March 20, 2005
Mr. John Cash
Accounting Branch Chief
Division of Corporation Finance
US Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Mr. Cash:
In response to your Letter of Comments dated March 11, 2005, we
submit the following:
Item 2.) We will make sure to use the Commission File number 1-
31643 on the cover page of all of our future filings.
Item 3.) We elected a New York based firm to audit the financial
statements of our company because at the time we selected Sheft
Kahn and Company LLP (actually their predecessor firm "Stuart Kahn
& Company") we were actually based out of New York and one of our
Directors was familiar with the quality of work, years of SEC
experience and fine reputation of the firm. Upon moving to NJ, we
saw no reason to change accounting firms since the proximity of
New York firms is very often closer than many New Jersey based
firms and there was apparently no advantage to having a New Jersey
based independent accountant.
The audit is currently performed partially in New Jersey. There
are several warehouse locations outside of New Jersey that the
auditors visit and much of the work is done at the auditors'
office in New York from documents faxed, emailed, delivered, or
taken from our office to theirs. The operations and most of the
assets of our company are physically located in New Jersey;
however, we do have substantial inventory located outside of New
Jersey.
We have met the requirements of Rule 2-01(a) by reviewing our
auditors' peer review reports and ascertaining (in compliance with
Reg. Sect 210.2-01 (a)) that they are in fact duly registered and
in good standing in the State of New York (their place of
residence and principal office). We also obtain a letter (in
compliance to Reg. Sect 210.2-01(b)) from the auditors to our
Audit Committee stating that they are in fact independent within
the meaning of the Securities Acts administered by the Securities
and Exchange Commission.
We understand that the State of New Jersey allows audits of New
Jersey companies to be performed by accountants who are licensed
by other states. We have been informed by our auditors, KGS LLP
(formerly of Sheft Kahn & Company LLP) that they are in the
process of having their newly formed company registered with the
State of New Jersey, and that they will be registered shortly.
Item 4.) We will make sure to include, in our second quarter 10Q,
the voting results of the annual meeting, scheduled to be held in
June 2005.
Item 5.) Regarding Item 6. Selected Financial Data, page 10, we
felt that in accordance with Item 301 it was appropriate to
include the "Special Charges" to "enhance an understanding of" the
financial condition and results of operations for the years
presented. However, we will revise all of our future filing to
remove the information from the presentation in accordance with
your guidance.
Item 6.) We will also revise our future filings to reflect any
cash dividends declared per share in each period.
Item 7.) Attached is our revised Management's Discussion and
Analysis which incorporates the additional information and
discussions suggested in your letter.
(a) We have added that the revenues increased with the increased
sales of the Mega-T appetite suppressant production and the
introduction of Mega -T chewing gum.
(b) We have also added that the acquisition agreement by CVS to
acquire Eckerd caused revenues to decrease by $1,500,000 from the
prior year.
(c) The discussion of prospective matters that may affect the
Company's business was added advising that the Company makes every
effort to control its cost of manufacturing and has had no
substantial cost increases.
(d) The Company focused on short-term securities in all
investments. The short-term was decided to protect the valuations
should interest rates rise as anticipated. The yield was reduced
accordingly. The Company invested in only investment grade
commercial paper thus reducing the degree of risk.
Item 8.) Below is our revised chart of our obligations showing the
amount of open purchase orders as of November 30, 2004.
Contractual Obligations
The following table sets forth the contractual obligations in
total for each year of the next five years as at November 30,
2004. Such obligations include the current lease for the
Company's premises, written employment contracts and License
Agreements.
