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Article by DailyStocks_admin    (12-25-07 02:58 AM)

The Daily Magic Formula Stock for 12/25/2007 is CCA Industries Inc. According to the Magic Formula Investing Web Site, the ebit yield is 15% and the EBIT ROIC is 75 - 100%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

(a) Recent Developments

On November 1, 2006 the Company entered into a letter of intent with Dubilier and Company relating to a proposed acquisition of the Company by Dubilier. A copy of the letter of intent was included as an exhibit to the Company’s 8K filed Report with the Securities and Exchange Commission on November 2, 2006. The Company and Dubilier have reached an agreement in principle on a transaction pursuant to which Dubilier will acquire all of the outstanding common stock and Class A common stock of the Company at a price per share of $12.25. The transaction is subject to, among other matters, the execution and delivery of a definitive merger agreement, approval of the transaction by CCA’s board of directors and shareholders, receipt of an opinion from an independent investment banking firm to the effect that the consideration to be paid by Dubilier is fair, from a financial point of view, to the public holders of the Company’s common stock, and Dubilier’s ability to obtain financing for the transaction.

(b) General

CCA INDUSTRIES, INC. (hereinafter, “CCA” or the “Company”) was incorporated in Delaware in 1983.

The Company operates in one industry segment, in what may be generally described as the health and beauty aids business, selling numerous products in several health and beauty aids and cosmeceutical categories. All of the Company’s products are manufactured by contract manufacturers, pursuant to the Company's specifications and formulations.

The Company owns registered trademarks, or exclusive licenses to use registered trademarks, that identify its products by brand name. Under most of the brand names, the Company markets several different but categorically-related products. The principal brand and trademark names include “Plus+White” (oral health-care products), “Sudden Change” (skin-care products), “Nutra Nail” and “Power Gel” and “Nutra Nail 60" (nail treatments), “Bikini Zone” (pre and after-shave products), “Mega - T” Green Tea and “Mega G” Grapefruit (dietary products), “Mega – T” chewing gum (anti-oxidant dietary product), “Pound-X” (dietary supplement), “Hair Off” (depilatories), “IPR” (foot-care products), “Solar Sense” (sun-care products), “Wash 'N Curl” (shampoos), “Cherry Vanilla” (perfumes), and “Scar Zone” (scar diminishing cream).

All Company products are marketed and sold to major drug and food chains, mass merchandisers, and wholesale beauty aids distributors throughout the United States and Canada. In addition, certain of the Company’s products are sold internationally.

The Company recognizes sales at the time its products are shipped to customers. However, while sales are not formally subject to any contract contingency, the acceptance of returns is an industry wide practice. The Company thus estimates ‘unit returns’ based upon a review of the market’s recent-historical acceptance of subject products as well as current market-expectations, and equates its reserves for estimated returns in the sum of the gross profits, in the five preceding months, realized upon an equivalent number of subject-product sales. (See Item 15, Financial Statements, Note 2). Of course, there can be no precise going forward assurance in respect to return rates and gross margins, and in the event of a significant increase in the rate of returns, the circumstance could have a materially adverse affect upon the Company’s operations.

The Company's net sales in fiscal 2006 were $ 63,302,220. Gross profits were $40,041,913. International sales accounted for approximately 2% of sales. The Company experienced a net profit of $ 5,604,251 for the current fiscal year. Net worth at November 30, 2006, was $27,284,791 despite the repurchase of an aggregate of 253,304 shares of the Company’s common stock from Officers/Directors and the purchase of 19,600 shares pursuant to Rule 144. (See Certain Relationships and Related Transactions.)

Including the principal members of management (see Directors and Executive Officers), the Company, at November 30, 2006, had 154 sales, administrative, creative, accounting, receiving, and warehouse personnel in its employ.

(c) Manufacturing and Shipping

The Company creates and/or oversees formulations, chooses colors and mixtures, and arranges with independent contractors for the manufacture of its products pursuant to Company specifications. Manufacturing and component supply arrangements are maintained with various manufacturers and suppliers. All orders and other product shipments are delivered from the Company's own warehouse facilities, which results in more effective inventory control, more efficient shipping procedures, and the realization of related economies.

(d) Marketing

The Company markets its products to major drug, food and mass merchandise retail chains, and leading wholesalers, through an in house sales force of employees and independent sales representatives throughout the United States.

