-----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, Ci6zz1Q5tpNwScDJKxD506/1m8x9/Fxd9UEnrnAGwojA6f8rV3ZSDHK+oVwba3EJ QFIT9ZfZDDhcmq6xXuLugg== 0000912057-99-006402.txt : 19991117 0000912057-99-006402.hdr.sgml : 19991117 ACCESSION NUMBER: 0000912057-99-006402 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991116 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/A SEC ACT: SEC FILE NUMBER: 001-05439 FILM NUMBER: 99758394 BUSINESS ADDRESS: STREET 1: 565 BROADHOLLOW RD CITY: FARMINGDALE STATE: NY ZIP: 11735 BUSINESS PHONE: 5162937070 MAIL ADDRESS: STREET 1: 565 BROAD HOLLOW ROAD CITY: FARMINGDALE STATE: NY ZIP: 11735 FORMER COMPANY: FORMER CONFORMED NAME: MARADEL PRODUCTS INC DATE OF NAME CHANGE: 19670706 10-Q/A 1 FORM 10-Q/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A (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, 1999 / / 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 ( ) The number of shares of Common Stock, $1 par value, outstanding as of November 11, 1999 was 7,365,201. DEL LABORATORIES, INC. AND SUBSIDIARIES Index
PAGE ---- Part I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 3 Consolidated Statements of Operations for the three and nine months ended September 30, 1999 and 1998 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION 13 SIGNATURES 14
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- PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DEL LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 (IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
September 30 December 31 1999 1998 ------------ ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 2,549 $ 3,731 Accounts receivable, less allowance for doubtful accounts of $1,300 in 1999 and 1998 46,897 47,116 Inventories 61,749 55,620 Deferred income taxes, net 3,649 3,649 Prepaid expenses and other current assets 5,446 2,975 --------- --------- Total current assets 120,290 113,091 Property, plant and equipment, net 37,580 37,915 Intangibles arising from acquisitions, net 17,321 18,450 Other assets 8,298 8,018 --------- --------- Total assets $ 183,489 $ 177,474 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable to bank $ 14,750 $ 3,500 Current portion of long-term debt 3,953 486 Accounts payable 33,581 35,781 Accrued liabilities 11,850 10,024 Income taxes payable -- 572 --------- --------- Total current liabilities 64,134 50,363 Long-term pension liability, less current portion 7,895 7,895 Deferred income taxes, net 719 719 Long-term debt, less current portion 60,000 59,400 --------- --------- Total liabilities 132,748 118,377 --------- --------- 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 1,232 1,850 Accumulated other comprehensive loss (1,023) (1,466) Retained earnings 76,297 81,204 --------- --------- 86,506 91,588 Less: Treasury stock, at cost, 2,634,799 shares in 1999 and 2,490,823 shares in 1998 (34,517) (31,097) Receivables for stock options exercised (1,248) (1,394) --------- --------- Total shareholders' equity 50,741 59,097 --------- --------- Total liabilities and shareholders' equity $ 183,489 $ 177,474 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. -3- DEL LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------ ------------ 1999 1998 1999 1998 ---- ---- ---- ---- Net Sales $ 64,586 $ 70,663 $ 196,899 $ 210,050 Cost of goods sold 34,748 30,527 93,245 85,385 Selling and administrative expenses 37,289 32,725 106,900 102,321 ----------- ----------- ----------- ----------- Operating income (loss) (7,451) 7,411 (3,246) 22,344 Gain on sale of facility -- -- 1,734 -- Interest expense 1,528 1,065 4,270 3,189 Interest income (16) (57) (41) (212) ----------- ----------- ----------- ----------- Interest expense, net 1,512 1,008 4,229 2,977 ----------- ----------- ----------- ----------- Earnings (loss) before income taxes (8,963) 6,403 (5,741) 19,367 Income taxes (2,897) 2,619 (1,608) 7,927 ----------- ----------- ----------- ----------- Net earnings (loss) $ (6,066) $ 3,784 $ (4,133) $ 11,440 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Earnings (loss) per common share: Basic $ (0.82) $ 0.50 $ (0.56) $ 1.50 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Diluted $ (0.82) $ 0.47 $ (0.56) $ 1.40 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Weighted average common shares outstanding: Basic 7,356,000 7,569,000 7,386,000 7,599,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Diluted 7,356,000 8,004,000 7,386,000 8,150,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
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, 1999 AND 1998 (In thousands) (UNAUDITED)
SEPTEMBER 30 ------------------------------ 1999 1998 ---- ---- Cash flows from operating activities: Net earnings (loss) $(4,133) $ 11,440 Adjustments to reconcile net earnings (loss) to net cash used in operating activities: Depreciation and amortization 5,167 4,891 Provision for doubtful accounts 73 118 Gain on sale of facility (1,734) - Other non-cash operating items 719 97 Changes in operating assets and liabilities: Accounts receivable (87) (13,995) Inventories (6,242) (9,980) Prepaid expenses and other current assets (2,471) 380 Other assets (280) (32) Accounts payable (1,233) 1,825 Accrued liabilities 1,825 (1,026) Income taxes payable (71) 1,729 ------------- ------------- Net cash used in operating activities (8,467) (4,553) ------------- ------------- Cash flows provided by (used in) investing activities: Proceeds from sale of facility 2,538 - Property, plant and equipment additions (4,948) (4,833) Additions to intangibles and other assets, net 85 (11,851) ------------- ------------- Net cash used in investing activities (2,325) (16,684) ------------- ------------- Cash flows provided by financing activities: Borrowings under long-term debt, net of principal payments of long-term debt 4,250 - Borrowings under short-term lines of credit, net of repayments 14,750 14,250 Repayment of short-term borrowings (3,829) (183) Decrease in receivables for stock options exercised 7 - Exercise of stock options - 48 Acquisition of treasury stock (4,539) (4,320) Dividends paid (1,037) (997) ------------- ------------- Net cash provided by financing activities 9,602 8,798 ------------- ------------- Effect of exchange rate changes on cash 8 (18) ------------- ------------- Net decrease in cash and cash equivalents (1,182) (12,457) Cash and cash equivalents at beginning of year 3,731 14,979 ------------- ------------- Cash and cash equivalents at end of period $2,549 $ 2,522 ============= =============
The accompanying notes are an integral part of the consolidated financial statements. -5- DEL LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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 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 significant accounting policies is presented in its 1998 Annual Report to Shareholders. Users of financial information produced for interim periods are encouraged to refer to the footnotes contained in the Annual Report to Shareholders when reviewing interim financial results. In the opinion of management, the accompanying interim 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. INVENTORY Classification of inventories were as follows (in thousands):
September 30 December 31 1999 1998 ---- ---- Raw Materials $ 39,410 $ 26,912 Work In Process 5,182 6,247 Finished Goods 17,157 22,461 -------- ---------- $ 61,749 $ 55,620 ======== ========
3. INTANGIBLE ASSETS ARISING FROM ACQUISITION In September 1999, the Company entered into an agreement with the former owner of CornSilk, related to its fiscal 1998 acquisition of the CornSilk brand of facial make-up. Under the provisions of this agreement adjustments to the original purchase price were negotiated. As a result the intangible assets arising from this acquisition were reduced by approximately $482,000. 4. EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders (which for the Company equals its recorded net income (loss)) 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. -6- 4. EARNINGS (LOSS) PER SHARE (CONTINUED) A reconciliation between the numerators and denominators of the basic and diluted income per common share is as follows:
(Amounts in thousands, except per share data) Three Months Ended Nine Months Ended September 30 September 30 1999 1998 1999 1998 ------- ------- ------- ------- Net earnings (loss) (numerator) $(6,066) $ 3,784 $(4,133) $11,440 ------- ------- ------- ------- Weighted-average common shares (denominator for basic earnings (loss) per share) 7,356 7,569 7,386 7,599 Effect of dilutive securities: Employee stock options -- 435 -- 551 Weighted-average common and potential common shares outstanding (denominator for diluted earnings (loss) per share) 7,356 8,004 7,386 8,150 ------- ------- ------- ------- Basic earnings (loss) per share $ (0.82) $ 0.50 $ (0.56) $ 1.50 ------- ------- ------- ------- Diluted earnings (loss) per share $ (0.82) $ 0.47 $ (0.56) $ 1.40 ------- ------- ------- -------
Employee stock options for 1,685,000 and 127,000 shares for the periods ended September 30, 1999 and 1998, respectively, were not included in the net earnings per share because their effect would have been anti-dilutive. 5. COMPREHENSIVE INCOME (LOSS) Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". This Statement requires that all items recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Other comprehensive income may include foreign currency translation adjustments, minimum pension liability adjustments and unrealized gains and losses on marketable securities classified as available for sale. The components of comprehensive income (loss) for the three months and nine months ended September 30, 1999 and 1998 are as follows:
Three Months Ended Nine Months Ended September 30 September 30 ---------------------- ---------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Net earnings (loss) $ (6,066) $ 3,784 $ (4,133) $ 11,440 Other comprehensive income (loss): Foreign currency translation 225 (27) 443 (61) -------- -------- -------- -------- Total comprehensive income (loss) $ (5,841) $ 3,757 $ (3,690) $ 11,379 -------- -------- -------- -------- -------- -------- -------- --------
-7- 6. GAIN ON SALE OF FACILITY In February, 1999, the Company sold a warehouse facility in Plainview, New York for net proceeds of $2.5 million. At December 31, 1998, this facility was included in property, plant and equipment and was accounted for as a held for sale asset. 7. SEGMENT INFORMATION At December 31, 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". This statement established standards for reporting information about operating segments and related disclosure about products and services and geographic areas. 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. However, depreciation and amortization of unallocated assets are charged to each segment.
