-----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, PgIjJ5kBfBCi3bSo5EWZ3xbFg+tysIRxOfuR1rqmZPkWDAP84MJ/zyYpfP3qEegJ hgL5lyfsuiOufXdIc6Zblw== 0000909012-04-000761.txt : 20041110 0000909012-04-000761.hdr.sgml : 20041109 20041109164132 ACCESSION NUMBER: 0000909012-04-000761 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041109 DATE AS OF CHANGE: 20041109 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: 041130138 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 t301403.txt DEL LABORATORIES 10-Q 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 SEPTEMBER 30, 2004 |_| 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, PO BOX 9357, UNIONDALE, NEW YORK 11553-9357 (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 November 8, 2004 was 9,754,549. DEL LABORATORIES, INC. AND SUBSIDIARIES Index PAGE ---- Part I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets as of September 30, 2004 (unaudited) and December 31, 2003 3 Consolidated Statements of Earnings for the three and nine months ended September 30, 2004 and 2003 (unaudited) 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003 (unaudited) 5 Notes to Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 4. Controls and Procedures 24 Part II. OTHER INFORMATION Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 24 Item 6. Exhibits and Reports on Form 8-K 25 SIGNATURES 26 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 SEPTEMBER 30, 2004 AND DECEMBER 31, 2003 (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
September 30 December 31 2004 2003 ---- ---- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 2,365 $ 2,113 Accounts receivable, less allowance for doubtful accounts of $1,703 in 2004 and $4,391 in 2003 81,241 75,130 Inventories 101,160 92,518 Deferred income taxes 8,042 8,042 Prepaid expenses and other current assets 4,143 2,671 ---------- ---------- Total current assets 196,951 180,474 Property, plant and equipment, net 46,805 49,274 Intangibles arising from acquistions, net 7,250 7,761 Goodwill 6,282 6,282 Other assets 14,248 13,262 Deferred income taxes 6,159 6,159 ---------- ---------- Total assets $ 277,695 $ 263,212 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 489 $ 8,760 Accounts payable 47,455 43,872 Accrued liabilities 21,702 25,023 Income taxes payable 200 307 ---------- ---------- Total current liabilities 69,846 77,962 Long-term pension liability, less current portion 9,767 9,767 Deferred income taxes 5,205 5,205 Deferred liability 1,403 1,334 Long-term debt, less current portion 74,304 63,373 ---------- ---------- Total liabilities 160,525 157,641 ---------- ---------- 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 9,296 8,823 Accumulated other comprehensive loss (2,291) (2,594) Retained earnings 106,208 95,309 ---------- ---------- 123,213 111,538 Less: Treasury stock at cost, 250,065 shares in 2004 and 289,308 shares in 2003 (5,541) (5,325) Receivables for stock options exercised (502) (642) ---------- ---------- Total shareholders' equity 117,170 105,571 ---------- ---------- Total liabilities and shareholders' equity $ 277,695 $ 263,212 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 3 DEL LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------ ------------ 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Net sales $ 115,552 $ 99,716 $ 301,565 $ 291,055 Cost of goods sold 58,641 49,017 152,226 141,845 Selling and administrative expenses 44,267 41,931 126,996 121,735 Severance expenses (note 8) 14 119 17 1,969 Merger expenses (note 12) 1,150 -- 1,366 -- ------------ ------------ ------------ ------------ Operating income 11,480 8,649 20,960 25,506 Other income (expense): Loss on sale of land and building (105) -- (146) -- Interest expense, net (812) (954) (2,561) (3,008) Other income (expense), net 336 (31) (128) (4) ------------ ------------ ------------ ------------ Earnings before income taxes 10,899 7,664 18,125 22,494 Income taxes 4,437 3,013 7,226 8,578 ------------ ------------ ------------ ------------ Net earnings $ 6,462 $ 4,651 $ 10,899 $ 13,916 ============ ============ ============ ============ Earnings per common share: Basic $ 0.66 $ 0.48 $ 1.12 $ 1.45 ============ ============ ============ ============ Diluted $ 0.62 $ 0.46 $ 1.05 $ 1.38 ============ ============ ============ ============ Weighted average common shares outstanding: Basic 9,742,000 9,692,000 9,731,000 9,628,000 ============ ============ ============ ============ Diluted 10,432,000 10,209,000 10,392,000 10,064,000 ============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 4 DEL LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (IN THOUSANDS) (UNAUDITED)
SEPTEMBER 30 ------------ 2004 2003 ---- ---- Cash flows provided by (used in) operating activities: Net earnings $ 10,899 $ 13,916 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 6,209 6,051 Amortization of display fixtures 6,552 4,611 Provision (recovery) on allowance for doubtful accounts 32 (167) Tax benefit on stock options exercised 624 1,467 Loss on sale of land and building 146 -- Other non-cash operating items (32) 140 Changes in operating assets and liabilities: Accounts receivable (5,996) (15,671) Inventories (8,334) (5,561) Prepaid expenses and other current assets (1,596) (636) Other assets (7,516) (9,099) Accounts payable 3,557 6,371 Accrued liabilities (3,693) 2,456 Deferred liability 69 1,271 Income taxes receivable / payable (89) 994 ---------- ---------- Net cash provided by operating activities 832 6,143 ---------- ---------- Cash flows provided by (used in) investing activities: Net proceeds from sale of land and building 4,816 235 Property, plant and equipment additions (7,637) (14,601) ---------- ---------- Net cash used in investing activities (2,821) (14,366) ---------- ---------- Cash flows provided by (used in) financing activities: Principal borrowings under revolving credit agreement, net 3,000 11,000 Principal payments under mortgages (289) (113) Principal payment under senior notes -- (8,000) Repayment of mortgage -- (3,865) Borrowings under mortgage and construction loan -- 12,312 Payment of capital lease obligations (83) (78) Proceeds from the exercise of stock options 244 100 Acquisition of treasury stock (611) (1,408) ---------- ---------- Net cash provided by financing activities 2,261 9,948 ---------- ---------- Effect of exchange rate changes on cash (20) 26 ---------- ---------- Net increase in cash and cash equivalents 252 1,751 Cash and cash equivalents at beginning of year 2,113 501 ---------- ---------- Cash and cash equivalents at end of period $ 2,365 $ 2,252 ========== ========== Supplemental disclosures: Cash paid for: Interest $ 2,285 $ 2,480 Income taxes $ 6,960 $ 6,161 Non-cash transactions: Shares tendered by optionees to exercise stock options $ 1,886 $ 5,722 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) (UNAUDITED) 