUDITED)
Three Months Ended | Six Months Ended | |||||||||||||||
May 31, | May 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues |
||||||||||||||||
Sales of health and beauty
aid products Net |
$ | 14,708,108 | $ | 14,609,686 | $ | 27,799,285 | $ | 29,368,536 | ||||||||
Other income |
147,109 | 138,643 | 254,218 | 324,260 | ||||||||||||
Total Revenues |
14,855,217 | 14,748,329 | 28,053,503 | 29,692,796 | ||||||||||||
Costs and Expenses |
||||||||||||||||
Costs of sales |
6,119,823 | 5,527,838 | 11,150,922 | 11,144,050 | ||||||||||||
Selling, general and
administrative expenses |
5,538,352 | 5,050,297 | 10,945,348 | 10,257,140 | ||||||||||||
Advertising, cooperative
and promotional expenses |
2,353,530 | 2,782,150 | 3,905,037 | 6,449,490 | ||||||||||||
Research and development |
156,751 | 119,390 | 303,277 | 245,936 | ||||||||||||
Bad debt (recovery) expense |
(31,936 | ) | (72,181 | ) | 14,339 | (24,675 | ) | |||||||||
Interest expense |
1,004 | 2,383 | 2,751 | 5,668 | ||||||||||||
Total |
14,137,524 | 13,409,877 | 26,321,674 | 28,077,609 | ||||||||||||
Advertising Litigation
Expense |
2,067,407 | | 2,129,043 | | ||||||||||||
Total Costs and Expenses |
16,204,931 | 13,409,877 | 28,450,717 | 28,077,609 | ||||||||||||
(Loss) Income before (Benefit From)
Provision for Income Taxes |
(1,349,714 | ) | 1,338,452 | (397,214 | ) | 1,615,187 | ||||||||||
(Benefit From) Provision
for Income Taxes |
(439,125 | ) | 644,316 | (28,179 | ) | 796,685 | ||||||||||
Net (Loss) Income |
$ | (910,589 | ) | $ | 694,136 | $ | (369,035 | ) | $ | 818,502 | ||||||
(Loss) Earnings per Share: |
||||||||||||||||
Basic |
$ | (0.13 | ) | $ | 0.10 | $ | (.05 | ) | $ | 0.12 | ||||||
Diluted |
$ | (0.13 | ) | $ | 0.10 | $ | (.05 | ) | $ | 0.12 | ||||||
Weighted Average Common
Shares Outstanding: |
||||||||||||||||
Basic |
7,054,442 | 7,054,442 | 7,054,442 | 7,054,442 | ||||||||||||
Diluted |
7,054,442 | 7,054,442 | 7,054,442 | 7,054,442 | ||||||||||||
See Notes to Unaudited Consolidated Financial Statements.
4
Table of Contents
CCA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)
Three Months Ended May 31, |
Six Months Ended May 31, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net (Loss) Income |
$ | (910,589 | ) | $ | 694,136 | $ | (369,035 | ) | $ | 818,502 | ||||||
Other Comprehensive (Loss)
Income Unrealized (loss) gain
on investments, net of tax *
(Note 7, Note 12) |
(44,287 | ) | 1,059,550 | 139,999 | 260,824 | |||||||||||
Comprehensive (Loss) Income |
$ | (954,876 | ) | $ | 1,753,686 | $ | (229,036 | ) | $ | 1,079,326 | ||||||
* | Unrealized holding (loss) gain for the three and six months ended May 31, 2010 is net of a
deferred tax benefit from unrealized losses of $29,402 and $49,413 respectively. |
See Notes to Unaudited Consolidated Financial Statements.
5
Table of Contents
CCA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(UNAUDITED)
Six Months Ended | ||||||||
May 31, | May 31, | |||||||
2010 | 2009 | |||||||
Cash Flows from Operating Activities: |
||||||||
Net (loss) income |
$ | (369,035 | ) | $ | 818,502 | |||
Adjustments to reconcile net income to net
cash
provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
125,517 | 124,042 | ||||||
Loss on write off of fixed assets |
| 3,262 | ||||||
Loss (Gain) on sale of securities |
16,780 | (49,971 | ) | |||||
(Increase) decrease in deferred income taxes |
(225,775 | ) | 37,337 | |||||
(Increase) in accounts receivable |
(886,758 | ) | (1,262,827 | ) | ||||
(Increase) decrease in inventory |
(430,452 | ) | 151,864 | |||||
(Increase) in insurance claim receivable |
(475,000 | ) | | |||||
Decrease in prepaid expenses
and miscellaneous receivables |
217,539 | 62,020 | ||||||
(Increase) decrease in prepaid and
refundable income taxes |
(589,626 | ) | 720,949 | |||||
Increase (Decrease) in accounts payable and
accrued Liabilities |
3,550,588 | (331,560 | ) | |||||
(Decrease) in income taxes payable |
(147,153 | ) | ||||||
Net Cash Provided by Operating Activities |
786,625 | 273,618 | ||||||
Cash Flows from Investing Activities: |
||||||||
Acquisition of property, plant and equipment |
(27,492 | ) | (168,382 | ) | ||||
Purchase of marketable securities |
(9,008,164 | ) | (9,626,163 | ) | ||||
Proceeds from sale or maturity of
investments |
10,367,999 | 8,384,000 | ||||||
Net Cash Provided by (Used in) Investing
Activities |
1,332,343 | (1,410,545 | ) | |||||
Cash Flows from Financing Activities: |
||||||||
Payments of capital lease obligation |
(28,658 | ) | (28,219 | ) | ||||
Dividends paid |
(987,622 | ) | (1,551,978 | ) | ||||
Net Cash (Used in) Financing Activities |
(1,016,280 | ) | (1,580,197 | ) | ||||
Net Increase (decrease) in Cash |
1,102,688 | (2,717,124 | ) | |||||
Cash and Cash Equivalents at Beginning of
Period |
7,844,369 | 5,568,699 | ||||||
Cash and Cash Equivalents at End of Period |
$ | 8,947,057 | $ | 2,851,575 | ||||
Supplemental Disclosures of Cash Flow
Information: |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 2,751 | $ | 5,668 | ||||
Income taxes |
957,768 | 41,017 | ||||||
Schedule of Non Cash Financing Activities: |
||||||||
Dividends declared |
987,622 | 1,269,800 |
See Notes to Unaudited Consolidated Financial Statements.
6
Table of Contents
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. Operating
results for the three and six month periods ended May 31, 2010 are not necessarily
indicative of the results that may be expected for the entire year ended November 30,
2010. For further information, refer to the consolidated financial statements and
footnotes thereto included in the Companys annual report on Form 10-K for the year
ended November 30, 2009. The accompanying unaudited consolidated financial statements,
in the opinion of management, include all adjustments necessary for a fair
presentation. All such adjustments are of a normal recurring nature.
NOTE 2 ORGANIZATION AND DESCRIPTION OF BUSINESS
CCA Industries, Inc. (CCA) was incorporated in the State of Delaware on March 25,
1983.
CCA manufactures and distributes health and beauty aid products.
CCA has several wholly-owned subsidiaries, CCA Cosmetics, Inc., CCA Labs, Inc., and
Berdell, Inc, all of which are currently inactive. CCA has two active wholly-owned
subsidiaries, CCA Online Industries, Inc., and CCA IND., S.A. DE C.V., a Variable
Capital Corporation organized pursuant to the laws of Mexico.
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of CCA and its wholly-owned
subsidiaries (collectively the Company). All significant inter-company accounts and
transactions have been eliminated.
Estimates and Assumptions:
The consolidated financial statements include the use of estimates, which management
believes are reasonable. The process of preparing financial statements in conformity
with Accounting Principles Generally Accepted in the United States (GAAP), requires
management to make estimates and assumptions regarding certain types of assets,
liabilities, revenues, and expenses. Such estimates primarily relate to unsettled
transactions and events as of the date of the financial statements. Accounting
estimates and assumptions are those that management considers to be most critical to
the financial statements because they inherently involve significant judgment and
uncertainties. All of these estimates and assumptions reflect managements best
judgment about current economic and market conditions and their effects on the
information available as of the date of the consolidated financial statements.
Accordingly, upon settlement, actual results may differ from estimated amounts.
7
Table of Contents
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive (Loss) Income:
Comprehensive (loss) income includes changes in equity that are excluded from the
consolidated statements of operations and are recorded directly into a separate section
of consolidated statements of comprehensive (loss) income. The Companys accumulated
other comprehensive (loss) income shown on the consolidated balance sheets consist of
unrealized gains and losses on investment holdings, net of tax.