Three Months Ended Nine Months Ended September 30 September 30 ----------------------- ---------------------- 1999 1998 1999 1998 --------- --------- --------- --------- (in thousands) (in thousands) Net sales Cosmetic $ 48,403 $ 54,682 $ 149,902 $ 164,712 Pharmaceutical 16,183 15,981 46,997 45,338 --------- --------- --------- --------- Consolidated $ 64,586 $ 70,663 $ 196,899 $ 210,050 --------- --------- --------- --------- --------- --------- --------- --------- Operating income (loss) Cosmetic $ (10,307) $ 3,269 $ (10,034) $ 13,339 Pharmaceutical 2,856 4,142 6,788 9,005 --------- --------- --------- --------- Consolidated $ (7,451) $ 7,411 $ (3,246) $ 22,344 --------- --------- --------- --------- --------- --------- --------- --------- Gain on asset sale $ -- $ -- $ 1,734 $ -- Interest expense, net $ 1,512 $ 1,008 $ 4,229 $ 2,977 --------- --------- --------- --------- Earnings (loss) before taxes $ (8,963) $ 6,403 $ (5,741) $ 19,367 --------- --------- --------- --------- --------- --------- --------- --------- Depreciation and amortization Cosmetic $ 1,681 $ 1,569 $ 4,838 $ 4,559 Pharmaceutical 114 109 329 332 --------- --------- --------- --------- Consolidated $ 1,795 $ 1,678 $ 5,167 $ 4,891 --------- --------- --------- --------- --------- --------- --------- ---------
8. FINANCING ARRANGEMENTS Under the Company's senior note facility, the Company must meet an earnings-based financial test in order to declare and pay cash dividends. As a result of the net loss in the third quarter of 1999, the Company is unable to meet this financial test and is therefore restricted from paying a cash dividend for the third quarter of 1999. Further, under the Company's $20 million revolving credit facility, the Company is prohibited from declaring cash dividends until October 1, 2001. As a result of the net loss in the third quarter of 1999, the Company did not meet certain earnings-based financial covenants contained in its $20 million revolving credit facility. As of November 12, 1999, the lender under this facility waived compliance by the Company with these covenants for the third quarter and amended these covenants through October 1, 2001, the revised maturity date of the facility. 9. ASSET HELD FOR SALE The Company is in contract for the sale of land in Farmingdale, New York with estimated proceeds of $2,250,000. At September 30, 1999, this land was included in property, plant and equipment, with a net book value of approximately $800,000. -8- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (1) RESULTS OF OPERATIONS THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 1999 VERSUS SEPTEMBER 1998 NET SALES Net sales for the third quarter of 1999 were $64.6 million, a decrease of 8.6% compared to $70.7 million in 1998. Net sales for the first nine months of 1999 were $196.9, a decrease of 6.3% compared to $210.1 million in 1998. Cosmetic net sales for the third quarter were $48.4 million, a decrease of 11.5% compared to $54.7 million in 1998. Cosmetic net sales for the first nine months of 1999 were $149.9 million, a decrease of 9.0% compared to $164.7 million in 1998. The net sales decrease is due primarily to lower shipments of the Naturistics cosmetics and bath & body care line and higher product returns. Pharmaceutical net sales for the third quarter of 1999 were $16.2 million, an increase of 1.3% compared to $16.0 million in 1998. Pharmaceutical net sales for the first nine months of 1999 were $47.0 million, an increase of 3.7% compared to $45.3 million in 1998. The increase is primarily due to growth in the Orajel family of products. COST OF SALES Cost of sales for the third quarter of 1999 were $ 34.7 million, or 53.8% of net sales, as compared to $30.5 million, or 43.2% of net sales in 1998. Cost of sales for the nine months of 1999 were $93.2 million, or 47.3% of net sales, compared to $85.4 million, or 40.6% of net sales in 1998. The increase in cost of sales, as a percentage of net sales, is due primarily to lower shipments of the Naturistics cosmetics and bath & body care line and an increase in the provision for product returns due to the high level of unanticipated returns the Company continues to experience. Also included in the cost of sales for the third quarter of 1999 is an increase in the inventory valuation reserve of $4.5 million to reflect the estimated market value of the Naturistics inventory pursuant to the Company's plan to reduce excess and slow moving inventory of such brands. SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses for the third quarter of 1999 were $37.3 million, or 57.7% of net sales, compared to $32.7 million, or 46.3% of net sales in 1998. Selling and administrative expenses for the first nine months of 1999 were $106.9 million, or 54.3% of net sales, compared to $102.3 million or 48.7% in 1998. The increase in the third quarter was primarily attributable to increased advertising and promotional expenses which are subject to quarterly variability due to the timing of such expenses. The increase as a percentage of net sales is also attributable to the negative impact of product returns on net sales. GAIN ON SALE OF FACILITY In February 1999, the Company sold a warehouse facility in Plainview, New York for $2.7 million. At December 31, 1998, this facility was included in property, plant and equipment and was accounted for as a held for sale asset. NET INTEREST EXPENSE Interest expense, net of interest income, for the first nine