2005 2006 2007 2008 2009
Lease on Premises (1)449,376 449,376 449,376 449,376 449,376
Royalty Expense (2)606,000 606,000 606,000 606,000 606,000
Employment
Contracts (3) 2,194,772 2,294,959 2,401,156 1,988,726 2,108,049
Open Purchase
Orders 4,495,510
Total Contractual
Obligations 7,745,658 3,350,335 3,456,532 3,044,102 3,163,425
Item 9.) We apologize for the oversight. Drew Edell was
previously a director, but as a result of the Sarbanes-Oxley Act
and the regulations of the American Stock Exchange, he voluntarily
resigned as a director in June 2004. He was replaced by an
independent director, Dr. Gio Batta Gori. Inadvertently, his
directorship was not deleted from Item 10 nor was the title
removed from his name on the signature page. The errors will be
corrected in the amended 10K.
Item 10.) We will make sure to include in all future filings all
significant related party transactions, such as the repurchase of
common stock shares from David Edell and Ira W. Berman, in a note
to the financial statements.
Item 11.) The Company does not have any contractual agreements
with any suppliers and/or principal customers. It does have
agreements with customers relating to co-operative advertising,
damaged products returns and normal discounts and allowances.
The only Licensee Agreement filed was with Allegheny Pharmacal
because of the impact that the License had on the Company's
business, the initial upfront cost ($1,500,000) in 1986. All of
the other Licenses did not require any significant upfront cost.
Inasmuch as the company did not make any major upfront
investments, the Company is free to terminate the Licenses at any
time. There are no required royalty payments except to maintain
the License. The Company also prefers to keep the terms
confidential.
Item 12.) i.) The disparity stems from the fact that certain
shareholders "paid" for their exercise of stock options (138,000)
by surrendering shares of stock (8,758) already owned equal in
value to the exercise price. Therefore, the net effect on the
issuance of common stock was reduced. The issuance was then
adjusted to reflect the effect of the 2% stock dividend.
ii) The $995,440 listed as dividends declared in the
Consolidated Statement of Shareholders' Equity, page 6, refers
only to the cash dividend declared. The stock dividend is
reflected in the revised number of Common Stock Shares shown
throughout the statement.
iii) The number of shares issued pursuant to the stock
dividend was 138,108. The amount of cash dividends paid during
fiscal 2004 was $891,131 representing $379,117of dividends
declared in Fiscal 2003 and paid in 2004 and $512,014 of cash
dividends declared and paid in fiscal 2004. The amount of cash
dividends declared in fiscal 2004 but not paid until fiscal 2005
was $483,426. The cash dividends of $512,014 paid in June 2004
(Fiscal 2004) and the cash dividends of $483,426 paid in December
2004 (Fiscal 2005) equals the amount of Dividends Declared shown
as a reduction of Retained Earnings in Fiscal 2004 on the
Consolidated Statements of Shareholders' Equity. The Stock
dividend declared is reflected in the 2% proportionate increase in
all per share amounts shown on the Statement of Shareholders'
Equity.
Item 13.) The pertinent rights and privileges of our Class A
Common Stock are identical to the other Common Stock with the
exception that the Class A shareholders have the right to elect 4
members to the Board of Directors whereas the Common shareholders
can only elect 3 members.
Item 14.) It is impossible to ascertain when exactly the benefits
of advertising expenditures are realized but it is logical to
assume that the benefits overlap more than one interim period
especially since some of the advertising can run right up to the
last day of a particular period with no opportunity to reap the
benefits from it until the next period. Although, in accordance
with GAAP standards, we expense all of our advertising
expenditures within the Fiscal year they are incurred, we attempt
to give a more accurate picture of the results of our operations
by charging them against income equally through the year (in
accordance with the guidelines of APB 28 and SOP 93-7) rather than
distort any one periods results of operations by charging it with
a disproportionate amount of advertising expense. Quarterly
results could then be misleading and confusing to the public in
ascertaining how the Company is performing during the year.
Item 15.) Our Trademarks consist of various brand names and we
have found that the nature of our business is such that we must
keep updating our products and revising our Branding to keep up
with current market trends. Therefore, most of our Trademarks
become obsolete or devalued after several years. Since we
anticipate that the Trademarks will lose some value as new
competitive products are introduced into the market we amortize
them over 15 years to reflect that gradual decrease in value. We
use 17 years for any patents which we have on any of the product
formulations to coincide with the legal life of the patent.