Cash and Cash Equivalents:
For purposes of the statement of cash flows, the Company considers all highly liquid
instruments purchased with an original maturity of less than three months to be cash
equivalents.
Short-Term Investments and Marketable Securities:
Short-term investments and marketable securities consist of certificates of deposits,
corporate and government bonds and equity securities. The Company has classified its
investments as Available-for-Sale securities. Accordingly, such investments are
reported at fair market value, with the resultant unrealized gains and losses reported
as a separate component of shareholders equity. Fair value for Available-for-Sale
securities is determined by reference to quoted market prices or other relevant
information.
Accounts Receivable:
Accounts receivable consist of trade receivables recorded at original invoice amount,
less an estimated allowance for uncollectible amounts. The accounts receivable balance
is further reduced by allowances for cooperative advertising and reserves for returns
which are anticipated to be taken as credits against the balances as of the balance
sheet date. The allowances and reserves which are anticipated to be deducted from
future invoices are included in accrued liabilities. Trade credit is generally extended
on a short term basis; thus trade receivables do not bear interest, although a finance
charge may be applied to receivables that are past due. Trade receivables are
periodically evaluated for collectability based on past credit history with customers
and their current financial condition. Changes in the estimated collectability of
trade receivables are recorded in the results of operations for the period in which the
estimate is revised. Trade receivables that are deemed uncollectible are offset
against the allowance for uncollectible accounts. The Company generally does not
require collateral for trade receivables.
8
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CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventories:
Inventories are stated at the lower of cost (weighted average) or market.
Product returns are recorded in inventory when they are received at the lower of their
original cost or market, as appropriate. Obsolete inventory is written off and its
value is removed from inventory at the time its obsolescence is determined.
Property and Equipment and Depreciation and Amortization:
Property and equipment are stated at cost. The Company charges to expense repairs and
maintenance items, while major improvements and betterments are capitalized.
When the Company sells or otherwise disposes of property and equipment items, the cost
and related accumulated depreciation are removed from the respective accounts and any gain or loss is included in earnings.
Depreciation and amortization are provided on the straight-line method over the
following estimated useful lives or lease terms of the assets, whichever is shorter:
Machinery and equipment
|
5-7 Years | |
Furniture and fixtures
|
3-10 Years | |
Tools, dies and masters
|
3 Years | |
Transportation equipment
|
5 Years | |
Leasehold improvements
|
Remaining life of the lease (ranging from 1-9 years) |
Intangible Assets:
Intangible assets are stated at cost. Patents are amortized on the straight-line
method over a period of 17 years. Such intangible assets are reviewed for potential
impairment on a quarterly basis.
Web Site Costs:
Certain costs incurred in creating the graphics and content of the Companys web site
have been capitalized in accordance with the Accounting Standards Codification (ASC)
Topic 350, Intangible Goodwill and Other, issued by the Financial Accounting
Standards Board (FASB). The Company had determined that these costs would be
amortized over a two-year period. Web site design and conceptual costs are expensed as
incurred.
9
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CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Financial Instruments:
The carrying value of assets and liabilities considered financial instruments
approximate their respective fair value.
Income Taxes:
Income taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for future tax consequences attributable to the
temporary differences between the carrying amounts of assets and liabilities as
recorded on the Companys financial statements and the carrying amounts as reflected on
the Companys income tax return. In addition, the portion of charitable contributions
that cannot be deducted in the current period and are carried forward for future
periods are also reflected in the deferred tax assets. Deferred tax assets and
liabilities are valued using the tax rates expected to apply in the years in which
those temporary differences are expected to be recovered or settled. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management, it is
more likely than not that some portion, or all of the deferred tax asset will not be
realized.
Tax Credits:
Tax credits, when present, are accounted for using the flow-through method as a
reduction of income taxes in the years utilized.
(Loss) Earnings Per Common Share:
Basic (loss) earnings per share are calculated in accordance with ASC Topic 260,
Earnings Per Share, which requires using the average number of shares of common stock
outstanding during the period. Diluted (loss) earnings per share is computed on the
basis of the average number of common shares outstanding plus the dilutive effect of
any outstanding stock options using the treasury stock 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, returns are accepted if it is in the best interests of the Companys
relationship with the customer. The Company, therefore, records a reserve for returns
based on the historical returns as a percentage of sales in the five preceding months,
adjusting for returns that can be put back into inventory, and a specific reserve based
on customer circumstances. Those returns which are anticipated to be taken as credits
against the balances as of the balance sheet date are offset against the accounts
receivable. The reserves which are anticipated to be deducted from future invoices are
included in accrued liabilities.
10
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CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Sales Incentives:
In accordance with ASC Topic 605-10-S99, Revenue Recognition, the Company has
accounted for certain sales incentives offered to customers by charging them directly
to sales as opposed to advertising and promotional expense. These accounting adjustments
under ASC Topic 605-10-S99 do not affect net income.
Advertising Costs:
The Companys policy for financial reporting is to charge advertising cost to expense
as incurred. Advertising, cooperative and promotional expenses for the three months
ended May 31, 2010 and May 31, 2009 were $2,353,530 and $2,782,150, respectively.
Advertising, cooperative and promotional expenses for the six months ended May 31, 2010
and May 31, 2009 were $3,905,037 and $6,449,490, respectively.
Shipping Costs:
The Companys policy for financial reporting is to charge shipping costs as part of
selling, general and administrative expenses as incurred. Freight costs included for
the three months ended May 31, 2010 and May 31, 2009 were $681,604 and $722,360,
respectively. Freight costs included for the six months ended May 31, 2010 and 2009
were $1,317,320 and $1,397,133, respectively.
Stock Options:
In December 2004, the FASB issued ASC Topic 718, Stock Compensation. ASC Topic 718
requires stock grants to employees to be recognized in the consolidated statement of
operations based on their fair values.
Recent Accounting Pronouncements:
In December 2007, the FASB amended certain provisions of Accounting Standard
Codification (ASC) Topic 805, Business Combinations. This amendment changes
accounting for acquisitions that close beginning in 2009 in a number of areas including
the treatment of contingent consideration, contingencies, acquisition costs, in-process
research & development and restructuring costs. More transactions and events will
qualify as business combinations and will be accounted for at fair value under the new
standard. This amendment promotes greater use of fair values in financial reporting.
In addition, under Topic 805, changes in deferred tax asset valuation allowances and
acquired income tax uncertainties in a business combination after the measurement
period will impact income tax expense. Some of the changes will introduce more
volatility into earnings. Topic 805 became effective for fiscal years beginning on or
after December 15, 2008.
11
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CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
Topic 805 will have an impact on accounting for any business acquired after the
effective date of this pronouncement.
In December 2007, the FASB issued ASC Topic 810, Consolidation. Topic 810 will change
the accounting and reporting for minority interests, which will be recharacterized as
noncontrolling interests (NCI) and classified as a component of equity. This new
consolidation method will significantly change the accounting for transactions with
minority interest holders. Topic 810 became effective for fiscal years beginning after
December 15, 2008. Topic 810 will have an impact on the presentation and disclosure of
the noncontrolling interests of any non-wholly owned business acquired in the future.
In April 2008, the FASB amended certain provisions of ASC Topic 350,
Intangibles-Goodwill and Other. Topic 350 amends the factors that must be considered
in developing renewal or extension assumptions used to determine the useful life over
which to amortize the cost of a recognized intangible. It further requires an entity to
consider its own assumptions about renewal or extension of the term of the arrangement,
consistent with its expected use of the asset, and is an attempt to improve consistency
between the useful life of a recognized intangible asset and the period of expected
cash flows used to measure the fair value of the asset. Topic 350 became effective for
fiscal years beginning after December 15, 2008, and the guidance for determining the
useful life of a recognized intangible asset must be applied prospectively to
intangible assets acquired after the effective date. Topic 350 did not have a
significant impact on the Companys results of operations, financial condition or
liquidity.
In April 2009, the SEC issued Staff Accounting Bulletin No. 111 (SAB No. 111). SAB
No. 111 amends Topic 5.M. in regard to other than temporary impairment of certain
investments in debt and equity securities. SAB No. 111 confirms the establishment of
the other than temporary category of investment impairment. The adoption of SAB No.
111 became effective upon issuance and did not have any material impact on the
Companys financial position or results of operation.
In April 2009, the FASB issued an amendment to ASC Topic 825, Financial Instruments.