The Company sells its products to approximately 300 accounts, most of which have numerous outlets. Approximately 40,000 stores carry at least one Company product (SKU).

During the fiscal year ended November 30, 2006, the Company's largest customers were Wal-Mart (approximately 34% of net sales), McLanes (approximately 6 %), Walgreens, CVS, and Rite Aid (approximately 13%, 7%, and 5%, respectively). The loss of any of these principal customers, or substantial reduction of sales revenues realized from their business, could materially and negatively affect the Company's earnings.

Most of the Company's products are not particularly susceptible to seasonal sales fluctuation. However, sales of depilatory, sun care and diet aids products customarily peak in the spring and summer months, while fragrance product sales customarily peak in the Fall and Winter months.

The Company employs brand managers who are responsible for the marketing of CCA’s brands. These managers work with the Company’s in-house advertising and art departments to create media advertising, packaging and point - of - purchase displays.

The Company primarily utilizes local and national television advertisements to promote its leading brands. On occasion, print and radio advertisements are engaged. In addition, and more or less continuously, store centered product promotions are co operatively undertaken with customers.

Each of the Company's brand name products is intended to attract a particular demographic segment of the consumer market, and advertising campaigns are directed to the respective market segments.

The Company's in house advertising department is responsible for the selection of its media advertising. Placement is accomplished either directly or through media service companies.

(e) " Wholly Owned" Products

The majority of the Company's sales revenues are from sales of the Company's "wholly owned" product lines (i.e., products sold under trademark names owned by the Company, and not subject to any other party’s interest or license), which include principally "Plus+White", "Sudden Change", “Wash ‘N Curl”, "Bikini Zone", "Mood Magic", "Mega -T", “Pound-X,” "Cherry Vanilla", and "Scar Zone".

(f) All Products

The Company’s gross sales net of returns by category percentage were: Dietary Supplement 31%; Skin Care 30%; Oral Care 24%; Nail Care 9%; Hair Care 3% and Fragrance and Miscellaneous 3%.

(g) License-Agreements Products

i. Alleghany Pharmacal

In 1986, the Company entered into a license agreement with Alleghany Pharmacal Corporation (the "Alleghany Pharmacal License"). Under the terms of the Alleghany Pharmacal License, the Company was granted, and yet retains, the exclusive right to manufacture and market certain products, and to use their associated trademarks, including "Nutra Nail," "Nutra Nail 60," "Pro Perm," "Hair Off," "Permathene" and "IPR".

The Alleghany Pharmacal License required the Company (a) to pay royalties of 6% per annum on net sales of “Pro-Perm” hair care products, the PPA-based and now discontinued dietary-product "Permathene", “IPR” foot-care products, "Nutra Nail" nail enamel products, and "Hair Off" depilatories; and (b) to pay 1% royalties on net sales of a “Hair-Off” mitten that is a depilatory product accessory, and “Nutra Nail 60", a fast-acting nail enamel, and “Nutra Nail Power Gel.”

The Company had been required to pay not less than $360,000 per annum in order to maintain exclusive rights under the Alleghany Pharmacal License. (Royalties have always exceeded the minimum; but, if they did not, the Company would be entitled to maintain exclusive license rights by electing to pay the 'difference.' At the same time, the Company would not be required to pay any fee in excess of royalties payable in respect of realized sales if sales did not yield 'minimum royalties' and the Company chose in such circumstance to concede the license rights.)

The Alleghany Pharmacal License agreement provides that if, and when, in the aggregate, $9,000,000 in royalties had been paid thereunder, the royalty rate for those products 'charged' at 6% would be reduced to 1%. The Company paid an aggregate of $9,000,000 in royalties to Allegheny in April 2003. Commencing May 1, 2003, the license royalty was reduced to 1%.

The products subject to the Alleghany Pharmacal License accounted for approximately $9,062,416 or 14.3 % of total net sales in the fiscal year ended November 30, 2006. “Nutra Nail” and the “Hair-Off” depilatory were the leaders among all of the Alleghany license-agreement products, producing approximately 9% and 4.4%, respectively, of net sales.

ii. Solar Sense, Inc.

