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
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SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 844-2020
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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
14, 2002 was 8,686,064.
DEL LABORATORIES, INC. AND SUBSIDIARIES
Index
Part I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements:
Consolidated Balance Sheets as of
September 30, 2002 and December 31, 2001 3
Consolidated Statements of Earnings for the three and nine
months ended September 30, 2002 and 2001 4
Consolidated Statements of Cash Flows for the
nine months ended September 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 4. Controls and Procedures 16
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
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, 2002 and December 31, 2001
(In thousands, except for share and per share data)
September 30 December 31
2002 2001
------------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 3,374 $ 2,688
Accounts receivable-less allowance for doubtful accounts
of $5,160 in 2002 and $4,200 in 2001 59,647 52,797
Inventories 73,940 62,678
Deferred income taxes 6,300 6,300
Prepaid expenses and other current assets 2,841 2,302
--------- ---------
Total current assets 146,102 126,765
Property, plant and equipment, net 35,140 35,237
Intangibles 8,549 9,057
Goodwill 6,282 6,282
Other assets 10,948 9,361
Deferred income taxes 5,250 5,250
--------- ---------
Total assets $ 212,271 $ 191,952
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 8,377 $ 4,339
Accounts payable 32,498 21,101
Accrued liabilities 24,484 22,010
Income taxes payable 116 4,137
--------- ---------
Total current liabilities 65,475 51,587
Long-term pension liability, less current portion 9,613 9,613
Deferred income taxes 3,880 3,880
Long-term debt, less current portion 53,689 61,989
--------- ---------
Total liabilities 132,657 127,069
--------- ---------
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 1,800 835
Accumulated other comprehensive loss (2,240) (2,250)
Retained earnings 91,624 76,991
--------- ---------
101,184 85,576
Less: Treasury stock at cost, 1,336,269 shares
in 2002 and 1,505,256 shares in 2001 (20,788) (19,758)
Receivables for stock options exercised (782) (935)
--------- ---------
Total shareholders' equity 79,614 64,883
--------- ---------
Total liabilities and shareholders' equity $ 212,271 $ 191,952
========= =========
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, 2002 AND 2001
(In thousands, except for share and per share data)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
Net sales $ 95,215 $ 78,823 $ 268,417 $ 226,062
Cost of goods sold 48,024 38,304 130,380 108,806
Selling and administrative expenses 37,672 34,998 112,752 99,936
----------- ----------- ----------- -----------
Operating income 9,519 5,521 25,285 17,320
Other income (expense):
Gain on sale of land -- -- 2,428 --
Interest expense, net (1,083) (1,569) (3,427) (5,393)
Other expense, net (81) (124) (297) (328)
----------- ----------- ----------- -----------
Earnings before income taxes 8,355 3,828 23,989 11,599
Income taxes 3,259 1,454 9,356 4,640
----------- ----------- ----------- -----------
Net earnings $ 5,096 $ 2,374 $ 14,633 $ 6,959
=========== =========== =========== ===========
Earnings per common share:
Basic $ 0.59 $ 0.28 $ 1.70 $ 0.83
=========== =========== =========== ===========
Diluted $ 0.57 $ 0.27 $ 1.64 $ 0.82
=========== =========== =========== ===========
Weighted average common shares outstanding:
Basic 8,662,000 8,444,000 8,594,000 8,424,000
=========== =========== =========== ===========
Diluted 8,969,000 8,635,000 8,944,000 8,513,000
=========== =========== =========== ===========
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, 2002 AND 2001
(In thousands)
(UNAUDITED)
September 30
------------
2002 2001
---- ----
Cash flows from operating activities:
Net earnings $ 14,633 $ 6,959
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,545 6,257
Provision for doubtful accounts 1,073 720
Gain on sale of land (2,428) --
Other non-cash operating items 128 213
Changes in operating assets and liabilities:
Accounts receivable (7,912) 3,041
Inventories (11,248) (3,344)
Prepaid expenses and other current assets (538) 540
Other assets (1,586) (177)
Accounts payable 11,394 1,907
Accrued liabilities 2,470 5,760
Income taxes payable (1,669) 436
-------- --------
Net cash provided by operating activities 9,862 22,312
-------- --------
Cash flows provided by (used in) investing activities:
Net proceeds from sale of land 2,940 13
Property, plant and equipment additions (5,430) (3,626)
-------- --------
Net cash used in investing activities (2,490) (3,613)
-------- --------
Cash flows provided by (used in) financing activities:
Principal borrowings (payments) under revolving
credit agreement, net -- (11,500)
Principal (payments) under senior notes (4,000) (4,000)
Principal (payments) under mortgages (265) (144)
Receivables for stock options exercised 13 6
Exercise of stock options 76 --
Acquisition of treasury stock (2,491) (503)
-------- --------
Net cash used in financing activities (6,667) (16,141)
-------- --------
Effect of exchange rate changes on cash (19) (17)
-------- --------
Net increase in cash and cash equivalents 686 2,541
Cash and cash equivalents at beginning of year 2,688 2,910
-------- --------
Cash and cash equivalents at end of period $ 3,374 $ 5,451
======== ========
Supplemental disclosures:
Cash paid:
Interest $ 2,577 $ 5,415
Income taxes $ 11,134 $ 4,226
The accompanying notes are an integral part of the
consolidated financial statements.
