Summary of CCA INDUSTRIES INC

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (UNAUDITED)

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 February 28, 2009, the Company had revenues of $14,944,466 and net income of $124,366 after provision for taxes of $152,369. For the same three month period in 2007, revenues were $13,871,040 and net income was $ 343,683 after a provision for taxes of $ 183,784. Fully diluted earnings per share were $0.02 for the first quarter of 2009 as compared to fully diluted earnings per share of $0.05 for the first quarter of 2008. In accordance with EITF 01-9, 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 quarter of 2009 were reduced by $ 1,395,098 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, gross sales were reduced by $1,300,939 and trade promotion was credited by that amount. These accounting adjustments under EIFT 01-9 do not affect net income.
The Company's net sales increased $1,119,704 from $13,639,146 for the three-month period ended February 29, 2008 to $14,758,850 for the three-month period ended February 28, 2009. Sales incentives for the first quarter of 2009 increased $86,532 from the first quarter of 2008. Net sales were higher primarily due to the successful introduction of new products that increased sales of the Mega-T diet and Sudden Change skin care brands, despite a decrease in sales of Plus White oral care products. The Company previously disclosed in Form 8-K, filed with the United States Securities and Exchange Commission on January 21, 2009, that Wal-Mart had advised the Company, due to the slow down in the economy it will only carry the leading brands in their oral care sections, and as a result will no longer be purchasing the company's Plus+White® oral care products brand. Wal-Mart began decreasing its orders of Plus White products during the first quarter of 2009. Sales returns and allowances were 16.4% of gross sales for the three-month period ended February 28, 2009 versus 15.6% for the same period last year. This was a result of higher sales returns, with $1,301,476 or 7.4% of gross sales for the first quarter of 2009, versus $866,495 or 5.4% for the first quarter of 2008. Returns were higher due in part to discontinued products. As part of the Company's brand strategies, products are constantly reviewed, with new products introduced and non-performing ones discontinued. Gross profit margins decreased to 61.9% from 64.1% for the three months ended February 28, 2009 and February 29, 2008 respectively. The gross margin was affected by the higher level of returns in the first quarter of 2009 versus the same period in 2008. In addition the cost of goods was higher in the first quarter of 2009 versus the same period in 2008, primarily due to higher fuel prices which affected the cost of components.
The Company's net sales by category for the first quarter of 2009 were: Dietary Supplement $6,264,792, 42.5%; Skin Care $3,721,422, 25.2%; Oral Care $2,829,206, 19.2%; Nail Care $1,687,518, 11.4%; Analgesic $167,053, 1.1%; Fragrance, $96,468, .6% and Hair Care and Miscellaneous ($7,609), 0.0%; for a total of $14,758,850.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (UNAUDITED) (CONTINUED)

The Company makes every effort to control the cost of manufacturing and has had no substantial cost increases. Income before taxes is $276,735 for the first quarter of 2009 as compared to $527,467 for the same quarter in 2008. Returns and accounts receivable reserves accounted for $1,354,962 that was expensed against earnings for the first quarter of 2009 as opposed to $1,069,415 that was expensed for the same period in 2008. The increase in the expense resulting from the increase in accounts receivable reserve is mainly due to the timing of the Company's sales.
Advertising media expenditures were $3,559,279 in the first quarter of 2009 versus $2,531,150 in the same period in 2008, or an increase of $1,028,129. The higher advertising in 2009 versus 2008 was due primarily to increased media and retailer co-operative advertising. This increase was a continuation of an advertising program begun in the fourth quarter of 2008 to introduce some of the Company's new products into the marketplace. A major portion of the Company's co-operative advertising is reclassified as a reduction of net sales. Included in advertising media expense is the cost of newspaper inserts.
The selling, general and administrative expense for the first quarter of 2009 was $5,315,097 versus $5,682,551 in the first quarter 2008, or a decrease of $367,454. This was due in part to a reduction of $249,446 in donations of inventory by the Company to charitable organizations, as well as management's efforts to reduce general overhead costs. The full effect of management's overhead reductions will be seen in the second quarter of 2009.
The effective tax rate for the first quarter of 2009 was 55.05% versus 34.8% for the first quarter of 2008. The increase in the tax rate was primarily due to an increase in the amount of non-deductible expenses and adjustments during the quarter ended February 28, 2009 versus the quarter ended February 29, 2008. Non-deductible expenses and adjustments include the timing difference of depreciation expense on the Company's books versus the income tax return which also resulted in a decrease in the long term deferred tax asset.
The Company's financial position as of February 28, 2009 consisted of current assets of $35,589,584 and current liabilities of $12,364,113, or a current ratio of 2.9 to 1. Shareholders' equity decreased from $28,253,879 as of November 30, 2008 to $26,803,531 as of February 28, 2009. The decrease was due to dividends declared of $775,989 during the first quarter of 2009, while net income increased $124,366 and unrealized losses increased $798,726. The increase in unrealized losses was mainly due to the change in the market price of the preferred stock investments.
The Company's cash and cash equivalents were $1,443,651 as of February 28, 2009, a decrease of $7,491,048 from November 30, 2008. Included in this decrease was the purchase of bank certificates of deposit in the amount of $4,658,000, which are fully guaranteed by the Federal Deposit Insurance Corporation ("FDIC"), and which have been classified as short term investments due to market fluctuations which can affect the value if redeemed early. All of these certificates of deposit will mature during the 2009 fiscal year, and the Company fully intends to hold them until maturity. The certificates are from a number of banks; with no one certificate exceeding the $250,000 FDIC limit per institution.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (UNAUDITED) (CONTINUED)

The overall cash decrease was also due to capital expenditures, the payment of dividends and increased working capital needs. As of February 28, 2009, the Company had $11,244,511 of short term marketable securities and $2,197,994 of non-current securities. The Company's cash and cash equivalents together with both short and long term marketable securities, net of current liabilities were $2,522,043 as of February 28, 2009.
The Company's cash flow from operations utilized net cash of $2,085,688 for the three months ended February 28, 2009. Working capital requirements had increased due to increases in accounts receivable and inventory during the first quarter of 2009, partially offset by an increase in accounts payable and accrued liabilities.
The Company's long term investments as of February 28, 2009 were $2,197,994. Please refer to footnote No. 7 of the financial statements for further information regarding the Company's investments.
Accounts receivable, net of reserves, were $11,286,798 as compared to $8,230,716 as of February 28, 2009 and November 30, 2008, respectively. Accounts receivable were higher due to the timing of the Company's sales in the first quarter of 2009 versus the fourth quarter of 2008. Inventories, net of reserves, were $8,442,643 as of February 28, 2009 as compared to $7,932,798 as of November 30, 2008. Inventory was higher to satisfy sales and customer requirements for the second quarter of 2009. Accounts payable and accrued expenses increased to $11,529,155 as of February 28, 2009 from $10,182,511 as of November 30, 2008. The Company was not utilizing any of the funds available under its $20,000,000 unsecured credit line as of February 28, 2009. Please see Footnote No. 10 for further information.

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