months of 1999 was $4.2 million, compared to $3.0 million in 1998. Interest expense, net of interest income, for the third quarter of 1999 was $1.5 million compared to $1.0 million in 1998. The increase is due to higher average borrowings during the first nine months of 1999, as compared to the first nine months of 1998, principally due to the financing of the acquisition of intellectual property rights and other assets of the CornSilk brand of facial make-up in May 1998, and an increase in short-term borrowings with banks. -9- PROVISION FOR INCOME TAXES The Company recorded a tax benefit of $2.9 million and $1.6 million for the three and nine months ended September 30, 1999, respectively, based on an estimated 28% tax benefit for the year ending December 31, 1999, compared to an effective annual tax rate of 41% in 1998. The tax benefit recorded in the third quarter includes the reversal of $.4 million of previously recorded tax provisions in the first and second quarter of 1999 as a result of the change in the estimated annual effective tax rate (benefit). NET EARNINGS For the nine months ended September 30, 1999, the Company had a net loss of $4.1 million, compared to net earnings in 1998 of $11.4 million. For the three months ended September 30, 1999 the Company had a net loss of $6.1 million, compared to net earnings of $3.8 million in 1998.The net loss is primarily attributable to lower shipments of the Naturistics cosmetics and bath & body care line, higher product returns, and an increase in the inventory valuation reserve for the Naturistics brand. (2) LIQUIDITY AND CAPITAL RESOURCES At September 30, 1999 and 1998, the Company had cash and cash equivalents of $2.5 million. Net cash used in operating activities was $8.5 million for the nine months ended September 30, 1999, primarily due to an increase in inventories of $6.2 million to support new product lines and promotional sales. Cash of $2.5 million was provided by the sale of a facility in the first quarter of 1999. Cash used for property, plant and equipment additions was $4.9 million for the nine months ended September 30, 1999, compared to $4.8 million in 1998. Net cash provided by financing activities for the nine months ended September 30, 1999 was $9.6 million, due primarily to proceeds received under a four year revolving credit agreement with a bank and short-term borrowings under lines of credit with banks, partially offset by repayments of short-term borrowings and acquisition of treasury stock. Under the Company's senior note facility, the Company must meet an earnings-based financial test in order to declare and pay cash dividends. As a result of the net loss in the third quarter of 1999, the Company is unable to meet this financial test and is therefore restricted from paying a cash dividend for the third quarter of 1999. Further, under the Company's $20 million revolving credit facility, the Company is prohibited from declaring cash dividends until October 1, 2001. As a result of the net loss in the third quarter of 1999, the Company did not meet certain earnings-based financial covenants contained in its $20 million revolving credit facility. As of November 12, 1999, the lender under this facility waived compliance by the Company with these covenants for the third quarter and amended these covenants through October 1, 2001, the revised maturity date of the facility. The Company currently is in discussion with lenders to refinance its existing short-term and long-term financing arrangements in order to provide sufficient liquidity to the Company for the foreseeable future, when considered together with cash from future operations and cash on hand. However, there can be no assurance that a new long-term financing arrangement will become available to the Company or that the terms of this new financing will be at least as favorable to the Company as the terms of its existing financing arrangements. YEAR 2000 CONVERSION The Company has addressed the issue of many existing computer programs using only the last two digits to refer to a year. Some of these computer programs do not properly recognize a year that begins with "20" instead of the familiar "19". If not corrected, many computer applications could fail or create erroneous results. A committee specifically created to resolve Year 2000 issues meets regularly. It is led by a member of the Board of Directors and comprised of senior corporate executives and an outside expert, as well as sub-committees and task forces. The Company's efforts to identify and address issues relating to its readiness for Year 2000 have included the following: the identification phase (100% complete) consisting of development of an inventory of computer based systems, software, third party programs and all hardware including embedded microprocessors. The assessment phase (100% complete) has focused on the identification of those applications most critical to the business including examination of all coding used for date calculations. The remediation phase (100% complete) consisting of systems changes, where necessary, by replacement, modification or upgrade. The testing phase (approximately 95% complete) includes unit tests of each -10- application followed by fully integrated systems tests with dates rolled forward on test machines to check performance and computational accuracy. All significant suppliers, customers and financial institutions, as well as all customers doing business