CCA commenced the marketing of its sun care products line following a May 1998 License Agreement with Solar Sense, Inc. (the “Solar Sense License”), pursuant to which it acquired the exclusive right to use the trademark names "Solar Sense" and "Kids Sense” and the exclusive right to market mark-associated products. The Solar Sense License requires the Company to pay a royalty on net sales of said licensed products until $1 million total royalties are paid. CCA realized approximately $801,178 in net sales of sun-care products in 2006.

iii. The Nail Consultants Ltd.

In October of 1999, the Company entered into a License Agreement with The Nail Consultants, Ltd. for the use of an activator invented in connection with a method for applying a protective covering to fingernails. The Company’s License Agreement with The Nail Consultants, Ltd. is for the use of the method and its composition in a new product kit packaged and marketed by CCA under its own name, “Nutra Nail Power Gel”. The Company is required to pay a royalty of net sales of all products sold under the license, by the Company. Net sales were approximately $1,347,491 in 2006 and the Company paid or accrued the Nail Consultants the prescribed royalty.

iv. Dr. Stephen Hsu - Green Tea

Stephen Hsu, PhD., research faculty member of the Medical College of Georgia, entered into an agreement with the Company on February 26, 2004, to create green tea skin care products based on his years of research related to the various uses of green tea anti-oxidants for skin care problems.

Dr. Hsu collaborated with Drew Edell, Vice-President of Research and Development for the Company, to create and file a patent application for a special anti-oxidant green tea serum to be used for topical skin application. The patent was filed in November 2004.

Dr. Hsu will be entitled to a commission on the net factory sales of all of the Company’s products using the green tea serum created exclusively for the Company. The special anti-oxidant green tea serum was used as one of the skus in the Denise Austin “Skin Fit For Life” line and has been included in the new Sudden Change skin care line. Net sales of the products utilizing the green tea serum were $1,516,127 for the fiscal year ended November 30, 2006.

v. Mega -T Green Tea Chewing Gum and Mints

On May 18, 2004, The Company entered into a license agreement with Tea-Guard, Inc. to manufacture and distribute Mega -T Green Tea chewing gum and Mega -T Green Tea mints. Dr. Stephen Hsu created both formulations under special arrangements with Tea-Guard, Inc. (not related to the Company).

The license agreement requires the Company to pay a minimum royalty of $250,000 commencing with the period beginning March 1, 2007 to February 28, 2008. The minimum payments are required to maintain the Company’s exclusivity for the sale of the products and to continue marketing the products and until royalties have aggregated to $10,000,000, at which time all royalty obligations cease. Except as to maintain its rights to “exclusivity”, the Company has no obligation to meet minimum royalty requirements.

The Company commenced sales of the Mega -T Green Tea Chewing Gum in July 2004. Net sales of the Mega-T Green Tea chewing gum for the fiscal year ended November 30, 2006 were $1,235,806.

vi. Denise Austin “Skin Fit For Life” skin care line

On July 14, 2004, the Company entered into a license agreement with Denise Austin, a well known, respected fitness expert. Under the agreement, the Company created a special anti-oxidant line of signature skin care products called the Denise Austin “Skin Fit For Life” skin care line. The Company discontinued the license in March 2006.

vii. Other Licenses

The Company is not party to any other license agreement that is currently material to its operations.

(h) Trademarks

The Company's own trademarks and licensed use trademarks serve to identify its products and proprietary interests. The Company considers these marks to be valuable assets. However, there can be no assurance, as a practical matter, that trademark registration results in marketplace advantages, or that the presumptive rights acquired by registration will necessarily and precisely protect the presumed exclusivity and asset value of the marks.

(i) Competition

The market for cosmetics and perfumes, and health and beauty aids products in general, including patent medicines, is characterized by vigorous competition among producers, many of whom have substantially greater financial, technological and marketing resources than the Company. Major competitors such as Revlon, L'Oreal, Colgate, Del Laboratories, Unilever, and Procter & Gamble have Fortune 500 status, and the broadest based public recognition of their products. Moreover, a substantial number of other health and beauty aids manufacturers and distributors may also have greater resources than the Company.

(j) Government Regulation

All of the products that the Company markets are subject or potentially subject to particular regulation by government agencies, such as the U.S. Food and Drug Administration, the Federal Trade Commission, and various state and/or local regulatory bodies. In the event that any future regulations were to require new approval for any in the market products, or should require approval for any planned product, the Company would attempt to obtain the necessary approval and/or license, assuming reasonable and sufficient market expectations for the subject product. However, there can be no assurance, in the absence of particular circumstances that Company efforts in respect of any future regulatory requirements would result in approvals and issuance of licenses. Moreover, if such license requirement circumstances should arise, delays inherent in any application and approval process, as well as any refusal to approve, could have a material adverse affect upon existing operations ( i.e. , concerning in the market products) or planned operations.