The amendment requires disclosure of the fair value of financial instruments for
interim reporting periods of publicly traded companies as well as in annual financial
statements. The amendment to Topic 825 became effective for interim reporting periods
ending after June 15, 2009. The adoption of this topic had no impact on the Companys
financial position or results of operation.
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CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
In April 2009, the FASB issued additional guidance under ASC Topic 820, Fair Value
Measurements and Disclosures. Topic 820 provides additional guidance for estimating
the fair value of an asset or liability when the volume and level of activity for the
asset or liability have significantly decreased, and identifying circumstances in which
a transaction may not be orderly. The adoption of this topic became effective for all
interim and annual reporting periods ending after June 15, 2009. The adoption of the
additional guidance provided by Topic 820 did not have any material impact on the
Companys financial position or results of operation.
In April 2009, the FASB issued an amendment to ASC Topic 320, Investments Debt and
Equity which amends the guidance in regard to other-than-temporary impairments on debt
and equity securities in the financial statements. Topic 320 also requires additional
disclosures in the financial statements that enable users to understand the types of
debt and equity securities held, including those investments in an unrealized loss
position for which an other-than-temporary impairment has or has not been recognized.
The adoption of the amendment to Topic 320 became effective for all interim and annual
reporting periods ending after June 15, 2009. The adoption of this amended topic did
not have any material impact on the Companys financial position or results of
operation.
In May 2009, the FASB issued ASC Topic 855, Subsequent Events. The statement is to
establish general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued. Topic 855 became
effective June 15, 2009 for all subsequent reporting periods. The adoption of Topic
855 did not have any material impact on the Companys financial position or results of
operation.
In June 2009, the FASB issued Accounting Standards Update (ASU) 2009-01, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles. This update identifies the sources of accounting principles and the
framework for selecting the principles used in the preparation of financial statements
of nongovernmental entities that are presented in conformity with generally accepted
accounting principles (GAAP) in the United States. This update is effective for
financial statements issued for interim and annual periods ending after September 15,
2009. The adoption of ASU 2009-01 did not have any material impact on the Companys
financial position or results of operation.
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CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
In August 2009, the FASB issued ASU 2009-05, which is an update to Topic 820, Fair
Value Measurements and Disclosures. The update provides clarification in regard to
the
estimation of the fair value of a liability. In addition, it also clarifies that both
a quoted price in an active market for the identical liability at the measurement date
and the quoted price for the identical liability when traded as an asset in an active
market when no adjustments to the quoted price of the asset are required are Level 1
fair value measurements. This update became effective for all interim and annual
reporting periods ending after August 31, 2009. The adoption of ASU 2009-05 did not
have a material impact on the Companys financial position or results of operation.
In January 2010, the FASB issued ASU 2010-06, which is an update to Topic 820, Fair
Value Measurement and Disclosures. This update establishes further disclosure
requirements regarding transfers in and out of levels 1 and 2, and activity in level 3
fair value measurements. The update also provides clarification as to the level of
disaggregation for each class of assets and liabilities, requires disclosures about
inputs and valuation techniques, and also includes conforming amendments to the
guidance on employers disclosures about postretirement benefit plan assets. ASU
2010-06 will be effective for all interim and annual reporting periods beginning after
December 15, 2010. ASU 2010-06 is not expected to have a material impact on the
Companys financial position or results of operation.
In February 2010, the FASB issued ASU 2010-09, which is an update to Topic 855,
Subsequent Events. This update clarifies the date through which the Company is
required to evaluate subsequent events. SEC filers will be required to evaluate
subsequent events though the date that the financial statements are issued. ASU
2010-009 was effective upon issuance, and will not have a material impact on the
Companys financial position or results of operation.
Management does not believe that any other recently issued, but not yet effective,
accounting standards if currently adopted would have a material effect on the
accompanying financial statements.
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CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 INVENTORIES
The components of inventory consist of the following:
May 31, | November 30, | |||||||
2010 | 2009 | |||||||
Raw materials |
$ | 5,464,822 | $ | 5,246,185 | ||||
Finished goods |
3,292,906 | 3,081,092 | ||||||
$ | 8,757,728 | $ | 8,327,277 | |||||
At May 31, 2010 and November 30, 2009, the Company had a reserve for obsolescence of
$1,029,377 and $760,001, respectively.
NOTE 5 PROPERTY AND EQUIPMENT
The components of property and equipment consisted of the following:
May 31 | November 30, | |||||||
2010 | 2009 | |||||||
Machinery and equipment |
$ | 231,170 | $ | 217,323 | ||||
Furniture and equipment |
958,218 | 953,208 | ||||||
Tools, dies, and masters |
344,351 | 335,716 | ||||||
Capitalized lease obligations |
263,067 | 263,067 | ||||||
Web Site |
20,000 | 20,000 | ||||||
Leasehold improvements |
402,785 | 402,785 | ||||||
2,219,591 | 2,192,099 | |||||||
Less: Accumulated depreciation
and amortization |
1,633,601 | 1,509,178 | ||||||
Property and Equipment Net |
$ | 585,990 | $ | 682,921 | ||||
Depreciation expense for the six months ended May 31, 2010 and 2009 amounted to
$124,425 and $120,711, respectively. Furniture and equipment includes $132,550 of
costs for computer equipment and software that has been purchased, but not placed in
service as of yet. No depreciation expense for these assets will be recorded until
they are placed in service.
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CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 INTANGIBLE ASSETS
Intangible assets consist of owned trademarks and patents for ten product lines
May 31, | November 30, | |||||||
2010 | 2009 | |||||||
Patents and trademarks |
$ | 856,006 | $ | 856,006 | ||||
Less: Accumulated amortization |
159,592 | 158,500 | ||||||
Intangible Assets Net |
$ | 696,414 | $ | 697,506 | ||||
Patents are amortized on a straight-line basis over their legal life of 17 years and
trademarks are adjusted to realizable value for each quarterly reporting period.
Amortization expense for the six months ended May 31, 2010 and 2009 amounted to
$1,092 and $3,331, respectively. Estimated amortization expense for the years ending
November 30, 2010, 2011, 2012, 2013 and 2014 will be $2,185, $2,185, $2,185, $2,163 and
$2,123 respectively.
NOTE 7 SHORT-TERM
INVESTMENTS AND MARKETABLE SECURITIES
Short-term investments and marketable securities, which consist of fully guaranteed
bank certificates of deposit, stock and various corporate and government obligations,
are stated at market value. The Company has classified its investments as
Available-for-Sale securities and considers as current assets those investments which
will mature or are likely to be sold within the ensuing twelve months. The remaining
investments are considered non-current assets. The cost and market values of the
investments at May 31, 2010 and November 30, 2009 were as follows:
May 31, 2010 | November 30, 2009 | |||||||||||||||
COST | MARKET | COST | MARKET | |||||||||||||
Current |
||||||||||||||||
Guaranteed bank
certificates of deposit |
$ | 826,000 | $ | 832,758 | $ | 942,000 | $ | 944,910 | ||||||||
Corporate
obligations |
399,614 | 404,104 | 598,370 | 607,189 | ||||||||||||
U.S. Government
obligations
(including mortgage
backed securities) |
6,295,145 | 6,296,310 | 7,494,318 | 7,497,900 | ||||||||||||
Preferred stock |
454,855 | 402,570 | 250,000 | 187,720 | ||||||||||||
Common stock |
443,816 | 434,532 | 189,552 | 196,873 | ||||||||||||
Mutual funds |
215,274 | 171,722 | 215,274 | 165,383 | ||||||||||||
Other equity
investments |
70,206 | 32,364 | 70,206 | 36,128 | ||||||||||||
Total Current |
8,704,910 | 8,574,360 | 9,759,720 | 9,636,103 | ||||||||||||
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2010 | November 30, 2009 | |||||||||||||||
COST | MARKET | COST | MARKET | |||||||||||||
Non-Current: |
||||||||||||||||
Guaranteed bank
Certificates of deposit |
240,000 | 241,387 | 816,000 | 818,250 | ||||||||||||
Corporate obligations |
250,000 | 249,660 | 200,000 | 205,297 | ||||||||||||
Preferred stock |
2,279,039 | 2,184,701 | 2,074,845 | 1,876,488 | ||||||||||||
Total Non-Current |
2,769,039 | 2,675,748 | 3,090,845 | 2,900,035 | ||||||||||||
Total |
$ | 11,473,949 | $ | 11,250,108 | $ | 12,850,565 | $ | 12,536,138 | ||||||||
As of May 31, 2010, the Company had unrealized losses on its investments of $223,841.