electronically with the Company, have been contacted in order to identify potential areas of concern. Final integration tests are anticipated to be completed by December 1, 1999. The Company currently estimates that remediation costs will approximate $1,000,000 for replacement systems, discovery tools and expenses necessary to achieve Year 2000 compliance. Improper or inadequate remediation of Year 2000 problems by parties with whom the Company does business could adversely affect the Company's supply chain and subsequently the ability to effectively manage production and distribution activities. In addition, administrative functions essential to the day to day operations of the business could be impaired if Year 2000 remediation is not completed in a timely manner. Due to the general uncertainty inherent in the Year 2000 problem, resulting primarily from the uncertainty of the Year 2000 readiness of parties with whom the Company does business, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on the Company's results of operations, liquidity or financial condition. The Company has identified and documented potential business disruptions and continuity planning procedures. This activity has focussed on potential failures of internal and external systems required to carry out normal business operations, including services provided by the public infrastructure such as electric power, transportation and telecommunications. The above comments on the Year 2000 issue contain forward-looking statements relating to the Company's plans, strategies, objectives, intentions, and resources that should be read in conjunction with the following disclosure on Forward-Looking Statements. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133) as amended by SFAS 137, which is effective for quarters of fiscal years beginning after June 15, 2000. SFAS No. 133 provides guidance for accounting for all derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The Company does not believe that the implementation of SFAS No. 137 will have a significant impact on its financial position or results of operations. 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 and known uncertainties. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the 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 and mass merchandiser relationships due to the concentration of sales generated by such chains, changes in fashion oriented color cosmetics trends, and trends in the general economy. 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. -11- PART II - OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 10.1 Second Amendment and Waiver, dated as of November 12, 1999, to the Loan Agreement dated as of December 31, 1998, as amended, by and among the Company, Del Pharmaceuticals, Inc. and The Chase Manhattan Bank. Exhibit 27.1 Financial Data Schedule (filed previously). (b) Reports on Form 8-K None -12- 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 16, 1999 /s/ DAN K. WASSONG - --------------------------------------- ----------------------------------- Dan K. Wassong Chairman, President and Chief Executive Officer DATE: NOVEMBER 16, 1999 /s/ ENZO J. VIALARDI - --------------------------------------- ------------------------------ Enzo J. Vialardi Executive Vice President and Chief Financial Officer (Principal Accounting Officer) -13- EX-10.1 2 EXHIBIT 10.1 Exhibit 10.1 SECOND AMENDMENT AND WAIVER dated as of November 12, 1999 to the LOAN AGREEMENT dated as of December 30, 1998 as amended by the First Amendment and Waiver dated as of June 10, 1999 (as may be further amended, supplemented or modified from time to time in accordance with its terms, the "Loan Agreement") by and among DEL LABORATORIES, INC. a Delaware corporation (the "Borrower"), DEL PHARMACEUTICALS, INC. a Delaware corporation (a "Guarantor") and THE CHASE MANHATTAN BANK (the "Bank"). WHEREAS, by an Agreement dated as of the 8th day of July, 1999 among Parfums Schiaparelli, Inc., a New York corporation ("Parfums"), Royce & Rader, Inc., a Delaware corporation ("Royce"), 565 Broad Hollow Realty Corp., a New York corporation ("Broad Hollow") and the Bank, each of Parfums, Royce and Broad Hollow agreed (i) to become a Guarantor and (ii) to become a party to, and be bound by the provisions of, the Loan Agreement; and WHEREAS, the Borrower and the Guarantors have requested and the Bank hereby agrees, subject to the terms and conditions of this SECOND AMENDMENT AND WAIVER, to waive compliance with and amend certain provisions of the Loan Agreement as hereinafter set forth effective as of the date hereof; NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows: 1. WAIVER OF ARTICLE V. COVENANTS OF THE BORROWER AND THE GUARANTOR. SECTION 5.03. FINANCIAL REQUIREMENTS. (a) MINIMUM CONSOLIDATED TANGIBLE NET WORTH. Compliance with Section 5.03 (a) of the Loan Agreement is hereby waived for the fiscal nine month period ended September 30, 1999 to permit the Consolidated Tangible Net Worth to fall below $35,000,000, provided, however, Consolidated Tangible Net Worth was not less than $33,420,000 at any time during such fiscal period. 2. WAIVER OF ARTICLE V. COVENANTS OF THE BORROWER AND THE GUARANTOR. SECTION 5.03. FINANCIAL REQUIREMENTS. (c) CONSOLIDATED LEVERAGE RATIO. Compliance with Section 5.03 (c) of the Loan Agreement is hereby waived for the fiscal nine month period ended September 30, 1999 to permit the Consolidated Leverage Ratio to exceed 3.50 to 1.00, provided, however, such ratio was not greater than 3.97 to 1.00 at any time during such fiscal period. 