-5-
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for share and per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements of Del
Laboratories, Inc. and subsidiaries ("the Company") have been prepared in
accordance with accounting principles generally accepted in the United
States of America for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial
statements. Interim results are not necessarily indicative of results for
a full year.
On January 1, 2002, the Company adopted the Emerging Issues Task Force
("EITF") Issue No. 00-14, "Accounting for Certain Sales Incentives" and
EITF Issue No. 00-25, "Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Products". EITF Issue
No. 00-14, "Accounting for Certain Sales Incentives" requires that sales
incentives offered voluntarily by a vendor, without charge, to customers
that can be used in, or that are exercisable by a customer as a result of
a single exchange transaction be recorded as a reduction from revenue.
Previously, these items were included in selling and administrative
expenses. EITF Issue No. 00-25, "Vendor Income Statement Characterization
of Consideration Paid to a Reseller of the Vendor's Products" requires
that unless specific criteria are met, consideration from a vendor to a
retailer (e.g., "slotting fees", "cooperative advertising arrangements",
"buy downs", etc.) be recorded as a reduction from revenue. As result of
the adoption on January 1, 2002, of EITF Issue No. 00-14 and EITF Issue
No. 00-25, costs of $9,969 and $7,497 for the three months ended
September 30, 2002 and 2001, respectively, and costs of $26,295 and
$20,933 for the nine months ended September 30, 2002 and 2001,
respectively, were recorded as a reduction of net sales. In 2001, such
costs were included in selling and administrative expenses and have been
reclassified to conform with current year presentation.
Effective January 1, 2002, the Company adopted SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets".
SFAS No. 141 requires that all business combinations initiated after June
30, 2001 be accounted for under the purchase method only and that certain
acquired intangible assets in a business combination be recognized as
assets apart from goodwill. Since the Company did not enter into any
business combinations subsequent to June 30, 2001, the adoption of SFAS
No. 141 did not have an impact on the Company's consolidated financial
statements. During the first quarter of 2002, the Company performed the
required SFAS No. 142 impairment tests of goodwill and intangible assets
as of January 1, 2002, and determined that no adjustment to the asset
values or to the useful lives of the intangible assets is required. This
determination, as well as the fact that the Company's goodwill was
recorded prior to October 31, 1970 and therefore not subject to
amortization prior to the adoption of SFAS No. 142, resulted in earnings
per share information for the three and nine months ended September 30,
2002 being comparative with the corresponding period in the prior year.
The Company does not have any intangible assets, other than goodwill,
with indefinite useful lives.
A summary of the Company's critical and significant accounting policies
are presented in its 2001 Form 10-K. Users of financial information
produced for interim periods are encouraged to refer to the footnotes
contained in the Form 10-K when reviewing interim financial results.
In the opinion of management, the accompanying interim consolidated
financial statements contain all material adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the
consolidated financial position, results of operations and cash flows of
the Company for interim periods. Certain reclassifications were made to
prior year amounts in order to conform to current year presentation.
2. INVENTORIES
Inventories are valued at the lower of cost (principally first-in,
first-out) or market value. The Company records adjustments to the cost
of inventories based upon its forecasted plans to sell, historical scrap
and disposal rates and physical condition of the inventories. The
components of inventories are as follows:
September 30 December 31
2002 2001
---- ----
Raw Materials $46,164 $29,114
Work in Process 3,939 3,893
Finished Goods 23,837 29,671
------ ------
$73,940 $62,678
======= =======
-6-
3. INTANGIBLES
Intangibles arising from acquisitions are as follows:
September 30, 2002
------------------
Gross Carrying Accumulated Net Book
Value Amortization Value
----- ------------ -----
Intellectual property rights $10,558 $2,347 $8,211
Trademarks 3,000 2,662 338
------- ------ ------
$13,558 $5,009 $8,549
======= ====== ======
Amortization expense amounted to $170 and $220 for the three months ended
September 30, 2002 and 2001, respectively, and amounted to $508 and $660
for the nine months ended September 30, 2002 and 2001, respectively. The
estimated amortization expense for the fiscal years ending December 31,
2002, 2003, 2004, 2005 and 2006 is $678, $678, $678, $528 and $528,
respectively. The original useful lives were 20 years for intellectual
property rights and trademarks. Upon adoption of SFAS No. 142 as of
January 1, 2002, the remaining useful lives were still deemed
appropriate.