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 U.S. generally accepted accounting principles 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 U.S. generally accepted accounting principles for complete financial statements. Interim results are not necessarily indicative of results for a full year. A summary of the Company's critical and significant accounting policies are presented in its 2003 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 January 2003, the FASB issued Interpretation No. 46 "Consolidation of Variable Interest Entities" ("FIN No. 46"). FIN No. 46 was subject to significant interpretation by the FASB, and was revised and reissued in December 2003 ("FIN No. 46R"). FIN No. 46R states that if an entity has a controlling financial interest in a variable interest entity, the assets, the liabilities and results of activities of the variable interest entity should be included in the consolidated financial statements of the entity. The provisions of FIN No. 46 and FIN No. 46R are applicable for all entities that are considered special purpose entities ("SPE") by the end of the first reporting period ending after December 15, 2003. The provisions of FIN No. 46R are applicable to all other types of variable interest entities for reporting periods ending after March 15, 2004. The adoption of FIN No. 46 and FIN No. 46R did not have a material impact on the Company's consolidated financial statements. 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. Certain reclassifications were made to prior year amounts in order to conform to the current year presentation. Amortization of display fixtures, previously included in the cash flow statements in other assets as net cash provided by operating activities, has been reclassified as a separate line item, amortization of display fixtures, in net cash provided by operating activities. 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 Nine Months Ended September 30 September 30 ------------ ------------ 2004 2003 2004 2003 ---- ---- ---- ---- Net earnings, as reported $ 6,462 $ 4,651 $ 10,899 $ 13,916 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards net of related tax effects $ (459) $ (574) $ (1,496) $ (1,722) -------- -------- -------- -------- Pro forma net earnings $ 6,003 $ 4,077 $ 9,403 $ 12,194 ======== ======== ======== ======== Earnings per share: Basic - as reported $ 0.66 $ 0.48 $ 1.12 $ 1.45 ======== ======== ======== ======== Basic - pro forma $ 0.62 $ 0.42 $ 0.97 $ 1.27 ======== ======== ======== ======== Diluted - as reported $ 0.62 $ 0.46 $ 1.05 $ 1.38 ======== ======== ======== ======== Diluted - pro forma $ 0.58 $ 0.40 $ 0.90 $ 1.21 ======== ======== ======== ========
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 third quarter of 2003: dividend yield 0%; expected lives of 5.0 years; risk-free interest rate of 2.60%; and expected volatility of 33.2%. The weighted-average fair value of options granted during the third quarter of 2003 was $7.97. The Company did not issue any new stock options during the third quarter of 2004. Weighted-average assumptions for the first nine months of 2003, were: dividend yield 0%; expected lives of 5.0 years; risk-free interest rate of 2.51%; and expected volatility of 33.2%. The weighted-average fair value of options granted during the first nine months of 2003 was $7.42. The Company did not issue any new stock options during the first nine months of 2004. During the first quarter of 2004, the Financial Accounting Standards Board ("FASB") issued an exposure draft, "Share-Based Payment, an amendment of FASB Statements No. 123 and 95." This exposure draft would require stock-based compensation to employees to be recognized as a cost in the financial statements and that such cost be measured according to the fair value of the stock options. In the absence of an observable market price for the stock awards, the fair value of the stock options would be based upon a valuation methodology that takes into consideration various factors, including the exercise price of the option, the expected term of the option, the current price of the underlying share, the expected volatility of the underlying share price, the expected dividends on the underlying share and the risk-free interest rate. The proposed requirements in the exposure draft would be effective for the first reporting period beginning after June 15, 2005. The Company 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 were as follows: September 30 December 31 2004 2003 ---- ---- Raw Materials $ 56,847 $ 40,586 Work in Process 5,455 4,856 Finished Goods 38,858 47,076 -------- -------- $101,160 $ 92,518 ======== ======== 7 4. INTANGIBLES Intangibles arising from acquisitions were as follows: September 30, 2004 ------------------ Gross Carrying Accumulated Net Book Value Amortization Value ----- ------------ ----- Intellectual property rights $ 10,558 $ 3,402 $ 7,156 Trademarks and other 3,060 2,966 94 -------- -------- -------- $ 13,618 $ 6,368 $ 7,250 ======== ======== ======== December 31, 2003 ----------------- Gross Carrying Accumulated Net Book Value Amortization Value ----- ------------ ----- Intellectual property rights $ 10,558 $ 3,006 $ 7,552 Trademarks and other 3,060 2,851 209 -------- -------- -------- $ 13,618 $ 5,857 $ 7,761 ======== ======== ======== Amortization expense was $171 and $170 for the three months ended September 30, 2004 and 2003, respectively, and amounted to $511 and $509 for the nine months ended September 30, 2004 and 2003, respectively. The estimated amortization expense for the fiscal years ending December 31, 2004, 2005, 2006, 2007 and 2008, is $681, $531, $531, $531 and $531, respectively. The useful lives for intellectual property rights, trademarks and other are 20 years. 5. LONG - TERM DEBT Long - term debt consisted of the following:
September 30 December 31 2004 2003 ---- ---- Senior notes $ 24,000 $ 24,000 Notes payable under revolving credit agreement 37,000 34,000 Mortgages on land and buildings 13,437 13,694 Obligations under capital leases 356 439 -------- -------- $ 74,793 $ 72,133 Less current portion 489 8,760 -------- -------- $ 74,304 $ 63,373 ======== ========