Item 16.) The average expected life of the stock options used to
estimate the fair value of the options was based on the options
issued during Fiscal 2004. We apologize for the misprint. The
average life was 5 years. We had several people proof read the
10K and the number had been changed to "5 years" as had the
removal of the term "director" in item nine. Apparently, the
final corrected version was not transmitted via EDGAR. The
volatility was calculated by using a logarithm of the average
fluctuation of the stock price over the last 36 months.
Item 17.) There is no proforma effect of recognizing compensation
expense in accordance with FAS123 for Fiscal 2003 and 2002 because
no new stock options were granted during those periods. In Fiscal
2004, the proforma effect is shown since there were options
granted during the year.
Item 18.) The repriced or extended terms of any option grants have
been reflected in any calculations of EPS and Weighted Average
Shares.
Item 19.) Attached is the revised disclosure in Footnote #9 in
accordance with paragraphs 47 and 48 of SFAS No. 123.
Item 20.) Our total royalty costs by licensor for each of Fiscal
years 2002, 2003, and 2004 are as follows:
2004 2003 2002
"A" $91,968 $52,033 $74,711
"B" 109,035 427,419 672,538
"C" 8,369 1,906 3,850
"D" (910) 12,555 2,654
"E" 1,829 3,973 0
"F" 69,714 40,782 0
"G" 186 143 278
"H" 68,935 0 0
"I" 86,611 143,616 70,362
Total $435,737 $682,427 $824,393
Item 21.) The information set forth in Item 3 Legal Proceedings
sets forth the fact that there were originally 13 cases filed in
which the Company was named along with other defendants. Eleven
cases have been dismissed with prejudice. These cases cannot be
legally reinstated. The one case in Philadelphia in which one of
the defendants filed for bankruptcy has been delayed. The court
is rendering a decision on our motion to dismiss. We agree with
independent counsel that because under the decision in Seattle,
unless a plaintiff ingested a product with PPA within three days
of a stroke, there can be no causation to prove that a product
caused the stroke. We feel that the case should be dismissed
inasmuch as plaintiff at the deposition deposed that she took our
product months before the stroke.
The remaining case in Louisiana is fully insured to the extent of
$5,000,000. After reviewing the plaintiff's medical records, it
does not appear that there is ongoing significant medical problems
that would cause a jury to render a substantial judgment. Counsel
evidently in discussing the matter with Phoenix Insurance Company
has not made any substantial efforts to settle the case which we
have been led to believe could be settled for under $250,000.
We do not believe that any further litigations would be ensuing
because the Statute of Limitations throughout the country provided
that the case must be instituted within three to four years within
the time frame in which a plaintiff had constructive notice of the
product that proximately caused a stroke. The FDA put out a news
release nationally in October 2000. We included the last
sentence, "However...", because we believe it is the normal
boiler plate exculpation clause generally used when discussing
litigation."
Item 22.) We considered recognizing the total lease expense on a
straight line basis over the expected term and decided that the
difference was immaterial to the financial statements. Based on
the fact that we realize there is a reasonable possibility that
the lease will be renegotiated prior to its term and the straight
line method might not ultimately reflect the true expense anyway
we felt that expensing what we currently incur most accurately
reflects the results of operations for the current period.
Item 23.) The amount of options that were excluded from the
calculation because of their anti-dilution effect were 0, 0, and
50,000 for fiscal 2002, 2003 and 2004, respectively.
Item 24.) We apologize again, although this was also corrected
prior to the EDGAR filing, apparently the penultimate draft was
accidentally used for the EDGAR transmission rather than the
"final draft". The chronological order is not reversed, the items
were simply not updated from the 2003/2002 amounts to the
2004/2003 amounts. The number you attempted to reconcile with the
2004 numbers was in fact the 2002 number. We have corrected the
presentation in the amended 10K.