4. LONG-TERM DEBT
September 30 December 31
2002 2001
---- ----
9.5% senior notes $32,000 $36,000
Notes payable under revolving
credit agreement 25,000 25,000
Mortgages on land and buildings 5,066 5,328
------- -------
$62,066 $66,328
Less current portion 8,377 4,339
------- -------
$53,689 $61,989
======= =======
On March 26, 2002, the senior notes were amended and restated. The senior
note holder executed a Release and Termination Agreement of the
collateral liens granted in the previous amendment. The notes require
annual principal repayments of $8,000 on May 31, 2003 and May 31, 2004
and $16,000 on May 31, 2005. The amended agreement is unsecured and
includes covenants, which provide among other things for the maintenance
of financial covenants and ratios relating to consolidated net worth,
restrictions on cash dividends, the purchase of treasury stock and
certain other expenditures.
On March 26, 2002, the Company amended and restated the revolving credit
agreement entered into in December 1998 and amended on February 25, 2000.
The amendment provides credit of $45,000 and extends the expiration to
March 26, 2005. Under the terms of the agreement, interest rates on
borrowings are based on, at the Company's option, LIBOR or prime rates.
The weighted-average interest rates for the third quarter and nine months
ended September 30, 2002 were 3.9% and 4.2%, respectively. The terms of
the agreement include a commitment fee based on unutilized amounts and an
annual agency fee. The new deferred financing fees associated with the
March 26, 2002 amendment and the unamortized deferred financing fees
related to the February 25, 2000 agreement are now being amortized over
the term of the new agreement. Covenants provide, among other things, for
the maintenance of financial covenants and ratios relating to
consolidated net worth, restrictions on cash dividends, the purchase of
treasury stock and certain other expenditures. The agreement is unsecured
and no compensating balances are required. The lenders executed a Release
and Termination Agreement of the collateral liens granted in the amended
February 25, 2000 revolving credit agreement.
-7-
5. PLANT CLOSURE
On June 26, 2001, the Company announced that it would initiate a series
of actions resulting in a full closure of the Newark, New Jersey
manufacturing facility by the end of the first quarter of 2002. It was
estimated that the plant closure would result in the termination of
approximately 70 production and clerical employees. Estimated severance,
pension curtailment and other exit plan expenses of $226 were recorded in
the second quarter of 2001. During the second quarter of 2002, an
additional $45 in exit plan expenses was recorded. As of September 30,
2002, the plant was closed, a total of 67 production and clerical
employees were terminated and all exit costs totaling $271 were paid.
6. SALE OF LAND
On February 13, 2002, the Company sold 13.5 acres of vacant land in
Farmingdale, New York to an unrelated third party for gross proceeds of
$3,335 which was reduced by $160 for closing costs. In addition, $235 of
the sales price will be paid by the purchaser upon the earlier of
February 13, 2003 or two business days after receipt by the purchaser of
a certificate of occupancy on any building constructed on such land. The
land was included in property, plant and equipment at December 31, 2001,
with a book value of $500. After transaction related costs of $407, a
gain of $2,428 ($1,457 after-tax, or $0.17 per basic share) was recorded
in the first quarter. In connection with this sale, an option was granted
to the buyer for the remaining 8.5 acres of improved land and buildings
owned by the Company. The option is for a purchase price of no less than
$5,000 and cannot be exercised before December 1, 2004 or after December
1, 2005.
7. 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, 2001, the Company's Board of Directors approved a 5%
stock dividend. As a result, 404,510 shares of treasury stock were issued
on December 28, 2001 to shareholders of record on December 1, 2001.
Accordingly, the weighted-average common shares outstanding in the
consolidated statements of earnings for the three and nine months ended
September 30, 2001, have been adjusted to reflect the dividend.
A reconciliation between the numerators and denominators of the basic and
diluted earnings per common share is as follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
Net earnings (numerator) $ 5,096 $ 2,374 $14,633 $ 6,959
------- ------- ------- -------
Weighted-average common shares
(denominator for basic earnings per share) 8,662 8,444 8,594 8,424
Effect of dilutive securities:
Employee stock options 307 191 350 89
------- ------- ------- -------
Weighted-average common and potential
common shares outstanding
(denominator for diluted earnings per share) 8,969 8,635 8,944 8,513
======= ======= ======= =======
Basic earnings per share $ 0.59 $ 0.28 $ 1.70 $ 0.83
======= ======= ======= =======
Diluted earnings per share $ 0.57 $ 0.27 $ 1.64 $ 0.82
======= ======= ======= =======
Employee stock options to purchase approximately 830,000 and 794,000
shares for the three months ended September 30, 2002 and 2001,
respectively, and 526,000 and 1,394,000 shares for the nine months ended
September 30, 2002 and 2001, respectively, were not included in the net
earnings per share calculation because their effect would have been
anti-dilutive.
-8-
As a result of stock options exercised during the first nine months of
2002, the corresponding tax benefit of $2,349 was recorded as a reduction
to income taxes payable and as an increase in additional paid-in capital.