On May 18, 2004, the mortgage covering the property in North Carolina was amended. The maturity of the mortgage was extended from March 15, 2010 to March 18, 2011 and the interest rate was fixed at 6.39%. On April 13, 2004, the senior notes were amended and restated. The maturity of the notes was extended to April 15, 2011 with annual principal payments of $6,000 required on April 15, 2008, April 15, 2009, April 15, 2010 and April 15, 2011. The interest rate was reduced from 9.5% to 5.56% payable semi-annually on October 15 and April 15 of each year. The amended agreement is unsecured and includes covenants which provide, among other things, for the maintenance of certain financial ratios. 8 On April 13, 2004, the revolving credit agreement was amended and restated. The amended facility provides credit of $45,000, and extends the expiration to April 13, 2009. Under the terms of the agreement, interest rates on borrowings are based on LIBOR or prime rates at the Company's option. The terms of the agreement include a commitment fee based on unutilized amounts and an annual agency fee. The deferred financing fees associated with the April 13, 2004 amendment and unamortized deferred financing fees associated with the March 2002 and February 2000 amendments are being amortized over the term of the new agreement. Covenants provide, among other things, for the maintenance of certain financial ratios. The agreement is unsecured and no compensating balances are required. On April 1, 2004, the lender under the mortgage covering the property in Barrie, Ontario agreed to extend the maturity of the mortgage from March 1, 2005 to April 1, 2009 and to reduce the interest rate from 8.38% to 6.37%. 6. EMPLOYEE PENSION PLANS The Company maintains two non-contributory defined benefit pension plans covering all U.S. eligible employees. The Del Non-Union Plan formula is based on years of service and the employee's compensation during the five years before retirement. The Del LaCross Union Plan formula is based on years of service. The LaCross Plan covers former employees of the Company's Newark, New Jersey facility which ceased operations during 2002. As a result of this closure, more than 20% of plan participants in the LaCross Plan were terminated, which resulted in a partial termination of the plan. Due to the partial termination of the plan, all affected participants became fully vested in their accrued benefits at their termination date. Assets held by these plans consist of cash and cash equivalents, fixed income securities consisting of U.S. government and corporate bonds and common stocks. The Company also has a defined benefit supplemental executive retirement plan (SERP) for certain of its executives. The SERP is a non-qualified plan under the Internal Revenue Code. The assets in the SERP trust are considered assets of the Company, not plan assets, and as such, are included in other assets on the accompanying consolidated balance sheets. The assets of the SERP, which consist of cash and cash equivalents, are held-to-maturity securities and, as such, are carried at cost plus accrued interest. COMPONENTS OF NET PERIOD BENEFIT COST The components of net periodic benefit costs for the Company's domestic plans are set forth in the following tables:
Three Months Ended September 30, 2004 ------------------------------------- Del Non- Del Lacross Union Plan Plan Serp ---------- ---- ---- Service Cost $ 770 $ -- $ 13 Interest Cost 578 19 106 Expected return on plan assets (516) (18) -- Recognized prior service cost 13 -- 37 Recognized net (gain) loss 191 4 (3) -------- -------- -------- Net periodic cost $ 1,036 $ 5 $ 153 ======== ======== ========
9
Nine Months Ended September 30, 2004 ------------------------------------- Del Non- Del Lacross Union Plan Plan Serp ---------- ---- ---- Service Cost $ 2,310 $ -- $ 39 Interest Cost 1,734 57 318 Expected return on plan assets (1,548) (54) -- Recognized prior service cost 39 -- 111 Recognized net (gain) loss 573 12 (9) -------- -------- -------- Net periodic cost $ 3,108 $ 15 $ 459 ======== ======== ======== Three Months Ended September 30, 2003 ------------------------------------- Del Non- Del Lacross Union Plan Plan Serp ---------- ---- ---- Service Cost $ 648 $ -- $ 13 Interest Cost 514 21 103 Expected return on plan assets (394) (26) -- Recognized prior service cost 12 -- 69 Recognized net (gain) loss 182 3 (22) -------- -------- -------- Net periodic cost $ 962 $ (2) $ 163 ======== ======== ======== Nine Months Ended September 30, 2003 ------------------------------------- Del Non- Del Lacross Union Plan Plan Serp ---------- ---- ---- Service Cost $ 1,944 $ -- $ 39 Interest Cost 1,542 63 309 Expected return on plan assets (1,182) (78) -- Amortization of unrecognized transition asset (1) -- -- Recognized prior service cost 37 -- 207 Recognized net (gain) loss 546 9 (66) -------- -------- -------- Net periodic cost $ 2,886 $ (6) $ 489 ======== ======== ========
10 CONTRIBUTIONS The Company previously disclosed in its financial statements for the year ended December 31, 2003, that it expects to contribute in 2004 approximately $5,215 and $808, to its Non-Union Plan and SERP respectively, and did not anticipate that a contribution would be made to the LaCross Plan. As of September 30, 2004, $3,505 and $11 of contributions have been made to the Non-Union Plan and SERP, respectively, and no contributions have been made to the LaCross Plan. The Company presently anticipates contributing an additional $772 to fund its Non-Union Plan for a total of $4,277, contributing an additional $4 to fund its SERP for a total of $15 and making no additional contributions to the LaCross Plan. The decrease in the expected contribution to the Non-Union Plan for 2004 is due to a change, in April 2004, in the minimum funding requirement rules for 2004. The significant decrease in the expected contribution to the SERP is due to the fact that participants over 65 who were assumed to be retiring during the first quarter of 2004 did not retire. 7. SALE OF LAND AND BUILDINGS 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. 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 which was exercised by the buyer on June 30, 2004. The improved land and buildings were sold for gross proceeds of $5,000, which was reduced by $320 for closing costs and increased by $136 for other closing adjustments, resulting in net proceeds of $4,816. The improved land and buildings had a book value at June 30, 2004 of $4,513. After closing costs of $320 and other transaction related expenses of $313, the sale resulted in a loss of $146 ($88 after-tax). 8. 