3. WAIVER OF ARTICLE V. COVENANTS OF THE BORROWER AND THE GUARANTOR. SECTION 5.03. FINANCIAL REQUIREMENTS. (d) CONSOLIDATED INTEREST COVERAGE RATIO. Compliance with Section 5.03 (d) of the Loan Agreement is hereby waived for the fiscal nine month period ended September 30, 1999 to permit the Consolidated Interest Coverage ratio to fall below 1.75 to 1.00, provided, however, such ratio was not less than -0.27 to 1.00 at any time during such fiscal period. -2- 4. WAIVER OF ARTICLE V. COVENANTS OF THE BORROWER AND THE GUARANTOR. SECTION 5.03. FINANCIAL REQUIREMENTS. (e) CONSOLIDATED FIXED CHARGE RATIO. Compliance with Section 5.03 (e) of the Loan Agreement is hereby waived for the fiscal nine month period ended September 30, 1999 to permit the Consolidated Fixed Charge Ratio to fall below 0.20 to 1.00, provided, however, such ratio was not less than -0.74 to 1.00 at any time during such fiscal period. 5. WAIVER OF ARTICLE V. COVENANTS OF THE BORROWER AND THE GUARANTOR. SECTION 5.03. FINANCIAL REQUIREMENTS. (f) DEBT TO EBITDA RATIO. Compliance with Section 5.03 (f) of the Loan Agreement is hereby waived for the fiscal nine month period ended September 30, 1999 to permit the Debt to EBITDA Ratio to exceed 3.75 to 1.00, provided, however, such ratio was not greater than 13.73 to 1.00 at any time during such fiscal period. 6. AMENDMENT TO ARTICLE I. DEFINITIONS AND ACCOUNTING TERMS. SECTION 1.01. CERTAIN DEFINED TERMS. (i) The definition of the term "Maturity Date" is hereby amended by deleting the date "December 30, 2002" and by substituting therefor the date "October 1, 2001". (ii) Section 1.01 is hereby additionally amended by deleting the following terms: "Applicable Margin", "Consolidated Funded Debt (Applicable Margin)", and Debt to EBITDA Ratio (Applicable Margin)". 7. AMENDMENT TO ARTICLE II. AMOUNT AND TERMS OF THE LOANS. SECTION 2.01. THE REVOLVING CREDIT LOANS. Section 2.01 (a) of the Loan Agreement is hereby amended by deleting it in its entirety and by substituting therefor the following: "(a) The Bank agrees, on the date of this Agreement, on the terms and conditions of this Agreement and in reliance upon the representations and warranties set forth in this Agreement, to lend to the Borrower prior to the Maturity Date such amounts as the Borrower may request from time to time (individually, a Revolving Credit Loan" or collectively, the "Revolving Credit Loans"), which amounts may be borrowed, repaid and reborrowed, provided, however, that the aggregate amount of such Revolving Credit Loans outstanding at any time shall not exceed (i) from the date of this Agreement through March 31, 2001, TWENTY MILLION ($20,000,000) DOLLARS and (ii) from April 1, 2001 until the Maturity Date, TWELVE MILLION ($12,000,000) DOLLARS (the "Commitment"), or such lesser amount of the Commitment as may be reduced pursuant to Section 2.08 hereof." -3- 8. AMENDMENT TO ARTICLE II. AMOUNT AND TERMS OF THE LOANS. SECTION 2.04. PAYMENT OF INTEREST ON THE REVOLVING CREDIT NOTE. (i) Section 2.04 (a) of the Loan Agreement is hereby amended by deleting the first sentence thereof and by substituting therefor the following: "In the case of an Alternate Base Rate Loan, interest shall be payable at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) equal to the Alternate Base Rate PLUS 3/4 of 1%." (ii) Section 2.04 (b) of the Loan Agreement is hereby amended by deleting the first sentence thereof and by substituting therefor the following: "In the case of a Eurodollar Loan, interest shall be payable at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) equal to the Adjusted LIBOR Rate PLUS 2.75%." 9. AMENDMENT TO ARTICLE II. AMOUNT AND TERMS OF THE LOANS. SECTION 2.05. APPLICABLE MARGIN. Section 2.05 of the Loan Agreement is hereby amended by deleting it in its entirety and by substituting therefor, "Intentionally Omitted". 10. AMENDMENT TO ARTICLE II. AMOUNT AND TERMS OF THE LOANS. SECTION 2.07. COMMITMENT FEE. Section 2.07 of the Loan Agreement is hereby amended by deleting it in its entirety and by substituting therefor the following: "COMMITMENT FEE. The Borrower agrees to pay to the Bank from the date hereof and for as long as the Commitment remains outstanding, on the last Business Day of each calendar quarter, a commitment fee equal to 1/2 of 1% per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) on the average daily unused amount of the Commitment, such commitment fee being payable for the calendar quarter, or part thereof, preceding the payment date. 11. AMENDMENT TO ARTICLE II. AMOUNT AND TERMS OF THE LOANS. Article II of the Loan Agreement is hereby amended by the addition of a new Section 2.22 as follows: "Section 2.22. MANDATORY REPAYMENT OF REVOLVING CREDIT LOANS. At any time that the aggregate amount of Revolving Credit Loans outstanding exceeds the Commitment, the Borrower shall, subject to the provisions of Section 2.10 of the Loan Agreement, immediately repay so much of the Revolving Credit Loans as shall exceed the Commitment." -4- 12. AMENDMENT TO ARTICLE V. COVENANTS OF THE BORROWER AND THE GUARANTOR. SECTION 5.02. NEGATIVE COVENANTS. (l) LOSSES. Section 5.02 (l) of the Loan Agreement is hereby amended by deleting it in its entirety and by substituting therefor the following: "LOSSES. Incur a net loss for any fiscal year, provided, however, the Borrower may incur a consolidated net loss in an amount not to exceed $3,987,000 for its fiscal year ending December 31, 1999." 