8. COMPREHENSIVE INCOME
The components of comprehensive income for the three and nine months
ended September 30, 2002 and 2001 are as follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
Net earnings $5,096 $2,374 $14,633 $6,959
Foreign currency translation (431) (342) 10 (447)
------ ------ ------- ------
Total comprehensive income $4,665 $2,032 $14,643 $6,512
====== ====== ======= ======
9. 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 baby care products, oral analgesics, and first
aid products. The accounting policies of the segments are the same as
those described in the summary of significant accounting policies. As a
result of the adoption on January 1, 2002, of EITF Issue No. 00-14 and
EITF Issue No. 00-25, (described in note 1 to these consolidated
financial statements) costs of $9,969 and $7,497 were recorded as a
reduction of net sales for the three months ended September 30, 2002 and
September 30, 2001, respectively. Costs of $26,295 and $20,933 were
recorded as a reduction of net sales for the nine months ended September
30, 2002 and 2001, respectively. In 2001, these costs were included in
selling and administrative expenses. The third quarter of 2002 includes a
charge in cost of goods sold of approximately $1,080 for the write-down
of cosmetics inventory sold in the fourth quarter through closeout
channels of distribution at prices below full cost. 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
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
Net sales:
Cosmetic $ 77,939 $ 62,103 $ 217,922 $ 177,037
Pharmaceutical 17,276 16,720 50,495 49,025
--------- --------- --------- ---------
Consolidated $ 95,215 $ 78,823 $ 268,417 $ 226,062
========= ========= ========= =========
Operating income:
Cosmetic $ 6,548 $ 2,391 $ 18,469 $ 8,538
Pharmaceutical 2,971 3,130 6,816 8,782
--------- --------- --------- ---------
Consolidated $ 9,519 $ 5,521 $ 25,285 $ 17,320
Other income (expense):
Gain on sale of land $ -- $ -- $ 2,428 $ --
Interest expense, net $ (1,083) $ (1,569) $ (3,427) $ (5,393)
Other expense, net $ (81) $ (124) $ (297) $ (328)
--------- --------- --------- ---------
Earnings before income taxes $ 8,355 $ 3,828 $ 23,989 $ 11,599
========= ========= ========= =========
Depreciation and amortization:
Cosmetic $ 1,847 $ 2,202 $ 5,298 $ 5,880
Pharmaceutical 89 136 247 377
--------- --------- --------- ---------
Consolidated $ 1,936 $ 2,338 $ 5,545 $ 6,257
========= ========= ========= =========
-9-
10. COMMITMENTS AND CONTINGENCIES
In September 2001, the Company received notice from the Environmental
Protection Agency ("EPA") that it was, along with 81 others, a
Potentially Responsible Party regarding a Superfund Site ("the Site")
located in Glen Cove, New York. According to the notice received from the
EPA, the Company's involvement relates to empty drums coming to the Site
in 1977 and 1978. In the third quarter of 2001, the Company recorded an
estimate of $550 in selling and administrative expenses based on
information received from the EPA as to its potential liability for the
past remediation activities. In October 2001, the Company became a member
of a Joint Defense Group ("the JDG"). In the second quarter of 2002, the
EPA and the JDG agreed in principle to the amounts of payments required
to settle past and future liabilities under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") with
regard to the Site. Pursuant to an agreement among JDG members as to how
to allocate such payment amounts, the Company recorded, in the second
quarter of 2002, an additional estimate of $785 in selling and
administrative expenses. The charge of $785 had a negative impact of
$0.06 per basic share on net earnings in the second quarter of 2002 and
for the nine months ended September 30, 2002. During the third quarter of
2002, a trust was established with the intention of entering into a
Consent Decree with the United States and the State of New York to settle
all claims by the United States and the State of New York for past and
future response costs and future actions at the Site. In September 2002,
the Company paid $1,332 into a trust account which will be held in
escrow, together with payments by the other members of the JDG, for the
eventual settlement with the EPA of the Company's potential liability
under CERCLA. During the third quarter of 2002, the Company also paid
into the same trust account $18 for the eventual settlement of the
Company's potential liability for natural resource damages ("NRD")
claims, which also are expected to be settled in the Consent Decree.
On October 2, 2002 an agreement was signed with a general contractor to
expand the Rocky Point, North Carolina facility from approximately
225,000 square feet to approximately 430,000 square feet. The contract is
estimated to cost $7,747, of which $2,500 is projected to be incurred
within the next 12 months, and be completed during the fourth quarter of
2003.