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 for severance costs and related benefits for approximately 360 union and non-union employees associated with this move was recorded during the six months ended June 30, 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. During the first quarter of 2004, a provision of $56 was recorded for such earned severance benefits, net of adjustments of $66 to the initial accrual, which resulted in a net recovery of $10. During the second quarter of 2004, a provision of $18 was recorded for such earned severance benefits, net of adjustments of $5 to the initial accrual, which resulted in a net provision of $13. During the third quarter of 2004, a provision of $12 was recorded for such earned severance benefits, plus adjustments of $2 to the initial accrual, which resulted in a total provision of $14. During 2004 and 2003, $135 and $127, respectively, of relocation and other move related costs were expensed as incurred. The Company estimates that a total of approximately $3 (Cosmetic segment - $2; Pharmaceutical segment - $1), will be incurred for additional severance, relocation and other move related costs during the fourth quarter of 2004. As of September 30, 2004, 359 union and non-union employees have been terminated and $1,916 in severance benefits was paid. A summary of the activity in the accrual for the plant closure was as follows: Balance December 31, 2003 $ 1,714 Provision 86 Payments (1,597) Adjustments (69) -------- Balance September 30, 2004 $ 134 ======== 11 9. EARNINGS PER SHARE Basic earnings per share is computed by dividing income available to common shareholders (which for the Company equals its 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 20, 2003, the Company's Board of Directors approved a 5% stock dividend. As a result, 462,998 shares of treasury stock were issued on December 29, 2003 to shareholders of record on December 1, 2003. Accordingly, the weighted-average common shares outstanding in the consolidated statement of earnings for the three and nine months ended September 30, 2003, have been adjusted to reflect the dividend. A reconciliation between the numerators and denominators of the basic and diluted earnings per common share were as follows:
Three Months Ended Nine Months Ended September 30 September 30 ------------ ------------ 2004 2003 2004 2003 ---- ---- ---- ---- Net earnings (numerator) $ 6,462 $ 4,651 $ 10,899 $ 13,916 -------- -------- -------- -------- Weighted-average common shares (denominator for basic earnings per share) 9,742 9,692 9,731 9,628 Effect of dilutive securities: Employee stock options 690 517 661 436 -------- -------- -------- -------- Weighted-average common and potential common shares outstanding (denominator for diluted earnings per share) 10,432 10,209 10,392 10,064 ======== ======== ======== ======== Basic earnings per share $ 0.66 $ 0.48 $ 1.12 $ 1.45 ======== ======== ======== ======== Diluted earnings per share $ 0.62 $ 0.46 $ 1.05 $ 1.38 ======== ======== ======== ========
Employee stock options of approximately 484,000 shares for the nine months ended September 30, 2003 were not included in the net earnings per share calculation because their effect would have been anti-dilutive. There were no anti-dilutive shares for the three and nine months ended September 30, 2004 and for the three months ended September 30, 2003. As a result of stock options exercised during the nine months ended September 30, 2004, the corresponding tax benefit of $624 was recorded as a reduction to income taxes payable and as an increase in additional paid-in capital. 10. COMPREHENSIVE INCOME The components of comprehensive income for the three and nine months ended September 30, 2004 and 2003 were as follows:
Three Months Ended Nine Months Ended September 30 September 30 ------------ ------------ 2004 2003 2004 2003 ---- ---- ---- ---- Net earnings $ 6,462 $ 4,651 $ 10,899 $ 13,916 Foreign currency translation gain / (loss) 532 (8) 303 1,828 -------- -------- -------- -------- Total comprehensive income $ 6,994 $ 4,643 $ 11,202 $ 15,744 ======== ======== ======== ========
12 11. 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, baby care products and first aid products. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Company's 2003 Form 10-K. 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 Nine Months Ended September 30 September 30 ------------ ------------ 2004 2003 2004 2003 ---- ---- ---- ---- Net sales: Cosmetic $ 93,187 $ 79,641 $240,503 $234,475 Pharmaceutical 22,365 20,075 61,062 56,580 -------- -------- -------- -------- Consolidated $115,552 $ 99,716 $301,565 $291,055 ======== ======== ======== ======== Operating income: Cosmetic $ 6,727 $ 5,283 $ 10,467 $ 17,042 Pharmaceutical 4,753 3,366 10,493 8,464 -------- -------- -------- -------- Consolidated $ 11,480 $ 8,649 $ 20,960 $ 25,506 Other income (expense): Loss on sale of land and building $ (105) $ -- $ (146) $ -- Interest expense, net $ (812) $ (954) $ (2,561) $ (3,008) Other income (expense), net $ 336 $ (31) $ (128) $ (4) -------- -------- -------- -------- Earnings before income taxes $ 10,899 $ 7,664 $ 18,125 $ 22,494 ======== ======== ======== ======== Depreciation and amortization: Cosmetic $ 1,917 $ 1,918 $ 5,872 $ 5,757 Pharmaceutical 113 107 337 294 -------- -------- -------- -------- Consolidated $ 2,030 $ 2,025 $ 6,209 $ 6,051 ======== ======== ======== ======== Amortization of display fixtures: Cosmetic $ 2,261 $ 1,714 $ 6,552 $ 4,611 Pharmaceutical -- -- -- -- -------- -------- -------- -------- Consolidated $ 2,261 $ 1,714 $ 6,552 $ 4,611 ======== ======== ======== ========
For the three months ended September 30, 2004, severance expenses of $14 was included in the operating income of the segments, as follows: Cosmetic - $9 and Pharmaceutical - $5. For the nine months ended September 30, 2004, severance expense of $17 was included in the operating income of the segments, as follows: Cosmetic - $11 and Pharmaceutical - $6. For the three months ended September 30, 2003, severance expenses of $119 was included in the operating income of the segments as follows: Cosmetic - $77 and Pharmaceutical - $42. For the nine months ended September 30, 2003, severance expenses of $1,969 was included in the operating income of the segments as follows: Cosmetic - $1,280 and Pharmaceutical - $689. Operating income for 2003 includes an estimated recovery of $511 related to a 2001 charge for the K-Mart Chapter XI bankruptcy filing, recorded in the second quarter of 2003. Of this amount, $431 was attributable to the Cosmetic segment and $80 was attributable to the Pharmaceutical segment. 13 12. MERGER AGREEMENT On July 2, 2004, the Company announced it signed a definitive merger agreement to be acquired by DLI Holding Corp. in a cash transaction. Subsequent to the merger, DLI Holding Corp. will be owned by affiliates of Kelso & Company along with certain members of the Company's current management. An affiliate of Church & Dwight Co., Inc. will own non-voting preferred stock. Under the merger agreement, each outstanding share of Del Laboratories, Inc. common stock will be converted into the right to receive $35 per share in cash, without interest. Following the close of the transaction, which is expected to occur in the fourth quarter of 2004 or in January 2005, Del Laboratories, Inc. will become a wholly owned subsidiary of DLI Holding Corp. and will cease to be a publicly traded company. Financing commitments for the acquisition have been received by Kelso & Company. Consummation of the transaction is subject to satisfaction of certain conditions, including approval by the Company's shareholders and receipt by DLI of the necessary financing proceeds. DLI's financing is subject to certain conditions including the reasonable satisfaction of DLI's financing sources that the Company has achieved a minimum of $46 million in consolidated EBITDA for the 12 month periods ended on the last day of the most recent fiscal quarter, for which financial statements are available, and the last day of the most recent fiscal month, for which financial statements are available, prior to consummation of the merger. If the closing occurred as of the date hereof using financial information at September 30, 2004, the Company believes that the minimum EBITDA level would be achieved. DLI's financing sources are not required to confirm whether this condition has been satisfied until the closing. Expenses related to the merger of approximately $1.2 million for legal and advisory fees were incurred in the third quarter of 2004 and $216 were incurred in the second quarter. 