Item 25.) Specific reserves of certain individually large
receivables no longer exist because they were reduced due to the
actual write-off or collection of the specific amount thereby
reducing the reserves disproportionately.
We hope this response adequately answers all of the questions you
had regarding our filing. If additional clarification or
disclosures are necessary please notify us and we will gladly
provide the necessary data. We understand that 1) we are
responsible for the adequacy and accuracy of the disclosure in our
filings, 2) staff comments or changes to disclosure in response to
staff comments do not foreclose the Commission from taking any
action with respect to the filing, and 3) the company may not
assert staff comments as a defense in any proceeding initiated by
the Commission or any person under the federal securities laws of
the United States.
Very truly yours,
Mr. John Bingman
Chief Financial Officer
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - AMENDED
Except for historical information contained herein, this
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains forward-looking statements.
These statements involve known and unknown risks and
uncertainties that may cause actual results or outcomes to be
materially different from any future results, performances or
achievements expressed or implied by such forward-looking
statements, 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.
On March 3, 1986, the Company entered into a License
Agreement with Alleghany Pharmacal Corporation under the terms of
which the Company was granted the exclusive right to use the
licensed products and trademarks for the manufacture and
distribution of the products subject to the License Agreement.
Under the terms of the Alleghany Pharmacal License (see
"Business-License Agreements"), the royalty-rate for those
Alleghany Pharmacal License products previously 'charged' at 6%
will be reduced to 1% now that the sum of $9,000,000 in royalties
has been paid thereunder. In April 2003, the Company concluded
payment of an aggregate of $9,000,000. Therefore, all royalty
payments were reduced to 1% on all future orders.
Comparison of Results for Fiscal Years 2004 and 2003
The Company's revenues increased from $54,736,751 in fiscal
2003 to $61,517,758, primarily because of the increased sales of
the Company's Mega - T appetite suppressant product and Mega T
chewing gum. The revenues increased despite that fact that
during the year, a major drug chain entered into an agreement to
be acquired by another major drug chain. The acquisition caused
the Company a decrease in revenues by approximately $1,563,000
from the prior year. Gross profit margins remained at 66% this
year as they were last year. The Company makes every effort to
control the cost of manufacturing and has had no substantial cost
increases. Net income was $5,796,663 as compared to $5,252,131
in fiscal 2003. In accordance with GAAP, the Company reclassified
certain advertising expenditures as a reduction of sales rather
than report them as advertising expenses. The reclassification
is the adoption by the Company of the EITF 90-16 GAAP standard.
The reclassification reflects a reduction in sales for the years
ended November 30, 2004 and 2003 by $2,005,596 and $1,760,308,
respectively. The reclassification reduces the gross profit
margin but does not affect the net income.
For the current fiscal year, advertising, cooperative and
promotional allowance expenditures were $13,118,784 as compared
to $10,328,695 in fiscal 2003. Advertising expenditures were
21.6% of sales vs. 19.1% last year. The increased advertising
expenses were a result of the increased advertising costs as a
result of the media being purchased during the Olympics and the
presidential elections thus reducing the normal available times
for the Company. An additional $750,000 over and above the
projected media expense was expended to keep products
competitive. The increased SG&A expenses increased 5% to
$17,577,032 from $16,753,269 in 2003. The increase was due
mainly to SG&A expenses, which vary in relation to additional
sales volume (i.e. payroll, freight-out, royalties, etc.). Sales
returns and allowances increased to 9.2% of gross sales from 8.5%
last year. Research and development expenses decreased to
$876,665 this year from $884,425 last year.
On November 26, 2004, the Company sold 1,125 shares of K-
Mart Holding Corp, (the shares received in distribution in the K-
Mart Chapter 11 proceedings) in the gross amount of $159,483.