11. SUBSEQUENT EVENT
On November 7, 2002, the Board of Directors declared a 5% stock dividend
payable on December 27, 2002 to shareholders of record as of the close of
business on November 29, 2002.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (In thousands except per share data)
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
The Company makes estimates and assumptions in the preparation of its financial
statements in conformity with accounting principles generally accepted in the
United States of America. Actual results could differ significantly from those
estimates under different assumptions and conditions. The Company believes that
the following discussion addresses the Company's most critical accounting
policies, which are those that are most important to the portrayal of the
Company's financial condition and results of operations and which require
management's most difficult and subjective judgments, often as a result of the
need to make estimates about the effect of matters that are inherently
uncertain. The following is a brief discussion of the more critical accounting
policies employed by the Company:
REVENUE RECOGNITION
The Company sells its products to chain drug stores, mass volume retailers,
supermarkets and wholesalers. Sales of such products are principally denominated
in U.S. 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 estimate of reserves for future sales returns
based primarily upon actual return rates by product and planned product
discontinuances. The Company records estimated reserves for future sales returns
as a reduction of sales, cost of sales and accounts receivable. Returned
products which are recorded as inventories are valued based on estimated
realizable value. The physical condition and marketability of the returned
products are the major factors considered by the Company in estimating
realizable value. Actual returns, as well as estimated realizable values of
returned products, may differ significantly, either favorably or unfavorably,
from estimates if factors such as economic conditions, customer inventory levels
or competitive conditions differ from expectations.
-10-
On January 1, 2002, the Company implemented EITF Issue No. 00-14, "Accounting
for Certain Sales Incentives" and EITF Issue No. 00-25 "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products".
EITF Issue No. 00-14, "Accounting for Certain Sales Incentives" requires that
sales incentives offered voluntarily by a vendor, without charge, to customers
that can be used in, or that are exercisable by a customer as a result of a
single exchange transaction be recorded as a reduction from revenue. Previously,
these items were included in selling and administrative expenses. EITF Issue No.
00-25, "Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor's Products" requires that unless specific criteria are
met, consideration from a vendor to a retailer (e.g., "slotting fees",
"cooperative advertising arrangements", "buy downs", etc.) be recorded as a
reduction from revenue, as opposed to a selling expense. As a result of the
implementation of EITF Issue No. 00-14 and EITF Issue No. 00-25, costs of $9,969
and $7,497 were recorded as a reduction of net sales for the three months ended
September 30, 2002 and September 30, 2001, respectively. Costs of $26,295 and
$20,933 were recorded as a reduction of net sales for the nine months ended
September 30, 2002 and 2001, respectively. In 2001, these costs were included in
selling and administrative expenses and have been reclassified to conform with
current year presentation.
CO-OPERATIVE ADVERTISING AND PROMOTIONAL ALLOWANCES
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 arrangements primarily allow customers to take
deductions against amounts owed to the Company for product purchases. Estimated
accruals for promotions and co-operative advertising programs are recorded in
the period in which the related revenue is recognized. The Company regularly
reviews and revises the estimated accruals for the projected costs for these
promotions. 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.
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 adjustments 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
adjustments 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. Changes in
circumstances, such as technological advances, changes to the Company's business
model or changes in the Company's capital strategy could result in the actual
useful lives differing from the Company's estimates. In those cases where the
Company determines that the useful life of property, plant and equipment should
be shortened, the Company would depreciate the net book value in excess of the
salvage value, over its revised remaining useful life thereby increasing
depreciation expense. Factors such as changes in the planned use of equipment,
fixtures, software or planned closing of facilities could result in shortened
useful lives.
Long-lived assets, other than goodwill, are reviewed by the Company for
impairment whenever events or changes in circumstances indicate that the
carrying amount of any such asset may not be recoverable. The estimate of cash
flow is based upon, among other things, certain assumptions about expected
future operating performance. The Company's estimates of undiscounted cash flow
may differ from actual cash flow due to, among other things, technological
changes, economic conditions, changes to its business model or changes in its
operating performance. If the sum of the undiscounted cash flows (excluding
interest) is less than the carrying value, the Company recognizes an impairment
loss, measured as the amount by which the carrying value exceeds the fair value
of the asset.
In accordance with SFAS No. 142, 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.
-11-
PENSION BENEFITS
The Company sponsors pension and other retirement plans in various forms
covering all eligible employees. Several statistical and other factors which
attempt to anticipate future events are used in calculating the expense and
liability related to the plans. These factors include assumptions about the
discount rate, expected return on plan assets and rate of future compensation
increases as determined by the Company, within certain guidelines and in
conjunction with its actuarial consultants. In addition, the Company's actuarial
consultants also use subjective factors such as withdrawal and mortality rates
to estimate the expense and liability related to these plans. The actuarial
assumptions used by the Company may differ significantly, either favorably or
unfavorably, from actual results due to changing market and economic conditions,
higher or lower withdrawal rates or longer or shorter life spans of
participants.
RESULTS OF OPERATIONS
THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2002 VERSUS SEPTEMBER 30, 2001
Consolidated net sales for the third quarter of 2002 were $95,215, an increase
of 20.8% compared to $78,823 in 2001. Consolidated net sales for the first nine
months of 2002 were $268,417, an increase of 18.7% compared to $226,062 in 2001.