14 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On July 2, 2004, the Company announced it signed a definitive merger agreement to be acquired by DLI Holding Corp. in a cash transaction. Subsequent to the merger, DLI Holding Corp. will be owned by affiliates of Kelso & Company along with certain members of the Company's current management. An affiliate of Church & Dwight Co., will own non-voting preferred stock. Under the merger agreement, each outstanding share of Del Laboratories, Inc. common stock will be converted into the right to receive $35 per share in cash, without interest. Following the close of the transaction, which is expected to occur in the fourth quarter of 2004, Del Laboratories, Inc. will become a wholly owned subsidiary of DLI Holding Corp. and will cease to be a publicly traded company. Financing commitments for the acquisition have been received by Kelso & Company. Consummation of the transaction is subject to satisfaction of certain conditions, including approval by the Company's shareholders and receipt by DLI of the necessary financing proceeds. DLI's financing is subject to certain conditions including the reasonable satisfaction of DLI's financing sources that the Company has achieved a minimum of $46 million in consolidated EBITDA for the 12 month periods ended on the last day of the most recent fiscal quarter, for which financial statements are available, and the last day of the most recent fiscal month, for which financial statements are available, prior to consummation of the merger. If the closing occurred as of the date hereof using financial information at September 30, 2004, the Company believes that the minimum EBITDA level would be achieved. DLI's financing sources are not required to confirm whether this condition has been satisfied until the closing. Expenses related to the merger of approximately $1.2 million for legal and advisory fees were incurred in the third quarter of 2004 and $216 were incurred in the second quarter. Del Laboratories, Inc. is a fully integrated marketing and manufacturing company operating in two major segments of the packaged consumer products business: cosmetics and over-the-counter pharmaceuticals. Each of the Company's marketing divisions is responsible for branded lines fitting into one of these general categories and develops its own plans and goals consistent with its operating environment and the Company's corporate objectives. The Company owns a portfolio of highly recognized branded products which are competitively priced. As reported by ACNielsen, many of the Company's brands have leading market positions in their product categories. In our cosmetics segment, the Sally Hansen brand is the number one brand in the mass market nail care category with market leadership positions in nail color, nail treatment, and bleaches and depilatories. The Sally Hansen LaCross brand is the leader in nail and beauty implements providing a line of high quality beauty implements including nail clippers, files, scissors, tweezers and eyelash curlers. N.Y.C. New York Color is one of the most successful new cosmetics brands in the mass market. This highly recognizable brand of value cosmetics offers a complete collection of high quality products at opening price points. In our over-the-counter pharmaceutical segment, the Orajel brand is the leading oral analgesic in the mass market channels, as reported by Information Resources, Inc. The Orajel family of products has been developed with unique formulations specifically targeted at distinct oral pain and baby care indications. Our Dermarest brand is a complete line of non-prescription products for relief of psoriasis and eczema and is the market share leader in the psoriasis/eczema treatment category. The Company believes it has strong customer relationships with a diversified group of prominent retailers across multiple distribution channels including mass merchandisers, drug chains, drug wholesalers and food retailers and wholesalers. The Company has a strong track record of developing innovative new products and successful brand extensions. An in-house research and development department focuses on product development, clinical and regulatory affairs and quality control. 15 RESULTS OF OPERATIONS THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2004 VERSUS SEPTEMBER 30, 2003 Consolidated net sales for the third quarter ended September 30, 2004 were $115.6 million, an increase of $15.8 million (15.9%) compared to net sales of $99.7 million for the third quarter of 2003. Consolidated net sales for the nine months ended September 30, 2004 were $301.6 million versus $291.1 million for the first nine months of 2003, an increase of $10.5 million or 3.6%. Sales for the nine months ended September 30, 2004 were negatively impacted by production start-up problems during the first and second quarters of 2004 in connection with the transfer of the Company's principal manufacturing operations, for both the cosmetic and pharmaceutical segments, to Rocky Point, North Carolina from Farmingdale, New York. As previously reported in the Form 10Q for the second quarter ended June 30, 2004, the Company estimates that due to the production start-up problems, net sales for the first quarter of 2004 were negatively impacted by approximately $14.1 million, and net sales for the second quarter were negatively impacted by approximately $13.8 million. The Company has continued to make steady improvement in its production processes and is currently achieving the manufacturing efficiency levels that were anticipated prior to the relocation, and expects to continue to achieve these efficiency levels. The cosmetic segment of the business generated net sales for the third quarter ended September 30, 2004 of $93.2 million, an increase of approximately $13.5 million, or 17.0% compared to net sales of $79.6 million in the third quarter of 