This amount was reduced by a deferred tax benefit of $89,313, of which $39,900 was
recorded in prior periods and $49,413 was recorded in fiscal 2010. None of the
unrealized losses have been deemed to be other-than-temporary or temporary impairments,
and are accounted for under mark-to-market rules for Available-for-Sale securities.
Please see Note 3 for further information.
Bank certificates of deposit are insured by the Federal Deposit Insurance Corporation
for the full balance under the Temporary Liquidity Guarantee Program. The Company
maintains accounts with several brokerage firms. The accounts contain cash and
securities. Balances are insured up to $500,000 (with a limit of $100,000 for cash) by
the Securities Investor Protection Corporation (SIPC).
The Company adopted ASC Topic 820, Fair Value Measurements and Disclosures as of
December 1, 2007, which expands disclosures about investments that are measured and
reported at fair market value. ASC Topic 820 established a fair value hierarchy that
prioritizes the inputs to valuations techniques utilized to measure fair value into
three broad levels as follows:
Level 1 Quoted market prices in active markets for the identical asset or liability
that the reporting entity has ability to access at measurement date.
Level 2 Quoted market prices for identical or similar assets or liabilities in
markets that are not active, and where fair value is determined through the use of
models or other valuation methodologies.
Level 3 Unobserved inputs for the asset or liability. Fair value is determined by
the reporting entitys own assumptions utilizing the best information available, and
includes situations where there is little market activity for the investment.
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CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES (CONTINUED)
Significant | ||||||||||||
Quoted Market | Other | |||||||||||
Price in Active | Observable | |||||||||||
May 31, | Markets | Inputs | ||||||||||
Description | 2010 | (Level 1) | (Level 2) | |||||||||
Bank Certificates of
Deposit |
$ | 1,074,145 | $ | | $ | 1,074,145 | ||||||
Corporate obligations |
653,764 | | 653,764 | |||||||||
Government Obligations |
6,296,310 | 6,296,310 | | |||||||||
Preferred Stock |
2,587,271 | 2,587,271 | | |||||||||
Common Stock |
434,532 | 434,532 | | |||||||||
Mutual Funds |
171,722 | 171,722 | | |||||||||
Other Equity |
32,364 | | 32,364 | |||||||||
Total |
$ | 11,250,108 | $ | 9,489,835 | $ | 1,760,273 | ||||||
Quoted | Significant | |||||||||||
Market Price | Other | |||||||||||
in Active | Observable | |||||||||||
November 30, | Markets | Inputs | ||||||||||
Description | 2009 | (Level 1) | (Level 2) | |||||||||
Bank Certificates of
Deposit |
$ | 1,763,157 | $ | | $ | 1,763,157 | ||||||
Corporate obligations |
812,490 | | 812,490 | |||||||||
Government Obligations |
7,497,900 | 6,997,900 | 500,000 | |||||||||
Preferred Stock |
2,064,208 | 2,064,208 | | |||||||||
Common Stock |
196,872 | 196,872 | | |||||||||
Mutual Funds |
165,383 | 165,383 | | |||||||||
Other Equity |
36,128 | | 36,128 | |||||||||
Total |
$ | 12,536,138 | $ | 9,424,363 | $ | 3,111,775 | ||||||
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CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The following items which exceeded 5% of total current liabilities are included in
accounts payable and accrued liabilities as of:
May 31, | November 30, | |||||||
2010 | 2009 | |||||||
(In Thousands) | (In Thousands) | |||||||
a) Trade payables |
$ | 2,549 | $ | 3,775 | ||||
b) Advertising litigation |
2,500 | * | ||||||
c) Media advertising |
1,997 | 548 | ||||||
d) Accrued returns |
1,410 | 1,207 | ||||||
e) Coop advertising |
1,136 | 1,218 | ||||||
f) Accrued bonuses |
938 | 482 | ||||||
$ | 10,530 | $ | 7,230 | |||||
* | under 5% |
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:
Three Months Ending | Six Months Ending | |||||||||||||||
May 31, | May 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Interest and dividend income |
$ | 83,295 | $ | 102,007 | $ | 141,472 | $ | 212,407 | ||||||||
Royalty income |
45,000 | 36,180 | 90,000 | 57,768 | ||||||||||||
Realized (loss) gain on
sale
of Bonds |
(21,264 | ) | | (17,368 | ) | 49,985 | ||||||||||
Miscellaneous |
40,078 | 456 | 40,114 | 4,100 | ||||||||||||
$ | 147,109 | $ | 138,643 | $ | 254,218 | $ | 324,260 | |||||||||
NOTE 10 COMMITMENTS AND CONTINGENCIES
Litigation
A class action lawsuit, Wally v. CCA, alleging false and misleading advertisement of
the Companys dietary supplement, was commenced in the Superior Court of the State of
California, County of Los Angeles, on September 29, 2009. The action was brought
seeking monetary and equitable remedies.
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CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 COMMITMENTS AND CONTINGENCIES (CONTINUED)
Litigation (Continued)
The Company denied all of the allegations of wrongdoing and liability in regard to its
advertising. Nevertheless, it concluded that in the light of the costs, delays and
risks, as well as the disruption that would be caused by the litigation and the legal
expense to defend the action, it was in the best interest of the Company to settle the
litigation.
The performance of any act of the Settlement Agreement, or any other circumstance
regarding the parties agreement to settle, is not to be considered an admission of
liability, or as an admission of any allegations made in any claim or litigation.
The settlement, subject to the Courts final approval, provides for the deposit of Two
Million Five Hundred Thousand dollars ($2,500,000) into a common fund to be dispersed
as per provisions approved by the Court in the final Order of Settlement.
The Company also entered into a settlement with its insurance carrier in regard to
liability insurance coverage for litigation and settlement costs. The settlement calls
for the insurance carrier to pay fifty percent (50%) of any combination of defense fees and
related costs incurred for any settlement of, or any judgment on the released claims,
up to a total of Four Hundred Seventy-Five Thousand dollars ($475,000). The obligation
for the insurance carrier to make payments under this claim will cease once it has paid
$475,000 to or on behalf of the Company.