CEO BACKGROUND

David Edell, age 73, is a director, and the Company's Chief Executive Officer. Prior to his association with the Company he was a marketing and financial consultant; and, by 1983, he had extensive experience in the health and beauty aids field as an executive director and/or officer of Hazel Bishop, Lanolin Plus and Vitamin Corporation of America. In 1954, David Edell received a Bachelor of Arts degree from Syracuse University.

Ira W. Berman, age 73, is the Company's Executive Vice President and Corporate Secretary. He is also Chairman of the Board of Directors. Mr. Berman is an attorney who has been engaged in the practice of law since 1955. He received a Bachelor of Arts Degree (1953) and Bachelor of Laws Degree (1955) from Cornell University, and is a member of the American Bar Association.

Jack Polak, age 92, has been a private investment consultant since April 1982. He was knighted by Queen Beatrix of the Netherlands for his efforts on behalf of the Anne Frank Center, USA, for which he still actively works, and is Chairman Emeritus, and holds a tax certification in The Netherlands. He was a director and member of the Audit and Compensation Committee of K.T.I. Industries, Inc., from February 1995 until 1999, when K.T.I., a waste-to-energy business was `taken over' by Casella Industries. From 2000 until 2002, he was a director of Oakhurst Industries, a public company that owns an automotive accessories distributor, a waste-to-energy tire facility, and a road construction company.

Stanley Kreitman, age 72, has been Vice Chairman of the Board of Manhattan Associates, an equity investment firm, since 1994. He is also a director of Medallion Financial Corp., an SBIC. Mr. Kreitman has been Chairman of the Board of Trustees of the New York Institute of Technology since 1989, and of Crime Stoppers Nassau County (NY), since 1994. Since February 1999 and June 1999, respectively, he has been a member of the Board of Directors of K.S.W. Corp. and P.M.C.C. Mortgage Corp. He is also a director and/or executive committee member of the following organizations: The New York City Board of Corrections, Bank Hapdalim USA (Signature Bank), The New York College of Osteopathic Medicine, and the Police Athletic League. From 1975 until 1993, he was President of United States Banknote Corporation, a securities printer.

Dunnan Edell, age 49, President, is the son of David Edell and the brother of Drew Edell. He is graduate of George Washington University. He has been a director since 1994. Appointed to President in 2003, he joined the Company in 1984 and was appointed Divisional Vice-President in 1986. He was employed by Alleghany Pharmacal Corporation from 1982 to 1984, and by Hazel Bishop from 1977 to 1981.

Dr. Gori, 74, is president of the Health Policy Center, Bethesda, Maryland, a consulting group in toxicology, epidemiology, nutrition, and related scientific, industrial, and regulatory issues. Advisor to major corporations worldwide, his previous experiences include directing the Franklin Institute Policy Analysis Center, and executive positions at the National Cancer Institute as Deputy Director of the Division of Cancer Causes and Prevention, Director of the Smoking and Health Program, Director of the Diet, Nutrition and Cancer Program. He held earlier positions in the pharmaceutical and biologics industry, and in academia. Recipient of the U.S. Department of Health Education and Welfare Superior Service Award, he is active in toxicology, carcinogenesis, nutrition, tobacco, and environmental issues. He has been a two-term President of the International Society of Regulatory Toxicology and Pharmacology, is a member of scientific societies, fellow of the Academy of Toxicological Sciences, funding and former editor of the journal Nutrition and Cancer, and editor of the journal Regulatory Toxicology and Pharmacology.

Robert A. Lage, age 68, a retired CPA, was a partner at PriceWaterhouseCoopers Management Consulting Service prior to his retirement in 1997. He has been engaged in the practice of public accounting and management consulting since 1959. He received a BBA from Bernard Baruch College of The City University of New York in 1958.