2003. Net sales for the nine months ended September 30, 2004 were $240.5 million, compared to net sales of $234.5 million for the nine months ended September 30, 2003. The Company estimates that due to the production start-up problems, net sales for the first nine months of 2004 were negatively impacted by approximately $11.0 million in the first quarter and $11.0 million in the second quarter of 2004. The Company's core cosmetics business remains strong, and as reported by ACNielsen, the Sally Hansen brand remains the number one brand in the mass market nail care category with a 27.0% share of market for the quarter ended September 30, 2004. The over-the-counter pharmaceutical segment of the business generated net sales for the third quarter ended September 30, 2004 of $22.4 million, an increase of $2.3 million, or 11.4% compared to net sales of $20.1 million in the third quarter of 2003. Net sales for the nine months ended September 30, 2004 were $61.1 million, an increase of $4.5 million, or 7.9% compared to net sales of $56.6 million for the nine months ended September 30, 2003. The Company estimates that due to the production start-up problems, net sales for the first nine months of 2004 were negatively impacted by approximately $3.1 million in the first quarter and $2.8 million in the second quarter of 2004. The over-the-counter pharmaceutical business continues to grow and as reported by Information Resources, Inc., Orajel, the core brand of the pharmaceutical segment continues its leadership position in the oral analgesics category with a 30.4% share of market for the quarter. Cost of goods sold for the third quarter ended September 30, 2004 was $58.6 million, or 50.7% of net sales, compared to $49.0 million, or 49.2% of net sales for the quarter ended September 30, 2003. Cost of goods sold for the nine months ended September 30, 2004 were $152.2 million, or 50.5% of net sales compared to $141.8 million, or 48.7% of net sales for the nine months ended September 30, 2003. The increase in cost of goods sold as a percentage of net sales for the third quarter ended September 30, 2004 is primarily due to a change in product sales mix within the cosmetic segment. The increase in cost of goods sold as a percentage of net sales for the nine months ended September 30, 2004 is primarily due to higher production costs as a result of start-up problems during the first and second quarters of 2004 in connection with the transfer of manufacturing operations from Farmingdale, New York to Rocky Point, North Carolina. 16 Selling and administrative expenses were $44.3 million, or 38.3% of net sales for the quarter ended September 30, 2004 compared to $41.9 million, or 42.1% of net sales for the third quarter of 2003. Selling and administrative expenses for the nine months ended September 30, 2004 were $127.0 million, or 42.1% of net sales compared to $121.7 million, or 41.8% of net sales for the nine months ended September 30, 2003. The decrease in selling and administrative expenses as a percentage of net sales for the three months ended September 30, 2004 compared to the prior year is primarily due to the increase in net sales. The increase in selling and administrator expenses as a percentage of net sales for the nine months ended September 30, 2004 compared to the prior year is primarily due to increased patent and trademark litigation costs during the first six months of 2004. Expenses of $1.2 million were incurred in the third quarter of 2004 and $1.4 million were incurred for the nine months ended September 30, 2004, primarily related to legal and advisory fees incurred in connection with the proposed merger. Net interest expense for the three months ended September 30, 2004 of $0.8 million was approximately $0.1 million lower than the third quarter of 2003. Interest expense for the nine months ended September 30, 2004 was $2.6 million, or $0.4 million lower than the $3.0 million for the nine months ended September 30, 2003. The decrease in interest expense for the nine months ended September 30, 2004 is primarily due to the reduction of $4.4 million of average outstanding debt related to the senior notes and a reduction in average borrowing rates of approximately 137 basis points. The decrease was partially offset by an increase in average borrowings of $5.8 million under the revolving credit agreement, an increase of $2.3 million in average outstanding borrowings under the bank line of credit, and an increase of $3.9 million in average outstanding borrowings under the mortgage on the North Carolina property. Other income (net) for the three months ended September 30, 2004 was $0.3 million, an improvement of $0.4 million compared to the three months ended September 30, 2003 due primarily to gains on foreign exchange transactions. Income taxes for the nine months ended September 30, 2004 are based on the Company's expected annual effective tax rate of 39.9% for 2004. The increase from the effective tax rate of 38.1% used for the nine months ended September 30, 2003, is due primarily to an increase in state and local income taxes resulting from the reduction of available investment tax credits, an increase in the amount of permanent non-deductible expenses and the effect of such non-deductible expenses on taxable income for the period. Net earnings for the three months ended September 30, 2004 were $6.5 million, or $0.66 per basic share, compared to $4.7 million, or $0.48 per basic share for the third quarter of 2003. The third quarter of 2004 includes an after-tax charge of approximately $1.1 million, or $0.11 per basic share for costs related to the definitive merger agreement announced on July 2, 2004. Net earnings for the nine months ended September 30, 2004 were $10.9 million, or $1.12 per basic share compared to $13.9 million, or $1.45 per basic share for the nine months ended September 30, 2003. The decrease in net earnings for the nine months of 2004 as compared to prior year is directly attributable to higher production costs as a result of start-up problems during the first and second quarters of 2004 in connection with the transfer of the Company's principal manufacturing operations from Farmingdale, New York to Rocky Point, North Carolina. The nine month results of 2004 include an after-tax charge of approximately $1.2 million, or $0.13 per basic share for costs related to the definitive merger agreement. The nine months of 2003 include after-tax charges of approximately $1.2 million, or $0.13 per basic share for severance and related costs in connection with the transfer of the Company's principal manufacturing operations to Rocky Point, North Carolina from Farmingdale, N.Y. 17 LIQUIDITY AND CAPITAL RESOURCES CASH FLOW OVERVIEW Cash and cash equivalents of $2.4 million at September 30, 2004 was approximately $0.2 million higher than the balance