Comparison of Results for Fiscal Years 2003 and 2002
The Company's revenues increased from $45,680,974 in fiscal
2002 to $54,736,751 in the fiscal 2003. Gross profit margins
remained at 66% in the fiscal 2003 as they were in the fiscal
2002. Net income was $5,252,131 as compared to $3,074,353. In
accordance with GAAP, the Company reclassified certain
advertising expenditures as a reduction of sales rather than
report them as advertising expenses. The reclassification is the
adoption by the Company of the EITF 90-16 GAAP standard. The
reclassification reflects a reduction in sales for the years
ended November 30, 2003 and 2002 by $1,760,308 and $1,169,775,
respectively. The reclassification reduces the gross profit
margin but does not affect the net income.
For the 2003 fiscal year, advertising, cooperative and
promotional allowance expenditures were $10,328,695 as compared
to $9,239,249 in fiscal 2002. Advertising expenditures were
19.1% of sales vs. 20.4% in 2002. SG&A expenses increased 8.8%
to $16,753,269 from $15,389,528 in 2002. The increase was due
mainly to SG&A expenses, which vary in relation to additional
sales volume (i.e. payroll, freight-out, royalties, etc.). Sales
returns and allowances decreased to 8.5% of gross sales from
10.4% fiscal 2002. Research and development expenses increased
to $884,425 in the fiscal 2003 from $741,974 in fiscal 2002
On January 22, 2002, K-Mart filed for bankruptcy under
Chapter XI. As at November 30, 2002, after adjustments for
charge-backs, there was $256,236 due and outstanding for pre-
petition receivables for which the Company had set up a reserve
of $230,612 (90%). The Company's sales to K-Mart during 2003,
all post-petition, were $1,222,8421. As at November 30, 2003,
after K-Mart emerged from bankruptcy, all receivables from K-Mart
as debtor-in-possession were current. In fiscal 2003, the
Company wrote off the $230,000 pre-petition receivables and
reduced the reserve accordingly.
Liquidity and Capital Resources
As at November 30, 2004, the Company had working capital of
$13,562,389 as compared to $11,565,685 at November 30, 2003. The
ratio of total current assets to current liabilities is 2.7 to 1
as compared to a ratio of 2.9 to 1 for the prior year. Accounts
receivable was approximately $2,000,000 higher due to the
substantial increase of sales in the latter part of Fiscal 2004
as compared to 2003. Inventories were up $700,000 to prepare for
anticipated sales increases in 2005. Both the working capital
and the current ratio would have been significantly higher if the
Company hadn't purchased, on October 5, 2004, an aggregate of
500,000 shares of the Company's common stock at $8.99 per share
from officers/directors, David Edell and Ira W. Berman
respectively. Stockholders' equity increased to $23,522,047 from
$23,344,540 primarily due to the income from operations despite
the repurchase of the 500,000 shares.
The Company's cash position and short-term investments at
year-end was $5,094,968, up from $3,839,235 as at November 30,
2003. The increase is due to the liquidation of some of the
Company's short-term and long-term securities. The Company
focused on the short -term (1 to 3 year) on substantially all of
its investments. The short-term was purchased to protect the
valuation should interest rates rise as anticipated. The yield
was reduced accordingly. The Company invested in only
institutional grade commercial paper thereby reducing the degree
of risk. In December 2003, the Company declared a $.14
dividend for shareholders of record in May and November 2004,
which reduced the Company's cash position by approximately
$890,000.
Inventories were $6,048,000 vs. $5,312,699, and accounts
receivable were $8,677,984 vs. $6,604,982. Current liabilities
are $8,023,805 vs. $5,982,267 in the prior year. At year-end,
the Company had long and short-term triple A investments and cash
of $13,947,166 as compared to $14,830,646. As of November 30,
2004, the Company was not utilizing any of the funds available
under its $10,000,000 unsecured credit line.
Inventory, Seasonality, Inflation and General Economic Factors
The Company attempts to keep its inventory for every product
at levels that will enable shipment against orders within a three-
week period. However, certain components must be inventoried
well in advance of actual orders because of time-to-acquire
circumstances. For the most part, purchases are based upon
projected quarterly requirements, which are projected based upon
sales indications received by the sales and marketing
departments, and general business factors. All of the Company's
contract-manufacture products and components are purchased from
non-affiliated entities. Warehousing is provided at Company
facilities, and all products are shipped from the Company's
warehouse facilities.
