-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PpP5WK0wYmTzmlMOdjscBTC4tDo/Mfhmj+Yi2h+iIH/vocqpJr9wbBZmPiYf2fC1 xF2G+04bxOMiEaMm55NPGw== 0000909012-03-000573.txt : 20030813 0000909012-03-000573.hdr.sgml : 20030813 20030813091301 ACCESSION NUMBER: 0000909012-03-000573 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DEL LABORATORIES INC CENTRAL INDEX KEY: 0000027751 STANDARD INDUSTRIAL CLASSIFICATION: PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS [2844] IRS NUMBER: 131953103 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05439 FILM NUMBER: 03839117 BUSINESS ADDRESS: STREET 1: 565 BROADHOLLOW RD CITY: FARMINGDALE STATE: NY ZIP: 11735 BUSINESS PHONE: 5162937070 MAIL ADDRESS: STREET 1: 178 EAB PLAZA, 8TH FL CITY: UNIONDALE STATE: NY ZIP: 11556 FORMER COMPANY: FORMER CONFORMED NAME: MARADEL PRODUCTS INC DATE OF NAME CHANGE: 19670706 10-Q 1 t300490.txt QUARTERLY REPORT 6/30/03 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE --- SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______ COMMISSION FILE NO. 1-5439 DEL LABORATORIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-1953103 - -------------------------------- ------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 178 EAB PLAZA, UNIONDALE, NEW YORK 11556 ---------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (516) 844-2020 ------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES (X) NO ( ) Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES (X) NO ( ) The number of shares of Common Stock, $1 par value, outstanding as of August 12, 2003 was 9,232,519. DEL LABORATORIES, INC. AND SUBSIDIARIES Index Part I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements: Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002 3 Consolidated Statements of Earnings for the three and six months ended June 30, 2003 and 2002 4 Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 4. Controls and Procedures 18 Part II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 19 Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 20 All other schedules and compliance information called for by the instructions to Form 10-Q have been omitted since the required information is not present or not present in amounts sufficient to require submission. -2-
DEL LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 2003 and December 31, 2002 (In thousands, except for share and per share data) June 30 December 31 2003 2002 ---- ---- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 715 $ 501 Accounts receivable-less allowance for doubtful accounts of $4,616 in 2003 and $4,962 in 2002 66,011 51,080 Inventories 88,887 79,913 Income taxes receivable 1,297 1,319 Deferred income taxes 7,934 7,934 Prepaid expenses and other current assets 2,162 2,981 --------- --------- Total current assets 167,006 143,728 Property, plant and equipment, net 44,907 37,434 Intangibles arising from acquistions, net 8,041 8,380 Goodwill 6,282 6,282 Other assets 15,010 10,139 Deferred income taxes 5,019 5,019 --------- --------- Total assets $ 246,265 $ 210,982 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 8,354 $ 8,396 Accounts payable 40,898 32,397 Accrued liabilities 21,974 21,699 --------- --------- Total current liabilities 71,226 62,492 Long-term pension liability, less current portion 10,656 10,656 Deferred income taxes 4,348 4,348 Long-term debt, less current portion 65,804 50,588 --------- --------- Total liabilities 152,034 128,084 --------- --------- Shareholders' equity: Preferred stock $ .01 par value, authorized 1,000,000 shares; no shares issued -- -- Common stock $1 par value, authorized 20,000,000 shares; issued 10,000,000 shares 10,000 10,000 Additional paid-in capital 6,042 5,393 Accumulated other comprehensive loss (2,442) (4,278) Retained earnings 95,497 86,232 --------- --------- 109,097 97,347 Less: Treasury stock at cost, 784,697 shares in 2003 and 872,261 shares in 2002 (14,224) (13,667) Receivables for stock options exercised (642) (782) --------- --------- Total shareholders' equity 94,231 82,898 --------- --------- Total liabilities and shareholders' equity $ 246,265 $ 210,982 ========= ========= The accompanying notes are an integral part of the consolidated financial statements.
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DEL LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (In thousands, except for share and per share data) (UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------- ------- 2003 2002 2003 2002 ----------- ----------- ----------- ----------- Net sales $ 97,976 $ 93,262 $ 191,339 $ 173,202 Cost of goods sold 47,170 44,979 92,828 82,356 Selling and administrative expenses 40,155 39,663 79,804 75,080 Severance expenses (note 7) 1,850 -- 1,850 -- ----------- ----------- ----------- ----------- Operating income 8,801 8,620 16,857 15,766 Other income (expense): Gain on sale of land -- -- -- 2,428 Interest expense, net (1,009) (1,126) (2,054) (2,344) Other income (expense), net 107 (106) 27 (216) ----------- ----------- ----------- ----------- Earnings before income taxes 7,899 7,388 14,830 15,634 Income taxes 2,959 2,799 5,565 6,097 ----------- ----------- ----------- ----------- Net earnings $ 4,940 $ 4,589 $ 9,265 $ 9,537 =========== =========== =========== =========== Earnings per common share: Basic $ 0.54 $ 0.51 $ 1.01 $ 1.06 =========== =========== =========== =========== Diluted $ 0.52 $ 0.48 $ 0.97 $ 1.02 =========== =========== =========== =========== Weighted average common shares outstanding: Basic 9,147,000 9,047,000 9,139,000 8,988,000 =========== =========== =========== =========== Diluted 9,577,000 9,513,000 9,517,000 9,378,000 =========== =========== =========== =========== The accompanying notes are an integral part of the consolidated financial statements.