at December 31, 2003. For the nine months ended September 30, 2004 approximately $2.3 million was provided by financing activities, $0.8 million was provided by operating activities, and $2.8 million was used in investing activities. Cash of approximately $7.6 million used for property, plant and equipment additions was partially offset by net proceeds of $4.8 million received from the sale of land and buildings. OPERATING ACTIVITIES Net cash provided by operating activities for the nine months ended September 30, 2004 of $0.8 million was primarily due to net earnings of $10.9 million, depreciation and amortization of $6.2 million, amortization of display fixtures of $6.6 million, and an increase in accounts payable of $3.6 million, partially offset by increases in accounts receivable of $6.0 million, inventories of $8.3 million, and accrued liabilities of $3.7 million. The increase in inventories and accounts payable is due to the timing of material purchases to support projected sales levels and the inability in the first and second quarters to ship unfilled orders due to start-up production problems. 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 $2.0 million for severance costs and related benefits for approximately 360 union and non-union employees associated with this move was recorded in 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. As of September 30, 2004, 359 union and non-union employees have been terminated and $1.9 million in severance benefits were paid. It is anticipated that approximately $87 thousand will be paid during the last three months of 2004. INVESTING ACTIVITIES Net cash used in investing activities of $2.8 million was due to expenditures of $7.6 million related to tooling, plates & dies, and machinery and equipment, partially offset by net proceeds of $4.8 million from the sale of land and building. The Company estimates that capital spending related to tooling, plates & dies, and machinery and equipment will approximate $9.0 million for fiscal year ending December 31, 2004. FINANCING ACTIVITIES Net cash provided by financing activities of $2.3 million was principally due to borrowings of $3.0 million under the revolving credit facility, partially offset by $0.6 million related to the acquisition of treasury stock in connection with the exercise of stock options. On April 13, 2004, the $24.0 million senior notes were amended and restated. The maturity of the notes was extended to April 15, 2011, the interest rate was reduced to 5.56% payable semi-annually on October 15 and April 15 of each year, and principal payments of $6.0 million are due annually on April 15, 2008 through April 15, 2011. The amended agreement is unsecured and includes covenants, which provide among other things, for the maintenance of certain financial ratios. 18 On April 13, 2004, the $45.0 million revolving credit agreement with banks was amended and restated. The amended facility provides credit of $45.0 million, extends the expiration to April 13, 2009, eliminates all fixed dollar covenants, and reduces the interest rate pricing to a range of 75 - 125 basis points over LIBOR depending on certain financial ratios. The Company has the option to borrow at prime rates or LIBOR. Covenants provide, among other things, for the maintenance of certain financial ratios. The agreement is unsecured and no compensating balances are required. On April 1, 2004, the lender under the mortgage covering the property in Barrie, Ontario agreed to extend the maturity of the mortgage from March 1, 2005 to April 1, 2009 and to reduce the interest rate from 8.38% to 6.37%. On May 18, 2004, the mortgage covering the property in North Carolina was amended. The maturity of the mortgage was extended from March 15, 2010 to March 18, 2011 and the interest rate was fixed at 6.39%. The Company does not use any off-balance sheet financing arrangements. DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS In order to aggregate all contractual obligations as of September 30, 2004, the Company has included the following table:
PAYMENTS DUE BY PERIOD ---------------------- (In thousands) Less 1 - 2 2 - 3 3 - 5 After 5 Total 1 Year Years Years Years Years ----- ------ ----- ----- ----- ----- Long-term debt $ 37,437 $ 370 $ 404 $ 434 $ 13,900 $ 22,329 Revolving credit agreement 37,000 -- -- -- 37,000 -- Capital leases 356 119 126 105 6 -- Operating leases 31,546 3,894 3,432 2,969 5,530 15,721 -------- -------- -------- -------- -------- -------- Total contractual obligations (a) $106,339 $ 4,383 $ 3,962 $ 3,508 $ 56,436 $ 38,050 ======== ======== ======== ======== ======== ========
(a) The Company expects to contribute approximately $4.3 million in fiscal year 2004 to fund its pension plans. These expected pension contributions are not included in the above table. FUTURE CAPITAL REQUIREMENTS The Company's near-term cash requirements are primarily related to the funding of operations, capital expenditures and interest obligations on outstanding debt. The Company believes that cash flows from operating activities, cash on hand and amounts available from the credit facility will be sufficient to enable the Company to meet its anticipated cash requirements for 2005. 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 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. 19 DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company makes estimates and assumptions in the preparation of its financial statements in conformity with U.S. generally accepted accounting principles. 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. 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 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 estimates 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 expenses 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 costs. 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 co-operative 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. 20 ACCOUNTS RECEIVABLE In estimating the collectibility of our trade receivables, the Company evaluates specific accounts when it becomes aware of information indicating that a customer may not be able to meet its financial obligations due to a deterioration of its financial condition, lower credit ratings or bankruptcy. The Company also reviews the related aging of past due receivables in assessing the realization of these receivables. The allowance for doubtful accounts is determined based on the best information available to us on specific accounts and is also developed by using percentages applied to certain receivables. 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. Intangible assets with determinable lives and other 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. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to the future net cash flows expected to be generated by the asset. 