None of the Company's products are particularly seasonal,
but sales of its sun-care, depilatory and diet-aid products
usually peak during the Spring and Summer seasons, and perfume
sales usually peak in Fall and Winter. The Company does not have
a product that can be identified as a `Christmas item'.
Because its products are sold to retail stores (throughout
the United States and, in small part, abroad), sales are
particularly affected by general economic conditions.
Accordingly, any adverse change in the economic climate can have
an adverse impact on the Company's sales and financial condition.
The Company does not believe that inflation or other general
economic circumstance that would negatively affect operations can
be predicted at present, but if such circumstances should occur,
they could have material and negative impact on the Company's net
sales and revenues; and, more particularly, unless the Company
was able to pass along related cost increases to its customers.
There was no significant impact on operations as a result of
inflation during the current fiscal year.
Contractual Obligations
The following table sets forth the contractual obligations
in total for each year of the next five years as at November 30,
2004. Such obligations include the current lease for the
Company's premises, written employment contracts and License
Agreements.
2005 2006 2007 2008 2009
Lease on Premises(1) 449,376 449,376 449,376 449,376 449,376
Royalty Expense (2) 606,000 606,000 606,000 606,000 606,000
Employment Contracts (3) 2,194,772 2,294,959 2,401,156 1,988,726 2,108,049
Open Purchase Orders 4,495,510
Total Contractual
Obligations 7,745,658 3,350,335 3,456,532 3,044,102 3,163,425
(1) The Lease is a net, net lease requiring a yearly rental of
$327,684 plus Common Area Maintenance "CAM". See Section Part I,
Item 2. The rental provided above is the base rental and
estimated CAM. CAM for 2004 was $121,692. The figures above do
not include adjustments for the CPI. The lease has an annual CPI
adjustment of 3%, not to exceed 15% cumulative for five years.
(2) See Section Part I, Item 1(e). The Company is not required
to pay any royalty in excess of realized sales if the Company
chooses not to continue under the license. The figures set forth
above reflect estimates of the royalty expense anticipated
minimum requirements to maintain the licenses under the various
contracts for the licensed products based on fiscal 2004 sales.
Royalty expense includes Alleghany Pharmacal, Solar Sense, Hugger
Corporation, Nail Consultants, Tea-Guard, Inc., Stephen Hsu, PhD,
and Denise Austin.
(3) The Company has executed Employment Contracts with its CEO,
David Edell, and its Chairman of the Board, Ira W. Berman. The
contracts for both are exactly the same. The contracts expire on
December 31, 2010. The contracts provide for a base salary which
commenced in 1994 in the amount of $300,000 (plus a bonus of 20%
of the base salary), with a year-to-year CPI or 6%, plus 2.5% of
the Company's pre-tax income less depreciation and amortization
(EBITDA). (The 2.5% measure in the bonus provision of the
Edell/Berman contracts was amended so as to calculate it against
earnings before income taxes, less depreciation, amortization and
expenditures for media and cooperative advertising in excess of
$8,000,000.) On May 24, 2001, the contract was amended
increasing the base salary to $400,000. The figures above
include only the base salaries for the five years (plus 20% of
the base salary), and adjustment for CPI, and without estimating
bonuses, as the bonus is contingent upon future earnings. David
Edell's sons, Dunnan Edell and Drew Edell have five-year
employment contracts in the amounts of $270,000 and $200,000
respectively, which expire on November 30, 2007 (See Item 11,
Summary Compensation Table). In July 2003, Dunnan Edell's salary
was increased to $300,000 and in January 2004, Drew Edell's
salary was increased to $225,000.
Dunnan Edell is a director and during fiscal 2003 was appointed
President of the Company and Chief Operating Officer. Drew Edell
is the Vice President of Operations and Research, and Product
Development.