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DEL LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (In thousands) (UNAUDITED) June 30 ------- 2003 2002 -------- -------- Cash flows provided by (used in) operating activities: Net earnings $ 9,265 $ 9,537 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 4,026 3,609 Provision for doubtful accounts (202) 872 Gain on sale of land -- (2,428) Other non-cash operating items 140 128 Changes in operating assets and liabilities: Accounts receivable (14,190) (10,540) Inventories (7,506) (5,368) Prepaid expenses and other current assets 589 182 Other assets (4,793) (888) Accounts payable 7,911 4,553 Accrued liabilities 98 4,386 Income taxes receivable / payable 1,384 (1,727) -------- -------- Net cash provided by (used in) operating activities (3,278) 2,316 -------- -------- Cash flows provided by (used in) investing activities: Net proceeds from sale of land 235 2,940 Property, plant and equipment additions (10,083) (3,596) -------- -------- Net cash used in investing activities (9,848) (656) -------- -------- Cash flows provided by (used in) financing activities: Principal borrowings (payments) under revolving credit agreement, net 16,000 3,900 Principal payments under mortgages (104) (173) Principal payment under senior notes (8,000) (4,000) Repayment of mortgage (3,865) -- Borrowings under mortgage and construction loan 10,481 -- Payment of capital lease obligations (51) -- Repayment on receivables for stock options exercised -- 6 Proceeds from the exercise of stock options 53 32 Acquisition of treasury stock (1,184) (2,489) -------- -------- Net cash provided by (used in) financing activities 13,330 (2,724) -------- -------- Effect of exchange rate changes on cash 10 (30) -------- -------- Net increase (decrease) in cash and cash equivalents 214 (1,094) Cash and cash equivalents at beginning of year 501 2,688 -------- -------- Cash and cash equivalents at end of period $ 715 $ 1,594 ======== ======== Supplemental disclosures: Cash paid: Interest $ 2,105 $ 2,209 Income taxes $ 4,246 $ 8,103 Non-cash items: Income tax benefit arising from stock options exercised $ 1,217 $ 2,337 Shares tendered by optionees to exercise stock options $ 5,136 $ 6,196 Equipment acquired under capitalized leases $ 543 $ -- The accompanying notes are an integral part of the consolidated financial statements.
-5- DEL LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited consolidated financial statements of Del Laboratories, Inc. and subsidiaries ("the Company") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Interim results are not necessarily indicative of results for a full year. On January 1, 2003, the Company adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 requires that a liability be recognized for costs associated with an exit or disposal activity only when the liability is incurred. SFAS No. 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities. In accordance with the adoption of SFAS No. 146, other relocation costs and additional severance benefits as a result of the plant closure described in note 7, will be recognized when such benefits are incurred. It is estimated that a total charge of approximately $350 will be incurred for relocation and other move related costs throughout the third and fourth quarters of 2003 and approximately $100 will be incurred in the first quarter of 2004. Effective January 1, 2003, the Company adopted the provisions of FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that at the inception of the guarantee, a liability be recorded on the guarantor's balance sheet for the fair value of the obligation undertaken in issuing the guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued. The adoption of FIN 45 did not have any effect on the Company's results of operations, cash flows or financial position. A summary of the Company's critical and significant accounting policies are presented in its 2002 Form 10-K. Users of financial information produced for interim periods are encouraged to refer to the footnotes contained in the Form 10-K when reviewing interim financial results. In the opinion of management, the accompanying interim consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows of the Company for interim periods. 2. STOCK OPTION PLANS The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), and related interpretations, in accounting for its fixed plan stock options. Under APB No. 25, compensation expense would be recorded if, on the date of grant, the market price of the underlying stock exceeded its exercise price. Accordingly, no compensation cost has been recognized. Had compensation cost for the stock option plans been determined based on the fair value at the grant dates for awards under the plans, consistent with the alternative method set forth under SFAS No. 123, "Accounting for Stock-Based Compensation", and SFAS No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure", the Company's net earnings and net earnings per share would have been reduced. The following table illustrates the effect on net earnings and net earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, to stock based employee compensation: -6- 2. STOCK OPTION PLANS, CONTINUED
Three Months Ended Six Months Ended June 30 June 30 ------- ------- 2003 2002 2003 2002 ---- ---- ---- ---- Net earnings, as reported $ 4,940 $ 4,589 $ 9,265 $ 9,537 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards net of related tax effects $ (580) $ (400) $ (1,149) $ (682) ------ ------ -------- ------- Pro forma net earnings $ 4,360 $ 4,189 $ 8,116 $ 8,855 ======= ======= ======== ======= Earnings per share: Basic - as reported $0.54 $ 0.51 $1.01 $1.06 ===== ====== ===== ===== Basic - pro forma $0.48 $ 0.46 $0.89 $0.99 ===== ====== ===== ===== Diluted - as reported $0.52 $ 0.48 $0.97 $1.02 ===== ====== ===== ===== Diluted - pro forma $0.46 $ 0.44 $0.85 $0.94 ===== ====== ===== =====
The fair value of each option grant was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for the second quarters of 2003 and 2002, respectively: dividend yields 0% and 0%; expected lives of 5.0 and 5.0 years; risk-free interest rates of 2.43% and 4.43%; and expected volatility of 37.0% and 39.1%. The weighted-average fair value of options granted during the second quarters of 2003 and 2002 were $8.57 and $9.85, respectively. Assumptions for the first six months of 2003 and 2002, respectively, were: dividend yields 0% and 0%; expected lives of 5.0 and 5.2 years; risk-free interest rates of 2.51% and 4.46%; and expected volatility of 37.0% and 39.1%. The weighted-average fair value of options granted during the first six months of 2003 and 2002 were $8.44 and $9.34, respectively. On April 22, 2003, the Financial Accounting Standards Board ("FASB") determined that stock-based compensation should be recognized as a cost in the financial statements and that such cost be measured according to the fair value of the stock options. The FASB has not as yet determined the methodology for calculating fair value and plans to issue an exposure draft later this year that could become effective in 2004. We will continue to monitor communications on this subject from the FASB in order to determine the impact on the Company's consolidated financial statements. 3. INVENTORIES Inventories are valued at the lower of cost (principally first-in / first-out) or market value. The Company records reductions to the cost of inventories based upon its forecasted plans to sell, historical scrap and disposal rates and physical condition of the inventories. The components of inventories are as follows: June 30 December 31 2003 2002 ---- ---- Raw Materials $ 47,847 $35,942 Work in Process 4,087 3,878 Finished Goods 36,953 40,093 ------ ------ $ 88,887 $79,913 ======== ======= -7- 4. INTANGIBLES Intangibles arising from acquisitions are as follows:
June 30, 2003 ------------- Gross Carrying Accumulated Net Book Value Amortization Value ----- ------------ ----- Intellectual property rights $ 10,558 $ 2,742 $ 7,816 Trademarks 3,000 2,775 225 -------- ------- ------- $ 13,558 $ 5,517 $ 8,041 ======== ======= ======= December 31, 2002 ----------------- Gross Carrying Accumulated Net Book Value Amortization Value ----- ------------ ----- Intellectual property rights $ 10,558 $ 2,478 $ 8,080 Trademarks 3,000 2,700 300 ------- ------- ------- $ 13,558 $ 5,178 $ 8,380 ======== ======= =======
Amortization expense was $169 and $169 for the three months ended June 30, 2003 and 2002, respectively, and amounted to $339 and $338 for the six months ended June 30, 2003 and 2002, respectively. The estimated amortization expense for the fiscal years ending December 31, 2003, 2004, 2005, 2006 and 2007, is $678, $678, $528, $528 and $528, respectively. The useful lives for intellectual property rights and trademarks are 20 years. 5. LONG-TERM DEBT
June 30 December 31 2003 2002 ---- ---- 9.5% senior notes $ 24,000 $ 32,000 Notes payable under revolving credit agreement 38,000 22,000 Mortgages on land and buildings 11,666 4,984 Obligations under capital leases 492 -- -------- -------- $ 74,158 $ 58,984 Less current portion 8,354 8,396 -------- -------- $ 65,804 $ 50,588 ======== ========
At December 31, 2002, the Company had an outstanding balance of $3,954 under a five-year mortgage on the land and buildings in North Carolina. During the first quarter of 2003, the Company paid $89 of the mortgage and refinanced the balance with a seven-year $12,480 combination mortgage and construction loan facility. Of this facility, $10,481 was drawn down in 2003, of which $3,865 was used to pay the outstanding balance on the existing mortgage and $6,616 was used for funding of construction costs in connection with the expansion in North Carolina. The mortgage and construction loan facility provides construction funding as funds are expended during the building expansion project. The mortgage includes an interest rate based on LIBOR plus 1.75%, which totaled 3.07% as of June 30, 2003, monthly principal payments beginning April 15, 2004 based on a 20 year amortization schedule, a balloon payment due in March 2010, and terms that provide for the maintenance of certain financial ratios. 6. SALE OF LAND On February 13, 2002, the Company sold 13.5 acres of vacant land in Farmingdale, New York to an unrelated third party for gross proceeds of $3,335, which was reduced by $160 for closing costs. In addition, $235 of the sales price was paid by the purchaser on February 13, 2003, in accordance with the original terms of the transaction. The land was included in property, plant and equipment at December 31, 2001, with a book value of $500. After transaction related costs of $407, the sale resulted in a gain of $2,428, (approximately $1,457 after-tax, or $0.16 per basic share) which was recorded in the first quarter of 2002. In connection with this sale, an option was granted to the buyer for the remaining 8.5 acres of improved land and buildings owned by the Company. The option is for a purchase price of no less than $5,000 and cannot be exercised before December 1, 2004 or after December 1, 2005. -8- 7. CLOSURE OF FARMINGDALE PLANT On May 30, 2003, the Company announced the formal plan for the transfer of its principal manufacturing operations, for both the Cosmetic and Pharmaceutical segments, to Rocky Point, North Carolina from Farmingdale, New York. Pursuant to the Company's formal severance policy for non-union employees and, severance benefits due under the union contract resulting from the plant closure, a charge of $1,850 ($1,156 after-tax, or $0.13 per basic share) for severance costs and related benefits for approximately 370 union and non-union employees associated with this move was recorded in the second quarter of 2003. Additional severance benefits earned by employees being terminated will be recognized as a charge in the financial statements as such severance benefits are earned. The Company estimates that a total of approximately $350 (Cosmetic segment, $200; Pharmaceutical segment, $150), will be expended for additional severance, relocation and other move related costs throughout the third and fourth quarters of 2003 and approximately $100 (Cosmetic segment, $60; Pharmaceutical segment, $40), will be expended for such costs in the first quarter of 2004. 8. EARNINGS PER SHARE Basic earnings per share is computed by dividing income available to common shareholders (which equals the Company's recorded net earnings) by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options, were exercised, converted into common stock or otherwise resulted in the issuance of common stock. On November 7, 2002, the Company's Board of Directors approved a 5% stock dividend. As a result, 434,835 shares of treasury stock were issued on December 27, 2002 to shareholders of record on November 29, 2002. Accordingly, the weighted-average common shares outstanding in the consolidated statement of earnings for the three and six months ended June 30, 2002, have been adjusted to reflect the dividend. A reconciliation between the numerators and denominators of the basic and diluted earnings per common share is as follows:
Three Months Ended Six Months Ended June 30 June 30 ------- ------- 2003 2002 2003 2002 ------ ------- ------- ------ Net earnings (numerator) $4,940 $ 4,589 $ 9,265 $9,537 ------ ------- ------- ------ Weighted-average common shares (denominator for basic earnings per share) 9,147 9,047 9,139 8,988 Effect of dilutive securities: Employee stock options 430 466 378 390 ------ ------- ------- ------ Weighted-average common and potential common shares outstanding (denominator for diluted earnings per share) 9,577 9,513 9,517 9,378 ====== ======= ======= ====== Basic earnings per share $ 0.54 $0.51 $ 1.01 $1.06 ====== ======= ======= ====== Diluted earnings per share $ 0.52 $0.48 $ 0.97 $1.02 ====== ======= ======= ======
Employee stock options to purchase approximately 481,000 and 329,000 shares for the three months ended June 30, 2003 and 2002, respectively, and 692,000 and 393,000 shares for the six months ended June 30, 2003 and 2002, respectively, were not included in the net earnings per share calculation because their effect would have been anti-dilutive. As a result of stock options exercised during the first half of 2003, the corresponding tax benefit of $1,217 was recorded as a reduction to income taxes payable and as an increase in additional paid-in capital. -9- 9. COMPREHENSIVE INCOME The components of comprehensive income for the three and six months ended June 30, 2003 and 2002 are as follows:
Three Months Ended Six Months Ended June 30 June 30 ------- ------- 2003 2002 2003 2002 ---- ---- ---- ---- Net earnings $ 4,940 $ 4,589 $9,265 $ 9,537 Foreign currency translation 1,047 464 1,836 441 ------- ------- ------- ------- Total comprehensive income $ 5,987 $ 5,053 $11,101 $ 9,978 ======= ======= ======= =======
10. SEGMENT INFORMATION The Company operates in two segments, Cosmetic and Pharmaceutical, that have been organized by the products and services they offer. The Cosmetic segment's principal products are nail care, nail color, color cosmetics, beauty implements, bleaches and depilatories, personal care products and other related cosmetic items. The Pharmaceutical segment's principal products are proprietary oral analgesics, acne treatment products and first aid products. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates the performance of its operating segments based on operating income. Certain assets, including property, plant and equipment and deferred tax assets, are not allocated to the identifiable segments; depreciation of unallocated assets is charged to the Cosmetic segment.