Net sales for 2001 include a reclassification to conform with current year
presentation. Cosmetic net sales for the third quarter of 2002 were $77,939, an
increase of 25.5% compared to $62,103 in 2001. Cosmetic net sales for the first
nine months of 2002 were $217,922, an increase of 23.1% compared to $177,037 in
2001. The third quarter increase is due principally to volume growth in the
Sally Hansen family of brands. Sally Hansen, our core cosmetics brand, continues
to grow its market share as the market leader in the nail category. Sally
Hansen's market share in the nail category rose to 26% in the third quarter as
reported by Nielsen market share data. In the mass market nail color category,
the Company captured a 31% share of market during the third quarter.
Pharmaceutical net sales for the third quarter of 2002 were $17,276, an increase
of 3.3% compared to $16,720 in 2001. Pharmaceutical net sales for the first nine
months of 2002 were $50,495, an increase of 3.0% compared to $49,025 in 2001.
The third quarter increase is primarily due to the Gentle Naturals line of baby
care products and DiabetAid, a new line of products including mouth rinse,
lotions, creams and tablets to meet the health care needs of people with
diabetes. For the first nine months of 2002, sales of Orajel, our core
pharmaceutical brand, increased from prior year, however, the third quarter 2002
sales of Orajel were slightly below prior year due to a reduction of inventory
levels by wholesalers and retailers. The Orajel market share for the most recent
quarterly period increased from approximately 21% to 24% and syndicated
independent retail sales data for the most recent quarterly period reported an
increase in Orajel retail sales of 17% over the comparable period in 2001.
Cost of goods sold for the third quarter of 2002 was $48,024 or 50.4% of net
sales, compared to $38,304 or 48.6% of net sales in 2001. Cost of goods sold for
the first nine months of 2002 was $130,380 or 48.6% of net sales, compared to
$108,806 or 48.1% of net sales in 2001. The third quarter of 2002 includes a
charge in cost of goods sold of approximately $1,080 for the write-down of
cosmetics inventory sold in the fourth quarter through closeout channels of
distribution at prices below full cost. Pharmaceutical cost of goods sold was
above prior year as a percentage of net sales due to a change in product sales
mix primarily attributable to the new Gentle Naturals line.
Selling and administrative expenses for the third quarter of 2002 were $37,672
or 39.6% of net sales compared to $34,998 or 44.4% of net sales in 2001. Selling
and administrative expense for the first nine months of 2002 were $112,752 or
42.0% of net sales compared to $99,936 or 44.2% net of sales. The increase of
$2,674 for the three months ended September 30, 2002 and the increase of $12,816
for the nine months ended September 30, 2002 is primarily due to increased
freight and other distribution costs related to sales volume and increased
compensation and pension costs. The improvement in selling and administrative
expenses, as a percentage of net sales, is attributable to sales increasing at a
higher rate than increases in spending.
-12-
In September 2001, the Company received notice from the Environmental Protection
Agency ("EPA") that it was, along with 81 others, a Potentially Responsible
Party regarding a Superfund Site ("the Site") located in Glen Cove, New York.
According to the notice received from the EPA, the Company's involvement relates
to empty drums coming to the Site in 1977 and 1978. In the third quarter of
2001, the Company recorded an estimate of $550 in selling and administrative
expenses based on information received from the EPA as to its potential
liability for the past remediation activities. In October 2001, the Company
became a member of a Joint Defense Group ("the JDG"). In the second quarter of
2002, the EPA and the JDG agreed in principle to the amounts of payments
required to settle past and future liabilities under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") with regard to
the Site. Pursuant to an agreement among JDG members as to how to allocate such
payment amounts, the Company recorded, in the second quarter of 2002, an
additional estimate of $785 in selling and administrative expenses. The charge
of $785 had a negative impact of $0.06 per basic share on net earnings in the
second quarter and for the nine months ended September 30, 2002. During the
third quarter, a trust was established with the intention of entering into a
Consent Decree with the United States and the State of New York to settle all
claims by the United States and the State of New York for past and future
response costs and future actions at the Site. In September 2002, the Company
paid $1,332 into a trust account which will be held in escrow, together with
payments by the other members of the JDG, for the eventual settlement with the
EPA of the Company's potential liability under CERCLA. During the third quarter
of 2002, the Company also paid into the same trust account $18 for the eventual
settlement of the Company's potential liability for natural resource damages
("NRD") claims, which also are expected to be settled in the Consent Decree.
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 will be
paid by the purchaser upon the earlier of February 13, 2003 or two business days
after receipt by the purchaser of a certificate of occupancy on any building
constructed on such land. The land was included in property, plant and equipment
at December 31, 2001, with a book value of $500. After transaction related costs
of $407, a gain of $2,428 ($1,457 after-tax, or $0.17 per basic share) was
recorded in the first quarter. In connection with this sale, an option was
granted to the buyer for the remaining 8.5 acres of improved land and buildings
owned by the Company. The option is for a purchase price of no less than $5,000
and cannot be exercised before December 1, 2004 or after December 1, 2005.