SHARE OWNERSHIP

David Edell owns 9.7/10.5% ownership
Ira W. Berman owns 9.8/10.7% ownership
Drew Edell owns 1.7/1.9% ownership
Dunnan Edell owns 0.6/1.8% ownership
Jack Polak owns 0.4/0.74% ownership
Stanley Kreitman owns 0.1/0.35% ownership
John Bingman owns 0.0/0.14% ownership


MANAGEMENT DISCUSSION FROM LATEST 10K

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% was reduced to 1%, as the sum of $9,000,000 in royalties had been paid thereunder as of April 2003. Thereafter, all royalty payments were reduced to 1% on all future orders.

Comparison of Results for Fiscal Years 2006 and 2005

The Company’s net sales increased from $61,181,334 (after reclassifying certain advertising expenses from selling expense to a reduction of net sales as more fully described in the footnotes to the financial statements) to $63,302,220 for the current fiscal year. Gross profit margins increased from 62.8% to 63.3%. The increase in net sales is principally due to increased sales in Oral Care.

The Company’s gross sales net of returns and allowances by category were: Dietary Supplement $21,055,278 or 31% of sales, Skin Care $20,347,016 or 30% of sales, Oral Care $16,025,534 or 24% of sales, Nail Care $6,003,041 or 9% of sales, Hair Care $2,285,329 or 3% of sales, and Fragrance and Miscellaneous $2,382,240 or 3% of sales.

Income before taxes was $8,916,645 as compared to $7,107,528 for fiscal 2005. The increase in income before taxes for fiscal 2006 is principally the result of higher gross sales and less returns than in 2005. Returns were higher in 2005 primarily due to the return of product from the launch of the Denise Austin skin care line in 2005.

The allowance for doubtful accounts is a combination of specific and general reserve amounts relating to accounts receivable. The general reserve is calculated based on historical percentages applied to aged accounts receivable and the specific reserve is established and revised based on individual customer circumstances. This allowance decreased from $260,366 as of November 30, 2005 to $185,779 as of November 30, 2006. The decrease is directly attributable to the reduction of reserves for specific disputes.

The reserve for returns and allowances is based on a reserve for returns equal to its gross profit on its historical percentage of returns on its last five month’s sales, and a specific reserve based on customer circumstances. This reserve increased from $678,346 as of November 30, 2005 to $840,418 as of November 30, 2006 primarily from additional reserves for the Pound –X brand which was launched in the fourth quarter of 2006.

The reserve for inventory obsolescence is based on a detailed analysis of inventory movement. The reserve decreased from $854,764 as of November 30, 2005 to $ 777,715 as of November 30, 2006.

In accordance with GAAP, the Company reclassified certain advertising and promotional expenditures as a reduction of sales rather than report them as expenses. This reclassification is the adoption by the Company of the EITF 00-14 GAAP standard. The reclassification reflects a reduction in the sales for the fiscal years ended November 30, 2006 and 2005 by $4,013,619 and $4,007,051 respectively.

For the year ended November 30, 2006, the Company had revenues of $64,100,023, and net income of $5,604,251, after a provision of $3,312,394 for taxes. For the year ended November 30, 2005, the Company had revenues of $61,754,243 (after reclassification), and net income of 3,785,502 after a provision of $3,322,026 for taxes. Fully diluted earnings per share for fiscal 2006 were $.79 compared to $.52 in fiscal 2005.

The effective tax rate in Fiscal 2006 was significantly lower than Fiscal 2005 due to the effect of permanent tax adjustments and certain over accruals affecting the tax due for the periods. In Fiscal 2005, the company accrued for additional taxes due based on audits in progress for the previous three years. The actual settlement of the audits in 2006 was less than anticipated which resulted in smaller than estimated adjustments. The favorable outcome of some of the calculations in the audit also resulted in an over accrual of the actual tax due for 2005, which were originally accrued for based on the proposed change to some of our methods of calculating certain adjustments. There were also certain deductions and credits which we were able to avail ourselves of in our final preparation of our 2005 return that we had not anticipated at the time of making the accrual for financial reporting. These items resulted in an over accrual of our taxes in 2005 by approximately $200,000. The reversal of the over accrual in 2005 results in showing $200,000 less in 2006 (a $400,000 adjustment in the tax provision). We also had a larger deduction for donations of certain of our inventory in 2006 which resulted in a lower effective tax rate for 2006 versus 2005. The combination of the prior year’s over accrual and the larger “permanent” differences resulted in a significantly lower effective tax rate for Fiscal 2006.