The Company recorded a charge of $2,500,000 as an advertising litigation expense during
the second quarter of 2010, with the resultant liability recorded as an accrued
liability. To date, the Company has incurred legal fees related to the litigation of
approximately $204,362, of which $100,319 was taken as a charge against earnings in the
fourth quarter of fiscal 2009, $61,636 was taken as a charge against earnings in the
first quarter of fiscal 2010 and $42,407 has been charged against earnings for the
second quarter of fiscal 2010. The Company also recorded, as a result of the insurance
settlement, an insurance claim receivable of $475,000, during the second quarter of
2010. The advertising litigation expense was reduced by the amount of the insurance
claim receivable. The net cost of the litigation is reflected in the consolidated
statements of operations as advertising litigation expense and consists of the
following:
Three Months Ending | Six Months Ending | |||||||||||||||
May 31, | May 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Litigation settlement |
$ | 2,500,000 | $ | | $ | 2,500,000 | $ | | ||||||||
Legal expenses incurred |
42,407 | | 104,043 | | ||||||||||||
Insurance claim settlement |
(475,000 | ) | | (475,000 | ) | | ||||||||||
Litigation expense Net |
$ | 2,067,407 | $ | | $ | 2,129,043 | $ | | ||||||||
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CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 COMMITMENTS AND CONTINGENCIES (CONTINUED)
Dividends |
On December 21, 2009, the board of directors declared a $0.07 per share dividend for
the first quarter ended February 28, 2010. The dividend was payable to all
shareholders of record as of February 1, 2010 and was paid on March 1, 2010. |
On February 23, 2010, the Board of Directors declared a $0.07 per share dividend for
the second quarter ended May 31, 2010. The dividend was payable to all shareholders of
record on May 3, 2010 and was paid on June 3, 2010. |
Collective Bargaining Agreement |
On July 8, 2008, the Company signed a collective bargaining agreement with Local 108,
L.I.U. of N.A., AFL-CIO with similar provisions of the one that expired on January 1,
2008. The new agreement is effective January 1, 2008. Other than standard wage,
holiday, vacation and sick day provisions, the agreement requires the Company to
contribute to the Recycling and General Industrial Union Local 108 Welfare Fund
(Welfare Fund) certain benefits costs. The Welfare Fund provides medical, dental and
life insurance for the Companys employees covered under the collective bargaining
agreement. The new collective bargaining agreement is in effect through December 31,
2010. This agreement pertains to 32% of the CCA labor force. |
NOTE 11 401(K) PLAN
The Company has adopted a 401(K) Profit Sharing Plan that all employees with over one
year of service and have attained age 21 are eligible to join. Employees may make
salary reduction contributions up to twenty-five percent of compensation not to exceed
the federal government limits. The Plan allows for the Company to make discretionary
contributions. For all fiscal periods to date, the Company did not make any
contributions. |
NOTE 12 INCOME TAXES
CCA and its subsidiaries file a consolidated federal income tax return. |
The Company previously adopted the provisions of ASC Subtopic 740-10-25, Uncertain Tax
Positions. Management believes that there were no unrecognized tax benefits, or tax
positions that would result in uncertainty regarding the deductions taken, as of May
31, 2010 and May 31, 2009. ASC Subtopic 740-10-25 prescribes a recognition threshold
and a measurement attribute for the financial statement recognition and measurement of
tax positions taken or expected to be taken in a tax return. For those benefits to be
recognized, a tax position must be more-likely-than-not to be sustained upon
examination by taxing authorities. There were no penalties or related interest for the
fiscal year to date ended May 31, 2010 or for the fiscal year to date ended May 31,
2009. |
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CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 INCOME TAXES (Continued)
The United States Internal Revenue Service completed in 2009 an examination of the
Companys U.S. tax return for fiscal 2006. As a result of that examination, the
Company received a refund of $94,195 in federal taxes for the 2006 fiscal year. The
audit adjustments resulted in refunds from amended state tax returns for 2006 of
$28,145, and an additional $196,335 in refunds from federal and state amended returns
for fiscal 2007. The State of New Jersey, Department of The Treasury, Division of
Taxation is currently examining state income and sales tax returns filed for the fiscal
years 2004 2008. As of July 14, 2010, no adjustments have been proposed. No other
state has notified the Company of its intent to conduct an examination of tax returns
filed in their jurisdictions. The Company had $214,139 and $315,455 of officer
salaries during the three months ended May 31, 2010 and 2009, and $381,873 and $423,146
during the six months ended May 31, 2010 and 2009, respectively that were not
deductible for tax purposes in calculating the income tax provision. As of May 31,
2010, the Company had unrealized losses on its investments of $223,841. This amount
was reduced by a deferred tax benefit of $89,313, of which $39,900 was recorded in
prior periods, $20,012 was recorded in the first quarter of fiscal 2010 and $29,402
recorded in the second quarter of 2010. The deferred tax benefit has been recorded as
a deferred tax asset, and offset against the unrealized losses on marketable securities
reported on the consolidated balance sheets. |
At May 31, 2010 and November 30, 2009, respectively, the Company had temporary
differences arising from the following: |
May 31, 2010 | ||||||||||||||||
Classified As | ||||||||||||||||
Deferred | Short-Term | Long- Term | ||||||||||||||
Type | Amount | Tax | Asset | (Liability) | ||||||||||||
Depreciation |
$ | (293,619 | ) | $ | (117,154 | ) | $ | | $ | (117,154 | ) | |||||
Unrealized loss on
investments |
233,841 | 89,313 | 89,313 | |||||||||||||
Reserve for bad debts |
38,333 | 15,295 | 15,295 | | ||||||||||||
Reserve for returns |
1.770,567 | 706,456 | 706,456 | | ||||||||||||
Reserve for obsolete
inventory |
1,029,377 | 410,721 | 410,721 | | ||||||||||||
Vacation accrual |
293,365 | 117,053 | 117,053 | | ||||||||||||
Charitable Contributions |
145,448 | 58,034 | 58,034 | | ||||||||||||
Section 263A costs |
281,421 | 112,286 | 112,286 | | ||||||||||||
Net deferred income taxes |
$ | 1,392,004 | $ | 1,509,158 | $ | (117,154 | ) | |||||||||
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 INCOME TAXES (CONTINUED)
November 30, 2009 | ||||||||||||||||
Classified As | ||||||||||||||||
Deferred | Short-Term | Long- Term | ||||||||||||||
Type | Amount | Tax | Asset | (Liability) | ||||||||||||
Depreciation |
$ | (192,804 | ) | $ | (76,929 | ) | $ | | $ | (76,929 | ) | |||||
Unrealized loss on
investments |
314,428 | 125,457 | 125,457 | | ||||||||||||
Reserve for bad debts |
131,223 | 52,358 | 52,358 | | ||||||||||||
Reserve for returns |
1,453,591 | 579,983 | 579,983 | | ||||||||||||
Reserve for
obsolete inventory |
760,001 | 303,240 | 303,240 | | ||||||||||||
Vacation accrual |
276,161 | 110,188 | 110,188 | | ||||||||||||
Charitable Contributions |
9,569 | 3,818 | 3,818 | |||||||||||||
Section 263A costs |
261,298 | 104,258 | 104,258 | | ||||||||||||
Deferred income tax |
1,202,373 | 1,279,302 | $ | (76,929 | ) | |||||||||||
Valuation allowance |
(85,557 | ) | (85,557 | ) | | |||||||||||
Net deferred income taxes |
$ | 1,116,816 | $ | 1,193,745 | $ | (76,929 | ) | |||||||||
Income tax expense is made up of the following components: |
Three Months Ended May 31, | ||||||||
2010 | 2009 | |||||||
Current tax expense Federal |
$ | (177,373 | ) | $ | 514,952 | |||
Current tax
expense State & Local |
(51,136 | ) | 149,759 | |||||
Deferred tax (benefit) |
(210,616 | ) | (20,395 | ) | ||||
Total tax expense |
$ | (439,125 | ) | $ | 644,316 | |||
Six Months Ended May 31, | ||||||||
2010 | 2009 | |||||||
Current tax expense Federal |
$ | 152,308 | $ | 586,748 | ||||
Current tax
expense State & Local |
45,289 | 172,600 | ||||||
Deferred tax (benefit) expense |
(225,776 | ) | 37,337 | |||||
Total tax expense |
$ | (28,179 | ) | $ | 796,685 | |||
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CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
12 INCOME TAXES (CONTINUED)
Prepaid and refundable income taxes are made up of the following components: |
State & | ||||||||||||
Federal | Local | Total | ||||||||||
May 31, 2010 |
$ | 402,950 | $ | 276,211 | $ | 679,161 | ||||||
November 30, 2009 |
$ | | $ | 89,535 | $ | 89,535 | ||||||
Income tax payable is made up of the following components: |
State & | ||||||||||||
Federal | Local | Total | ||||||||||
May 31, 2010 |
$ | | $ | | $ | | ||||||
November 30, 2009 |
$ | 61,303 | $ | 85,850 | $ | 147,153 | ||||||
A reconciliation of (benefit from) provision for income taxes computed at the statutory
rate to the effective rate for the three months ended May 31, 2010 and 2009 is as
follows: |
Three Months Ended | Three Months Ended | |||||||||||||||
May 31, 2010 | May 31, 2009 | |||||||||||||||
Percent | ||||||||||||||||
Percent | of Pretax | |||||||||||||||
Amount | Amount | Amount | Income | |||||||||||||
(Benefit from) Provision for
Income taxes
at federal statutory rate |
$ | (458,903 | ) | (34.00 | )% | $ | 455,074 | 34.00 | % | |||||||
Increases in taxes
resulting from: |
||||||||||||||||
State income taxes, net of federal
income tax benefit |
(80,173 | ) | (5.94 | ) | 79,504 | 5.94 | ||||||||||
Non-deductible expenses and
other adjustments |
99,951 | 7.41 | 109,738 | 8.19 | ||||||||||||
(Benefit from) Provision for
Income taxes
at effective rate |
$ | (439,125 | ) | (32.53 | )% | $ | 644,316 | 48.13 | % | |||||||
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CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended | Six Months Ended | |||||||||||||||
May 31, 2010 | May 31, 2009 | |||||||||||||||
Percent | ||||||||||||||||
Percent | of Pretax | |||||||||||||||
Amount | Amount | Amount | Income | |||||||||||||
(Benefit from) Provision for
Income taxes
at federal statutory rate |
$ | (135,053 | ) | (34.00 | )% | $ | 549,163 | 34.00 | % | |||||||
Increases in taxes
resulting from: |
||||||||||||||||
State income taxes, net of federal
income tax benefit |
(23,595 | ) | (5.94 | ) | 95,942 | 5.94 | ||||||||||
Non-deductible expenses and
other adjustments |
130,469 | 32.85 | 151,580 | 9.38 | ||||||||||||
(Benefit from) Provision for
Income taxes
at effective rate |
$ | (28,179 | ) | (7.09 | )% | $ | 796,685 | 49.32 | % | |||||||
NOTE
13 SUBSEQUENT EVENTS
On May 28, 2010, the Board of Directors declared a $0.07 per share dividend for the
third quarter ended August 31, 2010. The dividend will be payable to all shareholders
of record on August 2, 2010 and will be payable on September 2, 2010. |
On June 16, 2010, the Company deposited $2,500,000 into an escrow account to fund the
proposed settlement of the advertising litigation expense. Please see Note No. 10 for
further information regarding the litigation. |
The Company has evaluated subsequent events that occurred during the period of May 31,
2010 through July 14, 2010, the date that these financial statements were issued.