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 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. 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 annual testing performed as of January 1, 2004, indicated that there was no impairment to goodwill. 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. 21 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 actuarial valuation incorporates 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. NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued Interpretation No. 46 "Consolidation of Variable Interest Entities" ("FIN No. 46"). FIN No. 46 was subject to significant interpretation by the FASB, and was revised and reissued in December 2003 ("FIN No. 46R"). FIN No. 46R states that if an entity has a controlling financial interest in a variable interest entity, the assets, the liabilities and results of activities of the variable interest entity should be included in the consolidated financial statements of the entity. The provisions of FIN No. 46 and FIN No. 46R are applicable for all entities that are considered special purpose entities ("SPE") by the end of the first reporting period ending after December 15, 2003. The provisions of FIN No. 46R are applicable to all other types of variable interest entities for reporting periods ending after March 15, 2004. The adoption of FIN No. 46 and FIN No. 46R did not have a material impact on the Company's consolidated financial statements. During the first quarter of 2004, the Financial Accounting Standards Board ("FASB") issued an exposure draft, "Share-Based Payment, an amendment of FASB Statements No. 123 and 95." This exposure draft would require stock-based compensation to employees to be recognized as a cost in the financial statements and that such cost be measured according to the fair value of the stock options. In the absence of an observable market price for the stock awards, the fair value of the stock options would be based upon a valuation methodology that takes into consideration various factors, including the exercise price of the option, the expected term of the option, the current price of the underlying share, the expected volatility of the underlying share price, the expected dividends on the underlying share and the risk-free interest rate. The proposed requirements in the exposure draft would be effective for the first reporting period beginning after June 15, 2005. The Company will continue to monitor communications on this subject from the FASB in order to determine the impact on the Company's consolidated financial statements. 22 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; trends in the general economy; and Del's failure to consummate the merger with DLI Holding Corp. 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. 23 Item 4. 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 13a - 15(e) and 15d - 15(e). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this quarterly report. The Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the Company's internal control over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report. The Company is continuing to perform the systems and process evaluation testing of its internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, in order to allow management to report on, and our Registered Independent Public Accounting Firm to attest to, our internal controls over financial reporting. As a result, the evaluation and testing continues to require significant costs and management time. In the course of its ongoing evaluation and testing, management has identified certain deficiencies and implemented remediation plans or is in the process of planning remediation for the deficiencies. PART II - OTHER INFORMATION Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
ISSUER PURCHASES OF EQUITY SECURITIES Total Number of Shares (or Units) Purchased Total Number of Shares Average Price Paid per as Part of Publicly Period (or Units) Purchased Share (or Unit) Announced Programs July 309 $34.26 -- August -- -- -- September 37,930 $33.68 -- -------------------- -------------------- -------------------- Total 38,239 (1) $33.71 (2) ==================== ==================== ====================
(1) Represents shares tendered by employees to pay for stock options exercised and shares withheld from options exercised to satisfy income tax liabilities on gains resulting from the exercise. (2) The Company does not have any publicly announced share repurchase program. 24 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 July 2, 2004 to report under Item 5 of that Form that the Company entered into an Agreement and Plan of Merger with DLI Holding Corp. and DLI Acquisition Corp., a direct wholly-owned subsidiary of DLI Holding Corp., as of July 1, 2004. The Company also issued a press release dated July 2, 2004, announcing that it had entered into the Merger Agreement. Copies of the Agreement and Plan of Merger and press release were filed as exhibits to the Form 8-K. The Company filed a Form 8-K with the SEC, dated July 30, 2004 to report under Item 12 of that Form that a press release was issued on July 29, 2004 announcing earnings for the three and six months ended June 30, 2004. 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 October 28, 2004 to report under Item 12 of that Form that a press release was issued on October 27, 2004 announcing earnings for the three and nine months ended September 30, 2004. A copy of the press release was filed as an exhibit to the Form 8-K. 25 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: NOVEMBER 8, 2004 /S/ DAN K. WASSONG ------------------------- ------------------ Dan K. Wassong Chairman, President and Chief Executive Officer DATE: NOVEMBER 8, 2004 /S/ ENZO J. VIALARDI ---------------------- -------------------- Enzo J. Vialardi Executive Vice President and Chief Financial Officer 26 EX-31.1 2 ex31-1.txt CERTIFICATION 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: November 8, 2004 /S/ Dan K. Wassong ------------------ Dan K. Wassong Chief Executive Officer EX-31.2 3 ex31-2.txt CERTIFICATION 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: November 8, 2004 /S/ Enzo J. Vialardi -------------------- Enzo J. Vialardi Chief Financial Officer EX-32.1 4 ex32-1.txt CERTIFICATION 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 10-Q for the period ended September 30, 2004 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) or 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 November 8, 2004 EX-32.2 5 ex32-2.txt CERTIFICATION 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 10-Q for the period ended September 30, 2004 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) or 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 November 8, 2004 -----END PRIVACY-ENHANCED MESSAGE-----