Cautionary Statements Regarding Forward-Looking Statements
This annual report contains forward-looking statements based
upon current expectations of management that involve risks and
uncertainty. Actual risks could differ materially from those
anticipated. Additional risks and uncertainties not presently
known may possibly impair business operations. If any of these
risks actually occur, the business, financial conditions and
operating results could be materially adversely affected. The
cautionary statements made in this Annual Report on Form 10K
should be read as being applicable to all forward-looking
statements whenever they appear in this Annual Report.
Concentration of Risk
The Company relies on mass merchandisers and major drug
chains for the sales of its products. The loss of any one of
those accounts could have a substantive negative impact upon its
financial operations. During fiscal 2004, a major drug chain
entered into an agreement to be acquired by another major drug
chain. The decrease in their orders caused revenue to decrease
approximately $1,563,000 from the prior year. {See Business -
General, Item 1(c)i Marketing.}
The Company does not manufacture any of its products. All
of the products are manufactured for the Company by independent
contract manufacturers. There can be no assurance that the
failure of a supplier to deliver the products ordered by the
Company when requested will not cause burdensome delays in the
Company's shipments to accounts. The Company does constantly
seek alternative suppliers should a major supplier fail to
deliver as contracted. A failure of the Company to ship as
ordered by its accounts could cause penalties and/or
cancellations.
There is No Assurance That Business Will Continue to Operate
Profitably.
In the current year, net sales were $60,667,562. This year,
almost all of the products were able to maintain the projected
gross profit margins. Net income was $5,796,663. There were no
FDA policies that affected the Company's brands. In 2000, the
FDA suggested the discontinuance of the Company's over-the-
counter drug appetite suppressant products containing PPA. As a
result, revenues that year were reduced by $1,245,000 due to
returns. In addition, the Company also wrote down $255,000 in
inventory causing the Company to incur a loss of $654,510 for the
year. This fiscal year, Mega - T and Mega - G dietary
supplements, marketed to replace the drug product, had net
revenues of $ 16,231,919.
The Pending Litigations in Connection with the Sale of the
Company's Products Containing PPA May Entail Significant
Uncertainty and Expense.
As described in "Legal Proceedings" set forth, there were
referenced 8Ks filed on May 23, 2002 and November 20, 2002, in
which the legal issues were discussed. Currently, there are two
remaining cases. One case in Pennsylvania is in the process of
being dismissed. The other case pending in Louisiana is fully
insured and is being defended by the Company's insurance carrier.
All of the other cases have been dismissed with prejudice. As
previously advised, it is independent counsel's opinion that the
Company has a defensible position in the two remaining lawsuits.
Competition in the Cosmetic, Health and Beauty Aid Industry
is Highly Competitive.
Reference is made to "Business `Sub-section' of
Competition."
CLASS A Shareholders Retain Control of Board of Directors.
See "Voting" in the Proxy Statement dated May 24, 2003.
Class A Shareholders, David Edell, CEO and Ira W. Berman,
Chairman of the Board of Directors, have the right to elect four
members to the Board of Directors. Common stockholders have the
right to elect three members to the Board of Directors.
Future Success Depends on Continued New Product Development.
The Company is not financially as strong as the major
companies against whom it competes. The ability to successfully
introduce new niche products and increase the growth and
profitability of its current niche brand products will affect the
business and prospects of the future of the Company and it relies
upon the creativity and marketing skills of management.