Three Months Ended Six Months Ended June 30 June 30 ------- ------- 2003 2002 2003 2002 ---- ---- ---- ---- Net sales: Cosmetic $ 78,576 $ 76,234 $154,834 $139,980 Pharmaceutical 19,400 17,028 36,505 33,222 -------- -------- -------- -------- Consolidated $ 97,976 $ 93,262 $191,339 $173,202 ======== ======== ======== ======== Operating income: Cosmetic $ 5,858 $ 6,929 $ 12,187 $ 11,912 Pharmaceutical 2,943 1,691 4,670 3,854 -------- -------- -------- -------- Consolidated $ 8,801 $ 8,620 $ 16,857 $ 15,766 Other income (expense): Gain on sale of land $ -- $ -- $ -- $ 2,428 Interest expense, net $(1,009) $(1,126) $ (2,054) $ (2,344) Other expense, net $ 107 $ (106) $ 27 $ (216) -------- -------- -------- -------- Earnings before income taxes $ 7,899 $ 7,388 $ 14,830 $ 15,634 ======== ======== ======== ======== Depreciation and amortization: Cosmetic $ 2,112 $ 1,774 $ 3,839 $ 3,451 Pharmaceutical 99 84 187 158 -------- -------- -------- -------- Consolidated $ 2,211 $ 1,858 $ 4,026 $ 3,609 ======== ======== ======== ========
Operating income includes a charge of $1,850 related to the severance costs associated with the transfer of manufacturing operations from Farmingdale, N.Y. to North Carolina. Of this amount $1,193 or 65%, was charged to the Cosmetic segment and $657 or 35%, was charged to the Pharmaceutical segment. Operating income includes an estimated recovery related to the 2001 charge for the K-Mart Chapter XI bankruptcy filing. Of this amount $431, or 84% was attributable to the Cosmetic segment and $80 or 16% was attributable to the Pharmaceutical segment. -10- 11. COMMITMENTS AND CONTINGENCIES In September 2001, the Company received notice from the Environmental Protection Agency ("EPA") that it was, along with 81 others, a Potentially Responsible Party regarding a Superfund Site ("the Site") located in Glen Cove, New York. According to the notice received from the EPA, the Company's involvement related to empty drums coming to the Site in 1977 and 1978. In the third quarter of 2001, the Company recorded an estimate of $550 in selling and administrative expenses based on information received from the EPA as to its potential liability for the past remediation activities. In October 2001, the Company became a member of a Joint Defense Group ("the JDG"). In the second quarter of 2002, the EPA and the JDG agreed in principle to the amounts of payments required to settle past and future liabilities under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") with regard to the Site. Pursuant to an agreement among JDG members as to how to allocate such payment amounts, the Company recorded, in the second quarter of 2002, an additional estimate of $785 in selling and administrative expenses. The charge of $785 had a negative impact of $0.05 per basic share on net earnings in the second quarter of 2002 and for the year ended December 31, 2002. During the third quarter of 2002, a trust was established with the intention of entering into a Consent Decree with the United States and the State of New York to settle all claims by the United States and the State of New York for past and future response costs and future actions at the Site. In September 2002, the Company paid $1,332 into a trust account which was held in escrow, together with payments by the other members of the JDG, for the eventual settlement with the EPA of the Company's potential liability under CERCLA. During the third quarter of 2002, the Company also paid into the same trust account $18 for the eventual settlement of the Company's potential liability for natural resource damages ("NRD") claims, which also are expected to be settled in the Consent Decree. During the second quarter of 2003, the United States, the State of New York and Federal District Court approved the aforementioned Consent Decree. 12. SUBSEQUENT EVENT The Company's corporate offices are located in approximately 48,000 square feet of leased space in Uniondale, New York. On July 17, 2003, the Company entered into an agreement to extend this lease to December 31, 2014, and simultaneously entered into a lease agreement to December 31, 2014 for approximately 41,000 additional square feet of leased space within the same building in Uniondale, New York. The Company will transfer all administrative offices currently located in Farmingdale, N.Y. to Uniondale, N.Y. and consolidate the corporate and administrative offices at the Uniondale, N.Y. facility. The total payment obligation for these leases approximates $28,670 as shown in the following table: Payments due by period ------------------------------------------- Less than 1 year $ 533 1 - 2 years 1,680 2 - 3 years 2,398 3 - 5 years 5,032 After 5 years 19,027 ------ Total $ 28,670 -11- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ----------------------------------------------------------------------- (In thousands, except per share data) DISCUSSION OF CRITICAL ACCOUNTING POLICIES The Company makes estimates and assumptions in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes that the following discussion addresses the Company's most critical accounting policies, which are those that are most important to the portrayal of the Company's financial condition and results of operations and which require management's most difficult and subjective judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The following is a brief discussion of the more critical accounting policies employed by the Company. REVENUE RECOGNITION The Company sells its products to chain drug stores, mass volume retailers, supermarkets, wholesalers and overseas distributors. Sales of such products are denominated in U.S. dollars and sales in Canada are denominated in Canadian dollars. The Company's accounts receivable reflect the granting of credit to these customers. The Company generally grants credit based upon an analysis of the customer's financial position and previously established buying and selling patterns. The Company does not bill customers for shipping and handling costs and, accordingly, classifies such costs as selling and administrative expense. Revenues are recognized and discounts are recorded when merchandise is shipped. Net sales are comprised of gross revenues less returns, various promotional allowances and trade discounts and allowances. The Company allows customers to return their unsold products when they meet certain criteria as outlined in the Company's sales policies. The Company regularly reviews and revises, as deemed necessary, its estimate of reserves for future sales returns based primarily upon actual return rates by product and planned product discontinuances. The Company records estimated reserves for future sales returns as a reduction of sales, cost of sales and accounts receivable. Returned products which are recorded as inventories are valued based on estimated realizable value. The physical condition and marketability of the returned products are the major factors considered by the Company in estimating realizable value. Actual returns, as well as estimated realizable values of returned products, may differ significantly, either favorably or unfavorably, from estimates if factors such as economic conditions, customer inventory levels or competitive conditions differ from expectations. PROMOTIONAL ALLOWANCES AND CO-OPERATIVE ADVERTISING The Company has various performance-based arrangements with retailers to reimburse them for all or a portion of their promotional