Interest expense, net of interest income, for the third quarter of 2002 was
$1,083 compared to $1,569 in 2001. Interest expense, net of interest income, for
the first nine months of 2002 was $3,427 compared to $5,393 in 2001. The
decrease in net interest expense is due primarily to a reduction in average
outstanding borrowings and also to decreased borrowing rates. Average
outstanding borrowings decreased by approximately $9,800 and $15,200 for the
third quarter and nine months ended September 30, 2002, respectively, as
compared to the third quarter and nine months ended September 30, 2001.
Income taxes are based on the Company's expected annual effective tax rate of
39% in 2002 and 40% in 2001. The decrease in the effective tax rate for 2002 is
primarily due to the reduced effect of non-deductible expenses on taxable
income.
Net earnings for the third quarter of 2002 were $5,096 or $0.59 per basic share
compared to net earnings of $2,374 or $0.28 per basic share in 2001. Net
earnings for the nine months ended September 30, 2002 were $14,633 or $1.70 per
basic share compared to $6,959 or $0.83 per basic share in 2001. Net earnings
for the nine months of 2002 include a gain on the sale of land in the first
quarter of $1,457 or $0.17 per basic share as more fully described above and in
note 6 to the consolidated financial statements.
-13-
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002 the Company had cash and cash equivalents of $3,374
compared to $2,688 at December 31, 2001 and $5,451 at September 30, 2001.
Net cash provided by operating activities was $9,862 for the nine months ended
September 30, 2002, due principally to net earnings of $14,633, depreciation and
amortization of $5,545, increases in accounts payable and accrued liabilities of
$11,394 and $2,470, respectively, partially offset by increases of $7,912 in
accounts receivable and $11,248 in inventories. The increase in accounts
receivable is attributable to increased sales volume and the timing of shipments
during the third quarter. The increase in inventories and accounts payable is
due to the timing of purchases of raw materials and components to support
projected sales levels.
Net cash used in investing activities for the nine months ended September 30,
2002 was $2,490 due to expenditures of $5,430 for property, plant and equipment,
partially offset by net proceeds of $2,940 from the sale of land in the first
quarter.
Net cash used in financing activities for the nine months ended September 30,
2002 of $6,667 was due primarily to a payment of $4,000 in the second quarter
reducing the outstanding principal of the senior notes and the acquisition of
$2,491 of treasury stock in connection with stock option exercises.
On March 26, 2002, the senior notes were amended and restated. The senior note
holder executed a Release and Termination Agreement of the collateral liens
granted in the previous amendment. The notes require annual principal repayments
of $8,000 on May 31, 2003 and May 31, 2004 and $16,000 on May 31, 2005. The
amended agreement is unsecured and includes covenants, which provide among other
things for the maintenance of financial covenants and ratios relating to
consolidated net worth, restrictions on cash dividends, the purchase of treasury
stock and certain other expenditures.
On March 26, 2002, the Company amended and restated the revolving credit
agreement entered into in December 1998 and amended on February 25, 2000. The
amendment provides credit of $45,000 and extends the expiration to March 26,
2005. As a result of this amendment, the Company's credit line increased to
$45,000 from $43,500. Under the terms of the agreement, interest rates on
borrowings are based on, at the Company's option, LIBOR or prime rates. The
terms of the agreement include a commitment fee based on unutilized amounts and
an annual agency fee. The new deferred financing fees associated with the March
26, 2002 amendment and the unamortized deferred financing fees related to the
February 25, 2000 agreement are now being amortized over the term of the new
agreement. Covenants provide among other things, for the maintenance of
financial covenants and ratios relating to consolidated net worth, restrictions
on cash dividends, the purchase of treasury stock and certain other
expenditures. The agreement is unsecured and no compensating balances are
required. The lenders under the amended February 25, 2000 revolving credit
agreement executed a Release and Termination Agreement of the collateral liens
granted in the previous amendment.
On August 5, 2002, the Company announced a series of actions, beginning in the
fourth quarter of 2002, to transfer all manufacturing operations from its
Farmingdale, New York facility to its Rocky Point, North Carolina facility. It
is estimated that the transfer will be completed by the third quarter of 2004.
On October 2, 2002 an agreement was signed with a general contractor to expand
the Rocky Point, North Carolina facility from approximately 225,000 square feet
to approximately 430,000 square feet. The contract is estimated to cost $7,747,
of which $2,500 is projected to be incurred within the next 12 months, and be
completed during the fourth quarter of 2003.