Except as disclosed above, management concluded that no other events required potential
adjustment to, or disclosure in these consolidated financial statements. |
25
Table of Contents
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (UNAUDITED) |
Except for historical information contained herein, this Managements 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, and statements which explicitly describe such
issues. Investors are urged to consider any statement labeled with the terms believes,
expects, intends or anticipates to be uncertain and forward-looking.
OVERVIEW
The Company had, for the three month period ended May 31, 2010, a net loss of $(910,589) as
compared to net income of $694,136 for the same period in 2009. The reason for the second quarter
loss was the recording of the proposed settlement of advertising litigation plus related legal
fees, reduced by an insurance claim, for a net expense of $2,067,407 before tax. This advertising
litigation expense also impacted the net income for the six month period ended May 31, 2010. If
the advertising litigation expense had not occurred, the income before provision for income taxes
would have been $717,693 and $1,731,829, respectively for the three months and six months ended May
31, 2010 as compared to $1,338,452 and $1,615,187, respectively for the same periods in 2009. Net
sales for the second quarter of fiscal 2010 were $14,708,108 as compared to $14,609,686 for the
same period in fiscal 2009. The Companys balance sheet as of May 31, 2010 reflects $37,964,095 in
current assets and $12,855,864 in current liabilities. The Company does not have any loan or line
of credit bank debt.
OPERATING RESULTS FOR THE THREE MONTHS ENDED MAY 31, 2010
For the three-month period ended May 31, 2010, the Company had total revenues of $14,855,217
and a net loss of $(910,589) after (benefit from) income taxes of $(439,125). For the same three
month period in 2009, total revenues were $14,748,329 and net income was $694,136 after a provision
for taxes of $644,316. If the advertising litigation expense had not occurred, the income before
provision for income taxes would have been $717,693 for the three months ended May 31, 2010 as
compared to $1,338,452 for the same period in 2009. Basic and fully diluted losses per share were
$(0.13) for the second quarter of 2010 as compared to basic and fully diluted earnings per share of
$0.10 for the second quarter of 2009. In accordance with ASC Topic 605-10-S99, Revenue
Recognition, the Company has accounted for certain sales incentives offered to customers by
charging them directly to sales as opposed to advertising and promotional expenses. Net sales for
the second quarter of 2010 were reduced by $1,858,394 and offset by an equal reduction of trade
promotional expenses, which were included in the Companys advertising expense budget. In the same
period of the prior year, net sales were reduced by $1,630,652 and trade promotion was credited by
that amount. These accounting adjustments under ASC Topic 605-10-S99 do not affect net income.
The Companys net sales increased $98,422 to $14,708,108 for the three-month period ended May
31, 2010 from $14,609,686 for the three-month period ended May 31, 2009. The Companys gross sales
had increased by $423,102 in the second quarter of 2010 as compared to the second quarter of 2009.
However, this increase was offset primarily by higher sales incentives of $227,242 and higher
returns of $42,452. Sales returns and allowances, not including sales incentives, were 11.88% of
gross sales for the three-month period ended May 31, 2010 as compared to 11.63% for the same period
last year. Sales
returns for the Plus White oral care brand were $201,278 higher during the second quarter of 2010
as compared to the second quarter of 2009, due to a voluntary product recall. A Form 8-K was filed
on April 14, 2010 announcing that the Company had requested the voluntary recall of three lots of
its Plus White whitening gel which had shipped in March and early April. The gel liquefied,
subsequent to shipment (a cosmetic change), which caused the product to lose its efficacy.
26
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (UNAUDITED)
(CONTINUED) |
Included in sales incentives is the cost of the coupons issued by the Company, which was
$246,005 in the second quarter of 2010 as compared to $280,389 in the second quarter of 2009. The
Company uses a national clearing house for the receipt and processing of coupons from our retail
partners. The national clearing house renders invoices to the Company on a weekly basis for
coupons that they have processed which are recorded as an expense in the period for which the
invoice is dated. The Company also records an expense accrual at the end of each period equal to
the prior six weeks of invoices rendered based on information from the national clearing house that
there is an average lag time of six weeks between the time that the retailer receives the coupon
and when the Company receives the invoice. The amount recorded as an expense or an accrual
includes the retailer cost of the coupon in addition to any processing charges by the national
coupon clearing house. Coupons are issued by the Company to be used with the purchase of specific
products, with an expiration date noted on the coupon.
The Companys net sales by category for the second quarter of 2010 were: Dietary Supplement
$5,517,103, 37.5%; Skin Care $4,749,930, 32.3%; Oral Care $1,966,020, 13.4%; Nail Care $1,757,105,
11.9%; Fragrance, $393,398, 2.7%; Analgesic $232,267, 1.6%; and Hair Care and Miscellaneous
$92,285, 0.6%; for a total of $14,708,108.
The Company makes every effort to control the cost of manufacturing and has had no substantial
cost increases. The gross margin for the second quarter of 2010 was 58.4%, as compared to 62.2%
for the second quarter of 2009. The gross margin was lower primarily due to higher inventory
reserves related to the voluntary recall of the three lots of the Plus White whitening gel and
higher sales incentives. The inventory reserve was increased by $271,153 for items directly
related to the product recall. Increases in the inventory reserve are charged to the costs of
sales. Sales incentives increased by $227,742 for the second quarter of 2010 as compared to the
same period in 2009. Sales incentives reduce net sales and the resulting gross margin.
Selling, general and administrative expenses were $488,055 higher in the second quarter of
2010 as compared to the same period in 2009. The increase was due to higher employee compensation
expense in the second quarter of 2010 as compared to the second quarter of 2009. The higher
compensation expense was due to one additional payroll period in the second quarter of 2010 than
the second quarter of 2009, and the timing of when additional compensation expense was recorded.
Advertising expense was $2,353,530 for the quarter ended May 31, 2010 as compared to
$2,782,150 for the quarter ended May 31, 2009, or a decrease of $428,620. Of this amount, $283,139
was due to lower co-operative advertising that is reflected as a selling expense and $144,835 was
as a result of lower advertising expense. The Companys advertising expense changes from quarter
to quarter based on the timing of the Companys promotions.
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (UNAUDITED)
(CONTINUED) |
The Company recorded an advertising litigation expense of $2,067,407 for the three month
period ended May 31, 2010. This expense was a result of the class action lawsuit, Wally v. CCA,
alleging false and misleading advertisement of the Companys dietary supplement, which was
commenced in the Superior Court of the State of California, County of Los Angeles, on September 29,
2009. Please see Note No. 10 to the financial statements for more information regarding the
litigation. The proposed settlement agreement provides for the Company to pay $2,500,000 in order
to settle the litigation. The Company incurred litigation related legal expenses of $42,407 during
the three month period ended May 31, 2010. The Company has also entered into a settlement with its
insurance carrier in regard to liability insurance coverage for litigation and settlement costs.
As a result of the insurance settlement, the Company recorded an insurance claim receivable of
$475,000 during the second quarter of 2010, which reduced the advertising litigation expense by the
same amount.
The loss before taxes was $(1,349,714) for the quarter ended May 31, 2010 as compared to
pre-tax income of $1,338,452 for the same quarter in 2009. As previously disclosed, the
advertising litigation expense had a material effect on the second quarter results. If the
advertising litigation expense had not occurred, the income before provision for income taxes would
have been $717,693 for the three months ended May 31, 2010 as compared to $1,338,452 for the same
period in 2009. The effective tax rate for the second quarter of 2010 was (32.5) % versus 48.1%
for the second quarter of 2009. The (benefit from) provision for income taxes included
non-deductible expenses and adjustments that decreased the (benefit from) income taxes by $99,951
or 7.4% of the pre-tax loss for the second quarter of 2010 as compared to $109,738 or 8.2% of
pre-tax income for the same period in fiscal 2009. During the second quarter ended May 31, 2010
and 2009, there was $214,139 and $315,455, respectively of officer salaries incurred that were not
deductible for tax purposes in calculating the income tax provision.