activities related to the Company's products. These sales incentives offered voluntarily by the Company to customers, without charge, that can be used in or that are exercisable by a customer as a result of a single exchange transaction, are recorded as a reduction of net sales at the later of the sale or the offer, and primarily allow customers to take deductions against amounts owed to the Company for product purchases. The Company also has co-operative advertising arrangements with retail customers to reimburse them for all or a portion of their advertising of the Company's products. The estimated liabilities for these co-operative advertising arrangements are recorded as advertising expense as incurred, or in the period the related revenue is recognized, depending on the terms of the arrangement, and included in selling and administrative expenses, since the Company receives an identifiable benefit from retail customers for an amount equal to or less than the fair value of such advertising cost. These arrangements primarily allow retail customers to take deductions against amounts owed to the Company for product purchases. The Company regularly reviews and revises the estimated accruals for these promotional allowance and cooperative advertising programs. Actual costs incurred by the Company may differ significantly, either favorably or unfavorably, from estimates if factors such as the level and success of the retailers' programs or other conditions differ from our expectations. -12- INVENTORIES Inventories are stated at the lower of cost or market value. Cost is principally determined by the first-in, first-out method. The Company records a reduction to the cost of inventories based upon its forecasted plans to sell, historical scrap and disposal rates and the physical condition of the inventories. These reductions are estimates, which could vary significantly, either favorably or unfavorably, from actual requirements if future economic conditions, the timing of new product introductions, customer inventory levels, fashion-oriented color cosmetic trends or competitive conditions differ from our expectations. PROPERTY, PLANT AND EQUIPMENT AND OTHER LONG-LIVED ASSETS Property, plant and equipment is recorded at cost and is depreciated on a straight-line basis over the estimated useful lives of such assets. Leasehold improvements are amortized on a straight-line basis over the lesser of the estimated useful lives or the lease term. Changes in circumstances, such as technological advances, changes to the Company's business model or changes in the Company's capital strategy could result in the actual useful lives differing from the Company's estimates. In those cases where the Company determines that the useful life of property, plant and equipment should be shortened, the Company would depreciate the net book value in excess of the salvage value, over its revised remaining useful life, thereby increasing depreciation expense. Factors such as changes in the planned use of equipment, fixtures, software or planned closing of facilities could result in shortened useful lives. Long-lived assets, other than goodwill, are reviewed by the Company for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The estimate of cash flow is based upon, among other things, certain assumptions about expected future operating performance. The Company's estimates of undiscounted cash flow may differ from actual cash flow due to, among other things, technological changes, economic conditions, changes to its business model or changes in its operating performance. If the sum of the undiscounted cash flows (excluding interest) is less than the carrying value, the Company recognizes an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset. The remaining useful lives of intangible assets subject to amortization are evaluated each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization. If the estimate of an intangible asset's remaining useful life is changed, the remaining carrying amount of the intangible asset should be amortized prospectively over that revised remaining useful life. Goodwill must be tested annually for impairment at the reporting unit level. The Company's reporting units are its Cosmetic and Pharmaceutical segments. If an indication of impairment exists, the Company is required to determine if such reporting unit's implied fair value is less than its carrying value in order to determine the amount, if any, of the impairment loss required to be recorded. The testing performed as of January 1, 2003, indicated that there was no impairment to goodwill. PENSION BENEFITS The Company sponsors pension and other retirement plans in various forms covering all eligible employees. Several statistical and other factors which attempt to anticipate future events are used in calculating the expense and liability related to the plans. These factors include assumptions about the discount rate, expected return on plan assets and rate of future compensation increases as determined by the Company, within certain guidelines and in conjunction with its actuarial consultants. In addition, the Company's actuarial consultants also use subjective factors such as withdrawal and mortality rates to estimate the expense and liability related to these plans. The actuarial assumptions used by the Company may differ significantly, either favorably or unfavorably, from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. -13- RESULTS OF OPERATIONS SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 2003 VERSUS JUNE 30, 2002 Consolidated net sales for the second quarter of 2003 were $97,976, an increase of 5.1% compared to second quarter 2002 net sales of $93,262. Consolidated net sales for the six months ended June 30, 2003 were $191,339, an increase of 10.5% compared to the first six months of 2002 net sales of $173,202. The Cosmetic segment net sales for the second quarter of 2003 were $78,576, an increase of 3.1% compared to $76,234 for the second quarter of 2002. Cosmetic net sales for the first six months of 2003 were $154,834, an increase of 10.6% compared to $139,980 for the first six months of 2002. The second quarter increase was primarily due to sales of Sally Hansen Healing Beauty, a new line of skincare makeup, and an increase in sales of the core Sally Hansen family of brands. The net sales increases for the first six months of 2003 were partially offset by reduced volume in the Naturistics brand and increased returns throughout the Cosmetic segment product line. The increased returns were primarily due to planogram changes by retail customers and the elimination of the Naturistics line by certain retail customers. The planogram changes by retailers occurred earlier in 2003 compared to the prior year, and therefore the Company does not anticipate the same level of returns during the second six months of 2003. The product mix within the Naturistics cosmetics brand is being repositioned in order to facilitate the introduction of a sub-brand of lip gloss items called Miss Kiss. Sally Hansen, the core brand of the Cosmetics segment, remains the number one brand in the mass market nail care category with a 26% share of market for the quarter, as reported by ACNielsen. The Pharmaceutical segment net sales for the second quarter of 2003 were $19,400, an increase of 13.9% compared to $17,028 in 2002. Pharmaceutical net sales for the first six months of 2003 were $36,505, an increase of 