13. AMENDMENT TO ARTICLE V. COVENANTS OF THE BORROWER AND THE GUARANTOR. SECTION 5.03. FINANCIAL REQUIREMENTS. (a) MINIMUM CONSOLIDATED TANGIBLE NET WORTH. Section 5.03 (a) of the Loan Agreement is hereby amended by deleting it in its entirety and by substituting therefor the following: "(a) MINIMUM CONSOLIDATED TANGIBLE NET WORTH The Borrower will maintain at all times Consolidated Net Worth (tested quarterly) of not less than (i) from September 30, 1999 until December 30, 1999, $33,420,000 (ii) beginning on December 31, 1999 through December 30, 2000, $33,684,000 and (iii) on December 31, 2000 and thereafter, $38,909,000." 14. AMENDMENT TO ARTICLE V. COVENANTS OF THE BORROWER AND THE GUARANTOR. SECTION 5.03. FINANCIAL REQUIREMENTS. (b) CONSOLIDATED CAPITAL EXPENDITURES. Section 5.03 (b) of the Loan Agreement is hereby amended by deleting it in its entirety and by substituting therefor the following: "(b) CONSOLIDATED CAPITAL EXPENDITURES The Borrower will not make Consolidated Capital Expenditures, in the aggregate, during any four (4) consecutive fiscal quarters of the Borrower in excess of (i) $10,350,000 for the period of four fiscal quarters ending December 31, 1999, (ii) $12,300,000 during the period of four fiscal quarters ending March 31, 2000, June 30, 2000 and September 30, 2000 and (iii) $8,000,000 during any period of four fiscal quarters thereafter." 15. AMENDMENT TO ARTICLE V. COVENANTS OF THE BORROWER AND THE GUARANTOR. SECTION 5.03. FINANCIAL REQUIREMENTS. (c) CONSOLIDATED LEVERAGE RATIO. Section 5.03 (c) of the Loan Agreement is hereby amended by deleting it in its entirety and by substituting therefor the following: "(c) CONSOLIDATED LEVERAGE RATIO The Borrower will maintain at all times a Consolidated Leverage Ratio (tested quarterly) of not greater than (i) from September 30, 1999 through September 29, 2000, 4.05 to 1.00, (ii) from September 30, 2000 through December 30, 2000, 3.70 to 1.00 and (ii) from December 31, 2000 and thereafter, 3.49 to 1.00." -5- 16. AMENDMENT TO ARTICLE V. COVENANTS OF THE BORROWER AND THE GUARANTOR. SECTION 5.03. FINANCIAL REQUIREMENTS. (d) CONSOLIDATED INTEREST COVERAGE RATIO. Section 5.03 (d) of the Loan Agreement is hereby amended by deleting it in its entirety and by substituting therefor the following: "(d) CONSOLIDATED INTEREST COVERAGE RATIO. The Borrower will maintain at all times a Consolidated Interest Coverage Ratio of not less than (i) from September 30, 1999 through December 30, 1999, -0.27 to 1.00, (ii) from December 31, 1999 through March 30, 2000, -0.49 to 1.00, (iii) from March 31, 2000 through June 29, 2000, -0.42 to 1.00, (iv) from June 30, 2000 through September 29, 2000, -0.36 to 1.00, (v) from September 30, 2000 through December 30, 2000, 1.13 to 1.00 and (vi) from December 31, 2000 and thereafter, 1.80 to 1.00." 17. AMENDMENT TO ARTICLE V. COVENANTS OF THE BORROWER AND THE GUARANTOR. SECTION 5.03. FINANCIAL REQUIREMENTS. (e) CONSOLIDATED FIXED CHARGE RATIO. Section 5.03 (e) of the Loan Agreement is hereby amended by deleting it in its entirety and by substituting therefor the following: "(e) CONSOLIDATED FIXED CHARGE RATIO. The Borrower will maintain at all times a Consolidated Fixed Charge Ratio of not less than (i) from September 30, 1999 through December 30, 1999, -0.74 to 1.00, (ii) from December 31, 1999 through March 30, 2000, -0.44 to 1.00, (iii) from March 31, 2000 through June 29, 2000, -0.21 to 1.00, (iv) from June 30, 2000 through September 29, 2000, -0.03 to 1.00, (iv) from September 30, 2000 through December 30, 2000, 0.58 to 1.00, (v) from December 31, 2000 through March 30, 2001, 0.76 to 1.00 and (vi) from March 31, 2001 and thereafter, 1.25 to 1.00." 18. AMENDMENT TO ARTICLE V. COVENANTS OF THE BORROWER AND THE GUARANTOR. SECTION 5.03. FINANCIAL REQUIREMENTS. (f) DEBT TO EBITDA RATIO. Section 5.03 (f) of the Loan Agreement is hereby amended by deleting it in its entirety and by substituting therefor the following: "(f) DEBT TO EBITDA RATIO. The Borrower will maintain at all times a Debt to EBITDA Ratio of not greater than (i) from September 30, 1999 through December 30, 1999, 13.73 to 1.00, (ii) from December 31, 1999 through March 30, 2000, 11.46 to 1.00, (iii) from March 31, 2000 through June 29, 2000, 9.73 to 1.00, (iv) from June 30, 2000 through September 29, 2000, 9.39 to 1.00, (iv) from September 30, 2000 through December 30, 2000, 4.18 to 1.00, (v) from December 31, 2000 through March 30, 2001, 3.78 to 1.00 and (vii) from March 31, 2001 and thereafter, 3.25 to 1.00." -6- 19. ADDITIONAL AMENDMENTS AND COVENANTS BINDING ON THE BORROWER AND THE GUARANTORS. (a) Notwithstanding anything to the contrary contained in Section 5.02 (d) of the Loan Agreement, the Borrower and the Guarantors each agree that during the period from the date of this SECOND AMENDMENT AND WAIVER through the Maturity Date, none of them shall, nor will any of them permit any Subsidiary to make, or engage in, any Permitted Acquisition. (b) Notwithstanding anything to the contrary contained in Section 5.02 (f) of the Loan Agreement, the Borrower and the Guarantors each agree that during the period from the date of this SECOND AMENDMENT AND WAIVER through the Maturity Date, none of them shall, nor will any of them permit any Subsidiary to make any loans or advances to employees of the Borrower, any Guarantor or any Subsidiary in