OPERATING RESULTS FOR THE SIX MONTHS ENDED MAY 31, 2010
For the six month period ended May 31, 2010, the Company had total revenues of $28,053,503 and
a net loss of $(369,035) after (benefit from) income taxes of $(28,179). For the same six month
period in 2009, total revenues were $29,692,796 and net income was $818,502 after a provision for
taxes of $796,685. If the advertising litigation expense had not occurred, the income before
provision for income taxes would have been $1,731,829 for the six months ended May 31, 2010 as
compared to $1,615,187 for the same period in 2009. Basic and fully diluted losses per share were
$(0.05) for the six months ended May 31, 2010 as compared to basic and fully diluted earnings per
share of $0.12 for the same period in 2009. In accordance with ASC Topic 605-10-S99, Revenue
Recognition, the Company has accounted for certain sales incentives offered to customers by
charging them directly to sales as opposed to advertising and promotional expenses. Net sales for
the first six months of 2010 were reduced by $3,508,863 and offset by an equal reduction of trade
promotional expenses, which were included in the Companys advertising expense budget. In the same
period of the prior year, net sales were reduced by $3,025,750 and trade promotion was credited by
that amount. These accounting adjustments under ASC Topic 605-10-S99 do not affect net income.
28
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (UNAUDITED)
(CONTINUED) |
The Companys net sales decreased $1,569,251 to $27,799,285 for the six month period ended May
31, 2010 from $29,368,536 for the six month period ended May 31, 2009. The Companys gross sales
of its diet products were $1,545,598 lower in the first six months of 2010 as compared to the same
period in
2009, with most of the decrease occurring in the first quarter of 2010. Sales returns and
allowances, not including sales incentives, were 9.6% of gross sales for the six month period ended
May 31, 2010 as compared to 10.0% for the same period last year. Included in sales incentives is
the cost of the coupons issued by the Company, which was $339,798 for the first six months of 2010
as compared to $399,275 for the same period in 2009.
The Companys net sales by category for the first six months of 2010 were: Dietary Supplement
$10,497,513, 37.8%; Skin Care $8,459,792, 30.4%; Oral Care $4,473,071, 16.1%; Nail Care $3,095,115,
11.1%; Fragrance, $656,369, 2.4%; Analgesic $460,354, 1.7%; and Hair Care and Miscellaneous
$157,071, 0.5%; for a total of $27,799,285.
The Company makes every effort to control the cost of manufacturing and has had no substantial
cost increases. The gross margin for the six months ended May 31, 2010 was 59.9%, as compared to
62.1% for the same period in 2009. The gross margin was affected by higher inventory reserves
related to the voluntary recall of the three lots of the Plus White whitening gel and higher sales
incentives. The inventory reserve was increased by $271,153 for items directly related to the
product recall. Increases in the inventory reserve are charged to the costs of sales. Sales
incentives increased by $483,113 for the six months ended May 31, 2010 as compared to the same
period in 2009. Sales incentives reduce net sales and the resulting gross margin. The Company has
also had higher manufacturing costs for its Plus White whitening gel, since it had to utilize a
secondary manufacturer at a higher unit cost due to the voluntary recall of the whitening gel.
Selling, general and administrative expenses were $688,208 higher in the first six months of
2010 as compared to the same period in 2009. The increase was due to higher employee compensation
expense in the second quarter of 2010 as compared to the second quarter of 2009 as a result of the
timing of when the additional compensation expense was recorded. The higher compensation expense
was also due to the hiring of additional sales personnel. Health insurance costs continued to
increase, with an additional expense of $37,896 for the first six months of 2010 as compared to the
first six months of 2009. Advertising expense was $3,905,037 for the six months ended May 31, 2010
as compared to $6,449,490 for the six months ended May 31, 2009, or a decrease of $2,544,453. Of
this amount, $512,811 was due to lower co-operative advertising that is reflected as a selling
expense with the balance as a result of lower advertising expense. The Companys advertising
expense changes from quarter to quarter based on the timing of the Companys promotions.
The Company recorded an advertising litigation expense of $2,129,043 for the six month period
ended May 31, 2010, of which $2,067,407 was incurred in the second quarter of 2010. This expense
was a result of the class action lawsuit, Wally v. CCA, alleging false and misleading
advertisement of the Companys dietary supplement, which was commenced in the Superior Court of the
State of California, County of Los Angeles, on September 29, 2009. Please see Note No. 10 to the
financial statements for
more information regarding the litigation. The proposed settlement agreement provides for the
Company to pay $2,500,000 in order to settle the litigation. The Company incurred litigation
related legal expenses of $104,043 during the six month period ended May 31, 2010. The Company has
also
entered into a settlement with its insurance carrier in regard to liability insurance coverage for
litigation and settlement costs. As a result of the insurance settlement, the Company recorded an
insurance claim receivable of $475,000 during the second quarter of 2010, which reduced the
advertising litigation expense by the same amount.
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (UNAUDITED)
(CONTINUED) |
The loss before taxes was $(397,214) for the six months ended May 31, 2010 as compared to
pre-tax income of $1,615,187 for the same period in 2009. As previously disclosed, the advertising
litigation expense had a material effect on the results for the first six months of 2010. If the
advertising litigation expense had not occurred, the income before provision for income taxes would
have been $1,731,829 for the six months ended May 31, 2010 as compared to $1,615,187 for the same
period in 2009. The effective tax rate for the six months ended May 31, 2010 was (7.1) % versus
49.3% for the six months ended May 31, 2009. The (benefit from) provision for income tax included
non-deductible expenses and adjustments that decreased the (benefit from) income taxes by $130,649
or 32.85% of pre-tax loss for the first six months of 2010 as compared to $151,580 or 9.4% of
pre-tax income for the same period in fiscal 2009. During the six months ended May 31, 2010 and
2009, there was $381,873 and $423,146, respectively of officer salaries incurred that were not
deductible for tax purposes in calculating the income tax provision.
FINANCIAL POSITION AS OF MAY 31, 2010
The Companys financial position as of May 31, 2010 consisted of current assets of $37,964,095
and current liabilities of $12,855,864, or a current ratio of 3.0 to 1. The Companys cash and
cash equivalents were $8,947,057 as of May 31, 2010, an increase of $1,102,688 from November 30,
2009. Included in this increase was net cash provided by operating activities of $786,625 and net
cash provided by investing activities of $1,332,343 offset by net cash used in financing activities
of $1,016,280. Included in the net cash used in financing activities was $987,622 of dividends
paid.
As of May 31, 2010, the Company had $8,574,360 of short term marketable securities and
$2,675,748 of non-current securities. The Companys cash and cash equivalents together with both
short and long term marketable securities, net of current liabilities were $7,341,301 as of May 31,
2010. Please refer to Note No. 7 of the financial statements for further information regarding the
Companys investments.
Accounts receivable increased to $8,500,031 as of May 31, 2010 from $7,613,273 as of November
30, 2009. Included in net accounts receivable are reserves for returns and allowances of
$1,770,567 and allowances for doubtful accounts of $38,333. Gross receivables were further reduced
by $952,349, which were reclassified from accrued liabilities, as an estimate of the co-operative
advertising that will be taken as a credit against payments. In addition, accrued liabilities
include $1,136,088 which is an estimate of co-operative advertising expense relating to fiscal 2010
sales which are anticipated to be deducted from future invoices rather than against the current
accounts receivable. Any changes in this accrued liability are recorded as a debit or credit to
the reserve for returns and allowances account. The gross accounts receivable as of May 31, 2010
was higher as compared to the balance on November 30, 2009 due to the timing of the Companys
sales.
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (UNAUDITED)
(CONTINUED) |
Inventory increased to $8,757,728 as of May 31, 2010 from $8,327,277 as of November 30, 2009. The
inventory increased to support the anticipated sales in the third quarter of 2010. The inventory
obsolescence reserve increased to $1,029,377 as of May 31, 2010 from $760,001 as of November 30,
2009. Changes to the inventory obsolescence reserves are recorded as an increase or decrease to
the cost of goods. The inventory reserve was increased by $271,153 during the second quarter of
2010 as a result of the voluntary recall of the Plus White whitening gel. This additional reserve
reflects the costs of the recalled product that remained in inventory as of May 31, 2010.
The Company recorded an insurance claim receivable of $475,000 during the second quarter of
2010 as a result of a settlement between the Company and its insurance carrier in regard to
liability insurance coverage of the advertising litigation, Wally vs. CCA. The Companys
insurance carrier agreed to pay fifty-percent of all litigation and settlement expenses up to a
maximum amount of $475,000.