9.9% compared to $33,222 in 2002. The second quarter increase is primarily due to volume growth in the Orajel brand. Orajel, the core brand of the Pharmaceutical segment, continues its leadership position in the oral analgesics category, with a 30% share of market for the quarter, as reported by Information Resources, Inc. The six month increase is due primarily to increased sales in the Dermarest brand of psoriasis and eczema treatments, the Gentle Naturals line of naturally-based baby care products, DiabetAid, a line of products designed to treat the common everyday health care needs of problems associated with diabetes, and Orajel. Cost of goods sold for the second quarter of 2003 was $47,170 or 48.1% of net sales, compared to $44,979 or 48.2% of net sales in 2002. Cost of goods sold for the first six months of 2003 was $92,828 or 48.5% of net sales, compared to $82,356 or 47.5% of net sales in 2002. The increase in cost of goods sold as a percentage of net sales for the six months is primarily attributable to the first quarter returns of Naturistics Cosmetics as a result of the repositioning of this line, and a change in sales mix within the Pharmaceutical segment primarily due to increased volume of the new Gentle Naturals and Diabet-Aid brands. Selling and administrative expenses for the second quarter of 2003 were $40,155 or 41.0% of net sales compared to $39,663 or 42.5% of net sales in 2002. Selling and administrative expenses for the first six months of 2003 were $79,804, or 41.7% of net sales, compared to $75,080 or 43.3% of net sales in 2002. The improvement in selling and administrative expenses, as a percentage of net sales, is primarily attributable to net sales increasing at a higher rate than increases in expenses. Additionally, the second quarter of 2003 and first six months of 2003 include an estimated recovery of $511 related to the K-Mart Chapter XI bankruptcy filing. -14- On May 30, 2003, the Company announced a formal plan for the transfer of its principal manufacturing operations, for both the Cosmetic and Pharmaceutical segments, to Rocky Point, North Carolina from Farmingdale, N.Y. Pursuant to the Company's formal severance policy for non-union employees and, severance benefits due under the union contract resulting from the plant closure, a charge of $1,850 ($1,156 after-tax, or $0.13 per basic share) for severance costs and related benefits for approximately 370 union and non-union employees associated with this move was recorded in the second quarter of 2003. The Company projects that $228 and $708 will be paid in the third quarter and fourth quarter of 2003 respectively, and $1,364 during the first six months of 2004. Additional severance benefits earned by employees being terminated will be recognized as a charge in the financial statements as such severance benefits are earned. The charge of $1,850 is included in the operating income of the segments as follows: Cosmetic - $1,193 or 65%, of the charge, and Pharmaceutical - $657 or 35%, of the charge. It is estimated that a total of approximately $350 (Cosmetic segment, $200; Pharmaceutical segment, $150), will be expended for additional severance, relocation and other move related costs throughout the third and fourth quarters of 2003 and approximately $100 (Cosmetic segment, $60; Pharmaceutical segment, $40), will be expended for such costs in the first quarter of 2004. The move to North Carolina will consolidate the Company's principal manufacturing operations with its principal distribution facility and result in improved operating efficiencies and reduced manufacturing expenses. In the first quarter of 2002, the Company sold 13.5 acres of vacant land in Farmingdale, New York to an unrelated third party for gross proceeds of $3,335 which was reduced by $160 for closing costs. In addition, $235 of the sales price was paid by the purchaser on February 12, 2003 in accordance with the original terms of the transaction. The land was included in property, plant and equipment at December 31, 2001, with a book value of $500. After transaction related costs of $407, a gain of $2,428 was recorded in the first quarter of last year. The gain of $2,428, or $1,457 after tax, increased basic earnings per share by $0.16 for the first quarter of last year. In connection with this sale, an option was granted to the buyer for the remaining 8.5 acres of improved land and buildings owned by the Company. The option is for a purchase price of no less than $5,000 and cannot be exercised before December 1, 2004 or after December 1, 2005. Operating income for the second quarter of 2003 was $8,801 or 9.0% of net sales, compared to $8,620 or 9.2% of net sales for the second quarter of 2002. The operating income for the second quarter of 2003 includes a charge of $1,850 (1.9% of net sales) related to severance cost associated with the transfer of manufacturing operations to North Carolina. Operating income for the first six months of 2003 was $16,857 or 8.8% of net sales, compared to $15,766 or 9.1% of net sales in 2002. The six months results for 2003 include a charge of $1,850 for severance costs recorded in the second quarter of 2003. Interest expense, net of interest income, for the second quarter of 2003 was $1,009 a reduction of 10.4% from net interest expense of $1,126 reported for the second quarter of 2002. Interest expense, net of interest income, for the first six months of 2003 was $2,054, a reduction of 12.4% from the net interest expense of $2,344 recorded for the first six months of 2002. The decrease in interest expense for the second quarter and first six months of 2003 is due primarily to a reduction of approximately 94 basis points in average borrowing rates. Income taxes are based on the Company's expected annual effective tax rate of 37.5% in 2003. The decrease from the rate of 39.0% used for the first six months of 2002 is primarily due to the effect of permanent non-deductible expenses on taxable income, the reduced effect of such non-deductible expenses on taxable income, and the benefit of a reduction in the Canadian statutory tax rate. Net earnings for the second quarter of 2003 were $4,940 or $0.54 per basic share, an increase of 7.6% compared to the net earnings of $4,589 or $0.51 per basic share reported in the second quarter of 2002. The net earnings for the second quarter of 2003 include an after-tax charge of $1,156 or $0.13 per basic share for severance costs. Net earnings for the first six months of 2003 were $9,265 or $1.01 per basic share compared to net earnings for the first six months of 2002 of $9,537 or $1.06 per basic share. The net earnings for the first six months of 2003 include an after-tax charge of $1,156 or $0.13 per basic share for severance costs and the net earnings for the first six months of 2002 include an after-tax gain of $1,457 or $0.16 per basic share from the sale of vacant land. -15- LIQUIDITY AND CAPITAL RESOURCES At June 30, 2003 the Company had cash and cash equivalents of $715 compared to $501 at December 31, 2002 and $1,594 at June 30, 2002. Net cash used in operating activities for the six months ended June 30, 2003 was $3,278. Increases in accounts receivable of $14,190 and inventories of $7,506 were partially offset by net earnings of $9,265 and an increase in accounts payable of $7,911. The increase in accounts receivable is attributable to increased sales volume and the timing of shipments during the second quarter. The increases in inventories