For fiscal 2006, advertising, cooperative and promotional expenses were $10,345,407 as compared to $10,671,906 in the same period for fiscal 2005. Advertising expenses were 16.3% of sales in fiscal 2006 versus 17.4% for fiscal 2005. The reduction in advertising expense was due to the change in the overall budget for the year.

SG&A expenses increased from $20,246,344 in fiscal 2005 to $21,104,728 in fiscal 2006. This was primarily due to increased compensation and related benefit costs as a result of hiring additional sales and marketing personnel.

At year’s end, there were approximately $2,053,946 of open co-op commitments, of which $1,172,057 is from 2006, $673,378 is from 2005 and 208,511 is from 2004. The Company’s total co-op commitment increased from $6,000,000 in fiscal 2005 to $6,484,840 in fiscal 2006. Co-op is advertising that is run by the retailers in which the Company shares in part of the cost. If it becomes apparent that this co-op was not utilized, the unclaimed co-op will be offset against the expense during the fiscal year in which it is determined that it did not run. This procedure is consistent with the prior year’s methodology with regard to the accrual of unsupported co-op commitments.


MANAGEMENT DISCUSSION FOR LATEST QUARTER

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.



For the three month period ended August 31, 2007, the Company had revenues of $14,266,083 and net income of $2,069,604 after provision for taxes of $1,409,470. For the same quarter in 2006, revenues were $15,996,688 and net income was $1,927,476 after a provision for taxes of $1,003,756. Earnings per share were $0.29 (diluted) for the three-month period ended August 31, 2007 as compared to earnings of $0.27 (diluted) for the same period in 2006. Income before taxes for the three month period ended August 31, 2007 was $3,479,074 versus $2,931,232 for the same quarter in 2006. In accordance with EITF 00-14, the Company has accounted for certain sales incentives offered to customers by charging them directly to sales as opposed to advertising and promotional expenses. Net sales for the third quarter of 2007 were reduced by $1,424,966 and offset by an equal reduction of trade promotional expenses, which were included in the Company’s advertising expense budget. In the same period of the prior year, net sales were reduced by $1,069,366 and trade promotion was credited by that amount. These accounting adjustments under EIFT 00-14 do not affect net income. Sales incentives costs were $355,600 higher for the third quarter of this year as compared to the same period last year due to the increased promotion of the Company’s brands.



The Company’s net sales decreased from $15,788,172 for the three-month period ended August 31, 2006 to $13,939,369 for the three-month period ended August 31, 2007. The decrease in net sales is attributable to discontinued products which are in the process of being replaced by new products. Sales returns and allowances were 16.7% of gross sales for the three-month period ended August 31, 2007 versus 12.3% for the same period last year. Sales returns and allowances were higher in part due to the return of products that were phased out and replaced by new items in the second quarter of 2007 and continuing into the third quarter, as well as the increase in sales incentives. Gross profit margins decreased to 64.6% from 68.4% for the three months ended August 31, 2007 and 2006 respectively. This was due to a combination of the effects of product mix and the increase in sales incentives and returns versus the same period last year.



The Company’s gross sales net of returns by category for the three-month period ended August 31, 2007 were: Skin Care $5,263,409, 33.9%; Dietary Supplement $4,680,260, 30.1%; Oral Care $3,528,118, 22.7%; Nail Care $1,499,582, 9.6%; Fragrance $285,806, 1.8%; and Miscellaneous $282,868, 1.9%; for a total of $15,540,043. The Company makes every effort to control the cost of manufacturing and has had no substantial cost increases. Returns and reserves accounted for $1,247,048 that was expensed against earnings for this quarter as opposed to $1,934,708 that was expensed during the third quarter of 2006.

Advertising media expenditures were $1,864,438 lower in the third quarter of 2007 versus the same period in 2006. The selling, general and administrative expenses for the third quarter of 2007 decreased $458,868 to $5,529,710 from $5,988,578 in the third quarter 2006.