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - STOCK OPTIONS
On November 15, 1984, the Company authorized the granting of incentive stock
options as well as non-qualified options. The plan was amended in 1986 and
again in 1994. On July 9, 2003, the Company approved a Stock Option Plan
authorizing the issuance of options up to 1,000,000 shares. The following
summarizes the stock options outstanding under these plans as of November
30, 2004:
Number Per Share
Of Option
Date Granted Shares Price Expiration
June 16, 1999 10,000 2.50 2009
May 24, 2001 289,500 .50 2007
March 9, 2004 50,000 9.00 2009
March 9, 2004 50,000 8.25 2009
June 6, 2004 5,000 8.25 2009
August 24, 2004 25,000 7.50 2009
429.500
The following summarizes the activity of shares under option for the two
years ended November 30, 2004:
Weighted
Number Per Share Average Per
Of Option Exercise Share
Shares Price Price Value
Outstanding - November 30,
2002 594,500 .50-2.50 $ 317,250
Granted - - -
Repriced - - -
Exercised ( 157,000) ( .50) ( 78,500)
Expired - - -
Cancelled - - -
Outstanding - November 30,
2003 437,500 238,750
Granted 105,000 8.25-9.00 8.61 1,091,250
Granted 25,000 7.50 7.50
Repriced - - -
Exercised ( 138,000) ( .50) ( .50) ( 69,000)
Expired - - -
Cancelled - - -
Outstanding - November 30,
2004 429,500 $1,261,000
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CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - STOCK OPTIONS (Continued)
Number Per Share Weighted Average
Exercisable Options by Range Of Option Exercise Per Share
of Exercise Price Shares Price Price Value
Options Exercisable - November
30, 2004 289,500 .50 .50 144,750
Option Exercisable - November
30, 2004 130,000 7.50 - 9.00 8.39 1,090,700
Option Exercisable - November
30, 2004 10,000 2.50 2.50 25,000
429,500 $1,260,450
The $.50 options outstanding at November 30, 2004 have a weighted average
remaining contractual life of thirty two months. The $2.50 options have a
weighted average remaining contractual life of fifty four months. The
options with a range of $7.50-$9.00 have a weighted average remaining
contractual life of fifty two months.
The Company accounts for its stock-based employee compensation under the
recognition and measurement principles of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Under APB No. 25, when the exercise price of stock
options equals the market price of the underlying stock on the date
of grant, no compensation expense is recognized in the consolidated
statement of operations.
During the year 2004, the Company issued stock options to purchase 130,000
shares under the 2003 stock option plan. Under the provisions of APB No.
25, no compensation expense has been, or will be, recognized in the
consolidated statement of operations.
Proforma net income and net income per share, as required by SFAS No. 123,
have been determined as if we had accounted for all employee stock options
granted under SFAS No. 123's fair value method. The proforma effect of
recognizing compensation expense in accordance with SFAS No. 123 is as
follows:
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<
CCA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - STOCK OPTIONS (Continued)
Year Ended November 30,
2004 2003 2002
Net income as reported $5,796,663 $5,252,131 $3,074,353
SFAS No. 123 based compensation ( 976,619) - -
Income tax benefit 390,648 - -
Net income - proforma $5,210,692 $5,252,131 $3,074,353
Basic net income per share - as reported $.78 $.71 $.42
Basic net income per share - proforma $.76 $.71 $.42
Diluted net income per share - as report $.75 $.68 $.40
Diluted net income per share - proforma $.73 $.68 $.40
Weighted average shares used in
computing net income and proforma
Basic 7,399,472 7,372,232 7,241,754
Diluted 7,680,781 7,768,361 7,731,583
The Company used the Black-Scholes model to value stock options for pro forma
presentation. The assumptions used to estimate the value of the options
included in the pro forma amounts and the weighted average estimated fair
value of options granted are as follows:
Stock Option Plan Shares
2004 2003 2002
Average expected life (years) 5.00 3.75 5.10
Expected volatility 237.35% 185.67% 210.19%
Risk-free interest rate 3.95% 3.00% 2.88%
Weighted average fair value
at grant - Exercise price
equal to market price $8.22 $7.01 $1.73
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, the Black-Scholes model requires the input
of highly subjective assumptions, including the expected stock price volatil-
ity and option life. Because the Company's stock options granted to
employees have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, existing
models do not necessarily provide a reliable measure of the fair value of
its stock options granted to employees. For purposes of this model, no
dividends have been assumed.
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