Prepaid and refundable income taxes increased to $679,161 as of May 31, 2010 from $89,535 as
of November 30, 2009. The increase was due to a reduction of the anticipated income taxes that
will be due for the fiscal year ended November 30, 2010. The reduction is as a result of the
recording of the advertising litigation expense. The Company had already made its estimated income
payments in the first quarter of 2010.
The deferred income tax asset increased to $1,509,158 as of May 31, 2010 from $1,193,745 as of
November 30, 2009. The Company expects that all of the deferred tax assets will be realized within
the next twelve month period subsequent to May 31, 2010. The deferred tax assets include $89,313
related to the Companys unrealized losses of $223,841 on its investments as of May 31, 2010. The
unrealized losses reported on the balance sheet were $134,529, which is net of the deferred tax
benefit. The Company had reported a valuation allowance of $85,557 as of November 30, 2009 against
the deferred tax benefit resulting from the unrealized losses on investments. There is no
valuation allowance against the deferred tax benefit from unrealized losses at May 31, 2010, as the
Company believes that if the unrealized losses were realized, the full amount of the deferred tax
benefit would also be realized in the subsequent twelve months, based on capital gains earned over
the prior three years and anticipated gains over the next year. The deferred tax liability
increased to $117,154 at May 31, 2010 as compared to $76,929 as of November 30, 2009. The
liability is due to the difference in depreciation between the Companys books and income tax
returns.
Accounts payable and accrued liabilities increased to $12,326,264 as of May 31, 2010 from
$8,775,676 as of November 30, 2009, or an increase of $3,550,588. The Company recorded an accrued
liability of $2,500,000 during the second quarter of 2010 as a result of the proposed settlement of
its advertising litigation. Please see Note No. 10 to the financial statement for further
information regarding the litigation. The balance of the increase was for accrued liabilities in
the normal course of business.
Shareholders equity decreased to $29,003,190 as of May 31, 2010 from $30,219,848 as of
November 30, 2009. The decrease was due to the net loss of $369,035 and dividends declared of
$987,622 during the first six months ended May 31, 2010, offset partially by unrealized gains on
its investments of $139,999 during the same period. Unrealized holding gains or losses are recorded
as other comprehensive income. Total unrealized losses on marketable securities were $134,529 at
May 31, 2010, net of a deferred tax benefit of $89,313.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK |
The Companys financial statements record the Companys investments under the mark to market
method (i.e., at date-of-statement market value). The investments are, categorically listed, in
Fully Guaranteed Bank Certificates of Deposit, Common Stock, Mutual Funds, Other Equity,
Preferred Stock, Government Obligations and Corporate Obligations. $466,896 of the Companys
$11,250,108 portfolio of investments (approximate, as at May 31, 2010) is invested in the Common
Stock and Other Equity categories, and approximately $2,587,451 in the Preferred Stock holdings
category. The Company invests in various investment securities. Investment securities are exposed
to various risks such as interest rates, market and credit risks. Due to the level of risk
associated with certain investment securities, it is at least reasonably possible that changes in
the values of investment securities will incur in the near term. The Company does not take
positions or engage in transactions in risk-sensitive market instruments in any substantial degree,
nor as defined by SEC rules and instructions, however, due to current securities market conditions,
the Company cannot ascertain the risk of any future change in the market value of its investments.
ITEM 4T. | CONTROLS AND PROCEDURES |
An evaluation was performed under the supervision of the Companys management, including the
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Companys disclosure controls and procedures (as defined in the Exchange Act
Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based on that
evaluation, the Companys management, including the Chief Executive Officer and Chief Financial
Officer, concluded that, as of May 31, 2010, the Companys disclosure controls and procedures were
effective to ensure that information we are required to disclose in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules and forms, and is accumulated and
communicated to our management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.
Notwithstanding the foregoing, there can be no assurance that the Companys disclosure
controls and procedures will detect or uncover all failures of persons within the Company to
disclose material information otherwise required to be set forth in the Companys periodic reports.
There are inherent limitations to the effectiveness of any system of disclosure controls and
procedures, including the possibility of human error and the circumvention or overriding of the
controls and procedures. Accordingly, even effective disclosure controls and procedures can only
provide reasonable, not absolute, assurance of achieving their control objectives.
There have been no changes in the Companys internal control over financial reporting during
the quarterly period ended May 31, 2010 that have materially affected, or is reasonably likely to
materially affect, the Companys internal control overall financial reporting.
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CCA INDUSTRIES, INC.
PART II OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS: |
A class action lawsuit, Wally v. CCA, alleging false and misleading advertisement of the
Companys dietary supplement, was commenced in the Superior Court of the State of California,
County of Los Angeles, on September 29, 2009. The action was brought seeking monetary and
equitable remedies.
The Company denied all of the allegations of wrongdoing and liability in regard to its
advertising. Nevertheless, it concluded that in the light of the costs, delays and risks, as well
as the disruption that would be caused by the litigation and the legal expense to defend the
action, it was in the best interest of the Company to settle the litigation.
The performance of any act of the Settlement Agreement, or any other circumstance regarding
the parties agreement to settle, is not to be considered an admission of liability, or as an
admission of any allegations made in any claim or litigation.
The settlement, subject to the Courts final approval, provided for the deposit of Two Million
Five Hundred Thousand dollars ($2,500,000) into a common fund to be dispersed as per provisions
approved by the Court in the final Order of Settlement. On June 16, 2010, the Company deposited
$2,500,000 into an escrow account to be used for the common fund upon the Courts final approval.
The Company also entered into a settlement with its insurance carrier in regard to liability
insurance coverage for litigation and settlement costs. The settlement calls for the insurance
carrier to pay fifty percent (50%) of any combination of defense fees and related costs incurred
for any settlement of, or any judgment on the released claims, up to a total of Four Hundred
Seventy-Five Thousand dollars ($475,000). The obligation for the insurance carrier to make
payments will cease once it has paid $475,000 to or on behalf of the Company.
The Company recorded a charge of $2,500,000 as an advertising litigation expense during the
second quarter of 2010, with the resultant liability recorded as an accrued liability. To date,
the Company has incurred legal fees related to the litigation of approximately $204,362, of which
$100,319 was taken as a charge against earnings in the fourth quarter of fiscal 2009, $61,636 was
taken as a charge against earnings in the first quarter of fiscal 2010 and $42,407 has been charged
against earnings for the second quarter of fiscal 2010. The Company also recorded, as a result of
the insurance settlement, an insurance claim receivable of $475,000, during the second quarter of
2010. The advertising litigation expense was reduced by the amount of the insurance claim
receivable.
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ITEM 6. | EXHIBITS. |
In reviewing the agreements included as exhibits to this Form 10-Q, please remember that they
are included to provide you with information regarding their terms and are not intended to provide
any other
factual or disclosure information about the Company or the other parties to the agreements.
The agreements may contain representations and warranties by each of the parties to the applicable
agreement. These representations and warranties have been made solely for the benefit of the
parties to the applicable agreement and:
| should not in all instances be treated as categorical statements of fact, but rather as
a way of allocating the risk to one of the parties if those statements prove to be
inaccurate; |
| have been qualified by disclosures that were made to the other party in connection with
the negotiation of the applicable agreement, which disclosures are not necessarily
reflected in the agreement; |
| may apply standards of materiality in a way that is different from what may be viewed
as material to you or other investors; and |
| were made only as of the date of the applicable agreement or such other date or dates
as may be specified in the agreement and are subject to more recent developments. |
Accordingly, these representations and warranties may not describe the actual state of affairs
as of the date they were made or at any other time. Additional information about the Company may be
found elsewhere in this Form 10-Q and the Companys other public filings, which are available
without charge through the SECs website at http://www.sec.gov.
The following exhibits are included as part of this report:
Exhibit No. | Description | |||
10.1 | Proposed
Order of Settlement |
|||
10.2 | Settlement
and Mutual Release Agreement |
|||
11 | Computation of Unaudited Earnings Per Share |
|||
31.1 | Certification of Chief Executive Officer pursuant to Section 302 the Sarbanes-Oxley Act of 2002 |
|||
31.2 | Certification of Chief Financial Officer pursuant to Section 302 the Sarbanes-Oxley Act of 2002 |
|||
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|||
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
34
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: July 14, 2010
CCA INDUSTRIES, INC. | ||||
By: | /s/ David Edell |
|||
David Edell, Chief Executive Officer | ||||
By: | /s/ Stephen A. Heit |
|||
Stephen A. Heit, Chief Financial Officer |
35