and accounts payable are due to the timing of purchases of raw materials and components to support projected sales levels. Net cash used in investing activities of $9,848 for the six months ended June 30, 2003, is principally due to expenditures for construction related to the expansion of the manufacturing and distribution facility located in North Carolina. On February 12, 2003, the Company received $235 representing the remaining proceeds due from the sale of vacant land in the first quarter of last year. The sale resulted in an after-tax gain of $1,457 ($0.16 per basic share) which was recorded in the first quarter of last year. In connection with this sale, an option was granted to the buyer for the remaining 8.5 acres of improved land and buildings owned by the Company. The option is for a purchase price of no less than $5,000 and cannot be exercised before December 1, 2004 or after December 1, 2005. Net cash provided by financing activities for the six months ended June 30, 2003, was $13,330 principally due to an additional $16,000 of net borrowings under the revolving credit agreement and borrowings of $10,481 related to the refinancing of the mortgage on the land and buildings in North Carolina, partially offset by a principal payment of $8,000 under the senior notes. At December 31, 2002, the Company had an outstanding balance of $3,954 under a five-year mortgage on the land and buildings in North Carolina. During the first six months of 2003, the Company paid $89 of the mortgage and refinanced the balance with a seven-year $12,480 combination mortgage and construction loan facility. Of this facility, $10,481 was drawn in 2003, of which $3,865 was used to pay the outstanding balance on the existing mortgage and $6,616 was used for funding of construction costs in connection with the expansion in North Carolina. The mortgage and construction loan facility provides construction funding as funds are expended during the building expansion project. The mortgage includes an interest rate based on LIBOR plus 1.75%, which totaled 3.07% as of June 30, 2003, monthly principal payments beginning April 15, 2004 based on a 20 year amortization schedule, a balloon payment due in March 2010, and terms that provide for the maintenance of certain financial ratios. DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS In order to aggregate all contractual obligations as of June 30, 2003, including the leases signed on July 17, 2003 as explained in note 12 to the consolidated financial statements, the Company has included the following table:
Payments Due By Period --------------------------------------------------------------- Less than 1 - 2 2 - 3 3 - 5 After Total 1 Year Years Years Years 5 Years ----- ------ ----- ----- ----- ------- Long-term debt $ 35,666 $ 8,245 $ 18,011 $ 888 $ 2,832 $ 5,690 Revolving credit agreement 38,000 -- 38,000 -- -- -- Capital lease 492 109 116 124 143 -- Operating leases (a) 33,282 3,080 3,084 2,823 5,259 19,036 Construction commitment (b) 2,567 2,567 -- -- -- -- ------- -------- -------- -------- -------- -------- Total contractual obligations $110,007 $ 14,001 $ 59,211 $ 3,835 $ 8,234 $ 24,726 ======== ======== ======== ======== ======== ======== (a) Includes payment obligations for leases signed on July 17, 2003 as follows: $ 28,670 $ 533 $ 1,680 $ 2,398 $ 5,032 $ 19,027 ======== ======== ======== ======== ======== ======== (b) The timing of the payments are based on the current construction timetable.
-16- The Company's corporate offices are located in approximately 48,000 square feet of leased space in Uniondale, New York. On July 17, 2003, the Company entered into an agreement to extend this lease to December 31, 2014, and simultaneously entered into a lease agreement to December 31, 2014 for approximately 41,000 additional square feet of leased space within the same building in Uniondale, New York, in order to transfer all administrative offices currently located in Farmingdale, N.Y. to Uniondale, N.Y. and result in the consolidation of the Company's corporate and administrative offices at the Uniondale, N.Y. facility. The Company believes that cash flows from operations, cash on hand and amounts available from the credit facility and the combination mortgage and construction loan will be sufficient to enable the Company to meet its anticipated cash requirements during 2003. However, there can be no assurance that the combination of cash flow from future operations, cash on hand and amounts available from the credit facility and the combination mortgage and construction loan will be sufficient to meet the Company's cash requirements. Additionally, in the event of a decrease in demand for its products or reduced sales, such developments, if significant, would reduce the Company's cash flow from operations and could adversely affect the Company's ability to achieve certain financial covenants under the senior note and revolving credit agreements. If the Company is unable to satisfy such financial covenants, the Company could be required to adopt one or more alternatives, such as reducing or delaying certain operating expenditures and/or delaying capital expenditures. NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN No. 46"). FIN No. 46 requires that if an entity has a controlling financial interest in a variable interest entity, the assets, liabilities and results of activities of the variable interest entity should be included in the consolidated financial statements of the entity. FIN No. 46 requires that its provisions are effective immediately for all arrangements entered into after January 31, 2003. As the Company does not have any variable interest entities, the adoption of FIN No. 46 did not have an impact on the Company's consolidated results of operations, cash flows or financial position. On April 22, 2003, the Financial Accounting Standards Board ("FASB") determined that stock-based compensation should be recognized as a cost in the financial statements and that such cost be measured according to the fair value of the stock options. The FASB has not as yet determined the methodology for calculating fair value and plans to issue an exposure draft later this year that could become effective in 2004. We will continue to monitor communications on this subject from the FASB in order to determine the impact on the Company's consolidated financial statements. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which amends and clarifies the accounting for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. In particular, SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No 149 is effective for derivative contracts entered into or modified after June 30, 2003. As the Company does not have any derivative instruments required to be reported under SFAS No. 149, the adoption of this statement did not have an impact on the Company's consolidated results of operations, cash flows or financial position. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how freestanding financial instruments, those financial instruments that have characteristics of both liabilities and equity, should be classified on a Company's balance sheet. The requirements of SFAS No. 150 require that financial instruments which give the issuer a choice of settling an obligation with a variable number of securities, settling an obligation with a transfer of assets or any mandatorily redeemable instrument should be classified as a liability. SFAS No. 150 is effective for all freestanding financial instruments entered into or modified after May 31, 2003. Otherwise, the provisions of SFAS No. 150 are effective July 1, 2003. The adoption of SFAS No. 150 did not have any impact on the Company's consolidated results of operations, cashflows or financial position. -17- FORWARD - LOOKING STATEMENTS Management's Discussion and Analysis of the Results of Operations and Financial Condition and other sections of this Form 10-Q include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 (the "Exchange Act"). All statements other than statements of historical information provided herein are forward-looking statements and may contain information about financial results, economic conditions, trends, certain risks, uncertainties and other factors that could cause actual results to differ materially from any future results implied by such forward-looking statements. Factors that might cause such a difference include, but are not limited to: delays in introducing new products or failure of consumers to accept new products; actions by competitors, which may result in mergers, technology improvement or new product introductions; the dependence on certain national chain drug stores, food stores and mass merchandiser relationships due to the concentration of sales generated by such chains; changes in fashion-oriented color cosmetic trends; the effect on sales of lower retailer inventory targets; the effect on sales of political and/or economic conditions; the Company's estimates of costs and benefits, cash flow from operations and capital expenditures; interest rate or foreign exchange rate changes affecting the Company and its market sensitive financial instruments including the Company's qualitative and quantitative estimates as to market risk sensitive instruments; changes in product mix to products which are less profitable; shipment delays; depletion of inventory and increased production costs resulting from disruptions of operations at any of our manufacturing or distribution facilities; foreign currency fluctuations affecting our results of operations and the value of our foreign assets and liabilities; the relative prices at which we sell our products and our foreign competitors sell their products in the same market; our operating and manufacturing costs outside of the United States; changes in the laws, regulations and policies, including changes in accounting standards, that effect, or will effect, us in the United States and/or abroad; and trends in the general economy. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. Without limitation, use of the following words is intended to identify forward-looking statements: "may," "will," "should," "expect," "anticipate," "look forward to," "estimate," "indications," "intend," "plan," "momentum," or "continue" or the negative thereof or other variations thereon. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis, judgment, belief or expectation only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. In addition to the disclosure contained herein, readers should carefully review any disclosure of risks and uncertainties contained in other documents the Company files or has filed from time to time with the Securities and Exchange Commission pursuant to the Exchange Act. Item 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report, the Company evaluated, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13(a)-14 and 15(d)-14). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting management to material information required to be included in the Company's periodic Securities and Exchange Commission filings. (b) Changes in Internal Controls There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date the Company carried out its evaluation. -18- PART II - OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- At the Company's annual meeting held on May 21, 2003, the Shareholders re-elected Martin E. Revson and Dan K. Wassong to the Board of Directors, in accordance with proxies solicited pursuant to Section 14 of the Securities Exchange Act. Votes were cast for each of such items as follows: ELECTION OF DIRECTORS VOTES FOR VOTES WITHHELD --------------------- --------- -------------- Martin E. Revson 8,556,710 20,956 Dan K. Wassong 8,149,285 428,381 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 31.1 Certification of Chief Executive Officer Exhibit 31.2 Certification of Chief Financial Officer Exhibit 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 Exhibit 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 (b) Reports on Form 8-K The Company filed a Form 8-K with the SEC, dated April 28, 2003 to report under Item 9 of that Form that a press release was issued on April 25, 2003 announcing earnings for the three months ended March 31, 2003. A copy of the press release was filed as an exhibit to the Form 8-K The Company filed a Form 8-K with the SEC dated May 22, 2003 to report under Item 9 of that Form that a press release was issued on May 21, 2003 announcing that the Company held its Annual Meeting of Shareholders on May 21, 2003 and information disclosed in that meeting. A copy of the press release was filed as an exhibit to the Form 8-K. The Company filed a Form 8-K with the SEC, dated July 30, 2003 to report under Item 9 of that Form that a press release was issued on July 29, 2003 announcing earnings for the three and six months ended June 30, 2003. A copy of the press release was filed as an exhibit to the Form 8-K. -19- 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. DEL LABORATORIES, INC. (Registrant) DATE: AUGUST 12, 2003 /S/ DAN K. WASSONG ------------------------- ------------------ Dan K. Wassong Chairman, President and Chief Executive Officer DATE: AUGUST 12, 2003 /S/ ENZO J. VIALARDI ---------------------- -------------------- Enzo J. Vialardi Executive Vice President and Chief Financial Officer -20- EX-31 3 exh31-1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 31.1 CERTIFICATIONS I, Dan K. Wassong, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Del Laboratories, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 12, 2003 /S/ DAN K. WASSONG ------------------ Dan K. Wassong Chief Executive Officer EX-31 4 exh31-2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 31.2 CERTIFICATIONS I, Enzo J. Vialardi, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Del Laboratories, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 12, 2003 /S/ ENZO J. VIALARDI -------------------- Enzo J. Vialardi Chief Financial Officer EX-32 5 exh32-1.txt CERTIFICATION 906 FOR CEO Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Del Laboratories, Inc. (the "Company") on Form 10Q for the period ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I Dan K. Wassong, Chief Executive Officer of the Company, certify, pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /S/ DAN K. WASSONG - ------------------ Dan K. Wassong Chief Executive Officer August 12, 2003 EX-32 6 exh32-2.txt CERTIFICATION 906 FOR CFO Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Del Laboratories, Inc. (the "Company") on Form 10Q for the period ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I Enzo J. Vialardi, Chief Financial Officer of the Company, certify, pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /S/ ENZO J. VIALARDI - -------------------- Enzo J. Vialardi Chief Financial Officer August 12, 2003 -----END PRIVACY-ENHANCED MESSAGE-----