excess of the sum of (i) $100,000 at any time outstanding plus (ii) the amount of such loans and advances in existence as of the date of this SECOND AMENDMENT AND WAIVER and any repayments of existing loans and advances subsequently received by the Borrower, any Guarantor or any Subsidiary shall not be re-advanced. (c) Notwithstanding anything to the contrary contained in Section 5.02 (e) of the Loan Agreement, the Borrower and the Guarantors each agree that during the period from the date of this SECOND AMENDMENT AND WAIVER through the Maturity Date, any net cash proceeds received pursuant to the sale of assets permitted pursuant to Section 5.02 (e) (iv) shall be utilized by the Borrower to repay Revolving Credit Loans. (d) Notwithstanding anything to the contrary contained in Section 5.02 (n) of the Loan Agreement, the Borrower and the Guarantors each agree that during the period from the date of this SECOND AMENDMENT AND WAIVER through the Maturity Date, it shall not (i) declare or pay any cash dividends on its capital stock including, without limitation in the context of Permitted Dividends and (ii) make any repurchase of its common stock including, without limitation, in the context of Permitted Stock Repurchases, provided, however, the Borrower may make Permitted Stock Repurchases pursuant to Section 5.02 (n) (ii) and (iii) of the Loan Agreement. This SECOND AMENDMENT AND WAIVER shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed in said State. All capitalized terms not otherwise defined herein are used with the respective meanings given to such terms in the Loan Agreement. Except as expressly amended and waived hereby, the Loan Agreement and all other Loan Documents executed in connection therewith shall remain in full force and effect. The Loan Agreement and all other Loan Documents executed in connection therewith, as previously amended and as amended hereby, are in all respects ratified and confirmed. Nothing herein shall be read or construed as an amendment, modification or waiver of any provision of the Loan Agreement or any other Loan Document, including, without limitation, any provision of Article -7- VI of the Loan Agreement, except as expressly provided for herein and nothing contained herein shall be read or construed as a waiver or estoppel (except for the waivers contained herein) of any rights or remedies which the Bank may have under the Loan Agreement or any other Loan Document, in law or in equity, whether arising out of the transactions described herein or otherwise. The Borrower and the Guarantor hereby represent and warrant that, after giving effect to this SECOND AMENDMENT AND WAIVER, (i) all of the representations and warranties made by the Borrower or the Guarantors in the Agreement and in the other Loan Documents shall be deemed restated and are true and correct in all material respects as if made on the date hereof, except for those made with respect to a particular date, which such representations and warranties are restated as of such date (ii) no Event of Default or event which with the giving of notice or lapse of time or both would constitute an Event of Default exists under the Loan Agreement or any documents relating thereto, (iii) there are no defenses or offsets to the Borrower or any Guarantors' obligations under the Loan Agreement, the Note or any other Loan Documents or any other agreements in favor of the Bank referred to in the Loan Agreement, and if any such defenses or offsets exist without the knowledge of the Borrower or any Guarantor, the same are hereby waived and (iv) the outstanding aggregate principal of the Loans as evidenced by the Note is $20,000,000. This SECOND AMENDMENT AND WAIVER may be executed in any number of counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one SECOND AMENDMENT AND WAIVER. This SECOND AMENDMENT AND WAIVER shall become effective when the Bank shall have (i) received payment of a fee in the amount of $50,000 in consideration of its granting of this SECOND AMENDMENT AND WAIVER, (ii) received for its satisfactory review, a copy of the Borrower's compliance certificate for the fiscal quarter ended September 30, 1999 to be submitted to the holders of the Senior Notes and (iii) received counterparts of this SECOND AMENDMENT AND WAIVER duly executed by an authorized signer of each of the parties hereto. -8- IN WITNESS WHEREOF, the Company, the Guarantors and the Bank have caused this SECOND AMENDMENT AND WAIVER to be duly executed by their duly authorized officers, all as of the day and year first above written. DEL LABORATORIES, INC. DEL PHARMACEUTICALS, INC. By: /s/ Enzo Vialardi By: /s/ Enzo Vialardi ------------------------------- ------------------------------ Title: Executive Vice President and Title: Executive Vice President and Chief Financial Officer Chief Financial Officer ROYCE & RADER, INC. 565 BROAD HOLLOW REALTY CORP. By: /s/ Enzo Vialardi By: /s/ Enzo Vialardi ------------------------------- ------------------------------- Name: Enzo Vialardi Name: Enzo Vialardi Title: Executive Vice President and Title: Executive Vice President and Chief Financial Officer Chief Financial Officer PARFUMS SCHIAPARELLI, INC. By: /s/ Enzo Vialardi ------------------------------- Name: Enzo Vialardi Title: Executive Vice President and Chief Financial Officer THE CHASE MANHATTAN BANK By: /s/ Christopher Zimmerman ------------------------------- Title: Vice President -----END PRIVACY-ENHANCED MESSAGE-----