For the nine month period ended August 31, 2007, the Company had revenues of $46,551,224 and net income of $3,835,276 after provision for taxes of $2,784,809. For the same period in 2006, revenues were $49,502,972 and net income was $4,703,362 after a provision for taxes of $2,775,564. The tax provision for the first nine months of 2006 as a percentage of pre-tax income was lower than the same period in 2007 due to an over accrual of the prior year’s taxes and additional deductions for charitable contributions. Earnings per share were $0.54 (diluted) for the nine month period ended August 31, 2007 as compared to earnings of $0.66 (diluted) for the same period in 2006. Earnings were impacted during the first nine months by transaction expenses related to the proposed acquisition of the Company by Dubilier as disclosed in Note 13. Transaction expenses incurred during the nine month period ended August 31, 2007 were $717,850. Income before taxes for the nine month period ended August 31, 2007 was $6,620,085. Income before taxes on a pro-forma basis eliminating transaction expenses would have been $7,337,935 versus $7,478,926 for the nine month period ended August 31, 2006. In accordance with EITF 00-14, the Company has accounted for certain sales incentives offered to customers by charging them directly to sales as opposed to advertising and promotional expenses. Net sales for the nine months ended August 31, 2007 were reduced by $3,932,576 and offset by an equal reduction of trade promotional expenses, which were included in the Company’s advertising expense budget. In the same period of the prior year, net sales were reduced by $3,480,973 and trade promotion was credited by that amount. These accounting adjustments under EIFT 00-14 do not affect net income. Sales incentives costs were $451,603 higher for the nine months ended August 31, 2007 as compared to the same period last year due to the increased promotion of the Company’s brands.



The Company’s net sales decreased from $48,909,273 for the nine month period ended August 31, 2006 to $45,746,254 for the nine month period ended August 31, 2007. Gross sales were $55,449,282 for the first nine months of 2007 versus $56,861,363 for the same period in 2006. Gross sales were lower than anticipated due to Pound – X, a dietary supplement launched in the fourth quarter of 2006 not meeting the Company’s expectations. The decrease in net sales is attributable to higher sales incentives, and higher sales returns. Sales returns and allowances were 16.4% of gross sales for the nine month period ended August 31, 2007 versus 10.5% for the same period last year. Sales returns and allowances were higher in part due to the return of products that were phased out and replaced by new items beginning in the second quarter and continuing into the third quarter of 2007. Gross profit margins decreased slightly to 63.5% from 65.2% for the nine months ended August 31, 2007 and 2006 respectively. This was due to a combination of the effects of product mix and the increase in sales incentives and returns versus the same period last year.



The Company’s gross sales net of returns and by category were: Skin Care $15,422,469, 30.8%; Dietary Supplement $15,176,198, 30.3%; Oral Care $12,833,647, 25.6%; Nail Care $5,307,814, 10.6%; Fragrance $1,055,425, 2.1%; Hair Care $275,616, 0.6%; and Miscellaneous $(16,047), -0.0.0%; for a total of $50,055,122. The Company makes every effort to control the cost of manufacturing and has had no substantial cost increases. Returns and reserves accounted for $4,794,092 that was expensed against earnings for the first nine months of 2007, of which $468,667 was for Pound – X, versus $5,886,144 for the same period in 2006.

Advertising media expenditures were $1,671,820 lower in the first nine months of 2007 versus the same period in 2006. They represented 12.2% of net sales for the nine months ended August 31, 2007 vs. 14.8% for the same period in 2006. The selling, general and administrative expenses for the first nine months of 2007 decreased $1,072,563 to $15,457,921 from $16,530,484 in the first nine months of 2006.



The Company’s financial position as of August 31, 2007 consisted of current assets of $33,777,294 and current liabilities of $8,468,068, or a current ratio of 4.0 to 1. Shareholders’ equity increased from $27,384,791 as of November 30, 2006 to $29,705,012 as of August 31, 2007. The increase in equity to $29,705,012 includes the recording of net income derived from operations and offset by dividends declared of $1,474,141 during the first nine months of 2007.



The Company’s long term investments as of August 31, 2007 were $3,243,113. Assuming these long-term investments could be sold and turned into liquid assets at any time, it would result in a current ratio of 4.5 to 1.



Accounts receivable, net of reserves, were $7,089,788 as compared to $7,188,197 as of August 31, 2007 and November 30, 2006, respectively. Inventories, net of reserves, were $7,646,480 as of August 31, 2007 as compared to $6,350,013 as of November 30, 2006. Accounts payable and accrued liabilities decreased to $7,687,001 as of August 31, 2007 from $8,104,424 as of November 30, 2006. The Company was not utilizing any of the funds available under its $25,000,000 unsecured credit line as of August 31, 2007.


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