CONTRACTUAL OBLIGATIONS
In order to aggregate all contractual obligations as of September 30, 2002, the
Company has included the following table:
Payments Due by Period
---------------------------------------------
Less Than 1 - 2 2 - 3 3 - 5
Total 1 Year Years Years Years
----- ------ ----- ----- -----
Long-term debt $37,066 $ 8,377 $ 8,394 $20,295 $ --
Revolving credit agreement 25,000 -- -- 25,000 --
Operating leases 5,574 2,528 2,056 674 316
Construction commitment 7,747 2,500 5,247 -- --
------- ------- ------- ------- -------
Total Contractual Obligations $75,387 $13,405 $15,697 $45,969 $ 316
======= ======= ======= ======= =======
-14-
The Company believes that cash flows from operations, cash on hand and amounts
available from the credit facility will be sufficient to enable the Company to
meet its anticipated cash requirements through 2003. However, there can be no
assurance that the combination of cash flow from future operations, cash on hand
and amounts available from the credit facility will be sufficient to meet the
Company's cash requirements. Additionally, in the event of a decrease in demand
for its products or reduced sales, such developments, if significant, would
reduce the Company's cash flow from operations and could adversely affect the
Company's ability to achieve certain financial covenants under the senior note
and revolving credit agreements. If the Company is unable to satisfy such
financial covenants, the Company could be required to adopt one or more
alternatives, such as reducing or delaying certain operating expenditures and/or
delaying capital expenditures.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which establishes an accounting standard requiring the recording
of the fair value of liabilities associated with the retirement of long-lived
assets in the period in which they are incurred. The Company must adopt SFAS No.
143 on January 1, 2003. The Company has not determined the effect, if any, that
the adoption of SFAS No. 143 will have on the Company's consolidated financial
statements.
On July 30, 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 requires that a liability be
recognized for costs associated with an exit or disposal activity only when the
liability is incurred. SFAS No. 146 also establishes fair value as the objective
for initial measurement of liabilities related to exit or disposal activities.
SFAS No. 146 is effective for exit and disposal activities initiated after
December 31, 2002. The Company has not determined the effect, if any, that the
adoption of SFAS No. 146 will have on the Company's consolidated financial
statements.
FORWARD - LOOKING STATEMENTS
Management's Discussion and Analysis of the Results of Operations and Financial
Condition and other sections of this Form 10-Q include "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities and Exchange Act of 1934 (the "Exchange Act"). All
statements other than statements of historical information provided herein are
forward-looking statements and may contain information about financial results,
economic conditions, trends, certain risks, uncertainties and other factors that
could cause actual results to differ materially from any future results implied
by such forward-looking statements. Factors that might cause such a difference
include, but are not limited to: delays in introducing new products or failure
of consumers to accept new products; actions by competitors which may result in
mergers, technology improvement or new product introductions; the dependence on
certain national chain drug stores, food stores and mass merchandiser
relationships due to the concentration of sales generated by such chains;
changes in fashion-oriented color cosmetic trends; the effect on sales of lower
retailer inventory targets; the effect on sales of political and/or economic
conditions; the Company's estimates of costs and benefits, cash flow from
operations and capital expenditures; interest rate or foreign exchange rate
changes affecting the Company and its market sensitive financial instruments
including the Company's qualitative and quantitative estimates as to market risk
sensitive instruments; changes in product mix to products which are less
profitable; shipment delays; depletion of inventory and increased production
costs resulting from disruptions of operations at any of our manufacturing or
distribution facilities; foreign currency fluctuations affecting our results of
operations and the value of our foreign assets and liabilities; the relative
prices at which we sell our products and our foreign competitors sell their
products in the same market; our operating and manufacturing costs outside of
the United States; changes in the laws, regulations and policies, including
changes in accounting standards, that effect, or will effect, us in the United
States and/or abroad; and trends in the general economy. Although the Company
believes that the expectations reflected in such forward-looking statements are
based upon reasonable assumptions, it can give no assurance that its
expectations will be achieved. Without limitation, use of the following words is
intended to identify forward-looking statements: "may," "will," "should,"
"expect," "anticipate," "look forward to," "estimate," "indications," "intend,"
"plan," "momentum," or "continue" or the negative thereof or other variations
thereon.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis, judgment, belief or expectation
only as of the date hereof. The Company undertakes no obligation to publicly
revise these forward-looking statements to reflect events or circumstances that
arise after the date hereof. In addition to the disclosure contained herein,
readers should carefully review any disclosure of risks and uncertainties
contained in other documents the Company files or has filed from time to time
with the Securities and Exchange Commission pursuant to the Exchange Act.
-15-
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Within the 90 days prior to the filing of 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, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Exchange Act Rule 13a-14 and 15d-14).
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective in timely alerting management to material information required to be
included in the Company's periodic Securities and Exchange Commission filings.
(b) Changes in Internal Controls
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date the Company carried out its evaluation.
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 Certification of Chief Executive Officer
Exhibit 99.2 Certification of Chief Financial Officer
(b) Reports on Form 8-K
None
-16-
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 14, 2002 /S/ DAN K. WASSONG
- ------------------------------ ---------------------------
Dan K. Wassong
Chairman, President and
Chief Executive Officer
DATE NOVEMBER 14, 2002 /S/ ENZO J. VIALARDI
- -------------------------------- --------------------
Enzo J. Vialardi
Executive Vice President and
Chief Financial Officer
-17-
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 quarterly 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 quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ DAN K. WASSONG
------------------
Dan K. Wassong
Chief Executive Officer
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 quarterly 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 quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ ENZO J. VIALARDI
----------------------
Enzo J. Vialardi
Chief Financial Officer